Over
the past four years, the Government has engaged
reforms within all the different sectors of the
economy and especially the financial sector. In
this regard, can you give our readers a brief overview
of the economic and financial performance of Rwanda?
This country has faced a serious socio-economic
crisis in 1994 and therefore after the genocide
the economy was in a bad shape. Since 1995 Rwanda
took an extensive rehabilitation program with the
new government and I think since then, there has
been significant progress.
First, in terms of GDP, the agricultural sector
has risen mainly due to the return of refugees and
the prospective security existing in the country.
This indeed has produced a significant increase
in the agricultural sector. Available statistics
indicate that the agricultural output in 2001 went
already over the pre-war levels.
Second, the service sector in the country has also
risen like the telecommunication sector. We now
have mobile phone operators coupled by the state
owned fixed phone system. The financial services
have been growing with the creation of three new
banks after the war. Many other urban services like
restaurants, transport, health care, skin care…
improved dramatically with more liberalization and
new skills brought in with the return of old case
refugees who came back since 1994.
The industry sector has a mix of opinions as far
as performance is concerned. After the 94 events
the country took on the liberalization policy. Most
of the industries set up in the early 60's up to
90's were designed in a macro-economic environment
that favored protectionism. So now with liberalization
in place and with the removal of some tariff barriers
such companies have had many problems especially
to compete in the external market. Most of them
are restructuring and adjusting to the new demands.
Therefore while the industrial GDP rate has been
relatively small for the past 6 years, we do expect
a greater change in the coming years.
The government, since 1995, has been able to mobilize
the international community for funding and that
has kept on even after the emergency period is over.
This financial assistance has contributed to a great
extend to stabilized some financial indicators like
the exchange rate. The rate was relatively stable
since 96 to 99 though some bit volatility was experienced
in 2000; but became stable again in 2001-2002
The government has also implemented a very prudent
fiscal policy. While the government is under a lot
of pressure to provide the enormous social needs,
it has limited the expenditure on the available
resources and did not crowd out the private sector
for getting funds from the banking sector to run
businesses.
This has in a way helped to contain inflation because
when you look at 1995, inflation was up to 95% and
now it has been contained at 4% for the last three
years. Our expectation for 2002 is that the inflation
rate should be contained at 3%. The monetary policy
conducted by the Central Bank especially focused
on controlling excess liquidity in the financial
sector will help us keep inflation at a low tune.
Now the question is how can one maintain this sustainability.
International financial assistance has been very
instrumental in the recovery and when you look at
the export performance, a lot more is still needed.
The export ratio was hit by a fall in the export
figures on coffee and tea. Good enough is that the
tea export statistics have risen sharply though
the sector still faces a problem of low prices on
the international market. Coffee production has
declined by 50% due to the war and also the pathetic
prices of coffee.
These two combined caused a sharp drop in external
incomes to the economy. Regarding the trade &
Current acc deficit, which percentage of the GDP
do you target for 2002?
The current deficit account stands 16%. This is
a problem and we are trying to mobilize both local
and foreign investors to diversify our exports.
We stand chances in the horticulture industry like
the vegetable, fruits and flowers. Also, the privatization
of the tea industry combined with the restructuring
of the coffee sector created incentives for private
investment to increase the output and improve the
quality.
The tourism industry is also another area of interest.
At one moment before the 1990-1994 war, the tourism
sector was contributing as much as $ 40 million
to the national economy. I think we should embark
on a comprehensive program to rehabilitate the industry,
create new tourism products and make an extensive
advertisement and marketing to improve the tourism
area.
Some countries have reduced the corporate tax
as an incentive for investment; does your country
have such similar plans in the future?
The corporate tax in Rwanda is really very high
at about 40% of the company net income. The Government
already decided to put it at 35% in 2003, which
I believe is still big enough. I would personally
put it at even 20% because when you even look at
the net income coming from these taxes, they amount
to about FRW 10 billion and I think the Revenue
Authority should collect more with a reduced rate
by simply extending the tax base, which is currently
understated by small companies to pay less.
We have to keep in mind that there is strong competition
among regional countries to attract investors. So
I believe the objective of Rwanda should be to adopt
a lower level of corporate tax to induce foreign
direct investment.
Have you also introduced new regulations on minimum
reserves and capital adequacy ratios for example?
After the genocide we embarked on a restructuring
plan with the banks since most of all were running
bankrupt. Our restructuring programs involve the
government, the bank shareholders and the Central
Bank itself to contribute to the rebuilding of the
financial capacity of the banks. |
For example,
after the new fiscal law passed in 1997 the government
put in place favorable provisions regarding bad
loans and this contributed to a great extend towards
strengthening the financial capacity of the banks.
The law also introduced new capital adequacy ratio
based on international standards as set up in the
bank of international settlement. This required
that each bank possesses an adequacy ratio of 8%
and this was very difficult for the banks.
When we started our restructuring measures with
each bank, we set up a timetable for each bank to
reach the required adequacy ratio on time. One of
the measures was not to allow any bank to issue
out any dividends until this target was reached.
The banks were also advised to ask the principal
shareholders to increase their share capital in
case the target was short of.
The Central Bank has also increased the minimum
required capital for setting up a commercial bank
from FRW 300 million to 1.5 billion. So all these
measures have been some of the mechanism put in
place to uplift the banking sector.
Most National Banks use the interest rate as
the main instrument of their monetary policy. Can
you tell us to what extent interest rates are a
significant indicator of the health of the financial
sector in Rwanda and how would you describe the
impact of your monetary policy on the inter-banking
system?
Before Rwanda started on a structural adjustment
supported by the IMF and the World Bank, we used
to embark on a monetary policy based on direct control.
Now the dramatic change is that we use indirect
control measures that exist in 3 elements, otherwise
the interest rate has been liberalized.
The Central Bank has come up with a new mechanism
imposing commercial banks to deposit a certain portion
of money in the Central Bank called the reserve
requirement ratio. The Central Bank can use this
instrument to regulate the increase in broad money
through distribution of credit by the commercial
banks. So whenever we see that there is excess liquidity
in the financial market, we can increase the Reserve
requirement ratio and vice versa.
We have also created the Money Market that is operated
on a weekly basis. We do an auction to absorb excess
liquidity if there is excess. When the liquidity
is small and money aggregate indicators are declining,
we inject more liquidity through the auctions. This
system harmonizes the interest rates amongst banks
and also enhances competition.
What measures are you putting in place to improve
the quality of banks' portfolios?
One big question we are looking at is how to help
the banks overcome the issue of bad loans. However
recovering the bad loans will depend entirely on
the economic recovery and the legal environment
of the country. In Rwanda, there is a big problem
with the Judiciary -very long procedures- and there
is, secondly, the problem of genocide related cases.
This is precisely why commercial court issues were
given second priority. But we are now pushing for
a new specialized commercial court.
The government has come with the reestablishment
of the mechanism where banks realize mortgage without
going through the entire legislative process.
Has the government studied the possibility of
creating an asset recovery institution that would
take over all the bad loans collection from the
banks?
We have been discussing the issue of setting up
an asset recovery institution. Some people do believe
that such vehicle should be very useful but the
Central Bank has held a different opinion due to
the fact that such a company can not be that more
efficient in recovering the bad loans that the banks
themselves.
We do prefer a different alternative because at
moment there is a big difference in terms of achievements
amongst the banks. Therefore if government borrows
money to buy bad loans from some commercial banks,
it could cause moral hazards.
Government has gone ahead by de-fiscalising provisions
made by the banks. The well-managed banks have achieved
great progress through these provisions than the
poorly managed ones. So, basing on this we do prefer
a direct restructuring action with banks facing
such managerial weakness. In this frame work there
should be recapitalizing of the banks but still
remains with the task of recovering the bad loans.
What do you think is the general feeling of the
banks on this situation?
Every bank is doing much to fight the crisis. They
are optimistic that if the legal environment to
recover the bad loans improves a lot will be achieved.
The government and some donor agencies like World
Bank are helping to restructure the legal environment.
The banks for sure sound optimistic about the future
and the opinion is based on the credit demand they
have been acquiring from potential clients with
investment projects.
The commercial banks are also very happy with the
new monetary policies because they are more flexible
and transparent than in the past.
You have recently been appointed as Governor
of the National Bank. Can you tell us more about
your professional background and what brought you
to become Governor?
I did my basic training in statistics and economics
in Paris. I did work in virtually all-key positions
in the Ministry of Economic Planning since 1983.
In 1990 I was appointed Director General of Economic
Policy and it is from here that I got in touch with
the Bretton Woods institutions. I later on worked
in the World Bank as a chief economist based here
in Kigali. Then two years ago, I was appointed by
the government as the vice-governor of the Central
Bank later on rising to the full position of Governor.
|
