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...