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CTA Accuses BdM of Ignoring Currency Shortage in National Banking

CTA Accuses BdM of Ignoring Currency Shortage in National Banking

The Confederation of Economic Associations (CTA) called the press this Tuesday, 2 October, to take a stand on the new measures taken by the Bank of Mozambique (BdM), which decided at its last Monetary Policy Committee (CPMO) to reduce the monetary policy interest rate (MIMO rate) from 14.25% to 13.50%, on the grounds of the continued consolidation of the outlook for inflation in the single digits in the medium term, in a context where the assessment of the risks and uncertainties associated with the projections remains favourable. The reduction represents an accumulated 3.75 percentage points over the course of this year, maintaining the consistency of the decline in interest rates.

The organisation, represented by its vice-president, Zuneid Calomias, expressed its satisfaction and congratulated the Bank of Mozambique on its continued efforts to improve credit conditions for the economy and the private sector in particular.

Shortage of foreign currency

On the subject of the currency shortage that has been debated for a long time, the CTA believes that the BdM has ignored the situation the national market is going through, which has recently seen a decrease in the availability of foreign currency.

The Confederation of Economic Associations (CTA) called the press this Tuesday, 2 October, to take a stand on the new measures by the Bank of Mozambique (BoM), which decided at its last Monetary Policy Committee (CPMO) to reduce the monetary policy interest rate (MIMO rate) from 14.25% to 13.50% on the grounds of the continued consolidation of the outlook for single-digit inflation in the medium term, in a context where the assessment of the risks and uncertainties associated with the projections remains favourable. The reduction represents an accumulated 3.75 percentage points over the course of this year, maintaining the consistency of the decline in interest rates.

For the association, there are two strands of analysis that can be made: the first on the performance of exports and imports, in which the CTA recognises that the situation is, on the one hand, associated with the low coverage of exports over imports. ‘As an example, in the first half of the year, when excluding Major Projects (GP), the coverage of exports over imports is estimated at around 25 per cent. If Major Projects are included, the coverage of exports over imports reaches 90 per cent. Analysing this data could mean, on the one hand, that if the Major Projects channelled most of their export revenue to the domestic market, then, on average, the deficit in the supply of foreign currency would be estimated at 10%, compared to 75% without the Major Projects,’ explained the head of the CTA.

The second analysis is associated with the Bank of Mozambique’s measures, in which the organisation believes that from 2022 to 2023, the financial regulator successively increased the interest rate on mandatory reserves from 11.50% to 39.5%, putting pressure on foreign currency liquidity in the market. Likewise, in the first quarter of 2023, the BoM took the decision to reduce the supply of foreign currency to support fuel imports from 100% to 0%, symbolising the end of its support for the market.

‘Looking at the events, it can be inferred that the central bank’s decision may have influenced the change in market behaviour, forcing commercial banks to demand more foreign currency to support fuel imports and thus leading to an increase in net conversions. This rapid growth in demand for foreign currency on the part of commercial banks has not been accompanied by an increase in exports, where, excluding GPs, exports cover around 25 per cent of import needs,’ revealed Zuneid Calomias.

The second analysis is associated with the Bank of Mozambique’s measures, in which the organisation believes that from 2022 to 2023, the financial regulator successively increased the interest rate on mandatory reserves from 11.50% to 39.5%, putting pressure on foreign currency liquidity in the market. Likewise, in the first quarter of 2023, the BdM took the decision to reduce the supply of foreign currency to support fuel imports from 100% to 0%, symbolising the end of its support for the market.

What measures do you recommend?

CTA believes that the measures to alleviate the market’s liquidity situation will involve a change in the Bank of Mozambique’s stance. ‘As has been shown, there is no theoretical or empirical basis for maintaining a mandatory reserve rate of 39.5 per cent for foreign currency. We therefore propose that the central bank reassess its position and reduce this rate. In addition, CTA proposes that the bank, instead of maintaining high Net International Reserves, start signalling to the market, injecting part of them so that commercial banks gain confidence and use their positive exchange rate position to support companies,’ he said.

Zuneid Calomias concluded that ‘exports, including Major Projects, cover around 90 per cent of import needs. But unfortunately, these export revenues from the major projects mostly don’t flow to the market due to the type of contract signed with the Mozambican government and the players on the international market. It is clear here that the negotiation of contracts once again fails to channel various benefits into Mozambique’s economy, being held hostage to the foreign currency generated by the country’s major projects.’

Text: Nário Sixpene

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