The Rwanda franc made gains against the US dollar last month, shedding 0.52 per cent during the month compared to the 0.85 per cent decline recorded in January, a statement from the National Bank of Rwanda (BNR) indicates.
Despite the positive trend, experts warn that dollarisation of the economy, which creates unnecessary demand for the greenback could continue to put pressure on the local unit.
An increasing number of landlords, especially for up-market properties, and other service providers are continually quoting and insisting that clients pay in dollars, a situation that hikes demand for the US currency.
BNR quoted the dollar at Rwf696.9/710.9 (buying and selling) at the end of last month, up from Rwf693.5/707.3 at the start of February.
The central bank attributed the pressure on the local unit to high demand for forex from importers, which it said is growing faster than the increase in forex inflows “as a result of fast economic growth; which exerts pressure on the Rwandan franc”.
Maurice Toroitich, the managing director of KCB Bank Rwanda, attributed it to the high demand for dollars by firms “that are importing capital equipment and intermediate goods like construction materials.” “This demand is out-pacing the rate at which the country was getting forex inflows from exports.
“Therefore, the best solution to the situation is for us to grow the export sector. My personal opinion is that there are many things that we can do to discourage use of dollars in the economy. For example, why should landlords charge rent in dollars?” he wondered.
He argued that payment for goods or services in dollars creates unnecessary demand for the dollar.
That aside, as demand for the dollar continues to grow, many traders and manufacturers, who import raw materials, have started feeling the pinch on their costs and earnings.
“The situation is becoming hard…The franc was trading at around Rwf700 at the beginning of January, but presently one has to part with Rwf725 per dollar.
“Since most of our raw materials are imported, the depreciating franc increases our costs, yet we cannot pass on the cost to customers,” noted Rakesh Bhatnagar, the proprietor of SRB Investments, a paper bag making firm in the Kigali Special Economic Zone.
In addition to the increased costs, Bhatnagar said the shortage of dollars has meant that the firm has had to delay payments to its suppliers.
“Sometimes it takes three to four days for the bank to make a transfer because there are no dollars in the market. It is worse when we try to buy dollars from ordinary forex bureaus in downtown Kigali,” he said.
Rohith Peiris, the director general of tea processing firm, Sorwathe Limited, said the firm has been forced to price its tea (which they sell on the Rwandan market) basing on what they incur on buying packaging materials. This firm imports most of its packaging materials.
“We set the price for local tea sales basing on the packaging materials we buy from outside. Since we sell in Rwandan francs, when the dollar depreciates, it eats into our earnings as we cannot continue increasing the price of tea daily,” he explained.
In the region, during the month of February, the Kenya shilling appreciated by 0.2 per cent against the dollar, while the Uganda and Tanzania shillings had a depreciation level of 1.01 and 2.65 per cent, respectively.
Internationally, the US dollar continued to strengthen as it appreciated by 1.21 per cent against the euro last month.
“Therefore, the appreciation of the dollar on the international market, coupled with the moderate depreciation among our business partners within the region, contributed greatly to the Rwandan franc woes in February,” concluded BNR’s statement.
Fred Karangwa, the manager of Platinum Forex Bureau, said the trend is common at the start of every year. “We expect the franc to stabilise against the dollar mid-way through the year,” he said.