26 March 2014

Rwanda: BNR Upholds Lending Rate At 7 Percent to Spur Devt

The Central Bank has maintained its key repo rate at 7 per cent, saying the decision would support "expected economic growth recovery" by sustaining increasing credit flow to the private sector.

The decision to keep the key repo rate (the rate at which the Central Banks lends to commercial banks) unchanged ince June 2013, was arrived at during the National Bank of Rwanda (BNR)'s monetary policy committee and financial stability committee ordinary meetings in Kigali yesterday.

The committees are chaired by BNR governor John Rwangombwa.

Credit to the private sector is projected to rebound this financial year after slowing down last year on account of a rise in government domestic borrowing.

Rwangombwa told journalists that the 2014 outlook is promising, with more than Rwf133bn in new loans approved by the banking sector in the first quarter.

He expressed optimism that the policy stance would help bring down lending rates, encourage more private sector borrowing and accelerate economic growth that slowed down to 4.6 per cent last year due to the effects of the 2012 cuts and delays in disbursement of donor-budget support.

This, Rwangombwa said, resulted in low increase in public spending as government instituted fiscal policy adjustments that mainly hurt the service sector-one of the major drivers of the country's economic growth.

The good news, Rwangombwa said, is that the economy has now put behind the challenges accruing from the 2012 cuts to return on a faster growth path, projected at 6 per cent this year.

BNR was expected to lower repo rate to allow faster decline in commercial bank lending rates, but Rwangombwa said interest rates on commercial loans had not reduced fast because the banks still have "a big stock of expensive finance."

Banks react

As a result, credit to the private sector is expected to grow by 15 per cent this year, according to Dr Thomas Kagabo, the BNR chief economist.

This, Kagabo said, is good enough to get the economy back to fast growth rate of about 6 per cent, from 4.6 per cent in 2013-the lowest in almost a decade.

Januario Mucyo, the Bank of Kigali relationship manager for non-businesses, said maintaining repo rate at 7 per cent might not have immediate impact on current lending rates, but will influence trends in the long term.

"We would wish the rate to be even lower than 7 per cent, because a lower lending rate means a higher turn up for credit and more private sector investment," Mucyo said.

Faustin Rutayisire, the head of institutional banking at Access Bank, said maintaining stability in the lending rates will create confidence among investors.

"It's actually the investors who will benefit more. When there is stability in lending rates, people are encouraged to take up long-term credit for long-term investments. Maintaining stability will mean controlled inflation," Rutayisire said.

The banking sector continues to perform, well with the capital adequacy ratio at 23.1 per cent and 33.4 per cent for microfinance institutions. This means the sector has adequate capital.

Slow growth

Figures from the National Institute of Statistics of Rwanda show that GPD at current price was estimated at Rwf4,819 billion in 2013, up from Rwf4,382 billion in 2012.

However, growth per sector saw major economic drivers such as agriculture and service sectors under-perform at three and four per cent, respectively.

International Monetary Fund and World Bank first projected the economy to grow at between 7.2 and 7.5 per cent in 2014, but the projections were revised to 6 per cent.

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