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I live in Rwanda, an African country that is constantly being claimed as a "quickly developing country" by multiple sources to the point of even being compared to Singapore. However, the country's currency, the Rwandan franc has been slowly but surely depreciating ever since I was born. And also, the prices of normal, daily items have also been going up ever since. Frankly, I'm desperately confused. Is there any logical explanation?

Rwandan currency depreciating over time

Articles that say that Rwanda is developing:

You can see a whole load of articles saying exactly this if you Google it.

jcm
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vixalien
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  • Here is a link: https://tradingeconomics.com/rwanda/indicators Then also click "Inflation" and click "25Y". – S Spring Nov 13 '21 at 12:49
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    I don't think that "depleting" is the correct term, unless you have a cite. You may be confusing it with "depreciating". – Acccumulation Nov 13 '21 at 23:19
  • @Acccumulation I most definitely confused them. Can I know what's the difference? – vixalien Nov 21 '21 at 16:15
  • "Depleting" means the amount of something is decreasing. "Depreciating" means that the value of something is decreasing. There's some overlap, since the value could be the thing that is decreasing, but generally when someone says that something is "depleting", they mean that the thing itself is decreasing in quantity, not the value of the thing. If the amount of money decreases, then that generally results in deflation, not inflation. – Acccumulation Nov 21 '21 at 16:57
  • @Acccumulation yeah. I don't think a currency can "deplete" anyways. – vixalien Nov 21 '21 at 17:24
  • I wish Turkish lira was depreciating like Rwandan franc. – uylmz Nov 26 '21 at 08:14
  • @uylmz why is that? – vixalien Nov 27 '21 at 11:46
  • It depreciated about 40% in the last year, against USD – uylmz Nov 27 '21 at 22:16

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I think inflation being higher in Rwanda than in the US is the main reason for Rwandan Frank (RWF) depreciating against USD over the long term. The annual inflation has averaged 5.2% from 2011 through 2020 in Rwanda whereas it has averaged 1.7% in the US during the same period according to the World Bank data. Meanwhile, the average annual increase in USD to RWF exchange rate has been 4.9% during the same period, also based on the World Bank data.

There could be many reasons behind consistently high inflation in an economy such as a too expansionary fiscal or monetary policy, or built-in expectations about rising prices. This Wikipedia article on inflation has quite a few details if you would like to read more about it.

Alper
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    It's worth adding that the Rwandan GDP per capita is now about 4x what it was in 2000,and that's already in dollars in PPP terms. Even considering inflation, people are much better off than they used to be. That's the development people are talking about. – TooTea Nov 15 '21 at 19:25
  • Even with all these explanations, I'm still lost. – vixalien Nov 21 '21 at 16:19
  • @vixalien What exactly is that you don't understand? – Alper Nov 21 '21 at 17:11
  • I guess I don't really understand inflation. Like if the GDP is increasing, why is there inflation. And the inflation isn't that much compared to the depreciated value of the currency. – vixalien Nov 21 '21 at 17:33
  • Gross Domestic Product (GDP) measures the monetary value of all goods & services produced in a nation minus any imports used in the production. Inflation is the change in the weighted average price of all goods & services. A nation might be producing, for example, more cars every year but this would not prevent car prices from rising. The nominal GDP would increase, for the sake of simplicity, as much as the increase in number of cars produced and their prices multiplied. The real increase in GDP (this is what is actually paid the most attention to) is the change in number of cars produced. – Alper Nov 21 '21 at 17:54
  • I gave in my answer the average annual inflation rate in the past 10 years in Rwanda (5.2%). This means the weighted average of all goods & prices in Rwanda increased by 66% from 2010 through 2020 ( calculated as ((1+5.2%)^10 - 1)) ). The RWF to USD exchange rates you have quoted has also increased by 66% (947/570 - 1) during the same period. So Rwandan inflation and the change in exchange rate in the long term are actually quite close contrary to your observation. (Theoretically, we should look at the difference between the Rwandan and US inflations but this is somewhat OK in this example). – Alper Nov 21 '21 at 18:10
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    @Alper thank you very much. I understand it now. – vixalien Nov 23 '21 at 18:14
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There could be a few explanations for this. It could be that Rwanda is actually not a quickly developing country and that the currency is slowly depreciating because the country is not doing well. It could also be that Rwanda is doing well, but that the value of the Rwandan franc is dropping because other currencies are doing better. This could be due to a number of factors, such as a strong economy or low inflation. Finally, it's also possible that prices are going up because of inflation, which is a general increase in prices over time. Inflation can be caused by a number of factors, such as high demand for goods or a decrease in the value of a currency.

Sasbadi Wan
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