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RWANDA MEDIUM TERM DEBT STRATEGY 2012/13 – 2015/16 Page 1

Clement NCUTI [Type the company name]

12/21/2011

REPUBLIC OF RWANDA

MEDIUM TERM

DEBT STRATEGY

MINISTRY OF FINANCE AND ECONOMIC PLANNING

June 2012


CONTENTS

CONTENTS 2

ABBREVIATIONS 4

EXECUTIVE SUMMARY 5

INTRODUCTION 6

OBJECTIVES OF THE MEDIUM TERM DEBT STRATEGY 6

SCOPE AND COVERAGE OF THE MEDIUM TERM DEBT STRATEGY 7

REVIEW OF EXISTING DEBT STRATEGIES AND DEBT PORTFOLIO 7

2008 MEDIUM TERM DEBT STRATEGY 7

EXISTING PUBLIC DEBT PORTFOLIO 8

COST AND RISK INDICATORS FOR EXISTING DEBT 10

MEDIUM TERM FINANCING OUTLOOK 10

MEDIUM TERM FINANCING NEEDS 11

POTENTIAL FUNDING SOURCES 12

MACRO-ECONOMIC AND MARKET ENVIRONMENT 13

BASELINE MACRO-ECONOMIC ASSUMPTIONS 13

RISK SCENARIOS TO BASELINE MACRO-ECONOMIC ASSUMPTIONS 14

VULNERABILITIES AND STRUCTURAL CONSTRAINTS 14

VULNERABILITIES AND CONSTRAINTS 14

IMPLICATIONS OF VULNERABILITIES AND CONSTRAINTS TO THE MEDIUM TERM

DEBT STRATEGY 15

ANALYSIS OF ALTERNATIVE STRATEGIES 16

FINANCING AND PRICING ASSUMPTIONS 16

STRESS TEST SCENARIO 17

DESCRIPTION OF ALTERNATIVE DEBT MANAGEMENT STRATEGIES 17

COST-RISK ANALYSIS OF ALTERNATIVE DEBT MANAGEMENT STRATEGIES 19

STRATEGY SELECTION 21


IMPLEMENTING THE MEDIUM TERM DEBT STRATEGY 24

CONCLUSION 25

APPENDIX I. COST AND RISK FACTORS OF DIFFERENT FINANCING INSTRUMENTS 26

APPENDIX II. TERMINOLOGY 27

FIGURES

Figure 1: Rwanda Existing Debt Profile 9

Figure 2: Cost and Risk Indicators for the Debt Management Strategies 23

Figure 3: Redemption Profile for the Debt Management Strategies 24

TABLES

Table 1: Cost and Risk Indicators for Existing Debt 10

Table 2: Net Domestic Financing – Cross Country Comparison 12

Table 3: Baseline Macroeconomic Assumptions 13

Table 4: Stress Test Scenarios for Debt Management Strategies 19

Table 5: Alternative Debt Management Strategies 21

Table 6: Risk Exposure Indicators for the Debt Management Strategies 23


ABBREVIATIONS

ADF African Development Fund

ATM Average Time to Maturity

AfDB African Development Bank

BoP Balance of Payments

BNR Banque Nationale du Rwanda

CIRR Commercial Interest Reference Rates

DSA Debt Sustainability Analysis

DMC Debt Management Committee

EDPRS Economic Development and Poverty Reduction Strategy

EUR European Euro

EU European Union

FY

GoR

Fiscal Year

Government of Rwanda

GDP

GDF

Gross Domestic Product

Gross Domestic Financing

GE

GEF

Grant Element

Gross External Financing

HIPC Highly Indebted Poor Countries

IFAD International Fund for Agricultural Development

IDA International Development Association

IMF International Monetary Fund

JPY Japanese Yen

KWD Kuwait Dinar

LIBOR London Interbank Offered Rate

MINECOFIN Ministry of Finance and Economic Planning

MDRI Multilateral Debt Relief Initiative

NPV Net Present Value

NV Nominal Value

OBL Organic Budget Law

OECD Organization for Economic Cooperation and Development

OPEC Organization of the Petroleum Exporting Countries

PIP Public Investment Policy

PPP Public-Private Partnership

RWF Rwandan Franc

SAR Saudi Riyal

SDR Special Drawing Rights

USD United States Dollar

XR Exchange Rate


EXECUTIVE SUMMARY

Uncertainties in the global financial market and the increasing needs of the country for

resources to accelerate development call for more comprehensive financing strategies.

Persistent turbulence in the global financial market has emphasized the need for countries to

develop clear strategies that help address vulnerabilities and uncertainties associated with the

composition of government debt portfolio. For Rwanda in particular, a mature stabilizer country

considering accessing the international financial market in the near term, this becomes more

relevant. This four year rolling Medium Term Debt Strategy (MTDS) helps determine how best

the Government’s financing requirements would be met faced with many potentially difficult

trade-offs between alternative financing options from which a desired composition of the debt

portfolio reflecting the preferred costs and risks trade-offs is selected.

The MTDS’s overall objective is to maintain sustainable debt levels while ensuring

adequate financing of the Government’s programs. A review of the existing debt portfolio

shows that debt levels are low, while financing needs have soared with the pressing need to

implement ambitious programs to fast track development. It is evident, from the assessment of

alternative debt strategies, that a strategy that maximizes borrowing from concessional sources is

cheaper than semi-concessional and non-concessional borrowing. Cognizant of possible donor

aid declines resulting from looming global recession risks; projected financing requirements

assume possible donor disbursement shortfalls. To bridge the gap resulting from assumed donor

disbursement shortfalls, this MTDS considers resorting to borrowing both externally and

domestically. The resort to additional external and domestic borrowing aims at ensuring that the

expenditure framework for the medium term is maintained in the event of lower grant financing

from donors. Although a strategy involving non-concessional borrowing beyond the threshold

provided for in the PSI arrangement with the IMF is not considered in this MTDS, costs and

risks implications of non-concessional borrowing to finance strategic investments are presented

given the high likelihood of it to materialize in subsequent strategies.

Four alternative financing strategies are developed and evaluated. The strategies are

designed to illustrate the impact of different financing strategies over the projection horizon on

cost and risk trade-offs and on Rwanda’s public debt profile. Risks scenario to the

macroeconomic assumptions underlying the strategies are discussed together with medium to

long term constraints and vulnerabilities to the strategies. Each of the four strategies is further

stress tested with interest rate and exchange rate shocks to assess robustness. Overall, one of the

four strategies considered markedly stands out of the costs and risks evaluation as the most risky

and costly strategy - the strategy assumes scaled up financing on non-concessional terms. The

three other alternative strategies do not significantly differ.

A strategy that assumes unchanged external borrowing while supporting to a large extent

the development of the government securities market proves the most realistic option to

consider. The strategy that lengthens the maturity of domestic instruments meets the objectives

of the MTDS while also providing the most realistic external debt portfolio composition

alternative. While a strategy that assumes increased bilateral financing proves to be the cheapest

and the less risky, raising financing from bilateral creditors to finance some of the envisaged

investment projects would be an unrealistic objective to achieve.


INTRODUCTION

1. Recent world economic developments constitute a challenge for financial and credit

portfolio management. For advanced Economies, public debt sustainability has to be

strengthened through the reduction of debt levels and fiscal deficits while increasing growth. For

countries accessing international financial markets, evaluation of financing options is very

important to avoid costly mistakes in accessing debt markets. In particular, for countries like

Rwanda exploring the possibility of accessing markets, a comprehensive, coherent and robust

framework needs to be in place to guide the choice in financing options.

2. Rwanda’s plan to scale up borrowing to meet the growing financing requirements

has made the need to develop a medium-term debt management strategy (MTDS) more

critical. The MTDS provides a framework within which informed choices can be made on how

financing requirements are met while taking due account of the constraints and risks associated

with the choices. It reflects the Government of Rwanda (GoR) desired composition of the debt

portfolio, with its cost-risk tradeoff preferences, and how it intends to be implemented. This

MTDS is a four years rolling strategy starting in FY 2012/13 that will be updated on an annual

basis to reflect new developments in financing needs and GoR’s debt portfolio preference. While

non-concessional borrowing beyond the threshold provided for in the Policy Support Instrument

(PSI) arrangement with the International Monetary Fund (IMF) is not assumed for this strategy,

there is relatively high likelihood that this might be considered in subsequent years as availability

of concessional and semi-concessional borrowing gets limited while financing requirements

arising from ongoing strategic investments step up. A review of the thresholds would eventually

be discussed with the IMF, aiming at setting new non-concessional borrowing limits that meet

the financing requirements while not compromising debt sustainability in the medium to long

term.

3. Alternative debt strategies are evaluated against costs and risks trade-offs and a

strategy meeting GoR’s medium term debt objectives is selected. Four alternative debt

strategies with distinct portfolio composition are evaluated, assuming a baseline macroeconomic

framework. The strategy selection is influenced by projected financing needs in the medium term

on the one hand and the medium term GoR’s objectives of domestic securities market

development.

OBJECTIVES OF THE MEDIUM TERM DEBT STRATEGY

4. The broad debt management objectives are provided for in the legislation. The

Constitution of the Republic of Rwanda provides the main legal basis for debt management. The

Organic Law on State Finance and Property - OBL (2006), Chapter 5 – article 54 states that the

Minister of Finance has the sole authority to borrow or to permit borrowing public money from

any legal entity or from or from an individual for financing the central Government deficit.

Article 57 further describes the objectives of borrowing as follows: “In order to support a sound

fiscal policy and effective debt management the Minister of Finance has authority to choose the


form of loans and to approve the terms of borrowing in consultation with the National Bank of

Rwanda (BNR)”. Additionally, article 61 of the same legislation, requires the Minister of

Finance to prepare and publish an annual public debt management strategy.

5. The GoR remains committed to sustainable debt levels while ensuring adequate

financing of its ambitious development programs. For this purpose, the GoR’s overall

objectives for this medium term debt strategy are three fold:

To ensure that the GoR’s financing needs and payments obligations within the provisions

of the development plans are met at the lowest possible cost over the medium to long term,

consistent with a prudent degree of risk;

To establish a sustainable debt service profile consistent with the GoR’s medium term

repayment capacity;

To promote the maintenance and further development of the market for domestic

government securities and diversify the GoR’s funding sources by reducing external resources

exposure while ensuring that domestic debt sustainability is not compromised.

SCOPE AND COVERAGE OF THE MEDIUM TERM DEBT STRATEGY

6. The scope for public debt portfolio in the present strategy is public and publicly

guaranteed debt, both domestic and external. The debt portfolio considered in the strategy

includes central government direct liabilities; external publicly guaranteed debt and public

corporation external liabilities. However, the portfolio considered does not include the Central

Bank’s debt. The scope is expected to be expanded in subsequent years’ MTDS documents to

also include the Central Bank debt. The time horizon for this MTDS covers a four (4) year

rolling period running from July 2012 - June 2013 to July 2015 - June 2016. Annual updates to

the strategy will be provided to include the current year debt developments and will be attached

to the documentation accompanying the annual budget submission.

REVIEW OF EXISTING DEBT STRATEGIES AND DEBT

PORTFOLIO

2008 MEDIUM TERM DEBT STRATEGY

7. The 2008 MTDS had the objective for debt to be sustainable in the medium to long

term, consistent with the cost risk preferences of the debt policy and the EDPRS financing

needs. With a narrower scope, only including central government direct liabilities, the 2008

MTDS’s external financing strategy emphasized grant financing - provided grants were available

- with external borrowing limited to financing development programs. The main elements of the

external debt strategy covering 2008-2011 were to ensure IDA like terms borrowing with 50

percent grant element, 0.75 percent interest rate, 40 years maturity and 10 years grace period.

Where there were no opportunities for IDA term concessional external loans, GoR could pursue


loans with a grant element of at least 50 percent, consistent with the concessionality threshold in

the context of the GoR’s arrangement with the IMF at the time. Domestic borrowing ensured

short term cash management and provided a reference rate for domestic market development

through the issuance of domestic Treasury Bills and Treasury Bonds. Treasury Bills and

Treasury Bonds of different maturities were issued for the purpose of financing short term

budget deficits accruing from fluctuations in external budget support flows and monetary policy

purposes (T-bills in particular). Government securities also and most importantly, provided a

risk-free reference rate for the development and extension of the yield curve to support the

domestic financial market development.

EXISTING PUBLIC DEBT PORTFOLIO

8. Rwanda’s external debt of the central government remains relatively low, following

the 2005 debt relief. From a total central government debt stock that stood at around US$1.73

billion (about 67 percent of GDP) at the end of 2005, central government debt declined in 2006

to about US$ 748 million (about 23.9 percent of GDP) following debt relief under the HIPC and

MDRI initiatives amounting to US$ 1.13 billion. Total debt portfolio during the time horizon of

the previous MTDS (2008-10) averaged 20.4 percent of GDP a year with external debt averaging

70 percent of total debt.

9. As of end June 2012, the stock of central government debt stood at US$1,189.2

million (20.4 percent of GDP), of which 75 percent (US$889.4 million) were external

(Figure 1). Multilateral creditors held 84 percent of all central government external debt, with

about 67 percent held by the International Development Association (IDA) and the African

Development Bank (AfDB). The Saudi Fund was among bilateral creditors, the one holding the

largest share at around 32 percent of total bilateral external debt. Domestic public debt (covering

only the central government and excluding the central bank) at the Rwf/US$ exchange rate of

596.95 was $US 299.8 million (5.1 percent of GDP) at end June 2012, with around 41 percent in

T-Bills (maturing in less than a year) that were used for cash management purposes in FY

2011/12 as a result of delays in donor disbursements.

10. Public debt including the central government debt and public corporations debt

amounted at end June 2012 to $US 1,279.6 million (21.9 percent of GDP). Public debt,

excluding the Central Bank’s debt, as of end June 2012 were around $US 90.4 million higher

than total central government debt.


Figure 1: Rwanda Existing Debt Profile

Source: MINECOFIN – Office of the Deputy Accountant General, Treasury


COST AND RISK INDICATORS FOR EXISTING DEBT

11. The long average time to maturity (ATM) of the total debt portfolio (12.8 years)

partially masks the true extent of the refinancing risk (Table 1). The long overall ATM

comes from the fact that multilateral concessional financing dominates the external debt

portfolio, which has an ATM of 15.3 years. Indeed, foreign currency denominated debt

accounted for 76.6 percent of total public debt as of end June 2012. The ATM of the domestic

debt portfolio, at 4.8 years, is comfortable, but is in part a result of the longer maturities of the

nonmarketable consolidated debt held with the Central Bank. However, domestic debt maturing

in a year is relatively significant, with 46.7 percent of total domestic debt that matures in a year.

The level of domestic debt maturing in a year reflects the large share of T-bills in the domestic

debt portfolio – T-bills as of end June 2012 amounted to $US 121.8 million (or 41 percent of

domestic central government debt stock).

12. Exchange rate exposure and maturity of domestic debt require close monitoring

going forward. The large exposure to foreign currency debt may pose a significant risk should

there be significant exchange rate fluctuations. The analysis of the existing debt portfolio broadly

points to the need for cautious management of exposure to exchange rate and short term

domestic debt. Lengthening the repayment profile in the domestic debt portfolio and particular

caution when contracting debt in non-concessional terms will be key considerations for the

medium-term choices of future MTDS.

Table 1: Cost and Risk Indicators for Existing Debt

Source: MINECOFIN staff estimates.

MEDIUM TERM FINANCING OUTLOOK

13. The least expensive option for Rwanda would be to adopt a strategy that maximizes

borrowing from concessional sources and to some extent semi-concessional and non-

External debt Domestic debt Total debt

1,233.2 250.2 1,483.4

18.9 3.8 22.8

% of GDP 12.8 3.8 16.6

% of Exports (incl. remittances) 78.3 … …

% of Revenue 92.9 … …

Cost of debt Weighted Av. IR (%) 0.9 7.2 1.9

Refinancing risk ATM (years) 15.3 5.0 13.5

Debt maturing in 1yr (% of total) 6.3 45.5 12.9

Interest rate risk ATR (years) 15.3 5.0 13.5

Debt refixing in 1yr (% of total) 6.3 45.5 12.9

Fixed rate debt (% of total) 100.0 100.0 100.0

FX risk FX debt (% of total debt) 83.1 … …

ST FX debt (% of reserves) … … …

Risk Indicators FY 2011/12

Amount (in millions of USD)

Nominal debt as % GDP

PV of Debt


concessional sources. Baseline financing assumptions assume maximization of grant financing

where available, resorting to borrowing to meet the financing requirements of key investment

projects – including public corporations’ strategic investments. For an unchanged medium term

expenditure profile and assuming programmed required grants may not fully materialize as

planned, additional borrowing may be required.

14. Looming risks on the world economy may impact capital mobility and raise the cost

of financing. Funding of multilateral concessional creditors may dry up as contributing countries

face constrained financial conditions limiting availability of concessional financing. In addition,

global recession risks might slow capital flows to developing countries thereby increasing the

cost of borrowing on non-concessional terms.

MEDIUM TERM FINANCING NEEDS

15. The ambitious GoR program to transform Rwanda into a middle income country in

the nearest future requires significant levels of investments. The financing needs associated

with the planned investments are large and cannot all be addressed at once but rather sequenced

according to priorities in the medium to long term. The financing needs presented in this strategy

take into account the present and projected GoR’s investment plans by 2014/15, including those

of the central government and public corporations.

16. Gross financing need of the central government and public corporations for the

projection horizon is projected to average around 5.6 percent of GDP a year (Table 3). The

recently concluded 4th review of the PSI arrangement with the GoR assumes zero net domestic

financing and a declining trend of external borrowing. Required grants to the tune of 2.5 percent

of GDP in FY 2012/13, 4.3 percent of GDP in FY 2013/14 and 6.2 percent of GDP in FY

2014/15 are programmed to meet the projected central government expenditure profile.

However, given the looming downturn risks and uncertainties among some of the development

partners, particularly bilateral donors, all the projected required grants may not materialize as

planned. Assuming the GoR may not be in a position to further curtail expenditures to make up

for the ensuing financing gap, additional borrowing would be needed to bridge the gap. Instead

of assuming all required grants are disbursed, we envisage the likelihood of a shortfall in donors’

commitments and disbursements in FY 2012/13 and FY 2013/14 and assume 32 percent and 29

percent of the required grants do not materialize, respectively for FY 2012/13 and FY 2013/14.

The most realistic assumption – that is also considered for in this MTDS – would be for the two

outer years of the strategy time horizon to cap new external borrowing to the level assumed for

2011/12 while Net Domestic Financing (NDF) could be allowed up to 0.5 percent of GDP. NDF

of 0.5 percent of GDP would be a very conservative assumption when comparing peer countries

(Table 2). Projected gross financing needs – based solely on existing debt levels – would be

about 2.2 percent of GDP, 2.2 percent of GDP and 1.8 percent of GDP respectively in 2011/12,

2012/13 and 2013/14 (Table 3).


Table 2: Net Domestic Financing – Cross Country Comparison

Source: IMF country reports.

POTENTIAL FUNDING SOURCES

17. Funding sources for external borrowing in the projection horizon (fiscal years July

2012/June 2013 - July 2015/June 2016) are assumed to be broadly similar to those already

in place. Borrowing to meet the financing requirements is restricted to borrowing on

concessional terms and only on non-concessional terms within the limits provided for in the

arrangement with the IMF. Borrowing on concessional terms would involve borrowing from

multilateral sources (at fixed rates with maturity above 25 years) and bilateral sources (at fixed

rates with maturity above 15 years). While borrowing on non-concessional terms within the

limits provided for would be sufficient to a certain extent within the fiscal year 2012/13, it may

not be sufficient afterwards given the likelihood of a decline in highly concessional financing.

Issuing a sovereign bond could be a possibility to consider should pre-conditions for a first

issuance be met in the time horizon beyond the period under consideration.

18. Borrowing domestically assumes use of GoR issued T-bills and T-bonds and the

introduction of a longer maturity bond in domestic currency for the regional market

and/or targeting the Diaspora. Financing from T-bills would include rollovers of existing T-

Bills to meet the objective of net domestic financing at 0.5 percent of GDP in FY 2012/13 and

FY 2013/14; T-bonds would include those with maturities of 2&3 years, 5 years and 10 years

(including a regional bond issued on the regional market in domestic currency or a Diaspora

bond).

2011/12 2012/13 2013/14 2014/15

EAC Countries

UGANDA (PSI - 4th Review, June 2012) 2.0 1.8 1.3 0.8

TANZANIA (PSI - 4th Review, July 2012) 1.0 -1.9 -0.2

KENYA (ECF - 3rd Review, April 2012) 1.9 3.0 2.3 0.9

BURUNDI1 (ECF - 7th Review, February 2012) 1.0 1.0 1.0 1.0

RWANDA (PSI - 4th Review) -0.7 0.2 0.0 0.0

NON-EAC SSA Countries

MOZAMBIQUE1 (PSI - 4th Review, June 2012) 0.9 0.6 0.6 0.7

SENEGAL1 (PSI - 2nd Review, December 2011) 1.6 2.0 1.3 0.8

CAPE VERDE1 (PSI - 2nd Review, February 2012) -0.6 -0.1 -0.6 -0.3

Average EAC Countries 1.0 0.8 0.9 0.7

Median EAC Countries 1.0 1.0 1.0 0.9

Average PSI Countries 0.7 0.4 0.4 0.4

Median PSI Countries 1.0 0.4 0.3 0.7

1 Calendar year basis 2011=2011/12

NDF (percent of GDP)


MACRO-ECONOMIC AND MARKET ENVIRONMENT

BASELINE MACRO-ECONOMIC ASSUMPTIONS

19. The MTDS was designed following the macroeconomic framework agreed under the

3rd review of the PSI arrangement with the IMF. Under the baseline macroeconomic

assumptions, projections assume a robust economic growth in FY 2011/12 at about 8.2 percent

and stabilizing on average trend growth of about 7.2 percent over the following 2 years.

Achieving fiscal consolidation would be the target for FY 2014/15. Non-interest spending is

expected to decrease from 28 percent of GDP in FY 2010/11, to 23.6 percent of GDP in

FY 2013/14. Total spending is projected to be scaled back by about 1.7 percent of GDP in FY

2012/13 compared to FY 2011/12 bringing spending below FY 2009/10 level as part of a fiscal

consolidation plan and to gradually unwind the large fiscal stimulus introduced with the latest

crisis. In addition, planned revenue administration and tax policy measures in the projection

horizon are expected to yield on average an estimated 0.2 percent of GDP additional revenue.

The gradual fiscal consolidation remains important as an increase in fiscal deficit may lead to

contract debt under unfavorable and costly terms should there be not enough highly concessional

financing available. This would result in an increase interest spending that would have to be

counterbalanced through either an increase in revenues or a corresponding cut in other

expenditures. A reduction in donors’ resource would likely force the government to seek (more

expensive) alternative sources of borrowing.

Table 3: Baseline Macroeconomic Assumptions

2011/12 2012/13 2013/14 2014/15 2015/16

Primary Deficit1

57,261.4 281,740.1 271,545.2 622,763.5 328,517.7

Primary Deficit (in % of GDP) 1.4 5.9 5.0 10.0 4.7

Gross Financing Need2

104,696.4 358,364.8 350,345.2 673,816.1 385,339.2

Public Revenues (incl. Grants) 1,028,572.0 1,208,412.5 1,338,495.5 1,336,934.5 1,469,378.9

Public sector primary expenditures 1,085,833.4 1,490,152.6 1,610,040.7 1,959,698.0 1,797,896.6

Public sector expenditure 1,105,624.0 1,513,039.7 1,631,072.5 1,981,939.5 1,821,538.5

Public sector interest expenditure 19,790.6 22,887.1 21,031.8 22,241.4 23,641.9

International reserves (USD mn)

GDP (billion RwF) 4,105,266.4 4,759,438.8 5,469,349.4 6,198,321.0 6,990,474.7

Baseline exchange rate, national currency per U.S. Dollar, average 630.1 661.9 685.5 713.2 728.2

Interest Payments 19,790.6 22,887.1 21,031.8 22,241.4 23,641.9

Interest on Existing Debt 19,790.6 22,887.1 21,031.8 22,241.4 23,641.9

Amortization 27,644.4 53,737.6 57,768.2 28,811.2 33,179.6

Amortization on Existing Debt 27,644.4 53,737.6 57,768.2 28,811.2 33,179.6

Gross Financing Need in USD millions 166.2 541.4 511.1 944.8 529.2

Gross Financing Need to GDP (%) 2.6 7.5 6.4 10.9 5.5

Public Revenues (excl. Grants) 565,112.0 724,432.5 780,963.4 903,460.3 1,039,632.0

Grant 463,460.0 483,980.0 557,532.1 433,474.2 429,746.9

of which Required Grants 0.0 0.0 0.0 33,843.3 299,746.9

1Public Revenues (incl.Grants) minus Public Expenditures excluding interest expenditures.

2Primary Deficit plus Interest Payments and Amortization.

(million RwF unless otherwise specified)


Source: MINECOFIN staff estimates and projections.

RISK SCENARIOS TO BASELINE MACRO-ECONOMIC ASSUMPTIONS

20. Despite a robust macroeconomic environment and the efforts of the GoR to sustain

its stability, risks to the baseline scenario beyond the Government’s control exist. Some

associated risks were identified as indicated below:

(i) A higher inflation on the domestic market, leading to monetary policy interventions could

raise the cost of issuing financing instruments with investors only willing to hold instruments at

higher nominal interest rates to protect themselves from yield losses resulting from high

inflation.

(ii) Higher external current account deficits, mainly through increasing trade deficits

(resulting from stagnant export prices and increasing import prices assuming unchanged

volumes) and a larger current account deficit (resulting from lower official transfers) could

adversely impact on the financing needs and contribute to a depletion of existing reserves

buffers.

(iii) A greater than expected depreciation of the RwF against major currencies (US$ mainly),

although beneficial for export competitiveness could raise the cost of servicing the existing and

forthcoming external debt stock.

(iv) Exchange rate policies to smoothen currency volatility could weigh on available

international reserves and increase the foreign exchange risk indicator of short term debt to

reserves.

(v) Higher than envisaged domestic financing resulting from higher financing needs could

crowd out private sector credit and adversely impact on growth.

(vi) A consistent negative outlook on global growth could lead to lower donor inflows,

reducing total resources; while a persistent increase in food and fuel prices could increase GoR

expenditures all leading to a higher financing need.

(vii) With lower growth perspectives and an environment of increasing staple food and fuel

prices, fiscal policy could become countercyclical to boost growth and preserve pro-poor

priority expenditures hence increasing the financing needs should revenues not increase in the

same proportions.

VULNERABILITIES AND STRUCTURAL CONSTRAINTS

VULNERABILITIES AND CONSTRAINTS

21. Rwanda’s economy remains vulnerable and extremely constrained by internal and

external imbalances exacerbated by savings and investment imbalances. With large

investment needs both public and private, and low domestic savings due partly to an

underdeveloped financial market, the country continues to rely on donor aid – with all the


unpredictability attached to it – to finance its saving and investment balance. Donor aid

disbursements, although contributing to bridging the financing gap are extremely volatile, and at

times coming with significant delays. Delayed disbursements often result in Government issuing

treasury bills to finance short term cash flow requirements. Current account balance deficit levels

although acceptable in the short to medium term on account of the large import needs related to

the ongoing development projects, are unsustainable in the long term. A larger deficit, with

declining donor aid disbursements, would lead to increased borrowing to finance the deficit with

limited availability of highly concessional borrowing as Rwanda matures from a country eligible

for IDA only financing terms.

22. Rwanda’s debt portfolio has a large component of foreign currency denominated

debt and makes it vulnerable to exchange rate risks. The depreciation of the Rwanda Franc

against major currencies would weigh on the debt service of external debt and hurt most should

inflows of foreign exchange remain at their current lows. The latest debt sustainability analysis

(DSA) confirmed that Rwanda’s export base continues to be a source of vulnerability. Measures,

including the recent GoR’s approval of a national export promotion strategy to expand and

diversify the export base, are being implemented to address the vulnerability.

23. The short term maturity of domestic debt heightens rollover and short term

liquidity risks. 46.7 percent of the domestic debt portfolio at end June 2011 matures in less than

a year and mostly comprises treasury bills issued to finance short term cash flow imbalances

resulting from donor aid disbursement delays. The protracted high share of the GoR’s

expenditure financed with donor aid and the associated delays in disbursements could weigh on

domestic borrowing in the medium to long term. Measures are currently going on to broaden the

tax base and improving revenue collection with measures expected to yield between 0.2 and 0.5

percent of GDP on average a year in the medium term aiming at gradually reducing donor aid

dependence.

24. Domestic borrowing remains constrained by a capital market in its infancy stage.

GoR domestic borrowing is limited to a few institutional lenders including banking (to a larger

extent) and some non banking lenders. In order to ensure that private sector gets adequate

financing, bank financing of the central Government is limited to levels ensuring private sector is

not crowded out. Further deepening the financial sector and expanding and developing the

capital market remain important objectives to achieve in the medium to long term.

IMPLICATIONS OF VULNERABILITIES AND CONSTRAINTS TO THE

MEDIUM TERM DEBT STRATEGY

25. With Rwanda’s growing income levels, access to highly concessional financing may

become limited. The tremendous growth achieved in the recent past is assumed to continue over

the projection horizon, gradually reducing access to highly concessional financing (IDA-only

terms of financing) – only available to poor and fragile countries – as Rwanda matures to upper

low income countries. Furthermore, given difficult conditions resulting from looming recession

risks and high indebtedness levels in OECD countries, there might be limited availability of full


replenishment of the IDA and ADF. Although provisions for scaled up financing on non

concessional basis other than those allowed in the limits of the IMF’s PSI have not been

considered in the time frame of this MTDS, it is something that needs to be considered in

subsequent MTDS.

26. Constraints on domestic financing may be unfavorable to further develop the

domestic market for Government securities. Further developing and expanding the capital

market would require the GoR to contribute to deepening trading with the issuance of medium to

long term Government securities. The options available would however be limited with

constraints on domestic financing.

ANALYSIS OF ALTERNATIVE STRATEGIES

FINANCING AND PRICING ASSUMPTIONS

27. Domestic borrowing relies on a number of financing assumptions broadly guided by

the debt policy. The main assumptions underlying domestic financing relate to the fact that the

primary focus of domestic debt issuance should be for financial market development and

exceptionally for budget financing to mitigate short term cash flow imbalances. Clear rules

should be set for reimbursing any short-term debt contracted for temporary liquidity purposes by

the end of the year, to ensure that it does not become a permanent debt burden. Debt issuance for

financial market development will imply moving away from issuing short-term debt towards

issuing small amounts of longer-term securities which can promote longer-term savings and

investment. Based on the experience of other countries, it should be possible to move towards

10-year bonds in the time horizon of this strategy.

28. Pricing assumptions for the domestic sources of financing are consistent with

current financing costs for domestically issued debt (See Appendix I for definition of

financing instruments). We assume that offer rates for Treasury bills and Treasury bonds do not

significantly vary from rates currently observed throughout projection horizon. The existing

treasury bonds include 2&3 years bonds priced respectively at 9.5 percent and 10.5 percent and 5

years bonds at 11.1 percent. For the purpose of this analysis, with 2&3 years bonds bundled into

a single instrument, we have assumed yields to be equal to the average of current rates. 10-year

domestic bonds are introduced with yields assumed at 200 basis points more than the 5-year

bonds. The 10 year domestic bonds are assumed to include 10 year domestic treasury bonds but

could also accommodate for a possible issuance of a “Diaspora” bond in domestic currency.

29. Financing assumptions for external borrowing are made taking into account the

assumptions regarding the flows of resources but assuming that not all the projected

required grants would be disbursed and there will be the need for some external

borrowings to fill the gap. Priority would be given to concessional financing with IDA terms

(40 years maturities, 10 years grace period and 0.75 percent of interest rate) as much as possible

horizon.


30. For the purpose of the analysis, the following pricing assumptions for different

external sources of financing are made:

(i) All future multilateral concessional external loans are priced at a fixed rate of

0.75 percent, with either a 40-year or a 50-year tenor and 10-year grace period.

(ii) Semi-concessional sources of financing are assumed to be from both Paris Club bilateral

creditors, and non-Paris Club creditors, such as China. We assume that all semi-concessional

loans are fixed rate, with 25-year maturity and a 5-year grace period.

(iii) Access to the international bond market is assumed to be in USD and priced on the

underlying forward US Treasury-curves plus a credit spread. The credit spread is assumed to be

550 basis points for a 10-year bond, taking peer countries into consideration, and broadly

consistent with current market conditions for a B-rated sovereign issuer like Rwanda. At 10-

year US Treasury yield on August 22, 2011, this would imply an equivalent yield of around

7.5 percent for a 10-year GoR USD-denominated international bond.

(iv) USD-denominated syndicated loans are assumed to be on a 10-year fixed rate basis,

priced at 10-year US Treasury plus an assumed credit spread of 500 basis points.

STRESS TEST SCENARIO

31. The robustness of the alternative debt management strategies was assessed under

four stress scenarios for interest and exchange rates. The magnitude of the shocks was

informed by the historical performance of Rwandan interest and exchange rates over the last ten

years. We assume that shocks materialize in FY 2012/13, and that all shocks are sustained

through the reminder of the simulation horizon. The impact of the exchange rate and interest rate

shocks is illustrated in Table 4.

(i) Scenario 1: 15 percent devaluation of the domestic currency (RwF) vis-à-vis the USD in

FY2012/13.

(ii) Scenario 2: 30 percent devaluation of the domestic currency (RwF) vis-à-vis the USD.

This would represent an event, characterized by, for example, a significant negative terms of

trade shock.

(iii) Scenario 3: 2 percent upward parallel shift in both the US Treasury and domestic yield

curves.

(iv) Scenario 4: combined shock scenario, whereby the interest rate shock in Scenario 3 and

exchange rate shock in Scenario 1 occur simultaneously.

DESCRIPTION OF ALTERNATIVE DEBT MANAGEMENT STRATEGIES

Four alternative debt management strategies, discussed in detail below, are examined

(Table 5). These strategies are designed to illustrate the impact of different financing

alternatives, used over the projection period (FY 2011/2012 - FY 2013/2014), on cost and risk

trade-offs, and on Rwanda’s public debt profile in the future. The funding strategies assume


that all the required grants programmed for FY 2012/13 and FY 2013/14 are not disbursed as

planned and envisage borrowing as earlier discussed (paragraph 13).

(i) Strategy 1: Baseline / DSA Scenario this strategy assumes maximization of concessional

and semi-concessional financing. Gross external financing needs are fully funded by

concessional and semi-concessional resources. The share of each external funding instrument

in gross external financing (GEF) is calculated based on the available information on current

and future commitments made by the multilateral and bilateral lenders. The gross domestic

financing is assumed to be met by issuance of T-Bills and 3-year and 5-year T-Bonds. The

share of each domestic instrument is calculated based on the current composition of domestic

debt and assuming gradual reduction of T-Bill issuance over the projection period.

(ii) Strategy 2 (S2): Increase in semi-concessional bilateral sources of external financing and

infrastructure bond. This strategy considers relatively higher reliance on external semi-

concessional sources of finance, with higher share of bilateral assuming possible

disbursement delays from the multilateral lenders as well as taking into consideration that

over the time highly concessional sources of funding would gradually dry up. The domestic

financing includes an infrastructure bond denominated in local currency, partly addressing

shortage in external financing of infrastructure projects, but also reducing exchange rate risk

exposure

(iii)strategy 3 (s3):increase in sovereign bond and infrastructure bond . This strategy assumes a

leveraging of external financing through issuing a sovereign bond, although exposing the

country to inflation and exchange rate risk, but also value erosion through interest payment.

(iv) strategy 4 (s4): baseline adjusted syndicated loan and infrastructure bond.

this strategy assumes the baseline scenario with adjusted share of syndicated loan to lower

percentage of GEF, and an infrastructure Bond. . The nominal non-concessional amount

considered over the projection period (the two outer years of the strategy) is approximately

us$105 million, which is considered reasonable and relatively easy to accommodate in addition

to the existing limits of non-concessional borrowing considered for in the psi arrangement. The

domestic financing is unchanged from the strategy 1.


Table 4: Stress Test Scenarios for Debt Management Strategies

Source: MINECOFIN staff estimates.

COST-RISK ANALYSIS OF ALTERNATIVE DEBT MANAGEMENT

STRATEGIES

32. The performance of alternative strategies was assessed under the baseline macro-

economic and risk scenarios described in the previous sections. The choice of cost and risk

indicators is essential for the analysis and since the risks are multi-dimensional, it is

recommended to examine on several cost and risk measures. Therefore a number of cost and risk

indicators were considered: the debt-to-GDP ratio, NPV of debt-to-GDP ratio, interest-to-GDP

ratio and interest-to- revenue (excluding grants) ratio. The results of the analysis are presented in

Debt Stock to GDP ratio as at end FY 2015/16

Scenarios S1 S2 S3 S4

Baseline 39.93 39.33 40.06 40.06

Exchange Rate Shock (7.5%) 41.27 40.63 41.27 41.33

Exchange Rate Shock (15%) 42.61 41.94 42.49 42.60

Interest Shock 40.32 39.46 40.42 40.45

Combined Shock (7.5% depreciation and IR Shock) 41.67 40.77 41.64 41.73

Max Risk 2.68 2.61 2.42 2.54

Interest Payments to GDP Ratio as at end FY 2015/16


Baseline 1.06 0.75 1.22 1.21



Interest Shock 1.25 0.80 1.41 1.41


Max Risk 0.23 0.08 0.20 0.23

PV of Debt to GDP Ratio as at end FY 2015/16


Baseline 32.10 31.31 37.05 33.61



Interest Shock 33.69 32.47 39.88 35.37


Max Risk 2.63 2.10 3.74 2.73

Nominal interest payments as % of revenue (excluding grants) as at end FY 2015/16


Baseline 7.11 5.01 8.23 8.15



Interest Shock 8.43 5.40 9.47 9.48


Max Risk 1.55 0.51 1.36 1.53


Figure 2 panels. In addition to these cost and risk indicators, other risk indicators of the debt

portfolio e.g., refinancing risk, interest rate and foreign currency risks are also assessed and the

results are included in Table 6 below. Since averages would potentially hide bad annual

outcomes, the focus when evaluating the cost and risk trade-offs was at the end of FY

2013/2014.

33. Under all cost-risk indicators examined (see Figure 2), Strategy 2 outperforms other

strategies, in that it possesses the lowest cost and risk for all the indicators considered. This

is driven by the high share of bilateral loans and an infrastructure bond, with the lowest cost and

risk. If we look at sustainability indicators, strategy 2 still performs well, and under the risk

scenario with shocks to interest and to exchange rates (see Table 4), S2 dominates other

strategies, by offering the most favorable cost – risk combination.

34. The portfolio resulting from adopting Strategy 1 (S2) is both the cheapest and

sustainable, given the PV of debt to exports of goods and services However, it may be

unrealistic to achieve compared to S1 which maximizes concessional and semi concessional

financing. Financing from multilateral partners often entails lengthy loan negotiation processes

and delayed disbursements. Moreover, access to concessional borrowing may become more and

more limited, making therefore S1 implementation being constrained. Strategy 3 (S2) may

provide financing, although exposing the country to high inflation, and high exchange rate risk.

S4 suggests the baseline scenario, with adjusted syndicated loan in case financing from

multilaterals suggested in the baseline scenario do not materialize. .

35. Overall the difference in costs between strategies S1, S2 and S3 is not large 1 .

Therefore other risk exposure indicators e.g., interest rate, refinancing and foreign currency risks

should also be taken into consideration.

36. As shown in Table 6, S2 would allow extending the Average Time to Maturity

(ATM) for domestic debt to 8.6 years compared to other strategies. The ATM for the total

portfolio increases to 16.9 years compared to S3,S4 and S1, while reducing the percentage of

debt maturing in one year of about more than 1.5 percent compared to all other strategies. This

means that the refinancing and interest rate risks are slightly lower for Strategy 3 than for the

Strategy 1.

37. Strategy 2 offers a gradual reduction of the exchange rate exposure, and would be

the strategy that to the largest extent supports domestic government securities market

development. Strategy 2 assumes issuance of government securities with longer maturities e.g.,

5 year and 10 year T-Bonds (including an infrastructure Bond and/or a Diaspora bond).

Development of the domestic government securities market would not only serve the objective

of public debt management, but would also contribute to financial sector development and

improve the financial market environment.

1 As an example there is only 0.03 percentage point difference between S1 and S2 and 0.02 percentage point

difference between the Strategies S1 and S3 if measured by interest payments to GDP. This is clearly a function of

the pricing and funding assumptions being made. However, it is the ordinal relationship of the respective strategies

that is key when comparing them.


38. The least attractive strategy based on the cost measures would be Strategy 4. This

strategy would result in the highest cost and bearing marginally lower risks compared to S3,

Under this strategy the debt stock to GDP is marginally higher than under all the other strategies.

To substitute concessional loans with market based instruments would be indeed more costly but

address the serious constraints and delays in access to concessional and semi-concessional funds.

STRATEGY SELECTION

39. An important consideration when comparing alternative debt management

strategies is which strategy would best satisfy GoR’s stated debt management objectives.

These considerations may be even more important particularly when the cost implications are not

significant. In other words, the choice of a preferred strategy should not only reflect cost-risk

trade-offs but also the preferences of the GoR, with regard to domestic market development and

other goals for debt management. Of all four alternative strategies evaluated, Strategy 1 (baseline

strategy) provides the most realistic in case planned borrowings do materialize. However it won’t

respond to the need of developing the domestic market. This makes the strategy as the best

option for Rwanda.

40. Given baseline macroeconomic assumptions, assumptions on prospective financing

needs, and considering the overall objectives of the MTDS, Strategy 2 would be the

cheapest and less risky best alternative to consider. The strategy that lengthens the maturity of

domestic instruments meets the objectives of the MTDS while also providing the cheapest and

less risky debt portfolio composition alternative.

Table 5: Alternative Debt Management Strategies


Source: MINECOFIN staff estimates

Strategy 1 - Baseline Scenario

Share Amount Share Amount Share Amount

Multi - Concessional 15% 49,368 24% 86,623 11% 75,840 16% 73,860

Multilateral 11% 36,884 11% 41,587 5% 32,084 3% 14,524

Bilateral 10% 33,237 65% 235,353 39% 266,575 81% 372,326

Syndicated Loan 65% 218,729 0% 0 46% 316,391 0% 0

External Total 100% 338,218 100% 363,563 100% 690,891 100% 460,710

Tbills 65% 55,067 65% 21,612 65% 17,361 65% 31,341

Bonds 2Y&3Y 19% 15,730 19% 6,173 19% 4,959 19% 8,952

Bonds 5Y 16% 13,764 16% 5,402 16% 4,339 16% 7,833

Infrastructure Bond 0% 0 0% 0 0% 0 0% 0

Domestic Total 100% 84,560 100% 33,187 100% 26,660 100% 48,127

Strategy 2 - Increase in Bilateral FX & Infrastructure Bond DX



Multilateral 11% 36,884 14% 37,701 5% 30,758 4% 12,058

Bilateral 74% 251,966 58% 161,275 84% 559,005 75% 224,834

Syndicated Loan 0% 0 0% 0 0% 0 0% 0

External Total 100% 338,218 100% 277,504 100% 662,468 100% 298,213

Tbills 65% 55,067 25% 21,612 65% 17,361 24% 31,341

Bonds 2Y&3Y 19% 15,730 7% 6,173 19% 4,959 7% 8,952

Bonds 5Y 16% 13,764 6% 5,402 16% 4,339 6% 7,833

Infrastructure Bond 0% 0 61% 52,084 0% 0 64% 84,278

Domestic Total 100% 84,560 100% 85,271 100% 26,660 100% 132,405

Strategy 3 - Sovereign Bond FX & Infrastructure Bond DX



Multilateral 14% 36,884 32% 38,697 6% 31,511 16% 13,114

Bilateral 67% 172,533 0% 0 80% 420,127 0% 0

Syndicated Loan 0% 0 0% 0 0% 0 0% 0

External Total 100% 258,785 100% 119,301 100% 526,123 100% 79,803

Tbills 34% 55,067 65% 21,612 10% 17,361 65% 31,341

Bonds 2Y&3Y 8% 12,581 15% 4,938 2% 3,967 15% 7,161

Bonds 5Y 10% 16,912 20% 6,637 3% 5,332 20% 9,625

Infrastructure Bond 48% 79,433 0% 0 85% 152,419 0% 0

Domestic Total 100% 163,993 100% 33,187 100% 179,079 100% 48,127

Strategy 4 - Baseline FX with adjusted Syndicated & Infrastructure Bond DX



Multilateral 13% 36,884 11% 41,323 6% 31,977 3% 14,240

Bilateral 12% 33,237 65% 233,861 48% 265,684 81% 365,045

Syndicated Loan 58% 167,996 0% 0 32% 177,618 0% 0

External Total 100% 287,485 100% 361,259 100% 550,866 100% 451,700

Tbills 41% 55,067 65% 21,612 11% 17,361 65% 31,341

Bonds 2Y&3Y 9% 12,581 15% 4,938 2% 3,967 15% 7,161

Bonds 5Y 13% 16,912 20% 6,637 3% 5,332 20% 9,625

Infrastructure Bond 37% 50,733 0% 0 84% 137,717 0% 0

Domestic Total 100% 135,293 100% 33,187 100% 164,377 100% 48,127

Financing InstrumentFY 2012/13 FY 2013/14 FY 2014/15

FY 2015/16

FY 2015/16

Financing InstrumentFY 2012/13 FY 2013/14 FY 2014/15

FY 2013/14

Financing Instrument

Financing Instrument

FY 2014/15

FY 2012/13

FY 2015/16

FY 2015/16

FY 2012/13 FY 2013/14

FY 2014/15


Figure 2: Cost and Risk Indicators for the Debt Management Strategies


Table 6: Risk Exposure Indicators for the Debt Management Strategies


S1

S2

S3S4

39.0

39.4

39.8

40.2

2.4 2.5 2.6 2.7

Cos

t (%

)

Risk

Debt to GDPas at end FY 2015/16

S1

S2

S3 S4

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

0.05 0.10 0.15 0.20 0.25

Cos

t (%

)

Risk

Interest to GDP as at end FY 2015/16

S1S2

S3

S4

29.0

32.0

35.0

38.0

2.0 2.5 3.0 3.5 4.0

Cos

t (%

)

Risk

PV of Debt to GDPas at end FY 2015/16

S1

S2

S3S4

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

Cos

t (%

)

Risk

Interest to Revenue (excluding grants) as at end FY 2015/16

2011/12

Current S1 S2 S3 S4

Nominal debt as % of GDP 22.8 39.9 39.3 40.1 40.1

% of GDP 16.6 32.1 31.3 37.1 33.6

% of Exports (incl. remittances) 78.3 171.3 166.4 201.9 180.8

% of Revenue 92.9 187.6 182.3 221.2 198.1

Implied interest rate (%) 1.9 3.2 2.2 3.6 3.6

Refinancing risk ATM External Portfolio (years) 15.3 15.8 17.7 16.5 16.6

ATM Domestic Portfolio (years) 5.0 6.5 8.6 8.4 8.3

ATM Total Portfolio (years) 13.5 15.4 16.9 15.4 15.7

Interest rate risk ATR (years) 13.5 15.4 16.9 15.4 15.7

Debt refixing in 1yr (% of total) 12.9 3.1 1.1 1.1 2.4

Fixed rate debt (% of total) 100.0 100.0 100.0 100.0 100.0

FX risk FX debt as % of total … 91.2 86.1 83.0 84.5

ST FX debt as % of reserves … … … … …

Risk IndicatorsAs at end FY 2015/16

PV of Debt


Figure 3: Redemption Profile for the Debt Management Strategies


IMPLEMENTING THE MEDIUM TERM DEBT STRATEGY

41. The assumptions and risk parameters associated with the selected strategy will serve

as a basis for monitoring implementation. The medium term debt strategy provides a clear set

of assumptions and some information on key risk parameters that are associated with the selected

strategy for borrowing in the medium term. These provide the basis on which the implementation

of the strategy will be monitored and reported. If there is a significant and sustained deviation in

the outturn relative to that assumed in the MTDS analysis, the strategy will be reviewed and

possibly revised. Annual reviews of the strategy will be made to update it should there be

fundamental shifts in macroeconomic or market conditions.

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

20

15

/16

20

19

/20

20

23

/24

20

27

/28

20

31

/32

20

35

/36

20

39

/40

20

43

/44

20

47

/48

20

51

/52

20

55

/56

20

59

/60

20

63

/64

20

67

/68

20

71

/72

20

75

/76

Strategy 2 Domestic

Externalmln RwF

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

20

15

/16

20

19

/20

20

23

/24

20

27

/28

20

31

/32

20

35

/36

20

39

/40

20

43

/44

20

47

/48

20

51

/52

20

55

/56

20

59

/60

20

63

/64

20

67

/68

20

71

/72

20

75

/76

Strategy 3 Domestic

Externalmln RwF

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

20

15

/16

20

19

/20

20

23

/24

20

27

/28

20

31

/32

20

35

/36

20

39

/40

20

43

/44

20

47

/48

20

51

/52

20

55

/56

20

59

/60

20

63

/64

20

67

/68

20

71

/72

20

75

/76

Strategy 4 Domestic

Externalmln RwF

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

20

15

/16

20

19

/20

20

23

/24

20

27

/28

20

31

/32

20

35

/36

20

39

/40

20

43

/44

20

47

/48

20

51

/52

20

55

/56

20

59

/60

20

63

/64

20

67

/68

20

71

/72

20

75

/76

Strategy 1 Domestic

Externalmln RwF


42. Progress on the implementation of the MTDS will be regularly communicated to the

Minister of Finance and Economic Planning and the Debt Management Committee.

Reporting on the MTDS implementation will be done on a quarterly basis and will be providing

information on the evolution of the portfolio, and the key cost and risk factors developments.

CONCLUSION

43. Changes in the debt structure occur relatively slowly over the projection horizon.

This reflects the very long maturity, and highly concessional interest rates of the existing debt,

coupled with very limited gross financing need in the medium term. As a consequence, the

impact of new borrowing on the cost and risk characteristics of the debt portfolio will be

marginal, and therefore transforming these characteristics through new debt will take time. The

medium-term analysis must be fed back to a debt sustainability analysis and it is important to

ensure that it is consistent with the overall macroeconomic framework.

44. Overall, the MTDS will aim at maintaining public debt at sustainable levels while

also ensuring the gradual development of the domestic debt market. The high foreign

exchange risks due to large foreign currency debt exposure, high costs associated with non

concessional financing and the current underdeveloped domestic borrowing market provide an

opportunity to diversify sources of financing and further develop the domestic borrowing market.


APPENDIX I. COST AND RISK FACTORS OF DIFFERENT

FINANCING INSTRUMENTS

Instrument Type Cost characteristics Risk characteristics Other comments

Multilateral Concessional

loan (e.g., IDA, AfDB,

ADF)

Highly concessional. Fixed rate; denominated in

foreign currency; ultra-long

tenor; amortizing structure;

long grace period.

Access will decline and

terms will harden as income

level increases. Limited

flexibility to negotiate terms.

Typically involves a

commitment fee.

Disbursement can be

dependent on certain

conditions being met.

Multilateral non-

concessional loan (e.g.,

IBRD, AfDB)

Some concessionality. Both fixed and variable rate;

denominated in foreign

currency.

Flexibility to tailor terms

(e.g., currency and interest

rate structure) to suit

recipient risk preferences.

Tenor and grace period

linked to country category.

Involves a commitment fee.

Not available to IDA-only

countries.

Bilateral loan (including

project loans)

Typically some

Concessionality.

Both fixed and variable rate;


currency.

Limited flexibility on choice

of terms. Various

transaction charges

involved. Project loans tied

to specific project use;

consequently disbursement

highly dependent on

progress of project.

Commercial bank loan

(including syndicated

loans)

Market rates Can be fixed or variable

rate; can be short-, medium-

or long-term; typically


currency.

Flexibility to influence terms

will depend on relative

negotiating power. Can

involve significant

transaction fees.

Sovereign Bonds Market rates (depending on

liquidity conditions and

country credit rating).

Can be fixed or variable

rate; typically denominated

in foreign currency;

typically bullet structure.

Authorities choose key

features (e.g., interest rate

structure, currency and

maturity). Significant

transaction fees involved.

Resource intensive to

launch.

Treasury bills Market rates Short-term; denominated in

domestic currency

Typically the first

instrument introduced in

the domestic market.

Treasury bonds Market rates Medium- to long-term;

typically denominated in

domestic currency. Can be

fixed or variable rate. Can be

indexed.

Structure of investor base

will be determinant of

relative cost of different

types and maturities.

External Instruments

Domestic Instruments

Source: IMF and WB – Developing a MTDS, guidance note for country authorities (2009)


APPENDIX II. TERMINOLOGY

Amortization – Refers to the repayment of principal of a loan spread out over time.

Arrears – The amount of scheduled debt service payments that have fallen due but have not

been paid to the creditor(s).

Commercial Interest Reference Rates (CIRRs) – The OECD Arrangement on Guidelines for

Officially Supported Export Credits states that minimum interest rates shall apply to official

financing support for export credits. These minimum interest rates are called Commercial

Interest Reference Rates (CIRRs). A CIRR is fixed for each currency of the OECD members

and the CIRRs are set on the 15th of each month. They are meant to correspond to the most

favorable terms of fixed rates that a country is able to contract on the international financial

market. This rate is used as the discount rate for Rwanda’s DSA for the purpose of calculating

the Net Present Value of debt. See Discount Rate.

Contingent Liability – A contingent liability is an obligation that may result from certain states

of nature. For example, a guaranteed loan is a contingent liability because if the primary debtor

defaults, then the Government must pay the pre-agreed service. Contingent liabilities are not

located on the balance sheet, but pose a risk to fiscal sustainability.

Concessional (Credit Terms) – Concessionality implies that loan terms are on generous terms

compared to current market conditions. This term applies to any credit whose grant element is

higher than 25percent. The grant element reflects the repayment terms of a credit operation:

interest rate, maturity period, and grace period. See Grant Element.

Debt Relief – Debt relief refers to any actions on the part of the creditor that make repayment

less burdensome for the debtor. This takes many forms: loan rescheduling, restructuring, debt

stock forgiveness, various debt swap programs (such as, for equity in public enterprises or even

natural resource preservation), and debt relief grants.

Debt Sustainability – A country is considered to have sustainable external debt when it is able

to meet its current and future external debt-service obligations in full, without recourse to debt

relief, rescheduling, or the accumulation of arrears. Generally external sustainability is judged

through solvency and liquidity ratios. See Debt Sustainability Analysis and Threshold.

Discount Rate – The interest used in discounting future debt service payments. See Net Present

Value.

Debt Sustainability Analysis (and DSA Ratios) – Debt Sustainability Analysis (DSA) is an

international best-practice framework for determining the sustainability of debt. DSA ratios

consist of both solvency and liquidity ratios. These ratios have thresholds determined through


empirical research at international institutions, which indicated historical levels at which

countries faced either sovereign default or bailout. See Threshold and Debt Sustainability.

Debt Service – Debt service payments refer to all payments made against a loan: amortization,

interest and commission payments. Debt service paid is the amount actually paid to satisfy a

debt, in contrast to debt service due, which does not consider debt relief grants.

External Loan – A legally binding document which obligates a lender of one country to make a

specific amount of funds available for disbursement to the Government or entity in another

country once certain preconditions have been met. The amount disbursed is repaid in accordance

with the terms set out in a repayment schedule or in a promissory note.

Fixed Interest Rate – An interest rate on a loan which remains constant throughout the duration

of the loan. See variable interest rate.

Grace Period – The period of time between the date of signature and the date of the first

payment of principal. Interest is assessed during this period.

Grant – A legally binding obligation for the disbursement of a specified value of funds for

which repayment is not required.

Grant Element – The grant element of a loan is an indication of the concessionality of

repayment terms. The grant element is calculated as the difference between the NPV of debt and

its nominal value, expressed as a percentage of the nominal value of the debt (i.e. the grant

element is equal to the nominal value minus NPV divided by the nominal value). A higher grant

element reflects more generous repayment terms from the creditor, or higher concessionality in

other words. See Concessional, Nominal Value, and Net Present Value.

Guaranteed Loan – A loan guarantee provides an assurance to the creditor of a non-central

government entity that the central government will finance an agreed amount of debt service

obligations if the primary borrower were to default. It is international best-practice for central

governments to only guarantee a minority of debt service payments of any given loan to ensure

that the borrower’s incentives are properly aligned.

Liquidity Ratios – Liquidity ratios seek to determine whether a country has sufficient resources

to meet debt service payments. These indicators are particularly relevant short-term measure of

debt-sustainability. Over a long period of time, however, this indicator is particularly sensitive

to macroeconomic projections.

Maturity Period – The maturity period is an expression often used to denote the period over

which payments (amortization, interest, and commissions) are made for the loan and includes the

grace period.


Net Present Value (NPV) – The net present value of debt (or, simply present value of debt) is

the current value of a future stream of cash payments or receipts discounted to reflect the time

value of money. It is defined as the sum of all future debt service payments (interest and

principal minus debt relief grants) on existing debt, discounted at market interest rates.

Whenever the interest rate on a loan is lower than the market rate, the resulting present value of

debt is smaller than the nominal value, with the difference reflecting the grant element.

This is a useful measure for debt sustainability analysis as it takes into account the degree of

concessionality. Furthermore, the concept of present value of debt is used because the nominal

value of external debt stock is not a good measure of a country’s debt burden if a significant part

of the external debt is contracted on concessional terms; for example, with an interest rate below

the prevailing market rate. See Discount Rate, Solvency Ratios, and Debt Sustainability

Analysis.

Nominal Value (Face Value) – Refers to the outstanding principal of a loan, or in other words

the stock of outstanding debt. At the date of signature, when the grant element is calculated, the

nominal value refers to the total loan disbursement amount.

Solvency Ratios – Solvency ratios seek to determine whether a country will have sufficient

resources to service a particular debt stock in the long-term. Solvency ratios look at the net

present value of debt compared to ability-to-pay measures, such as exports and GDP. Generally,

solvency ratios are seen as a short-hand measure of long-term debt sustainability. All solvency

ratios use net present value calculations and are, therefore, very sensitive to discount rate

assumptions. Refer to the Technical Annex for an explanation of how discount rates are

calculated for Rwanda’s DSA. See Discount Rate, Liquidity Ratios, Debt Sustainability Analysis

and Net Present Value.

Thresholds – Debt sustainability is judged by whether DSA ratios are below pre-determined

thresholds. Empirical thresholds have determined through research at international institutions,

which indicated historical levels at which countries faced either sovereign default or bailout.

These thresholds are policy-dependent, meaning that countries that are judged to have a ‘strong’

policy environment (as determined by the World Bank’s Country Policy and Institutional

Assessment Index - CPIA) have thresholds that allow for greater levels of external indebtedness

relative to domestic macroeconomic factors. Rwanda scores as a medium policy environment,

which determines the ratios that are used in the DSA.

Variable Interest Rate – A rate of interest that is computed by adding a spread to a

predetermined base rate. For example: 1 percent over the LIBOR (London Inter-Bank Offered

Rate).

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