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Cablegate: Mozambique: Macro-Economic Stability And

VZCZCXRO7557
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHTO #1112/01 2570943
ZNR UUUUU ZZH
R 140943Z SEP 07
FM AMEMBASSY MAPUTO
TO RUEHC/SECSTATE WASHDC 7948
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC
RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY

UNCLAS SECTION 01 OF 02 MAPUTO 001112

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EAID EINV MZ
SUBJECT: Mozambique: Macro-economic Stability and
Strong Growth


MAPUTO 00001112 001.2 OF 002


1. This report on MozambiqueQs macro-economic
situation draws largely from a recent presentation
by the IMFQs Resrep in Mozambique. As of September,
Mozambique continued on track with core inflation in
line with expectations although headline inflation
spiked temporarily. Overall annual inflation is now
anticipated to be slightly more than 8 percent, which
is above expectations, but down from 9.4 percent at
the end of 2006. The Bank of Mozambique (BM) reduced
both its standing lending facility and the standing
deposit rates. Real interest rates for treasury
bills dropped nearly five percent between April and
the end of August 2007. The foreign exchange market
remains stable and calm after the BM fully restored exchange rate
flexibility in June 2007. While
positive, these indicators belie weaknesses in
sustainability, as growth has come largely from mega
projects as opposed to being based on growth in small
and medium enterprises.

Interest Rates Drop
--------------------

2. The Bank of Mozambique (BM) reduced its standing lending
facility (FPC) by 200 basis points to 15.5
percent and the standing deposit facility (FPD) by
250 basis points to 10.5 percent in early June. This
came in reaction to a downward adjustment in treasury
bill yields and softening inflation. These actions,
in conjunction with a recent increase in the
twelve-month headline inflation rate, reduced the
real interest rate for treasury bills by nearly 5
percent between April and August 2007--from 10.8
percent at the end of April to 5.9 percent at the
end of August.

Headline Inflation Spikes, Core Inflation Stable,
Overall Reduction Expected
--------------------------------------------- ---

3. Headline inflation increased and is now expected
to remain slightly above eight percent in 2007. If
expectations are correct this will be a decrease from
9.4 percent at the end of 2006. Inflation this year
reflects a more than twenty percent rise in domestic
fuel prices and is tempered by a containment of core
(nonfood and other energy) inflation in the five to
six percent range. Inflation in June, July and
August rose by 0.61 bringing the accumulated
inflation (January-August) to 4.5 percent. Bread
(0.14 percent), rice and onions (0.08 percent) and
live chicken (0.07 percent) were main contributors
to AugustQs inflation increase.

Foreign Exchange Stable; Transparency and Credibility
Enhanced
--------------------------------------------- ---------

4. The Central BankQs auction rate on August 29, 2007
was 26.10 Metical (Mt) per US dollar against 26.15 at
the start of the year. In November 2005, the Central
Bank introduced bands in both the auction and the
foreign exchange interbank (MCI) markets; the Central
Bank removed these bands in June, completely
restoring exchange rate flexibility. Reaction was
minimal and the market remained calm. The real
effective exchange rate appreciated, reflecting the depreciating
U.S. dollar and increasing foreign
inflows. Approval and electronic dissemination of
a long-term monetary policy strategy document
enhanced transparency and credibility. The
creation of a new Monetary Policy Committee has the
potential to do the same.

Comment: Positive Indicators, yet Sustainability
an Issue
--------------------------------------------- ----

5. While these numbers suggest continued economic
growth for Mozambique, there is much discussion
within the private sector regarding sustainability.
Large scale, mega-projects have brought impressive
numbers on paper. However, for Mozambique to
continue this growth, and for the growth to bring
actual change to the lives of the majority of
Mozambicans, there must be a sustainable growth of
small to medium size enterprises (SMEs). Private
sector representatives argue that a clear economic development
strategy and support for the business environment and SMEs are

MAPUTO 00001112 002.2 OF 002


absolutely necessary as
Mozambique moves forward with SADC integration.
To date, this vision has not been forthcoming.

Chapman

© Scoop Media

 
 
 
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