The severe malfunctioning of Zaire's monetary system has negative consequences for recovery in both the modern economy and the informal popular economy. It also affects the operations conducted by central governments, monetary authorities, and, more broadly, the central political institutions. Among other things, it is for now impossible to establish a budget that is really operational, still less to administer and audit it properly, and no monetary policy can be effectively implemented. Moreover, the current situation allows officials to manipulate funds and waste resources, especially foreign exchange, despite the acute shortages.
There are profound implications for aid policy. Indeed, until radical changes in the monetary system are taken (that is, with the establishment of a currency board), it will remain extremely difficult, even counterproductive, to channel funds directly or indirectly. Tensions among the central political institutions will rise and reinforce the clientalist behavior of officials. To prevent the misallocation of funds, aid agencies should make arrangements with the central government to channel aid for predetermined purposes to existing NGOs or para-NGOs (associations composed of not only representatives of civil society but also local officials and military authorities).
An essential precondition for economic survival is the maintenance of civil peace and national solidarity. Civil peace, intertribal "good neighborliness," and good regional relationships must be preserved at all costs. Absent a climate of public security, no economic recovery is possible. The security function in Zaire can be enforced not only by the usual instruments of the formal police and army but also by other kinds of supplementary security provided by local communities. A major problem is to sustain, on a pragmatic basis, the links between security functions performed by the formal central government and those performed by local communities.
ZAIRE'S MONETARY SYSTEM
The current monetary system makes it very difficult to channel aid funds to the neediest sectors of society. The current system has five components.
"Useful" banknotes denominated in NZ (nouveaux zaires). The "useful" banknotes are the only Zairian money accepted in the country. The ultimate holders of these notes are the poor: women, men, and children who animate the informal economy and need the notes for undertaking their micro-activities. For most workers in the informal popular economy, holding cash balances in banknotes is the essential counterpart to their modest working capital, and it allows them to generate income and employment.
About 85 percent of the cash balances in Zaire is the hands of the informal popular economy. The remainder is held by the upper-income set (big traders in diamonds and gold), by those in the private modern sectors who need the banknotes for transactions (with workers or local suppliers) in the informal economy, and by the elite who have family links with the informal economy. Most of the cash holdings in banknotes are located in Kinshasa and its suburban hinterlands (home to over twelve million people).
The real value of the cash holdings in banknotes denominated in NZ is $80 million. The real purchase values of the different banknotes range from six cents to around $1.25, which is the largest banknote that can be used in the informal economy.
The responsibility for issuing currency notes rests with the Central Bank. Because issuing banknotes is the only means of financing public expenditures, the printing of banknotes exceeds the needs of the informal economy, and the value of the currency circulation of banknotes degenerates rapidly.
Due to the hyperinflation provoked by excessive public financing, the circulation of notes has had to be totally renewed every year. Monetary authorities are constrained to annually print between 650 and 900 million banknotes. Thus the cost of maintaining an average of $80 million in real cash holdings amounts to $50 million a year.
Old one-million-zaire banknotes that were to have been retired on December 10, 1993. At the time of the monetary reform in September 1993, only 65 percent of the banknotes in circulation were exchanged against the NZ. Most of the currency that was not exchanged consisted of one-million-zaire notes. These notes were progressively sucked into the two regions of Kasai, where they are now used for transactions in the informal popular economy. There are probably between 400 and 410 million banknotes with a real purchase value of around $25 million. In fact, the one-million-zaire notes issued in September 1991 are now appreciating versus the NZ. (At the end of September 1995, a one-million-zaire banknote could buy 385 NZ.) This currency will probably continue to circulate until it is worn out.
Notes denominated in U.S. dollars. The dollar currency circulation, already important before 1994, was boosted by an injection of dollars through the relief aid from humanitarian agencies and NGOs coping with the Rwandan refugees in Kivu. Dollar notes of almost all denominations are in use. A very rough estimate of the dollar notes in circulation in Zaire is around $40 million.
This currency is mainly used in the informal popular economy of the two Kasai and the two Kivu regions. Dollar notes are used for transactions in the upper-income bracket of the informal economy outside of Kinshasa. A substantial amount are also held by the elite and the private sector for payments in local transactions.
The foreign-exchange accounts deposited in local banks in Zaire are used mainly by exporters. This foreign-exchange deposit is estimated at $50 million, the majority of which belongs to a dozen big diamond traders. Fed mainly by the repatriation of export proceeds, these foreign-exchange deposits are formally under the control of central monetary authorities, but in fact they are freely used by their holders. (Indeed, when central authorities periodically try to take hold of these funds, they have little success.) Foreign-exchange deposits are used for both foreign commercial transactions and local payments, either by acquiring NZ banknotes to settle payments with local businesses holding these types of deposits or by cashing dollar notes.
"Zairian Belgian francs," which appeared in Kinshasa in 1994. The difficulties of running a business with banknotes denominated in zaires has encouraged some in the middle class to engage in certain financial arrangements with large local religious associations. These middle-class traders, mainly operating in Kinshasa and in Bas-Zaire, bring the proceeds of their sales in zaires to the association, which then opens in its books a deposit account denominated in Belgian francs.
The transfer to this deposit account is executed at the current rate of exchange between the NZ and the Belgian franc. These Belgian deposits are used mainly to protect the real value of cash holdings. Sometimes they serve to settle local transactions with colleagues who also have accounts in the association. Finally, part of these deposits are used to pay for goods and services bought in Belgium. The entire process is computerized and seems to work fairly well on a small-scale basis.
Degenerated money deposit accounts denominated in NZ. The deposit accounts in NZ cannot be used either for current normal transactions or to retire banknotes. They only retain their value because they permit the settling of fiscal obligations. Such accounts are sometimes the only way to receive a payment by the Treasury, and there is always a hope that banknotes will be retired by some arrangement.
These accounts are a virus in the monetary system. Their proportion varies between 8 percent and 30 percent of the total monetary circulation. Recently, the authorities officially legalized the rate of conversion between zaires held in deposit accounts with banknotes denominated in zaires. In late February 1994 the legal rate applied for deposit accounts that could serve to settle transactions was 14,000 NZ per $1 (compared to 3,500 NZ per $1 for banknotes).
From February onward, the rate of conversion was fixed by "the market"--that is, by arrangements between customs, revenue administration, and local businesses. This floating rate of exchange only adds to the confusion in the monetary system and in public finance. It has also put the Central Bank in an embarrassing situation: according to the books of the Central Bank, deposits of zaires do not perfectly equal zaires in banknotes. It will be extremely difficult now to have an accurate idea of the real accounting situation of the Central Bank, the government, or the local banks.
The current monetary system, with its multiple currencies and annual renewal of banknotes, invites malpractice and mismanagement. Opportunities include manipulating the exchange rate by issuing more or fewer banknotes; acquiring foreign exchange by issuing banknotes; speculating on the variable rates between the currency rates and the deposit rates; and arbitrarily selecting the beneficiaries of public funds and settling their payments either in banknotes, in deposit accounts, or in foreign exchange.
Given these conditions, it will remain extremely difficult, and may be counterproductive, to inject aid through those channels ruled by the central government and monetary authorities. The best remedy is to establish some sort of currency board (as was done, for example, in Estonia in 1992) adapted to the conditions of the Zairian economy. Establishing such a board would require not only that financial, technical, and economic decisions are made but also that the current political institutions reach a consensus that the issuing of money should be strictly linked to a corresponding foreign-exchange deposit at a fixed intangible rate and that public expenditures cannot be financed simply by issuing banknotes.
THE WAY AHEAD
The fundamentals of the Zairian economy are still promising and could rapidly generate a high growth rate if proper political and monetary conditions were restored.
Potential resources and environment. As is well known, Zaire has a significant natural resources potential, notably in the mining and the hydraulic sectors: this could be exploited in the medium term. Zaire has maintained a relatively well-protected natural environment compared with other countries in sub-Saharan Africa, although the influx of Rwandan refugees has threatened the environmental situation. It should also be noted that the social environment is still relatively sheltered from chronic and general violence, as yet uncontaminated by ferocious tribal war, urban guerrillas, or modern and international forms of crime.
The dynamism of the informal popular economy. The informal economy is very dynamic, working on a highly free and competitive market-oriented basis. Participants have a sense of opportunities and flexibility, and are making the best of the available local resources. The informal popular economy generates a deep sense of solidarity, founded not so much in sentiment as in the necessity for survival: people need one another to undertake profitable activities. Finally, the participants are conscious of the public goods that need to be provided, because the success of their humble activities depends on their understanding of their local market. The highest priorities expressed by those in the informal sector are (1) security, that is, freedom from personal violence and aggression toward property; (2) access to health care and education; (3) freedom and facilities to move easily, one priority being the maintenance of roads; and (4) free access to information and communications.
The endurance of the modern sector of the economy. Despite the collapse of the public sector and its infrastructure, and despite the outbreaks of looting in 1991 and 1993, the private modern sector, notably the manufacturing industry, has survived. Indeed, under the pressure of circumstances, the modern economy has made several far-reaching and sound economic adjustments:
- Local experts have replaced redundant expatriates. Between 1989 and 1994, around 60 percent of the total expatriate labor force left industry and services in the private sector.
- The unqualified labor force has been reduced (at a tolerable social cost) by almost 45 percent since 1989.
- The manufacturing sector is able to sell products in a very competitive environment while employing cheap labor. Goods and services are provided by the informal economy most efficiently and at lowest cost.
- Intensive labor and equipment have been favored over sophisticated machinery in capital expenditures.
- There has been a growing awareness that a social environment must be created, in collaboration with the local NGOs and authorities, that addresses the economic and social problems of the local people. In some regions, health, education, road maintenance, and electricity distribution have been partly financed by coalitions, with manufacturing industries and private mining enterprises being particularly responsive.
The informal economy, the private modern sector, and the large local NGOs thus represent quite a large segment of Zairian society that is trying to work together. Operating mainly without foreign aid, and relying instead on their own resources (both local and external), these economic actors have developed a kind of consensus to supply and finance certain priority public goods. They are sensitive to financial constraints and careful to spend scarce resources on the highest local priorities.
CONCLUSIONS
Until the monetary system is changed it will be difficult to channel a substantial amount of aid to the central government. There is, however, a strong case for targeting aid on the local level.
Providing support to regional and local communities does not require a complex infrastructure either in Zaire or outside. The first step is to encourage those local initiatives already under way to make themselves known to international agencies. Designing arrangements to allow international organizations to dispense foreign aid without channeling it directly or indirectly through the central government calls for creativity and an understanding of local and national realities. Working from the local groups' proposals, a high-powered representative of international organizations could help conclude practical arrangements with central government authorities.
To begin with, the amount of financial aid that can be efficiently absorbed by local communities under this approach will be small. However, as the program achieves greater success, so the capacity to absorb much more substantial aid will enlarge. In this manner, the program will directly address Zaire's most pressing problem, which lies not so much with the absence of large-scale aid as with the country's limited capacity to absorb aid, particularly for the economic development of the poor. The most important role that international organizations can play in the transition is to help enlarge Zaire's capacity to absorb aid through formulas developed by local communities and to foster appropriate arrangements with the central official authorities.
United States Institute of Peace -- 1200 17th Street NW -- Washington, DC 20036
(202) 457-1700 (phone) -- (202) 429-6063 (fax)
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