Food and commodity prices have been going up in recent months across the country raising concern among retailers and consumers on how it could impact the cost of living.
Increased food and commodity prices have consequently driven up inflation to 4.3 per cent in January 2022, according to the Central Bank. New projections show that it could rise past the 5 per cent threshold to around 7.5 per cent in 2022.
Inflation is an increase in the level of prices of the goods and services that households buy with high levels of inflation leading households to forgo some of what they previously consumed.
Rising inflation naturally has an impact on the population in that one spends more on basic food basket with the income most likely staying the same.
Among the commodities whose prices have been soaring include fuel, cooking gas and cooking oil among others. This somewhat affects the cost of living as they are key components in the consumables basket that determines cost of living.
According to the Central Bank, among the key drivers of inflation include the global rise in fuel and petroleum prices, food items as well as education fees.
As the global economy recovers and activity peaks up, demand for fuel and food items have driven up prices. Among the ways the Central Bank is responding to the challenge is by revising the Key Repo rate from 4.5 per cent to 5 per cent.
For instance, global crude oil prices rose by 67.4 per cent in 2021.
Adjusting its key repo rate to 5 per cent, is a signal to banks to tighten lending which will have an effect of reducing liquidity consequently curbing inflation.
The key repo rate is the maximum rate at which commercial banks invest their money at the central bank. Raising makes it ideal for banks to invest their funds with the Central Bank as opposed to lending it.
According to Central Bank Governor John Rwangombwa, the rising inflation prompted them to adjust the repo rate to contain inflation in the medium term to minimize the effect it would have on the public’s purchasing power.
Rwangombwa further noted that due to low inflation in 2021 to an average of 0.8 per cent as food prices had dropped significantly, the effects of inflation has been much more evident as it is coming from a low base.
Thierry Kalisa the Chief Economist at the Central Bank said that measures by the government to subsidize public transport and fuel pump prices had also played a great role in reducing the effect of the inflation on the public.
He said that the adjustment of the repo rate to adjust lending is still supportive to access to credit and recovery of the economy and will serve to reduce pressures on inflation and remain accommodative.
Franc depreciation
Meanwhile, Rwangombwa allayed concerns on the depreciation of the franc against the dollar noting that the depreciation experienced was a result of trade imbalance as imports remain significantly high keeping the demand for the dollar high and consequent depreciation.
As a country that is investing in multiple industries and sector, he said that there is demand for multiple capital goods consequently demand for the dollar.
As a consequence to the depreciation trends and the structure of the Rwanda economy, the depreciation of the franc leads to a scenario whereby imports are not cheaper than locally produced goods and hence do not stifle emergence of the Made in Rwanda initiative.
Rwanda exports in 2021 rose by 53.4 per cent to settle at $1,167.8M from $761.3M in 2020 as the economy recovers and international markets re-open.
Imports on the other hand rose by 16.5 per cent riding on growing domestic demand and rising commodity prices. As a result, the trade deficit, (gap between imports and exports) widened by 2.4 per cent to $2033.1M.