UNCLAS KIGALI 001146

SIPDIS

SIPDIS
SENSITIVE

DEPARTMENT FOR AF/C
DEPARTMENT PASS USTDA: EEBONG
DEPARTMENT PASS USTR: WJACKSON
DEPARTMENT PASS COMMERCE: RTELCHIN
DEPARTMENT PASS OPIC: BCAMERON
ADDIS FOR LISA BRODEY

E.O. 12958: N/A
TAGS: EFIN ECON PGOV EINV ENRG ETRD EPET BTIO RW
SUBJECT: LIFE MORE DIFFICULT FOR LOW-INCOME RWANDANS

REF: Kigali 1005


1. (SBU) SUMMARY. Inflation in Rwanda is officially
reported at under 10 percent but the reality behind the
numbers is much more serious for low-income Rwandans, the
majority of the population. Certain food prices have
increased as much as 350 percent and virtually none less
than 10 percent over the past year or two. Life has become
increasingly difficult for urban Rwandans, as many
eliminate educational spending, or become more indebted to
local banks to make ends meet. Explanations for the
increased food prices range include cross-border trading
inefficiencies, poor harvests, and excess foreign reserves
coming into the country through foreign aid. END SUMMARY.
INFLATION DATA

2. (SBU) The Ministry of Finance established the National
Institute of Statistics of Rwanda (NIS) in 2006 to collect
economic data and to compile relevant statistics, including
inflation. The Rwandan consumer price index (CPI) is
calculated through a basket of goods that is overwhelmingly
weighted towards food (37 percent) and housing costs (16
percent), including rent, water, and electricity. Ernest
Mwuzi, Director at NIS, reported that NIS publishes the CPI
every month and takes an average of the previous twelve
months for the annual rate of inflation.

3. (SBU) Lars Engstrom, IMF country representative, says
that his office signs off on the NIS inflation numbers and
that he believes the NIS inflation figures to be accurate.
Not only does Engstrom report confidence in NIS inflation
data, but he credits the Rwandan Ministry of Finance and
Central Bank with keeping inflation within the acceptable
single digit target.
COST OF LIVING RISING

4. (SBU) While Engstrom reported that

the Rwandan
inflation numbers are accurate and within target, he
acknowledged that inflation data does not tell the full
story regarding the daily life of everyday Rwandans, most
of whom live on less than a dollar a day. Inflation, as
calculated by the IMF and NIS, includes the costs for
clothing, transport, restaurant dining, hotel stays, and
recreation, for example, which are not typical items in
most poor Rwandans' monthly expenses. Engstrom warned that
inflation data is a tool to help guide monetary policy, not
necessarily an accurate measure of the quality of life or
the cost of living for all socio-economic groups. The
basket of goods used to calculate inflation is large enough
to dilute changes in food prices if the non-food items
increased at a much lower rate, he noted.

5. (SBU) Informal surveys and questionnaires of Embassy
local staff, housekeepers, and guards conducted
periodically by the Embassy economic staff over the past
two years showed that individuals' top ten expenses - rent,
rice, sugar, milk, potatoes, cooking oil, school fees,
beans, flour, and charcoal have increased significantly and
steadily. (Note: this Embassy survey represents the growing
urban population living in Kigali and other towns, not the
80-85 percent of the population that lives on subsistence
agriculture in the countryside). As Mwuzi explained, there
are seasonal fluctuations in food prices, but most staples
in a Rwandan diet have increased from a year or two ago.
For example, prices for potatoes in November dropped 50
percent, back to where they were last year. But sugar,
beans, and charcoal have each sustained increases of 300
percent in two years. Milk, cooking oil, and many
vegetables have experienced increases of 100 percent since
2005, while school fees and rent increases have ranged up
to 50 percent since 2005. (Note: a few individuals reported
no changes in prices over two years).

6. (SBU) Individuals surveyed responded, almost
universally, that making ends meet -- feeding the family
and sending children to school -- is much more difficult
now than it was two years ago, and even six months ago.
Several respondents reported having to move to smaller and
cheaper homes, reducing the number of meals they take in a
day, withdrawing their children from school, and taking out
more loans. In fact, all respondents reported making ends
meet through bank loans, mostly small microfinance loans to
pay for electricity, school fees, weddings, or funerals.
POSSIBLE EXPLANATIONS

7. (SBU) Secretary General of the Ministry of Commerce,
Justin Nsumviyunga, explains that Rwanda is a net importer
of almost all staples and thus is affected by the internal
dynamics of its neighboring countries. For example, he
reported that 40 percent of the beans sold in Rwanda come
from the Democratic Republic of Congo (DRC). He argued
that conflict in Eastern DRC affects both the ability to
grow crops and the ability to get them to market.
Nsumviyunga predicted that continued instability in Eastern
DRC will further destabilize food availability and prices
in Rwanda. Similarly, Nsumviyunga reported that wholesale
fuel prices have increased 38 percent since June due to "a
worldwide shortage." The GOR controls pump prices to
mitigate the increase in the world oil price, but
Nsumviyunga surmised that the GOR may no longer be able to
match these increases from its budget and, thus, consumers
will have to bear the weight of these increases (Note:
gasoline prices in Rwanda recently increased 11 percent).
Increased fuel costs are not only reflected directly in the
CPI, but impact the cost of imported food, which relies on
transport costs to reach Rwanda.

8. (SBU) World Food Program (WFP) country director Maarit
Hirvonen pointed to the recent floods and droughts in the
north of the country as possible explanations for the price
increases. She believed these natural phenomena, including
lower rainfall in some regions, have reduced the domestic
supply. (Note: a recent USAID survey found the effects of
the recent floods to be locally contained, with little
impact on national food supplies and prices). Hirvonen
further reported that storage facilities are seriously
lacking around the country, and thus the ability to store
bumper harvests and lessen the impact of later poor
harvests is severely limited. Luckily for Rwanda, failed
harvests, natural disasters, and overall food security have
in the past been effectively dealt with via WFP and
organizations such as the Red Cross and World Relief.

9. (SBU) Abdul Nur Ndarubogoye, a wholesale importer of
sugar, rice, and cooking oil reported that he, along with
his competitors, buys as much quantity as he can afford,
knowing that the market is undersupplied. However, he and
other wholesalers and retailers lack access to sufficient
capital to carry much stock - they are at the mercy of
temporary price spikes as much as Rwandan consumers.
Delays in customs, poor roads, and other non-tariff
barriers create additional challenges which affect their
ability to bring products to market quickly and
consistently. These market inefficiencies may partly
explain the sustained price increases experienced in the
past few years.

10. (SBU) Rwanda receives a great deal of aid - almost 50
percent of the budget is funded by donors, which does not
include large amounts of project support and off-budget
donor aid. Each increase in donor commitment essentially
results in more money chasing the same amount of goods,
including essential food items. Engstrom explained that
the simplest way to relieve this inflationary pressure is
to reduce the build up of foreign currency in the country
through "sterilization" by the Central Bank (through
issuance of treasury bills). These efforts have been
largely effective, he noted, but the Bank lacks the full
range of monetary tools to do so as comprehensively as more
advanced economies. (Note: a U.S. Treasury officer has been
assisting the Bank in setting up a treasury bond market, a
more supple monetary tool).

11. (SBU) Comment. According to the IMF, Rwanda should
be commended for keeping inflation in the single digits
over the past two years. However, the main determinant of
inflation, the CPI, is a single basket of goods, and it
does not always accurately reflect how the most
disadvantaged populations in Rwanda live. Life continues
to be difficult for those on the lowest ends of the socio-
economic spectrum - not a phenomenon unique to Rwanda, but
significant nonetheless. Anecdotal evidence suggests many
average families are increasingly struggling to make ends
meet. Storage facilities for good harvests, infrastructure
development to bring food and other goods to market
efficiently, the easing of cross-border trade barriers,
investment in modern agricultural techniques, and real
peace in the region - all are necessary to bring Rwanda's
people a better life. End comment.
SIM