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The rapid depreciation of the Metical, What’s happening?

The Mozambican currency, the Metical, lost 50% of its value from 30Mt / 1USD in January to 45Mt /1USD as of October 1st. Normally, when the metical depreciates to much, The Government of Mozambique intervenes.

The tight monetary policy implemented by the central bank, has two fundamental objectives:

  1. Controlling inflation– which is done by setting the average marginal lending facility at 7.5% , the deposit facility at 1.50% and the compulsory reserve rate at 8%, which in turn entices commercial banks to set their average lending rates at +/-21% (including margins) to cover the spread &
  2. Currency stabilization — Achieved through market interventions such as selling dollars to commercial banks in local currency therefore “sucking out” the access  from circulation and keeping the “metical” stronger and/or by selling short term bonds and treasuries (which are government loans) in financial markets. So what’s happening? Let’s take a look

 Microeconomic factors

  • Payment of the first installment of Government $850m Ematum Bond– A controversial government investment made on fishing boats, from government accounts– totaled $77m,  a transaction which brought a scarcity in foreign reserves and a current account deficit.
  • The 2014 National Elections, financed from State budget.
  • High level of Gdm debt +/- 60% of GDP.
  • Unstable political situation resulting in the reduction of foreign direct investment inflows.

Macroeconomic factors

  • The United States Federal reserve banks decision to keep interest rates unchanged (0%) against the expectation that US rates would increase. It is still widely believed the interest rates will increase, leading speculators to spend less.
  • The overall strengthening of the US Dollar as the American Economy gradually strengthens, through stimulus methods such as quantitative easing in this post financial crisis era.
  • The decline in the international price of commodities, such as Coal and Aluminum devaluing Mozambique’s export basket.                                                                                                                                Effects
  • The price of imports has increased
  • Mozambique, being a net importer of most commodities (including foods, manufactured and processed goods) has seen the price of consumer goods go up.
  • Mozambican exports have become cheaper.
  • Government has cut key subsidies such as the (the bread subsidy) and have not adjusted the fuel price despite the international price of oil decreasing.

The result is an overall lack of market liquidity due to decreased Government spending and  a rapid deprecation of the Metical / Dollar exchange rate.