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Rwanda: We have reached a turning point in the economy – Central Bank Governor

By Interview by Honoré Banda in Kigali
Posted on Friday, 14 February 2014 12:36

Entering 2014, Rwanda’s Central Bank Governor, John Rwangombwa, is focused on encouraging banks to extend credit to the private sector, expanding financial inclusion and stabilising the economy after donors cut off aid to the government in 2012.

The International Monetary Fund predicts that the economy will grow by 7.5% in 2014 but warns that the financial system is too weak to offer the government the possibility of getting more financing from the domestic market.

In response, the government is preparing for the launch of an international sovereign bond within the next year or two.

2004 – Earned a master’s degree from the Maastricht School of Management

September 2005 – Named permanent secretary in the finance ministry

August 2008 – Became director of the East African Development Bank

February 2013 – Named governor of the National Bank of Rwanda

Rwangombwa is working on improving Rwanda’s macroeconomic performance. President Paul Kagame appointed him as governor of the National Bank of Rwanda on 25 February 2013.

Prior to his appointment, he served as finance and economic planning minister.

Rwangombwa had served as the permanent secretary and secretary to the treasury from September 2005.

As permanent secretary, he oversaw the drafting and implementation of Rwanda’s first Economic Development and Poverty Reduction Strategy, under which Rwanda was able to reduce poverty by 12% between 2006 and 2011.

He chaired development partners’ forums for the government.

Rwangombwa also oversaw the drafting and implementation of a five-year public finance management reform programme that led Rwanda to produce its first government financial statements in 2007.

The Africa Report : What are the greatest economic risks that you see ahead in the short and medium term?

John Rwangombwa : [There are] two main risks. The biggest one is agriculture because we are still relying on weather. If the weather is not good, it will affect the performance of the economy in 2014. We are still weak in terms of financing international trade. For instance, the experience of last year about the delayed donor support shows how if anything of that nature happens this will affect our growth as well.

To what extent has the Rwandan economy recovered from the impact of the shortfall in donor funding?

In 2013, we started feeling the challenges of reduced government spending because government is a big player in this economy. Any reduced government spending affects different parts of the economy. Achieving 5.7% and 6% growth in the first two quarters of 2013, I would say, was good compared to the challenges that we had experienced. We are now waiting for the statistics of the third quarter, but I do not expect much difference from that.

However, we do see a turning point in the economy in the fourth quarter in terms of the increase in credit to the private sector. […] We also expect to see trade going up, financial services going up. It shows that we have reached a turning point from the effects of delayed disbursement [of aid] in 2012 and in 2013. We are likely to see growth going back to normal.

The central bank has been easing the interest rate it charges to commercial banks over the past few months as a signal to banks to lower rates. Rates have come down but not as much as the central bank sought. Where do we go from here?

We have started seeing positive signs as we had expected. When we reduce our Key Repo Rate (KRR), normally it is the money markets or short-term interest rates that follow immediately and this is what we saw happening.

In June 2013, when we reduced the policy rate from 7.5% to 7%, we saw the treasury bill interest rates moving from 10.81% in June to 6.06% in November 2013 and the repo rates going down from 6.68% to 4.42% between June and November 2013. We also saw the deposit rate dropping from 10.6% to 8.5% between June and November 2013.

All these factors are playing into influencing the movement of the lending rates, but this happens with a time lag because by the time the deposit starts going down, banks still have expensive deposits that they took before the decline of deposit interest rates. The lending rates also slightly reduced from 17.6% in June to 17.19% in November 2013. This is a good sign.

In addition, banks have been responding to the change in the KRR. We have seen a pick-up in lending to the private sector. New authorised loans are thus likely to hit RWF145.9bn ($221m) in the fourth quarter 2013, compared to RWF116.16bn issued in the fourth quarter of 2012. This might be the highest ever in recent years.

The Rwandan franc is weakening. What is happening? To what extent are you concerned about this depreciation?

This is expected. It is partly linked to the delayed aid disbursements in 2012. But even without that, we expect this trend to continue as we try to build our exports. The biggest challenge is that our export base has not been growing fast enough to catch up with imports. We have had double-digit growth in our exports – almost over 20% this year – but the import bill is still quite high.

We have high demand for foreign exchange because our economy is growing and most of the materials and goods used to grow this economy are imported. This exerts pressure on the exchange rate.

But as we increase our exports, the depreciation itself is a catalyst to increase the competition of our export sector. Our biggest worry about depreciation is how this translates into inflation. But if it is still at levels where it is not translating into inflation, it is not worrisome. ●

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