ECONOMY : Balance of trade deficit is the next big challenge

Rwanda’s trade deficit went up 20 percent in 2009, it was a bumpy year with the overall with the global slowdown casting a shadow. We are faced with the options of reducing consumption or increasing exports. The truth is we need to do both, but reducing consumption is immediately crucial because increasing exports will take time.

Rwanda’s trade deficit went up 20 percent in 2009, it was a bumpy year with the overall with the global slowdown casting a shadow.

We are faced with the options of reducing consumption or increasing exports. The truth is we need to do both, but reducing consumption is immediately crucial because increasing exports will take time.

This is the first big test for our new Finance minister John Ryangombwa, how tough can he get on imports? The treasury is getting more revenue from taxing imports but this is having negative effects in building our deficit.

We have to see a massive rise in import duties to restrict imports of non-essential goods.

This will cause some discomfort in the retail sector that relies on imports and well as the urban middle-classes but it will be beneficial in the long run. The recent reduction in liquidity will check spending in the short term but there is a chance of imports rising continually.

Our import culture has other effects such as pollution, as well as killing our own industries. I often wonder why all the biscuits sold in Rwanda are imported, and taste of chemicals.

Can no Rwandan think of starting a biscuit factory? It is the most basic type of manufacturing that is somewhere beyond us. Then we import them from China and India and tax them low enough to sell at 50frw.

No Rwandan Biscuit maker can compete with that. So we need some kind of export-substitution but a method that begins at the grass-roots. In the past we always opted for larger projects which ended up as white elephants. We need to encourage small-medium manufacturers and slowly get down our deficit.

We have to divert this demand for foreign goods into local goods. Most of our trade agreements restrict punitive tariffs but some kind of carbon tax must be levied to reduce mileage and encourage local and regional trade. Most of what we import can be produced here, and cheaper while providing jobs.

We have to increase our import duties to match the deficit, and make the import duties variable according to the annual deficit rate. That way we can react quicker to changes in demand and supply, turning the tap on and off as we need to.

One immediate effect might be inflation as retailers pass on the increase to customers, but the demand will shrink after that. We also have to make it easier to invest here, the banks charge you a punitive fee for a 10-second transaction.

A person wishing to invest $20,000 will pay $750 in transfer fees or even more. Investors often prefer to smuggle money into Rwanda to avoid the punitive banking system. Imagine criminalising an investor who wants to build this country.  

One practical measure the minister can take is to remove the charge banks levy on all money transfers. That 3.5 percent might be the profit margin of a venture, the negative effect in investor confidence outweighs the 3.5 percent profit to the bank.

Standing up to the banks will be his biggest test this year, to effect more than the cosmetic changes we have seen. They have new buildings but the mindset is still the same and won’t change itself. Someone has to change it.

ramaisibo@hotmail.com

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