Mozambique: Sudden Changes in Exchange Rate Raise Questions

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The metical increased in value by 13% in a week, from $1 = MT 65.5 on 6 April to $1 = MT 56.8 on 14 April. Then it was kept at precisely that level for two weeks, It has now drifted back to $1 = MT 58.6.

The sharp change in less than a week, followed by two weeks of an absolutely constant $ exchange rate, means the that Bank of Mozambique, and not the market, is setting the exchange rate. And questions are being asked.

The Metical had been slowly devaluing for a year, reaching $1 = MT 75.3 at the beginning of February. The appreciation since then is 24%. There was a similar appreciation against the Rand, from R 1 = MT 5.2 in February to R 1 = MT 3.9 on 16 April.

Economists said there was nothing in the economy that could explain this. Standard Bank said "this rate is unsustainable due to the large and historic current account deficit and the weak outlook for foreign direct investment." Fitch said it expected the metical to return to the January level of $1 = MT 74 by the end of the year. Fitch believes that the currency is overvalued, and “does not reflect favourable macroeconomic conditions”, noting that the twin budgetary and external deficits increased in 2020 as a result of the coronavirus pandemic, and that attacks in Cabo Delgado have harmed the country’s attractiveness as an investment destination.

The Bank of Mozambique announced on 30 April that it would take a further $60 mn from its $4 bn reserves and inject them into the economy. Bloomberg said that internal market is being flooded with dollars.

The main impact of the appreciation of the Metical is to make imports cheaper and especially to encourage imports of food and other good from South Africa to Maputo. And consumer prices fell slightly in April.

But it squeezes exporters. It is clear many businesses see the appreciation as temporary. State Electricity Company EDM quotes some salaries in dollars, but continued to pay at the rate of $1 = MT 75 - until this was published and EDM agreed to only pay the official rate.

Some South Africa banks and merchants are using their power to set their own exchange rates on Visa credit cards to keep the effective rate at $1 = MT 75. Question: Arbitrage? Arbitrage is taking advantage of price differences in different markets for the same asset - or of buying knowing that the price will change.

Thus anyone who sold their dollars at 65.5 on 6 April and bought the dollars back a week later at 56.8 would have made a large profit. Selling $100 on 6 April provided enough Meticais to by $115 a week later. And anyone with inside knowledge would have made a lot of money.

Similarly, the predictions of a return to $1 = MT 75 this year means that banks and traders will snap up the extra $60 mn and hold them until the price goes up, making an arbitrage profit of $15 mn. Individuals and illegal money traders will do the same thing - hold dollars for the next six months.

Arbitrage and access of dollars fuelled Zimbabwe's hyperinflation because of the gap between official and parallel exchange rates. In Mozambique arbitrage works by guessing - or knowing - how the Bank of Mozambique is going to manipulate the exchange rate.

Who owes? Mozambique has an external public debt of $15 bn but has foreign currency reserves of $4 bn, according to the IMF. Much of those reserves will be US dollars held in US banks, and US bonds. By holding this money and not spending it, Mozambique (and other countries) are giving a loan to the United States. The US Treasury reports that there are foreign holdings of an incredible $ 7100 bn - in other words the US owes $7100 bn to rest of the world.

Over the last 50 years the US has manipulated the international financial system by making the US$ the global currency and though the IMF to push countries to hold ever larger reserves in the form of loans to the US, in effect propping up the US economy.

This started in 1973 when the US ended the fixed price of gold. The 1997 and 2008 global financial crises started in the US, but led counties to keep ever larger reserves to try to provide a cushion against US financial collapses. The US$ is also the normal currency of illegal trade, notably drugs, and those holdings of dollars are also, in practice, loans by the drug dealers to the United States government.

Follow up Afungi TechnipFMC withdrawal 'fake news' but Total is blocking equipment removal The report in Africa Intelligence (11 May, reported here 11 May) claiming TechnipFMC had contracted a South African firm, Bridge Maritime, to remove equipment from Palma is not true.

Bridge Maritime called it “fake news” and TechnipFMC said the report “is incorrect”. (Energy Voice, 13 May) But Zitamar (12 May) reports some contractors complain Total is blocking equipment removal from Afungi, effectively holding it hostage there.

TechnipFMC has a more than $1 bn contract for subsea work on Mozambique LNG, both for Total for links to Afungi, where work has not started, and for Eni’s Coral Sul floating LNG platform where work is continuing.

TechnipFMC CEO Douglas Pferdehirt said the company had no in-country exposure. It is carrying out manufacturing for Mozambique LNG but it is being carried out “a long way from Mozambique". We have noted that Africa Intelligence's information on Cabo Delgado is often poor and its reports exaggerated.

Also the Paris-based newsletter is pushing very hard a line that the gas logistics base in Pemba should be moved to the French island of Mayotte. Protest works. Parliament on Tuesday (11 May) removed from discussion the final reading of a bill to give parliamentary staff $1.8 mn per year additional perks.

This follows a small demonstration by students and a petition submitted to parliament. The Maputo middle class bubble had a lot of anti-parliament chatter over the weekend. The attack on Palma means Maputo has finally noticed the war in Cabo Delgado, and finally noted that parliament was increasing its own spending when there was not enough money to care for 700,000 displaced people.

After 8 hours in detention, including a several hour drive around Maputo, student Valdo Jose Cuambe was released by the police. He was arrested at the 11 May demonstration against the approval of $1.8 mn in additional perks for parliament staff.

Having arrested him, the police did not know what to do with him, and took him to five different courts and prosecutors offices before being told to release him. (CDD 12 May) Personal note: Hope This newsletter has been filled with reports of an intensifying war. One group with no hope and no future believed their only choice was to attack the group they saw stealing their future.

The other side brought in an army of fighters recruited from other people who had no hope and saw no future. The war escalated and now we are reporting on foreign countries who want to send soldiers to kill peasant fighters with no hope.

I was watching a concert by an amazing Syrian clarinettist Kinan Azmeh http://bit.ly/Car-Azmeh writing the most beautiful and hopeful music drawn from his war torn country. It was part of a series by Carnegie Hall in New York called "Voices of Hope", organised in the worst time of Trump and Covid-19. https://www.carnegiehall.org/Events/Highlights/Voices-of-Hope available only until 31 May.

Ute Lemper on music under the Nazis, black music in the US, other music of hope in terrible times. Wonderful concerts - do listen. All civil wars go through phases, usually of increasing outside intervention as each side tries to kill more of the other.

Eventually the war ends, often after a decade, and a new generation filled with hope tries to rebuild. Cabo Delgado is moving into the escalating, killing phase. Must this continue for a decade until the war ends and hope returns to rebuild? This has already happened twice in Mozambique, and the hopeful rebuilding is being overtaken by another civil war. Is the momentum too great; is it too late to stop? Or is there still a tiny amount of time left? Could the people of Cabo Delgado talk to each other about their hopes and dreams. Could the warlords and warmongers allow them to do it? Another decade of war is on the cards. There are still people with hope - could they stop the war? There are good people at the local level. Can space be created for them to try?  jh

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