Rwanda’s Debt Sustainability Analysis – August 2014
Risk of external debt distress:
Augmented by significant risks stemming from
domestic public and/or private external debt?
Low
No
Rwanda’s debt stock continues to remain sustainable. As of December 2013, the country has a low
risk rating associated with its external debt, in part because of improved prospects for exports,
prudent debt and macroeconomic management, and a strong Country Policy and Institutional
Assessment (CPIA) score. All of these reasons contributed to a total public debt stock in 2013
equaling just over US$2 billion, or 27.4 per cent of GDP, with the majority of this classified as
concessional. A US$ 400 million Eurobond issued in April 2013 demonstrated Rwanda’s
commitment to seeking alternative financing to traditional donor funding and investors’ response
to it signaled trust in Rwanda’s creditworthiness. Domestic debt equaled 6.3 per cent of GDP by
end-2013, an increase of 0.9 percentage points from 2012. Going forward, the main risk to debt
sustainability will be servicing more expensive forms of debt, such as commercial borrowing, which
may be contracted in order to advance key infrastructure projects.
A. Background
The total stock of public debt increased in 2013 by 4.7 percentage points of GDP, mainly as
a result of the Eurobond issue in April 2013 and due to lower than expected economic growth
for the year (9.7 per cent nominal GDP growth realised as opposed to 12.9 per cent forecast).
The total stock is now just over US$ 2 billion, which represents 27.4 per cent of GDP. This
remains the lowest debt/GDP ratio in the region (see Figure 1). The majority of this is external
debt i.e. debt owed to foreign creditors, such as multilateral institutions or overseas Eurobond
investors. Domestic debt – which represents 22.9 per cent of total public debt – increased in
2013 due to the Government’s cash flow needs, as the impact of the 2012 aid shock persisted
into the next calendar year. Government guaranteed external debt declined in 2013 as RwandAir
and the Kigali Convention Centre successfully paid back expensive commercial loans.
Guaranteed domestic debt increased due to the Energy, Water and Sanitation Authority (EWSA)
increasing its loan facility with Bank of Kigali.
The scope of public debt for the purposes of this Debt Sustainability Analysis (DSA) is external
and domestic debt contracted and guaranteed by central government. Table 1 highlights the
important components of Rwanda’s current public debt stock and provides an estimate for
2014. Very little change is expected compared to 2013.
Note that private sector external debt in Rwanda remains at low levels: it equaled 5.4 per cent of
GDP in 2013 as opposed to 6.0 per cent in 2012. The vast majority of this is long-term debt.
1
Figure 1: Public debt in the East African Community in 2013
Public debt as % GDP
60
50
40
30
20
10
0
Kenya
Tanzania
Uganda
Burundi
Rwanda
Source: WEO April 2014, MINECOFIN
Table 1: total public debt in Rwanda, 2012 – 2014
2012
2013
2014 (estimate)
Stock
(USD
mn)
1651
%
GDP
22.6
%
share
of
total
debt
100.0
External Debt
1259
17.3
76.2
1602
21.1
77.1
1709
21.1
76.1
Government
1062
14.6
64.3
1555
20.5
74.8
1655
20.4
73.7
i. Multilateral
891
12.2
53.9
939
12.4
45.2
990
12.2
44.1
ii. Official Bilateral
172
2.4
10.4
216
2.8
10.4
265
3.3
11.8
0
0.0
0.0
400
5.3
19.2
400
4.9
17.8
Guaranteed by central govt
196
2.7
11.9
47
0.6
2.2
54
0.7
2.4
Domestic Debt
393
5.4
23.8
477
6.3
22.9
536
6.6
23.9
5
0.1
0.3
11
0.1
0.5
10
0.1
0.4
Total Public Debt
iii. Commercial
of which guaranteed
Stock
(USD
mn)
2079
%
GDP
27.4
%
share
of
total
debt
100.0
Stock
(USD
mn)
2245
%
GDP
27.7
%
share
of total
debt
100.0
Nominal GDP (RWF billion)
4479
4915
5406
Exchange rate (period average)
614
647
666
Nominal GDP (US million)
7291
7601
8116
Note: Table 1 follows the definition of debt agreed in the IMF Policy Support Instrument (PSI) with Rwanda. However,
the definition of debt provided in the IMF Government Finance Statistics 2014 Manual – which will be the guideline
used by the East African Community for government macroeconomic statistics in the future - excludes guarantees
from the definition of debt until the guaranteed entity actually defaults. Although Table 1 includes guarantees, in line
with the definition in Rwanda’s current PSI, these do not represent guaranteed entities that have already defaulted
but guaranteed entities that may default in future.
2
Figure 2 shows the share of different kinds of debt in GDP and in total public debt. Bilateral and
domestic debt as a share of GDP increases over time. This is because the Government aims to
diversify its set of lenders; for example, it is very committed to exploring partnerships with
emerging market Exim banks. The increase in domestic debt reflects, in part, the Government’s
agenda to expand local capital markets along with funding shortfalls for the FY2012/13 budget.
The change in shares of the total debt stock mainly reflect the change from reliance on
multilateral lenders to more market driven solutions such as commercial lending. Nevertheless,
multilateral lenders, who provide highly concessional loans, will remain the majority holder of
Rwandan public debt for the foreseeable future. The change in total debt shares needs to be
managed carefully as different creditors have different priorities and different tolerance levels
for sudden changes in Rwanda’s macroeconomic outlook.
Figure 2: shares of components of debt in GDP and total public and publically guaranteed debt
Domestic
Domestic
Govt guaranteed
Govt guaranteed
Commercial
Commercial
Bilateral
Bilateral
Multilateral
Multilateral
0
5
10
0
15
20
40
60
% share in total debt
% GDP
2014 (estimate)
2013
2012
Total debt service in 2013 equalled $55.2 million (4.5 per cent of exports of goods and services
in Table 2). The largest share of the servicing was accounted for by interest repayment on the
Eurobond. Going forward, debt servicing will be slightly higher than in the past due to these
interest repayments ($26.5 million a year until 2023) but will still remain well within sustainable
levels, given the current macroeconomic outlook. However, a repayment risk does arise in 2023,
when the principal on the Eurobond falls due. In 2014, servicing is estimated to equal 4.9 per
cent of exports and 4.4 per cent of revenue; similar ratios are also estimated to apply in the
medium-term.
Table 2: servicing of external public debt, 2012 - 2014
2012
2013
2014 (estimate)
17.3
19.3
22.6
9.2
33.0
39.1
26.5
52.2
61.7
Debt service (% exported goods and services)
2.6
4.5
4.9
Debt service (% government revenue, excluding grants)
2.3
4.2
4.4
Amortization schedule (USD million)
Interest repayment schedule (USD million)
Total debt service (USD million)
Liquidity analysis
3
B. Underlying Assumptions
Box 1: the cautious macroeconomic framework for the DSA
Growth: long run real GDP growth is projected at 6.0 per cent. This is lower than growth estimated in
Rwanda’s current PSI (7.5 per cent) and is based on the cautious assumption that export growth will be
lower than previously forecast.
Inflation: inflation is expected to remain contained. In the medium and long term it is projected at 4.7
per cent, just under BNR’s medium-term target of 5.0 per cent.
External sector: the export of goods and services is projected to gradually rise from 15.4 per cent of GDP
in 2013 to 18.0 per cent by the end of 2034, as a result of the promotion of non-traditional exports such
as milling products and conference services. This reflects an annual average growth rate of 9.0 per cent,
lower than average growth in the past as it is cautiously assumed that infrastructural bottlenecks and
non-tariff barriers dampen potential growth. Import growth is high in the near-term, reflecting
investment in key infrastructural projects (average growth of 8.6 per cent in 2014-2019). However, it will
then slow down, growing on average by 6.0 per cent a year in the medium and long-term, reflecting the
fact that domestic demand may not be as buoyant as it has been in the past and that government capital
expenditure is projected to slow down.
Fiscal balances: there will be a consistent effort to mobilise domestic revenues, meaning revenue
excluding grants will increase from 16.3 in 2013 to 21.4 per cent of GDP by the end of the period. Grants
will steadily taper down over the period, equaling less than 1 per cent of GDP by 2034. Total public
expenditure will decline from 30.1 to 25.0 per cent of GDP, reflecting the slowdown in capital expenditure
in the long term.
Domestic borrowing: domestic borrowing is assumed to increase by the domestic financing need in
2014 – 2016 (which is at a level within the current PSI limit) and then to equal 1 per cent of GDP a year in
the medium and long-term, as the government faces an ongoing need to finance the budget. No further
domestic guarantees are assumed.
External concessional borrowing: the 2014-2019 estimates rely on data from Treasury on current
projects. After this, the stock of bilateral loans is expected to increase by 8 per cent a year, as Rwanda’s
low risk rating opens up new funding opportunities. The stock of multilateral loans is consistent with the
recent IDA-17 allocation, historical disbursement levels and projected USD inflation. This DSA makes no
assumption on when Rwanda becomes a ‘blend’ country (i.e. when it will be able to access IBRD loans,
which are less concessional than IDA loans).
External non-concessional borrowing: Rwanda’s second PSI currently has a ceiling on non-concessional
external borrowing of $250 million. Approximately $230 million of this is still available as of July 2014. The
framework assumes a new 10 year Eurobond for various infrastructure projects, including RwandAir
expansion, of $200 million in 2015, with an interest rate of 8.5 per cent and a grace period of one year.
No further external guarantees are assumed.
4
Box 2: the optimistic macroeconomic framework for the DSA
Growth: long run real GDP growth is projected at 7.5 per cent, and will be driven by export growth.
Inflation: no change to cautious macroeconomic framework.
External sector: the export of goods and services is projected to gradually rise from 15.4 per cent of GDP
in 2013 to 19.4 per cent by the end of 2034, reflecting an annual average growth rate of 10.7 per cent,
lower than average growth in the past, but higher than the cautious macro framework assumption as it is
assumed that infrastructural bottlenecks get resolved quickly. Import growth is high in the near-term,
reflecting investment in key infrastructural projects (average growth of 9.7 per cent in 2014-2019).
However, it will then moderate, growing on average by 7.0 per cent a year in the medium and long-term,
as demand from large infrastructure and construction projects diminishes.
Fiscal balances: there will be a consistent effort to mobilize domestic revenues, meaning revenue
excluding grants will increase from 16.3 in 2013 to 23.0 per cent of GDP by the end of the period. Of
course, with higher GDP growth throughout the period, this translates into more domestic resources than
under the cautious macroeconomic framework. Grants will taper down less slowly over the period, which
also has a positive impact on the current account balance. Total public expenditure will decline from 30.1
to 25.0 per cent of GDP, as under the cautious macroeconomic framework, but given stronger GDP
growth will grow by more on an annual basis than under the cautious framework.
Domestic borrowing: no change to cautious macroeconomic framework.
External concessional borrowing: no change to cautious macroeconomic framework.
External non-concessional borrowing: no change to cautious macroeconomic framework.
5
Box 3: comparison of the cautious macroeconomic framework with the previous MINECOFIN DSA
November 2013
July 2014
July 2014
Cautious
Optimistic
More cautious
Real GDP growth of 7.5
Real GDP growth of 6.0 per
Real GDP growth of 7.5
growth outlook
per cent in medium and
cent in medium and long
per cent in medium and
long term (reflecting PSI
term.
long term.
agenda).
Similar growth in
8.5 per cent growth in
9.0 per cent growth in
10.7 per cent growth in
exports but
exports in medium and
exports in medium and long
exports in medium and
greater leakage
long term.
term. Import growth is
long term. Import
higher.
growth is higher.
through imports
Composition of
Grants remain a key part
Tapering down of grants and
Slower tapering down
public financing is
of financing until the
revenue gradually increases
of grants and revenue
different
end of the period.
to 21.4 per cent of GDP in
increases to 23.0 per
Revenues are 16.8 per
2034. Capital expenditure
cent of GDP in 2034.
cent of GDP by 2034.
growth is lower than in the
past.
Level of
New debt is disbursed
More new debt is disbursed
No change with
concessional debt
more toward the end of
in the short and medium
cautious
is broadly similar
the period.
term. A new Eurobond is
macroeconomic
but timing
issued in 2015 for $200
framework.
changes
million (reflecting the new
PSI).
PV External Public
Debt to GDP
2014
2024
2034
16.7
14.6
14.6
7.8
15.3
14.1
9.1
11.6
9.4
6
C. External DSA
The External DSA firstly uses the cautious macroeconomic framework. Based on a twenty year
horizon, it shows that Rwanda’s external public and publically guaranteed debt outlook is
sustainable from 2014 (first year of projection) through 2034. None of the sustainability
indicators in Figure 3 breach the thresholds in the baseline scenario (the most realistic
scenario).1 There is one breach in the most extreme shock scenario but on closer analysis - which
accounts for Rwanda’s strong CPIA score – this is not deemed problematic. As none of the
thresholds are breached, Rwanda retains its low risk status, which effectively demonstrates it is
a creditworthy sovereign.
This external risk rating is crucial for determining Rwanda’s limit on external non-concessional
borrowing, as negotiated in the IMF Policy Support Instrument (PSI), and also determines the
mix of loans and grants Rwanda receives from the World Bank. The IMF/World Bank DSA
conducted in late 2013 saw the external risk rating change from moderate to low, and this
means that going forward Rwanda will receive IDA loans only, rather than a mix of loans and
grants as previously. In addition, certain bilateral donors are more likely to provide loans to
Rwanda, given its new low-risk rating.
Table 3 below sets out the evolution of key debt sustainability baseline indicators going
forward. Although the debt service to exports threshold only applies to the debt service of
public and publically guaranteed debt, it is worth noting that including the private sector does
not place an undue burden on the ability of exports to generate the forex needed to service
debt: over the whole period, the average ratio would be 9.8 per cent if the private sector’s
external debt were included, still well below the threshold.
Table 3: solvency and liquidity baseline indicators from the DSA, using cautious macroframework
Indicators
2014 2015 2016 2017 2018 … 2023 2024 2034 Threshold
PV Debt-to-GDP
14.6
17.5
17.9
17.5
17.2
15.7
15.3
11.6
50.0
PV Debt-to-Exports
93.6
114.7
117.3
115.9
114.8
98.8
95.7
64.9
200.0
Debt service-to-exports
5.8
6.5
6.6
7.6
7.0
20.4
5.3
4.6
25.0
Debt service-to-revenue
5.3
5.5
5.3
6.0
5.3
15.4
4.0
3.9
22.0
Note: 2014 estimates differ slightly compared to Table 2 as the DSA tool includes the servicing of guaranteed debt. In
reality, the central government will not service this debt unless the guaranteed entity defaults.
Figures 3b) to 3d) show that the present value of debt to various solvency indicators (GDP,
exports and revenue) is expected to increase in the medium-term, before declining in the longterm. Looking at the extreme shocks for these figures, the solvency indicators are in no danger
of breaching the threshold throughout the time period. This is because Rwanda currently has
quite a low debt-to-GDP figure, after debt cancellation in the mid-2000s, and because careful
1
The thresholds for the debt sustainability tests (on solvency and liquidity) are based on Rwanda’s Country Policy
and Institutional Assessment (CPIA) score which for this DSA assessment was 3.8. This makes Rwanda a ‘strong’
policy performer. But as of June 2014, Rwanda’s score actually increased to 3.9, the joint highest in Africa.
7
debt management will ensure that additions to the stock remain in line with GDP growth
forecasts and will be as concessional as possible. Whereas in the past, the PV Debt-to-Exports
indicator was regularly breached under the most extreme shock, this is no longer the case today
due to a wider export base and improving prospects for growth and diversification.
The liquidity indicator of debt service-to-exports in Figure 3 e) does not breach the threshold
under either the baseline (most realistic case) or under an extreme shock, but debt service-torevenue in Figure 3 f) gives some cause for concern. The baseline (the blue line) does not
breach the threshold but an extreme shock to the exchange rate would result in the threshold
being near-breached in 2023 (the year the Eurobond will be repaid).
This is known as a borderline case in the DSA framework, and necessitates closer analysis. The
thresholds for breaches are based on countries having a CPIA score above a particular floor, but
they do not take into account an individual country’s score. Probability analysis that does
account for Rwanda’s score - which is well above the floor for the threshold associated with a
strong CPIA rating – shows that a shock will not cause a breach in the threshold (Figure 4).
Nevertheless, the analysis highlights the risks when large debt repayments are due (and large
annual repayments are more likely to occur as Rwanda increases its non-concessional
borrowing). The analysis strongly suggests that Rwanda must focus its revenue and export
mobilisation efforts with the 2023 Eurobond repayment clearly in mind. It also suggests that
bullet repayments of any kind need to be monitored carefully in the future.
The table of inputs and results for the External DSA is presented in Table 5.
8
Figure 3: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios,
2014-2034: Cautious Macroeconomic Framework
a. Debt Accumulation
12
60
60
10
50
50
8
40
6
30
4
20
2
10
0
0
2014
2019
2024
2029
40
30
20
10
0
2034
2014
Rate of Debt Accumulation
Grant-equivalent financing (% of GDP)
Grant element of new borrowing (% right scale)
300
2019
2024
2029
2034
c.PV of debt-to-exports ratio
250
d.PV of debt-to-revenue ratio
350
b.PV of debt-to GDP ratio
200
250
150
200
100
150
100
50
50
0
0
2014
2019
2024
2029
e.Debt service-to-exports ratio
30
2014
2034
2024
2029
2034
f .Debt service-to-revenue ratio
25
25
2019
20
20
15
15
10
10
5
5
0
0
2014
2014
2019
2024
Baseline
2029
2019
2024
2029
2034
2034
Historical scenario
Most extreme shock 1/
Threshold
1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a one-time
depreciation shock; in c. to an exports shock; in d. to a one-time depreciation shock; in e. to an exports shock and in figure f. to a
one-time depreciation shock.
9
Figure 4: Probability of Debt Distress of Public and Publicly Guaranteed External Debt under
Alternative Scenarios, 2014-2034: Cautious Macroeconomic Framework
e.Debt service-to-exports
16
f .Debt service-to-revenue
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
2014
2019
Baseline
2024
2029
Historical scenario
2034
2014
2019
2024
Most extreme shock One-time depreciation
2029
2034
Threshold
1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a one-time
depreciation shock; in c. to an exports shock; in d. to a one-time depreciation shock; in e. to an exports shock and in figure f. to a
one-time depreciation shock.
10
D. Public DSA
Public debt includes both the external and domestic debt contracted or guaranteed by central
government. This Public DSA uses the cautious macroeconomic framework. Domestic public and
publically guaranteed debt remains low, equaling 6.3 per cent of GDP in 2013. By the end of the
period it is projected to have increased to 9.4 per cent of GDP with its maturity composition
becoming more long-term as the government seeks to develop local capital markets. Its level by
the end of the time period incorporates the assumption that domestic debt increases by 1 per
cent of GDP a year in the medium and long-term (which is the limit under the current PSI).
The results of the Public DSA can highlight broader vulnerabilities, which may have implications
for macroeconomic policy. There is no risk rating associated with the Public DSA but its results
can be used in general policy discussions.
For Rwanda, the present value of public debt to GDP does not change dramatically in the
baseline case over 2014-2034 (Figure 5a). An adverse economic shock would cause an increase
in the near-term but the ratio would then decline again over time. Looking at the alternative
scenario where the primary balance is fixed at the level in 2014, the indicator is higher but still
far below the benchmark. It should be noted that 2014 is an unusual year to hold fixed as
Rwanda is still adjusting to the 2012 aid shock (the 2014 primary deficit is forecast as 4.0 per
cent of GDP, whereas the historical average for the previous ten years was 0.3 per cent of GDP).
The other solvency ratio, the present value of public debt to revenue, follows a similar pattern
(Figure 5b). For debt servicing, the profile is comparable to the External DSA, with Eurobond
repayments sharply increasing the burden (Figure 5c).
The table of inputs and results for the Public DSA is presented in Table 6. None of the three key
indicators suggest that the overall risk of debt distress is any higher than when external debt is
analysed in isolation.
11
Figure 5: Indicators of Public Debt under Alternative Scenarios, 2014-2034: Cautious
Macroeconomic Framework
a. PV of Debt-to-GDP Ratio
80
70
60
50
40
30
20
10
0
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2028
2030
2032
2034
2030
2032
2034
b. PV of Debt-to-Revenue (including grants) Ratio
250
200
150
100
50
0
2014
2016
2018
2020
2022
2024
2026
c. Debt Service-to-Revenue Ratio
30
25
20
15
10
5
0
2014
2016
2018
Baseline
2020
2022
2024
2026
Historical scenario
2028
Most extreme shock 1/
Threshold
1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.
12
E. Results from the External DSA using the optimistic macroeconomic
framework
This section uses the optimistic macroeconomic framework assumptions (see Box 2). To recap,
this broadly means that economic and export growth are higher in the future and that the
government’s revenue mobilisation efforts are more successful. The baseline scenario under the
optimistic framework does not materially change the picture for debt sustainability compared to
the cautious framework. The critical difference compared to the cautious framework is that,
under the most extreme shock scenario, the debt service-to-revenue ratio is no longer a
borderline case. This implies that if strong revenue mobilisation does materialise, and an
adverse economic shock also occurs (in this case depreciation), then Rwanda’s debt servicing
obligations are not at risk of being left unmet, particularly in years when there are bullet
repayments.
As the baseline scenario for both macroeconomic frameworks is broadly similar, a comparison
between the most extreme shocks for the debt service-to-revenue liquidity indicator is
presented in Figure 6 instead.
Figure 6: Indicators of Public and Publicly Guaranteed External Debt under the Most Extreme
Scenario, 2014-2034
Debt service-to-revenue
26
24
22
20
18
16
14
12
10
8
6
4
2
0
2014
2019
Threshold
2024
Optimistic framework
2029
2034
Cautious framework
13
F. Scenario-building: additional borrowing in the medium-term
Rwanda has an ambitious development agenda. There are key national and regional projects
that the Government deems essential in the medium-term to boost growth and enhance trade
links with the region. This section undertakes some scenario-building to see how the debt
sustainability indicators will respond to these. Analysis was undertaken for both the cautious and
optimistic macroeconomic framework but only the cautious framework is discussed here as
results for both are broadly similar (highlighting, incidentally, that a couple of percentage points’
difference in export and GDP growth rates is not as important as the amount and composition
of new external debt).2
The total cost of implementing these projects is currently estimated at US$ 2.6 billion. To put
this in perspective, if central government fully financed these projects, it would result in Rwanda
more than doubling its public debt stock in the space of six years. Three scenarios are presented:
S1. The full cost is met by concessional borrowing;
S2. The full cost is met by a mix of non-concessional and concessional borrowing (2:1 ratio);
S3. Some of the cost is met by the private sector and $1.1 billion is met by the government
(again, a 2:1 ratio of non-concessional to concessional borrowing).
Table 4 sets out the proposed debt instruments and time-frame for Scenario 2 as an illustration.
All three scenarios follow the same time-frame i.e. full disbursement of funds by 2020.
Table 4: proposed projects and debt instruments in the medium-term under Scenario 2
Time frame
Debt instrument
Start disbursement
Total Amount
End disbursement
USD million
Non-concessional bond I
2015
2015
1000
Non-concessional bond II
2018
2018
500
Commercial loan
2016
2016
200
Bilateral semi-concessional
2016
2020
200
Multilateral concessional I
2016
2020
200
Multilateral concessional II
2018
2020
500
Total Amount
2600
Note: the concessional and semi-concessional instruments assume loan terms identical to instruments already in
Rwanda’s debt portfolio and that a constant fraction of the loan is disbursed each year. The non-concessional bonds
are assumed to be for 10 years, with a grace period of 1 year and an interest rate of 8.5%. The commercial loan is
assumed to be for 6 years, with a grace period of 1 year and an interest rate of 6%.
2
Note that both the cautious and optimistic macroeconomic frameworks do not adjust to the inclusion of these
projects as the DSA tool is not designed to allow such macroeconomic ‘feedback effects’. This means that the
indicators produced in the following charts are most likely biased upward. In reality such large projects would
probably lower the solvency and liquidity indicators as GDP, exports and revenue grow faster over time as
aggregate demand is stimulated by this large boost to investment and infrastructure.
14
Figure 7 shows the results for Scenario 1, when all projects are financed by concessional loans.
Here, an extreme macroeconomic shock would cause a threshold breach for the PV debt-toexports solvency indicator and to the debt service-to-exports and debt service-to-revenue
liquidity indicators. However the baseline case (the blue line), which is considered the most
realistic outcome, does not breach the threshold. The result suggests that the government
should negotiate hard to obtain concessional loans to meet its ambitious development needs as
they of course represent the least risky option for external debt sustainability.
However, obtaining the full sum of US$ 2.6 billion from concessional sources may not be
feasible. Therefore, Scenario 2 includes a mix of non-concessional debt sources too. Figure 8
shows the results. Using a 2:1 ratio of non-concessional and concessional debt results in
threshold breaches, both under the baseline and an extreme shock, for one solvency
indicator (PV debt-to-exports) and for both liquidity indicators. The solvency breach occurs
over 2015 - 2018, when new non-concessional bonds would be issued. The liquidity breaches
occur as a result of Rwanda’s current debt profile; as the 2013 Eurobond requires a bullet
repayment in 2023, debt repayments in this year will necessarily be sensitive to the addition of
new debt servicing.
15
Figure 7: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios,
2014-2034: Scenario 1 (US$2.6 billion in new concessional debt)
a. Debt Accumulation
14
12
10
60
60
50
50
40
8
40
30
6
30
20
4
2
10
0
0
b.PV of debt-to GDP ratio
20
10
2014
2019
2024
2029
2034
0
2014
Rate of Debt Accumulation
Grant-equivalent financing (% of GDP)
Grant element of new borrowing (% right scale)
c.PV of debt-to-exports ratio
300
2019
2024
2029
2034
d.PV of debt-to-revenue ratio
350
300
250
250
200
200
150
150
100
100
50
50
0
0
2014
2019
2024
2029
2034
e.Debt service-to-exports ratio
30
2014
2024
2029
2034
f .Debt service-to-revenue ratio
25
25
2019
20
20
15
15
10
10
5
5
0
0
2014
2019
2024
2029
2034
2014
2019
2024
2029
2034
1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a one-time
depreciation shock; in c. to a terms shock; in d. to a one-time depreciation shock; in e. to a terms shock and in figure f. to a one-time
depreciation shock.
16
Figure 8: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios,
2014-2034: Scenario 2 (US$2.6 billion in new non-concessional and concessional debt)
20
60
50
50
15
40
40
10
30
5
20
30
20
10
0
2014
2019
2024
2029
b.PV of debt-to GDP ratio
60
a. Debt Accumulation
2034
-5
10
0
0
-10
2014
Rate of Debt Accumulation
Grant-equivalent financing (% of GDP)
Grant element of new borrowing (% right scale)
250
2024
2029
2034
d.PV of debt-to-revenue ratio
350
c.PV of debt-to-exports ratio
2019
300
200
250
200
150
150
100
100
50
50
0
0
2014
2019
2024
2029
2034
e.Debt service-to-exports ratio
35
2014
30
25
25
20
20
15
15
10
2024
2029
2034
f .Debt service-to-revenue ratio
35
30
2019
10
5
5
0
2014
2019
2024
2029
2034
0
2014
2019
2024
2029
2034
1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a one-time
depreciation shock; in c. to an exports shock; in d. to a one-time depreciation shock; in e. to an exports shock and in figure f. to a
one-time depreciation shock.
17
Figure 9: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios,
2014-2034: Scenario 3 (US$1.1 billion in new non-concessional and concessional debt)
12
60
50
10
50
8
40
40
6
30
30
4
20
2
10
0
0
2014
2019
2024
2029
20
10
0
2034
2014
Rate of Debt Accumulation
Grant-equivalent financing (% of GDP)
Grant element of new borrowing (% right scale)
2019
2024
2029
2034
d.PV of debt-to-revenue ratio
350
c.PV of debt-to-exports ratio
250
b.PV of debt-to GDP ratio
60
a. Debt Accumulation
300
200
250
200
150
150
100
100
50
50
0
2014
0
2014
2019
2024
2029
2024
2029
2034
2034
e.Debt service-to-exports ratio
30
2019
f .Debt service-to-revenue ratio
25
25
20
20
15
15
10
10
5
5
0
0
2014
2019
2024
2029
2034
2014
2019
2024
2029
2034
1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a one-time
depreciation shock; in c. to an exports shock; in d. to a one-time depreciation shock; in e. to a terms shock and in figure f. to a onetime depreciation shock.
18
The results in Figure 8 beg a re-analysis of the maximum amount of new debt that the
government can sustain for these projects. Figure 9 shows results for Scenario 3, which assumes
some private sector financing, meaning that the total stock of new public debt reduces to US$
1.1 billion. The 2:1 ratio of non-concessional to concessional borrowing remains the same. Here,
the PV debt-to-exports threshold is not breached and the liquidity thresholds are only
breached when there is an adverse shock to the terms of trade or the exchange rate.
Comparing the three scenarios, it is clear that the third is the most desirable as it involves both
the least amount of new public debt and also the least risk in terms of debt servicing (although
the risk involved in debt servicing in Scenario 1 is reasonably comparable). Financing the
country’s medium-term development needs will require strong engagement with traditional
development partners as well as the private sector (in the form of a project investor or a
government bond investor). The reduction in the public burden of new debt from US$ 2.6 to
US$ 1.1 billion in Scenario 3 is only feasible if the private sector thinks the projects will generate
a high return for their investment.
Figure 10 takes a key liquidity indicator – debt service-to-revenue – and compares it across the
three project scenarios. The difference between servicing debt in the lowest cost scenario
(Scenario 3) and the highest cost (Scenario 2) across the whole time period equals US$ 1.6
billion (which is roughly 20 per cent of GDP in 2013). This shows the kind of saving that the
government can make if the private sector is brought on board to finance key projects.
Figure 10: debt service-to-revenue ratio by scenario
25
20
15
10
5
0
2014
2018
Scenario 1
2022
2026
Scenario 2
2030
2034
Scenario 3
The lesson from the scenario-building is that Rwanda certainly has space to fund its ambitious
national and regional projects but that this space is not limitless. To fund key projects
approximately US$ 1.1 billion may be added in the medium-term without risking debt
sustainability, and this assumes the private sector also directly invests in these projects.
This total assumes a roughly two-to-one ratio of non-concessional to concessional debt. The
total debt space available would increase if the ratio was reduced in favour of more concessional
debt. The result holds for both the cautious and the optimistic macroeconomic framework.
19
G. Conclusion
Rwanda’s debt stock remains low and is sustainable under different scenarios for 2014-2034.
Given the results of the External DSA, Rwanda’s external risk rating remains low. The debt
stock will increase in line with Rwanda’s development needs but with due regard to Rwanda’s
economic growth and ability to pay. The main risk emerging from the analysis is the debt
servicing of commercial debt. While it may be possible to roll over this debt, the interest rate is
not guaranteed to remain stable. Mitigation of the risk is possible by careful debt management,
seeking alternatives to fully non-concessional borrowing, and importantly also by strong growth
in exports. Diversification of the export base along with overcoming significant barriers to trade
(such as the cost of electricity and transport) will improve Rwanda’s debt sustainability in the
future, other things equal. In addition, strong growth in domestic revenue will ease the fiscal
pressure for domestic and external loans.
Scenario-building where Rwanda contracts substantially more external debt in 2016-2020, in
order to fund key infrastructure projects, indicates that the maximum new debt space available –
assuming direct private sector investment in the projects - is approximately $1.1 billion before
risks emerge.
20
Table 5: External Debt Sustainability Framework Baseline Scenario, 2013 – 2034, for the cautious
macroeconomic framework (in percent of GDP, unless otherwise stated)
Note: the debt stock estimates in 2013 and 2014 differ to the estimates in Table 1 due to different currency conversion
methodologies.
21
Table 6: Public Debt Sustainability Framework Baseline Scenario, 2011 – 2034, for the cautious
macroeconomic framework (in percent of GDP, unless otherwise stated)
Note: the debt stock estimates in 2013 and 2014 differ to the estimates in Table 1 due to different currency conversion
methodologies.
22