Central Bank explains franc depreciation

Leave a comment / By: manifel / 13 November, 2020 13:52:39PM
Central Bank explains franc depreciation

Recent months have seen the market value of the Rwandan Franc against the dollar depreciate fast with the rates in a majority of forex bureaus nearing Rwf1000 for Dollar.

The subject was on the agenda of the Central Bank’s quarterly Monetary Policy Committee (MPC) meeting, held on Wednesday, November 12 to review recent economic developments globally and nationally as well as potential interventions. 

The Central Bank found that in the 10 months of the year ending October 2020, the Franc had depreciated against the dollar by 4.4 per cent compared to 4 per cent in the same period in 2019. 

The bank however said that the foreign exchange market is expected to remain stable with adequate foreign exchange reserves covering 5.8 months as of end October. 

John Rwangombwa, the Central Bank Governor told The Imbereheza that the nominal depreciation of the franc edging towards the Rwf1000 mark was bound to happen driven by the economy structure.

Given the structure of the economy and trade deficit, depreciation of about 4 or 5 per cent is an expected trend.

“That is normally expected for an economy with a structure like ours. If anything, we would not want to fight depreciation without real economic fundamentals supporting it because that would create an artificial value of the currency making it uncompetitive globally,” he said.

Market forces drive and determine the value of the franc.

In 2020, the trend seemed to have been accelerated due to a rising import bill, low commodity prices for exports and reduced earnings from tourism.

“The government was able to mobilize resources to deal with the Covid-19 crisis which gave us deeper reserves and we are able to put some more interventions in the market to support the demand,” he said.

As opposed to fighting depreciation which is market-driven, he said that interventions are targeted at reducing the shortage in the market and avoid instances of artificial shortage by those who would like to benefit from the situation.

The intervention has been through increasing the supply of dollars in the market.

“We have more than doubled our supply to the market since October and we have seen the market coming down more than it was before,” he added.

 This is expected to curb any speculative tendencies that could come about as a result of a few forex operators trying to take advantage of the trend by hoarding dollars and selling them at a higher rate.

The Central Bank has standard regulations for forex operations as well as selling dollars to financial players. Last year, it was estimated that between $4 million and $5 million was being sold by the Central Bank to support demand, a figure which has since gone up.

The Central Bank also maintained its Key Repo rate at 4.5 per cent with an aim to encourage continued lending to the private sector to support economic recovery following the Covid-19 pandemic which has caused economic slowdown.

The key repo rate is the maximum rate at which commercial banks invest their money at the central bank.

The Central Bank noted that the pandemic had seen Gross Domestic Product had decreased by 12.4 per cent in the second Quarter but indicators point to improved performance in the third quarter as economic activity picks up.

The total turnovers of industry and services sectors were found to be improving but are still below last year’s levels.

For instance, industry turnover for the third quarter grew driven by demand in construction material spurred by construction of schools, healthcare centres and roads among other infrastructure.

The service sector on the other hand continues to bear the brunt of the pandemic but contraction easing in the third quarter as more services resume.

Inflation stood at 9 per cent in the third quarter of 2020, higher than the Central Bank’s desired levels out of the effect of the transport price shock.

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