The National Bank of Rwanda has announced its decision to reinstate the reserve requirement ratio to the pre-covid-level of 5 per cent, effective this month.

The ratio had been at 4 percent since April, 2020, after a temporary decision to reduce it in the wake of global economic shocks particularly due to Covid-19.

The reserve ratio is the amount of reserves, or cash deposits, that a bank must hold on to and not lend out.

Ordinarily, the greater the reserve requirement, the less money that a bank can potentially lend, despite the excess cash which would also stave off a banking failure, shoring up its balance sheet.

According to the Central Bank, the decision announced by its latest Monetary Policy Committee, comes at a time when the economy is gripped with high inflationary pressures unlike two years ago.

Reacting on the reason it was reduced, Thierry Kalisa, the Chief Economist at BNR said, that with Covid-19, economic growth was expected to "be very low.”

"At the same time there were issues on liquidity. So this decision was about supporting the economy, through injecting liquidity in a time of an economic crisis,” he said.

Comparing it to the situation right now, where the economy recovered from Covid-19, Kalisa said that growth is high, "and we have a very big issue of inflation which is now in double digits.”

"So now the MPC decided to go back to the reserve requirement ratio of 5 percent because the situation is different, and we are not seeing the need for liquidity again, we need the opposite, actually we need to slow down liquidity to reduce inflation.”

Questioned about the current status of liquidity, he highlighted, "Right now the numbers indicate that there is enough liquidity to cater for this increase. So the situation is different, we are not going back to normal, we are only witnessing a good level of economic growth but with a problem of inflation.”

According to him, the central bank remains committed to achieving price stability with a target to return to the 2 to 8 percent inflation band in the medium term.

Like Kalisa, experts say that increasing the reserve requirement ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.

"When you look at most clients that benefited from the moratorium period, like most hotels and other businesses, the size of the portfolio has really gone down,” commented Diane Karusisi, Chief Executive at the Bank of Kigali.

According to her, on average, the banking industry has surpassed the liquidity coverage ratio requirement by the central bank.

"For instance we have some over 300 per cent, which means that the current state of liquidity is enough to cater for the clients,” she said.

The liquidity coverage ratio refers to the proportion of highly liquid assets held by financial institutions to ensure that they maintain an ongoing ability to meet their short-term obligations

In other words, the liquidity coverage ratio is a stress test that is intended to make sure that banks and financial institutions have a sufficient level of capital to ride out any short-term disruptions to liquidity.

For Mugabe Mugomwa, an economist based in Kigali, the priority should be to balance economic growth with increasing inflation.

"If you adopt an expansionary monetary policy, it increases economic growth but also accelerates the rate of inflation,” he asserted.

Projections

Inflation was projected to average around 13.2 per cent in 2022, a projection that saw the central bank increasing the repo rate at 6.5 percent, higher than the 5 percent rate two years ago.

The decision, BNR highlighted, intended to reduce inflationary pressures and preserve consumers’ purchasing power.

However, projections also indicate that core inflation ( excluding food and beverages) will remain elevated until the first half of 2023, following the resilience of the domestic economy and high import costs, before it starts reducing.

Food inflation is projected to moderate early this year as the next harvest period starts with a normal production.