The International Monetary Fund is forecasting an economic growth of 7.5 per cent for the country in the medium-term — an average that is below the 8 per cent growth rate that the country witnessed for five years before the aid cut.

The IMF’s medium-term projection, which is for a three-year period from 2014-2016, would only be achieved if the current macro-economic factors prevail. 

Growth projections for this year are at six per cent, which is slightly lower than the World Bank’s forecast of 5.7 per cent down from 6.6 per cent earlier this year.

READ: Rwanda economy struggled last year, says World Bank

The medium-term projections are based on improved implementation of government development projects as well as good agricultural output.

The resumption of aid by international development partners is also attributed to the positive economic growth projection, which would facilitate financing of projects.

“On the monetary policy side, the National Bank of Rwanda must ensure that there is no build-up of pressure on the foreign exchange market, while at the same time the government needs to mobilise resources for domestic financing,” said Paulo Drummond, the IMF mission chief for Rwanda. 

The government is hoping to maintain a positive growth outlook in order to realise the ambitious 11.5 per cent average growth rate by 2020.

However, the IMF is cautioning the country against high lending rates in the financial sector as they could jeopardise the forecast.

The IMF mission met the Ministry of Finance and Economic Planning to review the progress of the Policy Support Instrument.

Although the economy is rebounding from the effects of the 2012 aid cuts that saw growth shrink to 4.6 per cent, the IMF said the government must ensure cheap credit to the private sector.

Rwanda’s private sector has remained uncompetitive and small largely due to lack of access to cheap credit.

With limited mobilisation of domestic resources, the government is increasing its domestic and international borrowing in order to increase financing of development projects.

Increased spending and borrowing could risk stocking of inflationary pressure and raise lending rates in a country that is considered to have some of the highest rates in the region.

“From the IMF’s perspective, we do see the high cost of borrowing as the biggest impediment to the country’s private sector development, which should be the key driver for economic growth,” added Mr Drummond.

He asked the government to try and make other components like electricity, transport and labour costs affordable as they contribute to a favourable business environment.

Rwanda’s average lending rate to the private sector is at 17 per cent, which is high given the level of Rwanda’s economy.

The high interest rates are attributed to un-competitiveness in an industry that is characterised by a monopoly.

Over 50 per cent of the market share is controlled by about five banks, while over 30 per cent of the market share is controlled by one bank.

Return on equity and assets for Rwandan banks is still low compared with their regional counterparts mainly because of inefficiencies.