The National Bank of Rwanda (BNR) is expecting increased private sector lending after it slashed its key repo rate— by 0.5 percentage point to 4.5 per cent.

The key repo rate is the maximum rate at which commercial banks invest their money at the central bank.

This is the first time in years that the rate has been revised to as low as 4.5 per cent.

The move is deemed necessary for stimulating lending to businesses, which will be desperately looking for capital in order to revive their operations after COVID-19 lockdown.

The intervention follows BNR’s earlier Rwf50 billion stimulus package from which banks can borrow to support their liquidity.

In addition to the stimulus, BNR also revised its reserve requirement ratio from 5 per cent to 4 per cent.

The revision of the reserve requirement ratio on April 1, helped to inject Rwf23.4 billion into the financial system.

John Rwangombwa, the Governor of the Central Bank told The New Times that the Monetary Policy Committee (MPC) meeting, held on April 29 made the adjustments with expectations that in coming weeks, banks would in turn disburse loans to firms to support the economic recovery.

This comes at a time when new authorized loans dropped by 10.6 per cent in the first quarter of 2020.

Statistics show that as of April 19 this year, new authorised loans stood at Rwf114 billion compared to Rwf123 billion at the same time last year.

With a plunge in economic activity, the central bank says that increasing liquidity was needed to ease pressure from banks—which are currently expected to show leniency to their distressed clients.

This is expected to create stability and reduce instances to sell collateral and security which at current conditions would not be of service to lenders and borrowers. 

Currently, banks reportedly have adequate liquidity and none of them has so far applied for the central bank’s Rwf50 billion fund.

With the government set to announce a new special fund for business recovery in May, it is expected that the move will further bolster liquidity in the financial market.

While the review of the repo rate is a signal to banks to lend to the private sector, experts say that banks will have to carry out assessments to establish which sectors bear less risk, able to pay back and have a trickle-down effect.

Among the sectors that fit this description is the manufacturing, given its ability to boot recovery of jobs and increase production of goods

The central bank’s intervention has been lauded by private sector player, saying that it was a timely.

 Private Sector Federation Chief Executive, Stephen Ruzibiza, told The New Times they expect that banks will extend the same support to the local private sector as they seek to restart their supply chains and recapture their markets.

Ruzibiza also called on local stakeholders not to hold up capital as it would only lead to a scarcity of funds in the market, calling on them to invest in aspects of the supply chain that have multiplier effects on the economy.

Bankers who spoke to this publication anonymously said that most lenders have considered the private sector’s concerns and are ready to work with them extending leniency as well as support to ensure that the economy picks up.

Rwangombwa is optimistic that the policy measures being taken by the Government to support the recovery of the economy after COVID-19 will increase the demand for credit by the private sector and reduce the country’s trade imbalance.

In the first quarter this year, the trade deficit deteriorated by 18.8 per cent owing to higher imports compared to exports.

Inflation in the first quarter stood at 8.2 per cent driven by food and energy inflation.

In the second quarter, inflation is likely to remain the same but is expected to decelerate in the second half of the year averaging 6 per cent for the year, according to central bank projection.