US embassy cable - 05KINSHASA162

C O N F I D E N T I A L KINSHASA 000162 
 
SIPDIS 
 
E.O. 12958: DECL: 01/31/2015 
TAGS: EFIN, ECON, PGOV, CG 
SUBJECT: CONGOLESE FRANC EXPERIENCING INSTABILITY 
 
Classified By: Econoff Peter Newman for reasons 1.4 b/d 
 
1. (SBU) Summary: The Congolese franc is experiencing a 
progressively worsening bout of instability that commenced in 
September 2004, and which has seen the franc depreciate 17.4 
percent from September through January. The Congolese Central 
Bank (BCC) has intervened with over $50 million in the past 
five months and is not meeting its net foreign assets (NFA) 
target. The IMF believes that extra-budgetary spending on the 
military campaigns of 2004 in the eastern DRC is the primary 
cause of the depreciation. Prices of basic consumer goods 
continue to increase, putting upward pressure on inflation. 
Corrective measures will be needed to remain within the IMF 
program inflation target of 9 percent for 2005. End summary. 
 
2. (U) The Congolese franc has depreciated 17.4 percent from 
September through January and shows no signs of stabilizing. 
The official exchange rate has hovered at approximately 
460-465 franc to the USD for one week, however, the informal 
market is trading anywhere from 460-480 in Kinshasa, Mbuji 
Mayi and Lubumbashi. Depreciation has been more severe in the 
Kivus where the franc is trading at 500-510 to the USD. 
 
3. (SBU) The BCC undertook an policy of active intervention 
in September which continues today. Over the past five months 
the BCC has injected over $50 million into the market to 
attempt to stabilize the franc. IMF ResRep told econoff on 
Jan 26 that the BCC is not meeting the NFA targets set by the 
IMF. Nonetheless, the BCC is sitting on approximately $210 
million in foreign exchange reserves. 
 
4. (C) IMF ResRep also said that the primary cause for the 
currency instability is likely the extra-budgetary spending 
used in 2004 to fund military campaigns in the eastern DRC 
after Rwanda's Novermber threat to invade. The IMF is not 
sure of the exact amount spent but estimates it to have been 
above $20 million. The economy has not been able to absorb 
the quantity of francs these operations have put on the 
market, essentially monetizing the 2004 budget deficit. 
 
5. (C) The IMF has been negotiating with the GDRC for the 
past two months to cut institutional spending (e.g. budgets 
to Vice Presidents and Ministries, including spending on 
travel) to help reduce the amount of francs on the exchange 
market and reduce pressure on the franc. IMF ResRep commented 
that he does not think the GDRC is following through on the 
recommendations and neither is the GDRC being transparent 
with the IMF about its extra-budgetary spending. The IMF 
thinks that the $400 million in foreign assistance destined 
to arrive in 2005 will have a positive impact on the 
inflation (exchange) rate, but the spending cuts it has 
recommended must also be taken to control the exchange rate. 
 
6. (U) Meanwhile, the Embassy price index is recording 
upwards of 11 percent inflation for the month of January 
2005. The IMF is putting its estimate at 5 percent for the 
same month. (Note: The Embassy and IMF baskets of goods 
differ. The Embassy solely focuses on basic consumer items. 
End note.) The IMF target for yearly inflation in 2005 is 9 
percent. The IMF admits corrective measures must be taken to 
roll back inflation and to meet the 2005 target. 
 
7. (C) Comment: The GDRC's extra-budgetary expenditures 
combined with current political uncertainty have created a 
potentially dangerous situation for the Congolese franc. 
Unless the GDRC undertakes the fiscal measures advised by the 
IMF and curbs institutional spending, the franc is likely to 
continue to slowly depreciate. Although the IMF is frustrated 
with the GDRC, it does not appear to be ready to take action 
to force the GDRC into spending cuts. Given ongoing security 
problems in eastern Congo, off-line spending is unlikely to 
decline, making formal corrective measures - including 
unpopular revenue-enhancing moves - an even greater priority. 
End comment. 
 
8. (U) Bujumbura minimize considered. 
MEECE