Q&A:Global crisis affecting demand for Rwanda’s exports – IMF

Business Times’ BERNA NAMATA, interviewed GERSHENSON DMITRY the International Monetary Fund (IMF)’s resident representative to Rwanda, on the current state of Rwanda’s economy. Below are the excerpts: To what extent is the global financial crisis affecting Rwanda? Rwanda has been shielded from the crisis for several reasons including the fact that it is geographically far away from the source of the problem (the developed world). It has also been shielded because it does not trade a lot with the outside world. However, the impact is still evident. The most obvious one is that the crisis is affecting (reducing) demand for Rwanda’s exports as the advanced world has been hit hard by the crisis, and most of these countries are major markets for Rwanda’s exports. Commodity prices have also been going down. The number of tourists coming into the country has fallen, and the tourism industry is an important source of foreign currency for Rwanda. We should also expect reduced capital flows for investment including money coming in from Rwandans living abroad. In terms of numbers, last year, the economy grew at an impressive 11 percent. This year’s growth is projected at 5 percent. But if you look at composition of the GDP, growth is largely due to the boom in the agricultural sector. As a matter of fact most of the growth projected in 2009 comes from agriculture because it is not affected by the crisis; it can only be affected by rain and government policy. Therefore looking at the GDP as a whole, apart from agriculture, the impact of the crisis is much more pronounced. Liquidity pressures in local commercial banks have heightened this year, would you attribute this to the global financial crisis? Even though this problem is manifesting itself now, its root causes are not new. The initial problem has nothing to do with the crisis itself because the source of the problem is a structural imbalance between the amount of savings that the country can generate and its investment needs. The issue is that in Rwanda, like in many other developing countries , savings are low. The reason for this is obvious – Rwanda being a low-income country, when many people do not have enough money to spend on necessities, it becomes difficult to save. Even when people save, it is mostly for the short term. As a result, banks rely on short-term deposits, yet banks have to use these deposits as a source of money to provide longer-term loans to other people. This has created a maturity mismatch between short-term deposits and long-term investment needs. The situation has worsened because last year inflation spiked to 20 percent. This also discouraged savings and encouraged borrowing. What needs to be done? The Central Bank has to make sure inflation goes down, and it is already coming down faster than expected originally. There are other measures like reduction in the required reserve ratio (a fraction of the deposits that commercial banks must keep as reserves) but reducing inflation is very important. Government has announced a ‘stimulus package’ to waiver any external shocks resulting from the crisis. What is your take on this? From our perspective the stimulus package is appropriate because it comes at the right time when demand is low, and it makes sense for government to spend more. During “good times” you have to save for a “rainy day” and during bad times like now, you try to stimulate the economy by expanding deficit. The lower growth that you are likely to see in 2009 compared to 2008 is mostly driven by low demand. So it is upon government to stimulate demand and boost the output of the economy. What policy measures are needed to create economic stability? Rwanda is a very small economy and as such it can’t control what is happening in the world economy, it just receives shocks from advanced economies. What Rwanda needs to do and is already doing is to make sure that whatever shocks come, there is a cushion to protect it. For instance fiscally, with the expansion of the budget deficit, what is important now is how exactly to organise it. There are several ways to do it but most importantly is to make sure that the money is actually spent. The other question is how you spend it and on what – it is always good to spend money on something that will be useful in the long run, such as infrastructure. This has been one of the priority areas for government and increased investment in other areas will also boost demand. The projected budget deficit of about 2 percent of GDP is also consistent with debt sustainability and curbing inflation. Why is it important for the government to cut back its budget deficit? The deficit in itself is not a bad thing, although no country can run deficits forever. What is important is to think about how the deficit is financed and how the money is used. And for a developing country like Rwanda with large investment needs in all sectors it makes sense to borrow to invest in good projects. However, if you borrow to consume, it could be a problem because you do not boost your productive capacity; therefore it becomes difficult to repay your debts. But if you borrow to invest it means the GDP is going to be higher in the future and this will create more resources to repay your debts. In addition, as we’ve discussed earlier, in a situation of low demand, the appropriate short-term response for the government is to spend more. Ends