How Rwanda can reduce the growing trade deficit


How Rwanda can reduce the growing trade deficit

How Rwanda can reduce the growing trade deficit
Photo credit: The New Times

Rwanda’s trade deficit has been widening as the import bill continues to outpace export receipts. This has in turn continued to exert pressure on the local currency with the dollar gaining ground on the franc.

In fact, the local unit shed about 4.9 per cent of its value against the greenback in the first half of the year.

In 2015, the franc depreciated by 7.5 per cent, the highest depreciation recorded in Rwanda in last decade, according to the central bank. With export receipts dwindling and imports widening to fund mainly ongoing development projects, pressure on the franc seems unrelenting.

2016 first half performance

The central bank estimates indicate that the country’s formal imports grew by 3.3 per cent in value to $1,171.3 million, up from $1,134.1 million in the first half of the year. However, Rwanda’s exports revenue declined by 2.4 per cent to $268.6 million compared to $275.1 million recorded over the same period last year.

Export earnings had dropped by almost 6.3 per cent in the same period in 2015, driven by 36.6 per cent decline in mining sector export revenue, as well as tea and coffee, which shed 5.7 per cent and 9.2 per cent, respectively. According to the National Bank of Rwanda (BNR) monetary policy and financial stability statement released last week, the growing demand for imports has led to a 5.1 per cent trade deficit to $902.69 million in the first six months of the year, up from $858.98 million in 2015.

Experts say the poor performance points to hard times, the economic stability Rwanda has been enjoying over the past decade notwithstanding. Addressing this challenge as the country seeks to transform into a middle-income and self-sustaining economy in the medium-term.

How Rwanda can reduce growing import bill

The central bank attributes the mismatch between imports and exports to over relying on low-value export products, whose prices depend on the performance of the global market. The bank also says the growing demand for foreign goods, including capital and intermediate goods to sustain the ongoing economic growth, plays a big role in this mismatch.

Experts have now called for strategic measures to help reverse this trend, including increasing domestic production.

John Rwangombwa, the central bank governor, says there is need to increase local production of products, like cement, sugar, wheat and rice, as a matter of urgency to reduce imports of the said commodities.

“The contribution of such commodities to the import bill is high. Therefore, producing them locally could save the country up to $240 million in forex exchange,” Rwangombwa said while presenting the statement last week.

According to Emmanuel Ndahimana, a Nyamagabe District-based wheat production and processing expert, the country needs a two-pronged approach – increasing agriculture output and encouraging agro-processing to add value to local produce to “win customer trust”.

“We are currently conducting research on how we can maximise wheat production through value addition to reduce imports,” Ndhimana noted on Friday. Rwanda’s wheat production has been increasing at an average rate of 30.8 per cent annually since 2000.

Local producers, like Cimerwa, the country’s sole producer of cement, have already demonstrated how encouraging local production can greatly reduce the import bill. For example, the construction sector alone, the import bill is slowly reducing mainly due to the fall in importation of construction materials, which declined by 39.3 per cent and 40.2 per cent in volume and value, respectively.

This was thanks to a 135.2 per cent increase in the local production of cement during the first half of 2016 compared to the same period of 2015. The development saved the country almost $85 million in foreign revenue, according to BNR statistics. Cimerwa’s new plant in Rusizi District has the capacity to produce 600,000 tonnes of cement a year, up from 100,000 tonnes previously. This is enough to satisfy the growing local demand for cement that currently stands at about 450,000 tonnes, and the surplus exported to regional markets.

Other efforts

Government invested up to Rwf8 billion to boost rice production in Rwangingo marshland early this year. The project, covering 900 hectares of the marshland, is expected to increase output to 50,000 tonnes of rice per season when it is completed later this year. More so, Rwanda is expected to save up to $28 million (about Rwf20 billion) on sugar importation when Mauritian investor, Mauritius ACS Limited, starts production by the end of the year. The project is one of the priority investments the government is trying to ensure come on line this year.

Rwanda’s sugar demand is over 80,000 tonnes per year, but Kabuye Sugar Works, the country’s sole sugar maker, produces about 10,000 tonnes per annum though it has capacity to make 60,000 tonnes a year.

This has meant that the country has had to rely on sugar imports to meet demand. Therefore, a second sugar manufacturer will provide a huge relief to the country and greatly ease the widening trade deficit.

Alphose Nshimiyimana, a Kigali-based economist and entrepreneur, said encouraging local production should be complemented with increased local consumption. “It is through initiatives, like the Made-in-Rwanda campaign that can boost local consumption and help reduce on importation of goods that are produced in the country,” he said. He added that the campaign must target how to change people’s perception of locally-made products.

Last year, government launched a campaign to promote consumption of locally-made products. The Made-in-Rwanda campaign focuses on improving product quality, especially among small-and-medium enterprises (SMEs), to spur export volumes and receipts, besides encouraging local consumption.

Import substitution

The government has also launched a new initiative; the “Domestic Market Recapturing Strategy” that promotes the manufacture of some products, like medicine, shoes and fabrics, to recapture market that is fed by imports.

The initiative, according to Emmanuel Hategeka, the permanent secretary at the Ministry of Trade and Industry, is designed to encourage production and consumption of locally-made products.

“We have a comprehensive programme to intervene and encourage local production and consumption while we maximise on our exports through value addition,” he said. He added that streamlining informal cross border trade could also help reduce the country’s trade imbalance.