Currency swap to strengthen economy

Central bank’s arrangement with the International Finance Cooperation (IFC), where the latter provides Rwandan franc-denominated loans for the private sector is shielding the economy from foreign exchange risks that may have resulted from borrowing in foreign currencies.

Central bank’s arrangement with the International Finance Cooperation (IFC), where the latter provides Rwandan franc-denominated loans for the private sector is shielding the economy from foreign exchange risks that may have resulted from borrowing in foreign currencies.

Monish Mahurkar the International Finance Corporation Director, believes that local currency swap, which was started in 2010, will help strengthen local capital markets.

 “Countries with vibrant local bond markets can mobilise long term local currency funds from local and international investors and put them to work for the economy,” he said, adding that; “Development of such markets is a priority.”

Experts say if borrowers are borrowing in foreign currency when their revenue strength is in local currency, there is a likelihood of mismatch if a currency depreciates which may lead to bankruptcy.

 “We believe that lending in local currency is important to mitigate cross currency risk for our borrowers,” Martin Habel, Principal Financial Officer at IFC says

During the Asian financial crisis in 1997 most companies almost ran into bankruptcy after devaluation when all borrowing was done in foreign currency due to lower interest rate.

Back home, there is optimism that currency swap will boost long term lending to the private sector.

Experts say that such a facility helps strengthen the local capital market since it enables companies borrow locally through bonds.

“It’s a big priority to facilitate and develop local currency markets,” Habel added.

Robert Mathu, Chief Executive Officer of Capital Markets Authority (CMA), says stakeholders understanding opportunities available in the capital markets will help raise long term capital to support the country’s economic growth.

 “For us it is a blessing in the sense that we are  going to develop our bond market and more important not just by being able to mobilise long term capital but also get more credible products from IFC,” he said

Through the local swap facility, IFC was able to inject in US$ 26 million in Rwandan francs towards projects that support agribusiness, manufacturing and finance for small business thus stabilising the local currency.

As a result of this, there was an increase in money supply driven by domestic credit. Credit to the private sector increased by 18.1 per cent against 8.9 earlier projected, according to the central bank.

“The National Bank of Rwanda has been working with IFC on currency swap which is operating very well, we expect this cooperation to help us strengthen our economy even more,” Claver Gatete, Governor Central bank said

The Rwanda franc has been stable vis-à-vis other regional currencies. The strength of the franc also helped to subdue inflationary pressures.

 

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