The central bank has moved to allay fears in the business sector that the proposed increased domestic financing market could hurt the private sector.

The government plans to increase borrowing from the domestic debt market as it increasingly seeks resources to fund development programmes in the face of faltering donor aid funds.

In the 2013/14 budget the Treasury intends to borrow in the excess of Rwf150 billion from the local banking system.

Analysts including the International Monetary Fund expressed fears that domestic borrowing to finance development projects could slow down private sector growth due to competition for funds that triggers high interest rates.

READ: IMF urges Treasury to cut domestic borrowing

The argument is that as commercial banks rush for government instruments like Treasury bills and bonds which are presumed less risky, there will be a liquidity problem in the economy.

But as commercial banks enhance their risk management to post healthy financials at the end of each fiscal year, this has resulted into tight liquidity as major lenders are likely to rush for less riskier government instruments.

Already figures from the central bank show that credit to the private sector has slowed down. For instance, in the first five months of this year, there was a moderate increase in outstanding credit of 4 per cent from January to May this year compared with 16.2 per cent recorded in the same period last year.

There was also a drop in new authorised loans to Rwf176.1 billion this year from the Rwf214.4 billion in the first months of 2012.

The victims, according to analysts will be the small and medium size enterprise (SMEs), though crucial in the economy, banks shun them saying they are more risky to lend to.

Alternative sources

However, John Rwangombwa, governor National Bank of Rwanda says the drop in lending to the private sector has little to do with increased domestic borrowing.

“Normally deficit financing to government is minimal. It comes after taking care of the private sector,” explained Mr Rwangombwa.

He said the microeconomic framework gives the private sector priority to be financed through domestic borrowing and the economy has shown resilience despite this.

The IMF, however does not share Mr Rwangombwa’s reasoning. The IMF official, Paulo Drummond, advised the Treasury to explore alternative sources of revenue mobilisation for projects in the next financial year.

In the past four years, government raised Rwf30 billion from Treasury bonds and currently has outstanding Rwf10 billion in T-bonds listed on the Rwanda Stock Exchange.

Financial health of banks

Maurice Toroitich, the KCB Rwanda general manager says government instruments are also attractive as they contribute highly to the financial health of banks.

He, however, cautioned that the borrowed money should be reinvested in capital goods and infrastructure development to have positive trickledown effect on the local population.

“Borrowing for consumption like paying salaries would be bad but the good thing is (Rwandan) government is borrowing to fund its development projects,” said Mr Toroitich.