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IMF Country Report No. 21/91

REPUBLIC OF MOZAMBIQUE

TECHNICAL ASSISTANCE REPORT—INFLATION TARGETING AND MODEL-BASED MONETARY POLICY ANALYSIS

May 2021

This Technical Assistance report on the Republic of Mozambique was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in February 2021.

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TECHNICAL ASSISTANCE REPORT

REPUBLIC OF MOZAMBIQUE

Inflation Targeting and Model-Based Monetary Policy Analysis

February 2021

Prepared By

Kristin Gulbrandsen (Long-term Expert, MCM), Karsten R. Gerdrup, Kenneth Sæterhagen Paulsen, and Øistein Røisland (External Experts, Norges Bank)

Authoring Department:

Monetary and Capital Markets Department

Contents

• Glossary

• Preface

• Executive Summary

• I. Introduction

• II. The Current Situation

  • A. Monetary Policy Framework

  • B. Medium-term Projection Model (QPM) to Support IT

• III. Further Capacity Development and Technical Assistance

• Table

• 1. Key Recommendations

• Appendix

• I. Outline of the Program for the September Part of the Mission

Glossary

Preface

At the request of the Bank of Mozambique (BM), a Monetary and Capital Markets Department (MCM) Technical Assistance (TA) mission, comprising two one-week visits, took place in Maputo, Mozambique; the first on July 6–10 and the second on September 16–20, 2019. Kenneth Sæterhagen Paulsen was a short-term expert in July, while the mission team in September comprised of Øistein Røisland and Karsten Gerdrup. All the three experts are from Norges Bank. The MCM Resident Advisor in Mozambique on Central Bank Modernization, Kristin Gulbrandsen, led the mission. The mission is part of the Norwegian-funded, multi-year, central bank modernization program covering the main areas of central banking activities. Since October 2017, the modernization project has delivered missions on near-term forecasting, on monetary policy communication, on monetary policy implementation and FX policy, and also provided capacity building to improve the analytical skills and tools of the forecasting team and the sector experts. This mission was the fifth on Forecasting and Policy Analysis System (FPAS) under the program.

The experts worked daily with management and staff of the Department of Economic Research (DEE). The September mission also met with the Board member and Executive Director of Monetary Stability Directorate, Mr. Jamal Omar.

The mission wishes to thank the staff of the Bank of Mozambique for their warm hospitality, productive cooperation and candid discussions, making the mission effective as well as inspiring. Special thanks are given to Ms. Ilda Elizabeth Comiche, Mr. Pinho José Ribeiro, and Mr. Helder S. Armando.

Executive Summary

The purpose of the mission was to improve the understanding of the conduct of monetary policy in an inflation targeting (IT) central bank. During the September visit, the mission provided capacity building through daily morning seminars, giving an introduction to modern theory of monetary policy in small-open economies, and by performing monetary policy analyses based on BM’s quarterly projection model (QPM) in the afternoons. The target group was primarily the staff of the Department of Economic Research (DEE). However, a broader audience, with economists from departments¹ having a seat on the Monetary Policy Committee (MPC), participated in the theory-based seminars. The purpose of the July part of the mission was to make necessary preparation for the model-based monetary policy afternoon exercises in September. The expert worked hands-on with the forecasting team to develop a certain set of codes, including routines to perform impulse-responses, historical shocks decompositions, forecast error variance decompositions and recursive forecasting analysis. In addition, a series of other improvements in the QPM infrastructure was made. These procedures can be used by BM’s forecasting team to improve their understanding of QPM and to identify inadequate features and calibrations in the model. Thus, the improved infrastructure may enable the BM to experiment and further enhance development of the Forecasting and Policy Analysis System (FPAS).

During the mission, an outline of a seminar series for the MPC was discussed and drafted. The goal of the seminars will be to reach a common understanding of the monetary policy framework and the path towards IT and of the merits of the modeling system to support interest rate decisions. These seminars could be an important first step in developing a monetary policy strategy for BM.

Further technical assistance for maintaining and developing BM’s quarterly projection model QPM is needed. IMF/ICD provided TA for the years 2008–17. However, the BM has not received any further assistance since October 2017. The modernization project has so far mainly provided FPAS TA on near-term forecasting, but will adjust the program and assist the BM in making improvements in the QPM model and the forecasting process.

^{Table 1.}

Key Recommendations

¹Near term: < 12 months; Medium term: 12 to 24 months.

^{Table 1.}

Key Recommendations

Recommendations and Authority Responsible for Implementation	Priority	Timeframe1
DEE arrange seminars for MPC on; (i) the reforming of the monetary policy f ramework into a system closer to IT; and (ii) the merits of the modeling system to support interest rate decisions.	High	Near-term
Revise the modeling of the exchange rate in QPM	High	Near-term
Actively use tools introduced by the July and September missions to understand the features of QPM and suggest improvements in the model	High	Near-term

¹Near term: < 12 months; Medium term: 12 to 24 months.

View Table

^{Table 1.}

Key Recommendations

Recommendations and Authority Responsible for Implementation	Priority	Timeframe1
DEE arrange seminars for MPC on; (i) the reforming of the monetary policy f ramework into a system closer to IT; and (ii) the merits of the modeling system to support interest rate decisions.	High	Near-term
Revise the modeling of the exchange rate in QPM	High	Near-term
Actively use tools introduced by the July and September missions to understand the features of QPM and suggest improvements in the model	High	Near-term

¹Near term: < 12 months; Medium term: 12 to 24 months.