As Claver Gatete, the Rwandan Finance Minister heads to parliament next week to read the national budget for 2016/17, he is faced with the task of crafting new fiscal and monetary interventions not only to tame the spiralling cost of living but also boost economic growth and reduce poverty.

The government expects the economy to grow at 6 per cent in 2016/2017, down from 7 per cent in 2015 — well below the target of 11.5 per cent.

But the government faces the twin challenge of dealing with a depreciating currency and import bill that is growing faster than export receipts.

The franc has continued to slide against the dollar, signalling a looming rise in the cost of living.

Inflation has remained under control, at 1.8 per cent and 2.5 per cent in 2014 and 2015, respectively, due to the fall in oil prices and good agriculture harvests.

But the annual average inflation is expected to pick up to 4.6 per cent in 2016, due to increase in food and fuel prices, according to analysts.

The economy also remains vulnerable to domestic and global shocks — in particular lack of foreign exchange — which may undermine growth.

On May 27, Fitch Ratings published its updated rating of Rwanda at ‘B+’ on the long- and short-term foreign and local currency sovereign credit with stable outlooks, but cautioned on rising balance of payments due to the depressed commodity price cycle, which has affected the value of its metal minerals exports.

“The current account deficit widened to 13.5 per cent of GDP in 2015, exacerbated by a rise in construction imports and the completion of the Kigali Conference Centre,” it said.

Fitch says the deficit will go up to 16.5 per cent in 2016, due to the purchase of two aircraft by the national airline. But the deficit is forecast to narrow slightly, and to improve to 11.7 per cent in 2017 due to monetary and fiscal policy tightening and as import substitution measures take effect.

READ: Rwanda struggles to tame growing trade deficit

Since 2012, the forex market has been under higher pressure mostly resulting from increased imports (especially capital and intermediate goods) to support high economic growth.

In addition to the traditional trade balance deficit, the global strengthening of the dollar, the contagion from high depreciation of regional currencies and associated speculative behaviour resulted in an annual depreciation of 7.6 per cent — the highest level in the last 10 years.

In cumulative terms, the depreciation of the franc between 2012 and 2015 is at 21.90 per cent, compared with the cumulative depreciation of 4.24 per cent recorded between 2004 and 2011.   

But the country’s current account deteriorated by 16.2 per cent from $ 945.4 million in 2014 to a deficit of $1098.3 million in 2015.

Both exports and imports declined in 2015 compared with 2014, due to a decline in both the price of minerals and energy. The gain from the decline in energy prices offset the decline in exports and the trade balance deficit slightly improved from $1.27 billion in 2014 to $ 1.23 billion in 2015.

Mineral incomes dropped by 42 per cent due to the fall in international prices, with declines of 26 per cent, 12 per cent and 19 per cent for cassiterite, coltan and wolfram respectively that adversely affected the performance of the traditional mineral exports.