When, in December last year, the Economic Studies Department of Banco de Moçambique shared the results of the monthly survey of economic agents’ perspectives regarding the evolution of the main macroeconomic indicators, it was difficult to foresee the metical’s exchange rate movement during the first half of 2021. The agents’ expectation was for exchange rate stability, even in a scenario in which they forecast a slight growth in inflation to close to 4.5%.
The maintenance of the falling trend of short-term rates continued to be the expectation of most agents, supported also with a forecast of maintenance or fall of the Central Bank’s reference rate. The market consensus at that time was that the economy would recover in 2021 with a growth of 2.4%, after a year plagued by the Covid pandemic that, once again, had postponed the long-awaited economic recovery. But in a few months everything changed.
Also during the month of January, the Monetary Policy Committee of the Bank of Mozambique announced a 300 basis point increase in its reference rate to 13.25%. This bold measure, and against the market consensus, was justified in order to combat the substantial upward revision of inflation prospects that accompanied the currency devaluation and the rise in prices of goods, in various economic sectors, a bit all over the world.
This measure was enough to halt the devaluation trend of the metical that began in January 2020, and cause a reversal, with an aggressive movement of appreciation that lasted nearly three months.
The change in monetary policy and the return to the MCI by the Central Bank, through sales of foreign currency to commercial banks after more than a year’s absence, combined with the cooling of imports as a result of prospects of a slower recovery of the economy after the adoption of new measures to contain the second wave of the pandemic, and the suspension of gas projects after the attack in Palma, led to an accumulation of foreign currency in the Mozambican banking system.
This increase in long positions in the banks and the potential risk of non-compliance with regulatory limits motivated some players to sell their positions, valuing the MZN close to 55.5 against the USD, an appreciation of about 25% since the beginning of the year. This strong appreciation of the metical, at a time of economic weakness, prompted increased vigilance by the regulator to the main commercial banks responsible for the foreign exchange market.
These measures culminated in the initiation of criminal proceedings against one of the main credit institutions in the market for serious prudential and foreign exchange violations. These measures quickly raised concerns among the country’s main economic agents, fearing that the economy could suffer from the suspension of the foreign exchange activity of the bank responsible for 45% of this market.
The truth is that since the first suspension was known almost a month ago, the Metical has remained stable, once again against the expectations of the market’s economic agents. The high level of foreign currency reserves, the continued participation of the Bank of Mozambique in the interbank foreign exchange market and the activity of the other banks have made it possible to support the exchange rate, which has also benefited from improved prospects of resumption of gas projects, with the arrival of Rwandan and SADC troops to fight the insurgency in Cabo Delgado.
If the second half of the year provides us with surprises of the magnitude of what we observed in the first half, it will be virtually impossible to predict the metical’s exchange rate evolution by the end of the year. However, the recent worsening of the pandemic in the country, with a third wave with proportions greater than previous waves, the resulting budgetary needs and the reduction in economic activity with the worsening of containment measures may be greater than the positive effects of the benefit of the suspension of debt service by the G20 and emergency support from multilateral entities, and may bring the metical close to the levels at which it closed the year 2020.