In Mozambique, the Consumer Price Index (CPI), which measures the average changes in the prices of a set of goods and services over a given period, has shown significant improvements over the last 12 months.
If we look at the country’s year-on-year inflation, after peaking at 12.96 per cent in August 2022, it slowed down, reaching a low of 4.93 per cent in August 2023 – mainly due to the continued fall in food prices and stability in fuel prices.
The stability of the metical in relation to foreign currencies traded in the country, unlike what has happened in other countries in the region, is another factor that has contributed to the slowdown in inflation in Mozambique. The country is predominantly an importer of consumer goods, which makes domestic price dynamics highly dependent on external risks.
As an example, we can cite the latest major shock, the war in Europe between Russia and Ukraine, which pushed the prices of cereals, other food products and fuel to historic levels, contributing to a generalised increase in inflation in the global economy. Mozambique was no exception.
However, since the end of 2022, as there has been a slowdown in prices internationally, along with other domestic factors or measures, inflation in the country has stabilised until it reached current levels.
“It is expected that at the next CPMO meetings the first measures to relax monetary policy will be verified. However, there are some risks that could make the decision difficult, with external risks being the most relevant”
Internally, the Bank of Mozambique has adopted measures, such as raising interest rates and banks’ reserve requirements, as part of its mission to control inflation and guarantee and promote exchange rate and macroeconomic stability.
With inflation under control and the exchange rate stable, the Bank of Mozambique may be in a position to change policy
The central bank increased the Monetary Policy Interest Rate (MIMO) by a total of 400 basis points in 2022, maintaining a restrictive stance that had already been implemented since 2021, when it was the first central bank to increase its reference rates by 300 basis points after the covid-19 pandemic.
In 2023, the central bank increased the Required Reserve Ratios (RO) for liabilities in domestic currency by 28.5 per cent and in foreign currency by 28.0 per cent, to 39 per cent and 39.5 per cent respectively.
These measures were aimed, firstly, at protecting the economy against the worsening of risks and uncertainties that can generate inflation, such as the shock in commodity prices abroad, natural disasters and increased pressure on domestic public spending.
Secondly, the increase in ROs was aimed at reducing liquidity, considered excessive, in the banking system, which could contribute to higher inflation.
These measures seem to have achieved the desired effect, bringing inflation well below the Bank of Mozambique’s reference limit of 10%, without excessively penalising economic activity.
When interest rates are high and liquidity in the banking system is low, the cost of financing in the economy tends to rise, making credit for investment and consumption more expensive. This can lead to a reduction in demand from consumers and supply from companies.
In Mozambique’s case, as the credit allocated is very concentrated in the public sector, the impact of the rate increase was felt more in public debt servicing, so the increase in Mandatory Reserves was essential to control the system’s liquidity, which the rate increase was failing to control. For this reason, aggregate economic activity remained resilient in the face of the Central Bank’s restrictive policies, positioning itself to have the strongest growth in recent years in 2023.
Considering that inflation in Mozambique is currently under control and the exchange rate is stable, the conditions for a change in monetary policy by the Central Bank seem to be in place. It is expected that at the next meetings of the Monetary Policy Committee, the first measures to relax monetary policy will be seen, with a cut in the reference interest rate, with the aim of bringing Mozambique’s growth back close to its potential.
This possible drop in interest rates will help the National Treasury Directorate to reduce debt servicing costs and reduce the level of indebtedness, which is expected to move towards more sustainable levels in the coming years. However, there are some risks that could hinder the decision to change monetary policy, with external risks being the most relevant. In September, the price of Brent oil remained above USD 90 per barrel, due to OPEC+ production cuts and the unilateral cuts made by Saudi Arabia and Russia, the organisation’s largest producers.
Some analysts estimate that if OPEC+ continues with such levels of supply and growing demand from Asia continues, prices could exceed the USD 100 per barrel mark as early as 2023.
If this scenario materialises, we could see an increase in domestic fuel prices, which could trigger a further increase in the prices of products and services whose production and supply depend on this energy source. The next few months will be key to whether or not this long-awaited change materialises.