Second day at Charles de Gaulle Airport.
Last night's flight was cancelled; apparently the weather over Central Europe is continuing uncooperative. So I got to stand in line for an hour at the transfer desk, then got a voucher for a night at a hotel and a boarding pass for the next afternoon. Well, we shall see.
Meanwhile, let me carry on with some further thoughts about dollarization in the Congo. If this is not the sort of thing that interests you... um, I dunno. I was going to put another link there? But somehow sitting here in the McDonalds is sapping my urge to surf the net for interesting links. Although not, apparently, my urge to talk about dollarization. Go figure.
So, the banks.
Congolese banks are even more dollarized than the economy generally. They loan in dollars, demand repayment in dollars (or, more rarely, in Congolese Francs but indexed to the dollar), and borrow abroad in dollars. (They don't keep their reserves entirely in dollars, though. I'll get back to that.)
Now: the Congo does not generate a lot of bank deposits. In a country of 65 million people, there are only about 150,000 depositors. And almost all of those are demand deposits -- meaning the depositors can take them out any time.
So, Congolese banks aren't able to make long-term loans. In fact, almost 90% of bank loans in the Congo are for one year or less. Loans of over three years are vanishingly rare. And even with the restriction to short term loans, there still isn't nearly enough money in the system to keep up with the demand for loans.
So a lot of Congolese banks
borrow abroad -- in dollars, of course. This of course could expose them to exchange rate risks. Except that it doesn't. Let me try to explain why.
When local banks borrow abroad in foreign currency, there are a couple of things that can go wrong. One is when the banks lend out that money to local borrowers who pay their debts in the local currency, -- and then the local currency suddenly crashes. Now the banks are collecting francs (or whatever) that have lost a lot of value, but they still have to repay their own overseas debts in dollars. This is what happened in Indonesia in 1997-8. It's why there are -- even today -- a lot fewer Indonesian banks than there used to be.
Okay, so let's say the banks are clever. They still borrow abroad in dollars, but this time they dollarize all their local loans: you must pay them back in dollars or in francs (or whatever) indexed to the dollar. Clever banks! Now if the local currency crashes, they're safe. Right?
Not necessarily. Here's the problem: the banks
haven't eliminated the exchange rate risk! They've just pushed it
downstream, to the local businesses that are borrowing from them.
Those businesses are getting paid in francs (or whatever), but they
have to pay their debt to the bank in dollars. If the exchange rate
moves too far too fast, they're screwed -- they won't be able to make
their loan payments. And if a lot of businesses can't make their
payments all at once, why, the bank has a problem after all.
This is a type of what's called "systemic risk", and it's what I saw in (for
instance) Cambodia. And it's what I was expecting to see here in the
But, as it turns out, not. The banks' portfolio here is very small
-- around a billion dollars of loans total for the entire country --
and it's disproportionately concentrated in the most dollarized sectors
of the economy: trade, services to the oil sector, high-end
construction, and mining. In other words, most of the banks' lending
is going to businesses that do most of their business in dollars, and
that get paid in dollars. So the exchange rate risk is minimal.
In theory, this should make it easier for Congo's banks to borrow abroad. In practice, that doesn't seem to be the case. That's because the Congo's general business environment is so degraded that it's hard for banks to do business anyway. Most developing countries go through a cycle or two of bank failures and then realize that (1) there should be an independent Central Bank, which (2) should regulate banks according to international best practices, with a few tweaks for local conditions. And when I say "most developing countries", I'm including some desperately poor and screwed-up places. Cambodia has a Central Bank that's astonishingly competent, and so do Uganda and Burundi. That's because those countries have all experienced hyperinflation, mass bank failures, sudden economic contractions, or other consequences of bad bank regulation. Congo is only just sidling up to that point.
This brings me to a possibly useful insight: Congo is, like much of Eastern Europe, a "transition" country that's just emerging from a long period of dictatorship. However, in Congo the transition started somewhere between the assassination of Kabila Senior (2001) and the holding of the first democratic elections (2006). So Congo today is sort of like Romania around 1993, if Romania was also in Africa and desperately poor and violent.
Okay, it's an intermittently useful insight. But I think it's relevant in this regard: most of the transition countries had to get their fingers burned at least once figuring out the proper role of a central bank. I hope Congo can avoid that. On one hand, they have some competent people at their central bank. On the other, it's really not independent.
That reminds me: reserves. Someone -- either the Central Bank or the government, it's not clear who -- has imposed a requirement that the local banks keep a big chunk of reserves in Congolese francs. The banks, of course, hate this. In order to enforce it, the Central Bank has to pay a whopping 70% interest on franc deposits. This is not as wonderful as it sounds; in the last year, the franc has fallen from about 550/dollar to around 910/dollar. So, if a bank converted a dollar to francs a year ago, and put it in their reserve at the Central Bank, today they'd have 550 x 1.7 = 935 francs. That means the real interest rate in dollars was just (935/910 = 1.028) about 2.8%. Not very attractive for the banks, and not a great deal for the Central Bank either.
I assume the idea is to resist dollarization, but I really doubt this is the best way to go about it. Also, if the franc suddenly jumps in value -- which, believe it or not, could happen, if copper or oil prices jump sharply -- then the Central Bank will have to scramble to cut those interest rates, or be hit with a hell of a bill.
Okay, it's still cold and snowy outside, but it's no longer actually snowing. On the other hand, someone told me that almost all trains have been canceled, which doesn't seem like a good sign. Will my flight leave? Will I see my little boys tonight? Watch this space.