The Monetary Policy Committee (MPC) of the National Bank of Rwanda (NBR) reduced its key interest rate, known as the central bank policy rate, from 7 per cent to 6.5 per cent, on August 21, citing a decking trend of inflation. The policy rate is the fee at which the central bank lends to commercial banks. Adjusting it upwards or downwards allows the regulation of liquidity in the banking system with an aim to stabilise the economy. In this case, it was reduced to stimulate money circulation in the economy given the stabilized inflation within the central bank band of between 2 and 8 per cent since the beginning of this year. In an exclusive interview, The New Times’ Alice Kagina spoke to Thierry Kalisa, NBR Chief Economist, to shed more light on the move and the state of Rwanda’s economy. Below are excerpts; The composite index used by the central bank to project economic growth indicates a double digit growth of 17.9 per cent in quarter 2. What factors inform that projection? We use indicators that show economic performance that we put together in this composite index. For example, monthly data on exports and imports, credit to the private sector, turnover in industries, service sector and other subsectors. All this data put together gives us an indication of how the economy is performing. The number might not be the exact gross domestic product (GDP), but the trend over the past years aligns. When the composite index increases, GDP also increases. So, this tells us that in the first half of this year, Rwanda’s economy has been performing very well. We already have the first quarter but the second quarter will also be good, according to the numbers. You have reduced the repo rate by 50 basis points to 6.5 per cent. What does this mean for the lending attitude in the economy? This is because of what we are seeing. The projections of economic indicators, especially inflation indicate that it will be stable this year and the next. It means that the monetary conditions that had been tightened before are now gradually going back to normal. The rates that followed, interbank rate, treasury bonds/bills rate, are also starting to reduce. What you see is the transmission to the rest of the economy, meaning lower interest rates, boosting investments and consumption, and ultimately economic growth. We have an inflation forecast of 5 per cent, but there are risks beyond control and depending on how they materialize or not, it might affect the projections. These are always assessed on a quarterly basis by the Monetary Policy Committee and adjusted accordingly. From data, food inflation has really dropped. How do you see the next agricultural performance in your projections? The first agriculture season was very good with food production increasing by 8.4 per cent in quarter one and can be the same in quarter two, because season A is the biggest season in the year. The statistics body will release numbers for season B next month, but at least from what we are seeing,it won’t be bad. It will be moderate because some crops vary. What we are looking forward to is the next season A in December whose harvest will go until May-June next year. So far, there is nothing unusual in projections, the Meteo agency is yet to give weather forecasts. What we currently see is normal projections and if it goes like that, the agriculture production will continue to be good. We continue to see the trade deficit widening. To what extent is the central bank concerned and what are the possible solutions to that? You’re right, it is widening because the exports are not growing and imports continue to increase. Solving the issue has to be done from the perspective of a medium-term solution. There are studies we conducted with the Ministry of Trade and the Ministry of Finance that will ultimately be reflected in the industrial policy and trade policies. We are also going to have the National Transformation Strategy (NST2) and sectoral strategies including one for export promotion. The efforts are on diversification of exports. Exports are volatile depending on international prices,and to reduce this volatility we have to diversify our products and to different markets. The idea is to also boost our industries so that we produce more to feed the demand that requires imports to the extent of a surplus for exports. This is a medium-term strategy where we can expect results of reducing the trade deficit in two to three years. Let’s talk about depreciation. How do the central bank reserves look vis-à-vis the forex market? Aren’t there concerns about shortage of dollar supply? The reserves are adequate. As of June, we were at 4.7 months of import. We are talking about the trade deficit because it is widening but there are other sources of inflows increasing very significantly. We have tourism revenue which has recovered beyond pre-Covid levels, remittances inflows are high, and foreign direct investments, among others. All these contribute to the adequate reserve and compensate for the loss in trade deficit. The consolidation of inflows contributes to the level of international reserves currently standing at $2 billion, equivalent to 4.7 months of import. On the forex market, we usually have seasonality in demand, and we see some bit of pressure in this period more than others, and we slightly increased sales to banks and forex bureaus to $7 million per week to help supply the increased demand. The situation is much more stable than last year. Depreciation is around 5 per cent compared to December, and in June it was around 3.7 per cent compared to the same period last year when it was 8.8 per cent. While it is still high, depreciation is gradually going back to normal. On the market, there is continued monitoring of practices to ensure that forex rates increase based on supply and demand pressures and not because of speculation. The central bank usually opens up and sells treasury bills on the market. What has been the uptake over the past years? We open up the sale on behalf of the government from time to time to support the budget, and what we see in terms of market development is the increased uptake as we have issuance on a monthly or weekly basis. The amount varies depending on the needs of the treasury but what we realized is that they are always oversubscribed. This is a good instrument to develop our capital markets; people are buying and reselling on the secondary market. The amount and timing of issuance depends on the government’s needs. Can you shed light on the country’s debt burden and service? More than 80 per cent of Rwanda’s debt is concessional loans which have very low interest rates and long maturity periods. The debt burden is small compared to other countries evaluated under the debt sustainability assessment. Rwanda has no difficulty in paying its debt and that’s why we are classified under moderate debt distress. There are many indicators looked at including debt to export ratio and debt to revenue ratio. Meaning we are below the threshold. Any country takes debts, the question is at what cost and to do what, and for which benefits.
