25 December 2012

Rwanda: Dollar Loans to Shield Coffee Exporters Against Exchange Losses

In a major policy change, loans to coffee exporters financed by the Development Bank of Rwanda (BRD) will be disbursed in United States of America dollars, bank officials said last week.

According to the director of credit administration, Emmanuel Karuranga, the move is aimed at cushioning exporters against losses resulting from currency conversion that may occur when they change earns from their exports into local currency to settle their Rwandan francs denominated loans.

Karuranga said that some of the clients have for long been calling for dollar denominated loans--a request that the bank granted last week during a meeting with clients in the coffee sector.

The annual meeting, often held just before the start of a new coffee season, was convened to assess the activities of 2012 season and plan for the coming season that usually starts in March 2013. Even though the current situation (the Rwandan Franc weaker against the dollar) favors exporters who earn in dollars and settle their obligations at home in the local currency, officials said that such a situation cannot be permanent.

Disbursing loans in dollars is however, also good for the bank that has had to convert dollars sourced in order to lend to clients in local currency--in the process incurring conversion-related losses. After recovering loans from borrowers, the bank again converts Rwandan Francs into hard currency to settle its obligations with lenders abroad--again incurring conversion related losses.

Therefore, in order to avoid all this, exports will borrow in dollars and pay their loans in dollars. "It is a win-win situation for the bank and the clients," said the director of operations, Evode Nshimimana. This helps both the bank and the exporters to avoid currency conversion losses.

Low season

The meeting noted that the 2012 season was generally good with credit finance to the sector hitting Frw 8 billion. More than half of the loans have already been repaid, according to Karuranga. He said that the rest of the unsettled loans will be recovered as soon concerned exporters, who expect payments from their customers, get paid soon.

During the meeting, the bank asked clients to submit request for 2013 financing in time so that bank assess their financial needs ahead of the next season. In their assessment of the coming coffee season, senior bank officials said they expect lower volumes even though it may not be easy to precisely predict the outcome that is often influenced by many factors.

Predictions of lower volumes as compared to the 2012 season are based on the traditional coffee maturity period. Officials said that usually a bumper harvest is followed immediately by lower yields the following season as trees take time to rejuvenate.

Another reason to expect lower volumes is the fact that some exporters that did not make profit following a fall in international coffee prices in 2012 compared to 2011, may this time be less enthusiastic. Prices are said to have declined to $3-4 per kg on the international market--eating into the profit margins of exporters who bought the beans locally based on 2011 prices. Coffee prices short up in 2011 after Brazil, the leading producer, had its crop damaged by bad weather.

In addition to price fluctuations, some exporters also reported a series of marketing problems that include some buyers who place orders and cancel then on short notice, sometimes when coffee has already been shipped.

Last year was good for coffee sector with the country earning $61 million between January and October. This is expected to hit $70million when November and December receipts are added. This represents a $17million increase from $44million earned during the same period in 2010.

However, prices are forecast to fall in 2012 due to the large harvests expected in Brazil and Vietnam.

Rwanda has about 90 million coffee trees with over 400,000 coffee farmers operating on an estimated area of about 35,000 hectares. However, the productivity from the sector has been low.

As the leading sources of longer term development capital, BRD has over the years invested heavily in the coffee sector--the country's main export. The bank has funded coffee washing station, coffee farms and exporters to ensure the whole value chain in coffee sector is taken care off. So far, the bank is working with over 40 cooperatives in the coffee sector.

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