18 June 2012

Rwanda: Will Rwanda Weather Another Global Economic Crisis?

The new financial year (2012/13) is predicted to be quite challenging for poor economies like Rwanda that are heavily dependant on agricultural exports, tourism, remittances and aid.

Just as these financially constrained countries were beginning to put behind them the misery of the 2009/2010 global economic downturn, yet another dark cloud has started hovering over the already stressed economies--signaling even harder times ahead.

According to a recent World Bank report, Global Economic Prospects, released last week, developing countries should prepare for tougher times with the resurgence of a bleak economic outlook in Euro Zone.

There is much to worry about this time round even though conditions are currently not that band yet. According to the World Bank, economic growth among developing countries is projected to slow down to a relatively weak 5.3% this year, and may pick up to about 5.9 percent in 2013. This recovery is however only possible if the affected economies put in place adequate measures to mitigate the effects of reduced foreign aid, high inflation and battered local currencies--the main causes of the current economic woos.

What then should poor countries such as Rwanda do in order to remain afloat?

According to experts at the World Bank, focus should be on investment in infrastructure such as roads and energy as well as food production.

"In this [challenging] environment, developing countries should focus on productivity-enhancing reforms and infrastructure investment instead of reacting to day-to-day changes in the international environment," Hans Timmer, the director of development prospects at the World Bank is quoted saying.

Indeed, Timmer seems to be reading from the same page as Claver Gatete, the governor of the central bank of Rwanda.

According to Gatete, inflation in developing countries including the East African region is projected to remain high at about 6.1% and therefore pose a big challenge to economic management. Coupled with the debt crisis in the Euro zone, economies like Rwanda that depend on agricultural exports to Europe and tourism are very vulnerable to shocks.

In order to avoid such shocks, Gatete says that Rwanda seeks to spur exports to the region by putting in place mechanisms to increase informal trade with neighboring countries. There is flourishing informal trade of mainly food between Rwanda and Uganda as well as the DR Congo.

"Regional trade is our backup position incase the situation in traditional export countries gets worse," Gatete said during a recent event by Bank of Kigali to brief investors on the performance of the bank.

It is this approach, together with fiscal discipline that enabled Rwanda to emerge virtually unscathed from economic turbulence of 2009/10 that left economies of regional neighbors battered by high inflation and weak local currencies. Strong growth in local manufacturing, construction and household enterprises played a big role. Last year, the economy grew by about 8.8%, well above the 7% target--posting the fastest growth rate in the region.

According to Gatete, 2011 was a successful year for Rwanda with exports growing by about 29.5% and the country will seek to apply the same policies to withstand any adversity from the global economic downturn.

"Regional trade is our backup position incase the situation in traditional export countries gets worse," says central bank governor, Claver Gatete.

"Last year was good and we expect this year [2012] also to be good for us," he said. His optimism is based on a strong banking sector, construction, regional export trade and food production.

Already, export figures for the first quarter of 2012 show a 68% increase in exports against 30% rise in imports--a sign of good results ahead.

"Our financial sector is not only stable but resilient. The IMF [International Monetary Fund] was here twice last year and they confirmed this," Gatete said. Rwanda's banking sector grew its assets by 245% from Frw 869.8 billion in 2010 to about Frw 1,083.3 billion by December 2011. Loans grew by 28.4% while profitability went up by 42.4%.

With a stable and resilient banking sector that has the capacity to lend money to productive sectors, Rwanda's economic planners are confident of posting good results.

Short-term debt

Economists say that big investment in infrastructure and food production has a multiplier effect on any struggling economy. In addition to enhancing production, there is an immediate gain of generating employment for many people whose purchasing power is tremendously boosted as a result.

Increased purchasing power increases consumption, which in turn spurs production and hence growth.

The is indeed the rationale behind Rwanda's plan to borrow $100m this year to fund big infrastructure projects such as the Kigali Convention Center and a new international airport in Bugesera. When completed, the convention center will house 292-room five-star hotel, shopping mall and conference facility with a seating capacity of 2,600 people.

The country must however avoid increasing its short-term debt as this could increase vulnerability, the World Bank warns.

"...the world's poorest countries will also feel the fall out - especially countries that are heavily reliant on remittances, tourism or commodity exports or that have high-levels of short-term debt," the bank says in its report.

This warning is emphasized by the lead author of the report, Andrew Burns.

"Where possible, developing countries need to move to reduce vulnerabilities by lowering short-term debt levels, cutting budget deficits and returning to a more neutral monetary policy stance," Burns is quoted saying.

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