IMF tips on reducing donor aid dependence

The international Monetary Fund (IMF) has urged the government to step-up efforts to strengthen the domestic revenue base in order to reduce dependence on donor aid.
A man pays tax at Rusumo customs point. Expanding the tax base could help cut dependence on aid.  The New Times / File photo
A man pays tax at Rusumo customs point. Expanding the tax base could help cut dependence on aid. The New Times / File photo

The international Monetary Fund (IMF) has urged the government to step-up efforts to strengthen the domestic revenue base in order to reduce dependence on donor aid.

In an executive board assessment released mid-last month, IMF directors indicated that Rwanda’s overall fiscal policy was on the right track despite aid delays and increased importation of goods, which has resulted in lower official transfers.

According to IMF, Rwanda’s economic performance in the last decade was strong, leading to a sharp decline in poverty and income inequality underpinned by inclusive policies.

Although the outlook remains favourable, it is subject to highly uncertain prospects for donor aid and the global environment, while the export base is narrow and poverty needs to be further reduced, IMF stated.

Risks to Rwanda’s steady growth might arise mainly from possible cutbacks in aid and a more challenging global environment, according to IMF. A prolonged delay in the delivery of budget support could also lower growth in 2013 by 1.5 per cent, the assessment report from IMF added.

“IMF directors stressed the importance of maintaining sound economic management and the momentum of structural reform, and promoting regional stability,” the report noted.

“Authorities should reform tax policy and revenue administration in line with the recommendations of a recent IMF technical assistance mission. They should also continue their efforts to improve the business environment, strengthen competitiveness, and broaden the economic base.”

Ronald Nkusi, the director of the external finance unit at the Ministry of Finance, echoed IMF’s recommendations, saying the country had adopted measures to improve tax collection and to strengthen public financial management.

“First and foremost, more SMEs and informal businesses must be formally captured in the country’s tax base in order to boost revenue collection. This way, we will not have to rely on donor aid in the long-run,” Nkusi told The New Times in an interview.

Revenue collection reached about Rwf317.8b during the first semester of 2012/13, representing a 15.6 per cent rise during the same period the previous year.

However, the Rwanda Revenue Authority is still challenged by the informal and SME sectors, which are not captured in the tax base, yet comprises over 80 per cent of the country’s businesses.

The IMF assessment stressed the need to maximise the use of concessional financing and lauded government’s planned issuance of a euro bond that is expected to provide financing for the country’s external debt.

“The bond is not yet issued, but the country is on track to do so this year.

“Under restrictions from the market, we do not disclose details of the bond before it is issued. What I can say for now is that part of the funds raised from the bond issue will be used to finance the completion of Kigali Convention Center, as well as to service RwandAir’s debt among other government priorities,” Nkusi said.

IMF also supported government’s maintenance of a tight monetary stance to contain inflationary pressures and welcomed the central bank’s adoption of a more flexible reserve money framework to improve liquidity management.

Have Your SayLeave a comment