Identifying Determinants of FX Stability in Mozambique

IMF Working Papers, November 8, 2024

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In early 2021, as monetary policy tightening reversed a multi-year trend of Metical depreciation, the exchange rate vis-à-vis the US dollar de facto stabilized.
The report discusses elements of the market structure and other drivers of Metical stability since mid-2021.
The particularities of Mozambique, a small open economy with an export sector that has a strong foreign currency cost structure, provide important insights into that discussion, as does the structure and development of the Foreign Exchange (FX) market.

Monetary policy tightening in early 2021 coincided with a reversal of a multi-year Metical depreciation trend and de facto exchange rate stabilization vis-à-vis the US dollar.
Market structure elements and other drivers are central to understanding Metical stability since mid-2021.
Mozambique’s economic particularities that matter for FX stability:
- Small open economy status.
- An export sector with a strong foreign currency cost structure.
The structure and development of the Foreign Exchange (FX) market are identified as important factors shaping FX outcomes.

Subjects: Currencies, Currency markets, Exchange rates, Financial markets, Foreign exchange, Imports, International trade, Money
Keywords: Central Bank Policy, cost structure, Currencies, Currency markets, development of the foreign exchange, Exchange Rate Regimes, Exchange rates, Foreign Exchange Stability, FX Market Structure, FX stability, FX supply, Global, Imports, Market Intervention, market participant, Mozambique, MZN exchange rate fluctuation, reference rate