The past few weeks have seen a sustained public outcry as the price of the dollar for the first time went beyond Rwf800 hurting importers who had to buy the greenback in large quantities to settle regional and international bills.

The central bank blamed this on ‘irresponsible’ dealers on the forex exchange market, who were reportedly hoarding dollars to further escalate its price. In exclusive interview with The New Times’ Kenneth Agutamba, last week, National Bank of Rwanda (BNR) governor John Rwangombwa revealed that the country has enough dollars and that the speculators have been defeated.

Excerpts;-

The foreign exchange rate curve has been consistently rising from around Rwf704 for a dollar in February to Rwf800 in recent weeks, what are the factors behind this?

It’s true the curve has been rising. In fact even when you look back two to three years ago, there are two factors here; first, it’s to do with the structure of our economy. When you look at our import bill, it has been growing much faster, not as a percentage but in nominal terms, than our export earnings; we are talking of an import bill worth billions of dollars and export earnings in hundreds of millions.

This has created a payment gap that continues to widen as we increase our investments and economic growth, it puts pressure on the foreign exchange market and partly explains the sustained rise of the curve.But like I have always said, that’s not a big deal and I know at times when people hear me saying it’s not something to worry about, that it’s normal, they don’t get it; but in an economy like ours that’s in a development phase without vast natural resources to earn us dollars, we expect that to happen; and when you take it into the equation of our economic performance in general, you find that it doesn’t impact, negatively on the performance of the economy.

When we started this year, we projected the economy to grow by 6.5 per cent, inflation of around 3.5 per cent and depreciation of three to 5 per cent, that’s normal. So what’s important is what we are doing as a country to try and bridge this trade gap, moving forward, but that’s a topic for another day.

When you look at specifically this year, depreciation has been relatively higher because of the general strengthening of the US Dollar across the globe and in fact when you compare our single digit depreciation to our counterparts’, some are even above 20 percent, it’s more than 10 per cent for the Euro. We expected these developments to put more pressure on the exchange rates to exceed our projected depreciation to about 6 or 6.5 per cent.

But then toward the end of June to beginning of July, another phenomenon emerged; speculation kicked in because of what was happening around us in the region. Some people took advantage of that and hoarding hiding dollars and because of that, it created noise in the market.

This noise caused a stampede as people rushed to buy dollars, which created an ‘artificial scarcity’ and the high exchange rates (seen in recent weeks). So that’s what created problems in July, it was an outlier compared to the normal expected upward trend of three to 5 per cent or 6 per cent projected by end of this year.

You talk of a wide balance of payment deficit as well as a globally strengthening dollar, both fair points; but then you blame speculation for escalating matters, it’s mid-August now, would you say you have defeated speculators?

Yes, seriously. I am happy to announce that we have decisively dealt with speculators. Because of the artificial situation they had created, we are on the market everyday to monitor what’s happening and at least for the last more than one week now, we have seen stability return.

As you reported, the dollar had gone to more than Rwf800 in value and you said some of your friends had bought it at Rwf900, but now, at least the average rate across the market is around Rwf755 although there are some still pushing it to Rwf760.

So that gives us confidence to say we have dealt with speculators because we know some of them have lost money because they tried to hoard dollars but came back rushing as the price was going down.

We used two weapons against them, by increasing the supply on the market and dealing with specific forex bureaus that were acting irresponsibly.

How is the price of a dollar determined? Is it by market forces or central bank sets the price?

There’s a base set many years ago. Today we might be at Rwf750 but how it goes up or down depends on the supply on the market. If the supply on the market is good then the forces of demand and supply will dictate on whether the price rises or drops, scarcity automatically pushes the price up.

There are periods of high inflows like early in the year when international organisations bring in money. This creates stability. But there are also periods of high demand, such as June to August and October-November, which pushes the exchange rate up, so it’s about demand and supply dynamics.

Is it true that because of speculation pressure, the central bank has been influencing the market by instructing forex bureaus what prices to trade at in recent weeks?

No, that’s not true. We only came in to address the issue of them displaying Rwf755 for a dollar but selling at Rwf800 behind the counters. That, we don’t accept, but we don’t set the price at all.

The central bank rate is only a reference not a standard; in fact even our rate is determined by the market rate; we have a formula where we take the commercial bank rate, not forex bureau rate because their volumes account for only 10 per cent of the market, so the commercial bank rate today can determine our rate tomorrow.But normally, you can’t wake up one morning and increase from Rwf755 to Rwf800 that would create unnecessary problems if not stopped, so we only tell forex bureaus to act responsibly but not how to price, no.

Rwanda is experiencing fast economic growth; Kigali city is one huge construction site generating high demand for the dollar as developers import construction materials, do we have enough dollars to sustain this demand?

Interesting question but let me put it like this; we have enough dollars to fight speculators and we have enough dollars to maintain the international trade, that we are doing as a country.

By the way, our exports are not doing that badly apart from this year because of the weak commodity prices but in the past three years they have been growing above 20 per cent although that can’t close the payment gap in nominal terms because we are comparing $400 million with $2 billion.

So, when I say we have enough dollars, I mean we have enough reserves to sustain our trade within the expected depreciation rate of three to 5 per cent. As a country we are taking other measures to increase our foreign exchange as well as other measures to decrease our import bill.

For instance, this year, we have a new cement factory coming on board which will save us more than $90 million worth of cement imports; also, when I say we have enough dollars, it doesn’t mean central bank is the source of everything, a big chunk of it is from the private sector; we just intervene to smoothen the noise.

Give us a sense of how much foreign currency we have in our reserves to support import trade?

Sure, as central bank and government in general, we have set a principle that we can’t allow our reserves to go beyond below four months of imports and we are still there.

In fact we ended last year with 4.4 months of trade, giving you a figure today maybe tricky because it keeps fluctuating depending on the disbursements we get but, on average, we are around 4.3 and 4.4 months of trade but, in principle, we can’t go below four months.

There’s a disturbing trend of people gradually ‘dollarising’ this economy, everyone seems to prefer transacting in dollars instead of the national legal tender, landlords are one example; does this worry you?

I don’t think it’s such a big problem; this only happens in Rubavu and Rusizi because of their proximity to DR Congo, people prefer to trade in dollars, in Kigali, the problem is historically linked to mainly rent, contracts and hotels.

For rent, historically, almost all houses in the 90s were rented by foreigners who were here, they were charged and paid in dollars. That legacy has continued. But we have also seen periods like 2008 to 2009 when the Franc was appreciating against the dollar even when rent was charged in dollars, so I wouldn’t agree with the statement that people are shunning the local currency for dollars, it’s not true.

However, we are saying that those that are doing so, demanding payments in dollars is illegal. Even then, those receiving rent in dollars will still have to exchange it into francs to spend locally on stuff like school fees.

So the main source of pressure on dollars is from international trade, big investments and change in consumption habits of Rwandans as most of the things they want have to be imported because they aren’t produced locally.

When you scan the marketplace, most products are made in China, given our huge Chinese import volumes. Have you thought of a currency swap deal with China to allow for the use of the Yuan and reduce pressure on the dollar demand?

Yes, that’s our responsibility as a central bank and we are working on that; although still in the pipeline, we are considering Yuan as one of our reserve currencies, and this is something that’s being approved internationally, anyway, despite a few noises.

But even then, when you look at our import bill from China, it accounts for around 14 per cent of the total import bill, so you’re looking at around $300 million. So, yes, we are working on that although I wouldn’t take that as breaking news given its work in progress, but we have already taken that decision as the board of the central bank anyway, what remains is the technical work to see how it works.

At a regional level, when Rwanda wants to do business with Kenya or Uganda, traders still have to seek dollars which comes with exchange related costs, are we making any progress on a single regional currency?

A single currency will be in place in 10 years, if all goes well. But in the meantime, what we are doing as central banks of the region is, we have reached an understanding on currency convertibility.

It’s taking time to implement and in fact it’s one of the main topics we shall discuss during the meeting of East African Community central bank governors (this week). We will be discussing how to expedite regional currency convertibility so that when a Rwandan goes to import goods in Kenya, they exchange from the Franc to Kenya shillings directly, without going through the dollar.

We have made positive steps like opening accounts with our counterpart central banks like Kenya Central Bank having an account here, so we’ll be acting between the central banks to do the clearing so that a Rwandan can go to Kenya, buy goods and use Francs to exchange directly.

This is something we’re trying to expedite, it’s not easy so may not work overnight, we signed the MoU last year and we are working on expediting implementation.

Growth in the US economy is not showing any signs of slowing down, and investors are shifting dollars from other parts of the world to go have a piece of the pie. Do you see this further hurting economies like Rwanda’s in coming months?

I don’t think so. We are being hit because this is an adjustment period; the US Dollar, since the financial crisis, had challenges which led to capital flight to emerging markets but now as the economy strengthens, we are witnessing a return of those dollars back to the US.

I would call this a transition period, which I don’t expect to last more than two years, so it can persist for another six months or one year.

Generally, the effect will be that a big chunk of capital to emerging markets will be reduced but the impact of this shift in capital movements can’t last for a long time before stabilisation.

editorial@newtimes.co.rw