High inflation has had a negative impact on Rwanda’s economy. It has depressed household budgets, devalued the Rwandan franc in part, and exerted immense pressure on companies, some of which are already reporting that their profit margins have been pressed.

Last year, prices for things people buy every day went up faster than they have in previous years.

Headline inflation, a key metric which tracks the average change in prices for a basket of goods and services that a typical household consumes, hit 20.7 per cent in January of 2023, statistics from the National Institute of Statistics Rwanda (NISR) show.

For example, the average price of bread and cereals, vegetables, and fruits increased by 16.3 per cent, 52.3 per cent, and 28.6 per cent in 2023, respectively, according to the National Bank of Rwanda.

The year before that, the average price of bread and cereals, vegetables, and fruits had increased by 24 per cent, 33.3 per cent, and 21.7 per cent, respectively.

The high inflation experienced in 2022 and 2023 were mainly due to high international commodity prices such as processed food and fuels, largely because of the aftermath of Covid-19 and negative effects of the Ukraine-Russia war.

"This has eased since central banks took decisions to tighten their monetary policies. That tied financial conditions slowed down economic performance, slowed down global demand, and that slowed down global inflation,” John Rwangombwa, the Governor of the National Bank of Rwanda told The New Times.

The Central Bank has managed to bring back inflation within its target range of 2-8 per cent. Headline inflation dropped to 4.9 per cent year-on-year in February this year from 20.8 per cent in February 2023.

"Headline inflation is on a declining trend evolving within the band, this is due to alleviated pressures on core inflation from international food prices, easing trend recorded from global energy prices, and improved fresh food supply resulting from crop production,” the governor said.

Asked whether inflationary pressures seen last year would push people to increase prices this year, the Governor said he believes that most adjustments – second round effects – to last year’s shocks have already happened, suggesting that price increases due to past pressures have likely already happened.

"The only trickle-down inflation that we expect is from the high depreciation that we registered last year. We don’t expect any major increases except if the risks we identified materialize,” he noted.

Some of those risks include geopolitical tensions such as the war in Ukraine, Red Sea disruptions, global oil cuts, and climate change. These risks could potentially lead to inflation hikes, and worsen the local currency which lost 18 per cent of its value against the US dollar last year.

The Red Sea in particular has long been a vital waterway to international trade, but attacks by Houthi militants from Yemen on shipping vessels since the start of Israel-Hamas war has caused major disruptions on commercial shipping.

The number of specialized car-carrying ships using the Red Sea dropped by more than half in December 2023 compared with December 2022, United Nations Conference on Trade and Development (UNCTAD) said in February this year.

"If disruptions at the Red Sea persist, we expect this will hike commodity prices due to expected increase in transport prices. Otherwise, if the projected growth in agriculture [is realised], and no unusual crisis globally, we don’t expect any pressures on Rwanda inflation,” the governor said.

In November when the Central Bank held its key lending rate at 7.5 per cent, it was hoping the decision would bring back inflation within its targeted range of 2-8 per cent.

That has been achieved and inflation is projected to average 5 per cent in 2024.

Economy resilient

The Central Bank says the economy will continue to maintain the growth momentum seen in 2023 provided that major risks subside. This would put the growth rate for 2024 at 6.6 per cent.

"This strong growth momentum is expected to continue in 2024 led by increasing investments in the construction and tourism sub-sectors and the recovery of the agriculture sector thanks to improving weather conditions,” Rwangombwa noted.

The World Bank Group puts the economic growth rate for 2024 even higher. The Bank said in its economic update last month that Rwanda’s economy will grow at 7.2 per cent in 2024.

"Rwanda’s economy showcased resilience and adaptability, achieving a robust growth rate in 2023, amidst a series of challenging external and domestic factors,” Peace Aimee Niyibizi, World Bank Country Economist for Rwanda indicated.

She added, "The World Bank encourages the country to pursue its prudent fiscal management by reducing non-essential spending and prioritizing investment in human capital.”

Rwanda’s economy grew at 8.2 per cent in 2023, higher than the initially projected growth of 6.2 per cent. This was driven mainly by the services and industry sectors which grew by 11 per cent and 10 per cent, respectively.

Last year, construction activities increased by 12 per cent. This could have been driven by increased demand in new construction activities including the ongoing construction of the Bugesera airport, road construction activities, and upcoming private commercial housing projects.

"We saw increased imports and exports. But imports increased much faster than exports. Part of the biggest driver of our import bill is food imports,” Rwangombwa said.

According to the central bank, Rwanda’s international trade continued its recovery in 2023. Merchandise exports rose by 1.7 per cent in 2023, supported by the good performance of domestic manufacturing exports.

Merchandise imports also rose by 6.9 per cent, mainly driven by the increased demand for imported goods and services to support the economic recovery.

The country’s trade deficit – the difference between exports and imports – widened by 10.2 per cent.