The Mozambican currency, “The Metical” lost 50% of its value from 30Mt / 1USD in January to 45Mt /1USD as of October 1st. Normally, when the metical devalues, The Government of Mozambique intervenes to restore the currency to equilibrium through the monetary policy.
The tight monetary policy implemented by the central bank, has two fundamental objectives:
- Controlling inflation – which is done by setting the average marginal lending facility at 7.5% , the deposit facility at 1.50% and the compulsory reserve rate at 8%, which in turn entices commercial banks to set their average lending rates at +/-21% (including margins) to cover the spread and;
- Currency stabilization — Achieved through market interventions such as by selling foreign currency to commercial banks in local recurrence therefore “sucking out” the access from circulation and keeping the “metical” stronger and/or by selling short term bonds and treasuries (which are government loans) in financial markets. So what’s happening? Let’s take a look
- Payment of the first installment of Government $850m Ematum Bond– A controversial government investment made on fishing boats, from government accounts– totaled $77m brought a scarcity in foreign reserves and a current account deficit.
- The 2014 National Elections, financed from State budget.
- High level of Gdm debt +/- 60% of GDP.
- Unstable political situation resulting in the reduction of foreign direct investment inflows.
- The United States Federal reserve banks decision to keep interest rates unchanged (0%) against the expectation that US rates would increase. It is still widely believed the interest rates will increase, leading speculators to spend less.
- The overall strengthening of the US Dollar as the American Economy gradually strengthens, through stimulus methods such as quantitative easing in this post financial crisis era.
- The decline in the international price of commodities, such as Coal and Aluminum devaluing Mozambique’s export basket.
The result has been a rapid downward spiral of the metical vs the dollar at an alarming rate.
- The average price of imported goods has increased
- Mozambique –being a net importer of most commodities (including foods, manufactured and processed goods) has seen the price of consumer goods go up.
- Mozambican exports have become cheaper, bring in less revenue.
- Government has cut key subsidies such as the (the bread subsidy) and have not adjusted the fuel price despite the international price of oil decreasing.
The result is an overall lack of market liquidity due to decreased Government spending and gradual reductions in social safety net investments.
Text by: Carlos Matos