Kigali plans to resume borrowing on the domestic market in the coming weeks, in its latest attempt to reduce dependency on donor aid to finance its development plans.

While exact details are yet to be released, this February the Treasury is expected to begin by issuing a bond worth Rwf12.5 billion ($18.3 million) with a maturity of three years.

With the government borrowing from the domestic market instead of turning to investors, a rise in interest rates is likely. This is because investors know the government is in need of the cash and will demand a good return on their money. 

“We are working with the central bank to see how we can have more appropriate government securities on the domestic market to boost capital. Going forward, we know that the government may have to rely more on domestic borrowing for funding its budget,” said Kampeta Sayinzoga, Permanent Secretary in the Ministry of Finance and Economic Planning.

She was speaking at the recent official launch of Rwanda’s Economic Update by the World Bank.

Ms Sayinzoga said the government is considering using long term instruments not only to raise capital, but also to support the development of the local capital market.

The government has been using short term instruments such as Treasury-bills, that range from 91 to 182 days.

“In the past we have used government securities as cash flow instruments. Now government securities are going to be financing instruments. Because of that, you will see a reintroduction of government long term securities and bonds through the central bank,” Ms Sayinzoga said, without disclosing details.

The Rwanda Stock Exchange (RSE) currently has three government bonds with the longest — a five-year bond — maturing in September 2016. 

Celestin Rwabukumba, the chief executive officer of the RSE, confirmed that the government is in the advanced stages of issuing long term bonds in a bid to facilitate the growth of the capital markets.

“We are going to do book building to determine the yield curve. If the issuance is continuous it will give a benchmark for private issuances,” Mr Rwabukumba said.

He said frequent issuing of bonds by government could help to attract the private sector to borrow money through the RSE bond market. 

Currently, RSE has only one eight-year corporate bond worth Rwf10 billion ($14.4 million) issued in 2010 by I&M Bank (previously Commercial Bank of Rwanda).

“When it started in 2008, they did three bonds then halted them. When there is no issuance, there is no benchmark for the private sector,” Mr Rwabukumba said, underscoring the need for government to list bonds frequently.

Following improved donor sentiment last year, the government had reduced borrowing from the domestic market as shown by interest rates on Treasury-bills, which fell to 5.1 per cent for one-month instruments and 6.5 per cent for maturities of one year, down from an average of 12 per cent in April 2013.

The central bank also reduced the repo rate, its lending rate to commercial banks, to seven per cent from 7.5 per cent, to stimulate credit in the second half of 2013.

This has increased liquidity in the banking system and created room for banks to lend to the private sector in the fourth quarter. 

However, fresh data released by the World Bank recently showed that government borrowing in the second quarter of 2012 on the domestic market squeezed the banking sector’s room for expanding credit to the private sector.

As a result, credit growth slowed down sharply in the first quarter of 2013, reducing domestic demand for goods and services. 

Domestic demand declined by 1.4 per cent in the first quarter of 2013, (year on year) reducing GDP by 1.6 percentage points. 

But John Rwangombwa, the Governor of the National Bank of Rwanda sought to allay fears about heavy government borrowing saying the current level of liquidity in the market is sufficient.

READ: Rwanda govt allays fears over domestic financing

“We consider the level of liquidity in the market before issuing a bond; currently we have enough liquidity,” said Mr Rwangombwa. “We have a big stock of short instruments including Treasury-bills and repo that could cover any unforeseen surge in liquidity.”  

World Bank figures show that Rwanda’s year-on-year GDP growth slowed to less than six per cent for the first time since 2010, on account of the aid shortfall.

Rwanda’s GDP slowed to 3.9 per cent in the third quarter of 2013 compared with 6.7 per cent in the same period in 2012, the lowest level of growth recorded in recent years, according to figures released by the National Institute of Statistics in early January.