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The impact of monetary policy on consumer price index (CPI): 1985-2010

par Sylvie NIBEZA
Kigali Independent University (ULK) - Master Degree 2014

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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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