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InterviewsApril 2 2012

National Bank of Rwanda governor averts inflation hike

Rwanda’s monetary authorities stood out from their east African peers in 2011 for managing to withstand the severe inflationary pressures buffeting the region. Claver Gatete, governor of the National Bank of Rwanda, explains how this was done and what the country's government is doing to lure more foreign direct investment.
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National Bank of Rwanda governor averts inflation hike

East Africa’s central banks had a torrid time in 2011. The region’s worst drought in 60 years sent food prices soaring, while rising costs for fuel imports heaped pressure on local currencies.

Still, many monetary officials were blamed for exacerbating the crisis through their inaction. Some parliamentarians in Kenya recently called for their central bank governor to resign, saying his refusal to put up rates early in 2011 was part of the reason why inflation in the country rocketed from 6% to 20% between January and November and the shilling depreciated by more than 30% against the US dollar. Uganda’s record was even worse, with inflation climbing to more than 30% by October. In Tanzania and Burundi it rose to more than 15% by the end of the year.

Rwanda was the exception. Its inflation peaked at a mere 8.3% in December, and had already fallen more than 50 basis points by February this year.

Competent co-operation

Luck played its part. Rwanda suffered far less than Kenya and Uganda from poor rains in the first half of 2011. But the competence of its central bank undoubtedly helped, too. Claver Gatete, governor of the National Bank of Rwanda (NBR), told The Banker in Kigali, the capital, that close co-operation between the monetary and fiscal authorities was crucial to maintaining price stability.

Mr Gatete says the NBR realised early on that the region would face severe inflationary pressure thanks to the Arab Spring, which pushed up oil prices, and food shortages from the drought. It warned the cabinet that inflation was accelerating mainly due to supply-side factors, not high demand for credit, and that fiscal measures would thus have a better chance of curbing it than interest rates hikes.

As a result, the government acted quickly and reduced fuel taxes. “We decided that the food and fuel [price increases] were coming from the supply side, not the demand side,” says Mr Gatete. “That meant we needed to approach the government to do something about it because that was its direct responsibility. We gave it the information and said: ‘There’s a danger here.’

“The [costs of inflation] would have been way higher than the taxes that were going to be lost. That’s why the [government] agreed to reduce taxes on fuel. That helped in containing inflation.”

Locally generated inflation was not ignored, however. The central bank put up its main interest rate from 6% to 7% in the final quarter of 2011 to ensure that the credit market, which was growing by about 30% on an annualised basis, did not overheat.

By 2020 the private sector should be leading in terms of being the engine of economic development. This can’t happen without funding from the financial sector

Claver Gatete

Strong institutions

The NBR’s actions not only meant that price rises were kept under control far more than elsewhere in east Africa, but also that the Rwandan franc remained stable. It depreciated just 1.6% against the dollar over the year and even appreciated versus the euro.

The central bank’s performance in 2011 exemplified the efficiency for which Rwanda’s institutions are known – especially in comparison with those in most of the rest of sub-Saharan Africa.

In large part because of the quality of its public entities, Rwanda, which has little in the way of minerals or hydrocarbons, has recently been one of the fastest growing economies in the world. Its gross domestic product (GDP) rose 8.8% last year in real terms and is forecast to expand 7.6% in 2012.

Mr Gatete says that much of this growth is a consequence of the government having boosted agricultural production by encouraging more use of irrigation and fertilisers, something that many other African countries have failed to do. “The government decided to invest very heavily in agriculture,” he says. “If you look at our growth in agriculture in the past three years, the investment has consistently yielded results. That has been one of the biggest contributors to our GDP growth. We used to have famine. But now we’ve solved that problem. Rwanda is completely food secure.”

Large public investment in sectors such as agriculture and infrastructure has been vital to Rwanda’s development since its genocide in 1994, which saw up to 1 million of its population of 10 million killed and its economy shattered. Private sector investment, both from Rwandans and foreigners, will have to increase substantially if current growth rates are to be sustained over the next decade. Mr Gatete says that support from the banking industry is essential for this to be achieved. “Last year, private sector credit to the economy grew 28%,” he says. “So it is increasing significantly. By 2020 the private sector should be leading in terms of being the engine of economic development. This can’t happen without funding from the financial sector.”

Modernising the banks

The central bank has done much to modernise Rwanda’s banking sector in recent years. It has licensed mobile phone and agency banking (the latter being whereby lenders use retailers to sell their services in areas where they have no branches) to help reduce Rwanda’s large unbanked population, thought to be between 70% and 80% of the total. It has also promoted the use of card-based payments, which it says will speed up money transfers and lead to reduced borrowing rates for businesses and consumers. “Once you get the country hooked on [electronic] payment systems – whether you are using a card or mobile phone – that will help keep money in the banking system,” says Mr Gatete. “When it is outside the system, banks have no access to it, which has an impact on their lending.”

The NBR is confident that its tight regulations – including a minimum capital adequacy ratio (CAR) of 15% and restrictions on foreign currency lending – will ensure that banks do not overstretch their balance sheets as they go about expanding their provision of credit. The majority are well cushioned to deal with any problems – the industry had an overall CAR as high as 27% at the end of 2011.

In addition, banks have dramatically reduced their non-performing loans, which, largely as a hangover from the genocide, stood at well over 20% a decade ago. They have now been cut to about 8%. The NBR wants them below 5% within the next few years.

The speed of Rwanda’s future economic growth will also depend on its further integration with the four other members of the East African Community (EAC) – Burundi, Kenya, Tanzania and Uganda (newly independent South Sudan is expected to join the customs union soon). Bankers in Kigali say that Rwanda, as a tiny, land-locked country, heavily dependent on imports, needs to open its borders more to boost trade with the EAC, a market comprising 130 million people.

East African politicians talk of eventually creating a monetary union. While Mr Gatete would not comment specifically about that, he admitted deeper integration was necessary. “Integration generally is for the best,” he says. “That’s why we became part of the EAC. Whenever there is integration, there are trade flows. We [in Rwanda] are 11 million people and we want a bigger market.”

FDI keeps on coming

Paul Kagame, Rwanda’s president, has been accused of running an increasingly repressive administration over the past five years. While he remains popular, critics say the fact he won 93% of the vote in elections two years ago had much to do with him not having allowed a genuine opposition to foster since he came to power in 2000. “A democratic culture exists on the surface, but you don’t have to scratch very far below it before you uncover this extremely autocratic regime that really doesn’t tolerate political dissent at all,” says Patrick Mair, an Africa specialist at Control Risks, the global risk consultancy. “That appears to be getting worse.”

For now, however, foreign investors seem convinced that Rwanda’s politics will remain stable and are increasingly putting their money into the country. “One of the reasons for our efforts to create a conducive environment for business is to attract investment, be it foreign direct investment [FDI] or portfolio investment,” says Mr Gatete, who denies the government restricts political freedom. “FDI increased significantly last year. We believe people are now getting to understand Rwanda.”

Portfolio investment is being encouraged by the gradual development of Rwanda’s capital markets. They are shallow, with only two local companies listed on the stock exchange and few government bonds outstanding. Mr Gatete wants all nine of the country’s commercial banks eventually to list – only one, Bank of Kigali, which was partially privatised through an initial public offering in 2011, has done so far. He also says the government will sell a seven-year bond, its longest yet, in 2012 to deepen the local debt market and persuade corporate borrowers into issuing. Ten- and 15-year bonds will come soon after that. “We really want the capital markets to develop,” he says.

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