VZCZCXYZ0003
PP RUEHWEB

DE RUEHKI #0172/01 0501203
ZNR UUUUU ZZH
P 191203Z FEB 08
FM AMEMBASSY KINSHASA
TO SECSTATE WASHDC PRIORITY 7551

UNCLAS KINSHASA 000172 
 
SIPDIS 
 
SIPDIS 
 
FOR A/OPR/ALS RPASCHALL and ATHURMAN 
 
E.O. 12958: N/A 
TAGS: ALOW AMGT AFIN ABUD CG
SUBJECT: Request for Exemption from Local Exchange Rate Adjustments 
to COLA 
 
REF: 07 Kinshasa 1422 
 
04 Kinshasa 1952 
 
¶1. This is an action cable.  Please see para. 9. 
 
¶2.  Summary: The DRC economy is very "dollarized."  Shopkeepers 
expect to be paid in dollars, post most prices in Congolese francs, 
and factor francs/dollar exchange rate increases immediately into 
those prices.  This practice effectively eliminates any exchange 
rate gains.  Most goods are imported from distant markets using 
foreign exchange and requiring high transport costs.  That foreign 
exchange (euros purchased with dollars) costs nearly 25 percent more 
than it did 18 months ago.  Inflation, exchange rate, and 
transportation costs have pushed prices higher over the last quarter 
and there is no end in sight.  Post requests immediate waiver of 
Post Allowance adjustment tied to exchange rate fluctuations.  End 
Summary. 
 
------------------------- 
A "Dollarized" Economy 
------------------------- 
 
¶3. (U) The DRC economy, especially in Kinshasa and other provincial 
capitals, is almost completely, although unofficially, dollarized. 
The Congolese franc (FC), currently trading at around FC 550 to the 
USD, is a non-convertible currency outside of the DRC.  In some 
border areas, such as northeast Congo on the Ugandan border, even 
foreign currencies besides the USD are preferred to the FC.  The 
largest denomination, now worth well less than a dollar, is the 500 
franc note.  Embassy personnel, other expatriates, and even many 
Congolese deal exclusively in dollars, except for small purchases 
and gratuities.  Post has determined that less than 10 percent of 
exchanges at the Embassy cashier are for francs, and even then for 
small amounts.  Most personnel receive enough francs in change 
(shops in Kinshasa don't deal in one dollar notes) to satisfy their 
needs for small bills. 
 
--------------------------------------------- ------ 
Store Prices Keep Pace with Exchange Rate Increases 
--------------------------------------------- ------ 
 
¶4. (U) Shops that cater to expatriate and well-to-do Congolese 
shoppers, of which there are dozens in Kinshasa, display their items 
in either USD or FC.  Large ticket items tend to be priced in 
dollars.  Shopkeepers use the following system in order to keep up 
with both exchange rate fluctuation and double-digit inflation: 
Instead of price tags on individual items, a sticker with a code 
(e.g. B2) is displayed on the shelf underneath the items.  Nearby, 
in every aisle, is a pricelist photocopy that links the code to a 
price in FC.  Shoppers must make the calculation back into USD. 
Store owners are thus able to change prices throughout the store 
(there are only a couple hundred codes) at will, depending upon the 
movement of the exchange rate and recent inflation.  There is 
virtually no lag time between an exchange rate change and the 
accompanying price change on the shelves, based upon the original 
cost of the item in USD (known to the owner) and the current FC/USD 
rate.  Prices in FC are never adjusted downward, only upward. 
Cashiers use hand-held calculators to convert the FC total into a 
USD price. 
 
--------------------------------------------- ---- 
Even "Local Products" are Imported Long Distances 
--------------------------------------------- ---- 
 
¶5. (U) Much of what post personnel purchase regularly for their 
households comes from these local stores.  Virtually every item in 
these stores is imported from Europe or South Africa.  They are 
purchased either in euros (EUR) or rand (ZAR), which are obtained 
initially using USD (ref A).  Even so-called local products, such as 
eggs and bread, are produced using imported materials, such as 
chicken feed and flour (imported directly or ground locally from 
imported wheat). Shopkeepers know the cost of their goods in 
dollars, including large transport costs for importing the items 
(perishables by air from Johannesburg, Brussels, Paris, etc.; 
non-perishables by sea to Matadi, the most expensive port on a 
per-ton basis in the world).  When the exchange rate rises (the FC 
depreciates) or inflation is particularly high, they merely raise 
the prices in FC to meet the new macroeconomic situation.  This is 
done to recuperate their costs, maintain their profit margin, and 
prepare to pay the rising costs necessary to restock their shelves. 
 
 
----------------------------------- 
Dollar to Euro Exchange Rate Rules 
----------------------------------- 
 
¶6. (U) The FC/USD rate, therefore, is irrelevant to post personnel 
cost of living except for how a store prices an item, based upon its 
dollar value.  What is relevant, however, is the USD/EUR exchange 
rate, since the majority of the items for sale in local stores come 
from European sources.  (Note: South African goods such as wine are 
 
available for sale, but the ZAR/USD rate has remained stable at 
around 7.0 for at least the past year.  End note.)  Since April 
2006, when the prior local exchange rate adjustment waiver was 
rescinded, the USD/EUR rate has risen (the dollar has depreciated 
against the euro) from about 1.20 to nearly 1.50, almost a 25 
percent decrease in buying power.  Coupled with annual double digit 
inflation in the DRC over the last few years, the cost of purchasing 
food and other household necessities in Kinshasa has gone up 
appreciably since 4/06. 
 
--------------------------------------------- ------- 
U.S. Chicken 25 Percent More Expensive Since October 
--------------------------------------------- ------- 
 
¶7. (U) A very recent example from Econcouns firsthand experience: a 
local food wholesaler sells frozen U.S. chicken leg quarters in 20 
kilo boxes.  As recently as October 2007, these sold for FC 10,000 
(USD 20).  As of February, only three months later, the same box is 
now selling for over FC 14,000 (over USD 25).  This 25 percent 
increase (in dollar terms) over three months is due to three 
factors: to cover exchange rate increases (FC 500/USD to FC 
550/USD), rising inflation in the DRC (over 5 percent since November 
1, 2007) and higher transportation costs (air, sea, and land) 
occasioned by higher international fuel prices.  This example could 
be repeated for any number of food and household items, all 
purchased wholesale and imported using USD, EUR, and ZAR. 
 
----------------------------- 
FC/USD Rate and Prices Go Up 
----------------------------- 
 
¶8. (U) As in October 2004, when the last local exchange rate 
adjustment waiver was requested and granted (ref B), local prices 
are increasing due to FC depreciation (higher FC/USD exchange 
rates), monthly inflation equal to annual inflation in the U.S., and 
higher transportation costs attached to products imported from long 
distances.  We fully expect that if this trend continues, the rising 
FC/USD exchange rate, despite being largely the basis for higher 
prices in stores, could actually trigger a reduction in Post 
Allowance.  Due to the ongoing uncertain security in eastern Congo, 
the continuing high price of fuel and transport, and the unstable 
macroeconomic situation (Note: the IMF has backed off on its earlier 
plan to reinstate a formal program for the DRC, due to recent 
macroeconomic instability.  End note.) post does not expect the 
Congolese economy to improve dramatically in the near future. 
 
¶9. (U) ACTION REQUEST: Based upon the considered expectation that 
the USD will continue to strengthen against the FC and that dollar 
denominated import prices (in turn based upon an ever-worsening 
USD/EUR exchange rate) will be reflected in local retail pricing, 
post requests a waiver from automatic Post Allowance adjustments 
based upon local exchange rate fluctuations.  Post understands that 
such an exemption will require that an annual Retail Price Survey be 
conducted for the duration of the waiver. 
 
GARVELINK