Killing the goose that laid the golden eggs (Part 1)
When money was not important

At independence, banking was not a Frelimo priority. Banco de Moçambique (BdM; Bank of Mozambique) was created as the new central bank on 17 May 1975 by simply transforming the Banco Nacional Ultramarino, but it was more than two years before any further action was taken.

Private banks were hostile to the new government and were facilitating capital flight, particularly by Portuguese who had left the country, both by direct transfers of capital and by allowing payments for goods which were never delivered. The government finally nationalised all but one of the remaining banks on 31 December 1977.

Four banks were merged into BdM and two were merged to form Banco Popular de Desenvolvimento (BPD, People's Development Bank). Only Banco Standard Totta de Moçambique (BSTM) remained private. BdM became the only bank that could deal in foreign exchange and was the treasury, central bank, the controller of the state plan, and a commercial bank.

Frelimo took the view that in a centrally planned economy, material balances (tonnes of cement or metres of cloth) are the principal method of allocating resources and money loses its importance. The state budget financed capital expenditure, while the banking system financed deficits of enterprises (private, state and intervened).

In the first years of independence, the priority was to keep production going and not dismiss workers, despite the flight of Portuguese managers and technicians; state-controlled banks were instructed to finance the deficits of these enterprises to keep them running. As Marc Wuyts makes clear in his thesis "Money and Planning for Socialist Transition", this "was the most direct and effective instrument in the combat against economic sabotage. Far from being a destabilising factor, this policy was crucial in stabilising employment, preventing a further collapse in production, and preserving stable prices."

But this did mean extra money in circulation, and by 1980 it was clear that large quantities of banknotes were in the hands of speculators. One reason for the 1980 currency reform, which replaced the old escudo with the new metical, was to destroy large cash holdings which had not been deposited in banks.

With the start of the war the picture changed. The government printed money to finance the war and again banks were lending to cover enterprise deficits, in this case increasingly caused by the war. Excessive money creation fuelled the black market (then known as "candonga") and surplus money quickly moved into the hands of speculators and of a growing private commercial capital.

Banking procedures of the first decade of independence were not corrupt or dishonest; indeed, they were highly successful in keeping the economy going despite the sabotage and flight of the Portuguese and then the worsening war. But procedures were irregular in any normal sense of capitalist banking. So long as it was according to the plan, company deficits were covered by loans which were never expected to be repaid.

The overlap between the treasury and the banking system was total. When President Samora Machel was travelling, someone from the presidency would simply phone BdM or BPD and ask for thousands of dollars, in cash, for the delegation. The system worked because of the honesty, integrity, and good will of most of the people in the banking system. But even by the end of the Samora era, extravagance was creeping in, as presidential delegations going abroad took more money from the banks for shopping on foreign trips.
(Joseph Hanlon)

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metical - archives 2001