For a number of years, the financial system [including the Central Bank of the Congo or BCC (Banque Centrale du Congo)] in the Democratic Republic of the Congo (DRC) has operated with limited resources in a climate of uncertainty created by political instability, civil war, and macroeconomic mismanagement. This difficult environment has resulted in major dysfunctions and evident weaknesses. In particular, the financial system has become irrelevant in mobilizing savings and providing credit to the economy. Empowered by the promulgation of a new central bank law enshrining its independence and a new banking law, the BCC has taken measures to remedy these weaknesses and help create the preconditions for a revival of financial intermediation. Although prospects have clearly improved, the challenges ahead are enormous. Technical, financial, and human resource needs are already considerable and are likely to increase as reunification progresses. This chapter discusses the challenges the BCC faces in seeking a resumption of financial intermediation. Section I offers an overview of the situation of the financial system following several years of political instability, macroeconomic mismanagement and the resulting hyperinflation, and of the initial response of the monetary authorities. It analyzes the causes of the unique monetary experience of the DRC that has been characterized by nonfungibility between the components of base money. Section II describes the policy measures that have been implemented by the monetary authorities to restore the fungibility of base money and subsequently shift to conventional monetary management, still in a context of low financial intermediation. Section III reviews the policy measures that, in the medium term, would foster reintermediation and dedollarization in the DRC context. Section IV draws some policy lessons from the DRC experience.

For a number of years, the financial system [including the Central Bank of the Congo or BCC (Banque Centrale du Congo)] in the Democratic Republic of the Congo (DRC) has operated with limited resources in a climate of uncertainty created by political instability, civil war, and macroeconomic mismanagement. This difficult environment has resulted in major dysfunctions and evident weaknesses. In particular, the financial system has become irrelevant in mobilizing savings and providing credit to the economy. Empowered by the promulgation of a new central bank law enshrining its independence and a new banking law, the BCC has taken measures to remedy these weaknesses and help create the preconditions for a revival of financial intermediation. Although prospects have clearly improved, the challenges ahead are enormous. Technical, financial, and human resource needs are already considerable and are likely to increase as reunification progresses. This chapter discusses the challenges the BCC faces in seeking a resumption of financial intermediation. Section I offers an overview of the situation of the financial system following several years of political instability, macroeconomic mismanagement and the resulting hyperinflation, and of the initial response of the monetary authorities. It analyzes the causes of the unique monetary experience of the DRC that has been characterized by nonfungibility between the components of base money. Section II describes the policy measures that have been implemented by the monetary authorities to restore the fungibility of base money and subsequently shift to conventional monetary management, still in a context of low financial intermediation. Section III reviews the policy measures that, in the medium term, would foster reintermediation and dedollarization in the DRC context. Section IV draws some policy lessons from the DRC experience.

Section I. Developments in the Financial System

The Banking System in a Context of Disintermediation and Dollarization

Financial intermediation in the DRC has remained low, despite the significant progress made in macroeconomic stabilization since 2001, through government economic programs supported by an International Monetary Fund staff-monitored program (SMP) and a successor three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). This low intermediation reflects (1) the importance of the informal, cash-based economy; (2) the continued low public confidence in the banking system—a result of, among other things, the recent experience of nonfungibility between cash and bank deposits, the poor financial health of the banks, and the lack of publicly available and reliable information on the soundness of financial institutions; (3) high fees and stringent conditions for the opening of bank accounts, in particular a requirement to maintain high minimum balances; (4) the banking system’s limited coverage of the DRC’s territory; and (5) certain policies that discourage bank transactions (see below). Consequently, the rate of financial penetration is very low: the DRC, with a population of about 55 million, has only 35,000 bank accounts, of which almost half are held by businesses. Congolese franc (CGF) bank deposits represent less than 15 percent of the money supply in Congolese francs, and the money supply itself (broad money, M2) amounts to only about 5 percent of GDP (see Figure 9.1). Broad money consists for almost 50 percent of currency in circulation and for 40 percent of deposits denominated in foreign exchange. The banking sector, which forms the bulk of the formal financial sector,1 has played a limited role in the economy since the early 1990s. Its total assets only amount to about 5 percent of GDP (Table 9.1), and credit to the private sector is negligible, even as a share of an already low GDP. A comparison with other countries shows clearly how low financial aggregates have fallen in the DRC, even when compared with neighboring African countries (Figure 9.1).

Figure 9.1.
Figure 9.1.

Financial Aggregates in the Democratic Republic of the Congo and a Sample of Other Countries, 2001–02

(In percent of CDP)

Sources: IMF; International Financial Statistics; and others to end-2002.
Table 9.1.

Consolidated Balance Sheet for the Commercial Banking System

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Source: BCC.

Including balances with correspondent banks abroad.

The low level of financial intermediation is also reflected in the small contribution of the commercial banking sector (excluding the BCC) to money creation. Credit denominated in CGF accounts for just 5 percent of the aggregated balance sheet of the commercial banking system and is made up almost entirely of short-term loans to a few local enterprises. For the most part, the activity of commercial banks is limited to their role as a conduit for payments to and from the government and to the opening of letters of credit for the financing of exports. Because the commercial banks grant little or no credit to the private sector, money creation has taken place mainly through the issuance of BCC currency.

At the macro level, several years of hyperinflation accompanied by a free fall of the exchange rate, as well as continued political uncertainty, have undermined confidence in the CGF, thus creating a strong preference for foreign exchange as a vehicle for savings. This tendency toward the use of foreign exchange is further reinforced by the absence of large-denomination banknotes in local currency (the largest banknote in CGF is equivalent to less than US$0.60), the poor quality of the banknotes in circulation, and the virtual nonexistence of functional payment systems other than cash. These circumstances have forced economic agents to use foreign exchange for the settlement of large transactions and for liquidity management. The resulting dollarization of the economy is reflected in the balance sheet of the commercial banking system, almost four-fifths of which is in foreign currency. Dollarization is even higher—and continues to rise—among private sector bank deposits, more than 85 percent of which are held in foreign exchange, up from less than 80 percent one year ago (see Table 9.1).

The domestic CGF interbank market is virtually nonexistent and dried up completely during the second half of 2003 (see Table 9.1). Almost all interbank activity is denominated in foreign currency, consisting mainly of placements with correspondent banks abroad of customer deposits in foreign exchange. Finally, bank lending is also increasingly foreign exchange based. Barely a third of outstanding credit to the private sector is now denominated in CGF, down from more than 50 percent a year ago, which implies that virtually all new loans are denominated in foreign exchange.

Financial intermediation has also suffered from institutional and policy weaknesses in the monetary area, which in turn have generated major dysfunctions in the financial system and limited the commercial banks’ capacity to provide financial services to their customers. For a number of years, the BCC has not enjoyed adequate operational and financial autonomy, in part because it suffers structural operating losses caused by a balance sheet that, unlike that of the typical central bank, contains more interest-yielding liabilities than assets. As a result, the BCC has had insufficient resources to undertake the most basic central bank functions, such as maintaining the quality of currency in circulation.2 The lack of financial resources, combined with the low level of financial intermediation, also made the use of conventional monetary policy instruments difficult and enticed the BCC to resort to unconventional tools. In particular, the BCC has frequently not allowed banks to use their free reserves to obtain currency. Although this currency rationing had initially been prompted by the apparent inability of the BCC to produce sufficient amounts of banknotes, more recently it appears to have been utilized as a substitute for conventional liquidity mopping-up operations. The rationing has resulted in the nonfungibility between the components of base money (i.e., currency in circulation and bank free reserves) and prevented the banks from being able to meet their customers’ requests for deposit withdrawals, causing the emergence of a discount (décote) on CGF deposits in accounts with commercial banks (Figure 9.2). Using checks to transfer deposits, economic agents traded CGF bank deposits against CGF currency, at prices of up to 40 percent below par. Because the government accepted payment with deposit money, the main demand on this market came from economic agents who needed to make payments to the government.3

Figure 9.2.
Figure 9.2.

Décote Rate and BCC Operations on the Décote Market

(January 2002-August 2003)

Sources: BCC; and IMF staff estimates on the basis of information provided by market sources.

Finally, financial intermediation has been rendered difficult and costly through a number of policies outside the monetary area. The provision of credit has been discouraged by problems and uncertainties in the judicial and legal framework that make the recovery of claims difficult, as well as by a perceived antibank bias among courts. It has been hampered further by significant weaknesses in accounting and auditing and in corporate governance. Depositors have been scared away by the tax administration’s heavy-handed approach toward bank clients: Banks have been compelled to provide extensive information on their depositors, and the authorities have frequently resorted to blocking and confiscating deposits, over and above the amounts of disputed tax dues.

There is, however, real potential for strengthening financial intermediation, considering the country’s wealth of natural and human resources. Sustainable economic and political stabilization should stimulate both foreign and domestic investment. The financial sector should be capable of taking opportunities and participating in the financing of investments, and steps should be taken to ensure that short-term measures do not impede the long-term development of the financial sector.

Initial Steps in Strengthening Monetary Management

In the context of the SMP and the PRGF, and with the support of IMF technical assistance, rapid progress was made in strengthening the BCC’s institutional framework for the conduct of monetary policy.4 Key financial legislation reflecting international best practices—including new statutes for the central bank and a new banking law—was enacted during the course of 2002, although the transitional constitution approved in 2003 undid part of the central bank’s freshly gained independence. Good progress was also made in strengthening the BCC’s operational capacity. In particular, the BCC put in place key components of a framework to program currency issues, its net income position was consolidated in that of the government, and it established a Consultative Group on Monetary Policy to strengthen policy design and implementation.

The government’s monetary program under the PRGF aims to achieve price stability by limiting the growth of broad money. To achieve that aim, the program projects a growth path for base money and puts a floor on international reserves and a ceiling on the BCC’s net domestic assets. Difficulties in designing and implementing this program, however, include the instability of money demand, the high level of dollarization, and the lack of financial intermediation. As a result, the monetary program has amounted in practice to limiting the supply of CGF currency. Interest rate policy has been less essential in that effort and has been used in a more passive way, with the BCC adjusting interest rates as needed to keep them in line with declining inflation, while maintaining them at a positive level in real terms.

The currency supply itself has mainly been contained through fiscal discipline and unorthodox monetary policy measures (see above), in particular currency rationing. The resulting problem of the nonfungibility between the components of base money remained until the end of 2002. The rate of the discount (décote) remained volatile and at times high (up to 40 percent) in response to changes in the balance between the supply and demand for bank money. During the first six months of 2002, the BCC did not provide currency to the commercial banks, and all the currency issues were allocated to the payment of the government’s expenses (Treasury outflows in Table 9.2) and those of the BCC (BCC outflows in Table 9.2). This policy was modified beginning in July 2002, under pressure from banks that could no longer ensure payment services to the government (mostly the payment of public sector salaries that have to be paid in cash), although they had excess reserves with the BCC. However, in 2003, the previous trends were exacerbated when the commercial banks became net sources of banknotes, while the treasury’s needs doubled (Table 9.2).

Table 9.2.

Balance of Flows of CGF Banknotes at BCC Cashiers’ Desks

(In billions of CGF)

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Source: BCC.

In addition to currency rationing, the BCC relied on other unconventional instruments to regulate liquidity during the stabilization phase of 2001—2002, often at high cost to itself and/or the commercial banks and creating distortions in the process:

  • During 2001, certificates of deposits (CDs) were used to “buy” currency from the market.5 However, as their remuneration was brought in line with inflation (from 25 percent a month at the beginning of the year to 0.7 percent since May 2002), demand for CDs evaporated because they no longer incorporated the implicit cost of the décote.6 During 2002, BCC operations using CDs led to net repayments and the eventual retirement of the outstanding stock.

  • “Special arrangements” were used during 2002 to replace CDs. They involved operations of the BCC on the décote market, whereby the BCC was receiving CGF notes against CGF bank money.7 The BCC paid on average a 30 percent premium on the currency it bought, which led to a significant increase of the banks’ reserves with the BCC, relative to currency in circulation, and a correlated increase in the rate of the décote (Figure 9.2). The rate of the décote dropped in July as the BCC started to “liquefy” banks’ reserves at the request of the banks (see above). High volumes of BCC operations on the décote market in September—October led again to a sharp increase in the décote rate.

  • Near the end of 2002, the BCC moved toward a more conventional monetary policy. In December, it introduced central bank bills (BCC bills), with which it mopped up most of the banks’ free reserves. This largely contributed to the near-total disappearance of the décote. In July 2003, the imposition of reserve requirements on deposits in foreign exchange increased banks’ liquidity requirements and further reduced the stock of free reserves (Figure 9.3). Since then, liquidity conditions have continued to tighten, requiring banks to deposit banknotes (CGF 3 billion for October alone) or have recourse to BCC refinancing. Outstanding BCC refinancing, which was close to zero at the end of June 2003, increased to just under CGF 2 billion at the end of September 2003. The tight liquidity conditions also contributed to the appreciation of the CGF in late 2003 (Figure 9.4). The BCC now operates a call money window and a window for advances in current account (Box 9.1).

Figure 9.3.
Figure 9.3.

Changes in Bank Account Balances with the BCC

Source: BCC, Credit Directorate.
Figure 9.4.
Figure 9.4.

Exchange Rate Developments

Source: BCC (DSE).

Effects of the Nonfungibility of Base Money on the Financial System

The nonfungibility of base money de facto led to the creation of an additional currency in the DRC. To be able to attract banknotes, commercial banks needed to make a distinction between customer deposits made in cash (cash deposits) and customer deposits resulting from transfers through the payment system (bank money deposits), the counterpart of which consists of reserves with the BCC. Therefore, three payment instruments in local currency circulated in the DRC: currency, cash deposits, and bank money deposits. Whereas currency and cash deposits were interchangeable at par (provided that the latter were placed with a solvent bank), bank money deposits could frequently only be traded for currency at a discount (décote), which varied in function to the relative supply (payments in bank money made by the BCC not backed up by a willingness to issue currency) and demand for bank money deposits (capacity of taxpayers to settle their taxes in bank money).

The nonfungibility of base money also had adverse implications on financial intermediation. It acted as a barrier to the provision of payment services by the commercial banks—for instance, checks were not accepted unless the beneficiary was willing to take the risk of having to pay the décote to obtain currency, or was compensated for the décote through an increased check amount. In addition, it made bank lending virtually impossible because the banks could not provide currency to the borrowers when the latter wanted to use the loan proceeds. And it ensured that economic agents had no incentives to maintain demand deposits in the banking system. As a result, CGF-denominated demand deposits declined in absolute terms and even more so in relative terms vis-á-vis currency in circulation and foreign exchange deposits (Figure 9.5). However, in such a context, arbitrage between cash and bank money offered lucrative prospects for those having assets in currency and liabilities that could be settled in bank money, such as taxes.

Figure 9.5.
Figure 9.5.

Evolution of Currency in Circulation, Bank Deposits, and Bank Reserves, 2002–03

(In millions of Congolese francs)

Sources: BCC and IMF staff estimates.

DRC: Monetary Policy Instruments

Reserve Requirements

Set at 2 percent of local and foreign currency–denominated deposits; they are held in local currency.

Standing Facilities

Liquidity providing: Commercial banks may obtain rediscount credit or emergency funding from the BCC against trade bills as collateral. In view of the low quality of trade bills, the BCC is considering restricting collateral to foreign exchange.

Liquidity absorbing: Short-term BCC bills issued on demand, at a rate of remuneration that takes into account dollar interest rates and inflationary expectations.

Section II. Restoring the Fungibility of Base Money Fundamental Cause of the Nonfungibility of Base Money

Eventually, the nonfungibility largely confined the banks’ activities to the provision of payment services related to government receipts and expenditures. In such an environment, most imbalances between the banking system’s supply and demand of CGF banknotes reflected imbalances in the public sector not covered by the issuance of currency on the part of the BCC, hence the décote.8 There were several potential sources of these uncovered public sector imbalances. The government budget was run using a monthly treasury cash-flow plan, which was coordinated with the BCC. The BCC was supposed to cover any projected deficits in that plan. However, imbalances were possible that were not planned or registered in the cash-flow plan, including unbudgeted payments executed by the BCC on behalf of the government; BCC operating losses that were not promptly recorded in the budget; and tax revenues retained by financial institutions to pay for unbudgeted government expenditures.9

In this context, the décote becomes an early indicator of fiscal imbalances. Indeed, if the public sector’s budget were balanced, the BCC should not need to have recourse to the rationing of currency. The BCC should have been in a position to meet all payments requested by the government. However, it was not, as explained above and illustrated in Table 9.2 and in the evolution of the décote rate, which reached 40 percent in April–June and September–October of 2002.

Restoring the fungibility of base money is essential for a revival of financial intermediation and, indeed, the success of the reform agenda of the authorities.10 In particular, the development of the role of the commercial banks in the payment systems is contingent on the elimination of the décote. In turn, better payment services through the banking system will attract deposits in the system, allowing the banks to resume the provision of credit to the economy in local currency.

Corrective Measures

Durably eliminating the décote requires fundamental corrections to the environment that led to its appearance. In particular, it requires a refocusing of monetary policy on base money and bank reserves, rather than on currency. However, in a context where the bulk of the domestic currency transactions intermediated by the banking system are government receipts and expenditures, the government’s fiscal management and the BCC’s monetary management are intimately interlinked. In particular, avoiding the reappearance of the décote requires the BCC to be prepared at all times to provide the banks with banknotes in exchange for their free reserves in BCC accounts. However, the BCC can only do so and at the same time ensure a stable, noninflationary money supply if government budget deficits are contained and fully financed through government borrowing from economic agents other than the BCC, because, under current circumstances, the scope for the BCC to sterilize money created by monetized government budget deficits is limited. In a dollarized and cash-based economy, any injection of liquidity in the banking system caused by government expenses (i.e., expenditure in bank money rather than in cash) is most likely to result in an instantaneous demand for currency by the beneficiaries to finance their transactions or to purchase foreign exchange.

Although excess liquidity could in theory be mopped up by raising the ratio of required reserves on domestic currency deposits, or making foreign currency–denominated deposits subject to significant reserve requirements, the risk would be that banks would be unable to mobilize the necessary liquidity. The banking system as a whole could only raise CGF liquidity by collecting more deposits (thus taking currency out of circulation and returning it to the BCC), selling foreign exchange in return for CGF currency to the public or to the BCC (with the risk of generating a short foreign exchange open position), or borrowing from the BCC. To the extent that all these channels are either blocked or characterized by an inelastic supply, the risk is that such efforts would result in a resurgence of the décote, an unacceptably large increase in interest rates, an inability of the banking system to function, or undesirable exchange rate volatility.

It was in this context that the Congolese authorities took corrective measures at the end of 2002. On the fiscal side, these corrective measures included the freezing of nonessential expenditures, the elimination of identified “ghost” workers, and an increase in the prices of petroleum products. On the monetary side, the BCC started to issue short-term bills to mop up liquidity at positive real interest rates, starting in December 2002 (see above). Following these corrective measures, the décote was virtually eliminated.

Going forward, fiscal consolidation is a precondition for any program of macroeconomic stabilization to succeed. Strict adherence to the monthly treasury cash-flow plan is required to prevent the buildup of imbalances in the system because, at least until financial intermediation has deepened, the ability of monetary policy to compensate in a timely fashion for fiscal imbalances, even temporary ones, is limited. In the day-to-day implementation of monetary and fiscal policies, these limitations imply that the execution of the cash plan at the ministry of finance needs to be closely coordinated with the liquidity-forecasting exercise undertaken by the BCC.11

Looking to the future, a better identification and quantification of the causes of the imbalances in the public sector, along with a fundamentally improved management of the public sector’s finances, will facilitate the coordination of monetary and fiscal policies, by allowing the monetary and fiscal authorities to identify deviations from the monetary program early on.

Against this background, the Congolese authorities have undertaken a number of actions:

  • An action plan to strengthen the institutional capacity of the BCC was adopted and is being implemented. It includes, among other things, an overhaul of the accounting and internal audit functions, a strengthening of the monetary programming and liquidity-forecasting capacity, preliminary work to restructure its balance sheet and strengthen its financial position, and an overhaul of its information systems.

  • Measures to strengthen banking supervision in order to assess potential sources of outflows through the financial institutions participating in the collection of public sector revenues.

  • Measures to strengthen public accounting procedures (comptabilité publique) to enable the ministry of finance to more effectively monitor the government’s account on the books of the BCC.

The restoration of the fungibility between the components of base money will allow a shift from the current currency programming framework to a more conventional base money programming framework. Authorities in the DRC have already taken steps to establish strong lines of communication between the BCC and the ministry of finance, which in turn have helped greatly in the coordination of monetary and fiscal policies. In particular, a computerized connection for continuous exchange of data between the BCC and the ministry of finance was established in August 2003. Progress in this area will allow the BCC to analyze the autonomous sources of demand and supply of base money and to decide on discretionary monetary operations to keep base money in line with the assumptions in the monetary program. Such a framework could also be utilized for ex post analysis of actual flows, enabling the BCC to analyze past trends and decide on corrective actions as required.

Section III. Fostering Reintermediation and Dedollarization

As noted above, past macroeconomic instability and weak BCC policies have led to a combination of a marginalized banking sector, disintermediation, and multiple forms of dollarization. Bank deposits, which represent only about 2.5 percent of GDP, are mostly denominated in foreign currencies (85 percent in September 2003).12 At some point, total bank reserves in CGF with the BCC exceeded the level of loans in CGF. Furthermore, bank money in CGF is used mostly in the context of operations on behalf of the government, while other transactions in the economy are either executed in dollars or indexed to the dollar. As a result, any excess supply of local currency, in the face of a limited demand, leads to additional demand for foreign exchange and has a direct inflationary impact due to the high pass-through of exchange rate changes into prices. Dollarization of deposits has mainly taken the form of unremunerated foreign currency–denominated demand deposits. These deposits reflect a reluctance to hold balances in domestic currency for transaction purposes because of the recent experience of high inflation, rather than interest rate arbitrage. As these deposits are converted into Congolese francs, they can be utilized in the settlement of transactions.13 Finally, dollarization of large transactions is encouraged by the low value of CGF banknotes. For instance, the note with the highest face value currently in circulation (CGF 200) was equivalent to less than US$0.60 when it was introduced in October 2003, whereas the CGF 100 banknote was equivalent to US$70 when it was introduced in 1998.

Fostering reintermediation and dedollarization is a long-term challenge that requires a realistic, gradual approach. An efficient financial system will not develop unless the overall business climate improves significantly, including in areas beyond the monetary authorities’ responsibility. In addition, it should be noted that although dollarization has its drawbacks, it is preferable to an economy without a functional currency. In the absence of a reliable domestic currency, dollarization has facilitated the functioning of the Congolese economy. Therefore, dedollarization should be based on measures designed to restore confidence in the financial system rather than through policies aimed at discouraging—or raising the cost of—the use of foreign currency. Meanwhile, it is also important to avoid actions that might further reinforce dollarization, given the costs and risks that dollarization brings. First, dollarization reduces seignorage revenue related to the issuance of domestic currency. Second, dollarized financial systems are more vulnerable to solvency and liquidity risks. In particular, dollarization of loans to domestic borrowers could lead to increased credit risk because loans are not necessarily issued to borrowers with foreign exchange income. Dollarization also imposes limits on the central bank’s lender-of-last-resort function, because the central bank cannot provide foreign exchange liquidity in the case of a run on (foreign exchange) deposits to the same extent as it could in domestic currency.

In the short term, the progress that has been achieved thus far should be consolidated, private initiative encouraged, and priorities established. The stabilization of the exchange rate, the elimination of the décote, and the reduction in inflation are crucial accomplishments that should be consolidated through the continued pursuit of prudent fiscal and monetary policies. To consolidate these accomplishments, the Congolese authorities must also avoid actions that might promote dollarization, impede the operation of the financial sector, or merely gain time while compromising the long-term outlook. In particular, the BCC should undertake irrevocably to guarantee the convertibility of banks’ free reserves into currency and launch a communication campaign to communicate this commitment to the public.

In addition, some concrete measures need to be undertaken with high priority. Among them are the replacement of worn banknotes, the introduction of larger denomination banknotes, and the restoration of the functionality of the BCC’s branch network, in coordination with the branch network strategies of the commercial banks. Regarding currency in circulation, the face value of CGF banknotes must be reevaluated with a view to ensuring a better match with the needs that arise for transaction purposes. Therefore, the BCC should have full discretion to introduce banknotes of larger denominations, although this should be done prudently, and accompanied by a communication strategy aimed at avoiding the creation of inflationary expectations.14 These larger denominations will allow the use of the CGF in large transactions, thus reducing incentives for the use of foreign exchange. At the same time, the BCC will need to continue to provide banknotes of smaller denominations, which are still in use by a large fraction of the population, but the quality of the notes in circulation will need to be improved and permanently maintained. Finally, the BCC will need to ensure that banknotes in all denominations are available throughout the country.

Monetary policy may affect the degree of financial dollarization through the interest rate spread between currencies. The authorities should, however, resist the temptation to use their interest rate policy to prop up the exchange rate. Such a strategy could generate difficulties in the long run. In particular, it would increase the lending rate for domestic currency and encourage dollarization of loans, with unfavorable consequences for the vulnerability of the financial sector to sudden exchange rate fluctuations, as indicated above. Rather, monetary policy should continue to be guided by price stability objectives.

In the medium term, dedollarization and reintermediation will require that the authorities expand and deepen their structural reforms so as to create a favorable environment for the development of the private sector. The necessary reforms involve enhanced independence and transparency of monetary policy; a strengthening of payment systems; the putting in place of reasonable limits on the discretionary powers of the public administration, in particular the tax administration; and the establishment of a judicial and legal framework favorable to banking activity.

In low-income countries, as is the case in the DRC, most of the deposits in commercial banks are demand deposits maintained primarily for transaction purposes. Therefore, a process of reintermediation in local currency will need to be supported by the development of an efficient payments and settlement infrastructure for local currency–denominated transactions. In addition, as the DRC consolidates the gains made in stabilizing the macroeconomic framework, the demand for savings instruments in local currency is likely to rise. In such a context, the availability of a short-term instrument offered by the BCC, such as the recently introduced BCC bills, will help the process of reintermediation in local currency by allowing economic agents to arbitrage between CGF and dollar instruments, thus reestablishing equilibrium between current and expected exchange rates, interest rates, and expected inflation.

Finally, it is important to recognize that the capacity to find outlets for stable demand deposits and to generate revenue will also depend on the environment in which credit activity is carried out. Therefore, the current efforts to build the pillars of sound banking activity are critical, including completion of the restructuring of the banking sector; the establishment of prudential regulation and supervision of banks in line with international standards; the completion of the reform of the public enterprise sector; the creation of a business environment conducive to the development of an efficient private sector; and the promotion of appropriate legal frameworks governing contracts and efficient judicial administration.

Section IV. Policy Lessons from the DRC Experience

The experience of the DRC with monetary policy implementation contains valuable lessons for countries sharing similar macroeconomic, institutional, and market development initial conditions for effective monetary policy, leading to low financial intermediation and high dollarization. The lessons mainly have to do with the framework for the coordination of macro policies, the desired level of institutional and operational autonomy of the central bank, and coordination of IMF operations, including technical assistance and the use of IMF resources.

The low level of financial intermediation in the DRC has imposed limits on the ability of the central bank to undertake monetary operations to sterilize excess liquidity, at times forcing the BCC to resort to unconventional, costly, and distorting instruments. This experience underlines the need for strong coordinating arrangements of monetary and fiscal policy, in particular government cash flow and central bank liquidity management. Indeed, in the extreme circumstances of low financial intermediation, monetary policy may not be effective in containing the macroeconomic effects of temporary fiscal imbalances. In such a context, implementation of the budget on a cash basis, which should incorporate any imbalances in the operating account of the central bank, has proved to be a much-needed framework to ensure macro-economic stability. In such circumstances, fiscal discipline will be essential to the stabilization of the macroeconomic framework.

The DRC experience also shows that institutional independence for the central bank, although highly desirable, is not a sufficient condition to ensure the effectiveness of monetary policy. The central bank also needs to enjoy a sufficient degree of operational autonomy so that it can bear the cost of undertaking liquidity management operations on a timely basis and in amounts that are required for monetary policy purposes. In addition, lack of operational autonomy may undermine policy effectiveness when other governmental bodies are involved in the decision-making process and implementation of monetary policy.

The experience with monetary reforms in the DRC shows that the design of an operational framework for the conduct of monetary policy requires consideration of the nature of the constraints posed by the environment. Therefore, there are benefits from providing policy and technical advice in the context of a broad and comprehensive approach that looks at the constraints to policy implementation arising from the environment in which the instruments are implemented. The approach that was followed in the DRC, where technical assistance to the BCC started in the context of the SMP and continued under the subsequent PRGF, allowed a close coordination of technical assistance to the BCC with the work of the IMF staff for the design and negotiation of the IMF program, while also allowing technical assistance to provide inputs for the design of the program. The need for adopting a holistic approach reflects the fact that the frontier between policy formulation and policy implementation is hazy in countries where the constraints to policy implementation are high, and where the ability of the monetary authorities to implement a given monetary framework may be constrained by considerations pertaining to the sphere of policy implementation.

Appendix 9.1. Progress Accomplished in Strengthening the BCC’s Operational Capacity

IMF technical assistance in the areas of monetary and exchange rate policy has been based on a multitopic diagnostic mission led by the African Department in early 2001, before the implementation of the SMP; follow-up IMF multitopic missions later in 2001, and in 2002 and 2003; the placement of IMF resident experts at the BCC; and short-term visits by experts in a wide range of central bank activities (Box A9.1).

The first multitopic mission resulted in the design of a road map of policy measures and an accompanying sequence of technical assistance, while taking into account the weak administration capacity in the DRC. This road map was updated during the review of the SMP and implementation of the successor three-year government economic program supported by an arrangement under the IMF’s PRGF.

Overview of IMF Technical Assistance Missions

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The technical assistance program began in early 2001 with a visit of an IMF short-term expert to assist the Congolese authorities in the unification and floating of the exchange rate and the establishment of an interbank foreign exchange market, which were crucial elements of the SMP. This assistance was complemented with IMF advice provided from headquarters on new exchange legislation. The authorities subsequently proceeded to abolish the official exchange rate, which at that time was set at CGF 50 per U.S. dollar. On Friday evening, May 25, they published an indicative closing rate of CGF 315.5 per U.S. dollar. This 84 percent devaluation eradicated the difference between the official and parallel market rates, thus clearing the way for a single, market-determined exchange rate. The new unified and liberalized foreign exchange market became operational the following Monday, and the authorities allowed the exchange rate to float from that point onward. The involvement of the BCC in the determination of the exchange rate has since been limited to occasional market interventions aimed at achieving the net international reserves target, limiting excessive exchange rate volatility, and covering customer operations. In addition, the BCC calculates and publicizes a daily indicative exchange rate, which is a weighted average of the rates used in all reported transactions.

The successful unification and floating of the exchange rate, in combination with greater budgetary discipline, stabilized the macroeconomic framework sufficiently to allow a refocusing of the IMF’s technical assistance efforts on capacity building. Thus, in October 2001, a new technical assistance mission visited Kinshasa to support the BCC’s capacity-building efforts. At that time, exchange arrangements for international transactions had largely been liberalized. In this context, the mission concentrated on monetary management, foreign exchange operations and market functioning, and central bank accounting and audit. During the course of 2002, IMF short-term experts made several follow-up visits to assist in the implementation of earlier recommendations, and an IMF resident advisor to the BCC governor was appointed. In coordination with the IMF’s efforts, the World Bank took a leading role in the restructuring of the banking sector, in particular in overseeing the liquidation of insolvent banks.

Financial Legislation

During the course of 2002, key financial legislation was enacted, including a central bank law that established the BCC’s independence and a banking law that put in place frameworks for bank licensing, supervision, and liquidation. The banking law specifically gives the BCC full responsibility for the supervision of the financial sector and spells out the conditions under which credit unions can be organized and operate, and the way they are supervised. Also, a new legal framework was created for the restructuring of the banking system. The restructuring framework extended a special regime, which had been in place since 1998 but had expired on December 31, 2001.15 The central bank law and the banking law, both of which benefited from IMF input, reflect best international practices in their respective areas and provide a sound framework for strengthening the financial sector.

Monetary Management

The October 2001 IMF technical assistance mission found that monetary management was constrained by several factors: a weak framework for liquidity forecasting, insufficient coordination between monetary management and government operations, the absence of any adjustments in official interest rates despite a downward trend in inflation, and the nonfungibility between bank reserves in account at the central bank and currency. Consistent with the recommendations of the October 2001 mission, the Congolese authorities have since implemented the following corrective measures:

  • The BCC has established some of the key components of a framework to program currency issues. In particular, its treasury directorate started, at the beginning of 2002, to monitor the counterparts of currency inflows and outflows, allowing the tracking of the factors that led to net injections of currency in the system. The BCC has also already started to use this tool to forecast the net demand for currency.

  • The net income position of the BCC was consolidated in the government budget to avoid the inflationary consequences of BCC losses, as had happened previously.

  • In September 2002, the BCC created a Consultative Group on Monetary Policy to facilitate the coordination of fiscal and monetary policy. The group is composed of eight members (six from key BCC departments and two from the ministry of finance), meets at least twice a month, and reports to the senior management of the BCC and the minister of finance.

  • The monetary authorities have brought the BCC refinance rate and the remuneration on CDs down in line with the decline in inflation, while maintaining them at positive levels in real terms. In May 2002, the central bank refinance rate was reduced from 39 percent to 12 percent, and the monthly rate on CDs was cut from 3 to 0.7 percent.

Foreign Exchange Market

Since the unification of the multiple exchange rates and the floating of the currency in May 2001, the foreign exchange market has continued to function satisfactorily. The spread between the formal and informal markets has never exceeded 2 percent, on average; the collection and dissemination by the BCC of the market exchange rate has functioned well overall; and the published rate has become a reference rate in the market. However, the BCC’s operations have suffered from the fact that the authorities used them to simultaneously pursue three objectives (reserve accumulation, limiting exchange rate volatility, and executing customer operations), without clear prioritization among them, and that no formal framework was in place for the execution of foreign exchange operations. The November 2003 technical assistance mission recommended the implementation of such a framework and the sale of foreign exchange through single-rate competitive auctions.

The October 2001 mission noted that short-term foreign exchange swaps could be used by the BCC to inject liquidity in the system given the lack of adequate collateral in domestic currency that could be used. While preliminary assistance was provided for their introduction, progress did not materialize because refinancing needs for the banking sector did not emerge at the time. When banks started to have recourse to BCC refinancing during 2003, the BCC chose to provide this financing on the basis of private paper as collateral, rather than on the basis of foreign exchange. Following the November 2003 technical assistance mission, the BCC started making arrangements for the replacement of the rediscount window by a foreign exchange swap facility.

Reserve Management

Work in the area of reserve management started with a visit by an IMF short-term expert early in 2002. The expert identified broad areas for reform, among them the need for a new organization for the reserve management function, the creation of front-office and back-office functions in the operations division, the reform of accounting practices, and the production of a procedures manual. The mission also recommended that the BCC’s numerous accounts be consolidated into one main correspondent account. IMF staff involved in reserve management subsequently made a study tour to a neighboring central bank that had just reformed its reserve management function with the support of an IMF technical assistance program. Since then, significant progress has been made in all areas. In particular, a front office and back office have been set up, a draft procedure manual for the BCC trading room has been prepared, and work on the consolidation of the accounts is progressing.

Accounting Framework and Internal Control Mechanisms

The October 2001 IMF technical assistance mission and a Finance Department Safeguards Assessment mission found serious weaknesses in the accounting framework and internal control mechanisms in place at the BCC, due to a lack of human and logistical resources, disregard for internal procedures, and lapses in accounting procedures and transparency. Subsequently, the external audits of the 2000 and 2001 accounts of the BCC have been finalized, but not certified, pointing to lapses in both accounting procedures and transparency, and casting doubts on the real financial position of the BCC. In response, the BCC created an Account Restructuring Committee (Comitè d’Assainissement des Comptes), with the IMF resident advisor as its chair, to clean up its balance sheet and implement transparent accounting procedures. Furthermore, in September 2002 the BCC drafted terms of reference for an overhaul of these systems by an international firm. In cooperation with the national regulatory authority on accounting, the BCC has been working toward the adoption of international accounting standards. The November 2003 mission recommended that the BCC’s accounting function be organized along architecture of the type “single accounting application with decentralized input,” in which decentralized units can upload their entries in a central accounting application. The mission also proposed a concrete implementation plan for the selection and putting in place of the necessary hard- and software for the new accounting system. The actions needed to modernize the BCC’s accounting system will continue throughout 2004 with the assistance of an IMF expert.

Regarding the internal audit function, which had also been identified by the Safeguards Assessment and by IMF missions as a problem area requiring urgent action, the BCC issued an audit charter in September 2002 (following the establishment in 2000 of an internal audit directorate), which defined the objectives, responsibilities, powers, and methods of operation of the internal audit directorate. This measure is an important element in the BCC’s efforts to implement best international practices in this area. In November 2003, an IMF expert started a six-month assignment as a resident advisor on internal audit with the BCC.

Restructuring of the Banking System

In coordination with the IMF, the World Bank has taken the lead in the restructuring of the banking system. Audits of the commercial banks by independent audit firms have revealed that only the foreign-owned banks are expected to become capable of functioning normally in the near future, while several domestically owned banks are in serious difficulties. With financial support from the World Bank, the BCC is expected to close the unviable banks and seek the restructuring of those deemed viable.

Involvement of the National Bank of Belgium

In 2003, the National Bank of Belgium set up a program of assistance to the BCC, covering a wide range of central bank operations and activities. To ensure consistency in policy advice and avoid duplication of efforts, the IMF has coordinated its program of technical assistance with the National Bank of Belgium. This has allowed the National Bank of Belgium to take over some of the capacity-building needs that had been identified by the IMF. This trend is expected to continue in the future.


  • De Boeck, Pascale, and John Leimone, 2002, “Exchange System and Exchange Measures Subject to Fund Jurisdiction under Article VIII, Sections 2 (A), 3, and 4 of the Articles of Agreement of the International Monetary Fund” (unpublished; Washington: Legal Department and Monetary and Financial Systems Department, International Monetary Fund).

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  • Gulde-Wolf, and others, 2004, Financial Stability in Dollarized Economies, IMF Occasional Paper No. 230 (Washington: International Monetary Fund).

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  • Laurens, Bernard, and others, 2001, “Capacity Building Assistance to the Central Bank of the Congo” (unpublished; Washington: Monetary and Financial Systems Department, International Monetary Fund).

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  • Laurens, Bernard, and others, 2003, “Challenges in Developing Financial Intermediation in the Democratic Republic of the Congo” (unpublished; Washington: Monetary and Financial Systems Department, International Monetary Fund).

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  • Laurens, Bernard, and others, 2004, “Challenges and Action Plan for Developing the Financial System in the Democratic Republic of the Congo” (unpublished; Washington: Monetary and Financial Systems Department, International Monetary Fund).

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The financial system consists of 10 banks, 5 nonbank financial institutions, a network of credit unions, and some 110 microfinance institutions. In addition, eight banks deemed nonviable have been closed and are being liquidated. No reliable data are available on the consolidated balance sheet of the nonbank financial institutions.


The BCC has had to recirculate worn-out banknotes, because it did not have the resources to replace them.


In addition to the fungibility issue, commercial banks also claim that their ability to intermediate has been impeded by high fees charged by the BCC.


See Appendix 9.1 for a review of IMF technical assistance to the BCC.


CDs were issued to finance the budget. However, they could only be purchased with cash, thus allowing the BCC, in its capacity of fiscal agent, to “buy” currency from the market that it could use for payment of the government’s expenses.


Because CDs were subscribed in cash, remuneration needed to incorporate the décote to be attractive to potential investors.


The BCC’s operations on the décote market involved purchases of foreign currency or CGF banknotes against payments in CGF bank money at a premium.


Here, “public sector” encompasses the government budget, the BCC, and all other public sector entities (including banks) that utilize the banks’ payment system.


The weaknesses in the information systems at the BCC, in the financial institutions, and in the public sector (comptabilite publique) have not permitted an assessment of the respective contributions of these potential outflows.


It is important to note that financial intermediation is also conditional to a number of additional policies, including an appropriate legal framework governing contracts and efficient judicial administration, and the presence of sound and effective financial institutions. This chapter does not discuss these policies.


In September 2002 the BCC created a Consultative Group on Monetary Policy to facilitate the coordination of fiscal and monetary policy (see Appendix 9.1).


At the end of 2001, average foreign currency deposits to total deposits in Africa reached 33.2 percent (see Gulde-Wolf and others, 2004).


At the end of October 2002, demand deposits represented 95 percent of total bank deposits, with 80 percent of these deposits represented by demand deposits in dollars.


In the recent past, introduction of banknotes of larger denominations was delayed because the BCC could not obtain the approval of the government. Such delays have further complicated the conduct of monetary policy, at times forcing the BCC to resort to costly monetary operations.


The new framework allows the BCC to decide to bring any institution under the regime, whereas the previous regime was voluntary. At the time of the IMF technical assistance mission, 7 of 10 active banks operated outside of the regime, and 4 private banks had been placed in liquidation.

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    Financial Aggregates in the Democratic Republic of the Congo and a Sample of Other Countries, 2001–02

    (In percent of CDP)

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    Décote Rate and BCC Operations on the Décote Market

    (January 2002-August 2003)

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    Changes in Bank Account Balances with the BCC

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    Exchange Rate Developments

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    Evolution of Currency in Circulation, Bank Deposits, and Bank Reserves, 2002–03

    (In millions of Congolese francs)