CENTRAL BANK GOVERNOR OUTLINES PRECARIOUS

UNCLAS SECTION 01 OF 02 KINSHASA 000168

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EAID EINV PGOV PREL CG
SUBJECT: CENTRAL BANK GOVERNOR OUTLINES PRECARIOUS
FINANCIAL SITUATION, APPEALS TO DONORS FOR
EMERGENCY ASSISTANCE

REF: (A) KINSHASA 1105;
(B) KINSHASA 1100


1. (SBU) Summary: The Central Bank Governor said on February 18
that the DRC has been in a recession since the second quarter of
2008, due to both a contraction in the mining sector and the effects
of the global financial crisis. He said the DRC needs USD 667
million in foreign assistance immediately in order to prevent the
Government from going bankrupt. With Central Bank reserves down to
less than one day of import cover and the recent devaluation of the
Congolese franc (FC),the Central Bank has run out of options for
correcting its balance of payments issues by itself. The IMF will
soon decide whether to grant a USD 200 million Exogenous Shocks
Facility for balance of payments assistance, and the World Bank and
others may also contribute funds. Without immediate assistance, the
Central Bank may be forced to print money in order to make already
much-delayed salary payments to its civil servants. End Summary.

DRC CENTRAL BANK RAISES THE ALARM
--------------


2. (U) DRC Central Bank Governor Jean-Claude Masangu Mulongo held a
press conference on February 18 to make a statement about the
economic crisis and answer questions. Masangu said the DRC had not
escaped the effects of the global financial crisis and officially
declared that the DRC's economy has been in a recession since the
second quarter of 2008, the first recession since 2001. He said
overall growth in 2008 has slowed to 5.9 percent, with growth only
in the first quarter and down from 6.3 percent in 2007. A decline
in commodity prices, the prolonged mining contract review in the
DRC, and a subsequent tightening of international credit markets
combined to drive down mining exports in 2008.


3. (SBU) Masangu described the Central Bank's two critical
concerns: a weaker balance of payments has driven inflation up and
lowered the purchasing power of most Congolese; and the economy is
not likely to rebound until the second quarter of 2009. The
official exchange rate has been slowly and steadily increasing since
December 2008, going from 500 Congolese francs (FC) up to today's
rate of 746 FC per 1 USD. The unofficial rate in the parallel
markets is currently between 775 FC and 785 FC to the dollar. A DRC
Central Bank representative told econoff its reserves amount to USD
32.8 million today (February 19),which amounts to less than one day
of import coverage.

NEW 1,000 CF NOTES TO HIT THE STREETS
--------------


4. (SBU) The Central Bank had planned to introduce a new 1,000 FC
note at the end of March. (Note: The 500 FC note is currently the
largest denomination in circulation. End note.) Some local
newspapers said the Central Bank may also issue new notes in 5,000
FC and 10,000 FC denominations, but the Central Bank representative
told econoff this was not true. The representative also said the
GDRC may apply pressure to issue the 1,000 FC note sooner than the
end of March, presumably to pay for mounting civil service and armed
forces salary arrears.


5. (SBU) Masangu said approximately 90 percent, or USD 1.2 million,
of savings accounts in the DRC's banking system is held in foreign
currency, and the Central Bank has no plans to forcibly convert
these holdings into Congolese francs. (Note: Former President
Laurent Kabila enacted such a requirement, but President Joseph
Kabila overturned the law requiring conversion into Congolese francs
soon after taking over power in 2002. End note.)

HOW DO WE FIX THE PROBLEM?
--------------


6. (SBU) Masangu said the only solution is for the international
community to provide USD 667 million in budget assistance, and
quickly. He said the IMF must approve its USD 200 million Exogenous
Shocks Facility (ESF) to support the DRC's balance of payments (Refs
A and B). The World Bank will consider a separate USD 100 million
package on February 26, and the EU and African Development Bank may
also provide approximately USD 50 million each. The Central Bank
has already increased their interest rate to 65 percent from 28
percent since the beginning of the year to shore up the value of the
franc, and has no further assets at its disposal to correct the
problem.


7. (SBU) Comment: The DRC is in dire need of foreign assistance in
order to prevent the government from falling into complete

KINSHASA 00000168 002 OF 002


bankruptcy. While the USD 200 million ESF may only buy a month or
two of time and some critics argue this only delays the inevitable,
without immediate assistance the DRC will be forced to either
increase the money supply by printing money or stop paying the
already much-delayed salaries of police, armed forces, and civil
servants. The GDRC has otherwise been making steady progress toward
reestablishing the IMF's Poverty Reduction and Growth Facility
program, but hyper-inflation due to currency flooding the market or
further disruptions in salary payments could derail efforts to
achieve recovery. End Comment.


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