25 October 2016

Mozambique: Interest Rates Up 6% as Inflation is Set to Jump

The new governor of the Bank of Mozambique (BdM), Rogerio Zandamela, on Friday night pushed up interest rates by 6% and imposed further restrictions on commercial banks. He said that with inflation now over 25%, the interest rate was effectively negative in real terms. Zandamela predicted that inflation will exceed 30% by the end of the year.

The base rate, the rate at which BdM lends to commercial banks (taxas de juro das Facilidades Permanentes de Cedencia de Liquidez - FPC), was raised to 23.25%, and the interest rate paid on compulsory deposits with BdM (taxas de juro das Facilidades Permanentes de Cedencia de Depositos - FPD) was raised to 16.25%. In addition, the commercial banks must deposit with the BdM 15.5% of their deposits (up from 13% for Meticais and 15% for foreign currency deposits). This is partly to mop up what Zandamela said was an excess of liquidity in the commercial banks of $60 million.

A renewed acceleration of devaluation, and concerns about secrecy in foreign exchange trading by the banks, led Zandamela to rule that commercial banks must notify BdM three times a day of their rates of exchange on foreign currency, and this will be published. Furthermore, commercial banks can now only go to BdM to borrow money twice a week.

Foreign currency reserves fell to $1,693 million at the end of September, which is equivalent to three months of imports, normally seen as the lowest acceptable level. Reserves fell by $92 mn in the third quarter after BdM gave $182 mn in hard currency to commercial banks and paid $66 mn in debt service.

Zandamela was clear about the cause of the crisis: "suspension of foreign aid, reduction in foreign direct investment, an increase in debt service payments," and falling exports, leading to a shortage of foreign currency.

The Metical depreciated another 3% against the Rand last week, and Zandamela noted that inflation is driven in part by the increasing cost of food imported from South Africa. On Friday 21 October, 1 Rand cost 5.62 Meticias and $1 cost 78.28 Mt.

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