Yesterday a government-controlled newspaper published an article whereby the central bank governor, John Rwangombwa, acknowledged that inflation was out of control and that Kagame’s regime had no idea what to do to slow it down.
The governor went on stating other misleading statements such as, “inflation has no impact on the economy or on the currency in general.” This is a direct quote.
First of all, anyone can see the negative impact of inflation on the economy, I don’t need to explain that. Simply put – If you can’t afford food and basic necessities, you may eat less or cheap/unhealthy and your body can’t function. Productivity goes down. If a manufacturer cannot afford raw materials, they will produce less (which decreases GDP) and the country will have to import more finished products to compensate, which increases trade deficit. Meanwhile trade deficit is already a problem for Rwanda as the governor acknowledged in the same interview.
Things get a bit tricky when it comes to the effects of inflation has on currency exchange rates. However, the trade deficit noted above can help better understand the impact of inflation the exchange rate. Trade deficit means that Rwanda is importing more than it is exporting. If Rwanda exports less, that means there’s less demand for Rwanda’s currency, which drives its value down. Simple rule of supply and demand. Countries with higher inflation typically see depreciation in their currency in relation to the currencies of their trading partners. For instance, when Rwanda imports more goods from Kenya, Rwanda is actually increasing demand for Kenyan Shilling, which drives the value of the Shilling higher relative to the value of the Rwandan Franc. Worse yet, higher inflation and the resulting currency depreciation will normally be accompanied by higher interest rates!
For those interested in getting more technical, refer to Cost-Push Inflation vs. Demand-Pull inflation.
The lies about inflation effects and GDP growth are part of a concerted effort by the Kagame’s regime. These false statements are intended to boost Rwanda’s image abroad as Rwanda gets ready to issue yet another gigantic eurobond that would get Rwanda’s public debt above and beyond the level where it was about 6 years ago, when the debt was forgiven. Based on the above explanation and the climate of financial crisis currently reigning inside Rwanda, it would take a miracle for GDP growth rise from 4.6 last year to 7% by the end of the 2014 as the governor falsely claims. Investors beware of Kagame’s living beyond his means and Rwanda’s high default risk.
After we sharply criticized the governors’ statements, the newspaper was quick to take the article offline. We have retrieved the deleted article, courtesy of our friends at Google who keep a snapshot of all lies and deceptions by Kagame’s regime – no matter how hard he tries to burn the evidence. There are footprints everywhere.