Rwanda Targets 7 Percent Growth Despite Inflation

Rwanda’s economy is expected to register seven per cent growth this year, despite pressure from increasing fuel and food prices.

Though inflation remained low falling to a record 0.2 per cent in December 2010 — the lowest in 10 years, with an annual average of 2.3 per cent — this year it is rebounding due to increase in food and transport costs. In June, for example, inflation rate accelerated to 5.8 per cent, up from 4.54 per cent the previous month, according to the National Institute of Statistics (NISR).

Finance Minister John Rwangobwa maintains the country is still on track to achieve its growth target this year.

“We kept our growth projection at 7 per cent instead of the 8 per cent that we had originally projected due to the effect of inflation,” he said.According to NISR, bread and cereal prices had the biggest increase of all measurable items last month, rising 6.1 per cent, while transport costs jumped three per cent.

“We had expected the fuel crisis to behave worse but it does not seem to be the case — it has been contained and our inflation has not had the speed that we expected,” Mr Rwangobwa said.

Following government reduction of fuel tax by Rwf100 ($0.161) per litre for both petrol and gasoil to mitigate the impact of rising fuel prices, the fuel prices of both petrol and diesel reduced to Rwf1,025 ($1.72) from Rwf1,067 ($1.799) effective June 1.

Tax reduction

The minister said the tax reduction on fuel is expected to maintain inflation in the 2011/2012 fiscal year at the projected 7.5 per cent by end of December.

“It is increasing but it is still within acceptable levels…. growing to around 7 per cent still there is no alarming situation that the central bank has to intervene.”

The National Bank of Rwanda recently kept its key lending rate unchanged at six per cent saying that after analysing the local and international economic situation, banking liquidity conditions, the current inflation rate would not pose a threat to the country’s macro-economic stability.

The economy has also been largely boosted by better performance of the agricultural sector.

According to central bank statistics for this year’s first and second quarters, the sector registered a decline in growth of 5.4 per cent compared with 11.4 per cent last year. The decline has been attributed to unfavourable weather in the East African region, which negatively affected Kenya, Somalia and Djibouti.

Irish potatoes and cassava showed high yield with an increase of 28.7 per cent and 5.5 per cent, respectively.

To deal with the increasing food prices, the minister said government is to purchase strategic stock to avoid any challenges in the next four months.

“What we see as the challenge is the famine in the Horn of Africa that could exact big pressure on our food production – we will make sure we create reserves that will take us through except if we have failed rains that will affect us,” Mr Rwangobwa said.

As of May this year, the non agriculture sector — service and industry — grew by 10.2 per cent compared with eight per cent in the same period last year, while industry and services grew by 37 per cent and 19.2 per cent respectively.

“I am fairly optimistic about the economic performance of Rwanda and I expect that the government target of at least 6 per cent GDP growth will be achieved despite the pressures of rising inflation … The rate of capital formation in Rwanda remains robust especially in infrastructure and housing,” KCB Rwanda managing director Maurice Toroitich said.

Stronger recovery

According to an International Monetary Fund country report released in June, Rwanda’s economic recovery has been stronger than projected and appears to be levelling off.

However, the IMF cautioned that heightened uncertainties due to rising global food and fuel prices pose threats to the recovery.

“This could dampen the growth momentum, resurrect inflationary pressures, and affect the pace of fiscal consolidation,”

The IMF said sustaining Rwanda’s strong performance over the medium term depends on government’s ability to entice foreign financing for the key investment projects essential for growth, the external environment and recovery in credit to the private sector.

Credit to the private sector is expected to expand by 19.2 percent this year compared with 11 per cent last year.

“This projection (7 per cent growth ) is based on the observed developments in the private sector, government’s fiscal stance, and assumptions about global economy,” the IMF resident representative Dmitry Gershenson, said.

He underscored that changes in any of the above underlying factors will affect the actual growth.

“For instance, if private sector or public sector spend less than envisaged, then growth may be lower. At this point in time, it seems that the main risks come from outside: Another spike in global fuel prices or a slower-than-expected global recovery could dampen Rwanda’s growth prospects,” Mr Gershenson observed.