May 18, 2022/Cordros Report
We initiate coverage of the Rwandan economy and discuss our views on growth, inflation, balance of payment, currency, monetary policy and fiscal policy.
Domestic Economic Activities Recoup Pandemic Losses
As with other world economies, the Rwandan economy grew by 10.90% y/y as of 2021FY (2020FY: -3.37% y/y), given the continued domestic economy reopening and government support. Meanwhile, favourable base effects underpinned the moderation in domestic prices by 0.83% y/y in 2021FY (vs 2020FY: +7.74% y/y). Simultaneously, the Current Account (CA) deficit as a percentage of GDP settled at 11.0% as of 2021FY (2020FY: 12.1%) due to an improvement in remittance inflow as the secondary income balance grew by 21.9% y/y in line with improved global mobility and employment conditions.
The RWF depreciated by 3.7% at the end of 2021FY to RWF1,019.61/USD (December 2020: RWF982.10/USD) primarily due to significant FX pressure emanating from higher imports amidst the improvement in domestic economic activities. In April 2020, the MPC cut the key policy rate by 50bps, supporting commercial banks to continue financing the economy and mitigate the COVID-19 shock on the Rwandan financial sector.
The Committee left the rate unchanged at 4.5% throughout 2021 but increased it by 50bps in February 2022 to contain the rising inflationary pressures. The fiscal deficit settled at 8.2% of GDP in 2021 (2020: 9.2%) as revenue (17.6% y/y) rose faster than expenditure (9.5% y/y) during the period.
Domestic Economy to Remain Stable amidst Twin Deficit
We expect the Rwandan economy to grow slowly in 2022E (6.62% y/y vs 2021E (10.90% y/y) in line with the (1) fading base effect from the prior year and (2) sustained government fiat-led intervention in the real sector. Similarly, we expect inflation to average 10.73% y/y in 2022E (2021FY: 0.83% y/y and 2020FY: 7.74% y/y). In addition to the impact of the base effects from the prior year, our view is hinged on the troika impact of (1) currency pressure, (2) increased demand and (3) higher international commodity prices.
That said, the reopening of the economy and increased infrastructural spending imply an increase in total imports. Similarly, total exports are expected to benefit from higher international commodity prices. Accordingly, we expect the moderation in the trade balance deficit to underpin a fairly stable CA deficit at USD1.22 billion in 2022E (2021FY: USD1.21 billion). In absolute terms, this translates to 10.2% as a percentage of our projected 2022E nominal GDP (2021FY: 11.0%).
On the currency, we expect the RWF to settle at 1103.79/USD by the end of 2022E, given our expectation of increased FX demand from corporates and foreign investors. We expect the MPC to increase the key policy rate further by 50bps to (1) mitigate potential foreign outflows as global central banks hike rates and (2) re-anchor domestic inflation expectations.
Lastly, we expect the fiscal deficit to narrow in the 2021/2022 fiscal year compared to the 2020/2021 fiscal year, given improved revenue mobilization amidst a moderate increase in expenditure.
