Forex bureaus: indicators of the state of Rwandan economy?

Economics is a great subject. It takes attributes of the physical sciences to tell you things as they are, just as a physicist would. This is called positive economics.
Sam Kebongo
Sam Kebongo

Economics is a great subject. It takes attributes of the physical sciences to tell you things as they are, just as a physicist would. This is called positive economics.

It combines this with aspects of social sciences, which deal with things as they ought to be (normative economics). Further, it has historical, present and predictive aspects to it. You can put in place economic policies to achieve a specific outcome unlike law where, almost always, new laws are enacted to arrest something that has already become material.

In order to make these policies, we need to know the economic trends, thus the need for economic indicators.

An economic indicator is simply any economic statistic, such as the unemployment rate, GDP, or the inflation rate, which indicate how well the economy is doing and how well the economy is going to do in the future. An economy is the aggregate business cycle (the total of purchases and sales) over time.

 Investors use this kind of information to make decisions. If a set of economic indicators suggest that the economy is going to do better or worse in the future than they had previously expected, they may decide to change their investing strategy.

From a predictive perspective, the first person to get accurate interpretation of economic indicators and use it well in decision-making, usually benefits the most.

Understanding economic indicators demands that we understand the ways in which economic indicators differ.

There are three major attributes each economic indicator has:  Relation to the business cycle / economy where indicators can have one of three different relationships to the economy, viz: procyclic, indicator is one that moves in the same direction as the economy. So, if the economy does well this number usually increases, and in a recession it decreases. Gross Domestic Product (GDP) is a procyclic economic indicator. The second is countercyclic (or countercyclical): that moves in the opposite direction as the economy like unemployment; the unemployment rate gets larger as the economy gets worse. The third, Acyclic, has no relation to the health of the economy and is generally of little use.

For the indicators to be useful, the data has to be as useful as possible. That is why in most countries GDP figures are released quarterly (every three months) while the unemployment rate is released monthly. Some economic indicators, such as the Rwanda Stock Exchange Index, are available immediately and change every minute.

Timing is another important aspect of economic indicators. They are either leading, lagging, or coincident which indicates the timing of their changes relative to how the economy as a whole changes. Leading economic indicators change before the economy changes. For example the stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future.

Lagged economic indicators change direction until a few quarters after the economy does. For example unemployment rate is a lagged economic indicator as unemployment tends to increase for 2 or 3 quarters after the economy starts to improve.

Coincident economic indicator is one that simply moves at the same time the economy does such as Gross Domestic Product and its associated indicators.

It made me wonder if there is a simple way of ‘feeling’ the economic trend. Like the activities of our foreign exchange bureaus. Are they also indicators as to the state of our economy?  They certainly show us who we trade with and who we do not. Carry Burundian Francs and shillings from the other three East African countries and you will know what I mean. We tried this and it was a thousand times easier to change the US Dollar. When we finally got a place to change Kenya Shillings; the rates were, to put it politely, out of touch with reality.

This indicates that we are not trading much with our neighbours. The lack of East Africa’s currencies in our Forex bureaus can be a procyclic, coincidental indicator of the fact that we do not trade with each other much. This negatively impacts on our business cycle as we are losing out on huge opportunities.

This is an unnatural, if unacceptable state in business. It also presents a great opportunity.... any takers?

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