US embassy cable - 04KINSHASA1975

UNCLAS KINSHASA 001975 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR ANDREW JEWELL 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, PREL, CG 
SUBJECT: EXCHANGE RATE FLUCTUATIONS PROMPT CENTRAL BANK 
INTERVENTION 
 
 
1. (U) Summary. The Congolese Franc (FC) has suffered from 
mild instability for the past two months, declining in value 
by 12 percent. The Congolese Central Bank has directly 
intervened to the tune of USD 37 million and has raised 
interest rates over the past month. The impact on the formal 
sector so far has been light. The informal sector and the 
average Congolese have been particularly hard hit, however. 
The exchange rate has appreciated slightly. Exchange rate and 
inflation changes could have complicating effects on GDRC/IMF 
budget planning. End Summary. 
 
2. (U) After one year of stability, the Congolese Franc 
depreciated by approximately 12 percent over the months of 
August and September, reaching a value of FC 430-440 to the 
USD. Decreased international diamond prices and increased 
international oil prices have contributed to decreased 
retention of USD within the local economy. At the same time, 
workers were quickly converting salaries paid in FC to USD to 
pay school fees which come due in September. 
 
3. (U) The net effects on the local economy is increased 
prices for a variety of goods and services. Those items 
normally paid for in USD (or which rely on petroleum 
products, e.g. gasoline) experienced the strongest increase, 
such as rent (29 percent) and public transportation (25 
percent). Some staple food items, such as frozen fish (22 
percent), milk (14 percent) and corn (17.6 percent), were 
also hard hit. The Embassy price survey is now registering a 
6 percent year-to-date increase in prices and expects 
inflation to go above the 6 percent target set by the Central 
Bank (BCC) and the IMF. 
 
4. (SBU) The BCC, with the support of the IMF, has undertaken 
a policy of active intervention in the currency market to 
stabilize the Congolese Franc. The BCC has: 
 
--Directly intervened to the tune of USD 37 million in three 
tranches (USD 7 million, USD 5 million and USD 25 million) 
over the past two months to remove excess FC from circulation. 
 
--Raised the interbank loan rate (Note. This is more similar 
to our Federal Funds Rate. End Note.) from 9 percent to 11 
percent (a 22 percent increase). 
 
--Increased the treasury bond rate to an average of 33 
percent to attract purchasers. 
 
5. (SBU) Citibank Congo stated that the intervention was 
needed because money expansion during the months of August 
and September overshot the projected growth figures of 4-5 
percent and instead reached 12-13 percent, largely due to the 
factors listed above as well as some speculative activity. 
Citibank VP Michel Losembe also noted that the BCC is sitting 
on comfortable foreign exchange reserves, enough to finance 
export-import flows for 8-9 months. 
 
6. (SBU) The BCC's actions have helped to appreciate the 
exchange rate to a national average of 410-420. IMF ResRep 
Arend Kouwenaar commented to econoff that the exchange rate 
was overvalued at FC380 and needed to depreciate slightly to 
about 400-410. The GDRC recently changed its exchange rate 
assumptions for the FY2005 budget from FC 380 to FC 415 to 
reflect the changing monetary conditions. The other 
macroeconomic assumptions of 5-6 percent inflation and 6-7 
percent growth remain the same. 
 
7. (SBU) Comment. While the exchange rate appears to be 
stabilizing at 410-420, seasonal depreciation often occurs 
around the Christmas Holidays. In the short term, however, 
the BCC's intervention, with support from the IMF, seems to 
have been successful. End Comment. 
MEECE