Central Bank promises intervention to shore up the metical in Mozambique


(2015-09-16) The Bank of Mozambique has decided to increase its sales of foreign currency in order to relieve the pressure on the national currency, the metical, AIM reports.

A statement from the latest monthly meeting of the bank’s Monetary Policy Committee, held on Monday, said that in August the metical had come under pressure “in all sections of the exchange market” and in relation to all major currencies, and particularly the US dollar.

At the end of August, the US currency was quoted on the inter-bank exchange market at 40.12 meticais to the dollar, a depreciation of the metical of 3.7 per cent over the month. Since the beginning of the year the metical had devalued 26.96 per cent against the dollar, and from 1 September 2014 to 31 August 2015, the depreciation was 31.5 per cent.

Ordinary citizens, however, do not change their money on the inter-bank market but in the commercial banks or foreign exchange bureaus. Here the depreciation was sharper. At the end of August, the average exchange rate in the banks was 42.2 meticais to the dollar, and in the foreign exchange bureaus it was 42.47 meticais to the dollar – a depreciation in just one month of 6.14 per cent in the banks and of 7.25 per cent in the exchange bureaus.

The metical continued to slip in early September, reaching 44.8 meticais to the dollar in the commercial banks last Thursday.

The depreciation of the metical against the South African rand, the currency of Mozambique’s main trading partner, was not so sharp. At the end of August there were 3.01 meticais to the rand. Over the previous year, the metical had lost 4.88 per cent of its value against the rand.

The Monetary Policy Committee argued that this picture “reflects the global conjuncture of the strengthening of the US currency, in a context of consistent falls in the international prices of commodities with an impact on the Mozambican balance of payments.” To this were added, the Bank said, “endogenous factors (of a structural and conjuncture nature) plus shocks to which the economy has been subject”. All of this produced “perverse effects” on the exchange rate.

This elliptical remark did not explain what “endogenous factors” or “shocks” the bank had in mind, but it is reasonable to assume that they include heightened politico-military tension, with Afonso Dhlakama, leader of the former rebel movement Renamo, threatening to set up new military installations, and to take over provinces by force.

The Central Bank has opted to shore up the metical, but not to increase interest rates. The Monetary Policy Committee announced that the bank will increase the sale of foreign currency, while “maintaining the necessary vigilance over the performance of the market operators”. But the Committee did not say how much foreign currency it intended to sell.

The sales will mean eating into Mozambique’s foreign currency reserves. According to provisional data, at the end of August the reserves stood at 2.559 billion US dollars. During the month the reserves fell by 73.2 million dollars. This was mostly due to the sale of dollars on the Inter-Bank Exchange market. – which did not halt the slide in the value of the metical. The reserves cover 3.76 months of imports of goods and non-factor services, when the operations of the foreign investment mega-projects are excluded.

The bank seems determined not to use the weapon of raising interest rates. The Committee announced that the Standing Lending Facility (the interest rate paid by the commercial banks to the central bank for money borrowed on the Interbank Money Market) will remain at 7.5 per cent. This rate was cut in November 2014, by 75 base points, from the previous rate of 8.25 per cent which had been in force for the previous year.

The statement announced that the Standing Deposit Facility (the rate paid by the central bank to the commercial banks on money they deposit with it) remains at 1.5 per cent, and the Compulsory Reserves Coefficient – the amount of money that the commercial banks must deposit with the Bank of Mozambique – is also unchanged at eight per cent.

The Committee also decided that the central bank will intervene in the inter-bank markets to ensure that the monetary base does not exceed 61.938 billion meticais by the end of September.

In August the monetary base fell by 56.3 million meticais to 60.248 billion meticais, below the ceiling of 60.577 billion fixed for the month. The amount of notes and coins in circulation fell by 104.7 million meticais in august which cushioned an increase in bank reserves of 48.4 million meticais. Over the entire year the monetary base has risen by 8,264 billion meticais (an increase of 15.9 per cent).

The depreciation of the metical has not yet led to significantly higher prices. The level of inflation remains low. The Committee noted that the figures released by the National Statistics Institute (INE) show that inflation, as measured by the consumer price indices in the three largest cities (Maputo, Nampula and Beira) was only 0.21 per cent in August.

Between 1 January and 31 August inflation was 1.23 per cent, and over the entire previous year (September 2014 to August 2015) it was 2.28 per cent.

Source: AIM

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