Why Rwanda forex reserves could fall below IMF red line

Rwanda's foreign reserves are expected to fall below the East African Community’s convergence criterion of four months in the coming year, as the country taps the stockpile to finance the construction of Bugesera Airport.

But National Bank of Rwanda Governor John Rwangombwa says the import cover will remain above four months this year. This means it will remain above the IMF’s three-month critical threshold.

Data from the Ministry of Finance and Economic Planning shows the reserves will slip from $1 billion to $989.2 million, reducing the import cover to an average of 3.5 months in 2018.

The Bank is expected to draw down $109.5 million of its reserves in 2017, and business leaders expect this to put pressure on the exchange rate.

Account balance

In 2015/2016, when the reserves were under pressure due to falling exports, increasing imports and a dollar firming against the franc, most businesses registered a slowdown.

Commercial banks also took a hit from the worsening current account balance after recording a 70.5 per cent decrease in foreign assets. In absolute terms, the lenders’ assets decreased by $39 million in the 12 months to December 2015.

“We should expect the Rwandan franc to be under pressure as demand builds up for foreign currencies,” said Maurice Toroitich, managing director of KCB Rwanda. “This also means the reserves will not be deep enough to finance imports.”

But Mr Rwangombwa says the reserve levels are strong and projects that they will cover four months of imports until the end of this year. The reserves have been bolstered by the improving external balance of payments and growing domestic production.

Imported goods

This year, Rwanda expects $100 million, the last tranche of the $204 million Standby Credit Facility from the International Monetary Fund. The IMF made $102 million available for immediate withdrawal.

Implementing the “Made in Rwanda” policy has also encouraged domestic production of certain imported goods.

Foreign direct investment is also expected to expand by Rwf42 billion ($50.3 million) in 2017, an 18.6 per cent increase. This is expected to increase to $148.8 million, official data shows.

At least $67 million is expected as foreign direct investment and $81.8 million as external loans to finance Bugesera International Airport in 2018 and 2019 respectively.