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Monetary Policy, Government Interventions Bring Inflation Under Control But Not Tamed

by Vincent Gasana
12:29 pm

Inflation in Rwanda, should average 5% for 2024. That is the message from the country’s central bank, after this year’s first meeting of the Monetary and Financial Statbility Committees.

The forecast does however, come with the usual warning, caeteris paribus, or all other things being equal.

Those things are whatever the state of the global economy, might be, climate change, and geopolitics. For the best part of four years, things have been anything but equal, and economies everywhere, have been buffeted by unpredictability.

Russia’s invasion of Ukraine undermined the world’s recovery from the dire economic effects of the Sars-Cov-2 pandemic, and just as the world’s economies were looking at the measures to meet that challenge, the Middle East crisis begins.

These shocks are weighing on global economic performance, as are tightened monetary policies, as central banks continue to try to keep inflation down. All of which mean that growth is likely to remain sluggish.

According to the IMF (International Monetary Fund) and the World Bank, global growth is expected to stay at 3.1% for 2024, doing only slightly better in 2025, at 3.2%.

There is some good news on inflation, which is falling faster than expected, in most regions. Global headline inflation is projected to fall to 5.8% this year, down from 6.8%, last year, and decreasing to 4.4% next year.

This is thanks mainly to reduction in global commodity prices, including energy.

Sub-Saharan Africa reflects this trend, but is weaker, with growth of 3.8% for 2024, up from 3.3% last year, and rising to 4.1% in 2025. Inflation this year is projected at 13.1% down from 15.8% in 2023.

Domestically, the central bank governor, John Rwangombwa could state confidently, that “the real economic performance remains strong…the first three quarters of last year, registered strong growth than was projected, overall average of 7.6% for the first three quarters…” Judging by the composite index of economic activities, the numbers that the central bank tracks to gauge economic performance, the fourth quarter is also expected to be strong, at 7.2% increase.

The composite index of economic activities, reflects the real GDP (Gross Domestic Product). From this, the bank expects performance for 2023, to be higher than the originally projected 6.2%.

The external sector remains weak however, mainly due to the reduced prices in the country’s primary commodity exports, of minerals and agricultural products. In addition, production of coffee and tea, was adversely affected by weather conditions, over the last two years. All of which meant that exports for 2023 grew by an anaemic 1.7%, while imports increased by 6.8%. The low performance led to a widening of the trade deficit by 10%.

All this, in addition to the strength of the US dollar, mainly as a result of the tightening of monetary policy to curb inflation, also led to the depreciation of the Rwandan currency, at one point last year, by 18.05%, the biggest depreciation of the currency for some time.

With the exception of the odd large loans that are able to attract lower interest, interest rates, whether in short term money market trades, treasury bills, government bond rates, deposit rates, all increased, in line with the direction of monetary policy over the last two years.

As with the rest of the world, Rwanda’s inflation continued to fall. The central bank’s projection for last year, that it would it would be in single digits by the end of the year, have proved accurate.

Headline inflation, that is inflation that incorporates all commodities, including food and energy, registered 8.9% in the fourth quarter of 2023, down from 12.7% in the third quarter. In December and January, it fell to within the bank’s preferred band of between 5 and 8 percent.

A number of measures taken account for these figures. The most obvious is the central bank’s continued tightening of monetary policy, to bring down inflation. That was supported by a policy decisions from the government.

To reduce the burden of rising costs on consumers, the government stepped in with subsidies on public transport, fuel and fertilizers. Some of the food stuffs also had taxes completely removed, in addition to increased support for farmers.

Coupled with the decrease in global commodity prices, these interventions produced the desired effect on core inflation, or the measure of inflation, excluding the volotile prices for energy and food. And energy inflation has remained below 5% for over six months, in part due to lower global oil prices.

Because of the risks associated with continuing geopolitical tensions however, the bank is holding the interest at 7.5%, to maintain stability, but may change its stance, if there are no major shocks that lead to projections being revised.

Rwanda aims to make the country a financial hub, and if the regulatory framework is anything to go by, the country is more than half way there. Each Financial Stability Committee (FSC) meeting, shows the sector growing in strength, and the latest FSC was no different.

Despite the global geopolitical tensions that are affecting economies everywhere, the financial sector maintained its growth. Financial assets grew by 20%, as of December last year, from FRW 8,909billion (jus over $10 million), to FRW 10,687billion (just under $11million). Increased efficiency, and high growth in deposits, saw the banking sector, which is the biggest subsector, growing by 22 percent.

Both public and private pension sectors, saw their assets increase by 13.7%, mainly from increased pension contributions, and income from investments. It is a similar story in the insurance and microfinance sectors, which grew by 17 percent and 23.6 percent, respectively. The sector’s assets relative to GDP, grew to 66.7 percent in December of last year, up from 64.9 percent the same period the year before.

The sector continues to be more than adequately capitalised, beyond regulatory requirements. Banks’ average Capital Adequacy Ratio (CAR), was at 21.5 percent, higher than the minimum regulatory requirement of 15 percent. The CAR in microfinance was 33.8 percent, well above the required 15 percent.

Notably, the solvency of private insurance improved by 296 percent in December of last year, from 221 percent the same period the year before, on the back of improved profitability and quality of assets.

According to the FSC, “over the medium, the financial sector is expected to remain stable, and sound…This resilience is backed by ample capital and liquidity reserves, strengthened risk management practices, and good domestic economic performance…”

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