The economic growth of Mozambique has been one of the fastest on the African continent for a decade, with growth averaging at 7%, between 1993 and 2014. Conversely, the growth trend altered in 2016 to a rate of 3% from 6% in 20151, driven by a tumultuous commodity market, adversarial climate conditions and the resultant depreciation of the Mozambican metical. Additionally, the ensuing sovereign debt crisis which is on the back of undisclosed government loans have pushed public debt to approximately 86% of the GDP in at the tail end of 20152.
The increase in public debt is spurred upon by the depreciation of the currency because these loans have commercial interest rates and whose maturity date is in 2021. This worryingly pushes the cost of servicing this debt to a rate of 40% of government revenue3. The country’s national accounts illustrates that public investment, as a proportion of GDP, were steady between 2009-2015, private investment was also steady on the back of substantial flows of foreign direct investment (FDI) and donor-funded infrastructure rehabilitation programmes. However, Mozambique’s external demand depreciated since 2011 due to the fall in international prices of the country’s main export products such as; mineral fuels including oil and other chemical goods.
The slowdown of the economy is on the back on uncertainty of how the government will charter the global economic situation which could see a perilous situation for the economy – as there is a steady fall in the country’s main export produce and this may have adverse effects on the expansion of production in export-orientated areas.
Mozambique has one of the largest current account deficits in Southern Africa; recorded at 42% of GDP in 2015. Mozambique’s GDP began to contract sharply in the first three quarters of 2016, due to depreciating FDI flows. Furthermore, deteriorating consumer demand and fiscal and monetary tightening are the key instigators to the decline in GDP growth. Sluggish GDP growth is engendered by a sizable reduction in FDI, this reduction facilitated the devaluation of the metical, thus resulting in pressure on the balance of payments. Balance of payments pressures led to a major devaluation of the metical and as a result, the street valuation of the metical, when pitted against the US dollar, dropped at a rate of 64% whilst the drop of value against the South African rand is at a rate of 28%. In FY2015 foreign currency reserves were down by 33% which is just shy of three months of imports.
In 2009-15 GDP growth averaged a rate of 6.9% in 2015, real GDP grew by 6.6% and the GDP per capita was USD 6014. In the same period, the average inflation recorded was 7.1%. The discovery of undeclared debt lead to a calamitous situation of donor withdrawal, which added further pressure on the currency. The Bank of Mozambique reports that their foreign currency reserves are at USD 2.18 billion. In a ploy to counter liquidity issues, currency devaluation and a concomitant surge in prices, the Bank of Mozambique espoused an exceedingly restrictive monetary policy. This is due to lower confidence, owing to the undisclosed loans and as such, this bred a climate of speculation which brought down the value of the metical.
In the last 6 months the metical has recovered meaningfully against major foreign currencies, moving from USD/MZN 72.7 and EUR/MZN 76.62 in December 2016, to USD/MZN 61.5 and EUR/MZN 62.5 in May 2017. This is on the back of short demand for foreign currency as companies await for the rates to improve even further. Whilst if one looks at the currency over a 12 month basis you will see that the currency has deteriorated facing the US dollar comparatively to the same period of the previous year, where at the same period we saw levels of USD/MZN 55.40. These changes have been driven by political risk as opposition party leader threatened to start a civil war, as well as the inability of the companies to pay the government secured loans amounting to above USD 2 billion which had to be restructured. A long term analysis illustrates that the metical started deteriorating in 2015 when the hidden loans came to light. Additionally, confrontation between rebel and government forces decreased foreign investors’ appetite in the economy.
This aggressive and restrictive course of action by the central bank can be traced back to the relieving of duties of the Governor of the Bank of Mozambique; the subsequent effects of this action were positive as the metical appreciated. In July 2016, there was an emergency budget review with the view of cutting spending by 1.2%. The Bank of Mozambique, along, with the Mozambican Association of Banks (AMB), its Associates and other Credit Institutions and Financial Companies, signed an agreement to introduce a Single Indexer, with effect from 1 June 2017. The indexer will serve as the basis for the calculation of the Prime Rate and the Variable Interest Rate to be applied in the credit operations contracted by the financial system with its customers. The Monetary Policy Committee (CPMO) of the Bank of Mozambique reduced the interest rate of the Permanent Liquidity Transfer Facility (CPF) by 50 basis points, from 23.25% to 22.75%. In the same vein, it chose to maintain the interest rate of the Permanent Deposit Facility (FPD) at 16.25% and the Compensation Reserve Ratio (RO) for liabilities in local and foreign currency at 15.50%. This is off the back of insights from the main macroeconomic indicators, which project inflation and the exchange rate will be chartering positive ground5.
In the first half of 2016, ratings agencies downgraded the sovereign credit ratings of Angola, Congo, Gabon, Lesotho, Mozambique and Zambia due to unsustainable debt burdens made worse by commodity fluctuations and resultant risks. This has left the cost of borrowing by respective nations substantially higher and thus, detrimental to their economic growth. As such, escaping the debt trap will take patience and sound macroeconomic interventions. Mozambique’s economic troubles will continue in the short term, on the back of depreciating FDI flows and the resultant economic malaise.
1 African Development Bank
2 World Bank Group
3 World Bank Group
4 World Trade Organisation
5 Bank of Mozambique