Kigali faces tough task ahead in shielding franc

Rwanda’s economic managers face the difficult task of crafting new monetary and fiscal interventions to rescue the country’s weakening currency.

Central bank statistics show that the local currency has lost about 4 per cent to the dollar since January, against the projected 5 per cent annual depreciation rate, largely due to a higher import bill and strengthening of the US dollar.

READ: Falling Rwandan franc hurting importers as cost of goods soars

While this is lower than the depreciation that has been experienced by regional currencies — the Kenyan shilling has declined by 11.8 per cent, Tanzania’s 20.2 per cent and Uganda’s by 20.6 per cent — it is the first time in recent years that the franc has depreciated rapidly, hitting a record high of Rwf800 against the dollar as of Wednesday, with a depreciation rate of more than 3 per cent before the close of the year.

But the official central bank exchange rate is Rwf 723, although it fluctuates between Rwf723 and Rwf 800 on the forex market.

Last week, the country’s central bank accused speculators in the forex market of creating an artificial run on the currency, and vowed to crack down on those involved.

“Speculation has put a lot of pressure on the currency — normally the spread between the official exchange rate and market rate is a difference of about 2 per cent — but because of this speculation, in July only, it has gone up to 4 per cent,” John Rwangombwa, Governor of the National Bank of Rwanda said at a press conference in Kigali on Wednesday.

Mr Rwangombwa said that the economic fundamentals of the country are still strong despite challenges related to the trade deficit as Rwanda continues to incur a high import bill due to its huge investment needs.

“From last week, we started increasing our interventions to smoothen out this crisis,” said Mr Rwangombwa.

However, analysts say as a small open economy, Rwanda is susceptible to global shocks at the same time, its shallow financial sector limits the effectiveness of the monetary policy instruments at the disposal of the central bank.

Rwanda also continues to face the challenge of uncertain donor flows which have been a major source of foreign exchange.

Donor announcements suggest financial support including project and budgetary loans and grants is expected to fall to its lowest level in a decade this year — slightly above 12 per cent of GDP, according to the International Monetary Fund.

Moreover, the gradual decline in foreign aid has put pressure on the import cover.

“The demand for foreign currency is higher than the intervention,” a senior banker who did not wish to be named told The EastAfrican, adding that lower donor and private inflows to the country in recent months — linked to weak economic performance in rich countries has also denied the country foreign exchange.

“Europe and America are no longer giving as much donations to NGOs while commodity prices of the main exports have been falling. The situation has been worsened by lower tourist numbers due to weak economic performance in aanced economies plus the impact of Ebola,” the banker added.

While the government has been working to expand the export base and promote export diversification over the past years to bring in foreign exchange, progress has been hugely undermined by the falling commodity prices on the international market witnessed most of this year.

In the first five months of 2015 compared with the same period of 2014, the Rwandan trade deficit improved slightly by 6.0 per cent to $679.22 million from $722.56 million as a result of decline in formal imports by 5.1 per cent in value compared with a slight decrease in formal exports by 2.1 per cent.

“Normally, our export import cover has been around 25 per cent in June, it was around 18 per cent – this puts a lot of pressure on the foreign exchange demand, but the currencies in the region depreciated much faster towards the end of June July, creating speculation across the region,” said Mr Rwangombwa.

This volatility, combined with depreciation in a number of emerging markets, could put a strain on the private sector. In particular, local banks have borrowed heavily in foreign currencies. This vulnerability could trigger or exacerbate capital outflows.