Mozambican central bank balances food import pressures with domestic industry concerns

Mozambique's central bank on Friday decided to hold rates steady in the face of accusations that it continues to maintain an over-valued currency vis-à-vis its biggest trading partner and neighbour, South Africa, to keep down the prices of imported goods in the capital, Maputo.

The Mozambican metical has, like many emerging market currencies, fallen sharply against the US dollar since the start of the year, which the central bank attributes to more than the growing strength of the American currency.

In its communiqué it highlights the fall in the global price of commodities that Mozambique exports such as coal and cotton, and the import of additional goods and services in the wake of severe weather in the first quarter of 2015 that wiped out crops as well as vital energy and transport infrastructure.

The currency – which, according to the Bank of Mozambique, fell 12.43% against the dollar in March alone – may also be suffering the effects of continued political uncertainty.

Elections in October continue to be disputed by the main opposition party, Renamo, which ended a 16-year civil war against the government in 1992 but which returned to violence in 2013 and is threatening to do so again this year if it is not given power in the country's central and northern provinces.

In December, the Bank of Mozambique's monetary policy committee said the "post-electoral aftermath" had brought "elements of political and social instability, [which] transmits nervousness to the markets and negative expectations regarding the maintenance of the pillars that sustain macroeconomic stability."

Despite these various pressures on the currency, Joseph Hanlon, a Mozambique expert and development economist based at the London School of Economics, says the value of the metical is being kept artificially high against the South African rand to keep food cheap in Maputo – at the cost of throttling domestic agricultural production.

"When the rand was allowed to rise to five meticais in 2010, increased local prices caused riots in Maputo," Hanlon said in an emailed note last week. "It was kept at 3.5 meticais to one rand during 2011–13 and, since mid-2013, has been kept close to three meticais to one rand," he said, adding it was "pulled down to 2.8 for the national elections this year."

This in turn means "local producers cannot compete with imports from South Africa", Hanlon argues, adding that his research on the ground has shown "meat and other foods could be imported from South Africa, more than 1,000km away, and still could be sold for less than local production costs. Thus keeping the peace in Maputo prevents Mozambique from being food self-sufficient and developing other forms of local production."

The state budget for 2015, published at the end of last month but still awaiting ratification by the country's parliament, calls for an exchange rate policy "consistent with efforts to promote the competitiveness of exports."

However, interest rates in the country could yet rise if inflation comes in much above the 5.1% annual rate projected in the budget, which will not help reduce the value of the currency. The central bank held its policy rate at 7.5% on Friday.

The central bank targets inflation in a range of 5–6% and, although Tiago Dionisio, assistant director at Africa-focused investment bank Eaglestone Securities in Lisbon, told Central Banking that inflation is "likely to remain contained in the foreseeable future", he warned any upward pressure could see the central bank increase rates in the second half of the year.