Rwanda’s macroeconomic performance over the past decade has been impressive, and the central bank governor says that developing the country’s bond markets is crucial to ensuring that remains the case.

Since 2000, Rwanda has stood out for its macroeconomic stability. Economic growth in the small east African country has averaged about 8%. Inflation has tended to be far below the regional average.

Maintaining that situation is a priority for John Rwangombwa, governor of the National Bank of Rwanda (NBR), the country's central bank. Inflation has steadily fallen in the past two years, dropping from 8% in mid-2012 to 1.4% in June. Mr Rwangombwa thinks it will rise by the end of the year, but only to about 3%.

But despite this rosy outlook, he faces a tough task, not least because much of what affects prices in Rwanda is outside the central bank’s control. Fuel, all of which has to be imported, makes up a large chunk of the basket of goods used to measure inflation, as does food, some of which is brought in from abroad. “The main drivers of inflation in Rwanda are fuel and food,” says Mr Rwangombwa, who became governor in early 2013 after a four-year stint as finance minister. “That creates problems for us at the central bank [as it means a significant part] of our basket may not be highly influenced by the money in circulation.”

The NBR therefore tries to coordinate closely with Rwanda’s fiscal authorities. “We don’t act alone,” says the governor. “Our monetary policy is not just about juggling with the money in circulation. We also influence and work with government. We show them what we think they should prioritise. We discuss their borrowing and spending policies. That’s helped us control inflation and ensure economic stability.”

Against the odds

This collaboration paid off in early 2011. Then, east Africa’s worst drought for decades and rising fuel costs sent inflation soaring in Kenya, Tanzania and Uganda. Rwanda managed to contain the damage, after the NBR urged politicians to reduce supply-side inflationary pressures by lowering fuel taxes.

Mr Rwangombwa says the central bank has long-emphasised the need to develop the agricultural sector, arguing that the country’s success in increasing its food production has helped to keep the economy on a sustainable path. “When you focus on investment in agriculture, it doesn’t just stabilise prices, it’s a key driver of poverty reduction and economic growth,” he says. “You kill many birds with one stone.”

The governor is working to make the central bank’s main monetary tools more effective. Because the Rwandan financial sector is small – bank assets total $1.8bn, equivalent to just 25% of gross domestic product – the base rate is not yet a powerful tool on its own for managing liquidity. Moreover, the bond market is immature, with the government rarely issuing debt with a tenor of longer than one year. The NBR says that a longer yield curve needs to be created to establish proper market-based rates that can influence the economy.

The government took a first step in February when it issued a RwFr12.5bn ($19m) three-year bond. It was the country’s first local currency deal marketed to international investors, with Kenyans among the main buyers.

Mr Rwangombwa says a five-year bond could follow within a few months, after which the government will consider seven- and 10-year deals. “In the next three years, we should sell a 15-year bond,” he says.

Risky business

Policy-makers recognise that opening the bond market to outside investors could destabilise the currency if it results in large capital flows. But the governor insists the benefits outweigh the potential problems. “The question is: ‘Would you rather develop your capital markets and try to mitigate the risks? Or would you rather just be unconnected with the rest of the world?’,” he says. “We know there are dangers. But it’s our responsibility as managers of the economy to maintain stability.”

The recent progress in building the capital markets is demonstrated not just by the three-year bond, but by the International Finance Corporation, the World Bank’s private sector investment arm, choosing Rwanda as one of the first sub-Saharan countries in which to issue local currency debt. It sold a RwFr15bn five-year deal in May.

Mr Rwangombwa expects Rwandan companies to start selling bonds in the near future. He also believes the capital markets can help the country reduce its dependency on aid, which accounts for about 40% of the budget. “By developing the capital markets, we’re creating another window for government financing,” he says. “We don’t expect big increases of aid in future and we can’t continue relying on it as a source of funding.

“The capital markets are a window for wealth creation. We have many Rwandans that have small savings they could invest. This is a vehicle we think will help fight poverty and increase people’s well-being.”


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