A potential devaluation of around 30% in the metical at the start of 2027, forecast by British consultancy Oxford Economics in the context of a possible financial adjustment agreement with the International Monetary Fund (IMF), could raise the cost of imports, pressure public finances and reduce household purchasing power, according to economists Constantino Marrengula and Teresa Boene.
Oxford Economics argues that the deterioration of public finances and a shortage of foreign currency are pressing Mozambique's macroeconomic stability. The consultancy projects that a possible IMF agreement could be accompanied by a devaluation of approximately 30% in the metical. According to Oxford Economics, a correction of that magnitude would immediately raise the metical price of imported goods, potentially placing additional pressure on inflation and household purchasing power.
For Teresa Boene, an economist and public policy researcher at the Centre for Public Integrity (CIP), this would be one of the first effects to be felt in the economy, given that higher import costs would directly affect companies dependent on products, raw materials and equipment sourced abroad.
"For a country as heavily dependent on imports as ours, the fastest impact is the rise in the cost of imports in local currency," she said. Boene noted that the higher costs borne by companies tend to be passed on to the prices paid by consumers.
Rising prices would hit lower-income households hardest, as these households allocate a significant share of their budgets to food, fuel and transport. "With wages and incomes that do not adjust at the same pace, families lose purchasing power and cut consumption," she said.
Beyond raising the price of goods, a devaluation could therefore reduce the volume of goods and services that households are able to purchase with the same income.
Constantino Marrengula, an economist and former researcher at the Centre for Learning and Capacity Building of Civil Society (CESC), offers a different perspective on the inflationary impact of a devaluation. In his assessment, part of that effect may already be embedded in prices in the economy, given that companies facing difficulties in accessing foreign exchange have been using the parallel market.
"There may be some marginal change in inflation, a small change in inflation," he said.
In Marrengula's view, this situation is linked to the gap between the official exchange rate and the rate prevailing in the parallel market. A devaluation of the official rate could narrow that differential and bring the two markets closer together.
"The first effect is the convergence of those two exchange rates. That improves intermediation between the two markets somewhat and reduces informality," he explained.
The CIP has also drawn attention to exchange rate misalignment and the persistent shortage of foreign currency, arguing that maintaining a stable official rate against a backdrop of scarce foreign exchange has contributed to distortions in the currency market.
"With wages and incomes that do not adjust at the same pace, families lose purchasing power and cut consumption" — Teresa Boene
The effects of a potential devaluation would not be confined to households and businesses. Marrengula noted that the state would also be directly affected, primarily through higher external debt servicing costs.
"Public debt service becomes more expensive. More meticais will be needed to service external public debt," he said.
Boene explained that when debt is denominated in foreign currency, a devaluation increases the amount the state must disburse in meticais to meet the same obligations, even without taking on new borrowing.
The pressure on public finances could be compounded by higher costs for goods and services procured by the government. "A rise in prices means higher public expenditure. It means having to spend more to deliver less and, in general, it means an ever-tighter fiscal space," Boene said.
With higher expenditure, the state would have less room to finance other areas, at a time when Oxford Economics has already highlighted the heavy weight of wages and interest payments on public revenues.
The foreign exchange situation could also continue to affect business activity. A CIP study on the foreign currency shortage concluded that the persistent restriction on foreign exchange has been associated with import constraints, higher prices, reduced economic activity, a widening fiscal deficit and growth in public debt.
The research, based on data from 1990 to 2024 and on interviews with import-dependent companies, shows that a shortage of foreign currency can produce effects that extend well beyond the currency market, affecting business activity and household welfare.
Among the sectors most exposed to this scenario, Boene highlighted healthcare, trade, transport, construction and agro-industry, particularly companies dependent on imported raw materials, equipment or other goods.
"Companies with foreign-currency debt and no foreign-currency revenues face additional balance-sheet risk," she said.
For Boene, reducing that vulnerability requires strengthening domestic production, industrialisation and export capacity, so as to lower dependence on imports and the need for foreign exchange.
A Possible IMF Agreement Could Ease Currency Pressure and Boost Confidence
Despite the short-term costs that a currency correction could entail, both economists acknowledge that the measure could produce some favourable effects over the medium and long term, particularly if it is backed by a credible IMF programme.
Boene believes the correction could "reduce the overvaluation of the metical, ease the foreign currency shortage, eliminate queues for import payments" and facilitate the rebuilding of reserves. The CIP has also advocated greater exchange rate flexibility as part of the measures needed to reduce the country's external and macroeconomic vulnerabilities.
Along the same lines, Marrengula said a potential IMF agreement could improve Mozambique's access to foreign currency and strengthen investor confidence.
"The first thing an IMF agreement unlocks is access to the external currency we need," he said.
In his assessment, the agreement could also signal to investors the existence of a credible economic programme and create conditions for greater confidence in the country's macroeconomic management.
The potential devaluation comes at a time when Moody's has placed Mozambique at the Caa3 level, a rating associated with a high risk of default and a possible restructuring of external debt.
Boene said the ratings downgrade could affect primarily investors operating outside the large natural resource projects — such as those in manufacturing and services — which are more dependent on macroeconomic conditions.
Marrengula, for his part, draws a distinction between those investors and those linked to natural resources, who, he explained, may place greater weight on project-specific conditions and the stability needed to operate.
A potential 30% devaluation would therefore have differentiated effects across the various sectors of the economy, ranging from higher import costs and external debt service to possible changes in access to foreign exchange and investment conditions.
For Boene, the principal challenge will be to prevent a currency correction from triggering a prolonged deterioration in household income and business activity. Marrengula, for his part, stressed that a convergence between the official and parallel exchange rates could help correct some of the distortions currently present in the currency market.
Source: Diário Económico
Original article: https://www.diarioeconomico.co.mz/?p=547959
