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Summary of Recent Economic Developments in the DRC (2017)

Core Content

This document outlines the economic developments in the Democratic Republic of the Congo (DRC) during the first half of 2017, focusing on fiscal and monetary trends, inflation, and foreign exchange (FX) dynamics. It highlights the challenges in maintaining economic stability and the impact of policy decisions on the financial system and the broader economy.

Main Themes and Key Points

1. Export Receipts Rebound, Boosting USD Deposits and Reserves

• Export receipts increased by 60% in 2017h1 compared to 2016h1, reaching over $6 billion, primarily due to higher commodity prices, especially copper.
• Copper prices rose from $4,500 per ton in early 2016 to nearly $7,000 per ton in 2017h1.
• Output indices and copper production also increased by 15%.
• Banks’ USD deposits rose by $500 million from end-2016 to July 2017, reflecting the increase in export receipts.
• However, this USD liquidity is not immediately available for the FX market unless clients sell their USD deposits.

2. FX Reserves Decline Despite Higher Revenue Inflows

• Foreign reserves fell from $845 million at end-2016 to $667 million at end-August 2017, a decrease of $178 million.
• The decline was partly due to sales and reduced Treasury net outflows, which were influenced by higher USD revenue receipts.
• Despite the rebound in export receipts, USD reserves continued to trend down, indicating structural issues in the FX market.

3. Inflation Surpasses FX Depreciation

• CPI inflation in the DRC and Kinshasa has surpassed FX depreciation, leading to a decline in purchasing power in both currencies.
• 12-month eop inflation reached 70% in August 2017, while 12-month average inflation neared 40%.
• 3-month quarterly inflation accelerated above 120% in July 2017.
• Even with stable prices, inflation is expected to reach 40–50% by end-2017.

4. Tight Fiscal Policy and Budget Surpluses

• The fiscal stance shifted back to a cash basis, resulting in a cumulative budget surplus in January–August 2017.
• However, budget deficits on a commitment basis persisted, with a portion of unpaid obligations being non-liquid and expungeable.
• Cash revenues and expenditures declined in USD, despite the shift in fiscal policy.

5. Severe Budget Downward Trend

• A sizeable cash surplus in July offset modest deficits in May and June, but this is unlikely to sustain for the rest of the year.
• The USD budget continues to fall, which is disproportionate to the balance of payments (BoP) shock.
• The political impact of these trends is unclear.

6. Resource Revenues Rise, Other Receipts Fall

• Resource revenues in USD increased by 29% in 2017h1 compared to 2016, aligning with copper price increases.
• Other revenues fell by 35% in 2017h1 compared to 2016 and 46% compared to 2015, unrelated to economic slowdown.

7. Non-Salary Spending Squeezed

• Salaries in USD decreased by 32% in 2017 Jan–Aug compared to 2016, despite salaries accounting for half of cash spending.
• Other spending fell by 55% compared to 2015, reflecting large spending pressures.

8. Unpaid Obligations Accumulate

• The shift to a cash basis has led to unpaid obligations and budget deficits on a commitment basis.
• A portion of these obligations has no counter-party and can be expunged, but G&S unpaid obligations imply forced borrowing, affecting banks.

9. Base Money Growth Supports FX Depreciation

• Base money expanded in CF until July 2017 due to the July budget surplus, supporting FX depreciation.
• This was despite reduced NCG and NFA and FX sales, driven by credit to banks and other items.
• The monetary policy is ineffective due to rising deposit dollarization.

10. Banks’ CF Liquidity Strained

• Liquidity reserve requirements on USD deposits in CF were raised in 2016h2 to tighten monetary policy, squeezing banks’ CF liquidity.
• The influx of USD deposits and increasing deposit dollarization have aggravated this liquidity strain.

11. Asset Dollarization Supports FX Depreciation

• CF deposits in banks declined from 20% to 10% of total deposits, while CF cash holdings remained stable at 20–25%.
• The shift to USD deposits on a small CF base fuels FX depreciation and diminishes monetary policy effectiveness.

12. Private Sector Credit Squeezed

• Private sector credit (PSC) in July 2017 fell by 15% compared to the previous year.
• PSC as a percentage of deposits dropped from 66% to 53%, indicating tightened credit conditions.

Conclusion

The DRC’s economic situation in 2017h1 is marked by rebound in export receipts, decline in FX reserves, high inflation, and strained monetary and fiscal policies. The shift to a cash basis has created budget surpluses but also unpaid obligations and intra-month deficits, complicating policy coordination. Deposit dollarization and asset dollarization have further undermined monetary policy effectiveness, leading to FX depreciation and private sector credit constraints. These trends suggest a fragile economic environment that requires careful policy management to avoid long-term instability.