Global Developments, European Crisis, and Rwanda

Dmitry Gershenson, IMFJune 6, 2012

School of Finance and Banking

Global Developments, European Crisis, and Rwanda

Dmitry Gershenson, IMFJune 6, 2012

School of Finance and Banking

Rwanda’s premier business school since 2002

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OutlineOutline

Global economy: cautious optimism What went wrong in the Eurozone Rwanda: strong growth, moderate

inflation Is Rwanda becoming less competitive?

Global economy: cautious optimism What went wrong in the Eurozone Rwanda: strong growth, moderate

inflation Is Rwanda becoming less competitive?

Global outlookGlobal 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

“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

Sub-Saharan Africa will remain among the fastest-growing regionsSub-Saharan Africa will remain among the fastest-growing regions

5International Monetary Fund, Regional Economic Outlook for sub-Saharan Africa, April 2012

Output Growth, 2012-13

Brakes on growthBrakes 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

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

The euro – what’s in a name?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.

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.

The euro – the central issueThe 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

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

The euro – complicationsThe euro – complications

Support systems were not in place to deal with the emerging crisis

Belated recognition of problems led to more problems

Support systems were not in place to deal with the emerging crisis

Belated recognition of problems led to more problems

The euro – the way forwardThe 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

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

Rwanda and the IMFRwanda 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

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

Third year of the PSIThird 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

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

Rwanda in 2012/13Rwanda 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

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

Productivity and real exchange rateProductivity 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

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

Is Rwanda becoming more or less competitive?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

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

Last word on competitivenessLast 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

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

In conclusionIn 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

Global recovery is uneven and subject to risks

Rwanda has been doing well Maintaining competitiveness and

sustainable current account are major medium-term issues