ADDITIONAL FINANCE-ACCESS TO FINANCE FOR RECOVERY AND RESILIENCE PROJECT (AFIRR)

active

Prospective

A. Country ContextRwanda is managing a strong recovery from the pandemic, amidst inflationary pressures and downside effects of the ongoing Ukraine war. The country experienced a remarkable recovery in 2021, with 10.9 percent GDP growth compared to its 3.4 percent contraction during the pandemic. However, inflationary pressures have been mounting, driven mainly by domestic food and utility prices, and is projected to average 12.1 percent in 2022 compared to 0.8 percent in 2021. Economic recovery has been supported by industrial activities benefitting from government support of the manufacturing and construction sectors, as well as a gradual recovery of tourism activities. Growth is expected to be moderate over the next two years, with downside risks including a potential pandemic resurgence, rising food prices, vulnerability to weather and climate shocks, and the potential for the increasing fiscal deficit to limit the Government of Rwanda's fiscal consolidation. The impact of risks of climate change could be consequential for Rwanda’s growth given the reliance of the economy on climate sensitive sectors. Rwanda’s increasing debt burden and associated risks underscore the need for the authorities to pursue measures to ensure fiscal sustainability in the long term while safeguarding the nascent economic recovery in the short term. Vision 2050 sets an ambitious goal to eliminate poverty in the country supported by economic transformation and private sector led growth. Considering the current global and national fiscal context, finding the right balance between development and climate action will be instrumental for Rwanda to sustain its impressive growth rates and deliver its national development plan Vision 2050.B. Sectoral and Institutional ContextThe private sector represents a small, but growing, share of overall jobs. Like many other low-income countries, Rwandan firms, for the most part, are young and informal. Women-led firms play an important role in the economy and faced additional increased challenges during the pandemic. Women head 42 percent of enterprises and comprise 58 percent of enterprises in the informal sector, which accounts for 30 percent of GDP. Access to finance is among key constraints for firm growth and survivorship. Micro, Small, and Medium Enterprises (MSMEs) play an important role in the economy, contributing 55 percent of total GDP and accounting for over 95 percent of businesses and more than 70 percent of in-establishment employment in Rwanda. The financial sector has supported economic recovery in the post pandemic period. Banks continued to provide credit to the private sector at an improved pace in line with liquidity buffers. The concentration of credit to vulnerable sectors poses elevated credit risk in the financial sector. The disruption in global supply chain is continuing to cause vulnerabilities to the manufacturing sector. Due to the adverse global supply shock associated with the Ukraine war, banks’ exposure to manufacturing sector is at risk due to the sector’s heavy usage of energy and other imported inputs that are currently subject to strong increase in prices. Short-term resources also limit banks’ ability to provide credit in the long term. The term deposits held by banks represent 35 percent of total deposits out of which, 92 percent hold a maturity of less than one year. With this funding structure, banks are exposed to a funding risk related to excessive maturity transformation. MFIs face similar challenges to those of banks, with the limited access to liquidity and stable sources of funding being more acute.C. Relevance to Higher Level ObjectivesThe proposed Additional financing project is aligned with the World Bank Group’s Country Partnership Framework (CPF) (FY21–FY26) for Rwanda. The project supports objective (ii) of the CPF “Improved conditions for private sector development”, particularly in areas of inclusive finance and MSME development. The CPF highlighted the need for supporting a financial sector that is sound, deep, and capable of effectively mobilizing and allocating resources to meet the needs of the private sector, including through enabling long-term private finance and investments. The CPF (FY21–FY26) was developed and finalized jointly with the GoR as the COVID-19 pandemic was unfolding and was discussed by the Board of Executive Directors on July 9, 2020. The project is also aligned with the World Bank Group Global Crisis Response Framework (GCRF) “Navigating multiple crises, staying the course on long-term development” published in July, 2022. The project activities support all four pillars of the GCRF. The proposed AF is also aligned with World Bank leading efforts to scale up sustainability-linked financing at the sovereign level. Sustainability-linked bonds (SLBs) and loans (SLLs) can be powerful tools to induce change and accelerate impact for the achievement of Sustainable Development Goals. Success in this endeavor would help improve mobilization of private capital (in better financial terms) for a broader range of issuers, while speeding up commitment and action to reach sustainability outcomes. Helping EMDEs to achieve the sustainable development goals (SDGs) and the Paris accord will require innovative solutions and significant private sector mobilization (PCM). For lower-income EMDEs, in particular, solutions that de-risk issuers, meet investors' risk appetite, and embed financial incentives to commit and achieve credible KPIs are critical to scale-up PCM. D. Project DesignIn April 2020, the Government of Rwanda established the Economic Recovery Fund (ERF) to support the recovery of businesses hard hit by the COVID-19 pandemic. The objective of ERF was to support businesses so that they can survive, resume operations and safeguard employment, thereby cushioning the economic effects of the pandemic. The AFIRR project was designed to further support the ERF and address binding constraints for Rwandan firms to access finance to support resilience and growth, further exacerbated during the COVID-19 pandemic.At less than two years into implementation, nearly half of the original project's resources has been committed. There is a need for additional funds to fast-track and scale up the parent project activities, relying on the project’s existing implementation capacity. The project will deepen project support to mobilize private capital and strengthen the resilience of government development institutions by helping them tap into new sources of long-term funding. Increasing private capital mobilization to support private sector development and access to finance will enable the Rwandan government to leverage scarce resources while continuing to respond to the needs stemming from the recovery in economic activity post-pandemic. The Project components aim at (i) addressing short and long-term financial needs of firms to help them withstand the crisis, grow their business and build resilience; (ii) enhancing and scaling up the existing partial credit guarantee scheme, and the development of two new de-risking schemes to provide liquidity and insurance instruments in support of micro, small and medium enterprises in the event of climatic shocks; (iii) strengthening capacity at various levels to support project implementation, including through technical assistance to project beneficiaries; technical assistance and capacity building for implementing agencies, and project management and monitoring.E. ComponentsComponent 1 – Liquidity and Recovery Facility (US$95 million IDA equivalent). Component 1 focuses on addressing firms' short- and long-term financial needs to help them withstand the crisis, grow their business and build resilience, including strengthening climate resilience. The facility will continue to provide lines of credit (LoC) to Financial Institutions (FIs) for on-lending to highly impacted and/or strategically important sectors and firms to support economic reco

FY17 - Financial Sector

World Bank Group

Project

Power Transmission, Warehouse, Hotel, Manufacturing (Industrial), Power Generation (CCGT), Government, Commercial