INFLATION AND EXCHANGE RATE COMING UNDER CONTROL
Strong intervention by the Bank of Mozambique has helped bring both inflation and the exchange rate under control, claimed the governor of the bank, Ernesto Gove, on Friday.Giving his end of year summary of the economy, Gove admitted that, in the early part of 2010, inflation had been much higher than expected, which he blamed partly on heavy rains, which worsened the domestic supply of vegetables, driving up their prices, and partly on the government relaxing some previously controlled prices (he was clearly referrig to the fuel price rises in March, April and May).Volatility in the exchange rate of the Mozambican currency, the metical, began in late October 2009, but became considerably worse in March-April 2010. Gove said this was partly due to the delay in donors disbursing promised budget support funds (often referred to as a “donor strike”), and to increased demand for foreign currency to meet the cost of imports, particularly liquid fuels.The Bank of Mozambique responded by hiking its key interest rate by 400 base points to 15.5 per cent, and by increasing, in August, the sale of foreign exchange on the Inter-bank Exchange Market.These measures appear to have worked. Inflation from January to August was 17.08 per cent – but prices actually fell in the following two months. By the end of November, the inflation rate was 15.06 per cent.The government had revised its target for the average 12 monthly inflation rate over the year from 9.5 to 12.7 per cent, and Gove believed this target can be reached.As for the exchange rate, in commercial banks this had reached almost 40 meticais to the US dollar, but by mid-December it had fallen back to 35 meticais to the dollar. The central bank’s figures for transactions on the interbank market indicate that the metical is continuing to strengthen. By 16 December there was around 34 meticais to the dollar – and, even more significantly, for the first time since early August, there were fewer than five meticais to the South African rand.Since so much food for southern Mozambique is imported from South Africa, the rand/metical exchange rate is crucial for Mozambican inflation. Gove noted that the rand had strengthened earlier in the year on the back of soaring gold prices, and also because of the investments and inflows linked to South Africa’s hosting of the 2010 World Cup.The sale of foreign exchange on the inter-bank market reduced the size of Mozambique’s net internal reserves. Nonetheless, those reserves stood at 1.68 billion US dollars in November – enough to cover 4.6 months work of imports of goods and services.Monetary policy for 2011, Gove said, envisaged an expansion in the money supply (M3) no greater than 18.3 per cent, while the increase in credit for the economy should be limited to 22.6 per cent.The bank believes that these limits are necessary in order to reach the government’s targets of a 7.2 per cent growth in gross domestic product, and an annual average inflation rate of eight per cent. Funding for the deficit on the 2011 budget and balance of payment had been negotiated with donors and funding agencies earlier in the year, and Gove announced that the World Bank has promised to disburse this month – that is, a few weeks in advance – its promised 100 million dollars in direct budget support.He promised that in 2011, “the Bank of Mozambique will remain committed to its main objective, which is to ensure a low and stable rate of inflation, since we believe this is the way to make ourselves more attractive to new investment, as well as to preserve the purchasing power of low income households, thus contributing to the fight against poverty”.
Strong intervention by the Bank of Mozambique has helped bring both inflation and the exchange rate under control, claimed the governor of the bank, Ernesto Gove, on Friday.Giving his end of year summary of the economy, Gove admitted that, in the early part of 2010, inflation had been much higher than expected, which he blamed partly on heavy rains, which worsened the domestic supply of vegetables, driving up their prices, and partly on the government relaxing some previously controlled prices (he was clearly referrig to the fuel price rises in March, April and May).Volatility in the exchange rate of the Mozambican currency, the metical, began in late October 2009, but became considerably worse in March-April 2010. Gove said this was partly due to the delay in donors disbursing promised budget support funds (often referred to as a “donor strike”), and to increased demand for foreign currency to meet the cost of imports, particularly liquid fuels.The Bank of Mozambique responded by hiking its key interest rate by 400 base points to 15.5 per cent, and by increasing, in August, the sale of foreign exchange on the Inter-bank Exchange Market.These measures appear to have worked. Inflation from January to August was 17.08 per cent – but prices actually fell in the following two months. By the end of November, the inflation rate was 15.06 per cent.The government had revised its target for the average 12 monthly inflation rate over the year from 9.5 to 12.7 per cent, and Gove believed this target can be reached.As for the exchange rate, in commercial banks this had reached almost 40 meticais to the US dollar, but by mid-December it had fallen back to 35 meticais to the dollar. The central bank’s figures for transactions on the interbank market indicate that the metical is continuing to strengthen. By 16 December there was around 34 meticais to the dollar – and, even more significantly, for the first time since early August, there were fewer than five meticais to the South African rand.Since so much food for southern Mozambique is imported from South Africa, the rand/metical exchange rate is crucial for Mozambican inflation. Gove noted that the rand had strengthened earlier in the year on the back of soaring gold prices, and also because of the investments and inflows linked to South Africa’s hosting of the 2010 World Cup.The sale of foreign exchange on the inter-bank market reduced the size of Mozambique’s net internal reserves. Nonetheless, those reserves stood at 1.68 billion US dollars in November – enough to cover 4.6 months work of imports of goods and services.Monetary policy for 2011, Gove said, envisaged an expansion in the money supply (M3) no greater than 18.3 per cent, while the increase in credit for the economy should be limited to 22.6 per cent.The bank believes that these limits are necessary in order to reach the government’s targets of a 7.2 per cent growth in gross domestic product, and an annual average inflation rate of eight per cent. Funding for the deficit on the 2011 budget and balance of payment had been negotiated with donors and funding agencies earlier in the year, and Gove announced that the World Bank has promised to disburse this month – that is, a few weeks in advance – its promised 100 million dollars in direct budget support.He promised that in 2011, “the Bank of Mozambique will remain committed to its main objective, which is to ensure a low and stable rate of inflation, since we believe this is the way to make ourselves more attractive to new investment, as well as to preserve the purchasing power of low income households, thus contributing to the fight against poverty”.
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