Letters

Tough race for regional banks in Covid era

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Kigali is now home to many international banks. PHOTO | FILE | NMG

Summary

  • Only two sub-Saharan African countries (from 11 in 2014) were classified as having low debt risk by the end of 2020.
  • To address the emergent economic weaknesses and debt risk, the IMF has called for fiscal consolidation, which mainly refers to spending cuts.
  • The commitment by Kigali to make it easier for the private sector to thrive could as well make all the difference in the race for economic recovery in the Covid-19 new normal.

The uniqueness of Covid-19 is that the fight to contain it has inevitably meant causing immediate and significant damage to the economy.

Constrained global mobility, as well as disruptions in logistics and value chains, have dealt a heavy blow on entire industries, and by extension national economies.

Most African countries that did not have sufficient fiscal headroom were forced to borrow heavily to plug gaping budget deficits created by economic shutdowns and general disruption in productive activities.

According to the International Monetary Fund (IMF), Regional Economic Outlook report for sub-Saharan Africa launched in March this year, public debt in the region increased to almost 58 percent of its GDP, touching the highest mark in 20 years.

Only two sub-Saharan African countries (from 11 in 2014) were classified as having low debt risk by the end of 2020, while 17 (from only six in 2014) were classified as being in the high risk and debt distress categories.

The recovery path to pre-Covid-19 economic levels is going to be long and arduous.

Economic activity will be slow to mend, even with the many targeted government interventions. Workers in the informal economy and small business owners, in particular, have been severely affected and will require support for many years to fully get back on their feet.

In the banking sector, strong liquidity and capital levels will determine specific lenders’ capacity to withstand the pandemic.

Management of banking institutions will be required to adopt more agile ways of working, supported by digital solutions and tools that make them more accessible and more relevant to their customers.

To address the emergent economic weaknesses and debt risk, the IMF has called for fiscal consolidation, which mainly refers to spending cuts, as well as mobilisation of non-commodity revenue to boost national coffers.

More importantly, the IMF report points out that transparency and good governance are key to ensuring prudent spending and the ability to repay. This point sets Rwanda apart from many other African countries.

Rwanda is easily Africa’s most agile economy. Kigali has over the years implemented economic, legal and governance reforms to improve the ease of doing business in the country.

Entrepreneurs can register a new business online in six hours. The ranking automatically places Rwanda as East Africa’s most competitive economy.

This commitment by Kigali to make it easier for the private sector to thrive could as well make all the difference in the race for economic recovery in the Covid-19 new normal.

As a result of the economic discipline and relatively effective immunisation of the population against the Covid-19 virus, it is projected that Rwanda’s GDP will grow by five percent this year, rebounding from a 3.4 percent contraction in 2020.

The country’s GDP grew by 20.6 percent in the second quarter ended June, maintaining the Q1 momentum when the growth rate was 3.5 percent, as per the National Institute of Statistics of Rwanda data.

The hugely successful $620 million ten-year Eurobond that closed in August 2021 demonstrated international investors’ unwavering confidence in the country’s economic stability.

The IMF review on Rwanda dated May 2021 states that the country’s risk of debt distress “is expected to remain moderate”, placing it in the safer bracket relative to African peers.

The “Made in Rwanda” has improved the perceptions of Rwandan products within Rwanda, promoting nascent industries, and boosting the productivity of exporting sectors.

In the private sector, Covid-19 has accelerated digitisation of the banking industry. Global consultancy, McKinsey, predicts that banks must keep lending at scale to thrive beyond the Covid-19 crisis. McKinsey recommends that banks must reimagine their business models.

Rwanda’s financial sector and the Bank of Kigali are, in many ways, already surpassing these recommendations by McKinsey.

Kigali is now home to many international banks with cross-border operations in East Africa and beyond. The most successful financial institutions in the Covid-19 new normal are those that will prioritise making services accessible through digital means.

Banks will have to let go or modify heavy procedures. Bureaucracy will have to change and be rethought, paving the way for smarter ways of working, supported by digital tools and solutions.

Diane Karusisi is the CEO, Bank of Kigali Plc