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What will it take to improve Rwanda’s trade imbalance?

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What will it take to improve Rwanda’s trade imbalance?

What will it take to improve Rwanda’s trade imbalance?
Photo credit: The New Times

Rwanda’s trade balance has been deteriorating over the years due to the continued higher import bill compared to export receipts.

The mismatch between imports and exports is mainly due to the continued reliance on low-value export products, whose prices depend on the international market dynamics and the continued excessive demand for foreign produced goods, especially capital and intermediate goods, to sustain the ongoing economic development.

However, increased production initiatives for some categories of imports such as rice, wheat and sugar whose domestic market is growing rapidly and whose contribution to the import bill is high should be reinforced.

This will be a game changer towards reducing the country’s import bill.

Formal imports decreased by 2.7 percent in value, to $2.2 million in 2016 down from $2.3 million in 2015.

The decline in formal imports value is due to a decrease in intermediary goods, which decreased by 16.6 percent and in energy and lubricants that registered a reduction of 15.7 percent.

Formal imports declined to 17.2 percent in volume due to decreasing volume of intermediary goods (unfinished products).

Government’s “Made in Rwanda” initiative seems to be paying off and according to experts, the campaign is key in correcting and balancing Rwanda’s trade books.

There is potential to produce most of the imported commodities locally which could have a huge potential and positive impact on Rwanda’s trade balance, according to experts.

For example, imports of cement, sugar, wheat, rice and second hand clothing exceed coffee and tea exports earnings. If produced locally they are expected to play a key role in narrowing down the country’s trade deficit.

Compared to 2015, Rwanda’s trade deficit narrowed by 5.9 percent in 2016, to $1.6 billion from $1.7 billion

This means the demand for imports decreased marginally driven by a drop in importation of consumer goods.

Many analysts believe the country’s economy will rebound fueled by the increasing commodity prices and increased local production.

The country’s total formal exports value, according to the National Bank of Rwanda (BNR) increased by almost 7.1 percent while total imports value recorded a modest decline of 2.7 percent during the same period.

Consequently, formal exports cover improved to 27 percent in 2016 against 24 percent which was recorded in 2015.

This is important for a country that is trying to grow its exports to an annual tune of more than 28 per cent on average.

Experts believe boosting local production while encouraging consumption of locally manufactured goods will boost exports and play a key role in trade balance, thus stabilizing the economy going forward.

The Central Bank governor, John Rwangombwa, says Rwanda’s trade balance improved with export cover of imports improving to 32 percent in 2016 compared to 28 percent in 2015.

This means that earnings from our exports in 2016 could only pay for 32% of all the goods we imported in the same period, compared to 28% in 2015.

More still, the improvement in the trade balance in 2016, does not take away the fact that Rwanda’s import bill continued to outstrip export receipts, exerting pressure on the economy.

“We have observed trade balance in the last three months of 2016 due to a slower decrease especially in traditional exports of almost 5 percent compared to the average decline of 21 percent registered same period in 2015,” Rwangombwa noted adding that the improvement was largely supported by good performance of the non-traditional exports category mainly driven by minerals and re-exports as well as the decline in imports.

Poor performance from formal exports

Meanwhile, the economy could have performed even much better had it not been the poor performance registered by the country’s traditional exports.

Rwanda’s traditional exports including coffee, tea, minerals, pyrethrum as well as hides and skins fetched $219 million in 2016 way below the target and less than $265 million earned in 2015.

The situation could have been much worse had it not been the boost Rwanda got from re-exports.

The country earned more than $224 million (about 37.5 percent of total exports) from re-exports in 2016 compared to $177 million earned in 2015.

Most of the re-exports were destined to Rwanda’s main trading partners including DRC, Burundi and Tanzania.

There are plans to ensure value addition to most re-exported products to make them more worthy before they can be re-exported.

This according to Ministry of Trade and Industry will translate into more revenues which will keep the economy more resilient.

Overall performance

Meanwhile, from Central Bank numbers, one can easily say that total exports recorded good performance in 2016, increasing by 7.1 percent in value ($598 million up from $558 million) in 2015.

In-terms of volumes, the sector registered a commendable increase of almost 19.3 percent driven by positive performance of non- traditional exports.

However, the sector suffered a setback due to a decline in coffee, tea and mineral exports.

For instance, coffee exports decreased in value by almost 5.7 percent from $62 million in 2015 to $58 million in 2016.

The decrease was mainly attributed to decline in coffee unit price of 4.9 percent, from $3.30/kg to $3.14/kg.

The sector registered a decline in volumes with a slight decline of almost 0.8 percent, from 18,793 tons in 2015 to 18,638 tonnes in 2016.

Equally, tea exports decreased in value by more than 12.5 percent, from $72.46 million in 2015 to $63.42 million in 2016.

This decrease was due to the decline in both the unit price and volume, as the former decreased by 11.5 percent from 2.94 $/kg in 2015 to $2.60 /kg in 2016 and the latter decreased by 1.1 percent, from 24,677 tons in 2015 to 24,415 tons in 2016.

Farmers say this affected profitability and ultimately house hold incomes.

Theopista Nyiramahoro, the Rwanda Coffee Federation chairperson, said performance was bad but is hopeful things will get better in 2017.

The governor has already reassured the public about economic improvements this year.

Last week, the central bank projected improvements in commodity prices and positive agriculture and export performance which will give a boost to the country’s economic growth in 2017.

Counting on the mining industry

Despite registering poor performance due to the fall in international commodity prices, experts believe the industry will bounce back in 2017 with improvements that will boost export revenues going forward.

This is important because the exported value of the main minerals including Coltan, Cassiterite and Wolfram declined from $117.81 million recorded in 2015 to $86.42 million in 2016.

Despite this poor performance, miners like David Bensusan, the Chief Executive of Mineral Supply Africa (MSA), is optimistic the sector will bounce back on account of rising prices in global markets.

He is however worried on how the Trump presidency in the US and Brexit in Europe will affect the sector.

“We have various agreements with companies in the US, but from the rhetoric we are hearing from the United States, no one can exactly tell how things will turn out, he said.

Andre Musabyimana, the president of a mining cooperative in Cyato sector in Nyamasheke district, says, they are counting on bankers to increase credit to the sector to help make it profitable this year.

Last week, Dr Diane Karusisi, the Bank of Kigali, chief executive, tasked fellow bankers to support the sector on optimism that prices were set to bounce back.

Karusisi expects banks to double support for exporters, especially in the mining industry, to help keep the trend positive.

In 2015, government launched the export growth facility fund as part of the strategy to boost exports and narrow down the widening trade deficit gap.

The aim according to Alex Kanyankole, the Development Bank of Rwanda chief executive,was to channel more than Rwf1 billion, through the Development Bank of Rwanda (BRD), to facilitate exporters especially through SMEs .

With the fund in place, exporters are expected to access the funds at about 8 per cent interest per annum, covering at least 50 per cent of the cost exporters incur as they try to seek new markets abroad.

However Kanyankole says it will take more than the fund to address the challenges exporters face.

He says increasing access to finance alone will not help unless stakeholders worked together to address other challenges.

Export targets by NAEB

The National Agriculture Exports Board (NAEB) is projecting to fetch more revenues from tea exports, from $65 million (about Rwf44.2b) to $147 million (about Rwf100b) by 2017, while coffee export earnings are expected to more than double from $73 million to $157 million during the same period.

This will however require concerted efforts including facilities like the Export Fund.

Government also plans to enhance honey, handcrafts and horticulture production and exports as part of the new strategy. Lack of access to affordable credit is only part of the problem, according to business analysts. The country’s export industry is still struggling with challenges, including, limited market, high taxes, poor export infrastructure and lack of skilled manpower.


Monetary Policy and Financial Stability Statement – 22 February 2017

Executive Summary

The world economic growth decelerated from 3.2 percent in 2015 to 3.1 percent in 2016 but is projected to improve to 3.4 percent by end 2017. Advanced economies grew moderately by 1.6 percent from 2.1 percent in 2015, reflecting lower than expected US economic growth in the first semester, a slowdown in Japanese economic growth and the expected effect of the Brexit on European economy. They are expected to grow by 1.9 percent by end 2017 as both advanced, emerging and developing economies are anticipated to improve.

Overall, growth in emerging and developing economies stabilized at 4.1 percent in 2016, the same level as in 2015, supported by high growth in emerging Asia while economic activity was subdued in commodity exporting countries. Growth in emerging and developing countries is estimated to improve to 4.5 percent in 2017 reflecting a recovery in previously distressed large economies.

In Sub-Saharan Africa, economic growth dropped to 1.6 percent in 2016 from 3.4 percent in 2015, particularly affected by lower commodity prices, droughts in South East African countries and the EBOLA disease in Western African countries as well as political tensions in some other countries. Supported by recovering commodity prices, the Sub-Saharan African economy is projected to recover, growing by 2.8 percent by end 2017.

Although still lower compared to the levels of 2015, prices for most industrial commodities are recovering, helped by improving manufacturing activity worldwide, particularly in China. Oil prices are expected to increase, backed mainly by OPEC’s effort to squeeze oil production. Prices are expected to hike for metals and minerals due to supply constraints, including mines closures, while trends are seen to remain mixed for agricultural commodities depending on supply conditions.

Lower commodity prices, together with weaker global demand kept inflation persistently low in advanced economies. In 2016, inflation was 0.7 percent, slightly higher compared to 0.3 percent in 2015. In 2017, helped by recovering energy prices and improving economic activity, inflation is foreseen to increase to 1.7 percent, but still below central banks’ inflation targets, pointing to continuous accommodative monetary policy.

Despite the aforementioned global and regional economic headwinds, the Rwandan economy performed well in the first three quarters of 2016. Real GDP grew by 6.1 percent on average in the first three quarters of 2016, against 6.9 percent recorded in the corresponding period of the previous year. This good performance was mainly driven by the service sector (+7.7 percent from +7.0 percent), with an average contribution of 49.7 percent to the real GDP during the period under review.

Leading indicators of economic activities indicate that the economy will grow by around the initially projected growth of 6.0 percent, from 6.9 percent in 2015. The Composite Index of Economic Activities (CIEA), in real terms, increased by 10.7 percent in 2016 but lower than 13.5 percent registered in 2015, while the total turnovers of industry and services sectors rose by 10.1 percent in 2016, lower than 14.1 percent registered in 2015.

Regarding external sector performance, Rwanda’s trade deficit improved by 5.9 percent in 2016, to USD 1649.7 million from USD 1752.5 million in 2015. Total formal exports value increased by 7.1 percent while total imports value recorded a decline of 2.7 percent during the same period.

Consequently, formal exports cover of imports improved to 27 percent in 2016 against 24 percent recorded in 2015. Despite the observed improvement in the trade balance in 2016, the import bill continued to outstrip export receipts, exerting pressures on the Rwandan francs exchange rate as the FRW depreciated against the USD by 9.7 percent y-o-y in 2016 compared to a depreciation of 7.6 percent in 2015.

In 2016, BNR maintained the KRR at 6.5 percent to ensure that the banking sector continues to finance economic activities while limiting inflationary pressures from the monetary sector. In line with economic activities, total new authorized loans to the private sector increased by 6.3 percent in 2016 compared to 13.7 percent in 2015; total outstanding credit to the private sector expanded by 7.8 percent in 2016, while broad money increased by 7.5 percent.

Headline inflation increased from 4.5 percent in January 2016 to 7.3 percent in December 2016. It went up from an average of 2.5 percent in 2015 to 5.7 percent in 2016, mainly driven by rising food prices and transport costs.

In line with the recovery in commodity prices, export receipts are expected to continue improving. Conversely, the import bill is likely to reduce following the increased domestic production of some products and the government’s “Made in Rwanda” initiative. Consequently, exchange rate pressures are expected to ease, reducing the pass through to inflation, albeit subject to the developments in food inflation.

The improvement in export receipts and the expected performance of economic activities will help to prop up the banking system liquidity, thus increasing the capacity of banks to scale up their lending to the private sector.

The Rwandan financial sector remained sound and stable in the year to end December 2016, despite a challenging macroeconomic environment. Assets and profits of Banks, MFIs, and the pension continued to expand, albeit at a slower pace compared to last year. The slowdown of growth in some key sectors of the economy reduced the lending space for banks and MFIs and increased NPLs. Nevertheless, the sector remains resilient and sound, largely due to strong capital and liquidity buffers held by financial institutions. Capital and liquidity levels of banks, MFIs and several insurance companies remained above the prudential requirements in December 2016.

Improved performance is observed in some insurance companies which were stressed in the early months of 2016 mainly due to unhealthy competition tendencies (price under cutting) and higher management expenses. These companies started recapitalizing in the third quarter of 2016 and their solvency conditions have improved. A number of other insurance companies are expected to recapitalize in 2017, which will strengthen the sector further.

Going forward, the BNR expects that recent reforms established will bolster performance and resiliency of the financial sector. Key reforms like the DGF establishment, the new capital requirements, the Umurenge SACCO automation and consolidation and the new directive on insurance business operations are expected to strengthen performance of the sector.

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