De-dollarization

First of all, I would like to wish you a Merry Christmas and a happy new year 2013.

Today we have had our last meeting of the year with the Central Bank of Congo (BCC). The topic was: the country de-dollarization process. For those of you unaware of the project, the BCC has started a process few months ago to ensure the Congolese Franc (CDF) finally plays its roles (payment, saving, investments tools…).  Indeed , today, the Congolese economy is highly dollarized and the local currency is replaced by the USD in almost all transactions; banks balance sheets are 90% in USD, bank loans are granted in USD, ATM distribute USD notes, shopping is done in USD ( and sometimes even in EUR). Therefore, the CDF is seen as a sub-category of the USD. One of the only reason people maintain CDF is to be able to pay taxes; although some taxes can also be paid in USD.

The monetary authorities’ objective is to inverse this trend by 2017. A committee including members of the BCC, the government and the Congolese banking association has been appointed to work on the matter. A very detailed timeframe has been put in place to reach this objective (headlines can be provided on demand).

As always the key word here is 'trust'. There is a reason why Congolese has turned to the USD at the first place. The lack of trust in the local currency and in the ability of the country authorities to maintain its purchasing power are the main reasons the demand for CDF remains marginal.

 Duchene and Goujon (2006) argue that the following conditions have to be fulfilled to successfully implement an economy de-dollarization:

·         Price and currency stability

·         Strong growth

·         Significant Forex reserves

·         …

The track record observed over the last 5 years is positive when it comes to those  factors.

However, the authors insist that the biggest risk is the political changes. I am not a political expert but I am pretty sure the political stability will be the main stumbling block toward the authorities’ objective…

Recently, the BCC has successfully introduced CDF notes of 1 000, 5 000, 10 000 and 20 000 without fuelling the inflation as feared by many. This is one of the many steps toward the above objective. The success of this operation was based on the people trust toward the Congolese authorities and I have to admit it was a success. However, this was a small operation compared to the magnitude of the de-dollarization

I argue that this process was long overdue and I am glad the government/BCC have decided to work on this issue. The method will be key (the BCC has already pledged that no one will be forced to convert its foreign currencies in CDF) as well as the trust in the authorities to achieve this goal…

Rendez-vous en 2017…

DRC new notes of 1000, 5000 and 10000 and its ‘Polémique’- some reactions

Yesterday I had a lunch with several friends and two of them told me: ‘this is very good but but it does not change 'real people' lives’. Indeed, what is the point of having new 'big' notes if people are unpaid and/or still live with less than a dollar per day anyway...?

According to the World Bank, 95.15% of the Congolese was living with less than 2 dollars per day in 2006 while 87.72% with less than a dollar. The GDP per capita (constant 2005 international $) was USD 329. Please note that this number assumes that the wealth is equally distributed among all Congolese!!!  

I fully agree with them but I do think it is still something that had to be done for the 'overall good’ of our currency and our economy. The main challenge remains to grow this economy faster without leaving anyone behind...

DRC new notes of 1000, 5000 and 10000 and its ‘Polémique’

Lately the hottest economic topic on Congolese lips was the issue of bigger notes. From waiters to economists, everyone was debating on the effects on inflation and/or local currency depreciation that those new notes would have.

Before giving my own opinion on this matter, let me provide you with a little bit of context. The data are provided by the Central Bank of Congo (BCC).

When the Congolese Franc (CDF) was launched on the 30^th of June 1998, CDF 100 represented $ 72.5. At that time the biggest note was CDF 100. Until the 2^nd of July 2012, and the release of the new notes, the biggest note was CDF 500. However, this note only represents 60 cents of a dollar today. To purchase a good of $ 72.5 in 1998, you only need a note of CDF 100, today you need 133 notes of CDF 500. My friends, amateurs of good champagne, will need around 360 notes of CDF500 for a good bottle!!! No wonder why the local currency is naturally replaced by the USD in Congolese daily transactions...

Regarding the inflation concerns, the BCC plans to release CDF 8.9 billion ($11 million) of new notes while withdrawing from the market CDF 17 billion ($19 m) during the month of July. This will prevent an increase of the liquidity in circulation. To avoid, merchants to round up prices, the BCC will also ensure small notes do not disappear from the market.

Regarding the CDF depreciation worries, the BCC is ready to intervene on the market and use its international reserves (USD 1.3 billion) to do so.  

So where are we 11 days after the release of those notes???

The exchange rate remains fairly stable with a small apreciation of the CDF (+0.3%) . The inflation remains below the 8%. Although it is a little bit early to claim victory, I argue that if the government continues to manage this process with the same rigour, the apocalypse on the economy predicted by my hairdresser and several economists won’t happen. 

I argue that if we want this currency to play its ‘legitimate’ role in this economy; this is a good first step. But the authorities should not stop there on their quest for economy ‘de-dollarization’. The next logical step to me should be to oblige ALL companies to pay their taxes in local currency. This will increase the demand of CDF by large companies and increase its value...

Time will tell if the BCC has won its bet. There is a huge lack of trust toward the Congolese authorities and this represents a good opportunity to demonstrate that they can be trustworthy.

I hope they will grab it...  

For the first time in years, the real interest rates on Congolese Central Bank (BCC) treasury bills are negative...

The BCC T-bills have been one of the most lucrative financial tools over the last 5-6 years with a real yield well above the ones in other monetary zones. While placements in EUR and USD was generating a 0.5 to 2% yield (in nominal terms), the BCC T-Bills interest rates (in real terms) have been above 20% p.a. for a long time.

However, the T-Bills interest rates have decreased to a meagre 3% p.a. on the 11^th of April from 16.3% a month earlier (both rates in nominal terms)!

There are two main factors explaining this decrease. First, the Central Bank has decreased its prime rate to 17% which has a direct impact on interest rates. The second and most important factor is the volume of T-bills sold by the Central Bank. In a one month period the BCC has reduced its offer by more than CDF 65 million increasing the competition among the commercial banks. As a result, to get a piece of the cake some banks have bid as low as 3%.

Central Bank T-bills are the only financial instruments available for investors who are looking to invest in the DRC local currency. There are two possible consequences from this drop. The first one (my favourite) is nothing will happen as investors have no other choice whatsoever.   The second choice (my colleagues favourite) is that people will start selling their Congolese Francs (CDF) to buy USD and invest somewhere else leading to a depreciation of the local currency. The reality is that most people keep CDF for only one reason, which is to pay taxes. Their excess CDF liquidity is only kept because they are waiting for a good opportunity to buy some dollars... 

As a result, I argue that the only impact will be a dramatic drop in commercial banks interests’ revenues...

Bhpbilliton (Bhp) is leaving the DRC- Quel Gâchis!

... 3 to 4 billion American dollars in Foreign Direct Investment, more than 9,000 jobs during the construction phase, millions of dollars in taxes revenues, an extra 2 500MW of electricity generated for the country...Once again the DRC has missed an incredible business opportunity to transform its economic landscape. 

Bhp project was a World Class 880 000 tones aluminium smelter. The aluminium industry is energy intensive and this project required approximately 2,000 MW, almost three times the current production of Inga I & II.  Therefore, the construction of INGA III, with an estimated capacity of USD 4,500 MW, would have stopped to be a dream for the Congolese people. Indeed, we keep on hearing since our childhood how great our hydro electric power potential is amazing but in reality less than 10% of the Congolese have access to electricity according the minister of energy itself! 

The question is: Why a country would let the world largest mining company cancel a project of this magnitude? I wish I had the answer but one thing is sure; the DRC has demonstrated once again why it is so badly ranked years after years in the World Bank Doing Business report. 

The vision for this country should also be questioned. I am hearing here and there (I am back in Kinshasa by the way) that Bhp leaving the country is not a big deal because Westcor will carry on with the project! I argue that Bhp project was by far a more profitable project for the DRC because it would have created new jobs here as well as increase the confidence the investors have in this country. Indeed, if Bhp had completed this project, investors’ confidence in the DRC authorities to protect foreign companies’ investments would have surged significantly.  I am hearing that it would have help with the regional integration and my answer is: do you really think the other 4 countries in the Westcor consortium have waited for us to develop their own capabilities??? The Republic of Congo (our neighbour) is about to finish its new power station and may be soon exporting some of its energy to the DRC!!?!?

During the LONG 6 years of negotiations things have changed in the rest of the world (oh yes, we, Congolese, tend to think that the rest of the world is waiting for us and dream to invest in our beautiful country no matter the business climate). China has significantly increased its aluminium capacity production and Bhp project in the DRC is not as interesting as it used to be few years ago...

This is a bad news for our country! One more...