The central bank on September 20 gave insights on how Rwanda’s economy performed in the first six months of 2023, the results of monetary policy decisions taken, and an outlook on performance for the rest of the year.

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The developments are projected in the Monetary Policy Committee and Financial Stability Statement.

Poor agriculture performance

The agriculture sector performed poorly for two consecutive years, something attributed to bad weather conditions. In the first half of 2022, the sector grew by 0.3 percent, with food productivity performing negatively.

While other agricultural subsectors, including export crops, livestock, forest, and fishery, grew by 6.4 percent collectively, their growth was not sufficient to compensate for the poor performance of food crops which decreased by 3.2 percent.

This remains a major reason behind the domestic increase in consumer prices on the market.

Insurance sector makes first-time underwriting profit

For the first time, in six years, the insurance sector made an underwriting profit. It has been making profit mostly from investment, as clarified by John Rwangombwa, the central bank Governor.

In June 2021, the sector had an underwriting loss of Rwf200 million. In the same period of 2022, it was Rwf400 million. However, in June 2023, it recorded an underwriting profit of Rwf1.9 billion.

Overall, the sector saw an increase in profit from Rwf7.1 billion in 2021 to Rwf12 billion in June 2023.

"The sector has stabilized and is on a good path, we expect to see more innovations, development, and efficiency in the way they deliver their services,” Rwangombwa said.

Increase in loan book

The central bank took note of commercial banks’ willingness to lend, with new loans approved amounting to Rwf823 billion higher than Rwf586 billion approved during the first half of 2022. This represents an increase of 40.4 percent compared to the decline of 7.2 percent registered in the corresponding period of 2022.

The increase was driven by the growing demand for loans due to the gradual recovery of economic activities after the Covid-19 pandemic. The four sectors that received the most financing were commerce, public works and building, personal loans, and manufacturing activities.

Patience Mutesi, the Managing Director of BPR, said that the financial sector is very stable and profitable despite the increase in interbank rate to 7.5 percent, up from 5.4 percent the previous year due to the central bank’s monetary policy that increased the key repo rate to 7.5 percent in August.

When a bank increases its investments such as growing its loan book, it may borrow money from the central bank or another bank (interbank) to support this growth. An increase in the repo rate is therefore expected to result in an increase in lending rates.

However, lending rates in Rwanda remained sticky and banks are absorbing the costs of higher borrowing rates, thus reducing their margins rather than passing the cost on to customers.

"The loan book across the country is increasing and we can anticipate stability at a later stage, but there might be potentially an increase in interest rate for borrowers,” she noted.

As of now, Mutesi said, BPR recorded 18 percent increase in lending from June 2022 to June 2023, reflecting a year-on-year growth above the industry average of 5 percent, and that within the current economic context, some of the growth in loans can be explained by the impact of inflation on business.

For instance, a businessperson who initially estimated a construction project budget of Rwf500 million will need to borrow more money due to price changes in 2022 and 2023.

Rwandan Franc depreciates

In the first six months of 2023, the Rwandan franc depreciated by 8.8 percent against the US dollar due to a mismatch between the supply and demand for dollars to the widening of the trade deficit which was at 23 percent.

This can be seen from an increase in import bills by 18.5 percent against export earnings which increased by 11.2 percent.

"It is unusual pressure but we believe it will ease next year because we can see a decreasing trend in imports and an increase in tourism revenue, among other avenues generating forex receipts,” Rwangombwa noted.

Inflation to average 7.6 percent by end 2023

"Last year, inflation was really challenging, reaching a peak of 21.7 percent in November 2022 and easing from December, as we had projected, we see it going down, though still high, at 12.3 percent in August this year,” said Rwangombwa.

Inflation is the rate at which commodity prices increase over a specific period on the market. The ideal inflation should be between a range of two percent to eight percent and a benchmark of five percent, as per the central bank target.

Rwangombwa said they expect consumer prices to increase to an average of 7.6 percent at the end of the year and around 5 percent in 2024.

However, he pointed out, there are still risks associated with this considering the geopolitical tensions, effects of the Russia-Ukraine war, and climate change which remains the biggest challenge to the economic performance.