Ernesto Gouveia Gove: Central Bank of Mozambique's review of 2006 and
prospects for 2007
Speech by Mr Ernesto Gouveia Gove, Governor of the Bank of Mozambique, on the occasion of the
2006 Financial Year Closing Ceremony, Maputo, 20 December 2006.
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Distinct Members of the Board of Directors of the Banco de Moçambique
Distinct Presidents and Representatives of Commercial Banks and Financial Institutions
Dear Guests
Ladies and Gentlemen,
First of all, I would like to thank you, on behalf of the Board of Directors of the Banco de Moçambique
and personally, for your presence in this traditional meeting of the end of the year in which we make
the first analysis of the financial year ending and present our perspectives for the 2007 financial and
economic year.
Introduction
The year 2006 was marked by important events for the country and our institution. The agreement on
the reversion of Cahora Bassa Hydroelectric (HCB) plant to the Mozambican Government was indeed
an event with an historic and economic dimension. Under this agreement, the Mozambican
Government became the holder of 85% of the shares of that important undertaking, which empowers
the government greater autonomy to make use of the HCB immense potential for social and economic
development of the country as well as the whole SADC region.
We congratulate our Government for this important victory and hope that Cahora Bassa becomes,
more and more, a strong instrument of promotion of national interests and implementation of the
national strategy of internal development and in the context of Southern African region.
In 2006, the IMF Board, World Bank and African Development Bank, decided to include Mozambique
in the list of poor countries, which benefited of debt relief, in the context of Multilateral Debt Relief
Initiative, widely known as MDRI. For our country, this decision meant a write-off of about USD 2
billion in the stock of external debt, being USD 1.3 billion from the World Bank, 540 million from the
African Development Bank and 154 million from the IMF. This gesture encourages us and confirms the
commitment of the international community in relation to the performance of the Government in the
implementation of PARPA (Plan of Action for the Reduction of Absolute Poverty) and macroeconomic
stability and development programs. With this forgiveness, the ratios of Mozambique external position
become greatly improved, allowing the Government to resort to external financing, on the basis of a
criteria based management indebtedness, to pursue the multiple purposes of its development program
and fight against absolute poverty.
The international recognition of the Government positive performance was once more expressed by
the International Monetary Fund (IMF) when on December 18th, 2006, approved the PRGF program
(Poverty Reduction and Growth Facility) that Mozambique has with that multilateral financial institution,
a fact that offers good perspectives for the consolidation of international cooperation.
It is worth referring to the changes that took place at the top management level of our institution during
the present year. On this occasion, I would like, once again, to express our tribute to Dr. Adriano
Maleiane who until mid of the present year was the Governor of the Banco de Moçambique. This
recognition is extended to the colleagues of the Board of Directors who have also retired. They left a
legacy of unselfish work in favour of our institution and the Mozambican financial system that we are
all invited to preserve and to deepen.
We would also like to praise the Associação Moçambicana de Bancos (Mozambican Association of
Banks) for, most recently, having achieved a consensus in relation to a code of conduct for all its
members.
Main goals for 2006
At the end of the last year, when we met in this same venue, we announced that our performance in
2006 aimed at contributing to the success of the Government's agenda, established in the Economic
and Social Plan and Government Budget, documents that pointed out to 7.9% economic growth, 9.5%
average inflation and an external position measured by gross international reserves equivalent to four
months of imports of goods and non-factorial services. Our intermediary objectives pointed out to
14.5% money supply and a growth of the credit to the economy in line with the GDP nominal growth.
At that moment, we explained that our agenda for 2006 would basically comprise multi-faced actions
aimed at implementing the Law no 7/2005, which defines the Conversion Rate of the Metical of the
New Family.
Performance of the monetary and foreign exchange policy
Ladies and Gentlemen
We began the year 2006 in an adverse international environment, due to the oil price volatility, which
in the present year reached a new historic record of about USD 78/barrel. Fortunately, the signs
reported this part towards the end of the year give us a certain optimism.
Preliminary information, based on data of the first semester of 2006, pointed out that the Mozambican
economy may experiment a real growth around 7.9%. Moreover, differently from the last years, GDP
growth was influenced by the construction, mining, transports and communication, and cattle-raising
activity sectors, which revealed themselves to be more dynamic and with greater relative contribution
than the major projects. That is really positive for our growth sustainability, as it results from the
activity of small and medium enterprises, which greatly absorb resources and local labour force and,
which has greater impact on the process of the fight against absolute poverty and reflect the
diversification of the productive activity in the country.
As we know, the main mission of our institution is to ensure price stability. The evaluation we make is
that inflation recorded a stable behaviour in 2006, compared with the year 2005, even taking into
account that it was characterized by three different moments. Until April, we observed a rising trend of
prices, period in which the annual variation rate peaked to 17%. Between May and August inflation
slowed down, having the monthly variations been successively negative, prompting the annual rate to
decline to 10%, the lowest level observed in the whole year.
Seasonally, at the end of the year, inflation tends to rise. However, the Consumer Price Index (CPI)
monthly variation in November differs from that of the similar period of 2005, which makes it possible
to record one-digit cumulative inflation at the end of 2006, even if in terms of average rate, we stand
slightly above the projections of the beginning of the year.
The main instrument of monetary policy we use to restrain and maintain inflation under control were
the Interbank Money Market operations supported by a strong vigilance over the requirement of
compulsory reserve, which stand at 11.51% and by the rise of our intervention interest rate announced
at the end of the first semester.
The oil price rise in the international market had a considerable impact on fuel and related products
domestic prices. This factor influenced the inflation, but the combination of policies by different
macroeconomic management institutions and the performance of real sector of the economy have
allowed to soften this shock.
In 2006, the National Institute of Statistics (INE) introduced a new CPI basket, changing the year-base
for 2004 and adjusting the weighing factors of several products comprising the basket. We
congratulate the INE for this effort that reinforces the comparability of our statistics with those of other
SADC countries, thus contributing to a greater integration of our economies.
After a year of clear disturbances, in 2006, the Metical revealed to be well more stable against the
main currencies traded in various segments of the foreign exchange market. The exceptional
measures announced late 2005 revealed to be important to abate the market and endow it with
greater discipline and professionalism. We would like to praise the results obtained with the
adjustments undertaken in the whole chain of the complex process of fuel imports, in order to stabilize
the exchange rate. The Metical depreciation in relation to the USD in 2006 was less than 10%, against
27% recorded in 2005; in relation to the Rand, our currency inverted the loss of 11% recorded last
year, as it appreciated by about 3.3%.
The Banco de Moçambique continued to be the main supporter of the Interbank Foreign Exchange
Market (IFEM), in terms of foreign currency sales, having to date allocated a total of USD 435 million
net, in auctions and bilateral sales, against 393 million recorded in 2005. The foreign exchange market
witnessed an increased confidence among its operators and this is proved by the increased volume
and frequency of foreign exchange transactions among commercial banks, which peaked to 181.4
million in 2006, against 39.5 million in 2005.
External sector developments (BoP)
Ladies and Gentlemen
According to information reported to September 2006, our Balance of Payments shows encouraging
results. However, it still depends significantly on external support, making us more exposed to
exogenous shocks, whose macroeconomic impacts are not always easy to predict.
Our Country is totally dependent on imports of liquid fuels. The rise of Brent price in the international
market results prejudicial in the behaviour of domestic inflation and international reserves. The fuel bill
until September 2006 had amounted to about USD 300 million, against 218 million recorded in 2005.
This figure worries us, taking into account that our exports, excluding the mega projects effect, are of
only USD 600 million, in other words, about a half of the country export revenues are set to finance
fuel bill.
Until September 2006, Mozambique current account deficit had improved 38% compared with the
similar period of 2005, if we include mega projects, and 9% excluding the operations of such projects.
In the overall, we continue to import more than we export, having the amount of imports risen 23% in
the first nine months of the current year, amounting to about USD 2 billion, whereas that of total
exports amounted to USD 1.750 million.
Thanks to a relatively more dynamic growth of goods export than that of imports, the imports coverage
rate by exports improved again, representing 89.4% in September 2006, including mega projects (10
percentage points rise in comparison with the similar period of 2005), or 32.9%, when excluding mega
projects.
Even though, this level may be considered low, requiring additional efforts in order to promote greater
diversification of exports, which must be done via increased production aimed at replacing imports, a
condition to reduce the strong external dependence of our economy.
In turn, the coverage ratio of imports of goods and nonfactorial services by gross international
reserves stood at 4.7 months in November, above the four programmed months, including the mega
projects.
Ladies and Gentlemen
One of our objectives is to foster a sound, strong and competitive financial system. In the period under
analysis, we improved the evaluation instruments of the risk of financial sector through CAMEL
methodology - Capital, Asset Quality, Management Quality, Earnings and Liquidity.
Financial system and banking supervision
Available data showed that, in the overall, our institutions are more sound and robust today, with the
main indicators evolving positively and with more encouraging perspectives. The level of capitalization
of the institutions continues to grow, standing at a position that can be considered satisfactory.
The improvement of the soundness of financial system indicators reflects a combined effort of the
Central Bank through the banking supervision and that of the credit institutions in strengthening their
internal management and control processes.
We can assert that today our system is more prepared to face several risks that the financial activity
brings about. In effect, the ratio of non-performing loan reduced to 3.6%, while the solvency ratio grew
to 16.7%, against the minimum of 8% required, according to the Basel I Convention terms or 12%
under Basel II terms.
Metical of the New Family
Simultaneously, we continued to undertake efforts aiming at modernizing our payment systems. The
process of implementation of the Law No 7/2005, regarding the introduction of the notes and coins of
the Metical of the New Family began on July 1st, 2006, contributed to the fulfillment of this objective.
We launched a broad advertising and civic education campaign addressed to resident citizens and our
expatriates, about the details of this process.
We praise the involvement of everyone, credit institutions, the local authorities, community leaders and
the media, in the campaign of the Metical of the New Family, process running calmly, with no
disturbances, having the notes and coins of the Metical of the New Family been accepted widely. We
are grateful for having achieved, until now, a rate of substitution of the notes and coins of the former
families of the Metical by that of the New Family above 85%, expecting it to stand above 90% by the
end of the year, which is a really satisfactory level for our conditions.
We would like to remind all the citizens that as from January 1st, 2007, the notes and coins of the
former families of the Metical will no longer have a legal tender for any payment, otherwise they should
be deposited or exchanged at any banking institution. Therefore, I would like, once again, to invite
everyone to change the former families of the Metical by that of the new family through the
commercial, banking and financial services existing in the country.
Such as established in the Law, during 2007 the currency exchange should be done at the commercial
banks, but even so, the people who by serious reasons are unable to change their money during this
period, they will have the opportunity to do it at the Banco de Moçambique until 2012.
Moreover, we would like to stress that as also prescribed in the Law, December 31st, 2006, marks the
end of the use of the register designation "MTn" and the return to the designation "MT", as well as the
end of the mandatory double indication of prices in force since March 31st, 2006.
Territorial expansion (branches)
Ladies and Gentlemen,
The strategy defined by the Government setting districts as the poles of planning and development of
our economy, brings increased challenges to the financial sector. We are expected to give our
contribution towards this objective, expanding our services throughout the national territory, especially
to the less favoured areas but with enormous wealth and business potential.
The financial sector should be sensible to the current low saving indices that the country records,
which require pragmatic initiatives to encourage saving habits on our population. The increased
demand of credit to finance public and private investment projects requires more dynamism in financial
savings.
On December 15th, 2006, we inaugurated the first branch of the Banco de Moçambique, in Quelimane
city and within a few days we are going to Maxixe with a similar purpose. In the coming months we are
going to open Tete, Pemba and Lichinga branches. This decision opens a new era in the activity of the
Mozambican financial system and within our performance philosophy, as the issuing and supervisory
bank of the financial and non-financial institutions.
With this measure, we showed a great sign to the banking system on the urgent need to do our best in
order to enlarge the financial services and decentralisation of banks throughout the country.
The branches of the Banco de Moçambique will enable our mission in terms of issuance and
circulation of notes and coins of good quality, modernization of the national payment systems,
reduction of storing costs and transport of notes and coins by commercial banks, enable the
Government financial operations, in the context of the Treasury single account and more decentralized
financial administration, as well as everything related with licensing, support and supervision of
microfinance institutions. Our branches are being open in a decisive stage of the process of introduction of
the Metical of the New Family.
We were pleased to note that in 2006 some credit institutions expanded their branch network and
financial services throughout the country, which we encourage recognizing its importance in fostering
savings.
Together with the Ministry of Finance we will continue to devise strategies and measures aimed at
minimizing constraints that today are pointed out by the national banking system as impeditive of a
greater territory expansion and extension of financial services outside the main cities. The presence of
banks in districts is going to foster the necessary savings for investments that the country really needs
in order to face the millennium challenges, related to the fight against poverty.
Ladies and Gentlemen,
The Parliament has just analysed the Economic and Social Plan of the Government and the Budget
for 2007, two important instruments of economic policy. In those instruments the Government
envisages 7% real growth and 8% annual average inflation. For such purpose, our intermediate
objectives will be set for 17.5% money supply, measured by the variation of stocks of the greater
monetary aggregate (M3) and an expansion of Reserve Money, our instrumental variable, not above
14.5%.
In 2007, we will continue to deepen the reforms underway in the interbank monetary and foreign
exchange markets, the main instruments of execution of our monetary policy. Once set the foreign
exchange market stability, we assume to have the conditions created for a gradual removal of the
transitional measures introduced in November 2005. We have just approved a new regulation of the
Interbank Foreign Exchange Market (IFEM).
This normative instrument introduces procedures that were object of a long process of negotiation with
commercial banks, namely: (i) inclusion of an adhesion requirement and obligation to quote firm to a
reference amount of USD 50.000 (fifty thousand American Dollars), to a maximum of one call per day;
(ii) enlargement of the spread between bit and offer rates, from the current 10 Ctn (ten cents) to 20
CTn (twenty cents); (iii) definition with greater detail of the bilateral operations with the Central Bank;
(iv) enlargement of the variation maximum limit of the daily rate to 1%, which appears reasonable for
greater flexibility of the IFEM operators in the whole business environment, where the foreign
exchange stability continues to be our major interest.
In order to offer greater credibility and transparency to the management of monetary policy, as well as
to conform to the international good practices on the matter, after a long process of preparation, which
included, among other aspects, the design of forecasting models and support monetary analysis to
decision making, our committee on monetary policy is going to change its format and content, as from
next year.
The model we are going to adopt will address special attention to communication with the public, with
the purpose of disseminating the nature of measures that the Central Bank takes, throughout the
market and the whole society, signalling more clearly the monetary policy pursued in the present and
future, which will certainly help the process of formation of economic agents expectations.
The year 2007 is decisive for the implementation of the International Financial Reporting Standards
(IFRS), thus marking the end of a transition process began in 2004. For such purpose, the banking
supervision is going to address a future risk approach, conforming with the international practices on
the matter.
As from February 2007, the Banco de Moçambique will start performing the clearance of visa network
credit cards issued by national banks, with the purpose of ensuring that (i) all domestic transactions
performed in Meticais using cards issued by national banks, members of Visa are settled in Meticais,
(ii) the role of the Metical as national currency is reinforced, (iii) the foreign exchange risk is reduced,
(iv) transactions performed with Visa payment cards are accompanied and recorded; (v) the absence
of a single payment network is partially fulfilled, and (vi) the ATMs (Automated Teller Machines) and
EFT/POS (Point of Sale) services are enlarged.
At the regional level, we will continue to give our contribution so that the objectives of macroeconomic
convergence and integration defined by the SADC (Southern African Development Community) are
achieved, particularly with respect to inflation, harmonization of procedures and legal framework that
governs the central banks of the region.
Within the African continent, as a member of the Association of African Central Banks (AACB), we will
continue to contribute to the objective of the creation of a central bank of the continent.
Final remarks
Ladies and Gentlemen,
We would like to express our profound recognition of the valuable contribution that all national
economic agents, the society in general and the international community has been giving us in order
to fulfil our mission, particularly in respect of the formulation and execution of a monetary policy in
conformity with the objectives of economic growth, with low inflation.
Allow me to address special thanks to the employees of the national financial system and in particular,
to the collaborators of the Banco de Moçambique, for their devotion and commitment demonstrated
during the year.
I finish wishing you all and your distinct families, Merry Christmas and a prosperous New Year.
Thank you very much.