Strong currency hurting Mozambique, IMF says

MAPUTO – An overvalued currency is putting Mozambique’s economic growth at risk by making its exports too expensive and uncompetitive, an International Monetary Fund (IMF) report said on Tuesday.

The report said the Mozambique currency, the metical, was up to 41 per cent overvalued in the 12 months to March 2009.’Substantial currency overvaluation in Mozambique has the potential to significantly impede its economic development,’ said the report, a working paper which while published by the IMF does not necessarily reflect its views.’In the absence of offsetting factors, this will raise the trade and current account deficits, draining official foreign exchange reserves and jeopardising external stability,’ it added.A strong currency which makes exports too expensive will also likely boost what become cheaper imports, putting the country’s balance of payments and then the wider economy under strain.The report said Mozambique needed to sell goods at competitive prices because the main products it exported – tobacco, sugar, cotton, prawns and cashew nuts – were weather-sensitive and subject to external shocks.Mozambique experienced a decade of eight per cent annual growth after its 16-year civil war ended in 1992, leading some to call it a development success story.But the country still lingers fifth from the bottom on the United Nations Human Development Index, which ranks countries based on quality-of-life data.Mozambique also relies on foreign aid for more than 50 per cent of its government budget, according to the UN.The report said there was a link between the twin problems of foreign aid dependence and chronic under-development.’Paradoxically, high aid inflows can ultimately lower living standards if appreciation of the currency stifles economic development, fostering continued aid dependence,’ it said.The report recommended using monetary policy to gradually bring down the value of the metical and restore its competitiveness against Mozambique’s trading partners.It said the global economic crisis, which has reduced inflationary pressure, would allow Mozambique the opportunity to rein in its currency by cutting interest rates without at the same time unleashing rampant inflation.Lower interest rates in a specific currency mean holders get less of a return, thereby undercutting its value. – Nampa-AFP

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