PUBLIC FINANCE AND TAXATION

ECONOMIC FINANCE IN RWANDA Etienne NZA 0786933786
KIGALI-RWANDA
TE:0786933786/0722055908
E-mail:etienne.nzabirinda@gmail.com
SUBJECT: ECONOMICS
PUBLIC FINANCE AND TAXATION
THE WING OF QUALIFICATION

Contents
UNITY ONE: RWANDAN TAXATION SYSTEM ............................................................................................... 4
1.1INTRODUCTION.................................................................................................................................. 4
1.2Taxation theory.................................................................................................................................. 4
1.3OBJECTIVES OF TAXATION SYSTEM IN RWANDA ............................................................................... 5
1.4Canons (Principles) of taxation .......................................................................................................... 6
1.5CHARACTERISTCS OF GOOD TAX SYSTEM .......................................................................................... 7
1.6TYPES OF TAX..................................................................................................................................... 8
1.6.1Type of tax according to the tax rate: ......................................................................................... 8
1.6.2The types of taxes according to incidence ................................................................................ 10
ADVANTAGES OF DIRECT TAX ........................................................................................................... 11
Disadvantage of direct tax ................................................................................................................ 11
1.7TAX DECLARATION AND PAYMENT.............................................................................................. 17
1.8TAX AVOIDANCE AND TAX EVASION................................................................................................ 20
Causes of tax evasion........................................................................................................................ 21
Methods of tax avoidance................................................................................................................. 21
1.9FUNCTION OF TAXATION ................................................................................................................. 21
UNITY TWO: MONETARY POLICY SYSTEM................................................................................................. 22
2.1Objectives of monetary policy ......................................................................................................... 23
2.2Tools of monetary policy.................................................................................................................. 23
2.3CENTRAL BANK................................................................................................................................. 24
2.4Functions of central banks ........................................................................................................... 24
2.5National Bank of Rwanda (BNR)....................................................................................................... 24
2.6BNR Monetary policy between 1964 and 1994................................................................................ 25
2.7Monetary Policy Framework............................................................................................................ 25
2.8Monetary Developments ................................................................................................................. 26
Money Supply ................................................................................................................................... 26
Money Demand ................................................................................................................................ 26
Monetary Policy Stance in 2015............................................................................................................ 26
2.9The Role of National Bank of Rwanda.......................................................................................... 27
2.10CREDIT CONTROL ....................................................................................................................... 27
2.11INTEREST RATE REGULATION..................................................................................................... 27
2.12BNR REFINANCING FACILITIES.................................................................................................... 28

2.13FOREIGN EXCHANGE RATES....................................................................................................... 28
2.14BNR MONETARY POLICY IN ECONOMIC DEVELOPMENT................................................................ 28
2.15REFORMS IN FINANCIAL SECTOR (1995-2015)............................................................................... 29
2.16MONETARY POLICY MAKING DECISION PROCESS .......................................................................... 29
2.17BNR monetary committee meeting December 2013 ..................................................................... 30
2.18COMMERCIAL BANKS IN RWANDA. ............................................................................................... 30
Function of commercial bank............................................................................................................ 31
2.19FOREX BUREAU.............................................................................................................................. 31
2.20Forex bureau in Rwanda ............................................................................................................ 31
UNITY THREE: INFLATION...................................................................................................................... 32
3.1THEORIES OF INFLATION.............................................................................................................. 32
3.2Inflation Developments in Rwanda (2015)................................................................................... 32
3.3CLASSIFICATION OF INFLATION.................................................................................................... 33
Classification of Inflation according to its causes.............................................................................. 33
3.4CAUSES OF INFLATION ................................................................................................................. 35
3.5EFFECTS OF INFLATION ................................................................................................................ 35
3.8SOLVING INFLATION..................................................................................................................... 36
3.9Conclusion.................................................................................................................................... 37
3.10 DEFLATION.................................................................................................................................... 37
3.11Deflation and economic policy................................................................................................... 37
Reference lists....................................................................................................................................... 38

UNITY ONE: RWANDAN TAXATION SYSTEM
1.1INTRODUCTION
Taxation: Is the process of assessing; collecting and administering of taxes. Taxation is the
biggest source of the public revenue of the government; also it is responsible for shaping the
political activities of government, it can be considered as convenient method of raising revenue
which turn is linked with the welfare of the people directly. The sense of the argument is that the
tax payer is not entitled to claim any return against the payment of his/her taxes though modern
taxation policy aims at the fulfillment of the objectives of welfare.
Tax: Is a compulsory payment made by individual or businesses to a state or to a functional
equivalent of state also tax can be defined as financial deduction by state natural personal or
regal entities according to contributing capacity through definitive constraint way and without
compensation “Emmanuel, D , Fiscallite oppliqee ,Tommel, DUNOD, Paris,1998. P1”
Tax is a kind of money of which it is the legal duty of every citizen of country to pay honestly. It
may be levied on income, property and even at time of purchasing a commodity. In short, tax is
the major source of the government’s income. In additional none or companies allowed to
collecting taxes only done by government. Also “According to De Marco, the tax is the share
of citizen which the state appropriates in order to procure for itself the mean necessary for
production of general public service’’
1.2Taxation theory
There are two traditional theories or approaches on how taxes burden should be distributed
among tax payer in community/society
Benefit theories: it deals with home taxes should be imposed based on promotion of benefit
obtained/recorded, even if it is difficult to measure the benefit for individuals
This approach should seem to be fair. But in general more people feel that their benefit should be
spend on their health and education while in other hand they feel that to pay tax is too high to
them.
This approach advocates that taxes should be seems in terms of earmarking taxes which deal
with specific goods and services such as government expenditures. In this situation the absence
of earmarking taxes the road user should wish to see funds for building their roads.
According to Musgrove earmarked taxes could increase efficiency and equity lead to better
expenditure decisions
Ability to pay theory: in the first approach we have seen that benefit theories seek to match the
government expenses with taxation in promotion benefit received,
While this approach deals with the tax paid by an individual according to his/her ability
Example: 8000frw of tax is less to a person earning 150000frw monthly than a person earning
40000frw all other things remain equal.

At this approach people in different situation should be treated differently and the progressive
system of taxation is required because if the ability of an individual increase also the tax rate
increase
The main problem for this theory is to decide the indication of person’s ability to pay. In general,
this theory is no more helpful than benefit theory in formulating the tax system
Reference:
Goodwin M. et al (1989) Administration and compliance cost of taxation, bath.
Musgrave R et al, (1980) Public finance in theory and practice (5th
edition), Mc graw hill.
Decant E. (1965) Earmarking and expenditure a survey and a new test, Nation tax journal.
1.3OBJECTIVES OF TAXATION SYSTEM IN RWANDA
 To raise revenue by the government for purpose of providing essential services to the
people like road, school, electricity, health center etc.
 To protect infant industries by taxing imported product hence encouraging the
consumption of home produced goods for instance made in Rwanda product
 Regulate the consumption and production of certain goods which are regarded as harmful
for example cigarettes
 To control monopoly
 To prevent dumping of goods from other countries by imposing taxes on imported cheap
goods these goods because more expensive hence encouraging the development of local
industries
 To reduce income inequalities amongst people

1.4Canons (Principles) of taxation
They are also known as maxims of taxation as they are the standard government should follow
when levying, collecting and administering a tax. The canons of taxes were first proposed by
Adam Smith in 1776, and since there other economists have tried to modify or add some other
principles. Those are the following:
Equity/ fairness: a good tax system should be fair, economists consider two principles to
determine whether the burden of a tax is shared and distributed fairly. They use the ability to pay
principles and benefits principles to determine fairness of a tax.
Fairness
Horizontal fairness
Same taxes
Certainty: the taxes imposed should be certain to the taxpayer and the taxes administrators; the
following be certain to both parties:
 Who is liable to that tax?
 How the tax is calculated
 When the tax is to be paid
 How the tax is to be paid
 The penalties for default
 What is being taxed (tax base)
Certainty is important to avoid the conflict between taxpayers and taxes collector.
Convenience: a good taxation system should be convenient to the taxpayer in terms of:
o Place of payment: the place of payment should be as near as possible to the
taxpayer.
o Time of payment: the taxpayer should pay the tax when he or she has an income
for instance; for the salary earners should pay the tax at the end of the month.
o Method of payment: cash, cheques and other methods of payment convenient to
the taxpayer should be acceptable.
Simplicity: a good taxation system should be simple to the taxpayers and the tax administration.
It should not be complicated to be understood by the taxpayers and tax collectors.
Elasticity or flexibility: the tax should not be rigid but flexible such that in case of need it can
be adjusted accordingly. The tax should also change in response to change in the taxpayers’
income.
Differenttaxes
Verticalfairness

Economy/cheapness: a good taxation system should be cheap to access collect and administer.
Government incurs expenses in taxes administration in collecting data, accessing taxpayers,
paying wages and salaries to the tax collectors, printing receipt and forms, paying bank charges
and conducting tax education. An economical taxation system ensures that those costs are as low
as possible in comparison to the tax yields. The total cost incurred should not in any case exceed
5%of the total tax revenue.
Efficiency: the tax imposed should have little excess burden. Excess burden is the change in
behavior caused by taxes; a tax imposed may make people to buy less of the taxed goods and
more of the untaxed goods.
Productivity: the productivity of the tax is its ability to achieve the purpose for which it is
imposed; tax is productive when it raises sufficient and continuous revenues for the government.
Neutrality: a good taxation system should be neutral. It should minimize the distortion of the
relative prices so that the government is able to reduce the problems of income inequality and
promote the general welfare of people.
The taxation system as a whole can be evaluated on its goodness in terms of:
 Economy that is how much is spent on taxation in relation to total tax revenues
 Diversity: how comprehensive it is
 Simplicity: how simple the taxation system is
 Flexibility:
 Neutrality
 Optimality, relation between what governments provides to the public.
Acceptability: a good taxation system should be accepted by the society, politics and the
economy of the country. Unacceptable taxation system cause revolution and coups over the
world.
1.5CHARACTERISTCS OF GOOD TAX SYSTEM
A good tax system should characterize by:
 Neutrality: a good tax system should be neutral so that it doesn’t affect economic
decision also it should be flexible so it can be used to achieve specific economic
objectives.
 Fairness :the tax system need to ensure that all tax payer share the tax burden equally
 Simplicity and compliance: the tax should be simple and easy to understand for the tax
payer
 Stability: a good tax system ensure stability of the tax revenue for the economies
 Flexibility: good tax system and rate of tax should be capable of being altered without
too much difficulty to cope with change in circumstance if the system of taxation is to be
used as a mean of regulating the economy
“According to Adam smith in his book called wealth of nation (1776) proposed a good tax
should display the following characteristics:

 It should reflect a person’s ability to pay
 It should be certain
 It should be convenient
 It should be administratively efficient and not cause economic distortion
1.6TYPES OF TAX
Government impose many types of tax ,individuals pay income tax when they earn, they pay
consumption tax when they spend and pay property tax for house or hand that they own these
and other taxes can be put into various categories depending on tax rate and tax incidence.
1.6.1Type of tax according to the tax rate:
Progressive taxes
The tax is progressive if the tax rate increases as the income increase for example:
A person earning 50000pay 10% and the person earning 100000 paying 15%
The table showing progressive taxes
Income Tax rate
10000-20000 10%
20001-40000 12%
40001-70000 15%
70001-90000 17%
90001-100000 20%
Proportional taxes
Taxes rate is constant for all level of income people with low income and the people with high
income pay taxes at the same rate
10%
12%
15%
17%
20%
0%
5%
10%
15%
20%
25%
TAXESRATES
TAXABLE INCOME
Tax rate
Tax rate

Table that show proportional taxes
Income Tax
rate
10000-20000 20%
20001-40000 20%
40001-70000 20%
70001-90000 20%
90001-100000 20%
Regressive taxes
Tax rate reduce with increase on level of income. As income increasing the tax rate reduces
The table below show regressive tax
INCOME TAX
RATE
10,000-20,000 20
20,000-40,000 15
40,000-70,000 12
70,000-90,000 10
90,000 above 8
20% 20% 20% 20% 20%
0%
5%
10%
15%
20%
25%
TAXESRATE
INCOME
Tax rate
Tax rate

1.6.2The types of taxes according to incidence
 Direct tax: A direct taxes are imposed on income, profit and wealth of individuals and
companies and the incident can’t be shifted forward or back word. Example of direct
taxes income taxes, land taxes properties taxes inheritance tax and corporate tax.
 Income tax: A tax levied on people whose income is above a certain level.
 Land tax: A tax on land normally intended to target the big land owner who at
times rent it out to famers. It intended to reduce monopoly of the land by a few
land lords.
 Properties tax: Is a tax imposed by individuals’ wealth. The value of
personnel’s assets both financial assets and real assets are considered.
 Corporate tax: corporate income tax is levied on business profit received by the
entities. The following entities are subject to corporate income:
 Companies established in accordance with Rwandan low or foreign low;
 Cooperative societies and their branches.
 Public business enterprise.
20%
15%
12%
10%
8%
0%
5%
10%
15%
20%
25%
TAXESRATE
TAXABLE INCOME
TAX RATE
TAX RATE

ADVANTAGES OF DIRECT TAX
 Direct taxes are easy to collect or cheap: this means that when tax are directly deducted
from people’s income by the employers and remitted to government.
 Direct taxes it is convenient to pay: because they are spread over a long period like
salary income earners have defined amount deducted from their salaries per month as tax
instead of paying tax in lump sum.
 Direct taxes are flexible and easily increasing or decreasing this means that
government can easily use direct tax to influence the level of economic activities.
 Direct taxes are simple to understand: most direct tax are simple to understand since it
percentage of tax payer income most direct tax are progressive since the rich people pay
tax at higher rate than the rate at which the poor people pay, this fit in where with the
principal of equity and help in reducing income inequality.
 Direct tax do not direct affect commodities’ price :therefore are not inflationary,
direct tax can’t be direct shifted to commodities price as easily as indirect tax this means
that direct tax cannot easily lead to inflation
 Direct tax are very affective at redistributive: national income among the population,
there are useful tools and income redistribution
Disadvantage of direct tax
 It is very difficult to major taxation capacity of the people to determine how much the
income tax they have to pay this lead to either over taxation or under taxation
 Direct tax negatively affects the rate of capital inflow because foreigner investors will be
scared of the tax
 Most direct tax are collected by local chiefs and leaders who lack competency to assess
and collect taxes
 Direct tax are very easy to evade, people cannot conceal their income other get income
from other sources and other are not resident in a single place this makes assessment and
collection complicated making it easy for same people to evade taxes.
 Direct taxes are very easily noticeable by the public and therefore can cause political and
social resentment. Unlike the indirect taxes that are hidden, direct taxes breed
unpopularity among the tax collector and the government that impose them.
 Direct tax on company profit may be translated into lower wages and less benefit for
workers. This has a big negative impact on the workers, standard of living, morale and
output of the taxed firm
 High direct taxes scared away foreign experts on working within the country and also
cause “brain drain” of highly scared and scarce labor-force.
“Herbert M. (2009), MK fundamental Economics of east Africa, MK Publisher Ltd; Kampala-
Uganda.”

INDIRECT TAX
Are those taxes that are levied against the tax payer but collected by a third party (such as a retail
store) who is responsible for paying the tax to the government?
They include sales tax, goods and services tax vat, and withholding tax on import and public
tenders
Consumption taxes are usually indirect. It is a tax on spending goods and services, the tax base
of such tax is the money spent on consumption
Consumption tax is levied on the following locally manufactured products such as beers, wines,
cigarette, spirits and mineral water made in Rwanda.
For instance, consumption tax of same goods in Rwanda at the corresponding rate:
Product Tax rate
Juice from fruits
Mineral water
Wine
Cigarette
Powdered milk
Telephone
communication
5%
10%
70%
15%
10%
5%
5%
10%
70%
15%
10%
5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
TAXESRATES
TAXABLE PRODUCT
Tax rate
Tax rate

The following are some example of indirect tax:
VALUED ADDED TAX
The valued added tax is a tax on the added value achieved by a firm. In term of economics, the
added value is understood as the difference between the value of goods and services by the firm
on the one hand and the goods and service used for the production, that is intermediary
consumption we have to consider the accounting approach that defines the added value as a
difference between production of a commodities (plus gross profit) and consumption of the same
commodities from third parties.
The Value added tax is taxed on:
 Each delivery of services or goods and are taxable in Rwanda
 Each import of taxable goods and services, carried out since the introduction of the VAT
in Rwanda
Tax rate
The VAT is applied to dirty free goods. Several rates can be applied depending on the nature of
product the rate is 18%
VAT is usually administrated by requiring the company to complete a VAT return forms giving
detail of the VAT it has been charged by its suppliers (referred to as output tax). The difference
between the output tax and input tax is tax payable to the tax authority. If input tax is greater than
output tax the company can claim back money from the tax authority.
Because VAT is levied as a percentage of the value added to the commodity it is an added value
tax. By collecting the tax at each production level the theory is that the entered economy helps on
the enforcement and collection of the tax. However forged invoices and other similar evasive
method have demonstrated that there are always those who will attempt to evade taxation.
VAT in Rwanda
The importance of introducing VAT in Rwanda has emerged as one of central tax policy issues
of the new century. VAT was introduced in Rwanda in 2001 replacing the existing ICHA (tax on
turnover) it was introduced on the basis that it will improve the overall fairness of the tax system
in Rwanda and it would generate higher revenue compared to ICHA(old style sales tax)
VAT was introduced in Rwanda in 2001 through low no
06/01 of 20/01/2001.
VAT is generally designed as tax on final consumption. All persons who buy taxable goods or
services pay VAT. VAT was levied at a standard rate of 15% on the majority of goods and
services considered in Rwanda it was later changed in 2003 to 18%

VAT declaration
Declaration is immediately done and submitted to tax office from 1st
day of the month till the 15th
day of the month which follow the one during the VAT was collected
When the deadline is a public holiday or vacation day declaration is done on the following
workday
A declaration is accompanied by annexes that are required before checking and signing for it and
keyboarding it in machines
The tax payer correctly fills his declaration and pay the VAT due in the bank indicated to him
PENALTIES
Any failure to submit the declaration in the legal time limits is charged lateness interests at the
rate of 0.92% for each month of lateness: When a tax payer has not appropriately filed a
declaration, the following penalties are applicable:
 One hundred Rwandan francs (100000rwf)if he is a small tax payer whose annual
turnover is inferior or equal to 20000000rwf
 Three hundred thousand Rwandan francs(300000rwf) if he is a small tax payer whose
annual turnover is superior to 20000000rwf
 Five hundred thousand Rwandan francs (50000rwf)if he is a big tax payer
VAT COLLECTION IN RWANDA
Vat collection in Rwanda
The vat department was also created in 2003 and I t collected Rwandan francs 24 bn which was
7.8 above the set target and this contributed 24 of the total tax revenue.
VAT now counts for above one –third of total revenue in Rwanda.
CHALLENGES
 Sales tax /turnover tax, this is tax on commodities sold within the country irrespective of
whether the goods have been produced locally or imported.
 Customs duties, an import or export duty is a tax levied on the movement of goods across
a political border.
<< James T. (2011), Economic for Rwanda, Fountain Publisher; Kampala, UGANDA>>

MERITS OF INDIRECT
 They are certain merits of indirect taxes which are regarded well than direct taxation they
are discussed below:
 Convenience: the indirect taxes are less inconvenient than direct taxes. Indirect taxes are
paid in small installments instead of lump- sum .They is the burden is not felt by the
consumer.
 People pay taxes without obligation because of their necessities therefore; Indirect taxes
are quite convenient as they are imposed on manufacturer or importer
 Elastic: indirect taxes can be elastic i.e. the revenue from them can be increased
whenever the demand is inelastic .however the principles of elasticity and ability to pay
contradict each other for instance if heavily taxes are imposed on the articles of common
consumption ,i.e. The demand for which is inelastic ,Then will bear more burden on the
poor than on the rich .On the other hand .the items of luxuries can’t be taxed heavily as
their demand is elastic
 No possibility of evasion: it is impossible for an individual to evade the payment of
indirect taxes because they are already included in the price of the commodity thus there
is every little possibility for evasion of such taxes, a person can only evade when he
chooses another commodity rather than taxed commodity in the case of smuggling. It can
be evaded by maintaining false account.
 Equity, indirect taxes are equitable, because these taxes are paid by the consumers on the
commodity so, it will be according to the ability to any principal, Therefore it is imposed
heavily on luxuries and other such commodities consumed by the rich consumer.
 Social welfare: heavy indirect taxation on article like wine, opium etc. serves as social
purpose by curtaining the consumption of such harmful commodities which is in the
interest of the commodities as a whole.
 Economic collection: cheap to collect since they are collected through a few producers
and sellers.
 Revenue generation: indirect taxes generate more revenues for government compared to
the direct taxes; the existence of indirect taxes enables government to raise enough
revenue to finance its expenditure. They can be made to cover wide variety of goods and
services to maximize revenue collection.
 Direct taxes, direct consumption: they are helpful directing consumption behavior of
the population; they can be used to discourage the consumption of harmful goods.
Consumption of such goods like tobacco and heavy alcohol is discouraged by imposing
high taxes on them.
 Encourage work: indirect taxes are less harmful to work as compared to direct taxes, an
indirect tax increase the price of commodities and the worker must work much hours to
be able to continue consuming goods and services such a person was consuming before
the taxes.

DEMERIT OF INDIRECT TAXES
 Regressive: they are regressive because they are taken from rich and the poor with the
same amount and in the process the poor spend a bigger percentage of their income on
taxes than the rich.
 Inflationary: indirect taxes increase inflation by increasing transport cost, labor cost and
cost of raw materials. When placed on trade activities, indirect taxes directly increase the
price of goods and services and this cause cost-push inflation within the economy.
 Uncertain: the revenue from the indirect taxes is less certain and difficult to estimate,
this makes planning difficult because the taxes are not compulsory, consumers and
producers can decide to abandon the taxes commodities in extreme cases, indirect taxes
yield no or very little amount of revenues especially if the rate is very high.
 Another demerit of indirect taxes is that by discouraging demand through highest price,
they also discourage production and investment and this has additional negative effect
on employment and balance of payment in a country.
 Indirect taxes interferes consumers’ with their sovereignty and divert production
even consumption habits of people. People will not consume those goods and services
they like but those on which less taxes are imposed because if their preferred choices
have been highly taxed they become unaffordable by causing increment in the price of
commodities, indirect taxes increase the cost of living and hence people are forced to go
without some necessities and to consume poor quality goods which decrease people’s
standard of living.
 Indirect taxes discourage international trade taxes on locally produced commodities make
them very expensive for foreign markets while import duties make import too expensive
for the local market. The result is a reduction in exports or import and this negatively
affect the balance of payment of the country.
 Misallocation of resources to not taxed economic activities that may not be very relevant
to the needs of the people of the country. The producers may take advantage of the taxes
to increase the prices more than the increases in taxes hence exploit the consumers.

1.7TAX DECLARATION AND PAYMENT
Declaration are made by any person who is, either the owner of the commodities, or a registered
Income tax; It is a tax which is imposed for a fiscal year which run from 6april to 5 April of the
following year. As income tax remain temporary tax, it must be reintroduced each year through
the finance act. This tax can be collected by either Deduction source or direct assessment.
 Deduction at source; by this type of income tax, the tax is collected from the person
paying the source of income rather than the person receiving the income.
 Direct assessment; the income is not taxed at source but self-assessed. For self-
assessment the two equal payments on account of tax due are made on 31st
january
and 31st
july with the balancing payment being due on the annual filling date.
Corporate income tax: this is the tax which is deducted by the state on industrial and
commercial income achieved by the firms working as a commercial company .And it is
proportional. In fact, corporate income tax is deduced from business income of companies.
Tax declaration for Corporate income tax; a tax payer who have to collect taxable income
prepares a declaration in a form which is specified by the Revenue service, and submit it not later
than the 30th
days of the sixth month of the following fiscal year, accompanied by an accounting
balance sheet, and the loss or profit account of the concerned year. (Emmanuel DISLE et al
paris, 2000: 145-146)
The amount of taxable income changed to thousands of Rwandan francs and taxed at the rate of
thirty percent (30%). The following entities shall be subject to corporate income tax:
Companies established in accordance with Rwandan law or foreign law, cooperative societies
and their branches, public business enterprises, partnerships, entities established by Districts,
Towns and Municipalities and the City of Kigali, to the extent that these entities conduct business,
de facto companies or associations and any other entities that perform business activities, which
are established to realize profits.

In fact, any person who is supposed to pay tax and then refuse to do so, is supposed to pay the
amount due, plus fine and lateness interests to the Revenue service. Apart from those companies
there are others which are exemption from this tax as are follow:
The City of Kigali, Districts, Towns and Municipalities; the National Bank of Rwanda; entities
that carry on only activities of a religious, humanitarian, charitable, scientific or educational
character, unless the revenue received during a tax period exceeds the corresponding expenses to
the extent that those entities conduct a business
International organizations, agencies of technical cooperation and their representatives, if such
exemption is provided for by international agreements, qualified pension funds; the Rwanda
Social Security Fund, the Rwanda Development Bank. All those are exemption from corporate in
came tax.
A professional income tax; these are that are applied to the professional activities carried out in
Rwanda such as; profit of all industrial, commercial artisan, agricultural or property firms,
including the profits of activities associates (shareholders) in companies.
And all profits, irrespective their designations, of the professions or their nature of jobs.
Moreover, when the employment income has not been deducted because the employer is not
obliged to operate a pay as you earn system, the employee is required to fill a tax declaration
form as specified by the commissioner general of the Rwanda Revenue Authority and pay the tax
due to the Revenue service in fifteen workdays (15).
In addition, taxable amount and tax rate for a monthly employment income are paid
according to the following scale;
Taxable monthly income
(RWF)
Tax rate
From To -
0 30000 0%
30001 100000 20%
100001 And above 30%

In addition to this, rules and regulation must be applied to any person who is supposed to operate
a pay as you earn system and then refuse to do so , is personally required to pay the amount
due, plus fine and lateness interests to the Revenue service. Official Gazette of Republic of
Rwanda, 2008, p.205
Personal income tax ;It is the total tax which is generally progressive and deducted by the state
.It is applied to salaries, industrial and commercial profit of entrepreneur who are not subjected
to corporate income tax, to financial incomes, to land incomes… Lexique d’economie Dalloz
In accordance with this, any natural person who collect a taxable income prepares a declaration
in a form which is specified by the General Commissioner of the Rwanda Revenue Authority,
and submits it to the Revenue service not latter 30th
day of the sixth month of the following fiscal
year.
In fact, the taxable income is made up of the following; Employment income, business profit,
investment income.
And the tax is calculate in the following;
Annual taxable income
(RWF)
Tax rate
From To %
0 360000 0%
360001 1200000 20%
1200001 And Above 30%
0%
20%
30%
0%
5%
10%
15%
20%
25%
30%
35%
360000 1200000 And Above
0 360001 1200001
TaxesRate
Amount of income
Tax rate %
Tax rate %

Exemption to the following payment are excluded from calculation;
 Payment or repayment of the fees invested by the employer.
 Retirement pensions paid by the social security fund of the state.
Any person who supposed to pay tax and then refuse to do so, is personally required to pay the
amount due, plus fine and lateness interest to the Revenue service. (Op cit,p, 199)
Custom rate; custom rate is a tax for imposed on imports in percentage or in value. This tax is
paid by national consumers and is collected by the state. (Lexique d’ecomie, Dalloz)
The taxable amount for the imported commodities are evaluated at cost insurance Fret (CIF) road
transport excluded or at the custom insurance fret (CIF)
In fact, taxation rate on entry duties are paid for the imported commodities .The rate that are
applied are found customs rate. (Depliant office Rwandais des recette)
Currently, the rates that are applied in COMESA member countries are :0%,1%,3%,6%,27% The
rates in The EAC:0%,10,25% commodities from EAC (East African Community) ,rate=0%
Tax declaration and payment are made by any person who is, either the owner of the
commodities, or a registered customs commissioner who is qualified for presenting these
commodities in customs.
Exemption to this, Equipment intended for national defense and security, the things transported
by travels in their individual luggage
1.8TAX AVOIDANCE AND TAX EVASION
Tax avoidance is a legal arrangement of the tax payer in order to minimize the tax liability. For
instance, VAT can be avoided by not buying the taxed goods /services.
0%
20%
30%
0%
5%
10%
15%
20%
25%
30%
35%
360000 1200000 And Above
0 360001 1200001
TaxesRate
Amount of income
Tax rate %
Tax rate %

On the other hand, tax evasion involves the international disregard of the legislation in order to
escape the liability to tax. Or it is illegal way that tax payer uses to escape from paying the real
liability to tax by making a false claims for allowance or failing to disclose a charge ability to
tax.
If tax evasion is to be curtailed then the tax low must be properly enforced. If some people are
perceived to be escaping their obligation of paying taxes, a great dissatisfaction is likely to be
aroused among the majority of conscientious tax payers.
(Kaldor. N, (1980) Reports on taxation, Duckworth)
Causes of tax evasion
Corruption; the use to which tax payer’s money is put high tax rate, low penalties for both tax
payer and tax collector who default tax weak administration.
Existence of wealth and politically active class of business people as they are difficult to tax.
Complicated tax lows to both tax payer and tax collector, political instability.
Methods of tax avoidance
 Income shifting; a tax payer at a higher marginal rate will always want to shift
income to one with low marginal rate for example; a parent may shift income to their
children by giving them some assets.
 Postponement of tax; it takes several methods such as using accounting tricks where a
tax payer postpones the recognition of income.
 Tax arbitrage; this involves taking advantage of price different for the same or similar
commodities when asset is sold. Example the price of houses are not fixed.
Tax shelter; these are investment schemes designed primarily to reduce one’s tax.
1.9FUNCTION OF TAXATION
 To raise revenues: the government rises over 90% of its revenues from different taxes,
and this is the most important reason for setting the taxation system.
 Redistribute income: inequality of income exist between individuals and regions but if
the income gap between the rich and the poor is very wide, it imposes serious

consequences to the economy so taxation is the tool to distribute the countries’ wealth by
imposing heavier tax burden on the rich in order to fund the services for the poor.
 Inflation control: taxation withdraw money from public hands which has the effect of
reducing demands and hence reducing inflation during inflation tax rate are raised in
order to reduce purchasing power.
 To control monopolistic power: the government imposes specific lump sum and profit
taxes to control monopoly. The taxes imposed on monopolist reduce abnormal profit for
those monopolists by reducing their dominance at the market.
 Domestic infant industries protection: the taxes imposed on the import provide
protection and assurance to the infants industries; high taxes on the import product
discourage import and give chance to the local industries to expand.
 Dumping discouragement: dumping is the selling of a product at a cheaper price in the
foreign market than in the home country market, and then taxes on such goods increase
their price that they can be the same with the local ones at the market, so taxation is a
good tool to control this dumping.
 Controlling of the consumption for the undesirable commodities: taxes are used to
modify the consumption pattern of people therefore discouraging the consumption of
undesirable commodities can be done by imposing high taxes on these commodities and
to encourage the consumption of a given good can be done by imposing low tax on it
which lead its price to low also and its consumption raise up.
 Direct investment and allocate resources: taxes are used as a tool to direct investment
to the desired sectors; for instance, in Rwanda there is a policy of reinforcing the
agricultural production that is the reason why they have reduced taxes for those who
prefer to invest their capital in agriculture and this will attract many investors in this
sector.
 Balance of payment problems correction: balance of payment problems exist when
countries export less than what it import, then tax on import limit the consumption of
imported commodities and reduce import and in this case tax can be considered as a tool
to balance the position of this balance of payment of the country.
 Strengthening foreign relation: imposing taxes or removing the existing taxes promotes
strong relationship among foreign countries.
 Internalize external cost in the process of production: something transfer negative
cost of production to the community so the imposed tax on polluting firm is used to help
clean the environment so that people are not affected by those activities of private
producers.
 Protect environment: government may impose high taxes on the firm which are engaged
in the activities that may destroy environment, for instance, the mining company should
be imposed, with high taxes so as to reduce them from destroying the environment.
UNITY TWO: MONETARY POLICY SYSTEM
This is the arrangement of demand and supply for money together with the interest rate in order
to influence economic activities. The monetary policy is carried out by central bank through the
commercial banking system.

2.1Objectives of monetary policy
 Stimulating economic growth
 Increasing the level of local and foreign investment.
 Reducing income inequalities.
 Achieving full employment level.
 Achieving balanced growth.
 Balance of payment stability.
 Minimize the interest rates that finance government securities.
 Creating sound financial institutions with the economy
 Price stability.
2.2Tools of monetary policy
There are the instruments used by central bank in attempting to achieve the objectives of
monetary policy. «Monetary policy may be expansionary and contractionary monetary policy».
Expansionary monetary policy increases money supply while contractionary monetary policy
reduces money supply.
Those tools are listed below:
 Bank rate: It is the act at which commercial banks borrow money from central bank.
Central bank raises the bank rate if its aim is to reduce money supply and will minimize it
if its aim is to increase money supply.
 Open market operations (omo): central bank normally sales or buys securities in the
open market. Sales of securities by central bank reduce money supply in economy. Ex: In
case of sales, cheques are drawn from commercial banks which reduce the capacity of
creating credit of the bank.
 Variable reserve Ratio (Minimum legal Requirement): By law, all commercial banks
are supposed to deposit a given percentage of their deposits with the central bank. This
ratio used by the central bank to manipulate the amount of money in calculation in order
to reduce money supply and raises the revenue ratio of commercial banks.
 Moral persuasion: Here central bank gives advices and appeals to commercial banks in
the conduct of credit and lending policies. It is the method to persuade or convince
bankers to follow policies which the central bank is pursuing in interest of the whole
country.
 Special Deposit: In addition to the minimum legal reserve requirement, central bank
directs commercial bank to deposit money with them above the legal reserve requirement
which reduces money supply.
 Selective credit control: The central bank produces directives to all commercial banks
and other commercial institutions to direct more credit to certain sectors while other
sectors, credit is either reduced or restricted. This reduces the number of sectors getting
loans hence reducing money supply.
 Margin requirement: Before the commercial banks lend money, they ask borrowers to
provide collateral security which acts as a means by which bank will sell in case the

borrowers’ defaults in order to recover the lent out money. Ex: the loan will be 60% of
the security value. The different between the value of security and the value of the value
of the loan advanced.
2.3CENTRAL BANK
The central banks evolved due to the need for commercial banks to have clearing place to settle
each other’s financial obligations. The first central banks were private profit motivated financial
institutions that provided financial services especially commercial banks. It is a financial
institution established to manage monetary system of a country. Central bank serves as the
government’s banker, as banker to other banks and as a policy maker for monetary and financial
matters in economy.
2.4Functions of central banks
 It is the banker of the government: As the government banker, it acts as the repository for
government receipts and as the auctioneer for government debt. The government keeps
its funds with the central bank.
 The central bank is last resort to commercial bank: When commercial banks need money
for their depositors’ withdrawals, they can borrow them from central bank at the bank
rate.
 It designs and implements monetary policy on behalf of the government: Central bank is
responsible for ensuring economic stability of a country. As the country’s monetary
policy maker, it controls the amount of credit and money available, the level of interest
rate and foreign exchange rate.
 It a banker to international agencies: International agencies like UN keeps their funds in
the central bank of country in which they are working.
 It supervises and monitors the performance of the commercial bank in terms of the
service delivery: When the central bank finds that the performance commercial bank is
below the acceptable minimum standards, it has the power to close it.
2.5National Bank of Rwanda (BNR)
National Bank of Rwanda was founded in 1964 with its headquarters in Kigali. BNR has 4
branches: Northern branch in Musanze district, Western branch in Rusizi, Eastern branch in
Rwamagana, and Southern branch in Huye. This bank has statutory power or legal mandate to
implement economic and monetary policies in Rwanda.

BNR was in charge of controlling monetary policy directly during 26years before the
introduction of the Structural Adjustment Program (SAP) in partnership with International
Monetary Fund (IMF).
The SAP was introduced to control and eliminate the macro-economic imbalance as well as
distortion and inefficiencies in the financial sector.
2.6BNR Monetary policy between 1964 and 1994
Rwanda gained its monetary power of control in 1964 and BNR started to direct monetary policy
in order to support government to its objective of promoting economic growth after the country
gained independence.
The system which characterized direct control regime was credit ceiling and sector credit
allocation, regulated interest rate regime and exchange control.
2.7Monetary Policy Framework
The goal of monetary policy is set out in the National Bank of Rwanda (BNR) Law which
requires the BNR to conduct monetary policy in a way to deliver price stability and in low
inflation environment. Law no 55/2007 of 30/11/2007 governing the Central Bank of Rwanda
assigns to the BNR the responsibility of formulating and implementing monetary policy.
According to article 5 of the same law, the main missions of the National Bank of Rwanda shall
be:
1. To ensure and maintain price stability;
2. To enhance and maintain a stable and competitive financial system without any exclusion;
3. To support Government’s general economic policies, without prejudice to the two missions
referred to in Paragraphs 1° and 2° above.
These objectives allow the National Bank of Rwanda to focus on price stability while taking into
account of the implications of monetary policy for the whole economic activity and, therefore,
price stability is a crucial precondition for sustained economic growth. The National Bank of
Rwanda agrees on the importance of low inflation and low inflation expectations. These assist
businesses in making sound investment decisions, underpin the creation of jobs, protect the
savings of Rwandans and preserve the value of the national currency.
In pursuing the goal of medium-term to long term price stability, the National Bank of Rwanda
agrees with the Government on the objective of keeping consumer price inflation low and stable.
This formulation allows short-run variation in inflation while preserving a clearly identifiable
performance benchmark over time.
To achieve the price stability objective, the BNR currently operates in a flexible monetary
targeting framework with the monetary base as operating target, broad money aggregate as an
intermediate target and inflation as the ultimate goal. The BNR monitors movements in monetary
base on daily basis in line with the targets as set in the annual monetary program.
In that exercise, the BNR uses several policy instruments mainly open market operations,
discount rate and reserve requirement.

The key repo rate (policy rate) set by the monetary policy committee is used to signal the stance
of monetary policy.
2.8Monetary Developments
Money Supply
Broad money (M3) expanded by 20.9% (y-o-y) in December 2015 against (+19.0%) in
December 2014. The growth in money supply was mainly driven by the expansion in Net
Domestic Assets (+57.1%) of the banking system, offsetting a decline of 7.1% in Net Foreign
Assets (NFA). The increase in net domestic assets followed the expansion in net credit to
government (+427.1%) and credit to private sector (+26.7%).
Money Demand
Currency in circulation accounts for more than 60% of the total reserve money, indicating its
importance in overall monetary management. Currency in circulation comprises the outstanding
amount of banknotes and coins held by the public and banks, and it is determined by the cash
demands of both the public and the banking system. Thus, it can be subject to the influence of
various unforeseen developments in the economy.
Currency in circulation displays a pronounced seasonality, with weekly, monthly and annual
patterns and may be determined by the payment of salary advances or salaries, New Year,
Christmas and other events such as coffee campaign.
There is a relationship between currency in circulation and the development of economic
activity. Currency in circulation grew by 18.1% (y-o-y) in December 2015 against (+1.7%)
recorded in December 2014. Over last 5 years growth of currency in circulation averaged 10.3%.
This situation is explained by continued economic performance and an increase in domestic
government spending by 8.8% in 2015 compared to (+1.0%) in 2014. Overall, developments in
currency in circulation were influenced by the transformation process in the economy
Monetary Policy Stance in 2015
In 2015, the National Bank of Rwanda maintained an accommodative monetary policy stance
aimed at supporting the economy since there were no inflationary pressures during the year. As a
result, the economic financing by the banking sector improved. Total outstanding loans to the
private sector expanded by 26.7% (y-o-y) in December 2015 compared to December 2014

against 19.6% recorded in the same period of 2014 while broad money supply grew by 20.9% (y-
o-y) in December 2015 against 19.0% recorded in December 2014.
2.9The Role of National Bank of Rwanda
 Banking function: Central bank acts as a banker to the government, commercial bank,
and international bodies like UNDP, the World Bank but not to individuals.
 Control function: Central bank controls commercial banks through persuasion, directive
and inspection in order to ensure that monetary and economic policies are followed by
commercial bank.
 It also acts as an agent to government both the home and a board: The government
assigns the central bank certain technical duties that are financial nature and central bank
performs these duties by the half of the government.
 Advisor to the government: Central bank gives advises to government for analyzing the
economy and appropriate economic measures like formulating monetary policies.
 Regulatory function: National Bank of Rwanda regulates the rate of interest by its
rediscount rate or bank rate policy. Commercial banks have to follow interest rate
mentioned by BNR to lend their borrowers money.
 Financing function: Central bank is responsible for the issue and redemption of legal
tender notes and coins. It helps centralized in suing of notes in controlled manner. It is
also responsible for maintaining foreign reserves.
 Development function: It involves in development programs like rural infrastructures
facility which contribute to the development of economy.
2.10CREDIT CONTROL
Every year BNR set amount to be granted among banks’ customer based on the deposit amount
from public. BNR also determines the maturity of banks and give them the authority to grant
customers and credit sector based the government strategy in terms of economic activities
priority.
BNR used this procedure in order to maintain credit supply constantly and to evaluate the risks
incurred by commercial banks in order to help them to rationalize their behavior to their
customer. BNR required commercial banks that all loan application should be submitted with its
approval collateral demanded like land and house, commercial vehicles and trade inventories
where the value of collateral was expected to cover 200-300 percentage of the loans’ value.
According to the purpose of loan only BRD was authorized to give long-term loan for productive
activities and short-term loan to its staff.
2.11INTEREST RATE REGULATION
Conditions to interest rate applied by banks were totally similar to the central bank defined, the
interest rates was changed / modified based on the development in the economy and financial
conditions of the country.

According to kind of interest rate like deposit interest rate was supposed to attract saving and
enterprises, the lending rate was divided into two categories: preferential rate for economic and
social important activities and ordinary rate for non-priority activities such as construction and
personal consumption.
Example: 1967 and 1987, deposit rate increased from 1% for one month to 3%, the minimum
rate was 3.25%, 4%, and 4.5% in 1997 at the same maturity. From 1967 to 1987 interest rate was
constant at 9% while lending rate was increased from 9% to 17% for other sector, in 1979 before
fixing the maximum rate at 12% in 1987.
2.12BNR REFINANCING FACILITIES
It is a form of instrument/ tool provided the bank to implement its credit policy. BNR determined
the rate to give banks in order to finance productive activities at lower rate. Banks has divided
this loan into short-term facility to finance the current operation such as working capital,
promotion of agriculture and export sector, and long-term facility to finance investment. These
measures facilitate primary sectors like tea and coffee farming and mines production. This was
done according to these provisions of instruction no01/09 of August 3, 1990.
2.13FOREIGN EXCHANGE RATES
Between 1964 and 1995, the value of Rwandan francs was fixed by the president of the republic
after consultation with the cabinet members. In this situation, the foreign exchange transactions
were controlled by BNR.
From 1964 to 1965, 1belgian franc was exchanged against 1Rwandan franc and in 1966, the
Rwandan franc was devaluated at 5% against the Belgian one and USD= 100rwf. 1971 USD was
devaluated where 1USD= 92.11rwf.
Since 1995, the foreign exchange transactions have been progressively liberalized where the
exchange rate management framework was shifted from fixed regime to managed floating
regime.
2.14BNR MONETARY POLICY IN ECONOMIC DEVELOPMENT
In 1980, Rwanda has experienced a low level of economic development due to lack of good
governance and economic policy failure. During this period monetary policy instrument was
used directly rather than economic criteria which were created to deal with economic problem.

There was also inefficiency in financial resources allocation by distributing loans and rates to
non-productive companies like SORWATOM, UTEXRWA, etc. as a result of economic growth
decline. Indication of financial development such as broad money as a percentage of GDP and
credit to private sector show that in 1988 and 1993, the ratio was 12.2% and 17.1%while in 2000
and 2013 the ratio were 13.8%and 21.3%.
2.15REFORMS IN FINANCIAL SECTOR (1995-2015)
Financial liberalization: according to the problem involved in monetary policy depend on the use
of direct monetary policy instrument, 1995 liberalization of financial system started with the
objectives of removing number of barriers like interest rate control requirement for banks to lend
money to specific sector. Other reforms included strengthening of banks supervision and setting
rules and regulation and building the capacity of BNR staff.
In 1996 interest rates was fully liberalized, BNR adopted indirect monetary policy instrument
like discount rate and open market operation. There was also a reform in exchange rate system
launched by SAP in 1990. In 1995, the introduction of flexible exchange rate system with a new
exchange regulations such as determination of the exchange rate by the market and the
introduction of foreign exchange bureaus
National Bank of Rwanda KN 6 AV.4 P.O.Box: 531 Kigali, Rwanda Tel, (+250) 788 199 000 E-
mail:info@bnr.rw Swiftcode:BNRWRWRW Twitter: @CentralBankRw
2.16MONETARY POLICY MAKING DECISION PROCESS
BNR underwent substantial transformation in the way monetary policy decision are taken and
communicated to the public, progressively moving from the governor (BNR management) as
single decision maker to the monetary policy committee composed of internal and external
members. This development of BNR decision making process is in line with the effort of the
bank to increase its transparency and credibility as well as making monetary policy more
predictable by improving the quality policy decisions.
The BNR monetary policy committee (MPC) which is a policy making body of the bank
responsible for the formulation of the monetary policy, was constituted on March31,2008
following a decision of the board of directors meeting.
Initially it was composed of the governor of the bank and chairperson, two non- executive
administrators and the members of the internal monetary implementation committee.
At jubilee celebration, the MPC was currently composed of the governor and chair person; the
vice governor and vice chairperson; one non-executive board member appointed by the board of
directors of the bank the chief economist and director general, monetary policy and research
directorate, the director general, financial stability directorate, the director general operations
directorate and the director of monetary policy and research department as secretary.
The committee met at once a quarter and often as the need arises. The MPC decision are
implemented by the monetary policy implementation committee (MPIC) which met every Friday
to decide on BNR interventions on money and forex markets for the following week based on an

assessment of the market development and the banking system liquidity forecasts and in line
with monetary decision made by the MPC.
2.17BNR monetary committee meeting December 2013
Furthermore, BNR developed its monetary policy transmission mechanism, and develop support
amongst relevant stakeholders for the central bank policy action, while enhancing the principles
of accountability, clarity, transparency and predictability.
BNR uses a variety of tools to communicate its monetary policy such as semi- annual monetary
policy and financial stability statement (in February and August ),MPC press releases and press
conferences by the governor, central bank publications as well as the use of social media such as
twitter .BNR also organizes regular meetings with stakeholders in the financial sector to discuss
key issues of relevance to the central bank mission of achieving price stability and sustaining the
financial sector.
The first BNR Governor’s monetary policy and financial stability statement was presented in
March 2005 in Kigali to a big audience composed of a cabinet members ,representatives of the
business community ,CEOs of financial institutions, representatives of international institutions
in Rwanda, academicians and its staff.
To reach more people, from 2010 the statements was extended to other provinces and
universities out of Kigali .Two sessions of such statements are organized in year. The first
monetary and financial statement made in February gives the policy orientation of the year after
reviewing the achievements and challenge of the previous year, while the second made in August
provides a mid-term review of the performance over the first half of the year and sets out the
projections for the remaining period of the year.
Apart from the monetary policy and financial stability statements, the BNR monetary policy
committee decisions are communicated immediately after the meeting of committee through a
press conference by the Governor where he (or members of MPC)Responds to media questions.
After the press
Conference, a press release is published by different media and posted on BNR website. In
addition, a technical report giving the rationale for MPC decisions is also published on the BNR
website. It summarizes results from analysis done on the global and domestic economies and
assessment of the outlook for growth and inflation.
2.18COMMERCIAL BANKS IN RWANDA.
Before 2000, banking system was in critical state and banks were limited. In 1995 two
commercial banks were open in Kigali with a few branch offices outside of the city functioning.
In 2009 Rwanda has seven commercial banks engage in mobilization of saving and allocation.
Some example of commercial banks in Rwanda: COGEBANQUE, Ecobank, Bank of Kigali,

Kenya Commercial Bank, I&M Bank, GT Bank, Banque Populaire, Unguka Bank, Agaseke
Bank.
Function of commercial bank
 Acceptance of valuable articles and documents for safe custody on behalf of customers.
 The carry out credit creation: It is a process by which commercial banks make more
deposits in excess of the initial money deposited with them.
 They accept deposits from public and they take care of these deposits.
 They transfer money on behalf of customers
2.19FOREX BUREAU
There are financial institutions whose activity of buying and selling currencies. The movement of
international funds and trade sometime requires the use of currencies of other countries. Forex
Bureau only operates in countries where trade in foreign currencies is liberalized. In some
countries, it is only central bank and some selected commercial banks that sell foreign
currencies. Forex bureau works under the supervision of the central bank to avoid illegal money
transfer practices and monitor and regulate the use of foreign currency.
2.20Forex bureau in Rwanda
Forex bureau I Rwanda, Rwanda has a good number of forex bureaus that exchange currencies.
Among them are Alfa Forex bureau, Vagep Forex bureau, Express Forex bureau, Kigali National
Forex bureau and many others.
References:
1) Herbert M. (2009). Fundamental Economics East Africa Edition. MK Publisher LTD;
Kampala- Uganda.
2) James T. (2011). Economics for Rwanda concepts, analysis and Application, Fountain
Publishers; Kampala-Uganda.

UNITY THREE: INFLATION
It is a percentage by which the price of goods and services is rising over a given period which
can cause the purchasing power to fall down. According to Tumwine (2011) in his book titled
Economics for Rwanda; the rising and falling price of particular goods and services is totally
different from inflation because the price of these particular goods and services can be raised or
fallen according to its demand. Inflation occurs when the price are rising by the same degree
across the whole economy.
The inflation is mostly measured by using index numbers with seeing the change in price level.
I=
𝑝−𝑝𝑜
𝑝𝑜
∗ 100where P is the price of the current year
Po is the price of the base year
3.1THEORIES OF INFLATION
The monetarists agree that inflation can only occur if there was an increase in the money supply.
According to this approach, when the price rises by 10% there is an inflation of 10%.
The monetarist agreed that the increase in money means the consumers and business find that
they have excess money balance which would be spent or invested. This causes an increase on
aggregate demand and inflation.
Keynesian: they agree that inflation is not only caused by increase in money supply but also
other factors in real economy can contribute to the rise of inflation.
Keynesian theory major inflation by observing the changes in the average price of goods and
services over a period, they believe that the causal link was the other round increase in the
money supply and not that increase in the money supply caused the increase in the price level.
3.2Inflation Developments in Rwanda (2015)
Generally, inflation in Rwanda continues to record moderate and low levels though it has been
increasing since January, from 1.4% to 4.5% in December 2015. On average, headline inflation
increased from 1.8% in 2014 to 2.5% in 2015, mainly driven by rising food prices, especially
influenced by vegetables’ prices. Downward pressures came from transport prices following the
trend in international oil prices.
Domestic inflation also increased but remained benign, standing at 3.0% in 2015 on average,
compared to 1.9% in 2014, while imported inflation slid to 1.1% in 2015 from 1.5% recorded the
previous year. The rise in domestic inflation reflects the increase in domestic food prices, while
imported inflation varied following the trend in international oil prices.
Core inflation, which excludes fresh products and energy, slightly declined on average from
2.7% in 2014 to 2.1% in 2015 justifying the BNR’s decision to maintain the ongoing monetary
policy stance to continue supporting the financing of economic activities.

3.3CLASSIFICATION OF INFLATION
The inflation can be classified according to its degree of intensity or the speed of change in price:
1. Mild/ gradual (creeping inflation): it is referred to a slow rise general price level
2. Hyper/ Runaway/ Gallop: it is when the price is changing at very high rate.
Classification of Inflation according to its causes
 Demand pull inflation: is caused by the increase in aggregate demand due to increased
private and government expenditure. Many factor cause this inflation include; increase in
population, increase in available income because of increased wages, increase in
available credits and reduced taxation.
 Cost-push inflation: it is also known as “supply shock inflation” is caused by a drop in
aggregate supply (potential output). This may be caused by different factors like natural
disaster, increase in price of input; for instance, decrease in the supply of oil result in
increase of oil price.
It also occurs when the firm increases the price in a response to the increase of the
production cost or the firm can rise price to maintain or protect their profit margins after
experiencing a rise in its cost of production.
 Wages price inflation: this kind of inflation is caused by the increase in wages. An
increase in wages makes the producers to raise their price in order to maintain their
margin profit.
For instance:
high wages
in industry x
high wages
in industry y
high cost of
production
in industry x
and y
high price of
commodities

 Price-wage inflation: when price of commodities increase, the workers also must be
increased in order to satisfy their needs.
This is illustrated below
 Imported inflation: this is a type of inflation where the commodities imported in the
country on high price. It import inflation along the goods imported priced at high cost.
For instance, if the product of petroleum increased while imported in the country and is
used in transport and generate thermal energy this will lead to the increase in the price of
transport.
 Structural inflation: this kind of inflation result from the structural problems of prices
which keeps down the level of output.
 The sectorial inflation: it happens when there is an increase in the price of goods and
services produced in certain sector of industries, for instance, an increase in the cost of
producing crude oil would directly affect other sectors related to the oil industry.
Rate of
inflation
High cost of
production
High prices

3.4CAUSES OF INFLATION
Inflation can be caused by different factors, in those factors, some can cause either increase in
demand or reduce in supply.
 Rapid increase in population: nowadays most country are experiencing with high
population growth rate, at this situation those countries do not have the ability to produce
the commodities as it is needed by their population, this create shortage in supply and
lead to the persistence price increase.
 Structural breakdown of industry: when the industry breakdown due to poor
management, production reduces immediately and this causes inflation in the economy.
 Dispansionary monetary policy: it refers to where there is more availability of money
through cheaper and easiest accessible credit. When the government gives credit to many
people, the purchasing power of population increases and this is away which lead to the
sellers realized that there is an increase in demand and they increase their product prices.
 High taxes: when the government is imposing high taxes on the producers and sellers,
they try to handle this amount by charging high price to their consumers.
 Deficient financing: when government has deficit budget, it will be forced to print
money year after year so this will lead to high level of money circulation causing
monetary inflation.
 Speculation: when people expect the price to increase tor they expect major shortage of
commodities, the producers refuse to sell what they have in stock and when they are
selling those commodities they do so at high price and when the price start to increase
due to the increased demand it acts as a result of inflation.
 Foreign exchange shortage: when there is a shortage of foreign exchange importers
can’t import commodities in quantities that are sufficient for domestic market, the result
is the scarcity of commodities which leads to inflation.
3.5EFFECTS OF INFLATION
Inflation has positive and negative effects; it means that inflation can be desirable or undesirable.
Inflation is desirable when the rate of it is low that is when it is creeping or mild inflation. The
consequences of inflation affect individuals, firms, government and the economy in general and
not only economically but socially also and politically.
3.6 Positive effect of inflation
 Inflation can lead to increased level of production; most producers are motivated by the
profit and prices then persistence increase in the general price level is therefore a good
motivation for investment and production.
 It increases the physical asset: inflation discourages people from holding cash at hand and
they prefer to keep them in their physical assets or other wealth such as house, land and
livestock.

 Borrowers of fund gains from inflation for the real value of money paid back is far less
than the value that they received when they borrowed, as the price increases, the value of
money reduces.
 Inflation increases the government revenue base; when there is inflation, consumption
expenditure increases hence revenue is collected by the government from the
consumption taxes.
 Reduction of unemployment due to new job creation owing to the acquisition of the
investors with the expectation of money to lose their value by the time of paying back.
 It forces people to work hard so as to maintain their life standards during the increased
price period.
 Inflation leads to the availability of variety of commodities with higher prices, when there
is inflation the importers who did not supply goods and services with higher price are
now starting to supply them with the expectation of higher profit.
 It leads to the development of agricultural production through increased demands,
 Low level of inflation will leads to increased firm experiencing in profitability and this
will lead to the provision of fund for investment purpose.
3.7Negative effect
 It creates uncertainty: in situation of uncertainty both domestic and foreign entrepreneurs
will be affected to invest, this will show low economic potentiality growth.
 Low saving: it is a factor that contributes to the circle. During the period of inflation,
people who don’t supply funds are accounted with the problem of saving. Decreasing
level of saving and hence of investment will lead to a decline in economic growth and
development.
 Inflation makes the export in a country with high price more expensive and less
competitive in region and world market.
 It reduces the amount of foreign exchange that a country should earn to its exports and
this is because of fall in demand for export of a country with high price hence reduces
export volumes.
 It leads to the increase in balance of payment deficient with its associated negative effect.
Import increases because the sellers like in country where the price are high which lead to
the deduction of exports volumes hence increasing deficit gap.
 The standard of living for fixed income earners like government employee goes down
because their wages and salary don’t reflect to this increase in price in the country.
3.8SOLVING INFLATION
To avoid the excess of inflation effective policy to control inflation must be focused to highlight
the cause of inflation in the economy at a particular time. Those policies are listed below:

 Monetary policy: it can control the growth of demand and hence control of inflation may
be done by increasing the banks rate, selective credit control, open market operations
currency forms and using increased interest rate.
 Monetary policy is also respected to control money supply.
 Fiscal policy: it deals with the government revenue and expenditure. As the government
put more money in public activities, this will be reduced in order to reduce inflation level.
 Price income policy: this involves adopting policy that increase people without
increasing price, for instance, Umurenge SACCO, Vision 2020, Umurenge practice in
Rwanda etc.
 Increase in the level of output, the government can increase local production by
encouraging both local and foreigner investors through infrastructure development. The
government can also encourage the importation of commodities with lower price to the
local market.
 Discourage the export of some goods, commodities that are lacking in the country
should be discouraged from being exported to another countries, this can be possible by
imposing high taxes on these export.
3.9Conclusion
All in all, inflation is not simply a matter of raising prices but perhaps it can be the nut of
inflation.
According to Assimwe (2009), fundamental economic (p203), inflation is persistent rise in the
general price level in the economy over a given period.
3.10 DEFLATION
It refers to persistent reduction I the general price level in the economy I a given period.
To be classified as deflation, the decrease in the price must be general and persistent. Deflation is
measured in the same way as inflation, only the difference is that the deflation change in the
negative price level persistently while for is positive.
Deflation also causes the real interest rate to rise, during a deflation prices of assets fall thus
personal wealth and inflating the real value of debt which result in higher business failure. It is
clear that deflation in the economy brings risks and problems as well as opportunities and
benefits.
3.11Deflation and economic policy
Deflation is normally controlled by an expansionary monetary policy with the central bank by
allowing the money supply to expand. This causes interest rate to fall and stimulates consumers
spending and investment demand. When the prices are falling down, lenders especially
commercial banks callback loan or refuse to lend out to potential borrowers.

Reference lists
1. Emmanuel, D , Fiscallite oppliqee ,Tommel, DUNOD, Paris,1998. P1”
2. Goodwin M. et al (1989) Administration and compliance cost of taxation, bath.
3. Musgrave R et al, (1980) Public finance in theory and practice (5th
edition), Mc graw
hill.
4. Decant E. (1965) Earmarking and expenditure A survey and a new test, Nation tax
journal.
5. Herbert M. (2009), MK fundamental Economics of east Africa, MK Publisher Ltd;
Kampala-Uganda.”
6. 2) James T. (2011). Economics for Rwanda concepts, analysis and Application,
Fountain Publishers; Kampala-Uganda.
7. National Bank of Rwanda KN 6 AV.4 P.O.Box: 531 Kigali, Rwanda Tel, (+250) 788 199
000 E-mail:info@bnr.rw Swiftcode:BNRWRWRW Twitter: @CentralBankRw
8. Charles G.(2008), taxes and charges in Rwanda, MINEDUC; Kigali city.

PUBLIC FINANCE AND TAXATION

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