With more money in circulation within the financial institutions, since the second half of 2009, market interest rates have gone down. This is expected to increase the potential of lending to the economy which had stagnated last year.
During the first quarter of 2010, new authorized loans by commercial banks to private sector stood at Rwf46.5 billion against Rwf39.7 billion in the same period of 2009, reflecting an increase of 14.6 percent.
“There is more liquidity in the system and this is why the interest rates have come down,” Central Bank’s Deputy Governor, Claver Gatete told Business Times this week.
According to the Gatete , credit to the economy has been
increasing with total loans hitting approximately Rwf100 billion as of last month, compared to the total of Rwf198 billion issued the whole of last year.
“We expect this year to be much better because last year the economy was affected by inflation and the crisis,” he said.
In the next 18 months, private sector credit is projected to grow by about 30percent. According to the Central Bank, the average repo rate which is the interest rate that it charges banks has fallen from 5.3percent in January to 4.4percent in March this year respectively.
On the inter-bank market where banks exchange different currencies, starting from end January this year the rate is below the floor of the inter-bank corridor set, moving around 5.2 percent.
This is in contrast to last year where the inter-bank rate was in the range of 8-7 percent. The volume of inter-bank transactions by end March this year hit Rwf168.5 billions against Rwf 125. 5 billions recorded last quarter 2009,
reflecting an increase of 34.3percent.
Gatete also observed that rates on the money market are taking a downward trend in response to the low inflation.
Rwanda’s inflation has been low and stable since last year, inspiring the Central Bank to slash its key repo rate at which it lends to commercial banks by 50 basis points to 7 percent in March.
In April inflation was recorded at 2.7 percent, according to the Deputy Governor last month it slightly rose to 4 percent.
”We have to help the economy to grow. As long as inflation is still low we can help by injecting more liquidity into the system. For this year we expect inflation to keep in single digit not exceeding 7 percent,” he said.
Increasing lending to the private sector is expected to boost economic growth that fell by 5.7 percent in 2009 from 11.2 percent in 2008.
Government projections suggest that Gross Domestic Product (GDP) growth will reach 7 percent this year on the back of the good performance of the agriculture sector as well as the improvement in the liquidity conditions in the economy.
However, despite the drop in the cost of funds, Gatete observed that banks might still be reluctant to issue new credit more on account of loan recovery and enhanced risk management.