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Deflation: Why the Central Bank Won't Use Foreign Exchange Reserves


 According to the governor of the central bank, John Rwangombwa, this is the first time in twenty years that Rwanda has registered a depreciation in the double digits, with an aggregate sum that is currently greater than 12 percent. In the first half of 2023, the Rwandan franc experienced a depreciation of 8.8 percent versus the US dollar. This occurred despite the fact that global economic challenges are still having an impact on Rwanda's foreign trade.

The country of Rwanda has seen its trade imbalance continue to grow over the course of the past several years, reaching recent estimates of 23% in the time period under consideration. The difference between import and export was used to compute the trade deficit. This difference was derived from an increase of 18.5 percent in import bills in comparison to a rise of 11.2 percent in export revenues.

On the other hand, the NBR's international reserves have reached a level that is higher than the benchmark, which is 4.4 months of planned imports of goods and services worth of goods and services. Rwangombwa noted that the first aim of reserves is not to buffer depreciation because it happens based on the state of the market; rather, it is kept exclusively for emergent instances. 

The recovery of domestic industries such as manufacturing, construction, and commerce led to an increase in the demand for the dollar, which continues to play an important role as a significant means of commodities exchange globally. As a result, the value of the dollar increased on the international stage.

While many people would ask why the central bank does not use the reserve to restrict the depreciation, Rwangombwa stated that the initial purpose of reserves is not to buffer depreciation because it happens depending on the state of the market. "For example, during the Covid-19 period, we went from selling four million dollars per week to fifteen million dollars per week; that was an extraordinary situation." "In order to keep the market operating normally, we were forced to use some of the reserves," he explained.

Rwangombwa went on to say that even during this time period, "We increased the supply a little bit to around 10 million per week." The most recent data from the central bank indicate that the value of the Rwandan franc decreased in comparison to other major currencies. This includes a decrease of 13.9% against the pound, 10.7% against the euro, and a lower appreciation of 0.4% against the yen, after respective appreciations the previous year.

Within the area, the currency strengthened by 5.1 and 10.0 percent against the Tanzanian and Ugandan shillings, respectively. On the other hand, it appreciated by 4.5 percent against the Kenyan shilling and by 20.2 percent against the Burundian franc. However, the Swiss franc actually increased in value by 1.3% due to high domestic inflation exceeding the effect of weighted international inflation and nominal effective devaluation combined. This caused the Swiss franc to gain value in real terms.

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