Central Bank of Congo (BCC) has cut interest rate to 15,5%. This is good for investment! Right? hmmmm let's see...

Last week, the BCC has reduced its Prime Rate from 18,5% to 15,5% taking into consideration the positive progress made regarding inflation and FOREX. 

As usual, I have received comments from people with good knowledge of economic theory (not being sarcastic here), telling me how great the news is for investments as banks are going to reduce their own interest rates, which makes sense... in theory.

Below are the two declared objectives of the BCC when reducing the rate:

The first one is to ensure credit is more affordable and accessible to economic agents by reducing the price of money. This should stimulate investment and boost growth by increasing production with the corollary of job creation and consumption

This is only possible thanks to the second objective. Indeed, thanks to this rate reduction, commercial banks will now be able to refinance themselves at a lower from the BCC. Indeed, it is expected from banks to pass on this drop, and reduce the rates charged to their own customers in order to encourage the demand for loans.

As a local banker, let me tell you what is going to happen. For several banks, interest rates charged to customers are flat and will only vary at renewal. Therefore, only new credits could enjoy lower rates. Other banks interest rates are directly link to the BCC rates (BCC rates + margin). In this case, the impact will be immediate. 

All good right? Interest rates charged by banks will decrease eventually, investment will rise blablabla…  

Well, now we need to ask ourselves the most important question of them all. In which currency people borrow in our beloved country? If you read this blog, you already know that our economy is highly dollarized and that more than 90% of banks credit portfolio are in US dollars! 

As a result, the impact of this change will mainly impact the remaining 10% that are usually civil servants’ consumer loans, governmental or local entities that needs to pay salaries, etc. 

The only way for this mechanism (BCC rates transferred to customers through banks) to work is for commercial bank to be indebted to the BCC in the same currency their customers borrow. 

It is worth noting that while CDF rates stand at 15,5% + a margin (I know but banks need to pay salaries too), rates in USD for Corporate customers (the one making the big CAPEX) are on an average at 8%. Consumer and commercial loans are also already cheaper in USD than in CDF. Why would people borrow in CDF if they are offered a choice?...

I argue, once again, that our monetary policy is impotent… but those are only my conclusion…

The DRC economy blog is back!!!

Two years ago, I wrote my last article, and I had no intention to restart writing on the DRC economy for a simple reason: It is too depressing! We usually go from one bad news to another… 

In the meantime, I have received several messages from people I know and even from complete strangers that didn’t understand why I stopped and insisted that they would like me to continue writing simple but relevant analyses on our economy. So here we are…

Soooooo did things improve since my last article two years ago? Let’s see…

When we look at the indicators, it is not brilliant. The Congolese Franc went from 1600 to 2000 to the dollar, this represents a 25% depreciation in two years. The inflation rose to 15,704% according to the Central Bank of Congo (BCC) which is quite high. The BCC prime rate rose to 18,75% p.a., making the real interest rate positive for the first time since the inflation started skyrocketing, which is a good thing for investors in Congolese Francs. 

I know, I know, you are going to tell me that this is all COVID fault but actually this performance was registered before the pandemic started and I have to admit that since the beginning of the pandemic, the depreciation and the inflation are relatively well contained. 

Despite the effects of this pandemic that has destroyed most of the economies in the Western World, it seems that we have managed to avoid our first recession in 20 years!!! Hurray!!! According to the BCC preliminary computation, the GDP should grow by 0,8% in 2020 and by 3,2% in 2021 thanks to a very strong performance of the mining industry (forever our savior unfortunately- read past articles here). 

According to a BCC survey, Congolese businessmen are more and more optimistic about the perspectives of the DRC economy, which is a very good sign. 

On a good note, the copper hit a nine-year peak of US$8,806.50/t on February the 19th. As you know, DRC is the main producer of the metal in Africa and despite the fact that analysts think the fundamentals behind this surge have disappeared, we expect a positive impact on the meager DRC international reserves that currently stand at US$ 693 million. 

In a country where the politics has an immense (usually negative) impact on the economy, we can’t wait to discover the members of the cabinet of the new Prime Minister. The new government is expected in the coming days and its composition as well as its size will give us an indication of the direction we are heading to. 

As you can see, I didn’t respond to my own question. I will let each reader respond for himself…

To be continued…