I've seen a lot of mods answer non-meta questions. Actually, to be elected a moderator, it helps to have answered a lot of questions, both meta and normal.
There are no restrictions, except for time. There's only 24h in a day and mods simply can't do everything. Heck, there's a lot of users that moderate more than they're answering. Which is fine, since Stack Exchange is supposed to be community moderated. Moderators simply moderate more, with more responsibility and some heavy tools to help.
You can find our current list of moderators here. Just to give a couple of examples:
Note that all of them have hundreds of answers, rolfl even has over 1300. True, not all of them were written while a moderator, but I'm hoping to squash your idea that moderators don't answer non-meta questions. They do. Just not as often as they'd like to since they got a lot of other things to do. Like moderating. And other things in life (yes, they have one).
Are mods allowed to answer non-meta questions?
Yes.
Are they just focusing on meta questions and close/report flags and not having enough time to answer?
Not just on meta questions. Moderating consists of a lot more than lurking on meta. But basically, yes, a lack of time is one of the major reasons.