2.2 Monetary policy
in Rwanda
2.2.1 Overview of monetary policy in
Rwanda
The National Bank of Rwanda (NBR) was instituted under the
terms of the law in April 1964
As a national, publicly owned, establishment equipped
with a civil personality and financial autonomy. The NBR has the
following general missions:
· To formulate and implement monetary policy to
protect the value of the currency and to ensure stability of the
Rwandan Franc. For this purpose, it controls the currency
and manages operations in the money market, regulates banking
structures and monitors the foreign exchange market (NBR, 1999);
· Has the exclusive privilege of providing currency or
legal tender in Rwanda;
· Manages the State's portfolio at its disposal and
ensures the execution of financial transactions on behalf of the State,
that is, the NBR is the financial agent of the State for any credit,
banking, and cash transactions.
Since its establishment, the NBR had to ensure that
monetary and credit conditions were in accordance with the overall
economic policies decided by the Rwandan government at least until 1990,
when the implementation of the IMF's Enhanced Structural Adjustment
Facilities (ESAF) in Rwanda began. Later, a law was passed
in 1997, to give the NBR greater autonomy. Further, a new banking law
was adopted and promulgated in June 1999, giving the necessary power to the
board of the NBR to determine monetary policy. This law has also
strengthened the NBR's role in supervising financial institutions and
enforcing rules of sound banking practice that are in conformity with
international standards.
The ESAF, which began in 1990, gave monetary policy
another way to influence financial markets. With the
disappearance of the credit rationing, rediscounting and setting of interest
rates, a new era emerged, as regards monetary management, characterized in
particular, by the introduction of the money market as a main source of funds
and it became the arena for the determination of interest rates.
In other words, interest rates were now determined by the
market.
A flexible exchange rate regime was introduced
in Rwanda in March 1995 with the creation of foreign exchange markets,
which meant exchange rates, were now partially determined by the forces of
demand and supply. The NBR does however ensure a smooth path of exchange rates
by occasional intervention.
2.2.2 Evolution of monetary policy in
Rwanda
The NBR was required to organize all monetary matters in
Rwanda. Thus it was required to support the realization of the social and
economic objectives planned by the government. Indeed, the National Bank of
Rwanda was regarded as being that entity able to guide the social and
economic development undertaken in the country.
In addition, it was also required to implement
monetary policy in order to achieve particular macroeconomic
objectives. In this context, and in order to make the banking system comply
with the aims of the government, the National Bank of Rwanda decided to control
directly, the banking system.
The central bank then, had to proceed, for this reason, to
control the credit given by the banks to their customers. In addition,
they had to determine the allocation of credit to the various economic
sectors according to a scale of priority based primarily, on
the strategic choices required by the government. Moreover, the NBR
determined the level of interest rates in the economy. This monetary policy
remained unchanged until the end of the 1980's.
It is only at the beginning of the next decade, that the
monetary policy started to take a new orientation, with the implementation in
November 1990, of the first Structural Adjustment Program. For two and a
half decades the NBR intervened in the macro economy using monetary policy. The
NBR intervened by controlling both the demand and the supply of credit.
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