Opinion 

Author: Paulo Matavela (Independent Financial Consultant)

Monetary policy plays a fundamental role in macroeconomic stability. Through Decree-Law no. 01/92, of January 3, the Bank of Mozambique describes the main objective of monetary policy as: preserving the value of the national currency and price stability..

Monetary policy faces significant challenges in crisis contexts, when economies suffer deep shocks such as recessions, political and financial crises, pandemics and climate shocks.

Since the beginning of 2024, the Bank of Mozambique has been introducing less restrictive monetary policy measures. The Mimo Rate fell by 450 basis points from January to November (Jan, 17.25% to Nov, 12.75%). The financial system's Prime Rate currently stands at 19.7% compared to 23.5% in January. These measures are introduced in a context of low and stable inflation at single-digit levels, with year-on-year inflation of 4.19% in Jan and 2.84% in Nov, compared to the same period in 2023.

On the other hand, credit to the economy has seen a decrease rather than an increase as was expected when the Bank of Mozambique took action. In the first half of 2024, credit to the economy contracted by 4,87% compared to the same period in 2023.

Since October, when the presidential elections were held, the country has been experiencing a period of political tension with potentially perverse economic impacts:

- Border blockades, causing a reduction in the supply of certain basic products, leading to shortages and consequently a potential increase in prices, with inflation reaching levels of 5% in the first quarter of 2025;

- General paralysis of activities, with huge financial losses in terms of state revenue and small, medium and large companies. In its latest statement, the CTA mentions a loss of around MZN 24.8 billion meticais, representing 2.2% of GDP. With the constant paralysis of activities, economic growth (GDP) will slow down in the coming periods;

- Reduction in Foreign Direct Investment (FDI) and foreign capital inflows, weakening the metical against the dollar;

- In crisis scenarios, commercial banks retract credit, and it is likely that the trend of reducing credit to the economy will continue, even despite cuts in the Prime Rate. The retraction of credit jeopardizes economic and inclusive growth;

- Possibility of further downgrading of Mozambique's local and foreign debt. In mid-October, the country was downgraded from CCC+ to CCC, in local currency, due to delays in the payment of domestic debt and the unsustainability of public debt, which has been reaching alarming levels, with around MZN 408.1 billion, an increase of MZN 95.7 billion compared to December 2023. As the crisis intensifies, the country's credibility will be drastically reduced with national and international creditors, increasing the risk of potential default.

Given this scenario, it is suggested that the WB adopt a proactive and prudent stance to avoid an economic recession. It is therefore expected that the WB will stabilize the MIMO Rate at current levels or increase the indicator slightly, in order to contain the potential prospects of an increase in the prices of goods and services; Introduction of some exchange rate balancing measures, such as: increasing the mandatory rate for converting income into foreign currency, currently at 30% and Reducing mandatory reserves in local and foreign currency. These measures could contribute to greater liquidity in local and foreign currency on the part of commercial banks with a view to boosting the economy through consumption and investment. Nevertheless, the WB should consider continuous control of aggregate demand levels in order to avoid potential inflationary effects.

However, monetary policy alone cannot boost the economy. Monetary policy is not capable of solving all the challenges, which is why the action of other policies and institutions, in this case the government and the private sector, is important.

The burden on monetary policy is high when other policies fail to act or the conditions are not in place for them to become complementary. And it becomes critical in crisis situations, in a context where the country has persistent structural challenges.