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1. Global Developments,
European Crisis, and Rwanda
Dmitry Gershenson, IMF
June 6, 2012
School of Finance and Banking

2. Rwanda’s
premier business
school since 2002
www.facebook.com/SchoolofFinanceandBanking www.twitter.com/SFBRwanda

3. Outline
 Global economy: cautious optimism
 What went wrong in the Eurozone
 Rwanda: strong growth, moderate
inflation
 Is Rwanda becoming less competitive?

4. Global outlook
 “Optimism has returned, but it should
remain tempered” (World Economic
Outlook, April)
 Global economy is projected to grow at
3.5 – 4.0 percent
 Africa to grow at 5.0 – 5.5 percent

5. Output Growth, 2012-13
International Monetary Fund, Regional Economic Outlook for sub-Saharan Africa, April 2012 5

6. Brakes on growth
 In advanced economies:
Fiscal consolidation – lower demand, lower
growth
Bank deleveraging – tighter supply of
credit, lower growth
 Additional global risks:
Possibility of another crisis in Europe
Oil price shock

7. The euro – what’s in a name?
 By definition, a single currency area
implies common monetary policy for all
member countries
 A single currency area should also be
supported by consistent fiscal policies
and uniform financial regulations
 The former was in place; the latter was
not.

8. The euro – the central issue
 Consistency of policies was mandated
but not enforced
 Nevertheless, introduction of the euro
created an illusion among the investors
that all member countries are “the
same”
 The countries that did not pursue
prudent polices could, therefore, avoid
market scrutiny and borrow cheaply

9. The euro – complications
 Support systems were not in place to
deal with the emerging crisis
 Belated recognition of problems led to
more problems

10. The euro – the way forward
 Assistance to the weakest members
 Measured fiscal consolidation in order
to achieve sustainability without
excessive decline in demand
 Monetary easing
 Bank recapitalization, including with
public money

11. Rwanda and the IMF
 Rwanda is in the second year of a
successful three-year PSI program
supported by the IMF
 Main elements of the PSI are revenue
collection, moderate inflation, and
strong financial sector

12. Third year of the PSI
 Small increase in the revenue-to-GDP ratio
(to 14 percent), in line with original program
targets
 Small increase in deficit (due to foreign-
financed capital expenditure)
 Room for wage increases in the public sector
comes from cuts in gov’t purchases and from
domestic financing
 Gradual monetary tightening to keep inflation
in single digits

13. Rwanda in 2012/13
 Favorable macroeconomic outlook, but
with notable risks
Strong growth, moderate inflation (7 – 8
percent)
Should global risks materialize, revenue
and inflation objectives may be in jeopardy

16. Productivity and real exchange rate
 Balassa-Samuelson: as a country becomes
more productive, its currency appreciates in
real terms
 Rwanda franc has been appreciating in real
terms at an average of 3 percent per year
since 2004
 Total factor productivity (TFP) has been
growing at about the same rate

17. Is Rwanda becoming more or less
competitive?
 Rate of real appreciation equals rate of TFP growth
 However, real exchange rate is a relative concept:
appreciation means Rwanda is becoming more
expensive vis-à-vis other countries
 TFP has been growing in other countries too:
Rwanda’s relative productivity growth has been
less than 3 percent.
 In other words, Rwanda may be getting more
expensive faster than it is getting more productive

19. Last word on competitiveness
 Sustained real appreciation means Rwanda
is becoming a more expensive place to do
business
 The key issue is whether Rwanda’ relative
productivity rises fast enough to support the
observed real appreciation; further analysis is
needed
 History tells us that many of the sustained-
growth countries had a depreciated currency
in real terms

20. In conclusion
 Global recovery is uneven and subject
to risks
 Rwanda has been doing well
 Maintaining competitiveness and
sustainable current account are major
medium-term issues