Editor,

RE: "Rwanda’s cost of borrowing should be put into context” (The New Times, March 10).

That sounds plausible, but without a reliable credit referral agency to assist financial institutions to better understand their borrowers’ risk profiles and therefore be in a better position to properly price that risk in the interest rate they offer to individual clients, the larger the banks’ loan portfolio grow, the higher the proportion of loan impairments they are likely to face.

This would eventually lead to higher interest rates as banks seek to recoup their losses, reduced lending and a credit contraction which would result in lower economic growth.

Given the high rates banks and other lenders can earn from investing in government debt, they will continue to be very conservative in how they price loans and very stringent in the conditions they apply to credit approvals.

Only a substantial reduction in borrowing by the public sector and a looser monetary policy from the central bank might change this situation. But looser policy might also lead to a serious slide in the franc’s exchange rate and higher import inflation.

Truly horns of a dilemma for policy-makers.

Mwene Kalinda