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Cablegate: Rwandan 2008 Budget Highlights

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DE RUEHLGB #1005/01 3060635
ZNR UUUUU ZZH
R 020635Z NOV 07
FM AMEMBASSY KIGALI
TO RUEHC/SECSTATE WASHDC 4859
INFO RUEHNR/AMEMBASSY NAIROBI 1058
RUEHDR/AMEMBASSY DAR ES SALAAM 0996
RUEHJB/AMEMBASSY BUJUMBURA 0182
RUEHKM/AMEMBASSY KAMPALA 1753
RUEHFR/AMEMBASSY PARIS 0361
RUEHKI/AMEMBASSY KINSHASA 0320

UNCLAS KIGALI 001005

SIPDIS

SIPDIS

DEPARTMENT FOR AF/C
DEPARTMENT PASS USTDA: EEBONG
DEPARTMENT PASS USTR: WJACKSON
DEPARTMENT PASS COMMERCE: RTELCHIN
DEPARTMENT PASS OPIC: BCAMERON

E.O. 12958: N/A
TAGS: EAID EFIN ECON PGOV PREL RW
SUBJECT: Rwandan 2008 Budget Highlights


1. Summary. Minister of Finance James Musoni officially presented
the 2008 budget to the Parliament on October 16. The overall budget
is approximately USD 1.1 billion, a 15 increase from the previous
year. Musoni predicted 6.6 growth in the economy with inflation
dropping to 5 by 2008. He proposed significant budget increases
for the Ministries of Infrastructure, Agriculture and Health, while
proposing budgets cuts for the Prime Minister's Office and the
Ministries of Information and Justice. Parliamentary examination of
the budget is now underway as ministers defend their individual
budgets. The Parliament's Budget Commission will work with the
Minister of Finance to make potential adjustments within each
ministry before presenting a final budget back to the plenary
session of Parliament and to receive final Senate confirmation. The
budget appropriately reflects the priorities outlined by the
government and the international donors for economic development and
poverty reduction. The budgetary process, including the questioning
of each minister's priorities by the Parliament, while imperfect, is
a sign of increased transparency, open debate, and growing
Parliamentary independence. End Summary.


2007 ECONOMIC PERFORMANCE AND 2008 PROJECTIONS

2. During his October 16 presentation of the budget to the
Parliament, Minister Musoni reviewed the 2007 economic performance
of the country, noting continued progress on several fronts, and
suggesting the economy is on track to reach a GDP growth of 6.6%.
Foreign currency receipts increased 22% from USD 414 million to USD
506 million from December 2006 to September 2007. Musoni stated
that increased exports and increased donor funding will augment
Rwanda's foreign currency account. He predicted that exports will
continue to rise by 15% next year. Private sector credit increased
by 11.3% in 2007 compared to 2006, expanding the amount of money
lent by financial institutions. Musoni projected this to increase
at a rate of 12% over the next three years. He also promised to
develop strategies to decrease existing credit rates which average
15% per year.

3. Minister Musoni estimated that inflation will average 7.5% by
the end of 2007, but predicted that prices will stabilize in 2008 at
an annual inflation rate of 5% (septel will address the rising cost
of living in Rwanda). Export receipts increased by 7% in 2007, but
imports increased by 23%, widening the existing trade deficit by 30%
in 2007.

4. Other predictions for 2008 included a 15% increase in farm
exports, 7% increase in industrial production, and a 9% increase in
tourism receipts. In addition, tax revenues are projected to
increase to USD 600 million by 2010 from USD 417 million collected
in 2007.

5. The overall domestic fiscal deficit was lower than projected,
Musoni reported, because the Rwanda Revenue Authority (RRA)
collected more domestic revenues than expected and the Government of
Rwanda (GOR) initiated a successful policy of monitoring performance
contracts of all institutions.

6. The Ministries of Heath and Education reported overspending
19.8% and 2% respectively on salaries and wages, while the Ministry
of Education reported underspending on goods and services by 36%,
primarily on books and other school materials as well as on the
construction of schools.

7. Following the presentation of the budget, Duncan Overfield,
Chief Economist at United Kingdom Department for International
Development (DFID) and chair of the budget support group (a working
group composed of donors providing direct budget support to the
Ministry of Finance), confirmed to EconOff that the government
reporting (including expenditures and inflation figures) are
accurate and dismissed any suggestion of GOR misreporting. He
commented that project support aid, as provided by the USG, is
difficult to capture in the overall budget. He urged all donors to
provide direct budget support as he believes the large amounts of
money spent off-budget make it difficult to monitor and to have a
complete picture of government expenditures.

REVENUES

8. Domestic revenues are projected to be USD 595.2 million,
representing 54 of the entire budget, while foreign grants will
account for 46 or USD 516.4 million. Domestic revenue will
represent 13 of GDP in 2008. 85 of domestic revenues consist of
fiscal revenues, 8 will be foreign loans, and 5 will be domestic
borrowing.

9. The World Bank, the African Development Bank, United Kingdom,
Sweden, Germany, the Netherlands, and the European Union will
provide approximately USD 516.4 million in direct budget support for
2008, representi
ng 46 of the overall budget. Other donors, notably
the USG, will continue to provide project support and the GOR will
work to capture these figures in budget reports to provide the most
complete

10. In compliance with the Multilateral Debt Relief Initiative
(MDRI) conditions and to keep its debt sustainable, the GOR will
favor grants as a form of financing and will maintain borrowing
levels at highly concessional rates of 50% (i.e., 50% loan and 50%
grant). However, if adequate grant financing is not made available,
he said, the GOR would seek loans with only 35% concessionality.
This would require a waiver from current international arrangements.

EXPENDITURES

11. Pending Parliament's approval, the following ministries will be
targeted for significant increases: the Ministry of Infrastructure
will receive the largest share of the 2008 budget to be mainly
allocated for roads and energy development. Its allocation will
increase by 17% to USD 187 million. The Ministry of Agriculture
will receive a 37% increase to USD 47 million; the Ministry of
Health budget will increase by 21%; the Ministry of Education budget
will increase by 6%; the Ministry of Commerce budget will increase
by 20% directed mainly at export promotion and construction of the
free trade zone; the Ministry of Lands and Environment budget will
increased by 40%.

12. Other GOR offices' budgets are being cut. The Office of the
Prime Minister, which encompasses the Prime Minister's Office, the
Ministry of Information, and the Ministry of Gender and Family
Planning received a 17% cut to USD 9 million. Of note, the Ministry
of Justice received a 34% budget reduction to USD 15 million for
2008. Musoni explained that the reduction is because the gacacca
traditional court system that has been trying genocide suspects is
winding down its mandate.


OPEN DEBATE

13. Members of Parliament openly questioned Musoni's rationale for
budget allocation. For example, Juvenal Nkusi of the Social
Democratic Party (PSD) felt more energy resources should be
dedicated towards the methane extraction projects in Lake Kivu.
Aron Makuba, another PSD member, pushed Musoni for solutions to
rising costs of living. Other issues raised during Musoni's
presentation included East African Community (EAC) integration and
the government plan to recover funds from students who studied on
government scholarships.

14. During the week of October 22, members of the Parliament's
Budget Commission began the process of questioning each minister
regarding priority areas to be funded through the 2008 budget. As
Francois Nkurikiyimfura, Director of the Treasury, explained the
process to EconOff, the Budget Commission will work with the
Minister of Finance to make potential adjustments within each
ministry before presenting a final budget back to the plenary
session of Parliament and to receive final Senate confirmation. The
overall budget and each ministry's allocation cannot be increased or
decreased, but spending priorities within each ministry can be
adjusted. The President of the Budget Commission, Constance
Mukayuhi, told EconOff that her commission is not given adequate
time and lacks staff expertise to analyze and propose adjustments to
the budget, but appreciates being involved in the process.

15. According to the IMF country representative, Lars Engstrom, the
budget as reported by the Minister of Finance, reflects the
priorities laid out in the GOR's draft Economic Development and
Poverty Reduction Strategy (EDPRS), balancing development goals and
poverty reduction. The allocations also reflect a good balance
between productive sectors, infrastructure, and human development.

16. Comment: Because Rwanda's economic performance is heavily
based on its exports, it is important to note that world prices for
Rwanda's main exports -- coffee and minerals, are expected to drop
in the upcoming year. Overall export volume must increase
significantly to offset the decreased prices. The international oil
market will also be a significant factor for the Rwandan economy, as
the GOR will continue to provide subsidies to the petroleum sector.
The current upward trend in world oil prices could put an
unanticipated burden on budget
expenditures if the GOR continues its
policy of subsidizing markets to curb inflation. The GOR has
competing interests it must balance, but it has outlined a long-term
strategy for itself and the 2008 budget appears to keep true to that
vision. The budgetary process, including the questioning of each
minister of his/her priorities by the Parliament, while imperfect,
is a sign of increased transparency, open debate, and growing
Parliamentary independence. End Comment.

ARIETTI

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