Rwandan growth is high; inflation is low. The country’s fiscal and monetary management are exceptionally well perceived in international markets. And as neighbouring currencies are attacked from all sides, the franc is a relative bulwark of stability
Rwanda is a small country — only 12 million people in a landmass that is barely 1% of its giant neighbour, the Democratic Republic of Congo. Yet in terms of the effectiveness of its monetary and fiscal management, it stands out in sub-Saharan Africa.
Rwanda’s economic growth shot up to around 7% in 2014 from 4.7% in 2013, according to the IMF. In the first half of 2015, central bank figures point to a similar rate of growth, around 7%. This is at a time when other regional nations, often richer in natural resources, are seeing their growth rates suffer as falls in global commodities prices and a rising dollar force their central banks to hike rates.
An important element of Rwanda’s economic management has been its efforts to diversify the economy away from primary industries, says Angus Downie, chief economist at regional lender Ecobank. Downie points to the country’s $400m debut Eurobond offering in 2013, in which proceeds went to financing the construction of a conference centre to boost its capacity to host conferences. He says the country can even boast a “small but dynamic” IT sector.
Exchange rate flexibility is a support to the country’s diversification push, according to the IMF. Yet the market draws confidence from Rwanda’s close co-operation between its central bank and an equally well respected finance ministry. National Bank of Rwanda governor John Rwangombwa, in fact, was previously finance minister, winning the regional Emerging Markets Finance Minister of the Year award in 2012.
Rwangombwa took on the central bank governorship in early 2013 and notes his continued role as economic adviser to the government. During Rwangombwa’s tenure at the central bank, inflation has fallen well below the 5% medium term target, ending 2014 at around 2%, a level around which it remained in the first half of 2015. The governor has nevertheless resisted further monetary easing, after a 50bp rate cut to 6.5% in June 2014.
Partly thanks to what Rwangombwa describes as accommodative monetary policy, Rwandan credit to the private sector rose by 20% in 2014 compared to 11% in 2013, with new authorised loans increasing by almost 40%. At the same time, the central bank increased the maturity of its bond issuance programme: mopping up liquidity and helping develop the financial sector, according to the IMF. Increasing foreign exchange reserves in the banking sector in 2014 allowed the central bank to reduce its foreign exchange sales to banks and foreign currency bureaux.
Alan Cameron, Africa economist at London frontier markets broker Exotix, says Rwangombwa has presided not just over single digit inflation, but also over a relatively stable franc, at a time when other regional currencies are under greater pressure. Rwangombwa, indeed, describes depreciation against the dollar of 5% in the first eight months of 2015, well below a 15% depreciation of the Kenyan shilling during the same period.
“Rwanda may have a relatively small population and geographic area but it has done well at punching above its weight in terms of its visibility in the market,” says Peter Sullivan, head of Citi’s public sector group for Africa. “That is partly thanks to policy consistency at the central bank.”
REGIONAL RESILIENCE
Slowing Chinese demand for minerals is having an effect on Rwanda, a producer of metals like coltan, tin and wolframite, says central bank governor John Rwangombwa. “Generally speaking we have had a good [economic] performance but of course there are challenges, mainly on exports because of commodity prices, despite an increase in [export] volumes,” he tells Emerging Markets.
Rwangombwa says that while export revenues are falling, cheaper oil prices mean the import bill is falling too, even as the volume of imports is rising. But he says that does not mean the central bank can sit back and relax as Chinese growth weighs further on global commodity prices. “We had to take action to increase the supply of dollars, to assure the market there was no crisis,” he says, talking of his response to currency market developments this year.
He says this intervention has helped maintain confidence that depreciation of the franc would remain in single digits. Co-ordination between fiscal and monetary policy in Rwanda, he adds, has been crucial to building up the kind of longer term credibility that has supported the currency and anchored inflation expectations.
“Our policies are linked and we don’t take one action and then another that would confuse the market,” he says, describing committees and quarterly plans that connect the central bank with the finance ministry. “We know what spending they will do; we know what their borrowing plans are. Our monetary policy is based on that.”
Looking forward, he says the resilience of the franc makes the country’s exports less competitive regionally — though he says regional exports are relatively low. “I expect to continue seeing a good economic performance over the medium term leading to reduced poverty and increased agricultural production,” he says.
“It’s being transferred to the lives of our population.”