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Financial crisis spares Rwanda, but indirect effects expected

Finance Minister James Musoni remains optimistic that the country will largely escape the global financial turmoil. (photo Timothy Kisambira)The global financial crisis is set to have negative impact on developing countries, especially in Africa, although the effects might not be as severe as in the USA and Europe. In the case of Rwanda, the financial sector will be affected indirectly, Finance Minister James Musoni said last week.

The global financial crisis is set to have negative impact on developing countries, especially in Africa, although the effects might not be as severe as in the USA and Europe.

Finance Minister James Musoni remains optimistic that the country will largely escape the global financial turmoil. (photo Timothy Kisambira)
Finance Minister James Musoni remains optimistic that the country will largely escape the global financial turmoil. (photo Timothy Kisambira)

In the case of Rwanda, the financial sector will be affected indirectly, Finance Minister James Musoni said last week.

“We have assessed the situation in Rwanda and have found that there is no direct financial impact on the Rwandan financial sector,” he announced after a consultation meeting with leaders in insurance, banking as well as social security.

“Our banks and insurance institutions are still solid, and the current financial turmoil will not lead to closure of any bank,” he said.

That is not to say, however, that the crisis does not affect the country. Prices of Rwandan exports are falling, for instances, with coffee prices plummeting by 23%, due to the fact that about 20% is exported in the US. Other coffee exporting markets such as Kenya and Burundi have also been hit by the falling prices.

On the other hand, the crisis is expected to reduce the inflow of investors into the country, especially from countries that have been hit most. “Yet so far we have seen no signs of investors reducing investments,” Minister Musoni said.

However, the Kenyan newspaper Sunday Nation, in its latest edition, reported that Crown Berger has put on hold plans to start production of paint in Rwanda, slated to begin end of this month, due to the financial turmoil in the US. Mr Rakesh Rao, chief executive officer of the firm, said the company will begin operations in January next year, according to the newspaper.

“Part of the machinery that was to be installed for the production has been delayed because of the crisis. If we are to go ahead with the plans, the costs will have gone up by about 70 per cent,” Rao is quoted as saying.

The company had secured operational certificates to establish a paint manufacturing plant in Rwanda, as part of its regional expansion plans, and put in Sh31.5 million.

Budget support

With the foreign capital inflows the country has been enjoying, a slow or reversal of the financial flows could retard or even postpone much needed infrastructure investment in the country.

Another risk is that development partners might reduce their aid packages. In Rwanda, more than 50% of the national budget comes from development partners, yet Minister Musoni assured that this support is not in danger.

“The biggest contributors to the national budget, such as the World Bank, have not been affected by the financial crisis. Some countries that offer assistance on a bilateral basis have been hit, but they represent only a small percentage,” he said. “Donors have already ensured us that they will honor their commitments.”

Therefore, the Finance Minister expressed optimism that the Economic Development and Poverty Reduction Strategy (EDPRS) would not be affected, even though it relies partly on development partners such as the World Bank and United Nations agencies.

Rwandan banks are also unlikely to suffer from the global financial crisis, given that they raise their capital mainly from domestic accounts. Moreover, the inter-bank market between Rwanda and other countries is still very small.

And even though some commercial banks have foreign ownership, their parent banks are not situated in areas that have been hit the worst such as the US.

The Minister also pointed out that the global financial crisis has some positive side-effects. For instance, there has been a reduction in food and fuel prices, as a result of reduced demand.

He pointed out that, in general, the African continent looks safe as its stake n the global economy is still limited. This is shown by the fact that African economies are often more affected by local issues rather than global ones.

However if the global financial situation continues to worsen, the negative effects are likely to be felt on the continent. The main causes are likely to be the acute reduction of exports prices, reduction in investment and foreign capital inflows.

Tight regulations

The greatest concern for the country, James Musoni remarked, is the resurgence of inflation as well as macroeconomic imbalances—already it was recently announced that the inflation had reached 20%.

Moreover, Rwanda has a huge trade deficit of about 18% of the GDP due to the increase in the prices of imports which outweigh exports, the prices of which are declining.

The Minister was nevertheless optimistic that these would be short term phenomena, pointing out that the reduction in fuel prices coupled with the increase in harvest could lead to a 40% reduction in inflation, which is mostly imported.

Concerning the housing market, the Minister remarked that the American problem had been caused mainly by slack regulation where banks issued housing loans sometimes without any tangible collateral. In Rwanda, on the other hand, tight regulations prevent banks from going under due to non-performing loans, he said.

The governor of the National Bank, François Kanimba, recognized however that these tight regulations also have a downside, in that they limit the number of people able to access housing loans.

“There are reforms going on to improve the people’s purchasing power and the time which banks can give their clients to service their loans,” Kanimba explained, adding that there are also plans to restructure the way banks issue mortgages.

The governor explained that apart from the savings scheme operated by the Social Security Fund, there are plans to set up a new saving scheme which would facilitate low-income earners to get access to housing loans. “The feasibility studies have been conducted and we expect it to be operational soon,” Kanimba said.

Monitoring committee

To monitor and assess the situation of the global financial crisis and come up with measures to mitigate its impact on Rwanda, a committee has been set up. It includes representatives of the finance ministry, the National Bank, heads of commercial banks, heads of insurance institutions and microfinance.

They will meet on a monthly basis to review the evolution of the global financial crisis and adopt measures to protect Rwanda’s financial sector against the worst setbacks.

The committee will share information in order to prevent capital flight where money would be pulled out of the financial system by investors. It will also make sure that none of the institutions invests in areas that have been affected by the financial turbulence.

Furthermore the committee will be tasked to employ macroeconomic measures that will tackle inflation and stimulate investment.

Last but not least, François Kanimba remarked that the Government could consider coming to the rescue of banks should the financial turmoil hit them, just as the governments elsewhere in the world have done.

Posted by on Oct 27 2008. Filed under National. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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