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WorldMarch 2 2015

Mozambique's CBG targets inclusive growth

Mozambique's economy has performed strongly in recent years, and the country's central bank governor, Ernesto Gove, describes how he intends to build on this growth with, among other things, more liberal investment policies, while also ensuring that opportunities are open to local businesses and profits benefit the entire population. 
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As statements of confidence go, the Mozambique central bank’s brand new headquarters, currently under construction on the Avenida de 25th Setembro in central Maputo, is a pretty obvious one. Set for completion in 2016, the high-rise, glass-encased structure will be one of the tallest in the neighbourhood, projecting a successful image and helping to spruce up the centre of the capital.

“It’s a bit like Caeser’s wife,” confides one senior ex-employee of the bank. “She has to stay beautiful to match public expectations.”

For now, the Banco de Mocambique resides in an austere, ageing building next door. It is led by Ernesto Gove, who was named African Central Banker of the Year for 2015 by The Banker. Despite the exciting changes under way at the bank, and the success of Mozambique’s booming economy, Mr Gove retains a cautious outlook.

“The rapid growth of our economy brings a lot of challenges,” he says. “We have to maintain this growth in a safe and secure fashion.”

From the bottom up

In each of the past two years, Mozambique’s gross domestic product (GDP) has expanded by about 7.5%, and is expected to repeat this performance in 2015, making it one of the most dynamic economies in Africa. Overall, GDP has risen fourfold since the turn of the century, and now stands at just less than $16bn. Mr Gove and his colleagues have managed to tame inflation to 3%. Average capital adequacy among the country’s banks remains high at just over 15%. Infrastructure projects are improving communications in the country’s vast rural areas, and Maputo thrums to the noise of new building work.

The country also stands on the verge of a natural resources boom, with massive, newly discovered natural gas fields adding to the coal seams already mined in the Tete region. For Mr Gove, this leads directly to the second important challenge facing his organisation – making sure that economic growth benefits as many in Mozambican society as possible.

‘Financial inclusion’ is the touchstone of most of the central bank’s policies. Aware that domestic Mozambican banks do not have the muscle to provide direct finance to the incoming natural resource projects, Mr Gove wants the satellite industries that will surround natural gas and coal activity to be financed locally in an affordable manner.

“Small and medium-sized enterprises will play a significant role in providing the logistics to support larger development projects and generating employment for Mozambicans,” he says. “Our banks must contribute to help their growth.”

To make this happen, Mr Gove is focused on stoking competition in the financial sector to reduce lending rates. Currently, 18 commercial banks operate in Mozambique, but more than half of total bank assets are shared between just two – Millenium BIM and BCI. The vast majority of Mozambicans do not have bank accounts, presenting an opportunity for smaller lenders to widen their deposit bases and offer more affordable products.

It seems that extra competition will be injected by foreign banks setting up shop in the country. “We have a number of applications from foreign banks in the pipeline,” says Mr Gove. “Global banks are interested in coming to Mozambique and offering a whole range of services, from investment banking to retail operations. They see the opportunities on offer from the discovery of natural resources, and they will bring the latest technologies and quality of service to the sector.”

The applications are currently under review and a decision is likely to be made on many of them some time this year.  

Liberal measures

Mr Gove’s push for cheaper borrowing costs seems to have borne some fruit. Interest rates on bank loans to companies have fallen from an average of 20% to an average of 16% to 17% in the past year or so, with a select few companies able to secure financing for as low as 14%.

The central bank is also making reforms to improve pricing in the money markets. Its main concern is widening the pool of brokers currently permitted to act as intermediaries for Mozambique government debt. “The brokerage role is currently played by commercial banks. When the government issues bonds, the commercial banks buy them, and then pass them on to the secondary market. Pricing in the secondary market therefore depends on what volume of these bonds the banks want to pass on,” says Mr Gove.

He hopes to end this conflict of interest by allowing more financial market participants to act as brokers, which will increase money market liquidity and help generate a local currency long-term yield curve. The central bank is also reducing the number of different maturities offered on government bonds from four to two, and lengthening the maturity of those remaining.  

The central bank has also partly liberalised Mozambique’s capital controls system, allowing foreign firms to bring money in and out of the country through a current account. It has also moved to boost local currency liquidity. Exporters must now hold at least 50% of their earnings in Mozambican meticals, rather than being allowed to hold 100% of their earnings in foreign currency, as before. Mr Gove also indicates that he and his colleagues are exploring the use of exchange rate taxes to discourage individuals and firms from divesting themselves of meticals while in the country.

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Read more about:  Africa , Mozambique