Congo Raises Key Rate to 7% to Check Inflation, Defend Franc

KINSHASA (Capital Markets in Africa) – The Democratic Republic of Congo raised its key interest rate by 5 percentage points to 7 percent because of accelerating inflation and “tensions” in the foreign-exchange market.

The increase marks the first change in the base rate in almost three years and comes after the government’s foreign-exchange reserves dropped below $1 billion for the first time since 2008. Reserves have fallen by a third since the start of the year as a sustained drop in prices for copper, oil and other key exports reduced government revenue, forcing the authorities to use reserves to support spending and protect the franc.

Inflation accelerated to 2.99 percent in September from 2.26 percent in August, while foreign-exchange holdings declined to $996 million, enough to cover 4.4 weeks of imports, from $1.5 billion at the end of last year, according to a statement by central bank Governor Deogratias Mutombo Mwana Nyembo handed to reporters on Wednesday in the capital, Kinshasa.

“The rate hike is unlikely to make much of a difference, but the central bank did not have many alternative ways to bolster the currency as foreign-exchange reserves are at rock bottom,” Mark Bohlund, an economist with Bloomberg Intelligence in London, said by e-mail. “The central bank may not have much alternative than letting the franc depreciate, at least until copper production picks up again, which now looks more likely to be weighted towards the second half of next year.”

Defending Franc
Congo has lowered its growth estimate for this year three times, with the latest assessment at 4.3 percent, citing lower commodity prices. It is Africa’s biggest copper producer and the world’s largest source of cobalt. The central African nation depends on mining, oil and gas revenue for 22 percent of gross domestic product and 95 percent of export earnings, which have been curbed by the fall in prices. Copper output dropped 14 percent in the first half, as cobalt production fell 13 percent.

Despite intervention by the central bank to protect the value of the currency by selling dollars in the market on several occasions, the franc has declined 12 percent since the start of the year to 1,040 per dollar, according to central bank data. On the parallel market, the currency has depreciated to an average of 1,137 per dollar.

“We applaud the decision of the BCC to raise rates,” Thierry Taeymans, chief executive officer of Rawbank Sarl, a Kinshasa-based lender, said in an e-mailed response to questions. “In principle, this will help alleviate the devaluation pressure that currently exists on the Congolese franc. In the near-term, we would like to see more contractionary policy decisions in order to encourage savings, control inflation, and stabilize the foreign exchange rates.”

Limited access to external loans and the drop in commodity prices have constrained Congo’s ability to replenish foreign reserves, making it difficult for the central bank to keep defending the franc and forcing it to look at the policy rate instead, according to Cephas Forichi, an analyst with Paarl, South Africa-based NKC African Economics.

“We doubt monetary policy will do much to lower inflation and defend the exchange rate due to the high level of dollarisation in the country and a rather under-developed financial sector,” Forichi said in an e-mailed response to questions. “Authorities should refrain from defending the local currency, but rather allow a flexible exchange rate for the franc.”

Source: Bloomberg Business News

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