Solutions for the de-dollarization of the Democratic Republic of Congo

Question

While reading this article, I was wondering about the policies the DRC's government could employ to make the congolese franc appreciate. To appreciate the currency, the DRC by decreased investment in the mining sector which decreased the supply of the currency -> Appreciation. On the other hand, the decrease in investment caused inflation to happen, countering the original beneficial effects of this policy.

My question is: what would the implications be if the DRC simply pegged its value to the dollar or revalued it? Why hasn't it done that?- there must be reasons...

I am learning high-school economics so pardon my limited knowledge.

I look forward to your answers!

Answer 1

Yes, it is possible to peg any currency to the USD. The big question is: at what rate? To peg the Congolese franc to the USD, the central bank needs USD reserves. This is necessary to maintain the peg. (If the currency depreciates, the central bank will sell some of its USD reserves and buy the currency to prop up the exchange rate and thus uphold the peg). As per the article cited in the question, the Congolese central bank doesn't have much foreign currency reserves.

Based on the chart below, it appears to me that the Congolese franc was in fact pegged to the USD until early 2016. It seems the central bank couldn't maintain the peg at that rate and had to let the franc slide.

To have a strong currency, the central bank needs to limit the money supply. However, the government will often pressure it to do the opposite, i.e. pressure the central bank to print money and buy government bonds, so the government has money to spend. (The article mentions plans to slash the government budget in order to limit the supply of francs in the economy). For this reason in advanced economies central banks are typically strictly independent from government.