Two weeks of economic diagnosis by the International Monetary Fund (IMF) ended on Thursday with a brief report giving Rwanda a clean bill of health on all fronts and strong growth forecast of 6.5 per cent in 2015. The low inflation is tipped to play a key role in this growth.

Paulo Drummond, who led the IMF mission to Kigali between March 23 and April 2, appeared at a joint press conference with finance and economic planning minister, Amb. Claver Gatete, and told journalists that: "Rwanda’s recent economic performance has been favorable”.

The IMF’s verdict was reached after painstaking analysis of government data on the country’s recent economic developments and several discussions with senior government officials, development partners and representatives of the business community.

It was the third such review of Rwanda’s economic performance under the Policy Support Instrument (PSI), a template of the IMF that helps countries that don’t need Balance of Payments (BOP) financial support to design effective economic programs.

BOP is a method that countries use to monitor all their international monetary transactions at a specific period of time, usually calculated every quarter and every calendar year.

What happens is that total trade conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money came in or out of a country.

But sometimes countries’ inappropriate policies may create difficulties where a country lacks sufficient financing to meet its international payment obligations, and in the worst-case scenario, it can build into a crisis that the IMF has to help fix.

Rwanda has never experienced such a crisis and therefore doesn’t need IMF support in that area.

But PSI is a big deal because once countries get their proposed economic policies approved by the IMF’s Executive Board; it becomes an endorsement to donors, multilateral development banks and capital markets which base their investment decisions on the Fund’s analysis.

In a statement issued on Friday afternoon, the IMF expressed its confidence in Rwanda’s performance under its PSI program although a few areas of caution were also highlighted.

"Policy performance under the IMF-supported program was satisfactory after all quantitative targets were met,” said Drummond.

The mission also applauded Rwanda’s 2014 economic rebound of 7 percent growth from 4.6 percent the previous year, a jump experts attributed to good performance by the services and construction sectors as well as agriculture output, which recovered due to favorable weather.

Low inflation benefits

Although both government and the IMF agreed on a joint growth forecast of 6.5 percent in 2015, the latter warned of lingering external risks that could spoil the party mainly stemming from weak commodity prices on the international market that could hurt export earnings.

Experts will tell you that high inflation has many costs while low inflation has many benefits and Rwanda has been enjoying low inflation levels with consumer price fluctuation hovering just below 1 percent at the end of February mainly driven by low food and fuel import prices. 

The thing with low inflation is that it should give your money more purchasing power; that’s to say, using less of it to buy the same quantity of goods that you normally buy, because prices have gone down.

Is that happening in reality?

The cost of food and fuel as well as transport have gone down according to government statistics but observers attribute this to government’s direct involvement in the regulation of transport and fuel prices.

Unfortunately, many city dwellers talked to say the case is different in other sectors where government has left regulation to market forces. Talk on the street with traders is still dominated by lamentations about high cost of housing/rent and interest rates which have kept their cost overheads high.

"You tell us prices have gone down but that’s not what we see. We are still paying through the nose to meet our cost overheads,” said Ivan Munuzero, a manager of a local factory.

Ideally, low inflation means consumers buy goods at low prices, save more and boost deposits for local banks, with increased savings, banks have more money to lend so they reduce interest rates on credit to facilitate the private sector to borrow at lower rates and invest more.

"That’s in theory,” said Bernadette Hakimana who recently failed to obtain a bank loan of Rwf2.5 million to expand her tailoring workshop.

Even larger investors such as Bhatnagar, General Manager of SRB Investments, a paper bag manufacturing firm, say interest rates are too high, between 18 and 20 per cent.

It appears therefore that the actual benefits of low inflation are limited to just a few products such as transport fares and fuel where there’s direct government intervention. Observers note that in other sectors of the economy whose regulation is entirely up to the market forces such as banking and real estate, prices remain high hence constraining consumption and slowing investment.

It’s probably the reason why the IMF noted in its statement that Rwanda Revenue Authority (RRA) missed its tax collection target, albeit narrowly, due to weaker than expected VAT and excise tax collection.

The significance of that is that weak VAT collection means there was weak consumption on the local market albeit low prices and weak excise duty collection, a tax charged on goods produced within the country, means that there was low production among local manufacturers.

Last month, BNR decided to keep its key repo rate, the fee at which commercial banks borrow, at 6.5 per cent because of low inflationary pressures and in a bid to encourage more lending to private sector.

However, private sector players told Sunday Times last week that they don’t expect banks to respond to BNR’s well intended move.

Export earnings

Locally, low inflation should therefore be beneficial to Rwandans if its effects can be spread to all sectors of the economy. And if local producers refuse to reduce prices claiming high cost of production, at least cheap imports from the region will be an alternative for consumers.

However, the worry is that Rwanda’s major export products such as coffee, tea and minerals will earn the country less forex due to low prices on the international market.

Last year, Rwanda’s exports were hurt by weak demand and low prices and the same factor is expected to form part of the external risks that the IMF warned about in its statement.

The poor performance of exports last year saw Rwanda’s trade deficit worsen in 2014 by 7.5 percent to US$1.79 billion from US$1.6 billion with total export earnings that year managing to pay for only 25 percent of total formal imports against 25.5 percent in 2013.

Fortunately, inflation might be the key player again. Even if Rwanda’s exports earn less due to weak international commodity prices, the export-import cover might improve because of the low prices for imports such as oil.

That’s what happened in the first two months of 2015 where earnings from Rwanda’s formal exports only grew by 6 percent but managed to pay for 24.5 percent of all imports which was an improvement from the 21.1 percent in the same period of 2014.

It happened because during the first two months, the value of imported goods dropped by 9 per cent due to low prices.