Some of the Bank of Mozambique’s decisions have not, at first glance, favoured business activity although, in the background, they have pointed to macroeconomic stability. Over the year, for example, reference interest rates rose 4 percentage points. On the balance sheet for 2022, and looking ahead to the new year, there are issues to be addressed. The Government missed the debate, but there was no shortage of messages about how it should conduct fiscal policy and help the BoM steer the economy towards stability.
For some years now, the domestic and international environments have imposed successive challenges to the business environment. And the solutions adopted by the competent authorities to resolve market imbalances, in this case the Central Bank (through monetary policy) and the Government (through fiscal policy), are far from satisfying the business class.
Less and less able to resist the multitude of obstacles – ranging from covid-19 to the war in Ukraine, to high interest rates, inflation, tax burdens, etc. -, the business class sat at the table with the Bank of Mozambique (BoM) and sought to prove in detail that the monetary policy solutions adopted by the regulator, in the end, do not help companies.
High interest rates
It is in the high interest rates that companies find the biggest obstacle to their activity. This is not new, but it has gained considerable dimension in recent times. Ricardo Sengo, president of the Financial Policy and Services Department of CTA (Confederation of Business Associations of Mozambique), began by recalling that the year 2022 was characterised by successive increases in monetary policy interest rates (MIMO rate) and the prime rate.
In the case of MIMO, in January 2022, the BoM maintained the rate in force since 2021 at 13.25%. But it changed it to 15.25% in March this year, and to 17.25% in September, representing a total variation for the current year of 4 pp (percentage points).
The prime rate, which had been set at 18.6% in January, rose by 0.5, 1.5 and 2 pp in May, July and October, respectively, also resulting in a cumulative change of 4 pp over the year.
The private sector’s suggestion for 2023 is that the Central Bank should seek to promote greater predictability and avoid wide variations in market interest rates
Other key rates, namely the Permanent Assignment Facility (FPC) and the Permanent Deposit Facility (FPD), were also adjusted upwards in the order of 4 pp. The FPC increased from 16.25% to 20.25%, and the FPD from 10.25% to 14.25% between January and November this year.
“The measure is, as a whole, penalising for the private sector and for society in general, because it will greatly reduce access to finance, not to mention the increase in the cost of credit with commercial banks that national economic agents have to incur,” said Sengo. The leader said that these adjustments were responsible for the economy’s shy 0.45 pct growth in the second quarter in comparison to the first, given the “weak business performance.
Thus, for next year, the private sector’s suggestion is that the Central Bank should seek to act to promote greater predictability and avoid large variations in market interest rates.
Businesses made a loss
Through the Business Robustness Index – CTA’s report that tracks the evolution of business performance and the macroeconomic environment over time – the organisation’s executive director highlighted the recovery of business dynamism, thanks to new investment projects from various sectors.
Indeed, the business robustness index has improved, albeit on a small scale, in the order of just 1 pp (from 28% to 29%).
Despite this, the scenario is one of rising costs accompanied by falling revenues, which has worsened the chances of profitability for companies.
Calculations made by the private sector indicate that, on average, the cost per unit of production of companies rose from 6517 meticais to 6628 meticais from the first to the second quarter. In the same period, average revenue per unit of output fell from 6225 meticais to 6223 meticais. This degree of deterioration in performance, in the order of 4.1%, resulted in losses of 292 meticais per unit of production in the first quarter, and 305 meticais in the second quarter.
With regard to the increase in costs, the cause is very much linked to the rise in fuel prices, which affected all sectors, by impacting directly on the prices of transport and industry.
The costs of business activity were also aggravated by the increase in prices of agricultural inputs and the growth of inflation.
Analysis from the standpoint of business productivity (through the productivity index) indicates that for every metical invested in a particular sector, 0.05 cents is lost in returns from an aggregate perspective. This result does not encourage new investment.
Stagnation in employment
When there is a crisis, there is no employment. On the contrary, it is expected that there will be layoffs. This is what Eduardo Sengo highlights based on data provided by Contact. Throughout the year there was no expansion of jobs.
“The economy was being sustained by temporary and part-time employment because the sectors that emerged were not sure about the sustainability of their business. For example tourism, which is still struggling with various obstacles, and agricultural marketing which is seasonal by characteristic,” he justified.
And because high interest rates are the aspect that most hurts the business sector, Eduardo Sengo refuted the argument put forward by the Central Bank for maintaining interest rates, and which is based on its main mandate (that of promoting low and stable inflation and thus protecting the poorest sections of society).
“When we look at the distribution of credit to the economy, we see that it is mostly granted to individuals and not to companies. This means that, in some way, the rise in interest rates affects individuals, including those sections of society that the Central Bank believes it is trying to protect. In other words, it is trying to prevent the loss of purchasing power through a measure that takes away families’ disposable income”, he criticised.
Central Bank assures that the situation is “under control“
At the meeting, the Bank of Mozambique was represented by the institution’s director, Silvina de Abreu, who listened carefully to the points raised by the business community.
She recalled that the Bank of Mozambique’s primary mandate is to maintain price stability, which presupposes that inflation is low, at a single-digit level, and stable in the medium term (two years). It assumes, however, that the idea is to protect the purchasing power of families, encourage investment and favour economic growth in a balanced and stable manner. But she explains that to ensure monetary stability, the Central Bank’s main instrument is the MIMO rate.
Silvina de Abreu explained to businesspeople that the Monetary Policy Committee of the Bank of Mozambique (CPMO) decides on the MIMO rate according to its analysis of the outlook for inflation in the medium term. And whenever it notices that there is a deviation from the desired target, it adjusts, in terms of decision, the most appropriate measure to keep
inflation at a single digit level. Thus, according to the official, the decision to maintain interest rates was sustained by the high risks and uncertainties associated to the projections.
Among the most important risks, he highlighted the prevalence of geo-political tension in Europe whose end is not foreseeable; the slowdown in external demand; the prospects of a slowdown in world growth in 2023 due, essentially, to the deepening effects of the conflict between Russia and Ukraine the isolation that is taking place in China to halt new waves of covid-19; the worsening of monetary policy interest rates that the central banks of almost all countries in the world are making to control inflation; and the trend of the weakening of the dollar against the main currencies, among other risks,” said the director of Banco de Moçambique.
In other words, the conditions that determine the fixing of interest rates at the current level are imposed by a thorough study of the risks prevailing domestically and internationally.
“When we had conditions to reduce the MIMO rate, we did it. It is not for pleasure that the BoM continues to have interest rates at high levels. But we can only reduce them when we are in a scenario where the analysed conditions of risks and uncertainties allow us to reduce them, which is not the case,” he explained.
What is expected in 2023?
It fell to the vice-president of the CTA’s Financial Policy and Services Division, Oldemiro Belchior, to forecast the performance of the economy in 2023. “Uncertainty will remain high.
In our view, we will have inflationary pressures that may result in further restrictive measures by the Bank of Mozambique. Such risks include a possible escalation of tension between Russia and Ukraine, as well as other geo-political events and natural disasters related to climate change.
We also do not exclude second order effects, either through higher and persistent wage increases or through stronger fiscal stimulus measures,” he explained.
Belchior estimates that a scenario of an increase in the price of imported raw materials of around 50% above forecasts may keep inflation at current levels, which means that the Central Bank’s intention to try and keep it in single digits may fail.
The effect of this, according to the official, is the impact that is generated at the level of demand for financing and in the supply of bank credit. “On the demand side, more expensive credits make private investments less appetising, less profitable and less economically viable.
In the head-to-head balance sheet for 2022 and the outlook for 2023, the private sector and the Central Bank have made clear the prevalence of high risks to economic stability
And on the supply side, the concern has to do with the vulnerabilities of the financial sector, as the Bank of Mozambique itself points to non-performing loans or non-performing loans as one of the potential risks that can degrade the quality of assets held on balance sheet at banks,” he noted.
“Therefore, even though we are aware of the prevalence of risks next year, we recommend that there should be some gradualism in the rise in interest rates, because the private sector is dependent on the consumption of borrowed capital that is made available by commercial banking. It is therefore crucial that there is better coordination between monetary policy and fiscal policy in order to reduce inflationary pressures, and for the Central Bank to be able to fulfil its main mandate.
At the same time that he fears a rise in interest rates in 2023, Belchior foresees scenarios that may favour their reduction, namely the fall in inflation caused by the start of gas exploration in the Rovuma basin, by the entry of international flows in the form of disbursements of international financial aid, the resumption of multilateral loans from the IMF and the World Bank, among others.
