January 13, 2009 / 9:01 AM / in 9 years

Congo raises rates, intervenes to support weak franc

<p>A street vendor counts cash in Kinshasa in a file photo. REUTERS/Finbar O'Reilly</p>

KINSHASA (Reuters) - Democratic Republic of Congo, facing a fall in demand for its exports, has raised key interest rates for a second time in three weeks and intervened in the market to support its franc currency, the government said.

The huge central African country, which has seen demand for its minerals, oil, timber and diamond exports slump over the past six months, has also launched a programme to rein in public spending, Communications Minister Lambert Mende Omalanga said.

It included raising the reserve requirement for banks to 7 percent of deposits from 5 percent, he said.

Omalanga, the government spokesman, told reporters in the capital Kinshasa late on Monday that the central bank had raised its benchmark director’s rate to 55 percent from 40 percent.

That followed a previous increase in the rate from 28 percent which was ordered in December but announced publicly by the government last week.

The central bank spent $10 million intervening in the market on Monday to support the Congolese franc, Omalanga said.

Although that is a small figure in terms of world currency markets, it represents a significant chunk of Congo’s foreign currency reserves, which stood at around $75 million in mid-December -- less than a third of their level last April.

The International Monetary Fund said last month that Congo’s foreign currency reserves were at a five-year low.

The government said last week that it would accelerate efforts to secure a $200 million loan from the IMF’s Exogenous Shock Facility to help cope with the effects of plunging exports and the scaling back of several large planned mining projects.

Congo’s franc currency lost nearly 20 percent of its value against the dollar between the end of September and January 9, when it traded at 703.6 Congolese francs to the dollar, the Central Bank of Congo said in a statement at the weekend.

The bank quoted 676.3 francs to the dollar on Tuesday.

FEARS OF HYPERINFLATION

For many people in a country that depends heavily on imports of food and other goods bought with hard currency, the franc’s slide is a poignant reminder of hyperinflation under late dictator Mobutu Sese Seko.

Inflation in what was then Zaire reached an annual 10,000 percent in 1994, helping to fuel a revolt that toppled Mobutu three years later. A 1998-2003 war further wrecked the country.

After post-war elections in 2006, investors flocked into Congo’s vast mining concessions, spurred by high metals prices.

However, plummeting prices linked to slackening Asian demand have hit Congo hard as financing has dried up, forcing companies to delay development or suspend operations in what had been one of the world’s most promising new exploration areas.

In December, Congo’s Mines Ministry lowered its 2009 copper exports forecast to 365,000 tonnes, from a pre-crash projection of 410,000 tonnes. Production forecasts for cobalt, which is widely used in electronics, were more than halved.

Last month, the IMF cut its 2009 economic growth forecast for Congo by more than half to 4.4 percent, and lowered its projection for direct foreign investment by over two thirds to $800 million.

Insecurity in Congo’s eastern borderlands, where Tutsi rebels routed President Joseph Kabila’s army in a renewed offensive late last year, and recent payments to service external debt, have further weakened government finances.

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