The Central Bank of Congo (BCC) monetary policy is still… impotent…

In 25th of January article, I argued that the Central Bank decision to increase its prime rate from 7 to 14% wouldn’t help curb the Congolese Franc (CDF) depreciation.

Unfortunately (for the country), I was right and 5 months later, the local currency further depreciated by almost 18%.

Earlier this week, the BCC has increased its prime rate from 14 to 20% to stabilize the CDF.  Once again, I doubt this decision will have any positive impact for the same reasons explained in my previous article.

With an inflation of 36%, the real interest remains largely negative (-16%) and therefore, there is no incentive to keep CDF. Why would someone buy treasury bills in CDF if the return worth less than the principal invested equivalent in United States Dollars (USD) (remember that the USD is the primary currency in the DRC)?

The reality on the ground is that people lost trust in the CDF; therefore, they try to get rid of it as fast as possible. People are expecting the local currency to depreciate everyday and are ready to buy USD at any rate fueling the CDF depreciation further… It is a vicious circle, a self-fulfilling prophecy.

In my opinion, the only short-term remedy would be for the BCC to intervene on the Foreign Exchange market by selling USD to reduce a little bit the pressure on the CDF. However, the international reserves are limited to CDF 717m. Therefore, the intervention can only be limited.

Last week the Chamber of Mines, announced that they are expecting a record production of copper for the year 2017 to 1,05 m tons. Copper is DRC primary source of foreign currencies. Hopefully, this expected increase of production (+2,4%) would allow the BCC to rebuild its international reserves in order to intervene on the market and limit this hemorrhage.  

Another bank is going down …

On the 8th of June 2017, the Central Bank (BCC) Governor has issued a statement to inform us the people « avis au public » that Fibank was going to be liquidated…

However, the Governor wants to reassure the bank’s customers that no one deposit will be lost as another healthier bank, Afriland Firstbank, is taking over the (healthy) assets and liabilities of the falling bank. This may prevent a rush to the cashiers’ desks…

Fibank RDC SA was a subsidiary of a West Africa banking group with its head-office in Banjul, Gambia. The bank has started operating in the DRC in February 2009.

The bank was under the management of the Central Bank for the last 18 months due to poor performance (notably in terms of non performing loans) with the mission of stabilizing the institution and (hopefully) to reinforce it…

Whatever the reason for this liquidation, this clearly demonstrates another failure from the banks regulator in preventing another bank to get into trouble.

This is the second bank under BCC supervision in less than 10 years that is liquidated and now all eyes are, once again, on BIAC. Although, I think, economic operators have already factored in the potential bankruptcy of BIAC; no one really knows how another bankruptcy will impact people (low) confidence in our banking sector.

It is worth noting that Fibank was one of the smallest banks while BIAC was the fourth largest bank in the DRC.

Today, it seems that the BCC is more proactive in dealing with those issues although it may be already too late to save BIAC…

On to the next good news…  

Macro update (and the correlation between the CDF depreciation and the BIAC case… )

It’s been a while since I have updated you on the main economic indicators of the DRC. I guess I was expecting to come back to you with good news at some point but while I am still waiting for it to happen let’s have a look at the actual performance.

Let’s start with one of my favorites because of its impact on the other indicators, the exchange rate. Since the beginning of the year the local currency has lost 19% of its value against the US dollar! Since January the 1^st, 2016 the currency has depreciated by 56% (while it was stable for 4 straight years before that)!!!

They are so many reasons that can explain this horrendous performance (commodities prices decrease, budget deficit, money creation, etc).

However, one of the reasons used last year by the former Prime Minister is not one of them! Indeed, the latter said last year that the main reason he has instructed the Central Bank of Congo (BCC) to stop refinancing the then 3^rd largest bank of the country (leading to its quasi bankruptcy) was that this operation led to a depreciation of … 3%!

He was a bright man, therefore, all things being equal, you would expect that his decision would have had a positive impact of some sort on the exchange rate but since that decision and the resolution to put that bank under the control of the BCC, the Congolese Franc has lost 51%!!! Therefore, I am struggling to see the correlation between the BCC lending to BIAC and the depreciation J. It would be like saying that the supervision of BIAC by the BCC led to a 51% depreciation of the local currency but this is a shortcut I am not ready to take contrary to the previous Prime Minister.

Anyway, we could debate all day on who/what is responsible for this situation but there is something more important. The impact it has on people lives. The country is importing almost everything he is consuming. Therefore, the CDF depreciation led to an important inflation of good and services (+31%) reducing drastically the purchasing power of anybody paid in the local currency (mainly civil servants), as their salaries have not been adjusted for inflation.

As an example, a civil servant with a monthly salary in CDF equivalent of USD 100 (please note that this salary is not fictive) last year barely earns USD 65 today! I was already struggling to understand how one (with a full time job) could survive with USD 100 but now…

The FOREX reserves dropped to USD 718m representing only 3 weeks of goods and services importations. As a result, we cannot expect any impactful intervention from the BCC anytime soon…

But we have a good new! We finally have the 2017 budget!!! Youhou! It is USD 3billion bigger than the one presented by the former Prime Minister (that did not stay long enough on the job to implement it). I can’t wait to have more details to understand how they intend to finance this budget increase based on the economic situation of the country…

Road infrastructure in the DRC- Interesting data from the World Bank

Road infrastructure in the DRC- Interesting data from the World Bank

I came across a World Bank (WB) report on the DRC named « Exogenous Shock, Macroeconomic Stability and Development: Economic Policy Options » published in December 2016.

I have discovered very interesting facts on the country road infrastructure. The WB reports that the level of coverage of the road network places the DRC well below the African average, with its Road Network of General Interest (RRIG) representing a spatial density of roads of 25 km/1000 km2 against an African average of 204 km/1000 Km2. Coverage in relation to the population is 0.9 km/ 1000 inhabitants compared to an African average of 3.4 km/1000 inhabitants. It is worth noting that only 26% of this RRIG can be used today!!!

The lack of quality and quantity of road infrastructure obstructs the development of economic activities and hinders the development of the private sector. Indeed, road infrastructure provides physical access to resources and markets and facilitates trade between the country provinces. In 2013, 24.8% of firms reported transportation problems as a major constraint to their operations according to the report. This is due to the fact that the majority of the territory remains inaccessible by roads, which makes the displacements of people and goods very expensive.

The WB continues by saying that poor infrastructure in the DRC leads to productivity losses of up to 40% and that by making the right investments, business costs could be reduced by 80% and the costs of transporting agricultural products could be reduced by 70%!!!

The maintenance is another issue. Indeed, the maintenance deficit accelerates the deterioration of existing roads and prevents the benefits of network expansion in circulation. The reports says that in 2012 for example, the Office des Routes (government agency in charge of road maintenance) was supposed to maintain 13,000 km of roads but only maintained 7,600 km, representing 58% of the total.

Although the report recognizes an important increase in road infrastructure expenditures and an improvement in the sector governance it is also saying that the government has invested an average of 1.8% of GDP over 2008-2012 in its urban and inter-urban networks, which is 1.2 percentage points lower than necessary to ensure adequate maintenance and progressive development of the road network.

Last but not least, the DRC is almost always the most expensive country in Sub-Saharan Africa (SSA) when it comes to cost of materials and work on road infrastructure as shown in the table below.

Table 1: DRC ranking on cost of materials and work on road infrastructure compared to SSA countries

	Asphalt	Crushed Stones	Gravel	Simple work on dirt road	Surface treatment	Double surface treatment
DRC ranking	2	2	1	5	2	1
Number of countries	11	8	10	12	6	7
Variance to the mean	+44,1%	+44,4%	+109,6%	+7,3%	+22,1%	+33,2%

Obviously, the full report provides more details on the country road infrastructure but the few statistics presented above were an eye opening for me on this crucial area of our economy. Not only we are far behind our SSA peers in terms of road network development but we are also one of the most expensive countries when it comes to acquisition of materials and to the work on roads itself. Needless to say that with our limited State Budget (not yet voted for 2017 by the way) this is not good news…