Mozambique

Mozambique became independent in 1975 after a long liberation struggle, with a colonial legacy monetary system. It soon asserted its autonomy within a rough and ineffective framework of central planning, with increasing monetary expansion and depreciation, before embarking on a difficult period of transition towards a more market-type economy. By the end of the period its monetary policy was focused more on inflation and its instruments were largely indirect, though not fully coherent or effective.

YearsTargets and attainmentClassification
1975-76[NB no IMF consultations before 1985] at independence in June 1975 currency is Mozambique escudo, at parity with Portuguese escudo; coins previously had been issued by Treasury and banknotes by local branch of Portuguese commercial bank; latter taken over 1975 by new central bank, which continues its central and commercial bank operations; small banking system had been mainly serving Portuguese settlers who now departpure exchange rate fix PERF
1977-86[NB no IMF consultations before 1985] currency fixed to trade-weighted basket from 1977 when Portuguese escudo depreciates strongly, with gentler depreciation; poor economy, developed in colonial period to serve neighbouring economies (transport infrastructure, labour for South African mines); post-independence, in context of severe shortage of skilled and administrative labour, government aims to implement central planning with nationalisations and wide-ranging price and trade controls (and emphasis on health and education spending); costly civil war of varying intensity and economic damage 1976-92; 1978 three failing commercial banks absorbed by central bank, leaving development bank and one foreign-owned commercial bank; central bank employs poorly observed indicative credit controls, provides rediscount facilities and sets but rarely changes interest rates, in context of large fiscal deficits partly financed by domestic banking system; new currency metical replaces escudo at par 1980, and continues to depreciate, less gradually; 1980s is period of negative economic growth, increasing monetary expansion, currency substitution, sharp rise in external debt, growth of parallel markets in goods, and much larger depreciation in parallel forex market; 1975-86 total depreciation vs SDR c. 50%; by 1983 recognition of need for more pragmatic policies, but security conditions hinder change; statistics very weak but improvingunstructured discretion UD
1987-2017January 1987 metical devalued massively and pegged to USD, further large devaluation June 1987, each followed by large price rises, as central plank of ‘rehabilitation’ programme (including substantial structural reform), while credit policy tightened (with shift from plan-based credit allocation to commercial criteria) and interest rates raised; further large devaluations 1988, and more frequent but smaller devaluations 1989-90, parallel forex market premium declines but remains over 100%; secondary floating exchange rate from late 1990; April 1992 most forex transactions moved to secondary forex market, further depreciation, parallel premium reduced; 1991-2 serious drought; peace negotiations not completed until late 1992; 1990-92 long process of separating commercial and central bank functions of central bank, institutional separation end-1992; further forex policy liberalisation 1994, rate now floating but managed; by 1996 some banks privatised, some new (mainly foreign-owned) banks, new interbank forex market, payments system improvements; 1997 interbank money market set up, treasury and central bank bills issued; over time monetary authorities put more emphasis on inflation, while monetary instruments shift towards use of interest rates, plus open market operations for liquidity management, and reserve requirements; early 2000 serious flooding; long process of bank restructuring; 2005 standing facilities to form corridor for treasury bill rate; 2005 forex market auctions increase flexibility and provide means for controlling liquidity, but temporary bands to counter short-term volatility; new metical July 2006 = 1000 old meticais; 2010-11 depreciation and spike in inflation from world commodity prices, but otherwise relatively little effect from GFC; from 2012 development of repo and government securities markets with bonds functioning as security in interbank money market; use of bank accounts by population low but now rising; renewed security issues from 2013 (RENAMO, resolved 2018-19), and from 2015 (Islamic State group); central bank inflation and liquidity forecasting upgraded; 2016 hidden bank debt to some state-owned enterprises disclosed; designated policy rate from 2017, transition to new monetary policy regime under way but current arrangements not always or fully effective; statistical database better by end of period  loosely structured discretion LSD

Selected references: The Economy of Mozambique, 1975, pp12; RED 1985 pp1-5, 33, 36-7, 49; SR 1985 pp2-14, 17-18, 19; RED 1986 pp3, 37-40, 59-61; RED 1987 pp15-18; SR 1987 pp6-10; SR 1988 pp5-10; RED 1991 pp53-4; RED 1993 pp26-7, 32, 33-4; SR 1995 pp4-5; RED 1996 pp21; SR 1999 p9; SR 2000 pp9, 10-12; SR 2002 pp5, 17; SR 2003 pp5, 13-14; SR June 2005 p7; SR 2007 pp6-8, 24-5; SR 2009 pp8, 14; SR 2013 pp16, 18, 42-3; SR 2015 pp9-11, 21-2, 24, 26; SI 2018 pp4-16; SR 2018 pp4, 14.

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