INFLATION WORSENED IN DECEMBER

Mozambique’s inflation rate, as measured by the Maputo City Consumer Price Index, was 3.48 per cent in the single month of December – making this the worst festive season inflation for the past three years.According to a statement issued on Tuesday by the Monetary Policy Committee of the Bank of Mozambique, this brought inflation for the year to 16.62 per cent. The average 12 monthly inflation rate was 12.7 per cent – which was the government’s revised target.The main factors in 2010 inflation were price rises in foodstuffs and non-alcoholic drinks. The Monetary Policy Committee blamed this on the deficit in domestic food production, forcing the country to rely on imports. But imports became much more expensive because of the depreciation of the Mozambican currency, the metical, and the strong appreciation of the South African rand.Since much of the food consumed in southern Mozambique is imported from South Africa, the rise of the rand sent food prices soaringOther factors were the rise in fuel prices in the first half of 2010, and speculation by shopkeepers in the run-up to the Xmas and New Year holidays. The Committee claimed that the government’s measures to attenuate the rising cost of living, taken after the 1-2 September riots in Maputo against price rises, “were important in cushioning the inflationary pressure, but were not sufficient to annul the inflationary surge and the pressure associated with the festive season”.The Committee noted that the average international prices for most of Mozambique’s main exports increased in November – very sharply in the case of cotton (up by 22.8 per cent) and sugar (7.3 per cent). But the price of Mozambique’s largest export, aluminium, fell by 0.8 per cent.The price of key imported goods also rose in November – a barrel of Brent crude rose by 3.3 per cent, while international rice and wheat prices were up by 1.9 and 1.5 per cent respectively.The Committee said that in December, the Mozambican banking system found itself with an excess of foreign currency. So for the first time ever, the Bank of Mozambique, via the Interbank Exchange Market, purchased more foreign currency from the commercial banks than it sold. The difference was 26.9 million US dollars.This, together with the disbursement of foreign aid, pushed the preliminary balance on the country’s net foreign reserves up to 1.877 billion dollars – 203 million dollars more than in November, and 35.7 million dollars more than in December 2009.December also saw a recovery in the exchange rate of the metical against the US dollar. At the end of November, according to the Committee, there were 35.37 meticais to the US dollar, but a month later only 32.83 meticais were needed to buy a dollar – a monthly appreciation of the metical by 7.18 per cent.The annual depreciation of the metical against the dollar was 19.34 per cent – better than had been feared, but a considerable deterioration when compared with the figure of just 9.65 per cent depreciation in 2009.The commercial banks are offering exchange rates that are very similar to the Central Bank’s rates – an average of 35.45 meticais to the dollar at the end of November, and 32.64 meticais to the dollar on the last day of the year.The Committee’s statement does not mention the metical/rand exchange rate, but that too has improved. A couple of months ago there were 5.3 meticais to the rand, but there are now less than 4.8, which should make a considerable difference for importers.The Committee noted that, despite the improvement in the exchange rate, “signs of inflationary pressure are still present in the Mozambican economy”, and it was therefore “opportune to strengthen anti-cyclical measures to hold back inflation in 2011”The Committee announced that the Central Bank’s key interest rate for its dealings with the commercial banks will rise from 15.5 to 16.5 per cent. This may well help strengthen the metical further – but at the price of higher interest rates for the customers of the commercial banks.The average annual interest rate charged on a bank loan is currently 21.26 per cent, while people holding deposit accounts can only expect annual interest of 11.7 per cent – although the Committee notes that competition is beginning to work in the financial market “with a considerable number of banks offering savings products with more attractive average interest rates”.The Committee also decided that the Central Bank will step up its intervention in the inter-bank markets in order to restrict the money supply.The key targets for 2011, it said, were to hold average annual inflation to eight per cent, and to hold net international reserves that will cover 4.5 months of imports of goods and services.