27 February 2018

Mozambique: Bank of Mozambique Lowers Interest Rates

Maputo — The Bank of Mozambique on Monday lowered its benchmark interest rates by 150 base points.

A statement from the Bank's Monetary Policy Committee (CPMO), said that the new interest rate, introduced in April 2017, the Interbank Money Market Rate (MIMO), falls from 19.5 to 18 per cent. The central bank's interventions on the interbank money market to regulate liquidity are based on this rate.

The Standing Lending Facility (the interest rate paid by the commercial banks to the central bank for money borrowed on the Interbank Money Market) falls from 20.5 to 19 per cent, and the Standing Deposit Facility (the rate paid by the central bank to the commercial banks on money they deposit with it) falls from 14 to 12.5 per cent. The Compulsory Reserves Coefficient - the amount of money that the commercial banks must deposit with the Bank of Mozambique - remains unchanged for local currency at 14 per cent, but for foreign currency, it rises by 800 base points, from 14 to 22 per cent.

Speaking at a Maputo press conference, the governor of the Bank of Mozambique, Rogerio Zandamela, said that the fall in inflation justified the cut in interest rates.

Annual inflation in January (1 February 2017 to 31 January 2018) was just 3.84 per cent. This is a dramatic turn-around from the situation a year ago: in January 2017, the annual rate of inflation was 20.56 per cent. Zandamela was confident that inflation will remain low (less than 10 per cent) for the rest of the year.

The governor described the performance of the Mozambican economy in 2017 as “moderate”, with a GDP growth rate of 3.7 per cent. He took some comfort from the fact that this is higher than the average growth rate for the SADC (Southern African Development Community) region, which is 2.8 per cent.

One alarming factor is that the Mozambican currency, the metical, is now under strong pressure. The metical declined from 58.92 to the US dollar on 16 January to 61.39 to the dollar on 23 February (and the average rate quoted by the central bank on Tuesday is 62.21 meticais to the dollar).

Against the South African rand, the metical fell from 4.78 to the rand in mid-January to 5.28 on 23 February (and the average selling rate on Monday was 5.38 meticais to the rand).

Zandamela said the exchange rate pressure reflected “the volatility of the main currencies on the international market”, and the greater opening to capital flows envisaged in recently adopted exchange regulations.

The rand has been rising against all other currencies, doubtless because markets breathed a sigh of relief at the fall of South African President Jacob Zuma and his replacement by Cyril Ramaphosa. But, given the large amount of food imported from South Africa, the rise in the rand could increase the Mozambican inflation rate.

Zandamela brushed this aside as “a correction resulting from political change”. If goods from South Africa became too expensive, “we will have to buy them from somewhere else”, he said.

From the beginning of the year to mid-February, Mozambique's net international reserves declined by 96.3 million dollars, due to the central bank's sale of dollars on the Interbank Exchange Market (largely to pay for imported fuels), and to servicing the foreign debt. The debts serviced are Mozambique's bilateral and multilateral debts - not a penny has been paid to service what even Zandamela called the “hidden debts”.

These are the loans of over two billion dollars contracted with illegal government guarantees by the security related companies Ematum (Mozambique Tuna Company), Proindicus and MAM (Mozambique Asset Management) from the European banks Credit Suisse and VTB of Russia. Zandamela did not want to join the debate on whether the three loans were illicit, but made it clear the central bank has no intention of repaying them.

The country's international reserves now stand at 3.188 billion dollars, enough to cover seven months imports of goods and non-factor services (excluding the imports of the foreign investment mega-projects).

Zandamela expressed concern at the rise in the government's domestic debt (largely through the sale of high interest bearing treasury bills and bonds). This domestic debt rose from 98 billion meticais in December to 104.6 billion in February.

He warned that this “raises questions of sustainability”, since the government could not expect the commercial banks and other buyers to go on purchasing government debt indefinitely.

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