Central bank governor John Rwangombwa remains positive that the economy will achieve the projected 6.0 per cent growth in 2016 despite the turbulent global economic times.
Following respective quarterly meetings by the Monetary Policy Committee and the Financial Stability Committee, Rwangombwa said, after considering several indicators, they remain positive on their initial projection.
Among the reasons for his conviction is the continued expansion of the financial sector and its ability to finance the private sector, he said.
Going by the assets that are the main indicators of the stability and soundness of the financial sector, the governor said the sector continued to grow in the first half of the year.
Assets grew in all the subsectors of the financial sector.
Between June 2015 and June 2016, total assets of banks increased by 14 per cent largely dominated by credit to the private sector.
Micro-finance assets grew by 22.8 per cent and the same growth was seen in insurance and pension sectors.
The soundness of the financial sector is translated to its ability to extend loans to private sector.
“Credit to the private sector increased by 19.3 per cent and 28 per cent on an annual basis in June 2016 for banks and microfinance institutions, respectively,” he said.
However, the asset quality for banks and micro-finance institutions slightly decreased as the non-performing loans in commercial banks increased from 5.9 to 7 per cent, while in the micro-finance sector, it increased from 7.4 to 7.5 per cent.
Between June 2015 and June 2016, the profitability of banks took a dip, from Rwf31 billion to Rwf29 billion, linked to the quality of portfolio and operating costs.
Rwangombwa, however, said that following consultations with banks, they had established that there was no serious crisis to worry about as the banks were cleaning up their books to improve the quality of assets.
The central bank chief observed that the prudent monetary policy stances maintained had served to contain both inflationary and exchange rate pressures while continuing to support the financing of the economy.
In the first eight months of the year, he said, the financial sector was serving to finance the private sector with new authorised loans increasing by 11.5 per cent, to Rwf514.1 billion.
Across the region, inflation was found to have remained moderate largely due to reducing pressures on regional currencies despite pressures from food prices.
In Uganda, inflation decreased to 4.8 per cent in August, in Kenya it went down to 6.3 per cent, while in Tanzania it slowed to 4.9 per cent in August.
Locally, inflation remained above the medium target of 5 per cent, standing at 6.4 per cent in August.
This was attributed to the increase in prices for fresh foodstuff and rising exchange rate pass through to domestic prices.
Owing to the increase in the exchange rate pass through, imported inflation moved from 3.9 per cent in June to 5.2 per cent and 5.5 per cent in July and August, respectively.
Rwangombwa said they expected that, by December, inflation will have dropped to 6 per cent as prices of fresh products are expected to ease following the start of the rainy season.
“This year, inflation has been slightly higher than the last two years, by projection for September is between 5.6 and 6.6. This is linked to food pressures beginning from November last year. It had eased a bit early this year but worsened around June and July. In August it had eased slightly,” Rwangombwa said.
“We expected it will ease towards the end of the year with projections of between 5.7 per cent and 6 per cent by December this year.”
Growing deficit concerns
One growing concern among financial experts is the widening trade deficit due to the mismatch between import bills and exports receipts.
In the first eight months of the year, the trade deficit rose by 2.2 per cent.
The governor explained that the widening trade deficit, coupled with additional foreign exchange demand from some big projects under public-private partnership framework, had put the Franc under pressure.
The Franc depreciated against the Dollar by 8.0 per cent in August this year.
Meanwhile, Rwangombwa said they would maintain the current monetary policy stance and the key repo rate at 6.5 per cent. The rate has remained unchanged at 6.5 per cent since mid-2014.
The key repo is the rate at which the central bank lends money to commercial banks.
By maintaining the monetary policy stance, Rwangombwa said that they hoped to contain both inflationary and exchange rate related pressures while continuing to support the financing of the economy.