A closer look at reasons behind Rwandan Franc depreciation

By Esther Muhozi
On 6 December 2023 at 03:51

The Central Bank of Rwanda (BNR) has drawn attention to the depreciation of the Rwandan currency citing multiple factors behind this, including trade deficit and the recent decision by the United States Federal Reserve to raise its base interest rate, which has contributed to this concerning trend.

Over the past few years, the Rwandan currency experienced a gradual depreciation of around 5% annually compared to major currencies, particularly the US dollar. However, the year 2023 witnessed a dramatic spike in this rate, reaching 13.5%, highlighting a pressing issue that demands attention.

The BNR reports that from January to September 2023, Rwanda’s trade imbalance widened to 12.2%, a significant increase from the previous year.

Professor Kasai Ndahiriwe, Director of the Monetary Policy Department at the BNR, shed light on the implications of this depreciation during a recent talk show aired on a local broadcaster.

Prof. Ndahiriwe emphasized that the decline in the value of the Rwandan currency has tangible effects within the country, where the purchasing power has eroded.

Inflation surged by 13.9% over the past year, considered a large percentage compared to BNR’s ideal inflation figure of less than 8%. This surge in prices directly correlates with the currency’s depreciation, impacting citizens’ ability to afford goods and services.

Prof. Ndahiriwe attributed the currency’s depreciation to the persistent gap between exports and imports, stating, "Our imports are still higher than our exports, which means that the inflows and outflows are not equal." He stressed the need for continued development, particularly in emerging industries under the ’Made in Rwanda’ initiative which continue to make imports as the country paves the way for self-sufficiency and international market competitiveness.

Highlighting external factors, Prof. Ndahiriwe pointed to the United States’ decision to raise base lending rates, which prompted investors to develop interest in the country looking for higher returns. This influx of capital into the US resulted in the strengthening of the dollar, causing a ripple effect in international markets, including Rwanda. Prof. Ndahiriwe expressed concern over the disproportionate impact of the US policy change on developing nations.

Despite these challenges, BNR has opted to maintain its repo rate at 7.5%, with a plan to stabilize rising prices within a range of 2% to 8%. This strategic move is part of the central bank’s broader efforts to address the economic imbalances affecting the nation.

As per current BNR exchange rates, the value of 1 US dollar is Rwf1248. However, it is purchased at Rwf1,235 and sold at Rwf1,260.