US embassy cable - 05KINSHASA217

C O N F I D E N T I A L KINSHASA 000217 
 
SIPDIS 
 
E.O. 12958: DECL: 02/08/2015 
TAGS: EFIN, ECON, PGOV, CG 
SUBJECT: CENTRAL BANK GOVERNOR ON EXCHANGE RATE INSTABILITY 
 
REF: A. KINSHASA 162 
 
     B. KINSHASA 216 
 
Classified By: Econoff Peter Newman for reasons 1.4 b/d 
 
1. (C) Summary: Pol/Econ Counselor and econoff met with 
Congolese Central Bank (BCC) Governor Jean-Claude Masangu on 
February 2 to discuss exchange rate instability in the DRC. 
Masangu believes, as does the IMF (Ref A), that the GDRC 
budget deficit is largely to blame for the depreciation of 
the Congolese franc (FC) but he intimated that there could 
also be other external factors that could explain the current 
slide. The BCC cannot continue to intervene indefinitely to 
support the franc. End summary. 
 
2. (C) During the course of a Feb 2 meeting with BCC Governor 
Masangu, Pol/Econ Counselor expressed concern about the 
instability of the Congolese franc. The franc is currently 
trading at FC 465 to the USD whereas it was at FC 380 to the 
USD in September 2004. Masangu explained that there is debate 
within the GDRC about the cause of the instability. The 
Ministries of Budget and Finance blame the BCC for not 
effectively managing the exchange rate. Masangu claims that 
unbudgeted supplementary expenditures resulting from the 
Congolese armed forces' (FARDC) unexpected deployments in the 
eastern Congo in June and November 2004 are the primary cause 
(Ref A). 
 
3. (C) Pol/Econ Counselor also asked if there were other 
factors that could be influencing the exchange rate, such as 
a crisis of confidence or perhaps intervention from abroad. 
Masangu said that there certainly was a lack of confidence 
due to recent political events. He specifically mentioned the 
MLC's threats to leave the Transitional Government as a 
particularly destabilizing factor. (Comment: Masangu did not 
address the question regarding possible foreign intervention. 
End comment.) 
 
4. (C) Masangu readily admitted that the BCC cannot 
indefinitely inject dollars into the market to cover 
shortfalls. He stated that the total intervention during the 
past 6 months has reached over $70 million, a rate that the 
BCC's foreign exchange reserves cannot sustain. 
 
5. (C) Regarding the 2005 budget, Masangu stated that the IMF 
Administrative Council in Washington will consider what 
action should be taken to adjust the budget in light of the 
depreciation. (Note: The 2005 budget was drafted assuming an 
exchange rate of FC 415.2 to the USD. End note.) He also 
stated that the Economic and Financial Commission of the GDRC 
needs to meet soon on the topic of the budget and the 
exchange rate and mentioned that the draft budget currently 
awaiting parliamentary debate may need to be recalled to 
reflect the depreciation of the franc (Ref B). 
 
6. (C) Pol/Econ Counselor asked if the ongoing instability 
will affect the release of new large denomination notes. 
Masangu told emboffs that the BCC plans to issue FC 1,000 and 
FC 5,000 notes in May and FC 10,000 and FC 20,000 notes by 
the end of 2005. At present, he does not see any reason to 
change the schedule. 
 
7. (C) Comment: The BCC is exhausting its ability to 
intervene in the exchange market. It is already violating its 
agreement with the IMF on its net foreign assets holdings 
(Ref A). If the GDRC runs a budget deficit for 2005 as in 
2004 (over $20 million), the Congolese franc is likely to 
continue to slowly depreciate. End comment. 
 
8. (U) Bujumbura minimize considered. 
MEECE