The government has to strengthen the financial muscles of local banks to equip them with the mettle to fund the country’s development projects, a new World Bank Group report suggests.

The World Bank Group’s bi-annual economic update on Rwanda, released yesterday in Kigali, gives the economy a clean bill of health but in projecting growth and constraints, highlights significant areas that need to be considered to deepen the economy.

Gunhild Berg, a WB financial sector specialist, said that although local commercial banks are the most important source of financing, their investments are constrained by maturity of liabilities, which consist mainly of short-term deposits.

The financial sector, Berg said, significantly contributes to economic growth, supports mobilisation of domestic savings, and facilitates domestic and foreign debt financing and investment as well as access to international capital markets.

"As the banking sector has limited capacity to provide long-term financing, domestic, regional, and international institutional investors such as the pension and insurance funds are natural candidates for investing in long term projects,” Berg added.

The report projects strong growth at 7.4 per cent for 2015, which is expected to accelerate to 7.6 per cent next year.

The report also projected poverty levels to further decline due to the fast growth, which is expected to have plucked another at least one million Rwandans from under the poverty line by 2016.

Rwanda’s growth recovered last year when it registered a 7.0 per cent expansion, up from 4.7 per cent registered in 2013. The recuperation was mainly attributed to strong private and public consumption.

The Bank’s growth projections for this year are almost two percentage points more optimistic than what government projects, and Finance and Economic Planning ministry chief economist Leonard Rugwabiza welcomed this projection.

"We prefer to be more cautious, better we expect less to get more than the other way round,” said Rugwabiza.

The conundrum of sector funding

The service sector, which contributed 48 per cent to GDP in the first quarter of 2015, is lauded for leading growth, a trend which is likely to continue, especially after signs that commercial bank lending to private sector has since recovered to levels recorded in the pre-aid shortfall period two years ago.

However, this recovery, while a good thing, is fragile because commercial banks, which account for 66 per cent of the total lending to private sector, are operating with short-term deposits that can’t support long-term financing to support investment, said the report.

It is this conundrum that perhaps informed the theme, "Financing development; the role of a deeper and more diversified financial sector,” under which the update was presented yesterday.

According to the report, investment efforts must double if Rwanda is to achieve and sustain higher economic growth in the medium and long run.

Currently, investment contributes 24 per cent of GDP, which is slightly higher than the average for low /medium income economies although it’s dominated by public investments.

Moreover, the public investments are mainly supported by funds from foreign sources, including donor aid. This, the report says, is mainly because of low domestic savings in the country, a situation not expected to improve in the medium term.

If increasing domestic savings in the medium term is deemed impossible, government has to explore new alternatives to diversify sources for development financing.

To this end, the Bank has some ideas.

"Workers remittance and foreign direct investment are potential alternative sources as they have steadily increased without significant volatilities in the past several years,” said Carolyn Turk, the World Bank country manager.

Meanwhile, like it often happens with most economic meetings where the role of commercial banks are discussed, the question of lending rates was thrown in as many continue to ask why a seemingly accommodative BNR monetary policy has not managed to influence commercial banks to lower their high lending rates.

Prof. Thomas Kigabo, the central bank’s chief economist, was on hand to explain: "Normally, monetary policy is transmitted through two channels, the first aimed at boosting the capacity of banks to disburse more loans to the private sector, this is working very well.

"The second is where we try to influence lending rates, and currently we are working on some structural problems that seem to be making it difficult for banks to lower their interest rates.” editorial@newtimes.co.rw