Why is the BCC interest rate increase won’t change anything?

The Central Bank of Congo (BCC) has increased its prime rate to 14% p.a. from 7% p.a in order to curb the inflation that has reached 29,42% as of January the 13^th , according to the same BCC.

In a “normal” economy, this increase would impact the inflation by reducing spendings/investments due to higher borrowing rates and increasing savings leading to less cash in circulation. This increase should also have a positive impact on the currency, as placements would become more attractive…

Well, this won’t work in the DRC, and it never did, for several reasons…

First, the BCC rate has almost no impact on the rate commercial banks are offering to their customers. Indeed, 85-90% of banks’ loans portfolios are in US dollars. Therefore, this increase will only impact loans in CDF that barely represent 10% of the total loans disbursed in the economy. The main problem here is that commercial banks are not indebted to the BCC… 

Secondly, there is almost no financial instrument in CDF except from the BCC T-Bills.  With an interest rate of 14% p.a., the maximum yield one can expect for a 7 days maturity T-Bill (the only maturity offered currently) is 14% p.a. With an inflation rate of 29,41%, the real interest rate is negative, therefore not attractive.

Finally, the weakness of the local currency is playing a major role here. Indeed, the main part of the inflation is “imported” due to the fact that the country is importing almost everything that it is consuming. Therefore, the weaker the CDF, the higher the inflation. As a result, even if people wanted to keep their savings in CDF (which is not the case), they will tend to keep them in hard currencies such as the USD to maintain their purchasing power. This is a vicious circle, the weaker the CDF, the higher the inflation, the higher the demand for foreign currencies leading to a further decrease of the CDF…

For all those reasons, the monetary policy of the BCC is simply impotent…

One recent measure taken by the BCC may actually improve the situation. Indeed, the BCC has increased the rates of the mandatory reserves for banks on current and saving accounts in foreign currencies from 10 to 13%. This measure has helped withdrawing more than CDF 150 billion ($125 million) from the economy. Several banks had to borrow CDF on the interbank market or at the BCC. In the long run, this may oblige some banks to sell their foreign currencies to respect this regulatory requirement. This could reduce the pressure on the CDF… just a little bit…

Congolese banks hit by the slowing economy in 2016...

Let me start by wishing you a happy new year 2017!

In my previous article, I wrote that the slowdown of the economy has had an enormous impact on the financial sector. Thanks to the Central Bank Governor exchange of greetings ceremony speech, we now have some figures to back what could be seen as speculations in my previous article.

Indeed, in his speech, the governor, who revised the growth downward one more time to 2.5% for 2016 compared to 9.5% and 6.9% respectively for 2014 and 2015, confirmed my previous assertion.

At the end of November 2016, the total balance sheet of the banking industry decreased by 5% to USD 4.9 billion compared to an increase of 11% for the same period the previous year.

Loans and advances to customers grew by a meager 0,6% compared to 15,4% for the same period the previous year while de total deposits have decreased by 6% to USD 3,4 billion.

The industry profit has decreased by USD 25,51 millions during the same period. I wrote in my previous article that: “the shrinkage of the economy led to several (small) businesses to close shop. The impact on the financial sector is enormous with a significant increase in provisions for non-performing loans”. The governor confirms this by affirming that the portfolios of bad loans in the industry have increased by 6 points of percentage from 13% to 19%.

The liquidity ratio of the industry went from 125% to 111% while the Capital Adequacy Ratio went down from 21 to 14%! Although those ratios are still within the regulator’s limits of 100% and 10%, this decrease is enormous and cannot be ignore…

Obviously, the governor has argued that things would have being worse without the measures taken during the year to prevent another bank’s bankruptcy but who can really tell…

According to Reuters, the BCC forecast a growth of 2.9% in 2017 which is better than the 2.5% of 2016 but yet insufficient to reduce the unemployment rate of the country and subsequently its level of poverty…