Monday, December 29, 2014

Rwanda: Trade deficit widens as foreign reserves drop to $900m

A market in Rwanda. To raise its export revenues, the country plans to increase the volume of traditional exports and diversify into horticulture. PHOTO | FILE  NATION MEDIA GROUP

Posted  Saturday, December 20  2014 at  12:45


Currency fluctuations

-The Rwanda franc has depreciated by 13 per cent from 2012 to October 2014.
This year, the franc had depreciated by three per cent by the end of October, lower than the 6.1 per cent recorded last year. In the first six months of 2014, the central bank sold $128 million. Its intervention in the currency market is projected to reach $152 million this year.

-Should the drop in international reserves persist, it would trigger further depreciation of the franc, stoke inflationary pressures and slow down economic growth.

-Inflation was at 0.7 per cent in November, from 0.5 per cent the previous month, and economic growth prospects have improved with a projected GDP growth rate of six per cent by the end of the year.

Rwanda needs to take new measures to restore and preserve its international cash reserves, which are set to fall by the end of this year, increasing the country’s exposure to financial turbulence.

Figures released by the International Monetary Fund show that Rwanda’s foreign reserves are set to drop to $900 million by the end of 2014, from $1.1 billion in 2013, as the import bill continues to outpace revenues generated from exports. A combination of last year’s suspension and delays in disbursement of aid money by some development partners, weak exports and a high import bill drastically impacted the country’s international reserves.

Although the reserves are still above the IMF’s critical threshold of three months of import cover, concerns are growing over Kigali’s escalating import bill, which is growing at a faster rate than export receipts.

Rwanda’s import cover (the number of months of imports its reserves can pay for) could fall to 3.9 months by the end of this year, from five months in 2013, and will slide further to 3.8 months in 2015 before rebounding to four months at the end of 2016, according to the IMF.

This demonstrates that the country’s ability to finance its imports is declining.

“Rwanda is committed to maintaining reserves for four months of imports, which is quite adequate,” Mitra Farahbaksh, IMF resident representative to Rwanda, told The EastAfrican.

The government is counting on a sustained drop in international oil prices to help reduce its import bill, which is forecast to rise to $2.147 billion at the end of the year.

Oil imports account for a quarter of Rwanda’s total import bill. Therefore, last week’s gesture by the Organisation of the Petroleum Exporting Countries (OPEC) that it is willing to let oil prices fall to as low as $40 per barrel will offer some sigh of relief to Rwanda’s policy makers.

Kigali also hopes to diversify its exports and add value to traditional exports by supporting a flower-cutting project in Eastern Province, in addition to promoting the export of green beans to France. The country is eager to diversify its export sector from traditional goods such as tea, coffee and minerals, which are vulnerable to international commodity price shocks, as it seeks to mitigate the risks associated with a narrow export base.

“We plan to increase the volume of traditional exports and diversify into horticulture,” Minister of State for Economic Planning Uzziel Ndagijimanatold The EastAfrican.

In an indication of the scale of the problems associated with falling reserves, the trade deficit continues to widen.

Meanwhile, imports continue to cater for consumption rather than facilitating manufacturing, which could help reduce imports in the long run. The current account is projected to deteriorate by 11.8 per cent of GDP, although it will gradually improve to 8.4 per cent by 2018.

Worse still, while output in agriculture increased in the third quarter of this year, the production of cereals — a major raw material for Rwanda declined, hurting agro processing.

This dampened the prospects of the manufacturing sector and dragged down its growth to -5 per cent in the third quarter of 2014.

The IMF says in a report that rising imports coupled with broadly flat exports reflect weak tourism and restrictions imposed on the movement of people between DRC and Rwanda that were in effect through August, as well as a reduction in prices of minerals and tea.

Although the IMF notes that Rwanda’s foreign exchange reserves are adequate, the Fund underscores that the country’s room for manoeuvre is limited, given that the stability of Kigali’s international reserves is partly dependent on the donor community.

Last year’s slow aid disbursement reduced the cash reserves available to the central bank. It is therefore not clear how Rwanda will maintain adequate levels of foreign exchange reserves while weaning itself off aid-led financing.

Maurice Toroitich, the managing director of KCB Rwanda, said that the country needs to increase domestic production in order to boost exports.

“Most of the projects we work on as a country have an import element, meaning the country needs a steady flow of foreign exchange,” he said.

The IMF and financial analysts credit the National Bank of Rwanda for ensuring continued exchange rate flexibility, which is critical to preserve policy buffers. However, the bank’s foreign exchange interventions are said to be primarily aimed at limiting the volatility of the franc.

Among the major challenges Rwanda’s economic policy makers face is to maintain a stable franc in the face of the high demand for the international currencies to finance imports


Post a Comment

Subscribe to Post Comments [Atom]

<< Home