New credit facility to boost forex market intervention

A standby credit facility approved for Rwanda by the Executive Board of the International Monetary Fund (IMF), on Wednesday, raises the central bank’s confidence to manage economic stability, the Finance minister said yesterday. The facility provides financial assistance to low-income countries with short-term balance of payment needs. Claver Gatete, the Minister for Finance and Economic Planning, said the $204-million credit facility (approx Rwf159.7 billion), will support the country’s reserve capacity. It will equally boost central bank’s capacity to intervene in the forex market when need arises, Minister Gatete told The New Times. “This will help support the needed imports while keeping the economy and currency stable,” he said. Currently, there is a lot of currency outflow which government is trying curb by encouraging locally produced commodities. It is, therefore, very important that the central bank remains liquidated enough in terms of reserves to meet the necessary expenditure that may arise. According to the IMF, the Standby Credit Facility will complement the authorities’ efforts to address growing external imbalances, by boosting reserves, with an initial 72.09 million disbursement available immediately. Experts believe that it’s imperative that the loan facility from the IMF be invested in the country’s import substitution drive as the government seeks to reduce the trade deficit gap by tapping into the regional market. The IMF projects that the Rwandan economy will slow down from 6.9 per cent growth registered last year to 6 per cent for two years as a result of shocks in 2016/17, before picking up in 2018. These shocks are fuelled by a firming dollar which has resulted in the Rwandan Franc depreciating, the falling export revenues and a ballooning import bill, putting pressure on external reserves. Meanwhile, the IMF Executive Board conducted a review of Rwanda’s economic performance and established that, despite a slump in global commodity prices, the country continued to post strong performance under the Policy Support Instrument which created a platform for high growth and steady poverty reduction Both short and medium term adjustment policies to position Rwanda’s external position on a sustainable basis will form part of an overall strategy to support growth, boost poverty reduction and improve the country’s resilience to future uncertainties in the global economy. The Executive Board also approved the Policy Support Instrument (PSI) for Rwanda in December 2013. Min Zhu, Deputy Managing Director and Acting Chairman IMF, hailed the country’s macroeconomic and fiscal policies that have helped keep the economy stable and resilient amidst global economic shocks. “Rwanda’s continued strong performance under the Policy Support Instrument has created a platform for high growth and steady poverty reduction,” he said. Growth in 2015 was buoyed by strong construction and services activity, while inflation remained contained. “Nevertheless, the situation has grown more challenging in recent months due to external shocks related to commodity prices and tighter conditions for private inflows. Combined with the appreciation of the U.S. dollar, these have reduced export receipts and put downward pressure on the exchange rate and official reserves,” Zhu noted. According to the National Bank of Rwanda, the strengthening of the US dollar against other currencies worldwide, coupled with the decline in international commodity prices that negatively affected the export revenues, has put pressure on the Rwanda franc. As such, the authorities are taking steps to address external imbalances; first, through using continued exchange rate flexibility as the principal adjustment tool. This will be supported by tighter fiscal and monetary policies to help curb demand for imports. Implementation of these policies should maintain GDP growth of around 6 per cent in both 2016 and 2017, while IMF financing under the Standby Credit Facility will help bolster reserves. Recent economic developments Despite the drop in global commodity prices, Rwanda’s growth remained strong in 2015, with a GDP growth rate of 6.9 per cent. Mining exports dropped by almost half in 2015, leading to a significant loss in foreign exchange earnings. As such, the current account deficit has also worsened, from a deficit of 16.4 per cent in 2014 to a deficit of 18.1 per cent in 2015. The growth outlook for 2016/17 has also become more uncertain. Consumer price inflation remained contained, averaging 2.5 per cent for the year 2015, though it increased in the second half of the year due to higher food prices and administrative increases in utility prices. Monetary policy remained largely accommodative through end-2015 but was tightened in the first quarter of 2016. Despite these developments, macroeconomic policy performance through December 2015 remained in line with the PSI programme objectives. Most targets were met and were also supported by structural reforms, notably changes to boost domestic revenue collection, reducing liquidity overhangs, strengthen financial market supervision and functioning, and improving domestic revenue collection. However, IMF says, plans to revise the property tax law and improve the timeliness of public reporting on budget execution are taking longer than anticipated. editorial@newtimes.co.rw

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New credit facility to boost forex market intervention