Monday, May 27, 2024

ʺA look at the potential risks of political influence on monetary policy decisionsʺ

The Organic Law of the Bank of Mozambique defines the primary objective of monetary policy as preserving the value of the national currency, which is reflected in low and stable inflation. At international level, central banks have recently adopted a restrictive monetary policy with a view to containing inflation, with emphasis on the increase in the prices of the main commodities due in part to the geopolitical conflict between Russia and Ukraine, in a context in which the debates around the contribution of fiscal policy to inflation stability have intensified.

The central bank, faced with the prospect of high inflation, adopted a restrictive stance, increasing the market reference rates in order to contain domestic demand and reduce the monetary multiplier in the economy, which led to a high cost of living for the population and weak investment by the private sector due to limitations in access to credit and financing. In addition, in the foreign exchange market, the central bank decided to cut the subsidy on fuel sales, meaning that commercial banks now fully cover the demand for foreign currency from petrol stations, negatively impacting on the availability of foreign currency in the foreign exchange market, although the metical remains stable against the dollar.

As of the second half of 2023, there has been a reduction and stability in inflation to levels of 4%, reflecting the successful implementation of the Bank of Mozambique’s monetary policy. Currently, there has been a relaxation of the restrictive monetary policy aimed at ensuring greater monetary circulation. The main reference rates have been falling and tend to continue at this pace until the end of the year, keeping inflation stable and low.

With the upcoming election period, the risk of political interference in the monetary policy decision-making process will tend to increase, but the Bank of Mozambique must resist these pressures, guaranteeing its independence for the sake of price stability.

This political influence can have negative effects on the economy, such as the risk of increased internal and external indebtedness, with an increase in the issuance of treasury bills and bonds and defaults on its international financial obligations, and the risk of unstable and unpredictable inflation, which is harmful because it reduces the possibilities for investment and savings, and leads to irrational consumption.

Furthermore, the country may find itself in a situation where it doesn’t have the necessary buffers for possible natural shocks and political instability at national and international level.

In a scenario in which the outlook for inflation remains controlled and low, the tendency to relax restrictive monetary policy is welcomed by both sides, including the government, as it will allow fiscal policy to be conducted better.

On the other hand, in a situation of medium and high inflation prospects, it is important that the Central Bank once again adopts a strict restrictive monetary policy, with an increase in reference rates and control of monetary liquidity, as well as guaranteeing the necessary levels of international reserves, even if these measures contribute to a slowdown in economic growth in the short term and in the medium and long term to the growth of the economy and the well-being of the population.

This decrease in economic growth, impoverishment of the population and increase in unemployment in the short term may not sit well with the government, especially against the backdrop of the current presidential elections. It is therefore necessary to be very prudent in order to avoid possible financial collapse in the medium and long term.

Extreme coordination between fiscal and monetary policy is extremely necessary if inflation is to succeed, especially in times of political elections.

By: Paulo Matavela

Brief Profile

Post-graduate degree in Business Management from the University of the Witwatersrand – Johannesburg, Degree in Financial Management.

Financial and Risk Manager, experience in the banking sector and Telecommunications, as well as Financial Consultant (financial services and capital markets), Coaching and Mentoring, Certification in Financial Modeling and Valuation Analyst course, Management Development Program by W-Consulting South Africa.

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