The Rwanda Franc is losing ground to the US dollar because of increased government spending and credit to the private sector during the second half of the 2012/13 financial year, central bank officials have said.

John Rwangombwa, the governor of National Bank of Rwanda, however, noted that the depreciation pressure against the local unit was "temporary”, saying the foreign exchange market would soon stabilise. The franc recently suffered its sharpest decline in nine months against the dollar on July 21. Yesterday the central bank quoted the unit at 648.2/654.4, a significant drop from 639.7/652 in June. 

Foreign exchange bureau operators are quoting the local unit at an average of Rfw660/670.

Rwangomba, who was presenting the central bank quarterly monetary policy and financial stability statement for the first half of this year on Tuesday, said higher than anticipated government spending and an 18 per cent rise in commercial bank lending increased the demand for dollars.

Figures released by the central bank on Tuesday show that while authorised loans to the private sector declined to Rwf220.5b between January and June from Rwf251.7 during the same period of 2012, lending bounced back in the second quarter of this year to Rwf222.9b, putting pressure on the franc.

Rwangomba said the franc was recovering, reducing the depreciation rate to 1.8 per cent during the first quarter of this year. In 2012, the franc lost 4.5 per cent value against the dollar.

The reduction in the depreciation rate was achieved after the central bank sold $118.78m to commercial banks in the first half of 2013. 

This intervention has, however, not been adequate to reverse the trend as the demand for the greenback from importers continues to surge, exerting pressure on the local currency. Rwangomba said the central bank has put in place new measures to stabilise the domestic foreign exchange market. 

"The central bank has spearheaded the establishment of the dealers’ association in order to ensure an organised foreign exchange market,” he said.

This follows reports that some dealers were involved in speculation, causing artificial shortage of foreign currencies.