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Cablegate: Exchange Rate Fluctuations Prompt Central Bank

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS KINSHASA 001975

SIPDIS

SENSITIVE

TREASURY FOR ANDREW JEWELL

E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL CG
SUBJECT: EXCHANGE RATE FLUCTUATIONS PROMPT CENTRAL BANK
INTERVENTION


1. (U) Summary. The Congolese Franc (FC) has suffered from
mild instability for the past two months, declining in value
by 12 percent. The Congolese Central Bank has directly
intervened to the tune of USD 37 million and has raised
interest rates over the past month. The impact on the formal
sector so far has been light. The informal sector and the
average Congolese have been particularly hard hit, however.
The exchange rate has appreciated slightly. Exchange rate and
inflation changes could have complicating effects on GDRC/IMF
budget planning. End Summary.

2. (U) After one year of stability, the Congolese Franc
depreciated by approximately 12 percent over the months of
August and September, reaching a value of FC 430-440 to the
USD. Decreased international diamond prices and increased
international oil prices have contributed to decreased
retention of USD within the local economy. At the same time,
workers were quickly converting salaries paid in FC to USD to
pay school fees which come due in September.

3. (U) The net effects on the local economy is increased
prices for a variety of goods and services. Those items
normally paid for in USD (or which rely on petroleum
products, e.g. gasoline) experienced the strongest increase,
such as rent (29 percent) and public transportation (25
percent). Some staple food items, such as frozen fish (22
percent), milk (14 percent) and corn (17.6 percent), were
also hard hit. The Embassy price survey is now registering a
6 percent year-to-date increase in prices and expects
inflation to go above the 6 percent target set by the Central
Bank (BCC) and the IMF.

4. (SBU) The BCC, with the support of the IMF, has undertaken
a policy of active intervention in the currency market to
stabilize the Congolese Franc. The BCC has:

--Directly intervened to the tune of USD 37 million in three
tranches (USD 7 million, USD 5 million and USD 25 million)
over the past two months to remove excess FC from circulation.

--Raised the interbank loan rate (Note. This is more similar
to our Federal Funds Rate. End Note.) from 9 percent to 11
percent (a 22 percent increase).

--Increased the treasury bond rate to an average of 33
percent to attract purchasers.

5. (SBU) Citibank Congo stated that the intervention was
needed because money expansion during the months of August
and September overshot the projected growth figures of 4-5
percent and instead reached 12-13 percent, largely due to the
factors listed above as well as some speculative activity.
Citibank VP Michel Losembe also noted that the BCC is sitting
on comfortable foreign exchange reserves, enough to finance
export-import flows for 8-9 months.

6. (SBU) The BCC's actions have helped to appreciate the
exchange rate to a national average of 410-420. IMF ResRep
Arend Kouwenaar commented to econoff that the exchange rate
was overvalued at FC380 and needed to depreciate slightly to
about 400-410. The GDRC recently changed its exchange rate
assumptions for the FY2005 budget from FC 380 to FC 415 to
reflect the changing monetary conditions. The other
macroeconomic assumptions of 5-6 percent inflation and 6-7
percent growth remain the same.

7. (SBU) Comment. While the exchange rate appears to be
stabilizing at 410-420, seasonal depreciation often occurs
around the Christmas Holidays. In the short term, however,
the BCC's intervention, with support from the IMF, seems to
have been successful. End Comment.
MEECE

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