The mandatory reserves of commercial banks in Mozambique reached 268.4 billion meticals (4.2 billion dollars) in September 2024, marking an all-time high. This measure, implemented by the Bank of Mozambique (BoM) since 2022, reflects a restrictive monetary strategy aimed at controlling inflation, stabilising the metical and protecting the economy from external shocks. However, economists warn that the policy has a disproportionate impact on Small and Medium-sized Enterprises (SMEs), the main generators of employment and economic dynamism in the country.
Restrictive monetary policy and the BoM’s priorities
The consecutive increase in mandatory reserves over the last 18 months is the result of the BoM’s efforts to combat inflationary pressures and reduce exchange rate volatility in a context of global uncertainties. Economist Yara Neila Aly Alexandre explains that ‘the Bank of Mozambique has adopted a conservative approach, prioritising economic and financial stability.’
For his part, economist Moisés Nhanombe emphasises that the measure not only responds to internal challenges, but also to external pressures. ‘By requiring a significant portion of commercial banks‘ assets to be held in foreign currency, the BoM is seeking to limit the depreciation of the metical, stabilise domestic prices and prevent further dollarisation of the economy,’ he says.
According to Yara Alexandre, this strategy is indispensable for a country that is highly dependent on imports. ‘With exchange rate stability, it is possible to mitigate the effects of fluctuations in the cost of imported goods, such as food and fuel, which have a high weight in domestic consumption,’ she adds. However, the analysts emphasise that the benefits of the policy come with significant costs, especially in the short term.
Impacts on credit and SMEs
Holding large volumes of foreign currency as mandatory reserves reduces the liquidity available at commercial banks, restricting credit to the private sector. This impact is particularly severe for SMEs, which depend almost exclusively on bank financing to operate and grow.
According to Yara Alexandre, ‘banks face higher operating costs due to the reduction in liquidity, and these costs are passed on to customers in the form of higher interest rates’. This situation, she adds, ‘discourages investment and weakens the competitiveness of SMEs, which are limited in their ability to finance innovation and modernisation.’
Economist Moisés Nhanombe emphasises that, as well as making access to credit more difficult, the policy intensifies the financial exclusion of SMEs. ‘Banks tend to prioritise large companies, which are considered lower risk, which creates a gap between large and small companies, damaging economic dynamism and reducing the capacity of SMEs to create jobs and promote innovation,’ he warns.
Sectors hardest hit
Among the sectors most affected by the policy are agriculture, commerce and small industries. According to economist Yara Alexandre, agriculture, which employs a large part of the population, is one of the most vulnerable sectors. ‘Without accessible credit, farmers face difficulties in modernising operations and increasing productivity, making them more susceptible to climate fluctuations and economic shocks,’ she observes.
Sectors such as commerce and services also suffer from reduced liquidity, which limits investment and job creation. ‘The lack of credit creates a cycle of economic stagnation, compromising the country’s sustainable growth,’ analyses Nhanombe.
Costs and benefits: a necessary balance
Although the short-term costs are evident, analysts recognise the benefits of the policy of high reserve requirements. ‘The retention of foreign currency reserves protects the country from external shocks and reduces the risk of abrupt currency devaluations, reinforcing economic resilience,’ explains Moisés Nhanombe.
For her part, Yara Alexandre points out that the policy helps stabilise the metical and increases investor confidence in the financial system. ‘This exchange rate stability is essential for creating a more predictable and secure economic environment,’ says the economist. However, she emphasises that economic sustainability requires a broader balance. ‘Inclusive and sustainable growth depends on a balance between monetary stability and economic dynamism. It is this balance that the Bank of Mozambique must seek.’
Proposals to mitigate the impacts
Economists recommend complementary policies to reduce the adverse effects of the high reserve requirement policy. Among the suggestions are:
Gradual reduction of reserve requirement rates: freeing up more liquidity for banks to finance the productive sector.
Differentiated structure of reserve requirements: lower requirements for loans to SMEs and priority sectors.
Tax incentives and subsidies: ease the tax burden on SMEs and offer credit subsidies for strategic sectors.
Credit guarantee programmes: reduce banks’ risk and facilitate financing for small businesses.
Infrastructure investments: create conditions that favour economic growth and business competitiveness.
Conclusion
Analysts recognise that the policy of high reserve requirements reflects the BoM’s commitment to protecting the economy against external shocks and guaranteeing exchange rate stability. However, they warn that the costs for SMEs and productive sectors are worrying.
Yara Alexandre emphasises that ‘financial stability is crucial, but it must be accompanied by measures that promote access to credit and productive investment, especially for SMEs.’
Moisés Nhanombe agrees and concludes that the main challenge is to harmonise financial stability with economic dynamism. ‘Coordinated fiscal and monetary policies can mitigate the negative effects and strengthen the resilience of the Mozambican economy, without harming the investments necessary for the country’s development,’ he concludes.
