In March 2014, the national statistics office reported that the economy had registered a 4.6 per cent annual growth the previous year, the worst in almost a decade.
“But I am confident it will fully recover this year,” said Governor of the National Bank of Rwanda (BNR) John Rwangombwa, then.
On Tuesday afternoon, a buoyant Rwangombwa told the press that indeed, the economy had regained after it registered a 7.8 per cent growth in the third quarter (July to September) and is on course to surpass the annual growth prospect of 6.0 per cent.
But BNR will have to wait for data from the fourth and last quarter of the year (October to December) to confirm the new prospect.
However, the trend in the first three quarters (Jan to September 2014) seems to provide sufficient clues to make bold conclusions.
In the first three months of the year, the economy grew by 7.5 per cent and although it slowed down to 6.1 per cent between April and June, it picked up again to register a 7.8 per cent growth between July and September.
“It’s a clear indicator that the economy is back on track and we are optimistic it will surpass our set annual target of 6.0 per cent,” said Rwangombwa who was presenting the quarterly reports from BNR’s financial stability and monetary policy committees.
If that happens, it will perhaps warrant a big sigh of relief but not a break from keeping a cautious eye on the external factors that caused trouble last year.
When asked whether the current fast economic pace is safe from possible shocks, economist Thomas Kigabo, sounded confident but cautious at the same time.
“In the short run, I do not see any shocks slowing our pace but we need to constantly keep a close look at external factors,” he said.
The secret of BNR’s confidence is hidden in the good performance of the country’s key sectors, so, far, up to the third quarter.
Agriculture, industry and services are the main drivers of economic growth and their performance in the past three quarters was promising.
For instance, the agriculture sector posted a growth rate of 6 per cent in the third quarter of this year, a major step forward from its minimal growth of 1 per cent attained in the same quarter of 2013.
Given agriculture’s significant contribution to GDP, the trend at which it has been growing since January already shows it might surpass 4.5 per cent, the annual growth projection that BNR anticipated.
Meanwhile, the services sector also boosted BNR’s hopes of a full economic recovery after it posted a 10 per cent growth rate in the third quarter compared to the 4 per cent rate at which it grew in the same quarter last year.
In 2013, the service sector’s annual growth rate was 4 per cent and BNR had set a target of 7 per cent for 2014 but the trend in the last nine months shows a better performance is possible.
Only the industry sector seems to be struggling after it registered a 4 per cent growth rate in the third quarter which is lower than the 9 per cent growth rate recorded in the same period last year.
Nonetheless, Rwangombwa says, the sector will most likely meet its 5.5 per cent annual projection that BNR anticipates.
Room for borrowing
When donors delayed or canceled aid to Rwanda in 2012, government lost revenue forcing authorities to narrow the budget by cutting expenditure.
This budget trimming mainly affected government suppliers in the private sector who either lost deals through canceled contracts or low demand from its government clients.
When business slowed down in the private sector, it affected people’s incomes hence negatively impacting on consumption levels and the low economic activity that arose was the crowning effect.
In order to mobilise funding of its priority projects, government sought for alternative sourcing and in April 2013, Rwanda issued its maiden international bond worth $400 million to mature in 10 years—the bond’s size is estimated to be around 6 per cent of the country’s annual economic output (GDP).
Although it was Rwanda’s first appearance on the market to borrow, the bond attracted hundreds of investors who oversubscribed to the tune of over $3.5 billion against the $400 million that Rwanda needed.
Locally, the government also successfully issued several smaller Treasury bonds to mobilise money from the local stock market.
The success of Rwanda’s international and local borrowing ventures, according to Finance Minister Claver Gatete, signaled investor confidence not only in the government but its investment plans.
But the money from these ventures also enabled government to rejuvenate economic activity as suppliers in the private sector returned to business again.
In fact, according to BNR’s statistics, money in circulation had increased by 18 per cent as of November 2014 which is more than the 14 per cent growth that the regulator had anticipated; this is a sign of robust economic activity.
When asked whether the government will use that opportunity and return to the market in 2015, Rwangombwa said any future government decision to borrow won’t bother the central bank, “because there’s room to do so”.
However, he also added that government will not borrow for the sake of borrowing.
“Future decisions to return to the market will have to be supported by the national debt sustainability analysis (DSA),” he said.
Recently, government created a debt management unit under the Ministry of Finance and Economic Planning. The unit’s work is mainly to monitor and advise on government’s borrowing activities.
The government stance seems to be that while the doors to domestic and international borrowing markets are wide open, any future borrowing will have to be backed by a firm need to raise resources to bankroll vital national investments in line with the country’s EDPRS2 targets.
So, going into 2015, Rwanda will not be expected to squander its borrowing opportunities on investments it doesn’t deem worthy to key national targets.
Are low fuel prices, good or bad?
Rwangombwa said the international oil prices that have continued to drop will largely benefit Rwanda’s economy as the country will spend less of its foreign reserves to pay for its imported fuel supplies.
“This obviously impacts on general commodity prices that will reduce in response to the reduced cost of transport,” he said.
In the past, higher fuel prices on the international market would affect Rwanda in form of imported inflation, which is basically, an increase in the cost of imported goods.
But with cheaper oil prices, BNR expects a reduction in the cost of imported commodities. Fuel prices in the country have already been reduced to less than Rwf900 and headline inflation is not expected to exceed 2.5 per cent in 2015.
However, Economist Kigabo, while in total agreement that low fuel prices will benefit Rwanda, also added a precautionary note regarding low global demand.
“If low fuel prices are due to low global demand for oil, that’s not necessarily good for Rwanda because it would hurt demand for our imports, so while we want low oil prices to stay longer, we also want global economy to pick up to support demand for our exports,” he cautioned.
In 2014, global economic recovery was moderate and is expected to end the year at 3.3 per cent and pick up slightly to 3.8 per cent in 2015 with the three biggest economies, USA, China and Japan limping.
This might not be robust enough to support a hungry Rwanda economy that has just regained full health.