Rwanda: First Review Under the Policy Support Instrument-Staff Report; and Press Release

KEY ISSUESMain challenges: Rwanda continues to face the challenge of sustaining high growth while reducing its reliance on aid and preventing the build-up of imbalances. After using foreign exchange reserves over the past few years to support the economy, the room for maneuver is more limited and it will be important to rebuild policy buffers.Outlook and risks: Growth is projected to increase to 6 percent in 2014, while inflation is expected to remain well contained. Downside risks to the outlook center around delays in government financed projects and a weak second season for agriculture.Policy discussions focused on the short and medium-term economic challenges:• In the short term, the need to support growth and preserve the level of foreign reserves requires a cautious fiscal stance while maintaining priority spending and leaving scope for private sector credit expansion. In the absence of inflationary pressures, and faced with a binding balance of payments constraint, the monetary stance is appropriate to prevent a build-up of pressures in the foreign exchange market. Exchange rate flexibility would help preserve reserve buffers.• In the medium term, the challenge will be the cost-effective financing of development projects, and implementation of the government's second Economic Development and Poverty Reduction Strategy (EDPRS2). Mobilizing domestic resources in support of the ambitious agenda embodied in the EDPRS2 will be crucial. The significant scaling up of investment also requires careful project selection and prioritization, with judicious recourse to non-concessional financing.