A low metical damages the economy

In partnership with the Mozambican Association of Economists (AMECON), the CTA has organized a debate on April 30 called “The recent currency fluctuations in Mozambique: determinants, impacts and policy implications.”

The meeting was attended by economists who reflected on the currency fluctuations in Mozambique and its impact on the economy. Since last summer, the metical has suffered a sharp depreciation against the US dollar, currently traded above 35 meticais in commercial banks against the usual 30, causing severe consequences for the private sector.

Currently, in our economy, apart from the beneficial effect of leverage to exporters who do not use imported inputs in their production, the devaluation of the metical considerably reduces the value of currency available, once the exporter (here entity selling services and products on the international market, foreign investor or international donor) will need less money to pay its expenses in local currency (payment of taxes and national workers’ salaries and other charges). The depreciation of the metical does not immediately attract foreign exchange inflows in the country because it does not have enough net assets tradable on the stock market attractive to foreign investors. The depreciation of the metical also obliges companies registered in Mozambique to reclassify their assets and liabilities to reflect the real value of items recorded in the balance sheets and income plans.

 

The intervention of the Bank of Mozambique is important, not only in foreign exchange transactions (sales and purchases) but also in taking legal measures to regulate the foreign exchange market. It is necessary to warn market participants (exporters, importers and commercial banks) that at any time, the Bank of Mozambique can take appropriate legal measures to correct the speculative market trends, taking into account the peculiarity of the economy of the country. 

 

The depreciation of the metical, in the case of Mozambique, does not lead to more exchange earnings for the country. It can even mean fewer dollars available in the market because it will take less foreign exchange to get the same amount of meticais. Moreover, because of the inability to immediately substitute imports by domestic production, demand for foreign currency will remain the same, worsening the position of the metical if the Bank of Mozambique does not contradict these expectations.