16 February 2013

Rwanda: Experts Hail Euro Bond Option but Urge Caution

Rwanda's plan to issue sovereign bonds to European markets to boost its national budget for the next three months has experts prescribing the need for careful management of proceeds from the bonds since Rwanda's economy would stand to significantly gain or desperately lose depending on how the money will be handled.

To boost its 2012/2013 budget with an increase of nearly 12 percent, the Rwandan government will issue government bonds to European markets to generate resources worth Rwf 227 billion.

According to Prof. Josephat Bosire who teaches finance and investment at Mount Kenya University's campus in Kigali, the issuance of the bonds is a good thing for the economy because it shows that the country has confidence in its ability to repay back the loan.

He also said that a successful repayment of the money would improve Rwanda's credit rating, a status that would give the country more chances to borrow more money in the future and invest in its development projects.

But he also warns that careful measures to effectively manage the funds will be needed once the government receives the money because the last thing it would want is to take another loan in order to repay back.

"They have to be extremely careful because they may end up getting another loan to be able to repay this," he said. "To make sure that they will repay, the management of these funds should always be number one."

One of the ways the professor recommends to make sure that the funds will be paid back is to keep checking the country's inflation, because the more it goes up, the harder it would be for the country to get enough money to pay back the loans.

"It's a good thing. My only worry is that with the experience we have with the financial crisis, the government needs to plan very carefully because the problem in Greece is basically a product of this crisis and the bonds....everything that happened in Greece is a lesson we should learn from because Greece has suffered," he said.

Over the last ten years, Greece went on a debt crisis that became severe at the end of 2009. The economic crisis has ruined the country's economy, brought down the country's government, and sparked social unrest as Greeks suffered from high unemployment and huge cuts in government spending while banks lacked funds to keep lending.

Professor Bosire's cautionary tale on the bonds is somehow shared by MP Abbas Mukama, the Deputy Chairperson of the parliamentary Standing Committee on National Budget and Patrimony.

As Minister of Finance and Economic Planning, John Rwangombwa, presented a bill to modify the current budget law in parliament last Thursday, the MP said that the government will need to prepare public servants for a better management of public funds because they are going to have to spend money to implement planned activities in just a few remaining three months of the 2012/2013 fiscal year.

It is the idea of floating sovereign bonds that Mukama used to show how careful management of public funds will be seriously needed in the future.

"These treasury bonds will be paid by taxes of Rwandans. There is need to carefully use public funds; no extravagance," he said.

The Cabinet has proposed a net increase of Rwf 164.6 billion to the original 2012/2013 budget, making it Rwf 1,549.9 billion instead of the original Rwf1,385.3 billion.

The finance minister said the revision was made in order to prepare Rwanda to current world economic prospects, suspended aid, and her investment priorities in the next three months.

The minister said the Euro bonds funds will especially be on-lent as soft loans to Rwandair and the Kigali Conference Center (KCC) to help the country attract foreign currencies.

Using proceeds from Euro bonds, Rwandair will end existing expensive debt while the KCC project will be completed to boost events tourism in the country, Rwangombwa said.

The original budget faced a reduction of Rwf 62.4 billion in aid cuts and aid suspension made by development partners in the budget's first semester last year.

What's a government bond?

Bonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company or country. A government bond is a bond issued by a national government, generally promising to pay a certain amount on a certain date, as well as periodic interest payments.

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