VZCZCXRO0051
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMR RUEHRN
DE RUEHKI #0560/01 1671252
ZNR UUUUU ZZH
R 161252Z JUN 09 ZDK
FM AMEMBASSY KINSHASA
TO RUEHC/SECSTATE WASHDC 9723
INFO RUEHXR/RWANDA COLLECTIVE
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHINGTON DC
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 KINSHASA 000560 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID PGOV PREL CG
SUBJECT: GDRC STABILIZES CURRENCY MARKET--BUT RISKS REMAIN 
 
REF:  (A) KINSHASA 520 
    (B) KINSHASA 479 
  (C) KINSHASA 331 
  (D) KINSHASA 317 
 
¶1. (U) Summary: Following a rapid depreciation of the Congolese 
Franc (franc congolais or FC, in French) in late 2008/early 2009, 
the government of the Democratic Republic of Congo (GDRC) has 
successfully helped stabilize the FC through a series of 
interventions in the foreign exchange market. Specifically, the 
Central Bank (Banque central du Congo or BCC, in French) launched a 
bi-monthly foreign exchange auction program in early April aimed at 
stopping the FC's slide by mopping-up excess liquidity and 
increasing demand for the local currency. Since launching the 
auctions, the FC has appreciated 9.63 percent.  The BCC's auction 
program was made possible due to the augmentation of international 
reserves following the approval in March 2009 of USD 200 million 
through the IMF's Emergency Shocks Facility (ESF) and other 
international emergency financial assistance (Refs A-D). An 
additional positive development has been a recent slowing of 
inflation, which had increased rapidly as the currency weakened. 
The strengthened franc and lower inflation are good news for the 
average Congolese, whose already low purchasing power had been 
significantly undermined.  While the BCC plans to continue the 
auction program in the near-term, these positive trends will also 
require continued tight monetary and fiscal policies, including a 
particular focus on public spending. End summary. 
 
CONGOLESE FRANC SLIDES AS FINANCIAL CRISIS HITS 
--------------------------------------------- --- 
 
¶2. (U) As noted in Ref C, one of the most visible signs of the 
deteriorating economic situation in the DRC as a result of the 
global financial crisis has been the steady depreciation of the 
local currency.  Prior to the final quarter of calendar year 2008, 
the GDRC's tight monetary policy had successfully kept the FC stable 
for two years, at a rate of approximately FC 550 against the dollar. 
 Starting in late 2008, however, the FC began to steadily lose 
value, a trend that continued through early 2009. Annual 
depreciation of the FC in 2008 was 27.3 percent; from January to 
mid-June, 2009, the FC depreciated by 19.34 percent.  In early 
January, the FC's depreciation rapidly accelerated-losing 12 percent 
of its value during a 24 hour period alone, the largest percentage 
loss of value in one day in over seven years. 
 
¶3. (U) Beginning in December 2008, the GDRC began to intervene in 
the foreign exchange market to reduce excess liquidity (estimated by 
the Central Bank at FC 57 billion at the end of March, 2009). The 
BCC used two principal instruments: raising interest rates and 
injecting US dollars into the local market. The BCC raised interest 
rates a total of three times in early 2009, from 28 percent to the 
current rate of 65 percent.  In addition, the BCC injected over USD 
16 million into the local market during two separate interventions: 
USD 10 million in mid-January and USD 6 million in mid-February. 
While these measures-in particular, the injection of US dollars into 
the local market-temporarily helped strengthen the FC, the overall 
trend continued. At the end of March,2009, just before the BCC began 
its new auction program, the official exchange rate was 838 FC/USD 
and the parallel rate was 831 FC/USD.  With reserve levels at close 
to zero during the first quarter of 2009 (Ref D), the GDRC had 
limited tools left to stabilize the currency. 
 
GOVERNMENT INTERVENES AGAIN - THIS TIME IT WORKS 
--------------------------------------------- ---- 
 
¶4. (U) Emergency financial assistance provided by the IMF, World 
Bank, European Union and African Development Bank (Refs A and B) in 
early 2009 provided the GDRC with the ability to undertake 
additional interventions in the foreign exchange market, this time 
through a new mechanism to purchase local currency through an 
auction program with local commercial banks.  Beginning in mid-April 
2009, and in coordination with the IMF, the BCC initiated a 
bi-monthly auction with commercial banks for the trading of foreign 
exchange aimed at reducing the liquidity of FC on the local market. 
During the first auction on April 13, the BCC made available USD 10 
million; however, commercial banks acquired only USD 6 million. Two 
days later, the Central Bank sold the remaining dollars to the 
commercial banks. For the second auction of April 27, BCC offered 
USD 15 million, of which the commercial banks purchased USD 11.16 
million. Seven commercial banks participated in the first two 
auctions. During the third auction, the Central Bank offered USD 10 
million, of which commercial banks acquired USD 8.7 million. Eight 
commercial banks participated. During the most recent auction on May 
27, the BCC offered USD 9 million, which was completely acquired by 
nine commercial banks. 
 
KINSHASA 00000560  002 OF 002 
 
 
 
¶5. (U) The auctions have been successful in stabilizing the 
currency, though perhaps less quickly than initially anticipated: 
following the fourth action of May 27, the official exchange rate 
was FC 785.1854 per USD, and the parallel market rate was FC 810 per 
USD. The GDRC plans to continue the bi-monthly auctions as long as 
necessary to continue to stabilize the currency. 
 
 
BUT RISKS REMAIN 
---------------- 
 
¶6. (SBU) While the BCC's foreign exchange auction program has been 
key in helping to stabilize the FC over the past two months, several 
risks remain. First and foremost, the government must avoid 
injecting new cash into circulation.  In fact, the government has 
officially frozen non-priority spending, and all public spending 
must first have a corresponding revenue. (Note: Post will report 
septel on President Kabila's recent directive to Prime Minister 
Muzito that all public spending must now be approved by the 
President. End Note) Central Bank Governor Masangu has publically 
acknowledged that the GDRC's fiscal deficit at the end of 2008 (in 
other words, before international emergency assistance was approved) 
was the result both of public spending and the impact of the global 
financial crisis. To date, the GDRC has not resorted to printing 
money or issuing the long anticipated larger FC notes.  However, 
there remain significant fiscal pressures, including continuing 
concerns over the government's ability to pay salaries, a recently 
launched USD 1.2 billion stabilization plan for Eastern DRC, and 
financial commitments for planned local elections in 2009.  These 
fiscal pressures will increase if the approval of a formal IMF 
program (Poverty Reduction and Growth Facility, PRGF) slips and a 
first PRGF disbursement does not arrive during 2009 (Refs A, B, D). 
 
 
¶7. (U) Comment: There is a longstanding and close correlation 
between exchange rate fluctuations and consumer price developments 
in the DRC.  Increasing inflation accompanied by the rapidly 
depreciating FC in late 2008/early 2009 had rapidly deteriorated the 
average Congolese's already low purchasing power.  A leading 
teacher's union (SYECO, Le Syndicat des enseignants du Congo, in 
French) recently called on the GDRC to index salaries to the US 
dollar to address what had been teachers' "shrinking" salaries in 
light of macroeconomic developments.  While such actions are 
unlikely, it highlights that while the recent strengthening and 
stabilization of the currency and accompanying declining inflation 
are positive developments, the economic downturn continues to 
significantly impact ordinary Congolese.  This could impact the 
political situation, but it is impossible to know at this time when 
(or if) that might happen.  End comment. 
 
BROCK