Metical appreciation does not imply improvement in economic growth – consultant

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Metical appreciation does not imply improvement in economic growth – consultant

3:12 CAT | 15 Apr 2021

File photo: Lusa

Consultancy NKC African Economics said on Tuesday that the appreciation of the metical in recent weeks is not a reflection of an improvement in economic growth, attributing the rise more probably to intervention by the central bank.

“There are several possible explanations for the sudden appreciation of the metical, but the most probable, only confirmed when the figures on March international reserves come out, is an intervention by the Mozambican central bank in the foreign currency market,” the analysts of the Africa branch of British Oxford Economics write.

In its comments, the analysts say that “the depreciation of the metical last year may have led the Bank of Mozambique to intervene in favour of exporters affected by the pandemic”.

However, they also point out as possible reasons, the rise in inflation by 5% since the beginning of this year, the rise in prices of the main raw materials that Mozambique exports (aluminium, coal and natural gas), the rise in interest rates in January, the reduction in imports due to the suspension of work on the LNG projects in Cabo Delgado in the north of the country, and the increase in the supply of US dollars resulting from the country’s debt relief from China.

The metical has risen 18.6% against the US dollar since February, reversing the trend of depreciation that it registered at the beginning of the year, making the Mozambican currency the fastest rising currency worldwide in the first months of the year.

“In addition to the impressive degree of appreciation, the performance of the metical was even more impressive since it appears in a context of global strengthening of the dollar and an increase in international attention to the Cabo Delgado crisis,” the scene of armed violence, analysts point out.

However, they add, the currency’s appreciation is not synonymous with an improvement in economic conditions in the country, grappling with a still timid recovery in the face of last year’s recession, war in the north of the country, and tropical storms.

“The first quarter was challenging for the economy. The Moatize mine, the largest in the country, had a technical stop expected in the first months, before production rose further towards the end of the year, while the ruby mine in Montepuez suspended activities in April last year due to the pandemic and only resumed operations in early March,” the analysis observes, also pointing to a resurgence in Covid-19 cases and the run of tropical storms that affected the port of Beira, the county’s biggest export exit point.

NKC African Economics says it will review the metical’s exchange rate forecast against the US dollar in its next bulletin, but warns that “although the currency still has room to appreciate, it will lose some of its gains towards the end of the year, due to the reduced monetary intervention motivated by the easing of inflation, the continued strength of the dollar and the increase in import needs”.

According to data obtained by Lusa, the Mozambican currency has appreciated by 18.6% against the dollar since the beginning of the year, the US currency unit falling from 75 to 61 meticais, according to average exchange rates.

The metical was relatively stable during January at 75 meticais per US dollar and started to appreciate at the end of February, reaching 61.8 meticais Tuesday. We have to go back to January 2020, before the Covid-19 pandemic, to find the Mozambican currency so strong.

The appreciation of the metical follows a decrease of about 10% against the dollar during the past year, and appears against the forecasts of most analysts, who foresaw an even greater fall for the metical this year. The appreciation comes despite the wave of violence in the north of the country, which has catapulted Mozambique to the top of the international media agenda in recent weeks.

Source: Lusa