Killing the Dollar Softly In The Democratic Republic of Congo
Top Congolese leaders say it's time the DRC got off the US currency and returned to the local franc. But ending "dollarization" comes with risks if not done properly.
KINSHASA - The Democratic Republic of Congo is one of several countries, both in Africa and elsewhere in the developing world, that uses the U.S. dollar as its de facto national currency. But is it time to put an end to "dollarization"?
The DRC government now says it wants to phase out the dollar, to be replaced with local Congolese francs in all financial transactions. Prompted by a four-month spurt of economic growth, the government is convinced that it is time to begin a reform, which it assures will be meticulously overseen by the monetary authority.
Still, in order to reassure citizens, banking officials and investors, the move is not going to happen overnight.
A meeting last year, led by Deputy Prime Minister Daniel Mukoko Samba, which included representatives from the top Congolese employers and banking associations, was billed as “Solutions to de-dollarize the Congolese economy.”
“To this day, despite the significant fall of inflation and a certain stability of the exchange rate, the dollarization level in the Congolese economy remains very high,” noted Mukoko Samba, who also serves as Budget Minister.
Most of the banking deposits in DRC are in foreign currencies, while bank credits are as high as 95%.
“How did we end up here?” asked Congo's Central Bank President Jean-Claude Masangu Mulongo in front of trade representatives from Belgium, Luxembourg and DRC meeting in late November in Kinshasa to discuss the subject.
Masangu Mulongo recalled a bit of recent history to provide some context. The 1980s and 1990s were a time when the ex-Zaire was struck by a severe economic crisis that included basic infrastructure collapse, looting of production tools, excessive external debt, the end of international cooperation and depreciation of the national currency compared to foreign funds. By 1994, inflation had reached the extreme rate of 9,769%.
The roads are long
Given both the political and economic instability, financial operators and the general population turned to the American dollar to protect their purchasing power and to benefit from discretion in commercial transactions. This situation led to the dollarization which is, in Daniel Mukoko’s terms, “induced by the use of a safe haven currency different from the national currency in economic transactions.”
But this process is ultimately detrimental to the country. It may lead to, among other things, “difficulties when it comes to finance the economy with national currency; a higher risk of a crisis in the banking sector in case of physical currency shortage,” explains Masangu Mulongo.
The central banker says those past conditions have changed, and the macroeconomic signals are looking good: an economic growth of 7.2% in 2012, with a 8.2% projection for 2013; an inflation rate of about 3%; a stable Congolese franc compared to the U.S. dollar; a peak in the financial sector confirmed by a larger number of banks and micro-financing institutions with an expansion of the credit and deposit volume.
The so-called "de-dollarization" process requires a balance between controlling the negative effects of giving up the U.S. currency, and beginning to push the regular use of the national currency.
To set the example, the 2012 budget was voted by the Parliament in Congolese francs. The Central Bank even recommends that the public sector settle the payment of any tax or outstanding charge in national currency. It even sent a letter to the financial operators urging them to display the prices in Congolese currency.
“De-dollarization cannot be imposed by law, it cannot be forced,” specifies the central bank governor. "It’s a seven to 10-year process minimum for those who manage to carry it out. It can only be achieved in a progressive, participative manner with a series of incentives.”
As far as the exchange regulations go, Masangu Mulongo added that everyone “will be free to use the currency he likes, it’s out of question to force people to convert their Foreign Currency Resident accounts (FCR) or Non-Foreign Currency Resident accounts (NFCR) into national currency.”
Economics Professor Grégoire Bakandeja believes that the currency reform can succeed only if it's carried out nationwide, and if exports continue to be handled in foreign currencies. “De-dollarization is a good thing, but exchange measures must be taken and resources exported in such a way that it remains profitable for the state.”