“Unusual behaviour”

The Bank of Mozambique on Friday night announced a massive hike in its benchmark interest rates, as it struggles to bring inflation under control, and mop up excess liquidity.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 600 base points, from 17.25 to 23.25 per cent.This is not quite the highest rate the central bank has ever charged. At one point in 2002 the Standing Lending Facility reached 32.5 per cent. But it subsequently declined, reaching 7.5 per cent in November 2014, and remaining at that level for a year. But rate rises in October, November and December 2015 and in February, April, June and July 2016 bought the rate to 17.25 per cent. The latest rise, to 23.25 per cent 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 600 base points from 10.25 to 16.25 per cent.

The Compulsory Reserves Coefficient – the amount of money that the commercial banks must deposit with the Bank of Mozambique – which had been divided into two, for local and for foreign currency, has now been reunited, and stands at 15.5 per cent for all currencies, For deposits in local currency, the metical, that is an increase of 250 base points, while for deposits in foreign currency the increase is only 59 base points.In a departure from previous practice, the central bank will now allow each commercial bank to use the Standing Lending Facility only twice a week.Furthermore each commercial bank must report the exchange rates it is using in transactions with the public to the Bank of Mozambique three times a day. The central bank will make this information immediately available to the public.

Explaining this move at a Maputo press conference, the governor of the Bank of Mozambique, Rogerio Zandamela, said the decision had been taken to make exchange rates more transparent. “It will allow each of us, through the central bank, to know what rates each of the commercial banks is offering”, he said. “This will allow the central bank to discipline the market better”.If any “unusual behaviour” was noticed in setting exchange rates, the Bank of Mozambique would be able to intervene at once. But Zandamela insisted that the central bank has no intention of fixing exchange rates administratively.The exchange market “has been under constant pressure partly due to factors that are not directly related to economic fundamental, which makes the formation of exchange rates less transparent”.As for the increase in interest rates, Zandamela said that previously the benchmark interest rates had been negative in real terms. The purpose of the change was to make them positive, since, with negative real interest rates, the central bank cannot fulfil its role as a regulator “sending signals to the market”.The Standing Lending Facility had become negative in real terms because, in recent months, it had fallen below the rate of inflation and below other interest rates used on the inter-bank money market.Thus in September the weighted interest rates on transactions in treasury bonds with maturities of 91 and182 days were respectively 18.4 and 18.5 per cent, considerably more than the standing Lending Facility rate of 17.25 per cent.

Zandamela said the metical had continued to depreciate against the US dollar and the South African rand. At the end of September, the average exchange rate in the commercial banks was 78.48 meticais to the US dollar, a monthly depreciation of 6.8 per cent. The devaluation over the past year was 84.8 per cent.The metical’s slide against the rand was considerably more serious, since so much of the food consumed in Mozambique is imported from South Africa. The average exchange rate on the last day of September was 5.72 meticais to the rand – a depreciation of 13 per cent in the month and of 85.7 per cent since October 2015.The statement from the Monetary Policy Committee said the depreciation was the result of “the shortage of foreign currency caused by the suspension of direct support to the state budget and the balance of payments”. In April the International Monetary Fund (IMF), the World Bank and all the donors who once provided direct budget support suspended further financial aid in the wake of the scandal of the previously undisclosed government guaranteed loans to the security related companies Proindicus and MAM (Mozambique Asset Management). Aid is likely to remain suspended until there is an international, independent audit of these companies.

 

Also contributing to the shortage of foreign currency, the Bank added, was the reduced flow in foreign direct investment and the slowdown in Mozambican exports “within a framework of difficulty in financing the budget deficit, and of increased debt servicing”.These factors, plus the military instability caused by the low level insurrection waged by the Renamo rebels, all contributed to increased inflation. The yearly inflation rate, calculated from the consumer price indices of the three largest cities (Maputo, Nampula and Beira), reached 24.92 per cent by the end of September. Zandamela warned that, by the end of the year, the inflation rate could reach 30 per cent or higher.The public deficit was also worsening. Budgetary execution for the first half of the year showed a slight increase in revenue, but this was more than compensated for by the increase in public expenditure, resulting in an increased deficit, before and after grants. The state, Zandamela noted, “is resorting permanently to the use of Treasury Bonds”. This use of domestic debt “shows the fiscal pressures on the funding of public expenditure”.Zandamela put the excess liquidity in the commercial banks at over five billion meticais – without taking into consideration the bonds held by the banks, which could be converted into liquidity at any time. This threatened to put further pressure on the exchange rate and on prices – thus, the central bank’s decisions were in part intended to mop up excess liquidity.

The excess liquidity is distributed unevenly among the commercial banks. Asked if any of the banks might face a crisis similar to that which led the Bank of Mozambique to intervene the fifth largest bank, Moza Banco, at the end of September, Zandamela declined to answer, citing banking secrecy.As for Mozambique’s net foreign reserves, these continued to decline, falling to 1.69 billion US dollars at the end of September. This is only sufficient to cover three months of import (excluding the imports of the foreign investment mega-projects). Zandamela described this as a “critical level”.One of the few bright spots in the picture painted by Zandamela is that the deficit on the balance of trade in the first half of the year improved by over 40 per cent, when compared with the January-June 2015 period. Exports slumped by 15.6 per cent, but the fall in imports – 27.9 per cent – was much larger.Asked whether Mozambique would be able to meet its obligations on debt servicing falling due in January, Zandamela said that was a decision, not for the central bank, but for the Finance Ministry.