2023-08-12 13:44:05
It is a strong reaction of the Central Bank of Congo in the face of the depreciation of the franc and inflationary pressures. Commercial banks are sure to raise their lending rate. Interest rates on local currency loans may exceed 40% per annum taking into account VAT and a whole series of bank charges. But interest rates on dollar loans will not change (between 7% and 12℅). However, the BCC’s monetary policy is handicapped by the strong dollarization of the economy.
Gaston Mutamba Permission
In a press release published on August 8, the Monetary Policy Committee of the Central Bank of Congo (BCC) announced that it had “decided to raise the key rate from 11% to 25% in order to further tighten monetary policy, neutralize any excess liquidity, and better support macroeconomic stability”. This is a strong reaction from the BCC in the face of the depreciation of the franc and inflationary surges. The franc has depreciated by 20% against the US dollar since the beginning of 2023. Likewise the annualized inflation rate is 23%. The monetary policy of the BCC aims to stabilize the economy with a view to economic growth. It has not always been the case. In 1994 the inflation rate reached 9,700% as a result of a lax monetary policy and the issue of real-counterfeit banknotes.
Monetary policy is based on three main instruments, namely the key rate, the compulsory reserve coefficient and commercial paper. As for the foreign exchange policy, it aims above all to attenuate fluctuations in the exchange rate and to consolidate the level of international reserves. A level of foreign exchange reserves equivalent to at least six months of imports of goods and services is ideal. The manipulation of the key rate or reference rate is part of the monetary policy of the Central Bank of Congo. It is this rate that is applied when commercial banks refinance themselves with the central bank. Just like natural and legal persons who go to borrow from commercial banks when they are short of cash, commercial banks also go to the central bank to borrow money when their cash flow is tight. In this case, the interest rate applied is the key rate. When it is high, the banks’ charges increase and the reverse when the rate is low. It should therefore be expected that commercial banks will also increase their lending rate. Interest rates on local currency loans may exceed 40% per annum taking into account VAT and a whole series of bank charges. But interest rates on dollar loans will not change (between 7% and 12℅). It should be noted that most of the loans granted are in dollars, the evolution of which depends on the monetary policy of the Federal Reserve Bank of the USA.
The East of the country and Ukraine at the base of the currency depreciation
The increase in the key rate which has just been made results, according to the BCC’s Monetary Policy Committee, from the fact that during the third quarter of 2023, the national economic environment was marked by an increase in pressures on the exchange rate and inflation. As a result, inflation and the depreciation of the Congolese franc accelerated, particularly in mid-July. For the Central Bank, these disturbances, which are also noticeable in the other countries of the sub-region, are the consequence of external shocks, in particular the impact on trading partners of the effects linked to the war in Ukraine. As the national economy is very dependent on imports, it is strongly affected by these negative external developments reinforced by significant internal shocks which affect the country, including the war in the East which continues to exert strong pressure on the budget of the state. It should be mentioned that the development of the franc also follows certain cycles. The franc generally appreciates at the end of the month as employers seek the national currency to pay salaries. During the holiday period, the franc depreciates, because travelers need foreign currency for their stays abroad.
The dollarization of the national economy remains a pitfall
The BCC’s monetary policy is handicapped by the strong dollarization of the economy. High dollarization limits the scope of the actions of the Central Bank of Congo. The pass-through of the key interest rate is diluted when most intermediation is done in dollars. Since the 1990s, the national currency has lost its functions as a unit of account, store of value and intermediary of exchanges in favor of foreign currencies, in particular the American dollar. Savings are mainly made in dollars. The same is true of investment and consumption. This, because of the inflation which increased from the 1980s and the accelerated depreciation of the national currency.
To guard against exchange rate risks, bank deposits in foreign currencies represent nearly 85% of all bank deposits and 70% of the money supply in circulation. Similarly, credits in foreign currencies are equivalent to more than 80% of the total credits granted by the banking system. To complicate matters, almost 90% of the money supply circulates outside the banking circuits. With such figures, there is reason to ask questions about the effectiveness of the Central Bank’s monetary policy on the economy. It controls barely 10% of the currency in circulation in the country. There is a titanic job to be done to dedollarize the national economy. Note that the BCC is already working on this task. It encourages commercial banks to mobilize more deposits in national currency. To counter the inflation resulting from the depreciation of the franc, there is no point in establishing price controls. It didn’t work in the past and it won’t work today. It’s just unnecessary hassle. Price controllers rather enrich themselves by being corrupted by economic operators. The prices don’t go down. In some cases, they even increase.
Gaston Mutamba Permission
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