Mozambique: Hike in banks’ reserve requirements ‘harmful to business’ – economists

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Mozambique: Hike in banks’ reserve requirements ‘harmful to business’ – economists

6:57 CAT | 05 Jun 2023

File photo: Lusa

Mozambican economists on Monday described a decision by the country’s central bank to increase the reserve requirement ratio [RRR] for commercial banks in the country as “harmful” for companies, stressing that the measure “will not solve” spiralling inflation, because the rate is affected by “structural problems” in the economy.

The rate hike “means that [companies] will pay their debts at a much higher cost” and this measure “may jeopardise the profitability and continuity of operations of many companies,” said Egas Daniel, an economist and coordinator of the programme in Mozambique of the International Growth Center (IGC) of the London School of Economics, adding that his “is the harmful part that accompanies these measures of a restrictive nature.”

The profitability of investments by companies is hereby “compromised,” he stressed. “No company plans to make investments based on loans or based on bank financing in a context where interest rates are so high.”

At the same time, he said, the survival of “some small banks” is at risk, because they have to deal with “already extraordinary squeezes” imposed by the regulator.

The economist expressed doubts about the argument according to which excess liquidity in the economy is causing inflationary pressure. Egas Daniel points out that the rise in prices in Mozambique is caused by structural factors such as weak production and productivity in the economy.

The Bank of Mozambique “does not find one economic structure that allows the measures to be effective,” he stressed.

Another factor behind the high interest rates. according to the economist, is the “chronic recourse” to bonds and treasury bills by the Mozambican state to finance public expenditure .

“The public sector does not contract its expenses over time; they have an exponential growth that is not accompanied by revenues, which generates a larger deficit that must be financed by the banks themselves,” he argued.

Another economist from Mozambique, Elcídio Bachita, also considered as risky the decision to raise the compulsory reserve coefficients imposed on commercial banks.

“I would say that it is not exactly a prudent measure” given the state of the economy, he said.

“Naturally, this will have its repercussions” because “commercial banks will be left with fewer financial resources to finance the economy,” Bachita continued. “The commercial banks will be forced to raise interest rates, we will see a rise in what is the ‘prime rate’ of the national financial system, I believe next month or by August at mosl .”

The Bank of Mozambique “is acting in isolation, without coordinating with other players in the national economy, because monetary measures alone are not proving effective in combating inflation,” Bachita stressed,

Meanwhile, Estrela Charles, an economist and researcher from the Centre for Public Integrity (CIP), a non-governmental organisation in Mozambique, said that the increase in coefficients was doomed to fail if it was an isolated measure and did not take into account the structural nature of the dynamics of inflation in the country.

“We know very well that our inflation is not caused directly by the issue of excess liquidity in our economy, it is an inflation that is also caused by the supply side and the production side,” she stressed, arguing that the decision “will have no effect if it is not reconciled with fiscal policy.”

By “drying up” the money in circulation, whether in national or foreign currency, she went on, the central bank could negatively affect the exchange rate and create a counterproductive effect by making imports more expensive and raising prices: “Our country depends on imports and the exchange rate is a very sensitive variable for our economy.”

At issue is the increase in the compulsory reserves that commercial banks have to keep with the central bank. The institution on Wednesday moved to increase the coefficients of liabilities (in the case of deposits) in local currency to 39.0% and, in the case of foreign currency, 39.5%.

This was the second rise of the year in these coefficients, which at the beginning of 2023 were at 10.5% and 11.5% respectively.

Year-on-year inflation in Mozambique in April slowed to 9.6%, its lowest level in 12 months.

The central bank justified the increase in coefficients with the need to “absorb excessive liquidity in the banking system [that has] the potential to generate inflationary pressure,” but the Confederation of Economic Associations of Mozambique (CTA) criticised the move, saying on Friday that the decision would make it even more expensive to obtain bank financing, which is essential in an economy of small and medium-sized enterprises (SMEs).

READ: Mozambique hikes bank’s reserve requirement ratios – Watch

Source: Lusa