CENTRAL BANK DECREES HUGE RISE IN KEY INTEREST RATE

The Bank of Mozambique on Thursday announced a dramatic hike in interest rates, as it struggles to bring inflation and the exchange rate back under control.A statement issued by the Bank’s Monetary Policy 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 rise immediately by 300 base points, from 14.25 per cent to 17.25 per cent.This is the seventh increase in the Bank’s main reference rate since October 2015. This rate had been falling gradually since late 2012. It reached 7.5 per cent in November 2014, and remained at that level for a year, but the rate rises in October, November and December 2015 and in February, April and June 2016 bought the rate to 14.25 per cent. Now this latest rise has pushed it to 17.25 per cent, an increase that will certainly be imitated by the commercial banks, making the cost of borrowing prohibitively high for small businesses.The Standing Deposit Facility (the rate paid by the central bank to the commercial banks on money they deposit with it) also rose by 300 base points from 7.25 per cent to 10.25 per cent.The Compulsory Reserves Coefficient - the amount of money that the commercial banks must deposit with the Bank of Mozambique – remains divided into two. For reserves in local currency, the central bank increased the coefficient by 250 base points. It thus rises from 10.5 per cent to 13 per cent.For reserves in foreign currency, which must be deposited in US dollars, the coefficient remains 15 per cent.

Explaining these drastic changes, the Monetary Policy Committee says it thought it necessary “to strengthen the anti-cyclical posture of monetary policy” because of “the atypical behaviour of the main macro-economic indicators”.Those indicators “point to a slowdown in GDP growth and continued inflationary and exchange rate pressures, resulting from the adverse effects of the international conjuncture, from natural shocks (drought and floods), from the suspension of foreign aid, and from a reduced availability of foreign currency due to the persistent fall in exports”.All this coincided with continued military tension in parts of the country, increased “responsibilities of the country to the outside world”, and successive downgrades of Mozambique by international rating agencies.Those “increased responsibilities” are the need to repay government-guaranteed loans, including those to the companies Proindicus and Mozambique Asset Management (MAM) , which, although contracted in 2013-2014, had not been disclosed by the previous government, led by President Armando Guebuza. Among those taken by surprise at the scale of the undisclosed lending was the Bank of Mozambique itself – indeed, in April the governor of the bank, Ernesto Gove, said he had never heard of Proindicus, which had taken out a loan of 622 million US dollars.The undisclosed loans precipitated a crisis between Mozambique and several of its main international partners, who suspended all direct support to the Mozambican state budget.

 The imbalances the economy faces, the Monetary Policy Committee added, “justify pursuing the fiscal and monetary measures now under way, seeking to re-establish macro-economic stability and protect the solidity of the financial sector”.Inflation in June, according to figures released by the National Statistics Institute (INE), was 0.8 per cent. This pushed inflation over the past year (July 2015 to June 2016) to 19.7 per cent.The Monetary Policy Committee blamed this high inflation on the impact of natural disasters on food production, the constraints on transport caused by “military tension in the centre of the country”, and the depreciation of the Mozambican currency, the metical, particular against the South African rand, thus increasing the prices of all goods imported from South Africa.The metical continued to lose value in June. At the end of the month, the US dollar was quoted at 63.5 meticais on the Inter-Bank Exchange Market. This was a monthly devaluation of the metical of 9.1 per cent. Over the entire previous year, the metical depreciated by 62.7 per cent against the dollar. In the commercial banks, the average exchange rate quoted on 30 June was 63.91 meticais to the dollar, while in the foreign exchange bureaus it was 65.2 meticais to the dollar.As for the South African currency, there were 4.32 meticais to the rand at the end of the month. This was an accumulated depreciation of the metical against the rand over the past six months of 50 per cent.Provisional figures indicate that in June the country’s net foreign reserves increased by 221 million dollars to 1.920 billion dollars. This was largely because of the compulsory deposit in the central bank of large sums in US dollars by the commercial banks under the new regime of compulsory reserves that took effect in June. Prior to June, the compulsory reserves had only been in meticais.