Currently, the commercial banks have not had sufficient availability of foreign currency to cover the needs of the private sector. One of the factors that may be at the root of this unavailability is related to the BoM’s (Bank of Mozambique) withdrawal in June 2023 of the subsidy to commercial banks for the provision of foreign currency for the payment of fuel import bills.
This decision by the BoM was taken in a context in which the Mozambican economy recorded moderate economic growth of 6.55 per cent in the first quarter and 5.87 per cent in the second quarter of 2023, and continued stability of the metical against the US dollar, remaining at 64.50 meticals.
On the other hand, year-on-year inflation showed no signs of improving, reaching double digits in February (10.30 per cent) and March (10.82 per cent) 2023. Net international reserves stood at around 3 billion dollars (196 billion meticals) in June 2023.
The Bank of Mozambique’s main role is to guarantee price stability in the market. Faced with a context of unstable inflation, the BoM decided to adopt measures to reduce aggregate demand, reducing liquidity in the market by increasing the rate of compulsory reserves.
Year-on-year inflation is currently at controlled levels, having registered 2.97% in July 2024, with a negative monthly variation of -0.05%. Net international reserves increased from 3 million dollars (196 billion meticals) to 3.6 million dollars (232 billion meticals), which is equivalent to around five months’ coverage of goods and services, excluding major projects.
“Meanwhile, the measures taken to contain inflation have affected the availability of foreign currency on the market.Commercial banks indicate that they have a backlog of 500 million dollars (32 billion meticals) in import invoices, expatriation of capital and other operations with foreign countries.”
Meanwhile, the measures taken to contain inflation have affected the availability of foreign currency on the market. Commercial banks say they have a backlog of 500 million dollars (32 billion meticals) in import invoices, capital expatriation and other foreign operations.
This shortage of foreign currency brings with it various constraints, such as a drop in production and turnover, gaps in project completion schedules, an increase in implementation costs and a reduction in the level of investment. In general, the lack of foreign currency on the market has made it difficult to pay invoices abroad, directly affecting international operations.
It is important to note that the country has a trade balance deficit. In the first quarter of 2024, exports of goods totalled 1.3 million dollars (86.7 billion meticals), compared to 1.3 million dollars (83.9 billion meticals) in the same period of 2023, while imports fell by 2.5% to 2 million dollars (128.5 billion meticals). Foreign Direct Investment (FDI) fell by around 10 per cent.
The current account deficit in the first quarter of 2024 remains high at negative 646 million dollars (41 billion meticals), despite a 21 per cent reduction compared to the same period last year.
Faced with this situation, the BoM should reconsider market expectations and implement measures to correct the imbalance in the foreign exchange market, considering that the market is not capable of absorbing the demand for imports on its own.
At the same time, the government should adopt fiscal policies that guarantee a higher percentage of dividends or revenues related to major projects by renegotiating some contracts, attract foreign capital through investments and boost local production with financing and training programmes, thus increasing the level of exports.
In addition, economic stabilisation measures must be adopted to mitigate the negative effects of fluctuations in commodity prices on the international market.
On the other hand, the low availability of foreign currency may also be linked to the influence of the black market and exporters’ lack of interest in releasing dollars.
Author: Paulo Matavela – Economist
