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