BUSINESS
Kigali needs to urgently protect cash reserves
Workers in Kigali off-load goods imported from other East African countries. The International Monetary Fund estimates Rwanda's current level of reserves cover at 3.5-4 months of imports. PHOTO | CYRIL NDEGEYA
Posted Saturday, February 6 2016 at 18:45
IN SUMMARY
- While definite figures of the current state of reserves are not readily available, the International Monetary Fund estimates the current level of reserves cover at 3.5-4 months of imports — the number of months of imports its reserves can pay for.
- A combination of lower commodity prices for its major exports especially minerals, a depreciating currency due to the strengthening of the US dollar, coupled with a persistently high import bill that outpaces revenues generated from exports has drastically impacted the country's international reserves.
Rwanda needs to take new measures to restore and preserve its international cash reserves, which have come under intense pressure in recent months, increasing the country's exposure to financial turbulence.
While definite figures of the current state of reserves are not readily available, the International Monetary Fund estimates the current level of reserves cover at 3.5-4 months of imports — the number of months of imports its reserves can pay for.
Although the reserves are still above the IMF's critical threshold of three months of import cover, there is concern that if the country's import bill continues to rise faster than export receipts, this will add pressure on the country's reserves.
"The trend has been downward for the past few years, partly related to the decline in foreign aid," said Thomas Alun, the IMF resident representative to Rwanda. "Our preference is for the central bank not to lower the import cover below this. On the other hand, to maintain a comfortable growth rate and help grease the economy, there is still some room for foreign exchange sales from the central bank."
A combination of lower commodity prices for its major exports especially minerals, a depreciating currency due to the strengthening of the US dollar, coupled with a persistently high import bill that outpaces revenues generated from exports has drastically impacted the country's international reserves.
In the first half of 2015, exports decreased by 6.2 per cent in value to $275.28 million, compared with $293.61 million in the first half of 2014, mainly due to the poor performance recorded by the mining sector, which shrank by 31.3 per cent.
Yet in the first 11 months of 2015, formal imports decreased by only 2.6 per cent in value $2,144.14 million from $2,202.02 million after an increase of 8.1 per cent in the same period of 2014.
"Looking ahead, the prospects for reserves are not very promising and there is a need for some exchange rate adjustment," said Mr Alun H. "The government also has to help to rein in some import demand through expenditure restraint since the public sector is a big part of the economy and demands a lot of imports."
The rationale for policy adjustment, he argued, is to facilitate a "smooth landing."
"This outcome is preferred over a situation in which the government and central bank suddenly realise that the forex coffers are at critical levels and the economy has to adjust abruptly to remain afloat," he said.
By mid January, the Rwanda franc had depreciated 7.2 per cent against the US dollar, trading at Rwf746.50 per dollar from Rwf694.37 at the end December 2014.
Rwanda's growth in 2015 was slightly stronger than expected, ranging from 6.5-7 per cent and inflation remained contained and far below the regional average of 4.5 per cent as at December.
Posted by: Nzinink <nzinink@yahoo.com>
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