Cost of living needs to be addressed

I have had many anecdotal reports that the cost of living in Rwanda is high, if one is to look at the situation it is quite complex. The first question is comparing what to where? If we take regional comparisons you find the purchasing power of currencies differs according to the local situation. Rwanda might look expensive, but our incomes are different compared to Uganda for example. When one looks at the pricing mechanisms in place in Rwanda, we find it is a planned market economy. The private sector is not yet fully developed to allow the “invisible hand” that Adam Smith predicted to prevail. Instead we have to allow the visible hand of government regulation to protect the consumer. The result is relative price stability. however it leaves us open to external shock factors such as fuel prices, coupled with an inability to respond in real-time to changes in supply and demand. Supply and demand are not connected, when one enters a Rwandan shop, you have to match your demand to their supply and not vice versa. Access to credit and guarantees of goods is limited, therefore supply is limited to these factors and not demand. Basic staple goods such as soap, oil, salt, sugar, flour, are stable. It is other non-essential goods and services that are seeing an increase. The recent inflation of 18 months ago has been arrested and it stands lower than 5 percent, but these essential goods need to come down in price. Supply is what is determining the price of these essential goods such as flour and sugar. Competition is also essential in supply, from the importers to manufacturers, to retailers. Rwanda needs to deal with factors such as: 1. Dumping – where cheap foreign goods flood our market, killing our local industry. 2. Exclusive dealing where companies or suppliers are given exclusive deals. 3. Barriers to entry – we have speeded up the time it takes to register a company, but regulations are getting restrictive. For example a restaurant requires certain regulations to be met such as having tiles and metal surfaces. This artificially sets the monetary entry barrier for the industry high, and yet doesn’t guarantee hygiene. 4. Price — fixing – most of our major industries are dominated by a handful of players or oligarchic firms, therefore there is a tacit arrangement to agree to the price, they all have similar costs and a captive market therefore competition never thrives. 5. Division of territory – a way of introducing competition is to divide a market into territories, for example getting a contract to supply computers to Eastern province. This is artificial competition because it is a divided monopoly. The cheapest and best product should be sourced from the cheapest source, not out of contractual obligation. The recent monetary survey by BNR, our Central bank shows that banks hold around 10 percent of currency. That shows that our banks are poorly capitalised and even worse Rwandans are saving less than 10 percent of income. That does not take into account other assets like property, which are considered a form of saving. Increasing the capital held in our banks is essential to attracting investors and stabilising our future. It is this asset-debt ratio that affects prices, the high debt-burden of suppliers distorts our prices. Ends