Rwanda’s economic managers are walking a tightrope as a weaker franc continues to make the fight to curb inflation harder, given the country’s dependence on imports.
Figures by the National Institute of Statistics Rwanda show that the economy grew 6.3 percent year-on-year in the second quarter of 2023, building upon the strong foundation of 9.2 percent in the first quarter.
Growth was fuelled by the strong performance of the service sector which contributed 45 percent reflecting the continued good performance of the tourism and hospitality sectors.
This year, Rwanda is projected to lead in economic performance across East Africa exceeding the regional average of 5.4 percent in 2023, from 5.1 percent in 2022. In the first quarter of this year, growth was 9.2 percent in Rwanda, 4.9 percent in Uganda, 5.7 percent in Tanzania and 1.1 percent in Kenya.
However, amid these promising numbers, recent natural disasters, poor performance of the agriculture sector, a weakening franc and a higher import bill have cast a shadow on Rwanda's growth trajectory.
Figures released this week by the National Bank of Rwanda (NBR), show that the Rwandan franc (FRW) depreciated by 8.8 percent against the dollar in the first six months of 2023 fuelling inflationary pressures as import prices globally surged, the highest ever recorded over the last decade.
In the first half of 2023, import bill increased 18.5 percent to $2.09 billion from $1.7 billion in the same period of 2022, driven by higher demand for food, capital, and intermediate goods. Meanwhile, export receipts increased by 11.2 percent to $784.4 million from $705.5 million in the first half of 2022.
This leaves policymakers with difficult choices as they balance keeping inflation in check with economic recovery.
“It is true that the depreciation of the FRW could affect inflation through imported inflation. We are closely monitoring that and taking that into account in our policy decisions... Our main monetary policy tool remains the Central Bank Rate to reduce inflation, we have increased it by 300 bps cumulatively since February 2022, it is now 7.5 per cent,” Dr Thierry Kalisa, chief economist, National Bank of Rwanda told The EastAfrican.
“As a result of these monetary policy actions and other measures taken by the government, inflation is on a declining trend and we are projecting it to continue decreasing toward the 5 percent benchmark next year,” he added.
Devastating floods have not only resulted in the loss of lives but also caused extensive damage to critical infrastructure. They have also raised the risk of food insecurity as the performance of the agriculture sector remains poor.
The situation has been made worse by external shocks including war in Ukraine, appreciation of the dollar, rising energy prices and global inflation.
Businesses say the depreciation of the Rwandan franc and rising prices globally are negatively impacting their operations eating into profit margins.
“The purchasing power of Rwandans has not grown; from the look of things the GDP growth is being propped up by the ongoing big infrastructure projects. Question is, are they bringing in more jobs? In what capacity are these projects actually pumping money into the economy, are they creating money into the economy relative to other investments that could have created more permanent jobs? I don’t think so…” Konde Bugingo, Managing Director MUA Rwanda told The East African, adding that growth is not inclusive as it is coming from a few projects.
“The more you employ locals the more they also employ others, and then the purchasing power improves, and people will get involved in other activities that will help propel us where inflation is killing us…” said Bugingo.
The Composite Index of Economic Activities (CIEA) increased by 6.3 percent in 2023 the second quarter year-on-year signalling continuous good economic performance.
However, this growth was slower than the 14.8 percent growth recorded in the previous quarter. Quarter-on-quarter, the CIEA declined by 3.4 percent, reflecting a slow pace in the expansion of private consumption.
“The dollar loans that were priced lower are now higher, the dollar lending rate is now really high, and this has affected appetite for loan facilities.
The effects of China closing down for a while due to Covid-19 are still affecting us, yet businesses have not fully recovered from the pandemic. Everything (prices of commodities) has gone up…” Lina Higiro, Chief Executive Officer of NCBA Bank Rwanda told The EastAfrican.
The multiple shocks have also damned demand for credit from banks.
NBR figures show outstanding credit to the private sector significantly reduced to 13.2 percent in the second quarter of 2023 compared to the growth of 16.5 percent in the second quarter of 2022 due to the current tight monetary policy stance.
“Interest rates have remained relatively flat, deposit rates have gone down, as banks our margins are reducing, we are just waiting to see how long these margins will remain tight…” said Higiro.
However, the NBR maintains that though the current appreciation trend of the US dollar against the Rwandan franc is making imports more expensive, the cooling monetary policy tightening by the Federal Reserve is expected to ease the strength of the greenback against other currencies.