18 January 2011

Mozambique: Business Protests At Interest Rate Rise

Maputo — The Confederation of Mozambican Business Associations (CTA) has called on the Bank of Mozambique to reverse the interest rate increases announced a week ago.

On 11 January, the bank's Monetary Policy Committee announced that the key interest rates in the central bank's dealings with the commercial banks would rise by 100 base points. This means that when a commercial bank buys from the central bank, the interest it pays rises from 15.5 to 16.5 per cent.

When it is the other way round, and the Bank of Mozambique is receiving excess funds from the commercial banks, the rate it pays rises from four to five per cent.

The Monetary Policy Committee defended this decision on the grounds that "signs of inflationary pressure are still present in the Mozambican economy", and it was therefore "opportune to strengthen anti-cyclical measures to hold back inflation in 2011".

A statement from the CTA, cited in Tuesday's issue of the independent daily "O Pais", protests that the central bank's interest rates will have a serious impact on lending by the commercial banks.

Since most of the loans granted by the banks are indexed to the central bank's interest rates, they too will put up their interest rates, making it much more expensive for businesses to borrow money.

The CTA also alleged that higher interest rates will scare off private investors, and affect economic growth.

The CTA painted a bleak picture, alleging that a one per cent hike in interest rates will reduce productive capacity, diminish Mozambican companies' capacity to compete, and increase unemployment.

"It will reduce consumption, which could result in reducing the total revenue of companies, worsening their cash flow problems", the statement claimed.

It predicted a fall in domestic production, which would lead to increased imports, putting fresh pressure on the Mozambican currency, the metical, "which will degenerate into a new inflationary cycle".

The CTA argued that "the problem lies not in any excess liquidity in the financial market, but in the lack of production in the national economy. The measures taken by the Monetary Policy Committee would be understandable, if the country had a productive capacity that made import substitution possible".

The business leaders claim it is "impossible" to increase productivity, while financing costs remain so high, and demanded that the central bank perform a volte-face, and scrap the interest rate increase.

Its fall-back position is that at least the central bank should ensure that the interest rate increase has no impact on loans from commercial banks agreed before 11 January.

These complaints are likely to meet a frosty response from the Bank of Mozambique, which has already made very clear that its dominant concerns are to hold down the rate of inflation and to defend the exchange rate of the metical.

Inflation became alarming in December - when, in a single month, prices rose by 3.48 per cent. Much of this was due to straightforward speculation by shopkeepers and other businesses during the festive season. Had business people restrained their greed, then perhaps the central bank would not have felt obliged to put up its interest rates.

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