Mozambique: Seven new tolls come into operation on June 1
in file CoM
According to Rand Merchant Bank (RMB), the corporate and investment banking arm of FirstRand Bank Limited – of which FNB Mozambique is also a division, the negative effects of the Russia-Ukraine war continue to reverberate throughout Africa’s economies. Coupled with the lingering effects of the Covid-19 pandemic, this is adding to higher oil and food prices.
Significant price increases and supply-side challenges have been the norm since the beginning of the year. Wheat and other cereal prices rose sharply and with the expectation of higher inflation, businesses have already increased their prices for goods and services.
Massive disruptions over the past two years due to the pandemic resulted in business input costs increasing by 10% to 15%. Further input costs should be expected this year as the global economy has not re-opened fully. China is still restricting movement as a result of the pandemic and the war is affecting trade in Europe.
Despite these challenges, Mozambique is widely expected to notch up growth above 4% over the next few years as a major liquified natural gas (LNG) project comes online and as government spending in key areas remains strong.
“Our base case is for GDP growth to come in at 4.1% in 2022 before lifting further to 5.1% in 2023,” says Daniel Kavishe, RMB Africa Economist.
Agriculture and construction are other sectors in the economy that are expected to grow this year.
Adds Kavishe: “Construction is likely to be supported by the government’s proposed expansionary budget while agriculture is anticipated to continue to grow given the constant good rains across the region. In mining, the production of coal, graphite and ruby is expected to pick up during the course of the year and may lead to a significant boost in the overall economic performance of Mozambique, further helping to narrow the exorbitant current account deficit.”
The monetary policy committee of Mozambique opted to hike interest rates by 200bp in March, a sign that the central bank is concerned about inflation.
“Notably, the central bank targets single-digit inflation. This hike suggests that the central bank is convinced that inflation could edge over 10% in the short to medium term,” says Kavishe.
Inflation fears are stoked by global oil prices that remain over 70% higher on an annual basis, and higher food prices — both exacerbated by the Russia-Ukraine war. However, the economy is likely to continue to grow this year, especially as extractive industries gain momentum amid a higher commodity price environment. Activity around the gas sector would further boost Mozambique’s economic performance.
“Overall, we believe the MIMO rate hike to 15.25% from 13.25% in March may have been premature, given our estimates that inflation is likely to remain within the central bank’s target in the short to medium term,” says Kavishe.
“Furthermore, the hike could ease the rate at which businesses borrow, especially as they are still on a path of recovering from the effects of the pandemic. On the other hand, front-loading hikes allows the central bank to remain proactive in an environment where interest rates are poised to increase by 200bp globally over the next two to three years. We do not anticipate any further rate hikes in Mozambique in 2022.”
The IMF team reached a staff-level agreement with the Mozambican authorities on a new arrangement under the Extended Credit Facility (ECF) for 2022-2025 to support sustainable, inclusive growth, and long-term macroeconomic stability. The three-year programme will be to the tune of SDR 341 million or US$470million.
“The Mozambican economy has been affected by severe weather conditions over the past few years as cyclones have devastated different parts of the economy. Notwithstanding, the restrictions imposed during the pandemic further curtailed economic performance. Meanwhile, oil and gas investments and developments have been hampered by terrorist attacks at key sites across the exploration area,” says Kavishe.
The IMF programme will also be key to driving fiscal reforms within the country.
“We expect board approval during 1H22 given that discussions have been going on for a while and unlike other countries, Mozambique is not restructuring its debt. The move will be positive for the broader market and should be supportive for the metical during 2H22,” concludes Kavishe.