Mozambique Resorts to Foreign Exchange Curbs as Metical Divesby and
Currency is Africa's second-worst performer this year
Spending limits ill-advised, says Rencap's Robertson
Mozambique has resorted to exchange controls in a bid to stave off a currency crisis, after running down its foreign reserves to defend the metical to little avail.
Mozambicans will be limited to charging 700,000 meticals ($13,600) a year on their credit and debit cards when shopping abroad, the southern African country’s central bank said by e-mail late Monday. The cap was an “exceptional” measure necessitated by the strain the global commodities rout had placed on the economy, Ernesto Gove, the bank’s governor, said Nov. 30 when he first announced the plan.
The metical has plunged 36 percent against the dollar this year, the most of 23 African countries monitored by Bloomberg after Zambia’s kwacha. The central bank burned through almost $1 billion of the country’s reserves in a fruitless bid to try and defend the currency, New York-based risk advisers Eurasia Group said in a report last month.
“The central bank is clutching at straws a bit at this point, having seen that using their already-limited foreign exchange reserves is almost futile against a concerted slide of the metical,” Hanns Spangenberg, a fixed-income analyst at NKC Independent Economists in Paarl, South Africa, said by e-mail. “We expect the Mozambican currency to continue to weaken in coming years due to the country’s very wide current-account deficit.”
Other African countries have raised interest rates rather than tightening capital controls in a bid to bolster their currencies and fend off inflationary pressures caused by the rising cost of imports. An exception is Nigeria, Africa’s largest oil producer, which has choked off supply of foreign exchange to banks and their customers to defend the naira, effectively pegging the value of the currency.
Such interventions are ill-advised, according to Charles Robertson, global chief economist at Renaissance Capital in London.
“Capital controls are not going to raise the price of commodities and resolve fiscal challenges,” he said by e-mail. “A weaker currency means that foreign direct investment and export receipts go further in local-currency terms. In general, we think letting markets find fair value is the best policy course.”
Nuno Rosario, an information technology consultant based in the capital, Maputo, said the new curbs would largely affect wealthy Mozambicans who shop in neighboring South Africa.
“This measure will have unseen consequences,” Rosario said in an interview. “Shops will refuse to swipe Mozambican cards, forcing Mozambicans to travel with cash and leading to an increase in robberies.”
Mozambicans racked up $800 million in credit- and debit-card transactions abroad last year, more than double the $300 million they spent in 2012, according to the central bank’s Gove. That equates to more than half of the country’s 2014 exports of about $1.5 billion, he said.
Gove is the only person authorized to discuss the capital controls and he was in a meeting and unavailable to comment, the central bank said Tuesday.
A global slump in commodities prices has reduced Mozambique’s earnings from exports of coal, gas, sugar and cotton. The country is waiting for Anadarko Petroleum Corp. and Eni SpA to commit to developing huge gas finds in the offshore northern Rovuma basin that could transform the nation into one of the world’s three biggest liquefied natural gas suppliers in the next decade.
Mozambique’s government has itself to blame for the country’s current economic woes, because the previous administration overspent and took on too much debt, according to Robert Besseling, principal Africa analyst at IHS Country Risk. The only way to prevent a further deterioration in its finances would be for the government to restructure debt and do more to ensure the giant gas projects proceed, he said.
“It is highly unlikely that curbs on credit card spending abroad will be able to stave off a financial collapse, even if such measures are properly implemented,” Besseling said by e-mail from Johannesburg.