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
By
JOHN GAHAMANYI
IN
SUMMARY
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
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