Focus Media (Kigali)
Sam Ruburika
24 August 2008
Rwanda has registered significant growth despite rising inflation, which now stands at 13.7%, the Governor of the National Bank announced last week.
BNR Governor Kanimba: "We can do little about imported inflation."
Francois Kanimba pointed out that the steep rise in inflation is mainly caused external factors. "The national economy is experiencing two external shocks related to the global rise in food and petrol prices," he said, adding that the turbulence in the housing markets in the US also played a role.
Global food prices have increased due to higher demand in emerging economies such as India and China, as well as the demand for cereals for bio-fuel.
Mr. Kanimba further pointed at the increasing domestic and sub-regional aggregate, where the bulk of goods such as beans, maize, potatoes and vegetables were during a certain period exported to neighboring countries thus creating shortage of food on the local markets. This resulted in a substitution effect, where high prices of imported goods put pressure on local products.
Moreover, the Governor also blamed speculative behavior in the domestic trade system, especially by intermediary cooperatives; however, the ministry of trade and commerce removed middlemen May this year.
Another factor contributing to the high inflation, Mr. Kanimba explained, was the increase in housing rent as well as school fees.
In order to further prove that the inflation was mainly due to external factors, the National Bank Governor remarked that there has been a 56% rise in value of imports, against only 4.3% in volume. Indeed, he pointed out that the volume of imported food decreased about 30.1% compared to last year.
On the side of exports, on the other hand, there has been a significant increase in value of 53.3% and in volume of 293.8%.
Green revolution
The decrease in food imports, Mr. Kanimba explained, is mainly due to the good performance in the agriculture sector. Reforms by the ministry of agriculture have resulted in increased affordability, accessibility and availability of fertilizers to farmers, as well as improved certified seeds.
"The green revolution program has helped a lot in increasing food production," the Governor said.
Roots and tubers, for instance, have recorded a 50% increase compared to last year, and production of cereals also rose spectacularly-175% for wheat and 62.9% for maize.
"We have witnessed cross-border trade with Rwandan food being sold, especially maize and beans," Mr. Kanimba said.
Apart from agriculture, the industry and service sectors have also performed notably better, with a growth in turnover of 38.93% and 40.95% respectively. The combined turnovers achieved by large companies of both sectors amounted to Frw 504.23 billion compared with Frw 359.25 achieved in the same period last year, representing a 40% increase. However, Mr. Kanimba called for caution saying that this increase could be a result of imported inflation.
Mr. Kanimba pointed out that little can be done to control the imported inflation, since this depends on the global economy. On the other hand, the National Bank has taken measures to counter the rise in internal inflation, such as to moderately increase broad money.
Furthermore, in a bid to reduce the excess liquidity in the market, the National Bank has been mopping up excess liquidity by selling foreign exchange to commercial banks; the mopping up rate has increased from 5.59% from last year to 6.79% this year.
Growth rate revised
Real growth for 2008 had been projected at 6.8% compared to the average growth of 6.2% for the past three years, yet considering the statistics for the first semester, real growth is now projected to be around 8.5%.
This is a result of increased agricultural production in the first two seasons of the year, good performance of the manufacturing industry especially beverage production, as well as good results in the service sector.
The Minister of Finance and Economic Planning, James Musoni, explained that this strong growth is a result of stable macroeconomics indicators with the exception of inflation, increased foreign direct investment as well as increase in domestic investment portfolio as a result of innovation in banking, recapitalization of banks and foreign investments, private equity and the introduction of capital markets.
Mr. Musoni further mentioned factors that could affect real sector growth, such as financial vitality and instability in the world economy, high global food and fuel prices, as well as a weak dollar.
Concerning rising food prices, the Minister said that the government is investing in the agriculture sector through a US$ 200m irrigation and rainwater project, crop intensification programs, bulk fertilizers purchases and auction for public purchases, and securing food security for vulnerable groups. Moreover, the budget allocated to agriculture is set to increase from the current 3% to at least 10%.
There will also be investments in energy, with projects such as the Nyabarongo, Rukara and other small hydropower projects, the estimated cost of which amounts to US$ 235 million. Moreover, the methane gas project is nearing completion.
The transport sector will also receive financial injections, through fuel subsidies, breaking up of cartels to promote competition, fostering leasing for the acquisition of commercial vehicles and equipment, plans for the railway line (Kigali - Isaka - Dar-es-Salaam) and the fuel pipeline.
Mr. Musoni also called for more investment in education, especially by the private sector, which can benefit from incentives to facilitate investment in schools such as the BRD fund.
Liberal economy
The Minister of Trade and Industry, Monique Nsanzabaganwa, remarked that there are other measures might be taken to curb inflation, such as exempting taxes on agricultural products, reducing the number of intermediaries, consultative meetings with importers and publication of the food prices.
Ms. Nsanzabaganwa stressed that despite inflation, the government cannot afford to fix prices of goods considering the functioning of a liberal economy. "It may look as a short time fix to the situation, but in the long run it would affect the economy," Minister Nsanzabaganwa said.
Regarding food exports, the Minister said that they should have a commercial presence in the country. She pointed out that there should be no importer who should be authorized to deal directly with the farmer but instead pass through the exporter's body.
She further pointed out that competition could also curb inflation. In this respect, a competition policy that would act as a guideline for all businesses is about to be finalized and it is expected to deal with market distortion that brings about inflation.
"We have already drafted the competition law which will implement the competition policy," Minister Nsanzabaganwa said, adding that the competition policy and law provide for a commission or authority to ensure its implementation.
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