Since the first few months of this year, some sectors of the economy have been complaining about a shortage of foreign currency, especially importing companies, which need to pay invoices in foreign currency. The blame is put on the fall in raw material exports, the global economic slowdown and the reduction in Foreign Direct Investment. But there are those who blame, above all, the high foreign currency reserves that the Bank of Mozambique is obliged to keep, but they see no cause for alarm. Where is the truth?
There are few dollars on the Mozambican market, lament various players. From the fuel sector to aviation, including individual economic agents and companies that import and export goods and services, various sectors are complaining and say they are suffering from the situation. What’s going on?
A shortage of foreign currency significantly affects the economy by limiting the country’s ability to import essential services and goods such as food, fuel, medicines and production supplies. With less foreign currency available, companies face difficulties in acquiring raw materials and equipment, which leads to a reduction in production, an increase in operating costs and less competitiveness on the international market.
In addition, shortages can put pressure on the exchange rate and lead to a depreciation of the local currency (in this case the metical) if demand for foreign currency increases markedly. A depreciation would make imports more expensive, contributing to inflation, which in turn would reduce consumers’ purchasing power.
It’s a double-edged sword. For the central bank, an increase in mandatory foreign currency reserves can be a measure to control inflation and prevent an excessive devaluation of the local currency. So where do we stand? Have we reached the desired equilibrium point?
Commercial banks report a backlog of 500 million dollars in import invoices, capital expatriation and other foreign operations
Why is there a shortage of foreign currency?
Generally, large volumes of foreign currency enter through Foreign Direct Investment (FDI): there is a movement of capital from a foreign country to the country receiving the investment, because investors send foreign currency to finance new projects, increasing the country’s foreign currency reserves.
Another major source of foreign currency inflow is exports, which in Mozambique’s case come from the sale of minerals, mainly coal, but also aluminium, among others – sales paid for in foreign currency.
From this, it would be easy to deduce that the fall in FDI and exports could be causing the lack of foreign currency. But other factors come into play, according to economic players heard by E&M. Which factors?
The role of foreign trade
The business class, represented by one of the most important employers’ organisations in the country, the Confederation of Economic Associations of Mozambique (CTA), points to two main reasons for the phenomenon. The first is related to the slowdown in the performance of foreign trade and the low coverage of exports over imports. For example, in the first half of the year, the coverage of exports over imports was estimated at around 25 per cent, not counting the major projects: mega-investments in gas and minerals. But including the big projects, exports already cover 90 per cent of imports.
According to the CTA, if the major projects channelled most of their export revenues to the domestic market, the foreign exchange deficit would be estimated at 10% instead of 75%. In other words, a potential that could help add liquidity to the market is lost.
Impact of the BoM’s measures
The second reason given by businesspeople for the shortage of foreign currency is linked to the BoM’s measures. In 2022 and 2023, the central bank successively increased the mandatory reserve rate in foreign currency from 11.50 per cent to 39.5 per cent. This is the percentage of customer deposits that must be deposited with the BoM and cannot be moved. In other words, for every 100 dollars of foreign currency deposits, banks are obliged to ‘freeze’ 39.5 dollars, which become unavailable to serve the economy. The suggestion put forward by the CTA is for the central bank to reduce this rate in order to free up liquidity for the market.
Furthermore, CTA adds, in 2023 the Bank of Mozambique took the decision to successively reduce the supply of foreign currency to support fuel imports (from 100 per cent to nothing). In the organisation’s view, this position may have influenced the change in market behaviour, forcing commercial banks to look for more foreign currency to support fuel imports and, as a result, causing net conversions to increase.
Ending fuel subsidies
In an opinion article published on the ‘Diário Económico’ portal on 4 September, economist Paulo Matavela also blamed the Bank of Mozambique’s stance on the shortage of foreign currency, in a line of analysis with some similarities to the CTA’s position. Entitled ‘The Problem of Foreign Exchange Shortages in Mozambique: Potential Causes and Solutions’, the article revealed that ‘one of the factors that may be at the root of this problem is related to the withdrawal, in June 2023, of the subsidy to commercial banks to make foreign currency available for payment of fuel import bills’. In the article, the economist also argues that since the Bank of Mozambique’s main role is to guarantee price stability in the market and in the face of unstable inflation, the institution decided to adopt measures to reduce demand, reducing liquidity in the market by increasing the rate of compulsory reserves.
Bearing in mind that one of the ways to measure the availability of foreign currency is to know how many months of imports are guaranteed with the ‘stock’ of international reserves, one gets the idea that the market is not facing any problems, as the governor of the Bank of Mozambique, Rogério Zandamela, defends. The data and arguments presented by economist Paulo Matavela confirm this: between June and July 2024, the Net International Reserves increased from 3 million dollars to 3.6 million dollars, which is equivalent to around five months of import cover for goods and services, excluding major projects.
Containing inflation
As for inflation, although it is under control (2.75% year-on-year in August 2024), ‘the measures taken to contain it have affected the availability of foreign currency on the market’, he argues. He explains that the commercial banks say they have a backlog of 500 million dollars (32 billion meticals) in import invoices, capital expatriation and other foreign operations. ‘This shortage of foreign currency brings with it various constraints, such as a drop in production and turnover, gaps in project completion schedules, an increase in implementation costs and a reduction in the level of investment,’ he concludes.
Falling FDI
Alongside all the factors already mentioned, there has also been a reduction in the flow of foreign investment. In the first quarter of this year, the volume of FDI fell by 3 per cent to 894.6 million dollars, compared to 926.7 million dollars in the same period last year. The extractive industry maintained its dominant position in the inflow of investment, bringing in a total of 489.2 million dollars, which corresponds to 75.2 per cent of total FDI. Of the investments made during the period, natural gas exploration operations stood out.
But the fall in FDI has been going on for several years. In 2022, for example, it fell 61.3 per cent to 1.9 billion dollars compared to 5.1 billion dollars in 2021. This movement runs counter to the recovery recorded between 2018 and 2021, at the time influenced by the increase in capital inflows for gas exploration (in the Rovuma basin), coal and heavy sands.
One of the major risks of the shortage of foreign currency in the near future is that it is already threatening oil companies that import and distribute fuel. This could lead to a crisis in the normal distribution of oil products, with repercussions for economic stability.
Text: Celso Chambisso – Photo: iStock Photo & D.R.
