Monetary policy and financial stability statement

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					Monetary policy and financial stability statement



             By KANIMBA François
                  Governor



                August,11th 2008



                                                    1
                          OVERVIEW

• ECONOMIC OUTLOOK in 2008
 International Economic Environment;
 National Economic Environment

•   MONETARY DEVELOPMENTS IN THE FIRST HALF OF 2008
   Inflation;
   Monetary aggregates, liquidity and interest rates;
   Exchange rates developments

•   FINANCIAL SECTOR REFORMS IN THE FIRST HALF OF 2008
   Banking system; Microfinance sector; NBFI sector
   Capital market;
   Payment system

• MONETARY POLICY AND FINACIAL SECTOR REGFORMS IN
  THE SECOND HALF OF 2008

                                                         2
           II. ECONOMIC OUTLOOK IN 2008
II.1. International economic environment
• Low global expansion due to financial markets crisis
• Emerging and developing economies less affected: grow
    at a rapid pace;
• The world is experiencing one of the worst inflationary
    shocks in the last 60 years;
• The USD stabilized in the second quarter of 2008 after a
    long period of depreciation;
• Fed Funds Rate cut continued to stabilize at 2% in the
    second quarter of 2008



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       II.2. National Economic Environment
• Good performance of the real sector in the first half of
  2008;
• Agriculture sector improved following government
  policies to increase the availability, accessibility and
  affordability of fertilizer to farmers,
• MINAGRI statistics show an increase of 19.2%;
• Sustained high level of activity in industrial and services
  sectors;
• The total turnovers achieved by large companies
  increased by 40.36%;




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                         CTD
• Imports rose by 56% in value and 4.3% in volume;
• Exports value and volume increased respectively by
  53.3% and 293.8%
• The higher increase in value is mainly due to the
  increase in import prices,
• The lower growth of imports’ volume (4.3%) is essentially
  due to the decrease by 30.1% of foods import volume;
• Government expenditure was in line with the
  budget: 18.5% increase compared with 2007;
• Capital expenditure slightly above the target: 23%
  increase compared with 2007;
• Revenue collection over performed by 11.9% compared
  with the target


                                                          5
 III. MONETARY DEVELOPMENTS IN FIRST HALF 2008
III.1. INFLATION
• The change of the overall price index by end June 2008 is 13.1%;
• The change in the index of locally produced goods and
    services(12.4%) and imported goods (15.8%) particularly oil and
    foods prices;
• Unit value of imported raw materials for local industries (24.6%);
• Rise in school fees;
• Rise in tariffs of transport;
• Some reforms in the environment sector;
• Increasing domestic and sub-region aggregate demand;
• Increasing in housing rent due to high increase in prices of
    construction materials.




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       II.2. MONETARY AGGREGATES, LIQUIDITY
              MANAGEMENT AND INTEREST
                                 RATES

• Moderate increase in broad money due to: NBR’s open market
  operations and transfers abroad by local investors;
• Credit to private sector:+13.8% (against +9% in the same period of
  2007);
• Currency in circulation out of banks: +14.6%;
• Deposits with banks : +2.8%;
• The growth of Currency in circulation(+14.6%) associated with a low
  growth of M2 (+4.4%) indicates a preference for people to hold cash,
  as a consequence of increase in inflation and seasonality factors
  (Coffee campaign)




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                               CTD
•   Excess liquidity persisted during the first semester of
    2008, but has been decreasing;
•   Government bonds were issued (RWF14.257 billion) and
    helped to transform a significant portion of government
    debt into medium and long-term dept;
•   NBR domestic debt reduced significantly from FRW 57.3
    billions on 31/12/2007 to 33.2 billions on 31/07/08;
•   Interest rates in the money market increased ;
•   The lending rates fluctuating around 16%, while the
    deposit rates and short terms T-bills rates have been
    pursuing their declining trend;




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      Table 6: Interest rate developments (in %)




                                               2007                     2008




                                       Jun      Sep    Dec      Mar            June


Mopping up rate                        5.59    5.52    5.26    5.20            6.79


Interbank market rate                  6.33    5.20    6.00    6.99            6.62
                        Source: DMMF

Weighted treasury bills rate           7.03    6.62    5.89    6.34            6.50


Deposit rate                           7.65    7.35    6.77    5.69            6.05


Lending rate                           16.03   15.84   16.10   15.59*          16.09*




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          III.3. Exchange rate developments
• Rwanda franc exchange rate stable in the first
  half of 2008 due to: Important inflows of budget
  support, Private transfers, Good performance of
  exports and Intervention policy of the Central
  Bank in the foreign exchange market;
• Slight appreciation of 0.9% against the $US
  during the first half of 2008,
• An appreciation of 3.3 % against GBPand an
  depreciation of 5.9% against Euro;
• Foreign exchange stock of the whole banking
  system : + 16.5%;

                                                 10
                       CTD


• Total sales of foreign exchange by NBR to
  Government and commercial banks:+51.6%;
• The current demand for foreign exchange
  indicates that the absorption capacity of the
  economy in 2008 is higher than the external aid
  the country has been able to mobilize.




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       IV.FINANCIAL SYSTEM STABILITY
IV.1. BANKING SYSTEM
• All banks respect the share capital requirement at
   30/06/2008;
• Consolidated assets increased by 5.2% from end
   December 2007 and end June 2008;
• NPL (Non Performing Loans) size reduced significantly
   from 14.3% to8.8% between December 2007 and end
   June 2008
• Overall solvency ratio increased from 15.1% to 16.6%
   during the same period against a minimum requirement
   of 10%;
• All banks comply with required solvency ratio of 10%,
   which vary between 14.7% and 23%;
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           IV.2. Ongoing Reforms in the financial sector

• The restructuring of banks in the first half of 2008:
 Access Bank from Nigeria acquired 75% shares of BANCOR;
 Three international Investors (BIO, Africinvest and Shore Cape)
  acquired 40% of COGEBANQUE;
 ADC acquired 25% shares in BRD;
 UBPR network transformed into a fully fudged commercial bank with
  RABOBANK acquiring 35% shares in the new bank;
 Barclays completed due diligence for the privatization of Banque de
  Kigali;
 BHR in a process to be transformed into a Mortgage Liquidity
  Facility;
 The new banking law has been published and the process to update
  prudential regulations is advanced.



                                                                   13
     IV.3. Opening New banks and expending bank
                   branches network


• A Kenya bank has been licensed to operate in Rwanda;
• Three bank branches were opened in the first half of
  2008;
• The new BPR has now 18 branches and 111 sub-
  branches and is expending its network of point of sale;
• The number of accounts opened with commercial banks
  increased by 2% in the first half of 2008




                                                        14
              IV.4. Microfinance Sector

• The micro finance activity has been significantly
  consolidated during the first half of 2008:
 Total assets: +17%;
 Total deposits: +23%;
 Total loans : +13%;
 NPL reduced by 3%
• A low governing micro finance activities adopted by the
  parliament and will be published in the gazette together
  with its implementing regulations;



                                                             15
                           CTD


• Two funds put in place for training of directors and
  managers and refinancing activities with a significant
  impact on poverty reduction;
• Creation of an association of micro finance institutions;
• An organizational and financial audit of big saving and
  credit cooperatives operating as networks is underway to
  improve their efficiency.




                                                         16
          IV.3. Credit Reference Bureau

• Compuscan which is a credit bureau from South Africa
  has accepted to operate in Rwanda. The project
  discussions with all stakeholders have been held and a
  partnership agreement is expected to be signed before
  the end of the year.




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        IV.4. Capital market developments
• The Capital Market Advisory Council was officially
  launched on January 31st, 2008 by H. E the President of
  the Republic;
• The government issued three Treasury bonds and
  another corporate bond was issued by the BCR;
• Secondary market operations have also taken place at
  the Rwanda OTC market (ROTC).
• To date, the bond market transacted a total turnover of
  Rwf 281,800,000 and the two active debt securities so
  far are the two 2 years government Treasury bonds that
  will mature in 2010 and a three years treasury bond. is
  also a 10 years BCR bond that will mature in 2017.


                                                        18
                           CTD
• CMAC is also working on the development of an
  appropriate legal framework for the capital market in
  Rwanda;
• A public education program is also underway.




                                                          19
      IV.5. PAYMENT SYSTEMS MODERNIZATION

• During the first half 2008, the National Payments Council
  (NPC) was put in place,;
• The National Payment Systems law and the National
  Payment System Framework and Strategy were drafted ;
• SIMTEL has been restructured and is earnestly working
  on the Rwanda Payment Card project;
• The NBR together with the World Bank are working to
  implement a real time settlement system-the RIPPS;
• The API is in the pilot testing phase with Electrogaz,
  BPR and BK.




                                                         20
  V. MONETARY POLICY AND FINANCIAL SECTOR
        REFORMS IN THE SECOND HALF
                   OF 2008

V.1. Monetary and Exchange policy guidelines in the
  second half of 2008

• NBR Will continue to closely monitor the monetary
  developments so as to minimize the adverse effects of
  money increase on prices;
• Foreign exchange sales to banks and Government by
  the NBR will continue to be one of the important
  instruments to regulate the liquidity within the Rwandan
  economy.


                                                         21
                          CTD
•  From the 8th August 2008, the REPOS operations have
  replaced the overnight and 7 days auctions;
• The NBR set the Money market reference rate at 8%
  (Key Repo rate) per annum and the inter bank rate
  corridor has been set to 125 basis points (1.25%) below
  and above the key Repo rate;
• In case shortage of liquidity in the banking system, the
  NBR will lend money to banks on a competition basis at
  a minimum rate equal to the upper limit of the inter bank
  corridor (9.25%),
• In case of excess liquidity, the NBR will absorb excess
  funds on a competition basis at a maximum rate equal to
  the over limit of the inter bank corridor (6.75%).



                                                         22
                            CTD
• The NBR last resort facility remains available: The
  interest rate to be applied on this facility is set at the
  daily clearing Repo auction rate plus a penalty of 2%;
• Banks and other investors have also the opportunity to
  invest in medium and long term debt instruments,
  namely T- bills and T-bonds at interest rates driven by
  the market forces;
• Prudent monetary policy is necessary but not a sufficient
  condition to achieve price stability in the current context.
  The fiscal policy and structural reforms in the real sector
  are also critical in this respect.




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 V.2. Reforms in the financial sector for the second half
                            of 2008
A. Banking system
•    Consolidating the achievements in strengthening the
     financial position of banks and putting in place a legal
     and regulatory framework in conformity with
     international banking supervision standards;
•    Continue efforts to reduce NPL level;
•    Opening of international operation by BPR
•    Opening of the newly licensed bank
•    Expansion of the branches network by current banks
•   Finalising the process of privatization of BK ;
•   Restructuring of BHR


                                                            24
                           CTD

B. Modernization of micro finance institutions
• Implementation of the two funds for finance training of
   directors and managers.




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      C. Non banking financial sector regulation

• Various laws will be drafted and submitted to the
  Government for approval:
 the law governing insurance contracts,
 the law governing compulsory/mandatory insurance,
 the law regulating Pension Funds,
 the law governing collective investment schemes.
• Financial and management audit of insurance
  companies;
• NBR will follow closely two new Government projects:
  Universal Medical Insurance and Rural Insurance
  Strategy.


                                                         26
          D. Capital market developments



• The city of Kigali is presently working on a
  municipal bond which they are planning to
  launch next month;
• There are also other companies that are
  planning to issue corporate bonds, in the near
  future.
• CMAC will continue to work on the development
  of an appropriate legal framework for the capital
  market in Rwanda;


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           E. Payment system modernisation



• National Payment System (NPS) Framework and
  Strategy will be passed by Government and published;
• Payment Systems law will be approved by the
  Government as well and sent to parliament;
• Securities holding law will be drafted to give legal
  protection and backing to securities operations;
•   RPC will be developed and tested;
• conclude negotiations with the winning company for the
  provision of the RIPPS software and sign a contract


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