The International Monetary Fund (IMF) has said that the impact of the Russia-Ukraine war is expected to weigh on Rwanda’s economic recovery through deterioration in external conditions, including a slower pace of recovery in trading partners and further increases in international food and energy prices.
The impact will add to the lingering effects of the pandemic on the economy, and this is a challenge posed to countries around the world.
This was shared in the IMF staff’s preliminary findings after virtual discussions with the Rwandan authorities on policies to complete the sixth review under the Policy Coordination Instrument (PCI).
“Although the magnitude of the impact is difficult to foresee at this juncture…higher global energy and commodity prices will fuel inflationary pressure and widen the current account deficit further this year,” said Haimanot Teferra, head of IMF mission in Rwanda, through a statement.
Driven by rising food and global energy prices, in February 2022, year-on-year inflation picked up to 5.8 per cent. Officials from the National Bank of Rwanda said that the country had started experiencing inflation pressures even before the outbreak of the Russia-Ukraine war, much being from imported inflation.
“The National Bank of Rwanda should stand ready to take appropriate action to contain second-round effects of higher imported prices on inflation while also considering the evolving outlook for growth,” IMF staff observed.
“Exchange rate flexibility should be allowed to mitigate the impact of rising oil and food prices on the current account and safeguard reserves. Interventions in the foreign exchange market should be limited to minimise excessive exchange rate volatility.”
Currently, the central bank says that Rwanda’s reserves are equivalent to 5.3 months of imports, well above the IMF’s threshold of three months.
Teferra said that Rwanda’s medium-term outlook, while uncertain, remains favourable, supported by the authorities’ commitment to the sustainability of public finances and debt and continued structural reforms.
Immediate policy priorities are to preserve fiscal and financial stability and mitigate the impact of the ongoing external shock on the most vulnerable, IMF noted.
It added that in case of economic disruptions justify the need to further support to the affected groups or activities, the support should be temporary, targeted, and transparent as well as accommodated by reprioritizing current and capital spending to avoid significant budget deficit and preserve debt sustainability.
“Although non-performing loans remain low, credit risk continues to be elevated following the expiry of forbearance measures,” IMF stated that intensive monitoring of credit risk and prudent loan classification and provisioning will be key in containing financial sector vulnerabilities.
The banking sector’s aggregate net profit increased by 53.6 per cent to Rwf125.5 billion in 2021 from Rwf81.7 billion in 2020. From the stability perspective, improved profitability enhances the resilience of banks through internally generated capital to buffer against shocks.
Rwanda’s economy in 2021 grew by 10.9 per cent, a bounce back from 3.4 per cent of contraction in 2020.
Source: The New Times