Saturday, October 28, 2017

Mozambique Central Bank Cuts Interest Rates
Maputo — The Monetary Policy Committee of the Bank of Mozambique on Thursday announced a reduction of 50 base points in the central bank's key interest rates.

The new interest rate, introduced in April, the Interbank Money Market Rate (MIMO), falls from 21.5 to 21 per cent. The central bank's interventions on the interbank money market to regulate liquidity are based on this rate.

The Standing Lending Facility (the interest rate paid by the commercial banks to the central bank for money borrowed on the Interbank Money Market) falls from 22.5 to 22 per cent, and the Standing Deposit Facility (the rate paid by the central bank to the commercial banks on money they deposit with it) falls from 16 to 15.5 per cent. The Compulsory Reserves Coefficient - the amount of money that the commercial banks must deposit with the Bank of Mozambique - falls by 100 base points, from 15 to 14 per cent.

At a Maputo press conference on Thursday evening, the governor of the Bank of Mozambique, Rogerio Zandamela, said that the Monetary Policy Committee, meeting earlier in the day, had decided that there was room for “a moderate reduction in interest rates”.

The Committee will continue to monitor economic and financial indicators and risk factors, he said, and, if it deems necessary, it will take “corrective measures” prior to the next scheduled meeting of the Committee on 20 December.

Reducing the interest rates was possible because of the continuing fall in inflation, said Zandamela. Annual inflation (from 1 October 2016 to 30 September 2017) was 19.78 per cent, according to the National Statistics Institute (INE), using the consumer price indices for the three largest cities (Maputo, Nampula and Beira).

But this year's inflation (from January to September) was only 3.53 per cent, and Zandamela expected annual inflation for 2017 to be under ten per cent. This will be a considerable achievement, since inflation in 2016 was 23.67 per cent.

But risks of rising inflation remained, he said, and the central bank feared that inflation could return to two digits in 2018. This justified “a continued prudent posture in monetary policy”.

A key factor was that the Mozambican state budget can no longer rely on donor support. Because the previous government, headed by President Armando Guebuza, in 2013 and 2014 illicitly guaranteed over two billion dollars worth of loans from European banks (Credit Suisse and VTB of Russia), to three security-related companies, Mozambique's foreign debt ballooned by 20 per cent, and has become unsustainable.

Much of this lending was secret - but, when the scandal burst into the open, thanks to press reports, in April 2016, the International Monetary Fund (IMF) suspended its programme with Mozambique. All 14 donors who once provided direct support to the Mozambican state budget suspended their disbursements and are unlikely to resume them in the foreseeable future.

“The extension of the freeze on direct outside support to the State Budget will require additional measures of fiscal adjustment”, said Zandamela, “and the acceleration of various reforms which could affect the favourable behaviour shown by some macro-economic indicators this year”.

Exchange rate stability had also favoured the slowdown in inflation. The Mozambican currency, the metical, has continued to gain ground against both the US dollar and the South African rand. On 23 August, the metical was quoted at 61 to the dollar, a slight improvement on the rate of 61.21 to the dollar recorded on 10 August (the date of the previous meeting of the Monetary Policy Committee). Over the same period the metical had strengthened from 4.57 to 4.47 to the rand. Since the start of the year, the metical had strengthened by 14.6 per cent against the dollar and 13.1 per cent against the rand.

Mozambique's net international reserves had also strengthened, rising to 2.514 billion dollars on 20 October. Zandamela said this was enough to cover 6.1 months of imports of goods and non-factor services, excluding the foreign investment mega-projects.

But the risks of inflationary pressures “remain high”, stressed the governor. He was worried by the government's continual resort to domestic borrowing. Domestic indebtedness rose from 97.7 billion meticais (about 1.6 billion US dollars) on 10 August to 100.5 billion on 25 October.

“This indebtedness shows in part the difficulties the public sector faces in mobilising resources for its expenditure, in a context where there is no sign of a return to foreign direct support for the State Budget”, he said.

In addition to this “high fiscal risk”, there was also continued volatility of commodity prices, and a difficult political environment in neighbouring countries, particularly South Africa, all of which could have an impact on inflation.

“We can live without the IMF, but it's difficult”, said Zandamela, stressing that the key task of the central bank remains the fight against inflation, and that was why interest rates remained high.

The Bank of Mozambique wanted to see rates fall further, “but it would be impossible for us to cut interest rates in a way that does not reflect reality”. That, he said, would merely lead to increased inflation, put pressure on the country's foreign reserves, and weaken the exchange rate of the metical.

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