Monetary policy plays a fundamental role in macroeconomic stability. The Bank of Mozambique, through Decree-Law no. 01/92 of 3 January, describes the main objective of monetary policy as preserving the value of the national currency and price stability.
Monetary policy faces significant challenges in crisis contexts, when economies suffer deep shocks such as recessions, political and financial crises, pandemics and climate shocks.
Since the beginning of 2024, when the Bank of Mozambique introduced less restrictive monetary policy measures, the Mimo Rate fell by 450 basis points from January to November (January – 17.25% to November – 12.75%). The financial system’s Prime Rate currently stands at 19.7% compared to 23.5% in January. These measures are introduced in a context of low and stable inflation at single-digit levels, with year-on-year inflation of 4.19% in January and 2.84% in November, compared to the same period in 2023.
On the other hand, credit to the economy has seen a decrease rather than an increase as was expected with the Bank of Mozambique’s measures. In the first half of 2024, credit to the economy contracted by 4.87 per cent compared to the same period last year.
Since October, when the presidential elections took place, the country has been experiencing a wave of political tension with potentially perverse economic impacts:
- Blockade of borders, causing a reduction in the supply of certain basic products, leading to shortages and, consequently, a potential increase in prices, with inflation potentially reaching levels of 5 per cent in the first quarter of 2025;
- General paralysis of activities, with huge financial losses in terms of state revenue and small, medium and large companies. In its latest statement, the CTA mentions a loss of around MZN 24.8 billion, representing 2.2 per cent of GDP. With the constant paralysing of activities, economic growth (GDP) will slow down in the coming periods;
- Reduction in Foreign Direct Investment (FDI) and foreign capital inflows, weakening the metical against the dollar;
- In crisis scenarios, commercial banks cut back on credit, and it is likely that the trend of reducing credit to the economy will continue, even despite cuts in the Prime Rate. The retraction of credit jeopardises economic and inclusive growth;
- Possibility of further downgrading of Mozambique’s local and foreign debt. In mid-October, the country was downgraded from CCC+ to CCC, in local currency, due to delays in the payment of domestic debt and the unsustainability of public debt, which has been reaching alarming levels, with around 408.1 billion meticals, an increase of 95.7 billion meticals compared to December 2023. As the crisis intensifies, the country’s credibility will be drastically reduced with national and international creditors, increasing the risk of potential default.
Given this scenario, it is suggested that the Bank of Mozambique adopt a proactive and prudent stance to avoid an economic recession. It is therefore expected that the Bank of Mozambique will stabilise the MIMO Rate at current levels or increase the indicator slightly, in order to contain the potential prospects of rising prices for goods and services. Introducing some exchange rate balancing measures, such as: increasing the mandatory rate for converting revenue into foreign currency, currently at 30 per cent, and reducing the mandatory reserves in national and foreign currency.
These measures could contribute to greater liquidity in local and foreign currency on the part of commercial banks with a view to boosting the economy through consumption and investment. Nevertheless, the Bank of Mozambique will have to consider continuous control of aggregate demand levels in order to avoid potential inflationary effects.
However, monetary policy alone cannot boost the economy. It does not have the capacity to solve all the challenges, which is why the action of other policies and institutions, in this case the government and the private sector, is important.
The burden on monetary policy is high when other policies are not acting or the conditions are not in place for them to be complementary. And it becomes critical in crisis situations, in a context where the country has persistent structural challenges.
