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…

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…

2016 is definitely not a good year economically. Thanks politicians...

I acknowledge the fact that today people in general and Congolese in particular are more focused on the country political situation as today is supposed to be the last day in office of the incumbent president but the probability for him to leave by tomorrow is null.

However, the political situation has a serious impact on the economy of this country and the latter on the lives of millions. Therefore, it is important to talk a little bit about the economical situation as it stands currently.

The former primer minister was very proud of his macroeconomics achievements. Therefore, I would like to summarize some of the key indicators, few weeks after his resignation.

The GDP growth rate forecast for 2016 went down from 8,8% to below 4,3% and it is expected to grow to 5,5% in 2017 according to Central Bank. Data. 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. This could further damage the sector already weaken by the bankruptcy of the fourth largest lender.

The reduction of foreign currencies inflows has put pressure on the Congolese Francs that has depreciated by 38% since the beginning of the year leading to an inflation of 16,39% y-o-y. I hear, here and there, that this is mainly due to the mining companies revenues decrease following weak copper and cobalt prices. Although this is partly true, the lack of energy is one of the major reasons the output of those mining companies has dropped. Mining companies have been crying for years for a more electricity but nothing has been done except of lot of conferences on the country hydroelectric potential.

In addition to that, the failure to diversify our economy has increased our dependency to the commodities market (the mining sector was representing 50% of the GDP last year…) and made us vulnerable to any price shock…

With the Central Bank prime rate up to just 7% p.a., the real interest rate on the local currency is actually negative. This will lead people wanting more and more hard currencies with further depreciation to come.

The 2017 state budget has being presented at USD 4 billion against 8 billion the previous year. This will have a negative impact on several industries, as the State is the #1 customer in many of them such as automobiles, airlines, hotels, etc.

Why is the budget size extremely important for the years to come? Because the budget constraint was the main argument used not to organize elections this year. Therefore, I wonder how are we going to organize those costly elections in 2018 with a budget 50% smaller than the one not big enough to organize the 2016 elections…

There are many more things we could say regarding the (poor) state of this economy but my heart is not there… I will stop here by saying that while politicians are fighting to obtain positions, no wealth is created and worse, no (serious) investors will risk their money in this long period of uncertainty ahead of us…

But I guess the name of the game for them is to make as much money as possible in the shortest time possible to ensure their family can study and receive medical treatments in proper schools and hospitals they deny to their own people but I digress here… this is not a political blog remember? but I guess I am just a concerned citizen…

2016 is not a good year (at all) !!!

Congolese Franc (CDF) depreciation, Inflation, slower growth, budget costs (and in deficit), financial scandals, a big bank bankrupt, etc.

The least we can say is that the DRC economy is not doing well at all in 2016.

In less than a year, the CDF has lost more than 32% of its value against the US dollar while it was stable for the last 5 years.  The reduction of foreign currencies (Forex) entering in the country due to the decrease of repatriation from mining companies is the main explanation. This situation will continue to pressurize the CDF as the mining sector (the biggest generator of Forex) continues struggling with low commodities prices and inadequate power supply.

As a result, the government has already reduced his GDP forecast 3 times! From 9% to 6.6% to 5.3% to 4.3% and he could do it again before the end of the year.

This high level of depreciation, in a country where even tomatoes are imported, led to higher consumer prices. The inflation is skyrocketing (+6,4% y-o-y) while it was contained below the 2% over the last two years. Some shops in Lubumbashi (the economic capital) have stopped displaying prices below items because they are moving too often…The direct consequence is the increase of the Central Bank prime rate to 7% from 2% leading to a higher cost of borrowing for those borrowing in CDF (a minority as more than 90% of the loans are disbursed in USD but still…)

The prime minister has presented his budget for 2017 and the latter stands at USD 4,5 billions.  This is a 50% decrease compared to the 2016 budget (that was also reduced by 22% few months ago).

Thousands of people have lost their jobs and this will continue if we do not take the necessary measures and those measures include creating the environment for investors to put their money in this country! The political uncertainty surrounding the (not-to-be-held-on-time presidential elections) is not conducive to business…