Thursday, March 18, 2021

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…



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