The National Bank of Rwanda has increased its lending rate by 50 basis points from 6.5 percent to 7 percent in efforts to tame the persistently high prices. This decision was announced during the quarterly Monetary Policy Committee and Financial Stability Statement pronouncement on Thursday, February 16. The New Times’ journalist, Alice Kagina, had an exclusive interview with the Central Bank’s Chief Economist Thierry Kalisa, on what it means for the economy and other key changes expected this year. Below are excerpts; TNT: What informed the decision to increase the lending rate to 7 percent from 6.5 percent? Kalisa: You have seen that we started increasing in February, August, and November 2022 with a total of 200 basis points. Now, we are forecasting a decline in inflation because of lower pressures from international prices such as fuel and food and also because of an anticipated good agricultural production. However, pressures are still there in the first half of the year. Yes, inflation is slightly reducing but still higher than the band we have (between 2 and 8 percent). That’s why the MPC took the decision to continue tightening the rate with an objection to bring inflation as quickly as possible. In the following quarters, we are going to analyze this trend on whether it will keep going down as well as pressures from the international side and domestic agricultural production. If inflation continues going down and if it will be really low next year, then, there could be an argument of pausing but we are not yet there. Within the Rwandan economic context, what’s worst-case scenario of inflation? This is not something that did not happen. It happened last year. So, this whole scenario is a combination of external shock and poor domestic agricultural production. That’s why the numbers were among the highest we have ever seen. That’s the worst case scenario, we are just coming out of it. The projections we are showing now is our most realistic scenario, knowing that it is very unlikely that the same thing happens this year. We assume that prices of fuel, gas, and food products imported are going to go down, and that there will be enough production of food in the country in 2023. So, if the two conditions are there plus the impact of the policy, we will see that happening. TNT: As you increase the key repo rate, won’t this strangle investments in different economic activities? Kalisa: Growth and inflation are things to be balanced. We want a long-term high economic growth. However, high inflation over a long period of time is a barrier to growth. Basically when inflation is too high and you want to have strong growth in the coming five years, you might need to tighten the monetary policy which could have consequences in the short term but the intended growth in the near future is secured. In the case of Rwanda, all indicators are showing that growth is going to be good this year, much better than most countries in the region. But at the same time, we need to fight this inflation so that growth continues in the future. Interbank rate is increasing but we are yet to see an impact on market lending. TNT: The IMF recommended Rwanda to cut some subsidies put in place to curb inflation but the government said otherwise. Do you think at this point it is still necessary to keep these subsidies? Kalisa: If you are fighting inflation, you need to do a combination of different things. The Central Bank is trying to touch the demand side and other government institutions are trying to avail products and increase the supply side. The government is making subsidies to minimize the impact of high inflation on final consumers with the case of fuel and fertilizers. If fertilizer prices increase a lot, then the products on the market will be way more expensive despite a good agriculture season. If subsidies were not there, inflation would have been higher than what we are seeing. Of course, everyone will have their opinions but what the government is trying to do is to be pragmatic. A subsidy like that is a short-term decision meant to cushion the shock and is made depending on what is going to impact many people. ALSO READ: IMF Boss on Rwanda’s economic potential, climate championship TNT: What’s causing depreciation of Rwandan franc against the US Dollar and is it something people should worry about? Kalisa: For the past few years, the Rwanda franc has been depreciating at around 4.5 or 5 percent every year. In 2022, it was a bit higher at 6.05 percent. This results from the increase in imports during the second half of 2022 with an increase of 23 percent leading to a widening of trade deficit by 19.1 percent. However much we are having growth in exports, the import base is still high. Last year, we had international prices increase so much. For instance, even if you imported the same quantity of energy, the prices had almost doubled. On the other side, we had an increase in activities here where more intermediate goods used in manufacturing were imported which also added some pressure on the exchange rate. The speed at which the franc is depreciating depends on the demand and supply of forex. We see forex entry increase in terms of tourism receipts and remittances. Normal depreciation of Rwandan franc is around 5 percent, and the current rate is relatively stable. The objective is to reduce the trade deficit and boost our domestic economy and eventually depreciation will go down. We end 2022 with 4.2 months of import reserves and we expect in the medium term to maintain 4 months of import this year. TNT: What major changes do you expect to see in the economy this year? Kalisa: We expect continued growth in the service sector and the recovery of agriculture sector from what happened last year which would boost all other activities including manufacturing, and wholesale trade, among others. We expect a full recovery of tourism and the industry sector to also pick up. Overall, growth prospects are good with projections of 6.2 percent but it is possible to achieve more if all goes well. But the focus is to solve the main issue in the economy which is inflation.
