Nuts and Bolts: Economic depreciation and inflation

Fruits vendors in Kimironko Market.In late 2019, food prices went up across the country raising concern among retailers and consumers with some afraid that the trend could persist further. / Dan Nsengiyumva.

In late 2019, food prices went up across the country raising concern among retailers and consumers with some afraid that the trend could persist further.

Increased foodstuff prices consequently drove up inflation to 6.9 per cent as of November, from 4.4 per cent in October. This was beyond the Central Bank projections of 5 per cent.

 

Scenarios, where prices rise, is technically referred to as inflation. Conceptually, inflation is a measure of the rate at which the average price of goods and services in an economy increases over some period of time.

 

It occurs when the demand for goods and services in an economy rises more rapidly than an economy’s productive capacity.

 

In 2019 scenario, supply had not declined, according to Yusuf Murangwa, the Director-General of National Institute of Statistics of Rwanda, but there was a growth in demand for food products driven by growing consumption. The rise in demand, in turn, led to higher prices.

Depreciation can be homonymous given the context. Currency depreciation is the loss of value currency with respect to American dollar.

When local value currency is instead ascending as opposed to the dollar, it is referred to as appreciation.

In 2012, $1 would buy Rwf600, today it is Rwf950. However, Teddy Kaberuka,, an economic analyst explains that depreciation is not necessarily caused by low exports but also local demand.

Depreciation in accounting is first, the actual decrease in value of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears

To explain more about inflation and depreciation, The New Times borrowed a hand from Teddy Kaberuka, an economic analyst.

How is inflation related to depreciation?

Depreciation can be the cause of inflation, among many others, Kaberuka explained. If local currency is depreciating in reference to the dollar, it means, as an importing economy, Rwanda will spend more local currency importing goods. Therefore, overall prices will escalate even when the price in dollars is unchanged.

Kaberuka added that the main mechanism to discourage depreciation, therefore inflation, is to boost local production and increase export. This will increase the value of local currency to the dollar. The more the exports, the more valuable local currency gets.

How can inflation and depreciation affect economy?

Hyperinflation erodes the value of currency and can render it worthless. The effect on a nation’s economy is substantial. It saps tax revenues, shutters businesses, raises the unemployment rate, and drives the cost of living so high that political instability ensues.

Rwanda’s inflation rate in 2020 is projected at 5 per cent which Kaberuka said is safe for economy.

“When rates exceed 10%, average price skyrocket and local currency lose value. Businesses and living standards can be the most hit. When the rates increase far above, the economy collapses,” he explained.

In countries such as Zimbabwe and Venezuela where inflation rates exceeded 100%, the effects were barely reversible.

Kaberuka gave tips on how inflation and depreciation rates can be lowered by increasing locally produces goods and services and export them, encouraging citizens to consume Made in Rwanda as a way of discouraging imports, creating jobs and curb levels of unemployment.

ailiza@newtimesrwanda.com

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