Abstract
This Selected Issues paper on the Republic of Mozambique highlights that in the period 1987–97, the economy of Mozambique made impressive gains. Real GDP and exports grew on average by 6.8 percent and 15.6 percent, respectively, and the ratio of investment to GDP rose from 36.1 percent in 1987 to 45.2 percent in 1997. In the two years ended December 1996, the 12-month inflation rate fell dramatically from 70.1 percent to 16.6 percent.
V. Exchange Rates and External Competitiveness in Mozambique16
A. Introduction
53. Since 1987, when the government launched the Economic Rehabilitation Program (ERP), a number of structural reforms have taken place in Mozambique. Price controls were eliminated, wage determination became the subject of tripartite negotiations, trade was significantly liberalized, and the tariff structure was simplified. Most important, the exchange rate system was substantially modified. These events are likely to have had significant effects on the external competitiveness of Mozambique. The main purpose of this chapter is to review the evolution of the external competitiveness of Mozambique in the last decade.
54. Among the main elements having a bearing on external competitiveness are prices, wages, and exchange rates.17 The evolution of prices and wages have been covered in Chapters II and IV, respectively. Section B of this chapter briefly discusses the evolution of the exchange rate system and nominal exchange rates in Mozambique since 1987. The remainder of this chapter is organized as follows: Section C introduces some traditional competitiveness indicators, describing their advantages and disadvantages; Section D presents the results of the calculation of some of these indicators for Mozambique; and Section E presents the conclusions.
B. Exchange Rates
55. In 1986, the metical was grossly overvalued, and the exchange rate against the U.S. dollar in the parallel market was nearly 40 times the official rate; however, since mid-1993, the exchange rate has been market determined. The adjustment of the exchange rate toward market rates proceeded in steps. In January 1987, the metical was sharply devalued from Mt 39 per U.S. dollar to Mt 202 per U.S. dollar, and the exchange rate peg was changed from a basket of six currencies to the U.S. dollar. Devaluations continued at irregular intervals until April 1989, when a system of monthly devaluations was instituted. In December 1989, the exchange rate peg was changed again to a basket of ten trading partners’ currencies. In October 1990, a secondary market for foreign exchange was introduced with market-determined exchange rates. After another substantial devaluation in mid-1991, foreign exchange transactions began to be increasingly shifted to the secondary market. In April 1992, official and secondary market rates were unified, but a special (more appreciated) rate for tied aid was introduced. In June 1993, the special rate for tied aid was abolished.
56. From mid-1992 to mid-1995, the metical further depreciated but much more gradually than in previous years (Figure 6). Since late 1995, the nominal exchange rate has been relatively stable. The premium between the official and the parallel market rates has been less than 5 percent (Figure 6) since October 1996. An interdealer market was started in 1996, and its operations expanded in 1997.
Mozambique: Exchange Rate Developments, 1989–97
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Sources: IMF, Information Notice System; and Mozambican authorities.1/ Index based on exchange rates defined as US dollars per unit of local currency. Increase = appreciation.Mozambique: Exchange Rate Developments, 1989–97
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Sources: IMF, Information Notice System; and Mozambican authorities.1/ Index based on exchange rates defined as US dollars per unit of local currency. Increase = appreciation.Mozambique: Exchange Rate Developments, 1989–97
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Sources: IMF, Information Notice System; and Mozambican authorities.1/ Index based on exchange rates defined as US dollars per unit of local currency. Increase = appreciation.C. Traditional Competitiveness Indicators
57. A useful measure of competitiveness is the real exchange rate, whose movements are associated with changes in a country’s balance of trade in goods and nonfactor services. The real exchange rate is usually constructed by deflating the nominal exchange rate, by a price index such as the consumer price index (CPI), GDP deflator, export deflator, or cost indices like unit labor costs. The real exchange rate is also measured as the relative price of nontradable and tradable goods (Dornbusch, 1974).
58. Other more industry-specific indicators of competitiveness traditionally calculated are profitability-based indicators. These indicators measure whether any given country is becoming more or less profitable than that of another country. The construction of these indicators is usually based on the unit labor costs in manufacturing; therefore, these indicators mainly focus on assessing external competitiveness in the industrial sector.
58. The usefulness of each indicator in assessing competitiveness needs to be carefully considered. Each indicator has pros and cons, and no one indicator provides an unambiguous assessment of competitiveness. With respect to the price indices, CPI-based real exchange rates are easily available and cover a large range of products that are fairly comparable across countries (Turner and Van’t dack, 1993). In addition, since wages are often influenced by CPI developments, CPI-based real exchange rates could be a good proxy for developments in a country’s cost competitiveness. However, CPI-based real exchange rates also reflect taxes and other institutional distortions, include the prices of services, many of which are nontradable, and do not take directly into account a large portion of prices of tradable goods, like intermediate goods. Meanwhile, real exchange rates based on GDP deflators incorporate the ratio of the relative prices of nontradable to tradable goods at home and abroad and, accordingly, movements in important determinants of trade flows. However, these data are less frequently available and less accurately constructed. Export-deflator-based real exchange rates provide useful information on a country’s export performance and consequently on its trade balance; however, as they do not contain information relevant to assess import performance, these indicators may not fully incorporate the information on competitiveness needed to explain movements in the trade balance (Marsh and Tokarick, 1994).
59. Indicators based on relative prices of nontradable and tradable goods provide information on goods that are currently traded, as well as on goods that are potentially tradable, but these indicators may not be reliable, especially when growth in labor productivity differs across sectors of the economy (Lipschitz and McDonald, 1991). Furthermore, as real per capita income rises over time, the relative prices of nontradable goods will tend to rise, but this shift should not by itself suggest that the economy has suffered a loss of competitiveness.
60. Indicators based on unit labor costs provide information about underlying costs of production and are defined similarly across countries; however, they cannot detect changes in the prices of other components of production costs, such as capital and intermediate inputs, and they are subject to large measurement errors (Lipschitz and McDonald, 1991).
D. Competitiveness Indicators for Mozambique
61. In this section, competitiveness indicators based on prices, costs, and profitability indices are calculated for Mozambique. The choice of competitiveness indicators and the period covered are limited by the availability and accuracy of the data. Mozambique’s competitiveness is assessed taking into account these limitations, as well as the advantages and disadvantages of each indicator.
Price-based competitiveness
Using CPI, GDP, and export price deflators
63. Mozambique’s CPI-based real effective exchange rate (REER) vis-à-vis all its major trading partners18 was calculated for the period 1980–96 (Figure 7, top panel). The figure shows that from 1980 to 1986 Mozambique’s competitiveness weakened markedly (as indicated by an appreciation of the REER); the low point reached in 1986 was followed by a remarkable gain of 61 percent in 1987 over the 1986 level. During the period 1988–95, Mozambique continued to improve its competitiveness position although more gradually than in 1987.
Mozambique: Real Effective Exchange Rates, 1980–96
(Index, 1990=100)
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Sources: IMF, Information Notice System, and World Bank.Mozambique: Real Effective Exchange Rates, 1980–96
(Index, 1990=100)
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Sources: IMF, Information Notice System, and World Bank.Mozambique: Real Effective Exchange Rates, 1980–96
(Index, 1990=100)
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Sources: IMF, Information Notice System, and World Bank.64. The above-mentioned behavior reflects an increasing appreciation of the metical through 1986, followed by a large devaluation in 1987, and further depreciations of smaller magnitude afterward. Prior to the adoption of the ERP in January 1987, the official value of the metical, which was pegged to the dollar, was Mt 40 per U.S. dollar. In 1987, the average exchange rate was Mt 329.5 per U.S. dollar, and, by the end of 1995, the market rate had depreciated to Mt 10,890 per U.S. dollar. In 1996, the CPI-based REER slightly appreciated, even though inflation declined markedly from 54.1 percent in 1995 to 16.6 in 1996. This appreciation is explained by the sharp devaluation of South Africa’s rand (South Africa is Mozambique’s major trading partner) and the relative stability of the metical.
65. The real effective exchange rate based on the GDP deflator (Figure 7, middle panel), which was calculated based on the same trading partners and the same weights as the CPI-based REER, shows similar results. From 1980 to 1985, the REER based on the GDP deflator appreciated by 102 percent; in 1987, it depreciated by 51 percent, and from 1988 to 1995 it depreciated by 67.5 percent. The net result was a depreciation of almost 68 percent with respect to its level in 1980. Like the CPI-based REER, the GDP-deflator-based indicator suggests a slight weakening of Mozambique’s competitiveness position in 1996.
66. The real effective exchange rate based on the export deflator (Figure 7, bottom panel) shows an overall gain in Mozambique’s competitiveness over the period 1981–96, except in 1987. Unlike the previous indicators, the REER based on the export deflator shows a gain in competitiveness in 1996. This gain could be attributed to export price growth that was lower than the CPI growth. In fact, as shown in Figure 8, export growth did increase markedly in 1996 relative to the real imports of Mozambique’s major trading partners. However, the increase stemmed largely from the increase in exports of agricultural products brought about by the good weather conditions. If the depreciation of the REER based on the export deflator was mainly related to transitory factors, like weather conditions, an assessment of competitiveness based on such an indicator could be misleading.
Real Import Growth of Mozambique’s Major Trading Partners vis-à-vis Real Export Growth of Mozambique, 1981–96
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Real Import Growth of Mozambique’s Major Trading Partners vis-à-vis Real Export Growth of Mozambique, 1981–96
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Real Import Growth of Mozambique’s Major Trading Partners vis-à-vis Real Export Growth of Mozambique, 1981–96
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
67. One way to analyze whether such transitory factors may have affected the export-deflator-based indicator is to filter it using the Hodrick-Prescott filter, which permits an identification of the trend component of the series by removing transitory variations. The results suggest that the filtered, export-deflator-based REER devalued in 1996 (Figure 9)—an outcome that does not support the hypothesis that transitory factors may have been the main factor driving the 1996 improvement in Mozambique’s export competitiveness.
Mozambique: Normalized Real Effective Exchange Rates Using Hodrick-Prescott Filter, 1980–96
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Mozambique: Normalized Real Effective Exchange Rates Using Hodrick-Prescott Filter, 1980–96
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Mozambique: Normalized Real Effective Exchange Rates Using Hodrick-Prescott Filter, 1980–96
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
68. A price index of nontradable goods relative to tradable goods was calculated based on the CPI index for Mozambique, detailed by major commodity groups. Nontradable goods comprise health; transportation and communication; and education, recreation, and culture. Tradable goods comprise food, alcohol, tobacco, clothing, firewood and furniture, and other goods and services. Owing to the limited availability of data, the monthly index was calculated for the period December 1993- December 1997 (Figure 10). The relative price index showed a gain in competitiveness from December 1993 to February 1996 but then reversed direction until the beginning of 1997, when it started to stabilize.
Mozambique: Prices of Nontradable Goods Relative to Tradable Goods, December 1993- December 1997
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Sources: IMF, Information Notice System; and Ministry of Planning and Finance.Mozambique: Prices of Nontradable Goods Relative to Tradable Goods, December 1993- December 1997
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Sources: IMF, Information Notice System; and Ministry of Planning and Finance.Mozambique: Prices of Nontradable Goods Relative to Tradable Goods, December 1993- December 1997
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Sources: IMF, Information Notice System; and Ministry of Planning and Finance.A comparison with some neighboring countries
69. Mozambique’s competitiveness vis-à-vis its major trading partners deteriorated from 1981 to 1986, while the competitiveness of its neighboring countries—Botswana, Lesotho, Swaziland, and Zimbabwe—against their major trading partners remained relatively stable (Figure 11a, top panel). This tendency reversed after mid-1987 (Figure 11b, top panel), when Mozambique started to gain in competitiveness with respect to all other countries, except Zimbabwe.
Mozambique: Price-Based Competitiveness, 1980:Q1–1997:Q2
(Index, 1980: Ql=100)
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Source: IMF, Information Notice System.Mozambique: Price-Based Competitiveness, 1980:Q1–1997:Q2
(Index, 1980: Ql=100)
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Source: IMF, Information Notice System.Mozambique: Price-Based Competitiveness, 1980:Q1–1997:Q2
(Index, 1980: Ql=100)
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Source: IMF, Information Notice System.
Mozambique: Price-Based Competitiveness, 1987:Q2–1997:Q2
(Index, 1980:Ql=100)
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Source: IMF, Information Notice System.Mozambique: Price-Based Competitiveness, 1987:Q2–1997:Q2
(Index, 1980:Ql=100)
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Source: IMF, Information Notice System.Mozambique: Price-Based Competitiveness, 1987:Q2–1997:Q2
(Index, 1980:Ql=100)
Citation: IMF Staff Country Reports 1998, 059; 10.5089/9781451827040.002.A005
Source: IMF, Information Notice System.70. An important determinant of Mozambique’s CPI-based REER is its competitiveness vis-à-vis South Africa, its major trading partner.19 Mozambique’s competitiveness deteriorated considerably vis-à-vis South Africa (Figure 11a, middle panel) from the beginning of 1981 to the beginning of 1987, mainly because the nominal exchange rate was maintained at an artificially high level. However, it improved remarkably after mid-1987 (Figure 11b, middle panel), as the nominal exchange rate was brought to more realistic levels, and from 1992 on improved faster than that of Botswana, Lesotho, and Swaziland, and kept pace with that of Zimbabwe. Competitiveness vis-à-vis South Africa deteriorated slightly during 1996, as South Africa’s currency depreciated faster than Mozambique’s. However, this trend reversed again in 1997 as the rand and the metical stabilized and Mozambique’s inflation rate fell drastically.
71. Mozambique’s competitiveness against its other major trading partners, mostly the European Union and the United States, also showed a deterioration from 1981 to the beginning of 1987; this deterioration was followed by a remarkable improvement in 1987 when the metical was sharply devalued (bottom panel, Figures 11a and 11b). Since then Mozambique improved its competitiveness only slightly through 1992, reaching an almost stable position afterward. During 1996, Mozambique’s competitiveness weakened somewhat and further deteriorated in the first half of 1997, reflecting mainly the strong depreciation of the European currencies against the dollar. From 1992 onward, Mozambique was more competitive vis-à-vis its major trading partners, excluding South Africa, than were Botswana, Lesotho, and Swaziland, and it was broadly as competitive as Zimbabwe.
Cost-based competitiveness
72. The unit labor cost index (ULCI) for Mozambique was calculated for the period 1987–96 and compared with South Africa’s (Table 8). The index is defined as the ratio of the index of hourly compensation per worker in the industrial sector to the index of production per man-hour. Owing to weaknesses in the data, particularly their limited coverage, the results based on the ULCI must be considered with caution. Over the period 1987–96, Mozambique’s ULCI declined by 53 percent. The significant improvement in competitiveness in 1988 can be mainly attributed to the decline in labor costs relative to prices, which rose rapidly following the liberalization of prices at the end of 1987. In the period 1995–96, however, the decline of ULCI can be attributed mainly to the productivity that was gained after the privatization program began taking hold.
Mozambique and South Africa: Unit Labor Cost Index, 1987–96
(Index, 1987=100)
Mozambique and South Africa: Unit Labor Cost Index, 1987–96
(Index, 1987=100)
| 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Mozambique | 100 | 67 | 93 | 93 | 70 | 62 | 78 | 73 | 49 | 47 |
| South Africa | 100 | 120 | 135 | 155 | 178 | 206 | 225 | 243 | 252 | 263 |
Mozambique and South Africa: Unit Labor Cost Index, 1987–96
(Index, 1987=100)
| 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Mozambique | 100 | 67 | 93 | 93 | 70 | 62 | 78 | 73 | 49 | 47 |
| South Africa | 100 | 120 | 135 | 155 | 178 | 206 | 225 | 243 | 252 | 263 |
73. In contrast, the ULCI for South Africa grew by 163 percent from 1987 to 1996. This sharp increase was due to a rapid growth in labor costs, brought about mostly by South Africa’s effort to improve the balance of payments through an import substitution policy that relied extensively on import restrictions.
Profitability-based competitiveness in manufacturing
74. An indicator of profitability-based competitiveness for Mozambique was calculated by dividing the ratio of the CPI to the ULCI for Mozambique by the ratio of the CPI to ULCI for South Africa. This indicator measures whether Mozambique’s economy is becoming more profitable, compared with that of South Africa. As suggested by this indicator (Table 9), Mozambique’s profitability-based competitiveness improved remarkably during the period 1987–96. The rate at which Mozambique’s CPI growth outpaced its ULCI growth was higher than that of South Africa. In 1996, the level of Mozambique’s profit margins relative to South Africa’s was 64 times higher than in 1987.
Mozambique: Profitability Relative to South Africa, 1987–96
(Index, 1987=100)
Mozambique: Profitability Relative to South Africa, 1987–96
(Index, 1987=100)
| 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Mozambique | 100 | 240 | 235 | 348 | 615 | 1,022 | 1,148 | 1,990 | 4,372 | 6,463 |
Mozambique: Profitability Relative to South Africa, 1987–96
(Index, 1987=100)
| 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Mozambique | 100 | 240 | 235 | 348 | 615 | 1,022 | 1,148 | 1,990 | 4,372 | 6,463 |
75. In order to measure the external competitiveness of Mozambique within the South African market, a profit-based competitiveness indicator, estimated as the ratio of South Africa’s deflator in manufacturing to Mozambique’s ULCI, was considered (Table 10). According to this indicator, the gain of Mozambique’s competitiveness in the South African market was remarkable during the period under review: the 1996 level was six times higher than that of 1987. This improvement in Mozambique’s competitiveness is even more remarkable when compared with South Africa’s profitability, which remained generally flat during the period under consideration.
Mozambique and South Africa: Profitability in the South African Market, 1987–96
(Index, 1987=100)
Mozambique and South Africa: Profitability in the South African Market, 1987–96
(Index, 1987=100)
| 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Mozambique | 100 | 170 | 157 | 176 | 263 | 319 | 275 | 321 | 527 | 600 |
| South Africa | 100 | 94 | 108 | 106 | 103 | 96 | 96 | 96 | 102 | 106 |
Mozambique and South Africa: Profitability in the South African Market, 1987–96
(Index, 1987=100)
| 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Mozambique | 100 | 170 | 157 | 176 | 263 | 319 | 275 | 321 | 527 | 600 |
| South Africa | 100 | 94 | 108 | 106 | 103 | 96 | 96 | 96 | 102 | 106 |
E. Conclusions
76. On the basis of a set of indicators based on price, cost, and profitability indices, Mozambique’s competitiveness deteriorated sharply from 1980 to 1986, followed by an improvement through 1995. The evidence on Mozambique’s competitiveness in 1996 is mixed. Despite a dramatic reduction in inflation, the REERs based on the CPI and the GDP deflator show an appreciation, while the REER based on the export deflator indicates a gain in competitiveness. Different factors, as reflected by the different indicators, can account for this mixed evidence, including the sharp devaluation of the rand, the stabilization of the metical, and the strong increase in exports related mainly to favorable weather conditions.
References
Dornbusch, Rudiger, 1974, “Tariffs and Nontraded Goods,” Journal of International Economics, Vol. 4 (May), pp. 177–85.
Lipschitz, Leslie, and Donogh McDonald, 1991, “Real Exchange Rates and Competitiveness: A Clarification of Concepts, and Some Measurements for Europe,” IMF Working Paper 91/25 (Washington: International Monetary Fund).
Marsh, Ian W., and Stephen P. Tokarick, 1994, “Competitiveness Indicators: A Theoretical and Empirical Assessment,” IMF Working Paper 94/29 (Washington: International Monetary Fund).
Turner, Phillip, and Jozef Van’t dack, 1993, “Measuring International Price and Cost Competitiveness,” BIS Economic Papers, No. 39 (Basle, Switzerland: Bank for International Settlements).
This chapter was prepared by Stefania Fabrizio.
An exhaustive assessment of the competitiveness of a country would entail an investigation of the evolution of the country’s skills and resources, such as technology, communication, information, capital and credit facilities, foreign direct investment, consumer markets, and government facilities. In Mozambique, these skills and resources are very limited. Mozambique’s private sector is just emerging, and it is fairly inexperienced. Moreover, after decades of war, most sectors of industry and manufacturing are only now becoming operational and thus lack exposure to, and experience in, quality control, marketing, packaging, and modern management practices. This chapter does not address these important issues.
The partner countries and their relative weights for the calculation of the CPI-based REER are those used by the IMF’s Information Notice System.
South Africa accounts for almost a 30 percent weight in the effective exchange rate indices for Mozambique.
