Rwanda is demonstrating macroeconomic stability - IMF

In an exclusive interview last week with Business Times’ BERNA NAMATA, talked to GERSHENSON DMITRY, the International Monetary Fund’s country representative to Rwanda, below are the excerpts. What were the key issues discussed when IMF team visited recently? The IMF team visited Kigali in March to begin negotiations on a new program with the government of Rwanda. These negotiations were successfully concluded in Washington last week, and after the final approval by the IMF Board and the government, Rwanda is set to have a new program in about two months. This program is called Policy Support Instrument (PSI). It is designed for countries that have already demonstrated commitment to macroeconomic stability. How do you view of Rwanda’s GDP growth last year? The year 2009 was a difficult year for the global economy, and sub-Saharan Africa was not an exception. In 2008, the last year before the crisis, African economies grew at almost 6 percent. In 2009, the growth was only 2 percent. In Rwanda, there was a sharp growth slowdown, from 11 percent in 2008 to an estimated 4 percent in 2009. This slowdown was due to a downturn in sectors that are particularly vulnerable to the global slowdown and tight domestic liquidity conditions, such as construction, financial services, commerce and tourism. At the same time, growth in agriculture was strong as a result of good rains and government’s crop intensification program, and this strong growth explains why the Rwandan economy outperformed the African average in 2009. What needs to be done to achieve double digit growth? Between 1998 and 2008, Rwanda’s real GDP growth averaged 8 percent a year, which is a very good result. It means that economy doubles in size in less than 10 years. The IMF team estimates the potential growth rate for Rwanda at between 8 and 9 percent. The objective of the government’s economic policy –which will be supported by the PSI – is to achieve and sustain this growth rate in the long term. To this end, the PSI focuses on three areas; fiscal sustainability (raising additional revenues in order to reduce aid dependency), price stability and structural reforms to deepen the financial sector, diversify the export base, and improve the business environment. For the last few years Rwanda’s inflation was untamed why did this happen? Since 2003, inflation was mostly in the high single digits, spiking only in late 2008-early 2009. The initial reason behind the spike was the worldwide food and fuel price increases in 2008. The economy started to overheat in the second half of 2008, but the data showing that became available to the policymakers only in the middle of 2009, making the timely policy adjustment impossible and hence leading to inflation in excess of 20 percent at the end of 2008. This episode underscores the importance of having timely high frequency estimates of economic activity; to this end, the National Bank of Rwanda has developed a composite index of economic activity. What has been the key driver for low inflation that Rwanda is currently experiencing? Is it sustainable? Inflation has remained below five percent since January. Inflation was only two percent in March (the latest data available), due to good harvest (and the corresponding low food price inflation) weak domestic demand, and decline in import prices. This situation is not likely to be sustainable nor is it desirable. Looking forward, the challenge is to stimulate the credit to the private sector (and the corresponding economic growth) without causing a sharp rise in inflation. How would you advise government to boost the economy? Sustaining high growth while avoiding inflation is the ultimate prize in macroeconomic management, and that is precisely what the PSI is aiming at. If the economy begins to overheat (as indicated by the rising inflation or the growth well above potential), the government can initiate fiscal tightening (raise taxes, reduce spending) or monetary tightening (print less money, raise interest rates). The point to keep in mind is that in the short term such tightening reduces both inflation and growth; the job of a policy maker is to weigh the benefit of reducing inflation against the cost of lowering growth. The Central Bank has not withdrawn any policy measures put in place last year to deal with liquidity crisis that hit the banking sector YET the banking sector appears to have recovered. Ends