Mozambique’s central bank has signalled a decisive shift in monetary policy, tightening liquidity conditions as inflation risks intensify despite a weakening economy grappling with floods, industrial disruption, and mounting debt pressures.
The move highlights a growing dilemma confronting many frontier economies: how to combat inflation imported through global energy markets without further undermining fragile domestic growth.
The Bank of Mozambique’s Monetary Policy Committee (MPC) left its benchmark MIMO policy rate unchanged at 9.25% following its latest meeting, marking a second consecutive pause after an aggressive easing cycle that saw rates cut 12 times over the past two years.
But while policymakers refrained from raising rates, they effectively tightened monetary conditions through another channel.
The central bank announced a 1,000-basis-point increase in reserve requirements on local-currency deposits, lifting the ratio from 29.0% to 39.0%, while maintaining reserve requirements on foreign-currency liabilities at 29.5%.
The decision reflects growing concern that inflationary pressures are building faster than previously anticipated.
The bank said the decision to keep rates unchanged “reflects the persistence of heightened uncertainty regarding the duration of the conflict in the Middle East and its spillover effects on supply chains and the supply of goods, as well as on international and domestic fuel and food prices.”
It added that it was acting “to sterilize excess liquidity within the banking system, which could otherwise exert inflationary pressure.”
The policy shift marks a notable change in tone for a central bank that spent much of the past two years focusing on supporting economic activity as inflation subsided.
The MIMO rate stood at 17.25% as recently as September 2022 before policymakers embarked on a sustained easing cycle beginning in January 2024.
Now, however, the inflation outlook is deteriorating.
The central bank warned that medium-term inflation projections have been revised upwards and could reach double-digit levels, citing fuel price adjustments and rising transport costs.
Annual inflation accelerated to 4.4% in April from 3.4% in March. More worrying for policymakers, food inflation surged to 10.24%, with fruit and vegetable prices rising 18.97% compared with a year earlier.
Core inflation, which excludes volatile food and administered prices, increased only marginally to 4.67%, suggesting broader inflationary pressures remain relatively contained for now.
Yet the bank’s latest economic outlook indicates that inflation expectations are beginning to drift higher.
Oil shock collides with economic weakness
At the centre of the central bank’s concerns lies oil.
Mozambique’s medium-term assumptions, aligned with international forecasts, project Brent crude prices averaging above $100 per barrel this year, underscoring the extent to which geopolitical tensions in the Middle East are reverberating across economies thousands of kilometres away.
For Mozambique, a net importer of petroleum products, the implications are immediate and widespread. Higher fuel costs feed directly into transport, agriculture, fisheries, manufacturing, construction and logistics — sectors that form the backbone of the country’s non-gas economy.
At the same time, the country’s export earnings are facing growing pressure.
While Mozambique has increased export volumes in some sectors, weaker international commodity prices have eroded revenues.
Coal exports have suffered from declining global prices, while lower natural gas prices have continued to weigh on earnings from the energy sector.
The result is a widening squeeze on the country’s external position as import costs rise while export receipts struggle to keep pace.
The near-term growth outlook offers little comfort. According to the central bank, the Purchasing Managers’ Index fell to 49.8 in April, slipping below the 50-point threshold that separates expansion from contraction.
The bank said growth prospects excluding liquefied natural gas production point to weaker economic activity during the second quarter of 2026, reflecting higher fuel prices and disruptions linked to the shutdown of the Mozal aluminium smelter.
The closure represents one of the most significant industrial setbacks Mozambique has faced in years.
South32, the Australian mining company that holds a majority stake in Mozal, placed the operation into care-and-maintenance mode on March 15 following six years of unsuccessful negotiations over electricity supply arrangements.
The economic consequences are substantial
Mozal contributes roughly 4% of national GDP, accounts for an estimated 13% of manufacturing output and generated approximately $1.1bn in aluminium export revenue in 2024, equivalent to around 15% of total goods exports.
The shutdown is believed to have ended contracts with about 20 suppliers and displaced at least 2,000 workers directly, with broader knock-on effects affecting an estimated 21,000 additional jobs.
The disruption comes on top of severe flooding that swept through southern and central Mozambique between late December 2025 and the first quarter of 2026.
According to UNICEF, the floods were the worst in a generation, affecting more than 724,000 people and devastating agricultural production across seven provinces. Ultimately, however, it is Mozambique’s debt burden that continues to cast the longest shadow over the economy.
In February, the International Monetary Fund classified the country’s public debt as both unsustainable and in distress.
