THE OTHER SIDE OF THE COIN

Mozambique 2016 | FINANCE | FOCUS: DEPRECIATION OF THE METICAL

The depreciation of the metical could be seen as a great opportunity for export promotion and import substitution.

The Mozambican currency, the metical, dropped 50% of its value against the dollar in 2015. This sharp depreciation has been linked to a combination of internal and external factors, fundamentally the appreciation of the dollar and the overall decline in the prices of products on international markets. The shock on consumers' pockets was unavoidable, but in foreign exchange terms Mozambican exports are now cheaper and metical export prices more favorable for sectors like agriculture, fisheries, and food.

In order to set an inflationary process aside, the Central Bank of Mozambique implemented a tight monetary policy to handle an “exceptional situation, which implies a change of consumption habits and the import model," Ernesto Gove, the Governor of the Central Bank, said. Raising the interest rates twice did not help the metical's plunge. Therefore, at the end of October 2015, Mozambique requested financial assistance for the first time in a decade. The loan from the International Monetary Fund (IMF) was of $286 million, and country's the growth prospects were lowered from 7% to 6.3% in 2015.

The depreciation contributed to a shortage of foreign currency in the market, although the Central Bank gave assurances it would be able to cover more than three months of imports. In fact, gross international reserves increased by $146 million in June 2015 to $2.6 billion, representing a surplus of $50 million compared to the target set. The government wanted also to slow the flow of foreign exchange out of the country by limiting citizens' expenditure abroad. Transactions through credit and debit cards outside of Mozambique increased from $300 million in 2012 to $800 million in 2014, the government said.

Mozambique pins economic hopes on 175 trillion cubic feet of natural gas reserves. With the recent discoveries of natural gas offshore in the northern Rovuma, the country is expected to become the third-largest gas producer in the world after Australia and Qatar. The privatization of some of the state-owned businesses and the utilization of the local bourse in order to attract foreign capital are seen as a good reform starting point. To tackle volatility, one of the key measures would be the creation of a sovereign wealth-development fund. This fund would act as a balancing tool that diversifies Mozambique's money through investment in non-resource related areas and prevent the economy of suffering Dutch disease. Furthermore, the rapid development of extractive projects will require the creation of infrastructure that also supports growth across other spheres.
On the other hand, taking into account that two-thirds of Mozambique's population is rural-based and more than four-fifths rely on agriculture or fishing to earn a living, agriculture is a sector to keep an eye on. As a country of 25 million people, Mozambique's domestic consumer market is relatively small. But as a member of the Southern African Development Community (SADC), investors in the country gain access through the region. The country is endowed with a range of climatic conditions, thus providing an opportunity for a diverse range of agricultural production. Its geographical position opens it to markets across the Middle East and Asia. Mozambique has the third-highest rice consumption in the SADC, most of it imported. Demand for rice, growing at 6% to 7% per year, indicates an expanding gap between demand and production. Experts estimate that poultry consumption, particularly chicken, could double in the next five to seven years. Feed production, including soy extraction, cashews, and sugar, has potential for boosting value in the agricultural sector.
The impact on Mozambican exports will bring in more or less foreign exchange depending on how the export market responds to the increased opportunities to sell. For a long time, both metical and foreign excess liquidity were absorbed and attracted in part by the booming real estate market. But the current situation opens a new range of opportunities that may help Mozambique to return to the path of sustainable long-term economic growth.