Mozambique’s central bank has announced a surprise cut in its key interest rate, the first since the global pandemic in 2020, in a bid to stimulate economic growth and recovery.
The Banco de Mocambique lowered the key rate known by its Portuguese acronym of Mimo to 16.5% from 17.25%, effective from February 1, 2024. The decision was made after considering the “evolution of the macroeconomic environment and the prospects for inflation and economic activity,” the bank said in a statement on Sunday.
The rate cut comes amid a challenging economic situation for the southern African nation, which is facing a triple threat of a violent insurgency in its northern province of Cabo Delgado, a devastating cyclone that hit the central region in January, and the lingering effects of the Covid-19 pandemic that has disrupted trade and tourism.
According to the International Monetary Fund (IMF), Mozambique’s economy contracted by 1.3% in 2020 and is expected to grow by 2.1% in 2024, below the average of 3.2% for sub-Saharan Africa. The IMF also urged the central bank to ease its monetary policy stance to support the recovery, while maintaining price stability and a flexible exchange rate.
The central bank said it expects inflation to remain low and stable, averaging 5.6% in 2024, within its target range of 5-6%. It also said it will continue to monitor the domestic and international economic situation and adjust its policy accordingly.
The rate cut was welcomed by some analysts and investors, who said it would help boost consumer spending and business confidence, as well as ease the debt burden of the government and the private sector.
“This is a positive move that signals the central bank’s willingness to support the economy and ease the pressure on the fiscal side,” said Nkosi Moyo, a senior economist at Standard Bank Group Ltd. in Johannesburg. “It also shows that the central bank is confident that inflation will remain under control, despite the recent shocks.”
Moyo added that the rate cut could also attract more foreign investment into Mozambique, especially in the energy sector, where several multinational companies are developing liquefied natural gas (LNG) projects worth billions of dollars. Mozambique has the potential to become one of the world’s largest LNG exporters, but the projects have been delayed by security and logistical challenges.
“The rate cut could improve the risk-return profile of investing in Mozambique, especially in the long term, as the country has huge natural gas reserves and a strategic location in the region,” Moyo said.
However, some experts warned that the rate cut could also have some negative consequences, such as weakening the Mozambican metical against the US dollar and other major currencies and increasing the vulnerability of the banking system to external shocks.
“The rate cut could put some downward pressure on the metical, which could make imports more expensive and widen the current account deficit,” said Carlos Rosado, a professor of economics at Eduardo Mondlane University in Maputo. “It could also expose the banks to more credit risk, as they have to lend more to stimulate the economy, but also face more defaults and non-performing loans.”
Rosado said the central bank should be cautious and gradual in its easing cycle, and complement its monetary policy with structural reforms to improve the business environment, governance, and security in the country.
“The rate cut alone is not enough to solve the deep-rooted problems that Mozambique faces,” Rosado said. “The government and the central bank need to work together to address the fiscal, social, and political challenges that are holding back the country’s development.”
Despite the difficulties, Mozambique has shown some signs of resilience and optimism in recent months, as it secured a debt relief deal with the IMF, resumed peace talks with the rebel group Renamo, and received humanitarian and military assistance from its regional and international partners.
The central bank governor, Rogério Zandamela, said the rate cut is the start of a gradual loosening cycle that will help Mozambique achieve its economic potential and improve the living standards of its people.
“We are confident that this decision will have a positive impact on the economy and the society, and we are committed to maintaining a sound and prudent monetary policy that fosters growth and stability,” Zandamela said.
Source: Bloomberg
