OPINION : Monetary Policy: The cash flow blockage

OPINION : Monetary Policy: The cash flow blockage I remember last year there was a shock around this time, money dried up on the streets, banks stopped lending and people felt a sudden pinch. That was attributed to the global economic crisis but local factors exacerbated matters. The monetary survey of 2009 shows a sudden reduction of liquid assets from Jan 09 to Mar 09 of 15% from Rfw313b to Rwf272b, which led to a 25% increase in the budget last year. When one looks at the cash-flow situation it has the problem of the cycles being out of synch. Our main exports and foreign exchange earners are seasonal, coffee and tea are sold in seasonal batches, and tourist numbers are also seasonal from March to October. Yet our other cycles do not recognise this, the credit cycle, monetary cycle, and the government expenditure cycle need to reflect that. When one looks at the monetary multiplier methods, these are the ways a central bank creates money and floats it on the market. We rely on the “reserves first” method, this is when the government divides the total reserves, banks part of it and loans the rest to the commercial banks to inject liquidity. This has limitations in the amount of broad money it can generate on the street. Our banks are poorly capitalised so we cannot use the “loans first” method where the government simply guarantees loans and doesn’t have to dip into reserves. There is a need to recapitalise the banks, but this cannot be done if they are partly state owned, this means they have no incentive to accumulate private capital and they can be used as a piggy bank. There is a rough doubling of value between M0 money and M3, with better risk assessment we can achieve a 300% increase in M0 to M3. M0 – M3 are the stages economists use to track money through the system from the central bank to the street. The basic use of money is to settle debt and hold store value, the problem is the Rwanda franc is used to pay debt but when it comes to storing value Rwandans prefer dollars and property. 40% of our money is traded in dollars, although the Franc is strong, dollar assets will always appreciated against the franc, and your francs will depreciate, so why save in francs? We need to see the dollar depreciating against the Franc to see a positive uptrend in savings in francs. That can help offset the high cost of borrowing but we need to strengthen our franc by not extracting the value by gradual devaluation. When it comes to money, most economists believe that the actual quantity is not as important as the velocity, in other words less money moving around more quickly is more effective that large amounts of stagnant money. Quite often our reflex action is to increase the quantities of money while leaving the systemic blockages in place. Systemic blockages are the main problem in Rwanda; the long time it takes to perform basic financial transactions is key to this. I timed transactions at BK, BCR and BP and found it takes on average 5 minutes per customer, if we reduce that to 2.5 minutes then it would be like doubling the number of bank staff. This has a massive bearing on the pace of our growth, the growth of credit, and building a savings culture. When the government pumps in new money through the commercial banks, they must make sure that the cash can flow freely and not get clogged. For example last year, despite increasing liquid cash by 25% the banks used that extra money to cover previous liabilities and froze lending. The problem with a planned market economy is that we cannot respond to sudden changes in demand. For example the planners estimate how many bars of soap Rwandans will use this year, say 50 million bars. If more Rwandans wanted to buy soap and demand expanded by 50% the local manufacturers and importers might not have the capacity for that, this would drive up the price of soap and therefore cause inflation. This is repeated in every sector with natural monopolies existing due to poor supply and a disconnect with demand. It is impossible to predict how many bars of soap Rwandans want to use, the level is dictated by “Rational expectations” formed by previous figures on use of soap. However, to predict the future based on previous data is to set limits on growth, limits on expansion of capacity, and hinders progress. There is little competition in Rwanda because of this fact, big players settle into a polite cartel to maintain their little share of the market. For example in insurance it, costs the same to insure a teenager to drive as it costs a careful experienced driver, where is the competition among the players for different segments and age-groups? The most important change we need is to link our cycles together, the tax cycle, business cycle, credit cycle, revenue cycle and debt cycle must all be linked. That way you do not suffer sudden shortfalls of cash, these minor shocks take months or even years to recover from. We need to recapitalise the banks to deal with sudden shocks, we also need the banks to be the main generators of money in the form of loans. We need an appreciating franc to encourage saving, and remove systemic blockages like transaction times. Finally we need to raise our rational expectations of growth, not to put a cap on growth but to encourage expansion. Ends

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OPINION : Monetary Policy: The cash flow blockage