MONETARY POLICY : How do we mitigate the effects of fluctuation?

Rwanda’s tight fiscal and monetary policy has meant that our currency has remained stable despite the global turmoil in the money market. Our currency has held up to the macro and micro-economic pressures stemming from a fall in overall global consumption, last year the Franc depreciated by only 2.2 percent but the effects have been felt. The global currency is the US Dollar, and as such Rwanda has to trade and cost projects in dollars. Our currency is pegged to the US Dollar more or less, even though we keep reserves in other currencies such as the Pound Sterling and the Euro. It is investors and donors from Europe who have paid the price. A recent House of Commons meeting in UK discussed the effect of the fall of Sterling on overseas aid. It reported that unless measures were taken, the Department for International Development (DFID) would not be able to meet its budget. The Euro is also under pressure with Greece, Portugal, Spain and Italy about to post huge deficits. The effect will be the weakening of the Euro and thus reducing the purchasing power of this aid. In the private sector the effects are worse, the cost of doing business goes up or even worse is variable, growth in certain sectors is slowed down, and competitiveness is slowed down. A secondary effect is that it creates differences of growth between the trading partners, thus a deficit and ultimately stops growth. Investors from UK have suffered even when the Dollar drops because the Dollar is the currency of trade. The Pound has depreciated from Rwf1080 to Rwf700 before it rose to Rwf930, only to drop again to Rwf830. It is impossible to invest in such a climate where the value of your investment can fluctuate by nearly 35 percent. With the Euro about to drop, the dollar will rise, it means that our reserves and exports will be worth more but there is a trade-off in rising costs in real terms. We must take measures to mitigate this fall and protect our investments. It is not beyond our control. While we can not control events we must mitigate the effects. The effects of currency fluctuation can be mitigated with more fiscal and monetary cooperation between neighbours and trade partners. Foreign governments have to take into account the effects of their currencies on developing nations. Regional partners in the EAC have to cooperate to reduce cost and red-tape. Finally we should target help for the worst hit sectors. This help should be in the form of tax incentives or loans that can cover variable costs. Investors from economies where currency fluctuation has made it hard to invest in Rwanda should also be assisted. Some nations like China have preferential exchange rates for investors to boost the purchasing power within China provided you invest the money there. While our currency will remain stable, we will still suffer the effect of the global elephants crushing us ants by accident. We must take evasive action. Ends