How should Congolese authorities manage exchange rates and exchange rate regimes in the era of globalization?

August 10, 2011 Leave a comment

Over the past two and a half decades, many developing countries which were in the Structural Adjustment Program (SAP) have been encouraged by the International Monetary Fund (IMF) and World Bank to adopt floating exchange-rate regimes. The Democratic Republic of Congo (DRC) also was subjected to that reform and changed its pegged exchange rate into independent floating in year 2000. However, in 1980-85 and 1990-95, the DRC adopted an interim regime. Monetary policy in DRC is highly depending on the government and has been hit by the budget performance. In many occasion, the government has resorted to printing more money. This speeds up inflation and increases exchange rates, devaluating the Congolese franc (CDF).  In 2010 for example, the CDF depreciated at 26% in relation to the benchmark US dollar.

Using different scenarios and criterion, the conventional peg regime seems to be the best for the DRC which is desperately struggling to stabilize its economy. In fact, pegged exchange rate will allow DRC policy makers to import credibility and low inflation. Moreover, the DRC is a small, open economy. Its degree of openness was 65% in 2007 and 56% in 2008. In addition, it has limited exposure to international capital flows, an undeveloped financial sector, a tendency towards expansionary fiscal monetary policies and inelasticities in tradable markets. Furthermore, DRC imports are determined by the availability of foreign exchange (determined by aid and exports), with the exchange rate playing only a minor role.

The DRC doesn’t have enough foreign reserve that can help him to survive to huge attacks or shocks. It can neither stop crises in the border. A flexible exchange rate would adjust to absorb the change in world price and keep the domestic price as stable as possible, if ever we are enforced to pay high energy prices for imported goods due to crisis. In the case of fixed exchange rate, adjustment will be made inside the economy and the labour market. Of course the rise in world price will be transmitted to domestic price and decrease profit in the firm but adjustment can be made in the labour market, not in terms of wage but in term of employment. Therefore, the economy can take shocks.

The only criterion that the DRC couldn’t satisfy in was the inflation rate. The price increased by 18% in 2008 and 46% in 2009. With this big gap in inflation between DRC and some trade patterns like EU and China, the PPP exchange rate will move faster and therefore, the market real exchange rate will follow them. So, the market exchange rate should be flexible. In this context, because inflation will cause our nominal exchange rate to depreciate in order to keep the relative competitiveness of our exports (the real exchange rate) about the same. If we have fixed exchange regime, inflation in DRC makes our exports less competitive on international markets. Nominal appreciation of the CDF, by itself, also makes DRC exports less competitive, so nominal appreciation plus inflation makes them even less competitive. However, there are some evidences that support that fixed exchange rate brings advantages in terms of lower inflation rates and higher growth rates particularly to low-income countries.

There is a tendency to suggest flexible exchange regime with monetary policies rules such as inflation targeting for developing countries. As far as DRC is concerned, the politics prevents a country from managing its monetary policy soundly. The central bank is legislatively independent but not in reality. Therefore, efforts in targeting inflation have not been successful because inflation is mostly coming from excessive money supply (printed money). When inflation is generated by other cause, the central bank fails in diagnostics and choice of instruments for policy response. In that case, adopting a hard peg solves part of the political problem, but leaves the country potentially exposed to financial or fiscal crises. Finally, the presence of dollar debt is often presented as an argument against flexibility.

Christian Otchia S.E

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Education in the Democratic Republic of Congo : Challenges and tentatives solutions

July 7, 2010 Leave a comment

The education in the Democratic Republic Democratic of Congo is among the most sectors affected by the 32 years crisis faced by the country. From the 1960s until the early 2000s, the Congolese public education budget declined from 7% of GDP and 25% of the national budget to 1% of GDP and 5% of the budget, creating a fall of 96% in spending per pupil per year in primary and secondary schools (from US$109 in 1980 to $4 in 2002). Consequently, many reforms were done and the worst one suggested that parents should finance the education system by themselves without sharing funds with the government. The consequence is the degradation of education quality and infrastructure.

Thus, as of the entire population, 66.6% of adults and 65.3% of youth are literate with a significant difference among gender for adults (77.5% for male and 56.1% for female). 3% of children are enrolled in pre-primary school. The gross enrolment ratios for primary, secondary and tertiary schools are respectively 47%, 18% and 1% for year 1999 (90%, 35% and 5% for year 2008). In the other hand, the net enrolment ratio in primary school is only 32% for 1999. School life expectancy ISCED 1-6 is 7.8 years and the percentage of repeaters in primary schools is 15%. Moreover, the survival rate to grade 5 is only 80% while the gross intake rate to last grade of primary is 53% and the primary to secondary transition rate 80%[i].

Another consequence of the funding reform is that since parents are forced to pay at the school gate for the education of their children, even for primary school, which the constitution provides should be free and compulsory, corruption became endemic, including the exchange of good grades for sexual favors or for cash; the use of funds for purposes other than those they were allocated to; the straightforward theft of funds from the institutions concerned.

The last challenge resides on the education program by itself. Congo’s education system is out of date and doesn’t meet people needs. Based on the Belgium system since independence in 1960s, no reform has aimed to change its contents. Actually, the economy structure has completely changed: more the 70% of the economy is informal. Since there is a lack of formal jobs, university graduates are unemployed or underemployed in the informal sector so that there is a misallocation of resources inside the economy.

The first solution resides in funding education by increasing its budget allocation. Not later than June 30, the IMF and the World Bank decided under the Heavily Indebted Poor Countries Initiative, to support debt relief worth $12.3 billion for the Democratic Republic of the Congo. The additional resources released by the debt relief will help create room in the budget for spending on priority programs such as roads, schools, and hospitals. If there is a political willing, a significant push can be made in terms of funding education.

The second solution is to reform the education system per se. This reform will aim to reassert the value of professors (teachers), update to content of curriculum and promote girl education. The first will struggle against corruption and immorality whereas the latter will increase the human capital quality and transform mentality. Actually, corruption, immorality and poverty have destroyed the quality of education in a level that people don’t respect public goods and forgot about culture of respect and tolerance. The need as far as the education program is concerned is to review the class curriculum by including subjects such as Civism and Congo’s tradition.

As for education reform, priority has to be on technical and technological education. This will enhance the elite’s capacity to absorb new technologies, increase productivity and get advantage of increasing return of scale. A push must be made here in R&D. An emphasize must also be made on the non formal education in order to provide skills to farmers and artisans so as to increase their productivity and help them to shift from informal sector to formal, or from substantial agriculture to agro-industries. Empowering women through non formal education will significantly decrease the infant mortality, the rate of malnutrition and increase children education.



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October 26, 2009 Leave a comment

Welcome to my blog.

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I am from Kinshasa, the capital city of the Democratic Republic of Congo and currently a master student in Economic Development Policy and Management. My field is Poverty and Social Impact Analysis and the aim of research is to support poverty reduction in development countries in analyzing intended and unintended consequences of policy interventions on the growth and the well-being or welfare of different groups, with a special focus on the vulnerable and poor.  I am interested in multidimensional statistics, econometrics, Computable General Equilibrium Models, Incidence Analysis and programming in statistical and econometrics software such as PASW (Former SPSS), STATA, EVIEWS and GAMS.

This blog is independent and is not affiliated with any organization, institution, or government agencies. The main objectives of this blog is merely to facilitate the needs of everybody (either researchers, academicians, analysts, reporters, traders, family, friends, or any other related parties9 to discuss, to share information, and to get socialized with me. Of course, I honor ethics, morality and privacy.

Thus, your ideas and comments are welcome.

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