INTERVIEW : Rwanda’s response to the global financial crisis adequate

In its latest Regional Economic Outlook for the subcontinent that was released last week in Istanbul - Turkey, the IMF says that sub-Saharan Africa (SSA) is set for recovery. In an interview with Business Time’s Berna Namata, IMF’s Deputy Director for the African Department, Mark Plant puts the Rwandan Economy in context. Below are the excerpts: The IMF Team visited Rwanda in August; can you briefly talk about the current state of the economy? Our view is that it has been improving. In early March when I was there, there was a problem of lack of liquidity in the banking system and they were suffering effects of the global recession, food and fuel prices. We found they were taking several appropriate measures—one is that they have tightened up the monetary policy so interest rates are now in positive trend as they begin to attract deposits and lower credit demand which is a good thing. At the same time the government has taken a fiscal policy that is appropriate for a recession. What‘s your view about government’s response to the impact of the crisis? It has been good in the sense that interest rates had to become positive in real terms. At the same time with activity falling, for most governments, there is temptation to cut expenditure back and they did not do that. We see many governments have had to do deficit spending to make its long term spending finance stays in place and make sure the poor are protected as much as possible. We do not see so many gaps right now. We think the response is basically in the right direction. What are some of the key challenges to Rwanda’s economy? The key challenge right now is getting through the recession. Clearly the global recession has had an impact on Rwanda, tourism is down, the prices of tea and coffee are down, and there was initial drop in foreign investments. This puts the government in a difficult position.At the same time the Central Bank had been pursuing relatively lax monetary policy, with inflation going up they did not raise interest rates, and interest rates where negative in real terms so the private sector credit was overheating. At the same time you have the recession that is overheating going on, so it is difficult to balance. But they seem to have reversed well as inflation comes down, interest rates will become positive, and this will attract more money into the banking system. At the same time the government has been spending to ensure the continuity of its development plans despite some lack of money from abroad. Economic growth for Rwanda has been impressive over recent years with last year the country achieving double digit growth but due to the impact of global recession, it has been revised downwards to 5.3 percent. What needs to be done for Rwanda to get back on track to achieve high economic growth? That is a major impact of the World crisis on economies. Every one’s growth is going down. It is hard to say but in some way Rwanda is fortunate that growth has remained at 5.2 percent as many countries are having negative growth, so in per-capita terms Rwanda continues to grow and that is a great thing. Now what we have to do is get it back on a higher growth path. Part of that is going to be patience, wait until world demand for Rwanda’s products picks up again be it coffee, tea or Rwanda’s tourism services. I think that will come about as the world recovers. At the same time Rwanda has very serious infrastructure problems that it has to overcome. Right now it is very dependent on a limited number of exports for its income from abroad, so it is the time to diversify, to strengthen infrastructure, to strengthen human capital. The important thing is not to stop that because of the crisis and the government indeed has continued. What should be the priority areas of focus within the economy? I think Rwanda has to emerge from being a subsistence agricultural economy to an economy that offers the world more of its exports and attracts investment from abroad. To do that you have to first of all increase human capital , there must be more education, better health, better people to produce its products. But again it is making strides in that direction. You need to have better infrastructure. Rwanda is land locked so it depends very much on trade and moving things in and out of its borders. The most important component of this will be exploiting the regional markets. How is it possible for Rwanda to move away from Subsistence without enough resources given the fact that the national budget deficit has been increasing? Rwanda has to be mindful it has benefited from debt relief from the World Bank. It has to be mindful of its debt situation. It is in a sustainable situation and that’s a difficult squeeze that government is in because it has to do many things; increase infrastructure, increase human capital but not borrow too much. In order to do that either you do it very slowly or rely on Aid from abroad. I know Rwanda has benefited a great deal from aid, though I know your president views aid with a skeptical eye. But that’s appropriate thing too because aid can become a curse just like oil and you can become too dependent. You need to look outside for help but it should be very much like the inside for basic motivation for development which is something that I saw when I was in Rwanda. Do you think it is possible for Rwanda to become an aid-free economy? It is certainly possible. Don’t ask me when (laughs) but if Rwanda continues to grow and get back on track records growing at 11percent a year, which means its per capita income doubles every seven years, it can quickly become not economic sufficient but more and more self sufficient. There are countries in the world who have received development aid for a long term, look at Egypt, Israel they receive aid from America but they are all sophisticated economies. The important thing is you can continue to receive aid without being over dependant and that is what Rwanda wants to get to. I think this is achievable in the next five to six years where aid will help you but if it disappeared, you can continue to be on the development path. It all depends on what you mean by aid dependent. Aid receipt probably for a long time, aid dependant you can think of a medium term you can get rid of aid dependency. What are some of the lessons for low income countries like Rwanda out of the Crisis? I think one of the lessons that we are taking out of the crisis is be prepared for crisis. What we see in this crisis and that is the thrust of the Regional Economic Outlook is that – you see Africa in a much better position to absorb the impact of the crisis. Why? Because globally Africa has more reserves, so you have a cushion that you can use. It is just like when you put something on your savings account, if a rainy day comes, if you have your savings there you can get through the rainy day. Most countries also have a better fiscal position, instead of running a large deficit, they are running a small deficit. This means they have room to increase the deficit without getting into debt problems. At least for a short period they can cushion the impact of the crisis temporarily and hope to get out of it. In the past there were no reserves, there was no cushion and fiscal deficits were bad, making them worse could only make situation even worse, so there was no cushion. One of the lessons is that in good times do not over spend, put some money away for cushion purposes. Another good lesson is that if you have a cushion then you do not have to react with bad policies. What we saw in the past is that there are no reserve cushion, no foreign exchange cushion. What countries do next when foreign exchange is disappearing is to stop trade. This makes the economic situation worse because keeping trade open is a good thing. Not getting your self too much into debt. The other thing that countries did was to print more money, widening the deficit. We are going to finance it but there is finding extra finance, loans, let’s just print more money –keep foreign exchange and control inflation. You can not have inflation and recession at the same time. Africa generally has not done that. The third thing is to focus on the medium term development goals, even though it’s tough time not forgetting that countries like Rwanda have a long term development goals in place. They know what their development priorities are. Focus on the priorities and keep those goals going. It will cost you money, make you look more vulnerable but if you have got the cushion you can keep them going. You do not disrupt your long term medium plans. This is going to give you growth in the long term. What is the way forward in terms of the relationship between IMF and Rwanda? We have just concluded our Poverty Reduction and Growth Facility (PRGF) program, the sixth review was in August and we decided that the government wanted to look at its overall economic strategy and come back to us early next year to discuss whether or not our program will be appropriate and what kind of a program. We are open to that kind of discussion with the government.If the government is in dire need of money we can mobilise that money but it is really a discussion that we are yet to have in detail with the government. But we are there to support them with our policy advice and technical systems or if they need with our money. But I think advice and technical assistance are most important. And our discussions continue in a very fruitful way. Ends