The National Bank of Rwanda (BNR) says the country is not short of US dollars and that the current fast-depreciation rate of the Rwandan Franc to the US dollar has been caused by market speculators who have succeeded in creating an ‘artificial’ exchange rate.

The remarks were made by BNR governor John Rwangombwa yesterday as he broke the silence over a worsening exchange rate turbulence that has seen regional currencies, including the Rwandan Franc, lose ground to an ever strengthening dollar.

Describing it as ‘recent noises’ in the media, the governor, who was speaking at the closure of BNR’s research conference in Kigali, said ‘currency depreciation is not a taboo’, especially for net importing economies like Rwanda.

But he also admitted that central bank was in control of the situation until a few weeks ago when the franc’s depreciation against the dollar reportedly got out of hand going above the projected 5 per cent annual depreciation rate forcing BNR to investigate the cause.

What BNR found is what most members of the public have experienced in recent days where currency exchange bureaus quote the cost of the US dollar at Rwf750, but actually sell it at Rwf800.

"Under normal rates, you should not pay more than Rwf750 for a dollar; anything more than that is an artificial rate caused by speculators,” Rwangombwa said.

But dealers at foreign exchange bureaus The New Times talked to, who preferred anonymity, insist that there’s scarcity of dollars on the market and their selling rate is informed by current market forces of demand and supply.

"It appears central bank wants us to trade on their terms instead of the market forces of demand and supply that guide us,” said one money changer.

As a result, many dealers are displaying rates that are within BNR estimates, but do business at different rates they think are in tandem with the market.

But the governor dismissed these claims as false, explaining that BNR has never forced foreign exchange bureaus to go against market forces.

"If their rates are backed by the current market forces then let them display those rates; there are clear rules to follow,” Rwangombwa countered.

Action expected

Yesterday Rwangombwa declared war on forex bureaus that are engaged in speculation pledging to crack the whip and bring the market back to normal within a week. 

"Whoever is engaged in this speculation will lose like they have in the past,” the governor warned.

Speculators basically earn from uncertainty, and currently, they have created a situation where everybody believes there is shortage of dollars which has driven the rates up.

While BNR says a dollar should not cost more than Rwf750; dealers are selling it at Rwf800, earning a profit of more than Rwf50 for every dollar sold.

"We are going to respond to these speculators by intervening in the market to restore order,” Rwangombwa announced.

Is this sustainable?

When the market is short of dollars, the central bank normally intervenes by selling more supplies to commercial banks to liquidate the market.

Rwangombwa says BNR will be doing that in coming weeks to counter the effect of speculators.

The general assumption is that speculators are hoarding dollars to create an artificial bubble to push the exchange rate high.

But BNR wants to burst that bubble by releasing more dollars into the market, hence pushing the exchange rate back to ‘normal.’ But how sustainable is this approach?

First, Rwanda does not print dollars; it must earn them through trade or, remittances from Rwandans in the Diaspora, foreign aid/grants or external borrowing.

Export earnings, the main source of Rwanda’s foreign currency, have not been performing that well due to weak commodity prices on the international market, partly explaining Rwanda’s negative balance of payment (spending more dollars on imports than it earns from its exports.)

For instance, previously, earnings from Rwanda’s exports would pay for at least 25 per cent of the country’s total import bill, but that cover has reduced to 18 per cent lately, according to central bank.

External factors

The Rwandan franc is not the only currency in the region struggling against the dollar. In fact, compared to its peers in the East African Community (EAC), it has depreciated the least with the Kenyan shilling losing by 11.8 per cent, Tanzania’s 20.2 per cent and Uganda’s 20.6 per cent.

BNR had projected that the Franc’s depreciation to the dollar would not exceed 5 per cent for the whole year and that projection was reportedly on course until the start of this month when its depreciation shot above 6 per cent causing stampede on the market.

However, the main factors behind the depreciation of the region’s currencies are more external than local and far out of the control of fiscal policies of EAC central banks.

Yesterday, Rwangombwa attributed these external factors mainly to the resurgent American economy which has been steadily recovering from the 2008 financial crisis.

"The other factor is reduced American imports for crude oil,” he said.

editorial@newtimes.co.rw