Trade deficit set to widen
Rwanda’s trade imbalance is projected to reach 17.6 per cent this year as the country’s imports grow much faster than its exports in the midst of turbulence in the global economic situation.
In the first quarter of this year, the country’s imports shot up 30 per cent to US$541.5 million, a reflection of strong growth in the importation of equipment for agriculture processing and other agribusiness projects.
trade in services show a moderate deficit in comparison to trade in goods, with tourism being the country’s major foreign exchange earner.
Exports increased by 29.5 per cent to US$104.8 million, driven by robust growth in coffee exports.
“We have not managed to bridge the gap as we still import equipment that is meant for bigger projects which in the future targets to bridge the trade deficit,” said Elias Baingana the Director General of National Budget in the Ministry of Finance and Economic Planning.
He adds; “It’s worth that we have this figure because industries and projects that are importing these equipment will contribute heavily in bridging this gap.”
Rwanda’s exports could be affected by the unstable global economy where demand is shrinking with weaknesses in labour and housing markets as well as financial tensions particularly in the Euro zone.
While in March most commodity prices on the international market continued to rebound from their low levels in December last year, tea and Arabica coffee prices fell. Tea prices fell by 5.7 per cent on a sharp fall in Indian prices because of a seasonal drop in tea quality as Arabica coffee prices slid by 10.2 per cent on the back large production from Brazil.
Tea and Coffee are among Rwanda’s top foreign exchange revenue earners.
Forecasts suggest that Rwanda’s imports are likely to expand almost twice as the growth of exports thus raising concerns.
On an average, between 2007 and 2010, imports of goods grew by 23.1 percent while exports grew by 12.9 percent.
However, Baingana allayed fears of a persistent trade deficit, saying that the recent surge in private investments in the country as well as government’s spending in strategic sectors will offset the imbalance in the next three to four years.
The capital goods being purchased are expected to add value to agricultural products to boost exports.
Central bank Governor, Amb.Claver Gatete said the government is still comfortable, because tourism contributes highly in bringing in foreign money.
“We have an extra buffer, in case of any kind of shortage, that’s when we come in the situation,” he said during a press briefing on the monetary policy meeting.
Central bank Vice Governor Monique Nsanzabaganwa agreed that the trade balance is rising. She, however, pointed out that its increase is at a decreasing rate.
Amb. Gatete is optimistic that the conducive business environment and monetary stability will attract investments and trigger export growth as well help in stabilising the Franc.
Central bank also says the economy has some “breathing space” with comfortable reserves that are still above the standard four months of imports.
Comfortable reserves would allow the central bank to intervene and help importers, especially the ones investing productive sectors in case of any shock.
In a bid to address the trade deficit, government passed a national export strategy which aims at increasing export of commodities through import substitution, services and export diversification. The policy targets sectors like horticulture, mining and Minerals, crafts, tea, Coffee, ICT and Tourism.
Figures indicate that trade in services show a moderate deficit in comparison to trade in goods, with tourism being the country’s major foreign exchange earner. The services deficit has risen by 26 percent between 2007 and 2010.
The service sector is also attracting more attention from commercial banks. Central bank statistics show that new authorised loans in the first quarter of this year were mainly concentrated in the commercial and hotel sectors, which received Rwf88.8 billion followed by the mortgage industry with Rwf47.6 billion and manufacturing with Rwf25.5 billion.
The export strategy targets diversification from tradition exports of coffee and tea and expanding market beyond the Euro zone. Africa is one of the target destinations for Rwanda’s exports, especially in countries where the national carrier, RwandAir, operates.
The economy is projected to grow by 7.7 percent this year, lower than last year’s growth of 8.6 percent.
Agriculture is expected to grow by 6.1 per cent, industry 11 percent, manufacturing 8.6 per cent and construction 13.2 per cent. The sector is projected to grow by 8.7 percent.
The central bank says that growth will be backed by stimulus financing that has seen credit to private sector almost double in the first quota to Rwf117.1 billion from Rwf60.9 billion authorised loans in the same period last year.
In order to mitigate inflationary pressures while maintaining solid economic growth, the central bank maintained a tight monetary policy, raising the key repo rate by 5o basis points to 7.5 per cent.
Rwanda has managed keep inflation at single digits despite external shocks due to the tight monetary policy.
As of March, inflation was at 7.81 per cent, the lowest in the region compared to other East African countries like Uganda, at 20.3 percent, Kenya and Burundi at 13 percent and at 24 percent, in that order.