Recent macro developments in Rwanda and the world including europe
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Transcript of Recent macro developments in Rwanda and the world including europe
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
www.facebook.com/SchoolofFinanceandBanking www.twitter.com/SFBRwanda
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