Persistent demand of the US Dollar to finance imports of goods and services has weakened the Rwanda Franc to a record low in six months.
The Franc depreciated by 1.4 per cent against the US Dollar between December 2011 and June 28, 2012.
Before the close of business on Friday, the Franc was buying at Rwf617/US$1 and Rwf616.8/US$1, the lowest in three years.
In an exclusive interview with Business Times Central Bank Governor, Clever Gatet0e, said that the slightly higher depreciated Franc compared to last year is due to the high demand of US dollars to finance imports of goods and services.
“However, the current level of depreciation is still very moderate to have an impact on the overall level of prices through the price of imports”
Rwanda’s import bill rose by 32 per cent in the last five months against 14.5 per cent recorded in the same period of the last year.
“Capital goods increased significantly (54.5 per cent) during the first five months of 2012 compared to 2 percent recorded the same period of last year and intermediary goods have increased by 33 per cent compared to 23 per cent recorded last year,” Gatete explained.
He added that to respond to demand, the central bank sold to commercial banks US$218.5 million (by June 26,) compared to US$134.1 million in the first half of the last year, which is an increase of 62.9 percent.
A report by Renaissances Capital warns that if the franc weakens at this rate, “it is likely to reach Rwf620/US$1 by the end of 2012, from Rwf607/US1 in March 2012. As Rwanda’s relationship with its donors remains benign, we see little risk for the franc”
Dealers and analysts in the foreign exchange market say that if the national bank does not intervene through repurchase agreements, the franc could further weaken above Rwf620/US$1 in the coming days.
The increasing in import bill could trigger high prices on the domestic market.
Rwanda’s inflation rate for May accelerated to by 8.32 per cent compared to 6.95 percent in the previous month.
In May central bank was forced to increase its benchmark rate, Key Repo Rate, to 7.5 per cent to help stem the Franc slide and contain inflation.