The National Bank (BNR) has said it is ready to consider a more supportive monetary policy to encourage lending to the private sector to spur economic growth.
“The easing of inflationary and exchange-rate pressures and developments in aggregate demand give the central bank more room to implement a more supportive monetary policy to encourage the financing of the economy by the banking sector,” a statement by the Central Bank said.
In the first half of 2017, BNR maintained an accommodative monetary policy to continue supporting the financing of the economy by the banking sector, given that both inflationary and exchange pressures were expected to decline.
The Central Bank twice reduced its policy rate (key repo rate) between December 2016 and June 2017, from 6.50% first to 6.25% and then to 6.0%. The key repo rate is the rate at which BNR lends to commercial banks in the event of a shortfall of funds, and is used by monetary authorities to control inflation.
BNR ensured that the banking sector continued to finance the economic activities while limiting inflationary pressures from the monetary sector. As a result, outstanding credit to the private sector increased by 8.3% between December 2016 and June 2017 against 7.9% recorded in the corresponding period of 2016. Broad money increased by 11.1% compared to 6.1% during the same period and 14.0% projected in 2017.
According to the Central Bank’s latest monetary policy and financial stability annual statement, the financial sector experienced continued growth in the first half of 2017. Its total assets grew by 12.4% year-on-year by end June 2017 to Rwf 3.8 trillion. The assets of banks, the largest sub-sector, increased by 12.9% to Rwf 2.6 trillion; those of the pension sub-sector increased by 13.0% to Rwf 661.3 billion, insurance 10% to Rwf 365.6 billion, and MFIs 7.6% to Rwf 247.7 billion.
This growth was however relatively lower than the growth rate observed in the previous periods. For example, the assets of banks grew by 14% in June 2016 and have been growing at an average rate of 20% over the last seven years. The lower growth rate of assets for both Banks and Microfinance Institutions (MFIs) reflected a sluggish economic performance during the year 2016 and beginning of 2017. Yet according to BNR, despite the challenges, the financial sector remains sound, resilient and stable.
The capital and liquidity buffers of banks and MFIs are strong relative to current regulatory minimums. By end June 2017, the capital adequacy ratio of banks stood at 20.7% and that of MFIs at 33.3%, higher than the required minimum of 15%. Similarly, their liquidity ratios were 39% and 91% respectively, well above the required minima of 20% and 30% respectively.
However, the asset quality further as the rate of nonperforming loans increased from 7% in June 2016 to 8.2% in June 2017 for banks, and from 7.5% to 12.3% for microfinance institutions. To deal with this issue, BNR intensified onsite inspections and is working with senior management and boards of banks to ensure that loans are well underwritten and monitored.
Rwanda's economy grew by 1.7% in the first quarter of 2017, compared to 8.9% in the same period in 2016. This slowdown was mainly due to the completion of big construction projects which affected the performance of the industry sector (-1.0% in 2017 quarter 1 from 11.0% in 2016 quarter 1).
Owing to a long spell of drought, growth of the agriculture sector slowed to 3.0% in Q1 2017 from 8.0% of the same period last year. The poor performance recorded in industry was mainly due to the decline in the construction sub-sector with a share of 42.2%. This sub-sector fell by 7.0% in 2017 Q1 after increasing by 15.0% in 2016 Q1.
The poor industrial performance was also attributed to the mining and quarrying sub-sector which recorded a slowdown (-1.0%) as a result of reduced quarrying activities by 5.0% in 2017 Q1 after a growth of 14.0% in the corresponding period of 2016, despite improving mining sub-sector (+ 8.0% in 2017 Q1 from -1.0% in 2016 Q1) due to increased international prices for minerals and metals.
The reduced performance of the agriculture sector was mainly due to export crops that were negatively affected by unfavourable weather conditions and low international coffee prices. Consequently, export crops growth decelerated from 73.0% in 2016Q1 to -24.0% in 2017Q1.
Read this article and more in issue n° 78 of Hope Magazine.