Throughout 2011, keeping low and stable prices of goods and services was one of the most daunting tasks, globally, due to increasing oil and food prices on the international market. The situation was also a direct consequence of turbulences in financial markets, especially the Euro zone’s debt crisis as well as the political turmoil that swept some of the world’s major oil producing nations.
Exacerbated by a persistent drought in the horn of Africa, most East African countries recorded the highest inflation over several years, reaching double digits except for Rwanda.
Although Rwanda’s inflation increased, it was maintained at a moderate pace amidst high pressures from regional and global economies.
In December 2011, Rwanda’s annual headline inflation rose to 8.3 percent from 6.6 percent in September, 5.8 percent in June and 4.1 percent in March of the same year. In terms of annual average, it increased to 5.6 percent in December 2011 from 3.7 per cent in September, 2.5 percent in June, 2.2 per cent in March 2011 and 2.3 percent in December 2010. The increase was driven mainly by imported inflation.
How did Rwanda manage to achieve that? My analysis leads to four main factors.
Improved aggregate supply
The aggregate supply of goods and services has improved in all productive activities leading to an estimated real GDP growth of 8.8 percent in 2011 from 7.5 percent in 2010.
Special mention must be made of agriculture. Food production significantly increased by 11.3 percent on account of improved output in roots and tubers, which increased by 15.3 per cent and cereals which grew by 10.4 percent.
The growth in agriculture has been sustained over the last four years; thanks to the crop intensification programme premised on land use consolidation, use of fertilisers and improved seeds. Increased domestic food production resulted in mitigated food-borne inflationary pressures. Given the size of food stuff and non-alcoholic products in the consumer basket which is more than a third (35%), good performance in that category contributed to contained inflation overall.
Efficient monetary policy management
2011 was a year of sustained improvement in credit market conditions, which has led to a 27.5 percent increase in credit to the private sector in November 2011. Prudent monetary policy management ensured that this growth does not fuel inflation. The Central Bank managed to keep the growth of broad money supply to only 21 percent by end of November 2011. The biggest share of the loans went to finance productive sectors rather than consumption, a factor confirmed by the high growth rates in Industry and Service sectors which expanded by 15.1 percent and 7.2 percent respectively.
The prudent monetary policies also ensured that real interest rates remained positive to further support domestic savings and financial deepening. In response to rising inflation and persistent uncertainties in international and regional economic environment, the Central Bank decided to raise the bank rate to 7 percent in November 2011 from 6.5 percent in October 2011. Previously, the Central Bank policy rate had remained unchanged at 6 percent since November 2010, in line with prevailing economic fundamentals.
The Rwandan franc was stable, having depreciated by just 1.6 percent against the US dollar and 1.5 percent vis-à-vis the British Pound, while it was quite stable against the Euro with an appreciation of 0.4 percent. This stability was explained by sufficient capacity of the banking system to respond to domestic demand for foreign currencies.
The fact that the franc appreciated against other EAC countries’ currencies was mainly the consequence of the depreciation of those currencies vis-à-vis hard currencies. The franc appreciated by 2 percent, 5.8 percent, 3.9 percent and 2.2 percent against the Kenyan shilling, Tanzanian shilling, Ugandan shilling and Burundi franc respectively. This appreciation against regional currencies has been one of the key factors that limited the pass-through of higher regional inflation to domestic market, as Rwanda remains a net importer.
Well-coordination of fiscal and monetary policies
Alongside prudent monetary policy instruments aimed at avoiding excessive money supply, on the fiscal policy side, the Government not only maintained the budget discipline, but also took additional actions to mitigate exogenous supply shocks. It is in this spirit that the Government decided to progressively reduce fuel taxes to contain increasing pump prices. Equally the Government put in place measures to reduce the price of sugar. Also, earlier during the second quarter, the Government had taken required administrative measures to overcome unfair speculative behaviour on domestic food markets that, if not properly handled, could have led to unnecessary supply shocks.
Economists and policy makers may find the Rwandan experience very informative in these four and many other areas. As the National Bank of Rwanda is determined to maintain single - digit inflation in 2012, it is everyone’s hope that sister central banks in the region will sustain the good work they are currently doing to get the regional economies back on track.
The author is a Manager, PR & Communications at the National Bank of Rwanda.