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Drop in Interest Rate Ignores Lack of Foreign Currency

Drop in Interest Rate Ignores Lack of Foreign Currency

Mozambican businesspeople on Wednesday criticised the central bank’s decision to lower the monetary policy interest rate from 14.25% to 13.50%, saying that the institution ignored the lack of foreign currency on the national market.

“The Bank of Mozambique has ignored the situation that the foreign exchange market in Mozambique is going through, which has recently seen a decrease in the availability of foreign currency,” said the vice-president of the Confederation of Economic Associations (CTA), Zuneid Calumia.

The Monetary Policy Committee of the Bank of Mozambique decided on 30 September to lower the monetary policy interest rate, known as MIMO, from 14.25%, which has been in force since July, to 13.50%, the institution announced.

“This decision is underpinned by the continued consolidation of the outlook for inflation in the single digits over the medium term, in a context where the assessment of the risks and uncertainties associated with inflation projections remains favourable,” the central bank said in a statement after the Committee’s meeting, which is held every two months.

At a press conference in Maputo today, the Mozambican business sector called for a “change in stance” from the central bank, arguing that “there is no theoretical or empirical basis” for the decision to maintain the mandatory reserve rate at 39.5%, when in 2022 it was 11.5%, given the lack of foreign currency on the domestic market.

“We propose that the bank re-evaluate its position and reduce the rate (…) The CTA proposes that the Bank of Mozambique, 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 position to support companies,” defended the vice-president of the CTA.

The Mozambican business sector added that as a result of the lack of foreign currency on the market, commercial banks began to retain liquidity in foreign currency, “buying more from clients and selling less”.

“Based on the combination of the dynamics of imports and exports, it can be inferred that commercial banks have low confidence in the market’s ability to generate foreign currency in the short term and are going public to buy more foreign currency from customers to stock up and meet commitments, resulting in an increase in net conversions,” explained Zuneid Calumia.

According to the CTA, the lack of foreign currency is partly due to the successive reduction in support for fuel imports until it was withdrawn completely.

“The Bank of Mozambique’s decision may have influenced the change in market behaviour, forcing commercial banks to demand more foreign currency to support fuel imports, thus increasing net conversions,” he explained.

The CTA added that the lack of foreign currency is caused by the low coverage of exports over imports, which was in the order of 25% in the first half of 2023 alone if revenues from megaprojects are excluded and 90% if they are included.

“If the Major Projects (GP) mostly channelled their export revenue to the domestic market, on average, the deficit in the supply of foreign currency would be estimated at 10%, compared to 75% without the GP,” concluded the CTA.

On 25 July, Mozambican businesspeople pointed to a deficit of $400 million in foreign currency, which is causing delays in payments abroad, fines, and shortfalls in invoicing. They called on the central bank to reduce the mandatory reserve ratio.

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