This may take a couple of posts. I'll try to keep it accessible for readers who are not economists. (Note: IANA economist.)
First let's talk a little about the Congolese Franc.
The Congolese Franc is a sad little currency. It gets no respect -- least of all from the Congolese, who greatly prefer dollars. Its value has collapsed by a third in the last year; it's currently trading at about 910 to the dollar, down from about 550-600 back in 1998.
This is actually a little unfair, because the Congolese Franc is a slightly better currency than you'd expect. The Congolese Central Bank is not independent -- oh dear me, no -- but it is staffed by some reasonably competent people. They remember the hyperinflation of the later Mobutu years, when Congo was one of those countries that was adding zeros to the currency every few weeks, and they're determined that nothing like it should happen again. They can't keep the central government from overspending its budget, but they can vigorously protest attempts to balance that budget by firing up the printing presses. So, the Franc is actually, by African standards, a tolerably well managed currency.
(Incidentally, that hyperinflation explains why the highest value Congolese note is just 500 francs or about 55 cents. Back in the 1990s, the Mobutu regime would bring out a new note every few months. After a while, this came to be a regular trigger for protests and riots. So the Central Bank is a little sensitive about introducing new, higher-denominated notes, even though at this point there's clearly a need.)
(How bad was the inflation? Well, it wasn't Weimar Germany. But after Mobutu fell in 1997, the Franc replaced the "New Zaire" at 100,000 to 1. The New Zaire had replaced the Old Zaire just four years earlier, at a rate of three million to one. So, that was a three hundred billionfold drop in four years. Bad enough.)
But if the Franc is well managed, then why has it lost a third of its value in the last year? Because the world economic crisis caused the price of metals to crash.
Think it through: why would anyone outside Congo ever want Congolese Francs? To buy stuff from Congo. And what do people buy from Congo? In rough order: metals, diamonds, oil, and hardwood timber.
Of those, metals -- gold, tin, copper, cobalt -- are the biggest. So when they become more expensive, buyers need more Congolese Francs to buy them. There's more demand for Francs, so the Franc rises against other currencies. Conversely, when metal prices crash, the Franc drops in value. And either way, there's not much the Congolese Central Bank can do about it.
This has a number of consequences. Here's one: the Congolese could not easily peg the Franc to another currency, even if they wanted to. (This is not a completely insane idea. Fourteen African countries, including Congo-Brazzaville next door, are using CFA Francs that are pegged to the Euro. Whether it's good policy is a separate question, but they're doing it.)
Here's another: cheap metals hurt Congo twice. Not only are they getting paid less for their metals, but their imports become more expensive as the currency falls. (In theory, their exports would become more competitive too. But Congo doesn't export much beyond the aforementioned metals, diamonds, oil and wood.)
-- Yes, I am simplifying the hell out of things here. But the key point is valid, and that's that the Franc is sensitive to metal prices. Tuck that away; we'll come back to it later.
Meanwhile, the economy of the Congo is massively, shockingly dollarized.
Everybody takes dollars. Hotels. Shops. Restaurants. Street vendors. The guy who shines your shoes. They all not only take dollars, they actively prefer them. The country has something like five ATMs; all of them give dollars, not francs. I just paid my hotel bill in dollars, bought some bottled water with dollars, gave dollars to buy a Christmas present for my mother-in-law. Congolese love dollars.
Why? Three reasons. One, most obviously, the dollar is a stable currency that's a hedge against inflation and the falling Franc. In theory, the Franc could go up again; in practice, over the long run it's tended to go down. If you had a Francs two or three years ago, and you swapped them for dollars, you'd now have twice as much purchasing power as your neighbor who held on to the Francs. And there are also memories of the horrible days of hyperinflation; the Central Bank may be acting responsibly these days, but who knows how long that will last? So that's just good sense.
Two, dollars are physically sturdier than flimsy Franc notes, and much harder to counterfeit. (Though that does not stop people from trying. The Congo is a major center for counterfeiting, and there are a lot of bogus U.S. bills in circulation.)
And three, there's a prestige aspect. Francs are grubby and common. Dealing in dollars shows that you're a player.
Now, an obvious question here is, why dollars and not euros? The Congo does plenty of business with EU countries, after all. I don't know the reason, but I can make a couple of guesses. One is historical: dollarization in Congo goes back long before the existence of the euro, and it was probably firmly established by the hyperinflation of the early and middle 1990s. The other reason, I'm guessing, is that a remarkable amount of Congo's exports are illicit -- blood diamonds, illegally clearcut rainforest wood, truckloads of metal smuggled over the border, you name it -- and the U.S. Dollar is still the preferred currency for illegal transactions worldwide.
Anyway, so the Congo is heavily dollarized. What does this mean for economic governance and policy here? I'll try to get back to this in a couple of days.