Rwanda’s fast rising fuel prices could stoke fresh inflationary pressures, hurting growth in the country.

Inflation figures released on Thursday by the National Institute of Statistics show that the consumer price index for urban areas rose by 1.04 per cent in February on the back of higher food and drinks prices, pushing the inflation rate up to 7.85 per cent from 7.81 per cent in January.

Last week, pump prices for both petrol and diesel went up by 6.3 per cent, the first increase in four months from Rwf940 ($1.5) per litre to Rwf1,000 ($1.6) per litre respectively following the rise in oil prices at the international market, where the price of a barrel of crude oil has increased by 17 per cent since January.

While the increase in pump prices has not resulted in an immediate increase in public transport prices, any further rise is likely to force them up. This would have a knock-on effect on the prices of petroleum products and eventually to other consumer products.

“An increase in fuel prices affects everything including food, because of transportation costs. Imported inflation is a key driver of rising prices in Rwanda because we import many of our goods,” said Hannington Namara, chief executive officer of the Rwandan Private Sector Federation.

He added that because the price of fuel is regulated by the government, private sector dealers of petroleum products have limited room to increase prices in response to rising international prices.

“Anything that increases prices threatens private sector revenue and profit. We therefore support all efforts to contain inflation,” Mr Namara said.

Earlier this year, the International Monetary Fund warned that Rwanda’s growth is expected to slow in 2012 on account of risks from an uncertain global economy and further price shocks that could result in reduced growth and higher inflation.

“The authorities have started to tighten monetary policy in late 2011 to contain inflation. However, further tightening may be needed in 2012 to prevent erosion of recent gains made in terms of macro-economic stability,” the IMF said in January.

The government is projecting an inflation rate of 7.5 per cent this year. “The risk of further inflation remains high given that global fuel prices are still going up and the Eurozone crisis has not yet been resolved. But generally, inflation will largely depend on how agricultural production behaves this season,” said Maurice Toroitich, managing director of KCB Rwanda.

Inflation rate

The National Institute of Statistics data showed that the inflation rate eased to 7.81 per cent from 8.34 per cent in December on account of lower prices of food and utilities including water, electricity, housing, transport and other fuels.

“It is too early in the year to predict the impact of recent hikes in fuel prices, and whether the increases will continue. If, for instance, Israel attacks Iran, expect oil prices to go through the roof. The government’s move to reduce fuel taxes was the right one at the time — but nothing can ultimately isolate a country from international price fluctuations,” said Andrew Mold, head of macro-economic and social policy analysis, the Kigali-based Cluster Sub-regional Office for Eastern Africa of the United Nations Economic Commission for Africa.

He added that any deterioration in agricultural production within the country and the region poses significant risks given that last year, Rwanda was largely shielded from inflation due to a good harvest.

Unlike its counterparts in the East African Community that saw inflation hit double digit, Rwanda maintained inflation in single digits, ending the year at 8.3 per cent.

(Read: EAC’s business leaders’ concerns for 2012)

“This is the major vulnerability, given the high weighting of agricultural products in the Rwandan Consumer Price Index – 54 per cent in the case of the national inflation index, and more than 60 per cent in the rural CPI.”

To contain the rising cost of living, during the fiscal year 2011/12 the government rolled out subsidies and incentives to cushion households and businesses, including reducing fuel tax by Rwf100 ($0.16) per litre — a move that will see it lose Rwf14.1 billion ($23 million) in tax revenue or 0.4 per cent of GDP.

However, Claver Gatete, Governor of the National Bank of Rwanda said BNR monetary policy will remain prudent to contain the impact of inflationary exogenous shocks and continue to support the government projections of economic growth of at least 7.6 per cent in 2012.

(More: Rwanda considers tax reforms to boost faltering revenue)