The Confederation of Mozambican Economic Associations (CTA) argues that the increase in interest rates announced recently by the Central Bank worsens companies’ obligations to the commercial banks.
While the increase in the cost of capital has its merit in the context of the conduct of monetary policy aimed at achieving its ultimate goal, the private sector considers that price stability (which reflects the improvement in the macroeconomic environment) is quite challenging for the business sector.
CTA reasons that businesses are still suffering from the negative impacts of Covid-19, the consequences of extreme weather events and the instability in some parts of the country.
After taxes, obligations with banks figure as the greatest burden of commitments with third parties, both for companies and for families.
According to the source, as well as restricting the already deficient access to credit, the increase in interest rates results in an increase in the burden of companies’ obligations to banks, with negative effects on the cash flow of the units and affecting the survival of a large number of small and medium-sized companies.
On the other hand, with this increase in key rates, particularly the MIMO, which is the reference interest rate of the Interbank Monetary Market and a fundamental part in the formation of the “Prime Rate” (which forms the basis for the formation of interest rates on loans to the economy), the cost of capital in Mozambique is expected to increase considerably in the coming periods.
That is, the increase of the MIMO by 300 basis points will have the impact of increasing the Prime Rate by this amount, which may have repercussions on lending rates, which currently stand at an average of 19.62%.
This means that the Prime Rate will rise from the current 15.5 to 18.5%, which may drive the increase in interest rates on credit to the economy from the current 19.62 to 22.62 per cent on average.
At the end of last month, the Bank of Mozambique decided to increase the monetary policy interest rate (MIMO) by 300 basis points, from 10.25 to 13.25%.
It also decided to increase the interest rates on the Permanent Assignment Facility (FPC) from 7.25 to 10.25 percent, and on the Permanent Deposit Facility (FPD) from 13.25 to 16.25 %.
The Bank of Mozambique justifies this increase in the leading rates with the substantial upward revision of the inflation outlook for the medium term, reflecting the continued depreciation of the metical, in an environment of increased risks and uncertainties, especially the negative consequences of the accelerated spread of Covid-19 and the occurrence of natural disasters, without neglecting the effects of military instability in the north and centre of the country.
