With Christmas and the holiday season on the horizon, which traditionally brings increases in demand for goods and therefore price(s) —the Mozambican Central bank has alerted the private sector to prepare for a rough holiday period. The central bank, who is mandated primarily to control inflation (aligned with the government policy of poverty reduction) but also serves as the lender-of- last-resort — has revealed that it is currently unable to intervene to control the rapid spiral of prices and/or exchange rate volatility, due to liquidity issues. Mozambique normally maintains (+/-) $3b in foreign reserves –this year that figure is substantially less.
The foreign currency scarcity is driven by reduced levels of foreign direct investment due to political instability, rapid drop in commodity prices ( Gas, Coal), a strengthening American Dollar, and tough economic times being faced by once flourishing BRIC Nations ( Brazil, Russia, India, China).
At this stage last year, the Central Bank had injected $700m of a total of $1.2b into the economy, but states that such a sum this year will be impossible attain.
So why the government is broke?
The current account deficit is drive by:
- Devastating rains which fell in 1st quarter of 2015, that affected the provinces of Zambezia and Nampula where there where electricity cuts for 45 days = No Productivity.
- Payment of outstanding VAT reimbursements to the private sector
- Payment of Subsidies (especially fuel) putting heavy pressure of government resources
- 2014 Elections
- Government debt payments
Acknowledging this, the government has already secured a $286m emergency loan from the IMF to curb the current situation, a tactic seen as a last resort by the Ministry of Economy and Finance. This loan, although useful, is sufficient only to cover the government’s debt bill essentially meaning that the Gdm is “paying a debt by creating more debt”. Because of the level of risk associated, the terms of the IMF loan oblige the government amongst others, to raise interest rates.
Interest’s rates in Mozambique hover between 15% -25%. The central bank has, for the past four years, embarked on an expansionary monetary policy, gradually reducing the average marginal lending rate in an attempt to increase credit access (currently at 7.5%)— while injecting vast sums of foreign currency into the market through currency “swaps” with commercial banks. These benefits however have not been felt by consumers, as the Mozambican economies reaction to exchange interventions (purchase of treasury bills etc ) are more immediate than interest rates reductions/hikes because of a stronger transmission mechanism —including the fact that the CB cannot control the spread — the markup made by commercial banks when lending. The question remains, how will commercial banks react rate to interest rate hikes?….Clearly by passing the costs onto consumers.
Although the medium to long term scenario remains optimistic (Incoming LNG Exports + Political stability bringing in more FDI) in the short term, Mozambique and Mozambicans should brace for tough times.
Text by: Carlos Matos
