24 September 2012

Rwanda: Dollar Scarcity Pushes Up Prices

Inside a busy warehouse in Kigali, a marketing manager of manufacturing company is adding, subtracting and multiplying figures using a computer and a Casio calculator simultaneously.

The manager, who requested not to be named, was not balancing the day's sales figures that Wednesday afternoon, but was calculating upward factory price adjustments for the various products his company makes - a necessary measure to stay in business in the wake of weakening local unit, the Rwanda Franc.

Yet as he goes about his calculations, has to be very careful when increasing prices, because there is a real risk of pricing out low income earners, the bulk of his consumer base.

This is the delicate situations local manufactures and importers of consumer commodities found their businesses in last week, following sudden depreciation of Rwanda Franc by about 6-7% from two months ago.

By close of business last week and as we went to press, the local currency was trading at 635/645 (buying and selling respectively) in major forex bureaus in the city - having fallen from 606/609 two months ago.

The trouble faced by local manufactures is that most of the raw materials they use to make goods consumed by Rwandans are imported from Europe or Asia, using dollars. With the exchange rate of the dollar going up, its immediate impact is a corresponding decline in the profit margin as they have to spend more Francs to buy dollars.

Yet, according to some of manufacturers interviewed for this story, profit margins are usually low - at just about 10%. "So, when the Franc loses value by 7%, it pushes profits margins lower to about 3%. At the level, no manufacturer can sustainably absorb the costs and the only option is to increase prices," said a manager of local manufacturing company.

The full extent of the impact of the rising price of dollar on the cost doing business in Rwanda today will however depend on how much it affects pump fuel prices. Manufacturers too are waiting to see by how much fuel prices will go up, before increasing prices of various goods.

Like other imports, petroleum products are also imported using dollars and the more expensive the dollar is on the local market, the higher the cost of importing petrol or diesel. And like any other business that seeks to make profit, fuel dealers too, will be forced to pass on the additional costs to the final consumer. That will most certainly mean high fuel prices and higher transport cost in the near future.

No cause for worry

Central bank governor, Claver Gatete and his team, therefore have their job cut out in calming the market. "Government has to do something to stop further depreciation of the Franc," said a local manufacturer who also requested to remain anonymous.

But National Bank of Rwanda (BNR) says that this depreciation is within the safe zone. "The annual depreciation rate stands at 2.7% today. This is not an alarming [rate] except that Rwandans are used to a stable situation," BNR said in an email response to our inquiry last week.

According to the central bank, the public need not worry about a possible spike in prices because inflation will be contained with the national target of not higher than 7.5%.

"[There] no cause for worry.... Prudent monetary policy, coordination of economic policies and declining regional inflation will mitigate the effect of imported inflation. This will keep the inflation on the normal trend, as projected," BNR added.

Inflation figures released by the National Institute of Statistics of Rwanda (NISR) recently, seem to support BNR's optimism. Urban areas recorded year-on-year rise in the rate of inflation for August of 5.81% from 5.57%, driven by increase in prices food and non-alcoholic beverages.

Compared to 7.81% in January 2012 and 8.32% in May 2012, the central bank believes that prices will not escalate. "Our forecasts show that the inflation in Rwanda will be in the line of our initial program, not exceeding 7.5% end 2012." Despite this assurance, NISR figures show that prices of imported goods increased by 1.16% year-on-year.

High imports bill

Until this month, the Rwanda Franc has been the only sable national currency in the east African region - holding firm in the face of a recent global economic melt-down that battered regional economies giants such as Kenya, Tanzania and Uganda.

In response to our query why the Franc is coming under pressure at the time when other currencies in the region are recovering, BNR points to a rise in the national imports bill. "The current situation is explained by high demand for foreign exchange driven by significant increase in imports in line with economic activities," says the central bank.

Rwanda imports increased by $ 228 million during the first half of 2012 compared with the same period last year. This increase, according to BNR, came against the backdrop of yet another 66.2% rise of $137 million between the first seven months of 2010 and the same period in 2011.

Although revenue from exports has remained steady, BNR said that some coffee exporters "have delayed to export" in an anticipation of better prices at the world market. This means that some dollars from coffee, the country's major export, have delayed to come - adding to the low supply of the greenback.

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