The Rwandan Franc has been experiencing depreciation pressures over the past threes months or so. Ever since it hit a nine-month low of 655/660 on July 21 (compared to September last year), the situation has continued to deteriorate, and the local unit was trading at 673/683 yesterday compared to 670/680 last week. This is over Rw10 decline compared to the same time last year (617.8/ 627.7). However, the central bank has said there is no cause for alarm, arguing that the situation is experienced each year, around this time, writes Edward Ojulu. 

A return to stability in the foreign exchange market is not to be expected soon.

The Rwanda Franc will continue to depreciate against the United States dollar and other major currencies this month or even in the coming months until the current high demand for dollars eases, the central bank has said.

The National Bank of Rwanda (BNR) has said the national currency that has faced depreciation pressures since July will continue to take a beating from the US dollar because of the high demand for the greenback by the business community importing goods for the End of Year festive season.

The central bank governor, John Rwangombwa, last week told the media that while the franc is always expected to depreciate against the US dollar towards the end of each year, this year’s depreciation rate has been higher because of a combination of new factors, such as "big” government spending at the end of the last financial year and delay in disbursement of donor support. 

As of September 27, the franc had depreciated by 3.9 per cent since December 2012, and Rwangombwa says the pressure on the local unit will remain until after this month, when the demand from importers reduces and as more budget support flows in from donors. 

"We normally have that depreciation every year of between 1.6 and 1.8 per cent, but because of the unusually big spending by government during the last quarter of the previous financial year and delayed disbursements, we have had (a relatively) higher depreciation rate this year,” Rwangombwa said.

"The Rwanda Franc has depreciated by3.9 per cent this year (as of September 27),  but the situation is expected to stablise [by] the end of 2013, on account of increase in foreign exchange inflows, as well as gained confidence in forex market,” he said. 

By close of business yesterday, the US dollar commercial banks and foreign exchange bureaus in Kigali quoted the franc at an average rate of 673/683 (buying/selling) - a slight increase from last week’s 670/680. 

The central bank rate yesterday stood at 657/663. The pound was at an average of 1,030/1,040 compared to 1,000.6/1,016.7 on September 28, 2012, while the euro traded at 860/920 as opposed to 794.7/807.6 in September last year.

More pressure against the franc also came from a sharp increase in lending to the private sector, which, although not  very big compared with the last half of last year, increased by 7.6 per cent as at the end of August. During the first quarter of this year, banks disbursed over Rwf97b, which went up to Rwf122b in the second quarter. 

According to Rwangombwa, credit to the private sector is expected to be about Rwf110b in the third quarter (July-September).

Why repo rate at 7% 

Rwangombwa said that as the economy continues to grow, so is the demand for imports and credit. 

"That increases demand for the hard currency, and that is why we see pressure on the exchange rate,” he said during a press conference to announce BNR’s decision to maintain the key repo rate at 7 per cent. 

The economy grew by 6 per cent and 5.7 per cent during the first and second quarters, respectively and, policymakers are optimistic that it will achieve the projected annual growth of 7.5 per cent.

Indeed in maintaining the key repo at (the rate at which the central bank uses to deal with excess liquidity) 7 per cent, the central bank had the current volatile situation in the foreign exchange market in mind.

Reducing the repo rate would send a signal to commercial banks to reduce lending rates that would trigger increased borrowing and automatically bring more pressure on the exchange rate. Yet, an increase would send the worst signal, to increase lending rates that the private sector says are already too high.

"We decided to maintain the repo rate at 7 per cent because we think this has already had an impact and it is accommodative enough to achieve the lending we expected to the private sector. 

"We also don’t want to lower it to the extent that it will lead our deposit rate to negative,” Rwangombwa explained last week.

He added: "So, to avoid any other pressures on inflation, although they are moderate, and to avoid pushing the deposit rates lower, we thought that we would maintain the key repo rate at 7 per cent.”

Financial analysts, however, say that with inflation rate at 4 per cent, the current interest rates of about 17.5 per cent remains prohibitively high to business. Usually, when calculating interest rates, the rate of inflation is a key determinant, with high inflation resulting into higher interest on loans.

The market expectations were for lowering the repo rate with a hope that this would compel banks to lower lending rates as well, but the volatile exchange rate and inflation pressure from major trading partners in the region (Kenya and Uganda) seems to have influenced the decision to maintain it at 7 per cent.

Is central bank helpless?

Moreover, the central bank appears to be having no capacity at the moment to deal with the depreciation of the Rwanda Franc, choosing to let market forces to prevail. This inability stems from the supply side, where the imports bill outweighs foreign receipts from exports. 

So, according to the BNR chief, while the central bank will continue intervening in the market, this intervention will be limited to "smoothening” the rate at which the franc will depreciate, but not "stopping” the depreciation.   

"We have been intervening on the weekly basis, but we don’t intervene to stop the rate from increasing because it is market driven. We intervene to smoothen the market so that it does not lead to speculation and worsen the situation.”

Economy buoyant

Despite the fragile forex market, the Rwanda economy remains buoyant and on course to attain this year’s growth projections despite global economic challenges, inflationary pressure from trade partners and a weaker national currency, Rwangombwa stressed on Friday