DR Congo power board to be sacked- Window dressing???

It is estimated that the DRC should invest as much as USD 749 million in its energy sector (8.8% of the GDP) per year for the next decade to develop the generation capacity for export. The expected net revenues from this export would be USD 519 million per year (6.1%) (The World Bank Group, 2010). The potential net revenues as well as the initial investments are huge for the DRC.

However, with a GDP of only USD 10.5 billion (current prices) and a gross saving rate of 17%, the DRC simply does not have the financial capabilities to fund those billion dollars projects. Therefore, having access to Foreign Direct Investments or attracting Independent Power Producers will be crucial to develop the sector. Today, the majority of FDI is directed towards mining industry estimated to be more lucrative (AFBD/OECD, 2008). The problem is that the DRC is often perceived, rightly, as a very difficult place to do business in, with a very low level of protection for the investors (The World Bank Group, 2011).

The recent case of the Canadian First Quantum which has seen its mining titles withdraw after an investment of more than USD 593 million (First Quantum, 2011) is the last example of the lack of protection that investors are exposed to. 

To attract more foreign investors in its energy sector, the country must work on improving the country’s investment climate and competitiveness.

According to the Societe Nationale d'Electricite (SNEL) itself, the involvement of the government in its daily activities is one of its major problems and the high level of corruption[1] within the ministries and the public companies is increasing the inefficiencies in the sector (Ministere de L'Energie Congolais, 2009)

I argue that sacking the Board of Directors of SNEL is simply window dressing if they do not address the real issues…

Meantime, good luck for today demonstration and well done to the committee...

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[1] The DRC rank on the Corruption Perception Index is 164 on 178 (Transparency International, 2010)

Inflation and Money Market- does BCC rate have (really) an impact on the liquidity?

The year-on-year inflation has increased by 120 basis points (bps) during last week to stand at 19.38%. The annualized inflation rate on his side dropped from 25.44% to 24.94%.

Last week T-bills auction was largely undersubscribed, by approximately USD 20 million on a total envelope of almost USD 100. This is probably the result of the CDF shortage on the market observed few weeks ago. The weighted average yield for the auction was 26.59%, 45 bps drop from the previous week while the real interest rate on the T-bills dropped by 165 bps to reach 7.21%.

The Central Bank (BCC) offering is most of the time high enough to accommodate commercial banks’ demand resulting in high interests payments from the BCC to the commercial banks- the T-bills revenues represents, for the majority of the banks operating in the DRC, their main source of revenues.

In theory it makes sense to increase the size of the envelope (leading to higher yields) to attract more CDF but in the ‘unique’ case of the DRC, I argue that it does not make any difference on the market liquidity, worse it increases the cost of the monetary policy for no reason. My reasoning is that the T-bills in their current form are the ‘only’ financial instruments available to commercial banks in CDF. Therefore they have no other choice than to buy T-bills with their excess liquidity if they want to avoid idle funds! Therefore, the interest rates could be lower and the demand from the banks would be the same as they have absolutely no alternative (banks only lend to their customers in CDF in exceptional occasion, almost all loans are in USD)!!!

The proof: when the BCC introduced this new form of auction few years ago, the yield on t-bills dropped below 5% (negative interest rate) because banks were afraid to be rejected by the BCC!

On the customers’ side, I had the opportunity to discuss with several multinational companies CFO & treasurers when I was a treasurer myself and they are not interested in T-bills! Most of them only want their bank to be able to convert their excess CDF in USD for import (or other need denominated in USD) purposes or simply to prevent their CDF revenues to shrink with depreciation.

As a result, the interest rates offered to commercial banks to reduce the CDF liquidity on the market are totally irrelevant in the case of the DRC. As long as T-bills will be their only alternative, the banks will purchase them, no matter the rate!!!