From the fear of floating to the fear of losing foreign exchange reserves: the interventionism of the Central Bank of Congo in the face of recurrent tensions on the foreign exchange market
Emmanuel Sungani and André M. Nyembwe
SUMMARY
Considering the period from January 2006 to April 2023, this study sets out to empirically establish the historical interventionism of the Central Bank of Congo (BCC) indicating the « fear of floating », to detect a change in attitude during the recent period of tension, marked by minimal interventions despite the historic level of accumulated foreign exchange reserves, before discussing its rationality and suggesting recommendations. The methodology adopted is based, firstly, on the calculation of the Exchange Market Pressure index (EMP), in order to identify periods of tension on the foreign exchange market, then on the calculation of the Central Bank Intervention index (CBI) and the Relative Volatility Ratio (RVER) in order to determine the trade-off that the BCC makes between letting the currency depreciate or losing its international reserves. The evolution of the various indices, as well as the calculation of the correlation between the trend component of the CBI and the level of reserves over different sub-periods, confirm a change in the behaviour of the BCC, which would shift from the « fear of floating » to the « fear of losing foreign exchange reserves ».
Without the government addressing the primary causes — notably fiscal — of the depreciation of the Congolese franc, the BCC would be condemned to arbitrate between the need to intervene for reasons of macroeconomic stabilisation and unnecessary losses of reserves in periods of crisis or high tension on the foreign exchange market. Its option of giving priority to interest-rate tools has the disadvantage of transmitting the repressed fluctuations of the exchange rate to bank liquidity, and therefore to banking activity.
Keywords: Fear of floating, Central bank, Foreign exchange reserves, Foreign exchange market
JEL codes: E52, E58, F31
ABSTRACT
Using data from January 2006 to April 2023, this study aims to empirically establish the historical interventionism of the Central Bank of Congo (BCC), indicating the « fear of floating », to evidence a change in the Central Bank’s attitude during the recent period of tension, marked by minimal interventions despite the historical level of accumulated foreign exchange reserves, before discussing its rationality and making recommendations. The methodology adopted is based, firstly on the calculation of the Exchange Market Pressure Index (EMP), to identify periods of tensions on the exchange market, then on the calculation of the Central Bank Intervention Index (CBI) and the Relative Volatility Ratio (RVER) in order to determine the trade-off that the BCC makes between letting the currency depreciate or losing its international reserves. The evolution of the various indices and the calculation of the correlation, between the trend component of the CBI and the level of reserves over different sub-periods, confirm a change in the BCC’s behaviour from « fear of floating » to « fear of losing foreign exchange reserves ».
Without treatment of the Congolese franc depreciation’s main causes – notably fiscal – by the Government, the BCC would still have to arbitrate between the need to intervene for reasons of macroeconomic stabilization and unnecessary losses of reserves in periods of crisis or high tension on the foreign exchange market. The BCC’s decision to give priority to interest rates instruments has the disadvantage of transmitting repressed exchange-rate fluctuations to bank liquidity, and therefore to banking business.
Keywords: Fear of floating, Central bank, External reserves, Foreign exchange market
JEL codes: E52, E58, F31