Introducing A Semi Structural Macroeconomic Model For Rwanda

We develop a simple semistructural model for the Rwandan economy to better understand the monetary policy transmission mechanism. A key feature of the model is the introduction of a modified uncovered interest parity condition to capture key structural features of Rwanda’s economy and policy framework, such as the limited degree of capital mobility. A filtration of the observed data through the model allows us to illustrate the contribution of various factors to inflation dynamics and its deviations from the inflation target. Our results, consistent with evidence for other countries in the region, suggest that food and oil prices as well as the exchange rate have accounted for the bulk of inflation dynamics in Rwanda.

Low-income countries in sub-Saharan Africa present unique monetary policy challenges, from the high share of volatile food in consumption to underdeveloped financial markets; however most academic and policy work on monetary policy is aimed at much richer countries. Can economic models and methods invented for rich countries even be adapted and applied here? How does and should monetary policy work in sub-Saharan African? Monetary Policy in Sub-Saharan Africa answers these questions and provides practical tools and policy guidance to respond to the complex challenges of this region. Most countries in sub-Saharan Africa have made great progress in stabilizing inflation over the past two decades. As they have achieved a degree of basic macroeconomic stability, policymakers are looking to avoid policy misalignments and respond appropriately to shocks in order to achieve stability and growth. Officially, they often have adopted "money targeting" frameworks, a regime that has long disappeared from almost all advanced and even emerging-market discussions. In practice, though, they are in many cases finding current regimes lacking, with opaque and sometimes inconsistent objectives, inadequate transmission of policy to the economy, and difficulties in responding to supply shocks. Monetary Policy in Sub-Saharan Africa takes a new approach by applying dynamic general equilibrium models suitably adapted to reflect key features of low-income countries for the analysis of monetary policy in sub-Saharan African countries. Using a progressive approach derived from the International Monetary Fund's extensive practice and research, Monetary Policy in Sub-Saharan Africa seeks to address what we know about the empirics of monetary transmission in low-income countries, how monetary policy can work in countries characterized by underdeveloped financial markets and opaque policy regimes, and how we can use empirical and theoretical methods largely derived in advanced countries to answer these questions. It then uses these key topics to guide policymakers as they attempt to adjust food price, terms of trade, aid shocks, and the effects of the global financial crisis.

This 2014 Article IV Consultation and Second Review Under the Policy Support Instrument highlights that Rwanda’s economic performance since the turn of the century has been remarkable. Strong policies have played a key role in maintaining real GDP growth at 7.8 percent on average since 2000, with significant poverty reduction. The economy is recovering from the disruptions induced by aid suspension through mid-2013, with growth bouncing back in the first half of 2014 and inflation well contained. Growth in 2014 is expected to be about 6 percent, rising to the longer-term growth rate of 7.5 percent in the medium term.

This book analyzes evolution of monetary policy in Rwanda since it was first implemented by the National Bank of Rwanda in 1964 when the bank was established. It contributes to the understanding of monetary policy which is formulation and implementation in different stages of development of a financial system that comprises the financial market (money market and capital market), financial intermediaries such as commercial banks, and the financial sector infrastructures such as payment systems and the credit reference bureau. The book breaks down applied empirical research on the assessment of key assumptions of a monetary targeting framework, namely the stability of money multiplier and money demand using econometrics of time series, through a number of case studies. Presenting a detailed empirical analysis of the monetary transmission mechanism, one of the most analyzed topics in central banks in advanced economies, this book is a valuable read for central bankers and other researchers of monetary policy, particularly in developing economies.

Despite strong economic growth since 2000, many low-income countries (LICs) still face numerous macroeconomic challenges, even prior to the COVID-19 pandemic. Despite the deceleration in real GDP growth during the 2008 global financial crisis, LICs on average saw 4.5 percent of real GDP growth during 2000 to 2014, making progress in economic convergence toward higher-income countries. However, the commodity price collapse in 2014–15 hit many commodity-exporting LICs and highlighted their vulnerabilities due to the limited extent of economic diversification. Furthermore, LICs are currently facing a crisis like no other—COVID-19, which requires careful policymaking to save lives and livelihoods in LICs, informed by policy debate and thoughtful research tailored to the COVID-19 situation. There are also other challenges beyond COVID-19, such as climate change, high levels of public debt burdens, and persistent structural issues.

Economic growth in sub-Saharan Africa this year is set to drop to its lowest level in more than 20 years, reflecting the adverse external environment, and a lackluster policy response in many countries. However, the aggregate picture is one of multispeed growth: while most of non-resource-intensive countries—half of the countries in the region—continue to perform well, as they benefit from lower oil prices, an improved business environment, and continued strong infrastructure investment, most commodity exporters are under severe economic strains. This is particularly the case for oil exporters whose near-term prospects have worsened significantly in recent months. Sub-Saharan Africa remains a region of immense economic potential, but policy adjustment in the hardest-hit countries needs to be enacted promptly to allow for a growth rebound.

Growth momentum in sub-Saharan Africa remains fragile, marking a break from the rapid expansion witnessed since the turn of the millennium. 2016 was a difficult year for many countries, with regional growth dipping to 1.4 percent—the lowest level of growth in more than two decades. Most oil exporters were in recession, and conditions in other resource-intensive countries remained difficult. Other nonresource-intensive countries however, continued to grow robustly. A modest recovery in growth of about 2.6 percent is expected in 2017, but this falls short of past trends and is too low to put sub-Saharan Africa back on a path of rising living standards. While sub-Saharan Africa remains a region with tremendous growth potential, the deterioration in the overall outlook partly reflects insufficient policy adjustment. In that context, and to reap this potential, strong and sound domestic policy measures are needed to restart the growth engine.

The sharp decline in oil and other commodity prices have adversely impacted sub-Saharan Africa. Nevertheless, the region is projected to register another year of solid economic performance. In South Africa, however, growth is expected to remain lackluster, while in Guinea, Liberia, and Sierra Leone the Ebola outbreak continues to exact a heavy economic and social toll. This report also considers how sub-Saharan Africa can harness the demographic dividend from an unprecedented increase in the working age population, as well as the strength of the region's integration into global value chains.