The central bank may suspend the reduction in the reference interest rate. The informal sector – which supports a large part of the population – could face falls in activity and the population could lose purchasing power. The result: uncertainty is growing.
The demonstrations that are shaking the country reflect popular dissatisfaction and are an expression of civil rights. But the economic impact raises concerns. The economic costs of the stoppages that have already taken place could be severe, demanding answers. Economists warn that Mozambique’s economic recovery will depend on a balance between popular demands and the preservation of economic stability.
Blow to the informal sector
In 2021, the informal economy accounted for almost half of Mozambique’s Gross Domestic Product (GDP). It is a vital source of income for millions of people, made up of small businesses in commerce, agriculture and workshops of various kinds. Economist Egas Daniel believes that those who live in the informal sector are the group that will suffer the most, since they depend on ‘street activity’ to produce income.
When the time comes to compensate for daily losses, those with ‘good salaries’ will have more leeway than those who live from informal businesses on a day-to-day basis, where you never know where the next metical is coming from, or when. Precariousness is a weakness. Egas Daniel defends the credibility of electoral processes and state institutions as a solution. He suggests setting up a credible commission, made up of all the players involved in the electoral process, including civil society organisations, to recount the valid votes, producing results that put an end to the social cost of the demonstrations.
Demand and supply clash
For Millennium bim’s chief economist, Oldemiro Belchior, ‘this crisis has an impact of great magnitude, with profound, vast and, for the most part, irreversible consequences’. He recalls that the demonstrations in Maputo caused restrictions in both the public and private sectors and significantly altered patterns of social interaction (difficulties in accessing the Internet and social networks). Oldemiro Belchior concludes that all this has led to a significant drop in turnover in various areas: industry, transport, logistics, services, catering and a sharp drop in tourism, car sales and retail trade. At the same time, according to the economist, there have been changes in the labour market, with redundancies in some sectors and an increase in the number of employees teleworking.
Informal workers are the group that will suffer most from the effect of the stoppages, as they depend on street activity, says Egas Daniel
‘These demonstrations represent a shock, both on the supply side and on the demand side, unprecedented in the recent past and with effects whose magnitude and scope are particularly complex and difficult to predict. The evolution of economic activity in this context also depends on how the political and social situation evolves, something that continues to be shrouded in great uncertainty,’ he lamented. The economist adds that there is a strong impact on prices (rising inflation), production (paralysed activities) and productivity (due to disruptions in production and employment).
‘In this context, the Mozambican economy will suffer an endogenous shock in 2024 with the outbreak of the political crisis, when it was recovering, albeit slowly, from the impact of the covid-19 pandemic,’ he points out. According to him, the weak points of the Mozambican economy are naturally under even more pressure with the current instability. ‘The slow recovery in recent years’ reflects ’structural constraints that have affected Mozambique’s economy for decades, such as a limited domestic market, decapitalised companies and a state with high public debt.’ There is also a ‘poorly diversified’ production structure, low qualifications among the labour force, low productivity, inadequate taxation and a low level of investment.’
Interest rates may remain high
Fáusio Mussá, chief economist at Standard Bank, believes that the current tension could lead the Bank of Mozambique to postpone further cuts in the benchmark interest rate, which some are already counting on in order to have more favourable conditions for accessing bank credit. In the October monthly report of the PMI (Purchasing Managers’ Index), published by Standard Moçambique, the economist points to the need for a more cautious approach to monetary policy in the current scenario.
Remember that in September the reference rate fell from 14.25 per cent to 13.50 per cent, in line with the forecast of low and stable inflation. Fáusio Mussá believes that this instability could motivate caution. ‘The tense post-election environment could lead the Bank of Mozambique to adopt a more prudent approach to normalising monetary policy. Therefore, we do not rule out a pause in cuts to the reference interest rate,’ he said, quoted in the report.
He recalled, however, that ‘the MIMO rate has been cut by a total of 375 basis points since the beginning of the year, to the current level of 13.5 per cent, but real interest rates have remained high, as inflation has been falling at a faster pace, with the most recent figure of 2.5 per cent in September, year-on-year. This scenario, combined with the fact that reserve requirements remain high and unchanged, suppresses credit growth.’
‘The tense post-election environment could lead the Bank of Mozambique to adopt a more prudent approach to the normalisation of monetary policy,’ said Fáusio Mussá
Other aggravating factors
The scenario of the demonstrations overlaps with a series of other risk factors that have been going on for years. Among these factors, Fáusio Mussá highlights the ‘recurring delays in liquefied natural gas (LNG) projects, which mean that Foreign Direct Investment (FDI) is likely to remain low, implying limited support for the supply of foreign currency, the state budget and slower GDP growth’.
Fáusio Mussá
Thus, ‘we maintain our outlook that GDP growth this year will slow to 3.6 percent year-on-year, down from 5.4 percent last year, as the favourable base effects from increased LNG production on the Coral South platform are likely to diminish. In addition, this economy is faced with an intermittent supply of foreign currency, persistent fiscal pressures, restrictive financing conditions and low investment,’ noted Mussá.
A generalised concern
According to the Centre for Public Integrity (CIP), the demonstrations and stoppage of activities may have cost the country around 2% of GDP in just 10 days. This loss is the result of reduced economic activity and the alienation of investors, who are averse to instability.
Text: Celso Chambisso – Photo: D.R.
