With Congo finances collapsing, desperate government has few options

It was Raymond O’Leary, a vice president from Russia’s second largest bank, state-owned VTB, to discuss a Eurobond aiming to raise funds for the cash-strapped government, Congolese and VTB officials confirmed.

The choice of lead manager was striking, given that VTB is under U.S. sanctions any deal would have shut the door on IMF and pretty much all Western funding owing to donor objections.

VTB’s press office emphasized, however, that its VTB Capital arm in charge of Eurobond issuances is not under sanctions.

“There are no legislative restrictions on the participation of foreign investment funds in placements organised by Russian investment banks,” it said in a statement.

Nevertheless, the deal fell through, partly because of concerns about the optics of dealing with VTB and also because Congolese officials realised any investors willing to buy the bond would demand a punitive spread.

But the fact that the meeting took place at all revealed just how desperate Democratic Republic of Congo’s government has become as it seeks to head off a collapse in national finances that is hitting the economy.

Inflation is now at 50 percent and the Congolese franc has lost 30 percent making it one of the world’s worst performers this year, though it recovered slightly this month. In addition, the central bank is so low on forex it has barely three weeks of import cover left.

Congo’s economic pain is fueling political instability. Violent street protests against President Joseph Kabila and a surge in militia attacks and prison breaks have stoked fears the Central African giant could slip back to the civil wars of the turn of the century in which millions died.

Kabila took power when his father was assassinated in 2001 and has since won two elections.

The IMF representative in Congo declined to comment, as did the prime minister’s office and finance minister. But in a speech last month, central bank governor Deogratias Mutombo was uncharacteristically blunt:

“The economy is in very bad shape,” he said.

“FALSE PROMISES”

Congo is Africa’s top copper producer and houses a trove of other minerals including oil, cobalt and gold, but low commodity prices have conspired with high deficits and rampant corruption to push its economic indicators into the red.

“Currently there is no possibility – with the current economic situation and political instability – to have … sufficient confidence to sustain a stable exchange rate,” former banking association head Michel Losembe told Reuters.

Earlier this month ratings agency Standard & Poor’s downgraded Congo’s sovereign credit rating, predicting year-end depreciation of the franc of about 35 percent and annual GDP growth of less than 2 percent from 2017-2020, down from 7.8 percent for 2011-2016.

The government forecasts 2017 GDP growth at 3.1 percent, up from 2.4 percent last year. Standard & Poor’s sees GDP growth this year at 1.5 percent.

Three quarters of Congo’s budget pays civil servant salaries and government operating expenses. Labour unions have launched strikes in recent weeks to demand pay rises.

Labour unrest would worsen Congo’s security crisis, which has seen violence rise in several parts of the country since Kabila refused to step down at the expiry of his mandate in December.

A general strike largely paralysed economic activity for two days last week.

In June IMF Managing Director Christine Lagarde, on Congo’s request, offered to send a delegation in September to discuss possible aid. Yet she warned this would require “a credible trajectory toward political stability”.

A Kinshasa-based diplomat says IMF help is “near impossible” because it would require Kabila to commit to a timeline for stepping down – which he refuses to do – and open the books of Congo’s opaque state-owned miner Gecamines.

On the streets of Kinshasa, patience is wearing thin. In Ngaba district, where cement trucks vie for space with rickshaws on dilapidated, flooded roads, some residents have turned to the only option left: criminality.

“Let the authorities spare us their false promises,” said one 22-year-old gangster in Ngaba who gave only his first name, Yves. He said he had studied at a professional institute but couldn’t find a job after graduating and has now turned to a cellphone theft racket.

“There’s no work,” he said. “That’s why we’re out here fighting like gangsters.”

(Additional reporting by Alex Winning in Moscow, Ed Cropley in Johannesburg and Karin Strohecker in London; Editing by Tim Cocks and Matthew Mpoke Bigg)