The issue occupying the minds of local economists and planners right now is the spiralling fuel prices. It is widely accepted that the events in the Middle East are seen as the main cause of this situation that has far reaching effects on the economies of oil importers such as Rwanda.It, therefore, means that if the increasing fuel prices do not stabilise soon, it will definitely lead to an increase in the national import bill. Naturally, such an increment will have to be shouldered by the local consumers.
The issue occupying the minds of local economists and planners right now is the spiralling fuel prices. It is widely accepted that the events in the Middle East are seen as the main cause of this situation that has far reaching effects on the economies of oil importers such as Rwanda.
It, therefore, means that if the increasing fuel prices do not stabilise soon, it will definitely lead to an increase in the national import bill. Naturally, such an increment will have to be shouldered by the local consumers.
The trickle down effect is that inflation is set to rise to higher levels. The main issue here is that such influences are brought out by external factors, which nobody has any control over.
However, before the unfortunate events in the Middle East that brought about the oil price volatility, can we claim that the internal factors have behaved in Rwanda? One of the key institutions directly involved in the issue of inflation is the Central Bank, which is tasked with undertaking various important functions.
The Central Bank prints the Rwandan currency and acts as the borrowing agent for the government. It also conducts monetary policy, while supervising the banking system among other major roles.
One has to look at the performance of the banking sector for the last five years to understand how the National Bank of Rwanda has been going about its duties. The latest banking sector report shows that the entire sector is now on a rebound after recording the highest earnings ever.
In 2009, the banking sector earned Rwf 3.8 billion as pre-tax profit which jumped to Rwf 13.1 billion last year, a huge jump of over Rwf 10 billion over a 12 month trading period.
Such record earnings were not accidental, rather, the earnings reflected what amounted to prudent policy measures. Through low underlying inflationary pressures, coupled with real interest rates being kept at positive levels, the Central Bank continued to stimulate the performance of the banking sector.
Other indicators have not been disappointing. The banking sector penetration through branch expansion has soared, thereby boosting the number of bank accounts and by extension the number of loans given out.
The tightening of supervision through establishment of the first ever credit reference bureau and boosting of the national electronic payments systems points to the major stabilisation functions by the Central Bank, last year.
Experts say that the main function of the Central Bank is to ensure price stability in the entire economy. One of the important factors that impact price stability is inflation.
Economists further say that one can judge the effectiveness of any country’s Central Bank by the predictability of the country’s prices, inflation, interest rates and the exchange rate.
This is where Central Bank Governor Francois Kanimba’s role comes into play, even as the issue of price stability that is being affected by external influences comes to mind.
At the height of the global financial crisis, Rwanda’s overall inflation fell from 22.1 percent in December 2008 to 10.1 percent by June 2009.The race to achieve single digit inflation was won when statistics released last year showed that overall inflation had been brought down to four percent.
What is Central Bank doing to check rising inflation right now? Reports indicate that the Bank is keeping its key lending rate at 6.0 percent to stimulate private sector lending while projecting that inflation would rise to 6 percent by June 2011.
Kanimba says that by maintaining an unchanged policy rate, the Central Bank expects commercial banks to continue increasing credit to the private sector, while ensuring that interest rates remain positive in real terms.
It came as a source of relief when Kanimba added that the Central Bank would be vigilant on looking at the causes and effects of rising inflation. While it remains to be seen whether the target of 6 percent by June 2011 will be met as projected by the Governor, the good job done so far is an indicator that the challenge at hand will nonetheless be tackled.
The author is an editor with The New Times