Thursday, December 18, 2014

Rwanda prepared to withstand external shocks should any arise

IMF Mission Chief for Rwanda Paulo Drummond. PHOTO | CYRIL NDEGEYA | NATION MEDIA GROUP 
By Berna Namata
In Summary
  • IMF Mission Chief for Rwanda Paulo Drummond spoke with Rwanda Today’s Berna Namata about the Fund’s discussions with the government and the current state of the Rwandan economy.

An International Monetary Fund mission visited Kigali from September 22 to October 7 to conduct the 2014 Article IV Consultation and the second review of the economic programme supported by the Policy Support Instrument (PSI).
The leader of the delegation, who is also the IMF Mission Chief for Rwanda, spoke with Rwanda Today’s Berna Namata about the Fund’s discussions with the government and the current state of the Rwandan economy.
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To what extent has the Rwandan economy recovered from the slowdown witnessed last year?
It has rebounded in the first half of the year. Growth came up to 6.8 per cent in the first half because of a pickup in government projects and good agricultural season. Growth has been broad-based, including the service sector.
How would you rate the preparedness of the economy to withstand external shocks, for instance if aid was to be delayed or suspended again?
A small low-income country like Rwanda, which has a very narrow export base, is subject to fluctuations in commodity prices, weather and aid shocks. Against these vulnerabilities, what policy makers should do, and have been doing in Rwanda, is preserving reserves and building policy buffers.
Reserves are estimated at four months of prospective imports by end of December. Is this sufficient?
A commodity exporter like Rwanda is vulnerable and therefore advised to keep an appropriate level of reserves. We agree with the government that the four months of reserves is adequate at this point.
Whether the current level is sustainable will depend on current and capital account flows. On the current account, much depends on the success of the export strategy and the ability to export more. On the capital account, much will depend on Rwanda’s ability to receive autonomous foreign inflows, including FDI, as it moves away from aid dependence. Receiving more private flows — equity flows — is a fundamental piece of the government strategy going forward.
Inflation has been relatively low, decelerating to 0.9 per cent in August from 3.7 per cent in December, raising deflation fears. What is your view on this?
We do not see signs of deflation in Rwanda. What has driven inflation down are low import prices for food and fuel and declining prices for fresh domestic food products because of a good agricultural season. As the supply of fresh food products went up prices actually declined, pushing down the headline number to below one per cent in August.
But these are temporarily factors and the expectation is that by year-end inflation will be at about three per cent, in line with the central bank projections. On growth, we expect six per cent for 2014.
The franc has continued to depreciate, that is 2.1 per cent against the dollar, in the first half of 2014. The private sector and banks are concerned it is increasing the cost of doing business. How do you view that?
The franc has been stable compared with other currencies in the region — partly because inflation in Rwanda has been lower than in other countries.


It is a policy of the central bank to keep a flexible exchange rate and one would expect the rate to move in line with inflation differentials between Rwanda and its partner countries.
In recent years, the IMF has underscored the need for a shift to a private sector-led economy but the private sector remains very weak. What is undermining this transition?
Rwanda has developed and sustained high growth driven by the public sector while relying on significant aid. It will need to rely more on a private sector-led growth with greater reliance on foreign inflows, including FDI.
Sustained high export growth will require rising non-traditional exports but also diversification of the export base, including by making good use of the regional markets. On ability to develop the private sector, a key issue is the need to reduce the cost of doing business.
What would it take to leapfrog this transition, in your view?
During the transition the government will continue spending, including to carry out investments in the EDPRS II priority areas. The private sector response will likely reflect Rwanda’s ability to reduce these costs of doing business.
A transition is unavoidable but it cannot be overnight. It will be key to phase out all the investment projects going forward, including through a public investment programme.

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