Boosting domestic demand critical to sustaining high economic growth -IMF

This week the International Monetary Fund (IMF) and the World Bank will be holding their Annual meetings in Washington DC. Ahead of the meetings, Business Time’s BERNA NAMATA interviewed GERSHENSON DMITRY, the IMF’s Resident Representative to Rwanda on the current state of the economy.
Gershenson Dmitry the IMF’s Resident Representative in Rwanda (File Photo)
Gershenson Dmitry the IMF’s Resident Representative in Rwanda (File Photo)

This week the International Monetary Fund (IMF) and the World Bank will be holding their Annual meetings in Washington DC. Ahead of the meetings, Business Time’s BERNA NAMATA interviewed GERSHENSON DMITRY, the IMF’s Resident Representative to Rwanda on the current state of the economy.

What is your view of the current state of the economy?

The economy is recovering gradually. The available data on the sale of manufactured goods and construction in the first half of 2010 suggest that the negative impact of last year’s shocks is passing. We have recovery in manufacturing, good agricultural harvest, and credit extended by the commercial banks is growing slowly, even though the lending rates remain high.

For exports, the picture is mixed: during the first six months of this year the volume declined by 7 percent, but the value of exports increased due to higher export prices.

Regarding inflation - we have seen it drop to almost negative since the beginning of the year. What is your view of the current trend in inflation figures?

The twelve-month inflation has been very low lately, but not negative: below 5 percent since January and only 2 percent in August, and that is well below the 7 percent targeted for end-December. The low inflation of the past few months is due to a combination of factors, among them good harvest (and correspondingly low food prices), falling prices for imported consumer and capital goods, and weak domestic demand.

I do not think that deflation is an immediate danger, because food and import prices are unlikely to fall further. In addition, the National Bank of Rwanda has enough tools to stimulate domestic demand if needed, by reducing policy interest rate and by expanding the money supply. 

How is the country performing so far in relation to achieving the Policy Support Instrument (PSI) program targets?  

The macroeconomic performance under the program has been good. Preliminary data indicate that all the critical targets for end-June were met. These targets specify the desired levels of international reserves of the National Bank of Rwanda, reserve money (which comprises currency in circulation plus reserves the commercial banks hold at the NBR), fiscal deficit, external debt, and external arrears.

One sub-critical target—on domestic debt of the public sector—was likely missed. During the month of June, the government had to borrow more than planned in order to ease its tight cash conditions due to late disbursement of donor assistance. Then, towards the end of June, the disbursements came allowing the government to spend more money.

If left unchecked, however, this would have expanded the amount of money in the system and jeopardized the important PSI target on reserve money. To avoid this problem, the NBR had to issue domestic instruments to absorb the extra liquidity. Thus, the target on reserve money was met, but at a cost of higher-than-planned stock of domestic debt.

This week, the IMF and World Bank will be holding their Annual Meetings. What is top on the agenda both on regional level (Africa) and globally?

The meetings will focus on the global economic outlook and on the reform of IMF governance and quota.

On the global economic outlook, the good news is that the policy actions taken by various countries in the wake of the global crisis have had a positive effect: the global economy has been recovering since mid-2009, and, unlike during the previous global crises, Sub-Saharan Africa has been recovering faster than the rest of the world (what helped Africa this time was prudent macroeconomic policies pursued by most countries, including Rwanda, before the crisis; therefore, the African countries have had sufficient resources to implement policies that mitigated the impact of the crisis).  

In many advanced economies, however, the recovery has been slow and the unemployment remains high. In addition, the financial shocks of the past few months have had a negative impact on business confidence and forced some of the vulnerable economies to speed up their fiscal adjustment, and this can slow down the economy further.  

The key to strong and sustainable global growth is greater global rebalancing. Advanced economies, especially those under fiscal pressure, have to rebalance internally from the public to private sector (in other words, as the public sector spends less, the private sector has to spend more).

Externally, there has to be rebalancing of demand from advanced to emerging economies. The emerging economies—especially those that produce much more than they consume—need to encourage domestic demand. This way, the global demand is maintained at a healthy level at the time when advanced economies—those that consume more than they produce—may have to reduce their demand.

Looking ahead, what are the prospects and risks for growth of the Rwandan economy from your perspective?

The economy is projected to recover gradually. In the medium term, Rwanda’s economic growth (estimated at 7 percent) - will be driven by three factors.

First, the government’s strategic investments in infrastructure (ICT, Convention Centre, Internet backbone, electricity) supported by a more business-friendly environment.   

Second, the expected recovery in external demand- last year was particularly bad, as the global trade took a hit and demand for Rwandan goods weakened. In particular, prices for coffee and minerals were low. This had an especially strong negative effect on the production of minerals, which is price-sensitive.    But as the global economy recovers, so will trade and demand for Rwanda’s exports.   

Third, the pick-up in credit to the private sector, as the government is working on improving the business climate. There are, of course, risks to this outlook -- they stem largely from the slower-than-expected recoveries in external demand and in domestic credit.  Domestic demand is recovering but, very slowly. To sustain high growth you need strong domestic demand, and we do not observe it yet.


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