Rwanda Focus (Kigali)

13 January 2013

Rwanda: Scared of Euro Debt Crisis, BNR Keeps Interest Rates High

Fearing effects of the fragile economic conditions in the Eurozone and the United States of America, the central bank has kept the repo--its benchmark lending rate -at 7.5% for the first month of 2013 even as inflation eased at home and in the region.

This decision was arrived at during the ordinary meeting of the National Bank of Rwanda (BNR's) Monetary Policy Committee (MPC) on December 21 2012.

In keeping the repo (the rate at which BNR lends to commercial banks) unchanged, the MPC sought to balance the need for adequate money supply to keep the economy growing while at the same time protecting it from spillover effects from the Eurozone debt crisis--now blamed for a weaker global economy.

This effectively means that the economic fundamentals for the first quarter of 2013 remain similar to the ones of the last quarter of 2012. BNR says the economy remains on the right track despite "challenging international environment, and suspension and delayed external aid disbursements."

Even though real GDP growth rate (the rate at which value of all goods and services produced in the country increased) slowed down from 9.9% in second quarter of 2012 to 7.3% in the last quarter of the year, BNR remains upbeat that the Rwanda economy remains sound and resilient to any external shocks.

The economy had grown at 7.5% in the fast quarter of 2012 before hitting its highest point in the year during the second quarter, thanks to the high demand for capital and intermediary goods that spurred investments. Construction and manufacturing were the major drivers of that growth.

Low inflation

It had been largely anticipated that the sharp decline in the rate of inflation from 8.3% in December 2011 to 4.6% in November 2012 would prompt BNR to reduce the repo rate and allow more liquidity in the market, but policy makers thought otherwise. For the last three consecutive months, BRN has maintained its lending rate at 7.5% partly convinced that the financial market is adequately supplied.

Indeed, official figures point to growth lending by commercial banks - pointing to the fact that the relatively high lending rates that average about 16.5% per annum have not dampened the demand for credit.

According to BNR figures, Total loans and advances to the private sector jumped from Frw 631.2 billion in December 2011 to about Frw 701 billion - 11% growth rate during the first quarter of 2012. Banking sector loan book climbed to Frw 744.5 billion as of June 2012 - having grown by 6.2%.

And as banks lend out more money, the rate of loan default has gone down with the ratio of non-performing loans (NPL) dropping to 6.5% in the first quarter of 2012. The central bank benchmark NPL ratio for commercial banks is 7% but most banks are on course to reducing it to below 5% as the entire sector NPL declined to about 4.3% during the first half 2012.

To date, Rwanda maintains the lowest inflation rate in the region - that the central bank attributes to "good economic performance and effective monetary and exchange rate policy."

Some local manufacturers who depend on imported materials are however feeling the pinch as the price of the dollar eats into their profit margins.

The BNR however has to contend with the depreciation of the local currency against major international currencies such as the United States of America dollar and the Euro. This partly explains the bank's unwillingness to cut lending rates. According to BNR, the Rwanda Franc has lost 4.5% of its value against the dollar since December 2011 and the BNR says the depreciation rate is "nominal" with little impact on the rate of inflation.

Some local manufacturers who depend on imported materials are however feeling the pinch as the price of the dollar eats into their profit margins.

Some say the local currency has actually depreciated by between 5-6% in the last six months.

The problem is that most of the raw materials used to make goods consumed by Rwandans are imported using dollars. With the exchange rate of the dollar going up, its immediate impact is a corresponding decline in the profit margin as importers spend more Francs to buy dollars.

Some relief for the economy will come from stable oil prices and easing inflation in the East African region. Both factors will reduce the risk of imported inflation into the Rwanda economy.

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