Bank of Mozambique admits economy may have to ‘bleed’ to keep inflation in check

Bank of Mozambique (BM) administrator Silvina Abreu admitted this Friday in the face of criticism from businessmen that the economy may have to bleed in the short term due to monetary policy to curb inflation.

“We think it is necessary to allow in the short term a point where the economy – due to the consequences of monetary policy – ​​may, so to speak, bleed, but for the greater good,” he said in a meeting with the Confederation of Economic Associations of Mozambique (CTA).

“We are fighting for the subsequent effect to be a reduction in inflation, from which all economic agents operating in the market, including families, could benefit,” he added.

Asked if the peak of monetary policy measures has already been reached, Silvina Abreu did not answer.

We are talking about an increase in the required reserves that commercial banks must keep in the Central Bank: the regulator on Wednesday decided to raise the coefficients to 39% for liabilities (in the case of deposits) in the national currency and 39.5% in the case of deposits. foreign currency.

This was the second increase in a year, and at the beginning of 2023 they were 10.5% and 11.%, respectively.

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

BM justified the move “with the aim of absorbing excess liquidity in the banking system, which could cause inflationary pressures,” but businessmen believe the move will make it even more expensive to contract bank finance, which is essential in a small business economy. and medium-sized companies, which will have a harder time.

“We foresee many difficulties for [as empresas] can grow, prosper and benefit the economy,” Aldemiro Belchior, CTA’s vice president of policy and financial services, said at a meeting this Friday.

An increase in reserve requirements would increase interest rates, and debt service would “worse not only for those seeking credit, but also for those who are already benefiting.”

“Companies will be outraged” by the “significant increase” in reserve requirements, he said.

João Figueiredo, president of the Portuguese and Mozambique Chamber of Commerce, who has a career in Mozambican banking, said “there will be an increase in interest rates and a penalty for the entire economy”, including large companies and families.

“We are all paying for the consequences of this stubborn policy with inflation,” he added.

Despite acknowledging that there could be pressure in the short term, Silvina Abreu rejects the idea of ​​treating monetary policy as the main reason for the lack of credit in the economy.

“I would not like to be told that therefore no credit will be given to the economy, because there have already been other moments of lower inflation and there was no way forward either. [de crédito] banking sector into the economy,” he said.

“There will be other factors that we could safely test later that would result in the economy not being prioritized in terms of credit,” he said.

The administrator suggested that banks use more “creative” ways to make financing the economy viable.

“We are doing our part,” as a central bank, he said, or else it could be accused of “not playing that role and that inflation is above the desired level.”