Q&A: EXCLUSIVE: Governor predicts growth despite finanical storm

The global economic downturn has had effects on African economies. Rwanda has not been an exception. The Business Times’ JOHN GAHAMANYI interviewed FRANÇOIS KANIMBA, the Central Bank Governor about the state of the Rwandan economy, practically the banking sector which has scaled down credit due to liquidity challenges. Below are the excerpts  

The global economic downturn has had effects on African economies. Rwanda has not been an exception. The Business Times’ JOHN GAHAMANYI interviewed FRANÇOIS KANIMBA, the Central Bank Governor about the state of the Rwandan economy, practically the banking sector which has scaled down credit due to liquidity challenges.

Below are the excerpts    

Qn: How is the current global economic recession affecting Rwanda?

There are a number of channels through which the Rwandan economy is being affected by what is going around in the global economy.

Following the decline in GDP growth worldwide, the global demand for goods and services Rwanda from to the global market has been declining and the prices have been affected.

For example, in minerals the prices of tin came down dramatically by approximately 40 to 50 percent, coffee prices have not been doing very well…even if there is some recovery.

In terms of exports, these are the two commodities that have been mainly affected but for the remaining commodities as well, the prices have been volatile but with along term trend to stability.

Because of the decline in the prices of these commodities, the net receipts we got from our exports came down as well.

Apart from export of goods, exports of services are also somehow affected. I am told that even if we don’t have clear numbers, the tourism industry, particularly hotels, the turnover came down quite significantly.

In Kigali city, when you talk to hotels they tell you they don’t see major slowdowns in their activities because conference tourism has been quite stable. But the flow of tourists in general has been declining.

Private transfers in different forms taken together have been declining as well. When you look at the average monthly volume of transfers coming in through our banks, the level during the first half of 2008 reached an average of $110 million per month while in the time being they are in the range of $95 million per month.

It’s a significant decline. But when you look at different components of these transfers, surprisingly, the remittances coming in Rwanda have not declined. There is quite a significant increase in 2009, in the range of 25 percent comparing the five first months of the year 2008 and 2009.

However, private transfers by enterprises have been reduced significantly. When you look at numbers of private transfers to churches and NGOs, there is no clear indication in terms of increase or decrease. It will be in the same range like last year.

So, all this information taken together we can say that the external inflows coming into the country from private sources, from export of goods and services, enterprises or individuals there’s a decline.

However, on the expenditure side this global crisis will have some positive effects. There is a general decline in the global oil prices even if recently there has been a slight increase. But in general the levels of oil prices this year compared to last year are significantly low.

The prices of other categories of imports being food, other final consumption goods, intermediate goods and construction materials have reduced, which means the cost of our imports has reduced as well.

Assuming the volume remain constant, I think this will mitigate a little bit the loss from declining private inflows from the different sources.

Qn: On public transfers, do you expect donor countries to cut their aid support to Rwanda since they have been hit by the recession?

As you know the government of Rwanda has been getting increased budget support from the international community. When you compare this year with last year, there is no decline even if some bilateral and international financial institutions have disbursed their budget support with some delay.  

But from the discussions with our partners, they have confirmed that their commitments will remain coming.

So, my reading of the numbers at this time is that even if there should be a net negative balance from private transfers, I think the increase in public aid can offset this potential negative balance at a point where I don’t expect to close the year with a significant balance of payment.

There are different tendencies but overall, in terms of our external operations, I think we are confident that we will have the resources to continue financing the economy in an appropriate manner.

Qn:  Do you expect the current account deficit to reduce?
The trade balance in 2009 will be negative. Even the deficit will be higher than last year. There is no doubt about that. But as I mentioned there are other likely financial inflows which can compensate, particularly those related to remittances and public aid at a point where we can close the year with a balance of payment which is in equilibrium.

Qn: The Rwandan franc depreciated by only two percent in 2008. How do you expect it to perform this year?

It was stable last year; it depreciated during the second half of the year. But when you look at the trend in the first half of 2009, there was a continued depreciation up to February 2009 but it became once again stable up to now.

Qn: Liquidity has tightened in the banking system. What is the cause ?

These different trends related to the global financial crisis are interfering with the banking business in some-way. If you do remember, we have been talking about liquidity problems since December 2008.

The analysis we made from the underlying factors behind the liquidity crunch in the banking system in Rwanda showed that the problem originated mainly from the rapid increase of credit distributed by banks in 2008 at the time when growth of deposits in the bank were slowing down.

Banks did not realise that there would be a mismatch problem. They continued to extend long term credits to some sectors, particularly in the construction.

There are many factors why the deposits in 2008 went in such a way.
The most significant one is that large institutions like the Social Security Fund of Rwanda (SSFR), some insurance companies, and large companies like MTN, Rwanda Investment Group (RIG) started to implement their big investments hence cutting down their deposits with banks.

This was one of the major reasons why deposits in the banking system were growing very slowly compared with the trend in the past years.

There are other reasons behind the decline in deposits in the banking system. Actually, the declining inflows I mentioned earlier. When you look at the trend, the slowdown in external inflows started sometime in July 2008.

You know when these transfers that generally came through the banking sector started deteriorating, they automatically affected the deposits in the banking system. I think this is the first effect of the global crisis in the banking system which was not captured earlier.

Unfortunately, it was in December 2008 and January 2009 when banks started to face tightening liquidity conditions that we started to seriously look at it. Even here at the Central Bank we had not closely captured this slow-down trend in transfers which interfered with the liquidity at that time.

Thirdly, there was huge inflation last year, linked to what was going on in the global economy.

Qn: So, what strategies have you put in place to restore liquidity in the banking sector?

The central bank has taken some steps to facilitate banks to cope with the crisis. You are aware of some measures we have taken like the reduction of the reserve requirement ratio to release part of the banks reserves with the central bank.

I think this has been extremely useful to allow banks to continue doing lending operations but at the same time we agreed with government that short term Treasury bills should not be rolled over at maturity.

So the government has been paying back a significant amount of money as these government short term Treasury bill were maturing.

But also at the same time while some donors have been delaying to disburse the budget support in the first quarter of 2009, the government has continued to spend based on its 2009 mini-budget up to June. The level of public spending has facilitated building liquidity in the banking system as well.

All these measures combined have facilitated the liquidity in the banking system to build again. As we are talking now the volume of reserves that banks have at the central bank in my understanding are quite enough to allow banks to continue lending operations without major bottlenecks.

Qn: Why then is the public saying that banks are no longer lending? 

I know the banks have been operating in a panic mood since January when they faced very tight liquidity conditions and they have somehow changed their behaviuor in terms of risk analysis.

They put more attention to study long term lending application from the market even for some kind of loans like mortgages. Now they require a minimum down payment which was not the case last year.

People have been complaining that banks are no longer lending. Actually it’s not true. Banks are lending through when you compare the volume of new loans in 2009 and 2008, in the first five months of the year, there is a significant decline.

People complain because banks changed their beahviour. But the most important thing is that liquidity has been built though but banks don’t think this is a stable liquidity which can allow them distribute significant amounts of long term lending.

Apart from these liquidity issues, I think banks are factoring within their operations the current global environment.

People are saying the global economic recession is reaching our country. this creates uncertainty around the operations of the banking sector because banks start to wonder if the loans they have been distributing in the last few years will ever be paid back.

In such kind of environment, it is normal that banks don’t increase lending to the economy. They are in such the wait and see while continuing to keep minimum operations with their major clients. This is briefly what is happening in the banking industry.
Qn: Government is talking about helping local banks to access lines of credit. Is this strategy viable considering the foreign exchange risk that could increase interest rates?

It’s true we have been encouraging banks to go around the region and internationally to borrow money from international financial institutions to get credit lines to sustain lending their clients.

All of them have started negotiating such kind of facilities and a recent survey showed us that the volume of credit line being negotiated now totals around $70m. Agreements can be signed in the coming six months.

The banks fully know the foreign exchange risk they are taking but I think they have been encouraged by the stability of the exchange rate of the Rwandan franc.

As you know in the last five years the Rwandan franc has been very stable with even a slight range to appreciate vis-a-vis the US dollar. even in the recent period while other currencies in the region were extremely volatile, the Rwandan franc kept some stability. I think this has encouraged banks to take the risk.

You know the foreign exchange risk is a question of the magnitude of the risk; the banks can include the risk in interest rates they charge their clients. But also some international financial institutions like the African Development Bank, European Investment Bank have shown interest lending local banks in the local currency.

Yes, they charge higher interest rates which means they already factor in the interest rates in the foreign exchange risk. But at least the banks can borrow with certainty about what the cost is.

Am told the European Investment Bank wants to lend Development Bank of Rwanda and Bank of Kigali at 11 percent in the local currency. This is still very high but it’s better than nothing.

When the Minister of Finance was reading his budget speech, he promised that if need arises the government can move in to inject long-time liquidity in the banking system.

We have been working on that and we have identified some categories which we consider long-term loans that justify why government can assist banks at least to keep sustained lending or delivering such kinds of loans to the citizens.

We have identified four categories of loans. The first one is loans to acquire productive vehicles like big vehicles for international transport, the second category is mortgage lending, the third category is equipment leasing.  The last one is general investment lending.

At the end of each month they (banks) will make a statement of each amount of money they have disbursed in these four categories of loans and government will deposit in each bank an equivalent of the amount they have disbursed.

It will be a long-term deposits probably up to five years but which will be paid back progressively over time.

It is always a risk when the government injects liquidity in the banks but I do not think we are at this stage.

But when you look at the behaviour of the aggregate of credit to the private sector since January, it has been flat which means it is a problem.

Normally the aggregate credit to the private sector should be kept growing. But if it is flat it reflects serious issues, which means that the economy is not growing as well.

Qn: The limited liquidity also partly reflects an investment gap in the banking sector. Are you likely to license new banks this year?

Following the licensing of Kenya Commercial Bank, we got two regional banks from Kenya requesting to begin operations in Rwanda. in the (meantime) the board of the Central Bank has set a new licensing criterion.

Taking into account the regional financial integration process, there is a big risk for small local banks. If they are not given a chance to have an economic base, they will possibly disappear in the next five years.

If we completely open up the market and allow these regional banks from Kenya, Uganda to operate to create a regional network without involving the local banks we will end up creating problems for Rwandan banks.

That is why in our new licensing criteria for these regional banks we will require them to look for local banks to partner with. This will facilitate the local banks to be part of the regional network.

This does not means we have closed the door for these banks which are coming in our market. It is only in the last two to three years that we have seen a dramatic growth in the sector, we have been seeing new banks coming in but when you look at what they are doing, all of them are concentrated in a small range of products targeting the same clients, the few corporates that we have.

They are very few banks that have been coming with innovative products and services for rural people who have limited or no access to financial services.

That is why in our new licensing criteria, a bank should come in with a business plan showing a new  innovative strategy, showing that they want to go into the rural areas. Such a bank will be allowed to operate without requiring it to merge with another local bank.

Equity bank officials from Kenya are present in the country. It is a Micro Finance bank which has been one of the fastest growing in Kenya.

Now they are established in Uganda, Southern Sudan and the next market target is Rwanda. This is exactly the kind of bank.

Qn: Inflation has come down in the recent months. Does this reflect a decline in the cost of living?  

 Inflation is coming down dramatically. But inflation coming down does not mean we don’t have it. Last year it peaked above 20 percent but we think it will close to the range of six or seven percent maximum.

But still it is a price increase of six percent compared to last year. If people’s incomes have not increased in normal terms we can not say that inflation going down has improved the livelihood of the people, all we can say is that it has not significantly deteriorated.

That is the meaning.