Metical loses

The metical, the Mozambican unit of currency, is depreciating strongly against the US dollar, which economists say could jeopardize the sustainability of public debt. Last March, the Mozambican government warned that the metical could depreciate against the dollar as a result of the Covid-19 outbreak. As of Thursday, one US dollar was purchased at 68.56 meticais and sold at 69.92 meticais, according to Bank of Mozambique official rates consulted by ‘O País Económico’. At the beginning of the year, the Mozambican currency was already showing a depreciation trend vis-à-vis the main circulation currencies in the Interbank Foreign Exchange Market (MCI), with emphasis on the North American currency. The official exchange rate, both in buying and selling, was not more than 63 meticais/USD. Some economists covered in our report associate the slippage of the metical with restrictions on foreign trade due resulting from Covid-19, as well as the monetary policy measures adopted by the central bank.

For economist Agostinho Machava, the depreciation of the national currency results from measures that Bank of Mozambique has been taking, almost routinely, for some time.

The restrictive measures of the national financial system regulator “limited the circulation of foreign currency in the Interbank Foreign Exchange Market, in particular of the US dollar”, Machava points out. Economist and executive director of the Confederation of Economic Associations of Mozambique (CTA), Eduardo Sengo, said that the depreciation of the metical “is no surprise”.

“At the beginning of the year, a CTA study already pointed out that pressures for the metical depreciation, be very strong this year. This is because, within Covid-19, one of the channels of impact in Mozambique was the export sector, where companies face constraints because their buyers’ economies are at a halt, limiting the generation of foreign currency in the market,” Eduardo Sengo explained. The drop in prices of the main export commodities also reduced the amount of foreign exchange, in particular, the US dollar. “The easing of restrictive measures in some partner countries has aggravated the exchange rate situation,” the CTA’s executive director concludes.

Public debt

 the metical falling, the risk of sustainability of the Mozambican public debt increases, now standing above 100% of gross domestic product, one of the highest rates in Africa. In fact, according to the assumptions of the Medium Term Fiscal Scenario released by the Ministry of Economy and Finance (MEF), which cover the period from 2019 to 2021, the indication is that a 1% depreciation in the exchange rate represents an increase of two percentage points in the external debt-to-GDP ratio.

According to the MEF, public debt is the variable most sensitive to fluctuations in the exchange rate, given that, in 2017, for example, 84% of the total debt portfolio was contracted in foreign currency.

“An exchange rate shock may have adverse effects on private consumption, investment and the real sector through higher production costs for sectors that depend on raw material imports. On the other hand, fluctuations in the exchange rate may negatively influence the balance sheets of public companies through changes in the valuation of liabilities in other currencies,” the MEF report on the medium-term fiscal risks, to which ‘O País’ has had access, reads.

Furthermore, the evolution of the exchange rate shock caused the debt level in 2016 to reach 126.7% of the gross domestic product. This exchange rate impact was more evident with the depreciation of the metical, when the Mozambican currency lost about 63% of its value against the US dollar, whereas in 2017, the appreciation of the metical against the dollar was the equivalent to a reduction of 14 percentage points of the GDP in external debt. To minimise the depreciation of the metical, economists say the Bank of Mozambique should adopt more assertive measures, throwing into the controversy the contentious US$500 million credit line made available to finance the companies’ treasury. According to economists, the financing line announced by the central bank errs because it applies commercial and non-subsidised interest rates.