## 1. Adjustment Scenario

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**Canonical URL:** [1. Adjustment Scenario](https://www.imf.org/-/media/files/publications/cr/2018/cr1865.pdf)

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---

### Background and macroeconomic context
- Growth slowed from 6.6 percent in 2015 to 3.8 percent in 2016 and is projected to barely reach 3.0 percent in 2017.
- Hidden debt: about $1.1 billion (Proindicus and MAM) and $0.3 billion of smaller bilateral loans — total $1.4 billion (~11 percent of 2015 GDP); Ematum borrowing of $0.85 billion discovered in 2014.
- Overall 2017 fiscal deficit (modified cash basis) estimated at around 8.2 percent of GDP (compared to 7.6 percent of GDP in 2016).
- Public sector debt-to-GDP reached 128.3 percent at end-2016 (including domestic debt of 24.6 percent of GDP).
- Sovereign external arrears on public and publicly guaranteed external debt reached $709.7 million by end-2017, including $94 million under bilateral discussions (Libya, Iraq, Angola, Bulgaria and Poland).

### Recent developments and sector vulnerabilities
- Inflation and monetary:
  - Maputo inflation index: 7.2 percent (y/y) in December; broadly-based index 5.7 percent (from 26 percent in November 2016).
  - Average inflation remained 15.3 percent in 2017.
  - BM shifted operational target to MIMO in April 2017; eased policy rate by 225 basis points to 19.5 percent in December; reserve requirements reduced by 150 basis points to 14 percent.
  - Policy rate reached 12 percent in real terms in December 2017.
- Credit and financial sector:
  - Y/y domestic credit contracted by 12 percent in nominal terms (December 2017); domestic currency deposits grew by 13 percent till November.
  - NPLs more than doubled to 11.4 percent in September 2017.
  - Reported regulatory capital-to-risk weighted assets ratio: 20.2 percent in September 2017.
  - Two bank resolutions in 2016: Moza Banco (6 percent of assets) official administration; Nosso Banco (less than 1 percent of assets) liquidated.
- External sector and reserves:
  - Current account deficit narrowed in 2017 helped by a one-off capital gain tax ($350 million or 2.8 percent of GDP) from sale of 50 percent of ENI’s stake in Coral South to Exxon Mobil and a 12.7 percent of GDP megaproject current account surplus driven by coal exports.
  - Non-megaproject exports of goods fell by almost 8 percent and imports grew by 3.3 percent y/y in 2017.
  - Net FDI in non-megaproject economy fell to about $1.3bn in 2017 (half of $2.6bn in 2015).
  - International reserves at end-2017 equivalent to 5.5 months of non-megaproject imports.
  - Gross international reserves (end of period) SEI Table values: 1,988; 2,532; 2,808; 2,823; 2,619; 2,447; 3,447; 2,876; 3,083; 3,079; 3,092; 4,304.

### Outlook and risks (Baseline, no further policy action from 2018)
- Real GDP: expected to further decelerate; inflation to remain at current levels.
- Fiscal deficit would expand, accumulate domestic arrears, and crowd out private sector.
- Banking sector health would deteriorate with rising NPLs.
- Non-megaproject current account deficit expected to widen from 2018 and remain elevated — around 30 percent of GDP (or 17 to 18 percent of GDP when adjusting for imports of domestic firms used to supply mega-projects).
- Absence of a real depreciation could result in loss of reserves.
- Debt sustainability:
  - External debt rating assessed as “in distress”; total public debt on an unsustainable path.
  - PV of external PPG debt to GDP largely exceeds the 40 percent prudent threshold for about eight years under baseline (no restructuring).
  - External debt service to government revenues averages about 30 percent over the medium term.
  - Domestic debt reached about 25 percent of GDP in 2017; PV of total public debt-to-GDP expected to peak at 126 percent by 2022 (benchmark 56 percent).
- Risks (broadly balanced):
  - Downside: deterioration in security; further loosening of expenditures; increased debt service from loss-making SOEs; unavailability of domestic financing; delays in megaprojects; policy inaction reducing confidence.
  - Upside: recovery in commodity prices; new oil and gas discoveries; resolution of hidden debt issue; reengagement with donors; start of natural gas production toward 2023.

### Adjustment scenario — policy alternative
- Key policy elements:
  - Fiscal tightening targeting a zero-primary balance by 2022 through spending and tax measures (mostly elimination of tax exemptions).
  - Gradual depreciation in the real effective exchange rate.
  - Cautious normalization of monetary policy with further cuts aligned with fiscal consolidation and an inflation target of 5-6 percent over the medium term.
  - Structural reforms including governance and accountability action plan.
- Expected impacts:
  - Improved fiscal and external balances; creation of fiscal space for social and development needs; reduced arrears; downward path for domestic debt.
  - Return of confidence and strengthened banking regulation would crowd-in private credit and reduce government borrowing costs.
  - Near-term growth limited by fiscal retrenchment; medium-term growth improved by monetary normalization, correction of overvaluation, and FDI inflows.
- SEI scenario selected exact indicators (annual percentage change or percent of GDP):
  - Real GDP growth (Baseline): 2016: 3.8; 2017: 3.0; 2018: 3.0; 2019: 2.5; 2020: 2.4; 2021: 2.3; 2022: 2.2.
  - Real GDP growth (Adjustment): 2018: 2.8; 2019: 3.0; 2020: 3.3; 2021: 3.8; 2022: 4.4.
  - CPI (end of period, Baseline): 2017: 21.1; 2018: 7.2; 2019: 6.5; 2020: 5.5; 2021: 5.5; 2022: 5.5.
  - CPI (Adjustment path): 2017–2022 convergence: 5.8, 6.8, 6.5, 6.2, 6.0, 5.8.
  - Credit to the economy (annual change): 2016: 12.6; 2017: -10.4.
    - Baseline 2018–2022: 2.9; 2.8; 2.7; 2.3; 2.1.
    - Adjustment 2018–2022: 6.3; 7.6; 8.4; 10.1; 10.9.
  - Overall balance after grants (modified cash basis, percent of GDP): 2016: -7.6; 2017: -8.2.
    - Baseline 2018–2022: -7.5; -10.8; -9.9; -9.6; -10.6.
    - Adjustment 2018–2022: -7.1; -7.1; -5.1; -3.5; -3.2.
  - Primary Balance after grants (percent of GDP): 2016: -4.6; 2017: -4.5.
    - Baseline 2018–2022: -3.2; -5.1; -5.5; -6.4; -7.6.
    - Adjustment 2018–2022: -2.8; -1.8; -1.1; -0.3; 0.0.
  - Total nominal public debt (percent of GDP): 2016: 128.3; 2017: 112.0.
    - Baseline 2018–2022: 121.6; 130.0; 136.5; 142.1; 145.9.
    - Adjustment 2018–2022: 125.4; 127.2; 129.3; 131.8; 130.1.

### Policy priorities
- Urgent need to rebalance policy mix to ensure durable macroeconomic stability while enhancing growth and reducing poverty and inequality.
- Core priorities:
  - Fiscal adjustment to restore sustainability and align deficits with financing availability while containing public debt.
  - Normalization of monetary policy and addressing financial sector challenges.
  - Strengthening governance and transparency; address institutional weaknesses and corruption underlying hidden loans; advance structural reforms for growth and employment.

*Italic: Source — IMF staff report — "1. Adjustment Scenario" (excerpted content).*

---

### 2018 Budget and Staff Assessment

### 2018 budget objectives and composition
- Budget target: overall deficit (after grants) of 3.8 percent of GDP.
- Budget assumptions:
  - GDP growth of 5.3 percent.
  - GDP deflator of 10.5 percent.
  - Non-resumption of direct budget support by donors.
  - Higher transfers: 0.6 percent of GDP (mostly military pensions and social protection).
  - Higher election spending: 0.6 percent of GDP.
- Budget measures:
  - New excises (e.g., soft drinks, plastic bags).
  - New customs and tariffs (e.g., surcharges on imports of electrical conductors, new telephone call service rates).
  - Wage bill measures: reductions in specific allowances and bonuses.
  - The 2018 budget does not incorporate full debt service obligations on external and domestic debt.
- Budget table (percent of GDP) — Budget vs Proj.:
  - Total revenue: Budget 22.5, Proj. 22.1
  - Tax revenue: Budget 18.8, Proj. 18.6
  - Nontax revenue: Budget 3.6, Proj. 3.5
  - Total expenditure and net lending: Budget 27.9, Proj. 30.9
  - Current expenditure: Budget 18.5, Proj. 22.0
  - Compensation to employees: Budget 9.3, Proj. 11.1
    - Social Insurance: Budget 0.0, Proj. 0.5
  - Goods and Services: Budget 3.1, Proj. 4.1
  - Interest on public debt: Budget 3.3, Proj. 4.3
    - Domestic: Budget 2.0, Proj. 2.3
    - External: Budget 1.4, Proj. 2.0
  - Subsidies and Transfers: Budget 2.8, Proj. 2.5
  - Capital expenditure: Budget 8.0, Proj. 5.6
    - Domestically financed: Budget 3.3, Proj. 3.2
    - Externally financed: Budget 4.7, Proj. 2.4
  - Net lending: Budget 1.4, Proj. 3.2
  - Overall balance before grants: Budget -5.4, Proj. -8.8
  - Grants received: Budget 1.7, Proj. 1.3
    - budget support: Budget 0.0, Proj. 0.0
  - Overall balance after grants: Budget -3.8, Proj. -7.5
  - Primary balance after grants: Budget -0.4, Proj. -3.2
  - Memorandum: Nominal GDP (Billions of Meticais) Budget 992, Proj. 875

### Staff assessment and alternative projections
- Staff view: 2018 budget targets are unlikely to be achieved.
- Staff estimate for 2018 overall deficit (considering slower growth, conservative yields for measures, and full debt service): overall deficit would reach 7.6 percent of GDP (down from 8.2 percent of GDP in 2017).
- Staff estimates of budget measures:
  - 0.4 percent of GDP in new excise tax measures.
  - 0.1 percent of GDP in specific taxation on mining and petroleum activities.
  - 0.3 percent of GDP in wage bill savings measures.

### Medium-term anchor and fiscal multipliers
- Staff recommended anchor: target a zero-primary balance by 2022.
  - Financing assumption: no recourse to central bank overdraft and no accumulation of arrears.
  - Achieved through a combination of spending and tax measures.
- Fiscal multipliers assumption: 0,5 (staff assumption).

### Adjustment scenario required yields by measure (Percent of GDP)
- All measures: 2019 3.5, 2020 4.5, 2021 6.2, 2022 7.4
- A. Tax revenue measures: 2019 1.9, 2020 1.9, 2021 1.9, 2022 1.9
- B. Wage bill rationalization measures: 2019 0.9, 2020 1.6, 2021 2.3, 2022 2.7
- C. Other measures: 2019 1, 2020 0.7, 2021 1.0, 2022 2.0

### Staff-identified measures to support objective
- Revenue measures:
  - Broaden tax base and improve revenue administration.
  - 2018 Budget measures: Review the Excise Tax Code (ICE); specific taxation on mining and petroleum.
  - Staff proposals: Remove VAT exemptions per FAD TA; revise VAT refund mechanism by clearing backlog through securitization and funding a sub-account with a fixed percentage of VAT receipts to repay new VAT refund claims.
- Spending measures:
  - Wage bill rationalization and other expenditure controls sourced from IMF TA; remaining unidentified measures could come from wage bill, revenue administration, and other tax policy.
- Timing constraint:
  - Tax base or rate changes approved during the year take effect next year; hence only further spending cuts feasible in 2018.

---

### Social Protection, Arrears, and Cash Management

### Social protection (Box 2)
- Non-contributory programs:
  - PSSB (Programa Subsidio Social Basico): main cash transfer for elderly and disabled.
  - PASP (Programa de Acção Social Produtiva): public works for extremely poor households.
  - PASD (Programa de Apoio Social Directo): temporary support for poor households with adults temporarily unable to work.
- Coverage and spending:
  - Households covered increased from 287,000 in 2011 to 549,565 households in 2017.
  - Coverage still relatively low: around 19% of people living below the poverty line.
  - PSSB benefits: range from 310 Meticais (around $5) per month for individuals to 620 Meticais (around $10) per month to elderly people with four dependents.
  - 2018 budget allocation for PSSB: increase from around 1.7 billion Meticais in 2017 to around 3.2 billion Meticais in 2018.
  - Overall spending on all three programs set to increase by around 2 billion Meticais (or around 0.2 percent of GDP) in 2018.
  - Increase mostly implies higher benefit amounts rather than number of households (households covered set to increase by around 12 percent).
  - Overall cost remains low, below 0.5 percent of GDP.
- Staff recommendations to mitigate impact:
  - Increase social assistance spending.
  - Streamline targeting (e.g., proxy means tests).
  - Institute a single registry of beneficiaries and integrate into e-INAS.
  - Adopt a formal electronic payment system via outsourcing for cash-based benefits.

### Domestic arrears, cash management, and expenditure control
- Stock of domestic arrears: around 3.7 percent of GDP at end 2016.
- Priority: validate arrears and gradually clear them after discussions with creditors and agreement on clearance modalities.
- 2018 Budget measures: reduce some bonuses and allowances.
- Staff short-term measures to contain wage spending growth:
  - Contain wage growth, streamline allowances and bonuses, curtail overtime pay, use attrition.
- Medium-term structural reforms:
  - Structural pay reforms; systematic review of compensation; functional reviews and restructuring; strengthen wage bill budgeting, execution and control.
- Recommendations to prevent new arrears:
  - Address cash management flaws; timely record spending in information management system at each spending stage; enforce budget ceilings; optimize government liquidity management.

---

### Financial Sector: NPLs, Sensitivity, and Reforms

### NPL deterioration, provisioning, and sensitivity (Box 4)
- NPLs doubled to 11.4 percent in September 2017 (average since end-2016).
- Causes: enhanced credit risk supervision; slow economy; rise in real interest rates; public sector arrears.
- In December 2017, the BM deposit facility earned 7 percent in real terms.
- Provisioning: 79 percent of NPLs composed of:
  - 58 percent specific provisions (down from 78 percent at end-2016),
  - 11 percent general provisions,
  - 10 percent prudential provisions beyond IFRS requirements.
- Sensitivity analysis (2018-19) under three scenarios (baseline; low credit growth with fast NPL increase; credit recovery): all scenarios require material provisioning and additional capital; system remains solvent though buffers eroded and some banks require capital.

### Sovereign and SOE exposures
- Bank exposure to sovereign risk: estimated 25 percent of total assets by end September 2017.
- Ten largest non-financial SOEs experienced rising losses in 2016; about half have substantial debt overhang.
- If banks fully provision for SOE debt at risk, banking system CAR would drop by about 5 percentage points to 16 percent, with a few banks close to or below minimum required ratio.

### Bank resolution framework and central bank law recommendations
- Weaknesses in legal framework complicated Moza and Nosso Banco resolutions.
- Staff encouraged authorities to:
  - Establish policy for independent governance and adequate surveillance.
  - Prepare a divestment strategy for Moza.
  - Enhance BM resolution powers via new bank resolution framework.
  - Strengthen deposit insurance scheme.
- Central bank law (1992) permits interest-free yearly loans up to 10 percent of revenue collected in penultimate year; staff recommend banning or strictly limiting credit to government in new law.

### Monetary operations, liquidity, and FX policy
- BM changed operational target to MIMO in April 2017; MPC to pace MIMO rate cuts amid rapid disinflation and fiscal risks.
- Liquidity management challenges: absence of BM-issued securities for policy sterilization; reduced reserve requirements; banks near sovereign risk exposure limits; FX interventions create sterilization needs.
- Staff recommendations: be cautious in lowering reserve requirements; remove restriction on banks' access to standing lending facility (only twice a week); explore issuing certificates (CDs) for monetary policy.
- FX law reform (December 2017): exporters and investors may keep 100 percent of proceeds in foreign currency (previously 50 percent); staff suggest considering higher reserve requirements on FX deposits and minimum FX liquidity requirements.

### Regulatory and prudential measures (selected, with dates)
- Adopted MIMO rate (April 2017).
- Revoked limit for credit card use abroad (April 2017).
- Changed reserve requirement base to monthly average (June 2017).
- Broadened investor base for primary T-bills (June 2017).
- New FX market regulation (December 2017).
- Increased minimum capital adequacy ratio to 12 percent and minimum social capital to Mt. 1.7 billion phased to 2020 (April 2017).
- Introduced minimum liquidity ratio 25 percent of short-term liquid assets (June 2017).
- Required banks to publish quarterly selected FSIs (effective March 2017).
- Introduced Standardized Prime Interest Rate (‘Indexante Unico’) with Mozambique Bank Association (effective June 2017).

---

### Debt Sustainability, External Position, and DSA Findings

### Re-classification and key DSA numbers
- Risk rating of Mozambique’s external PPG re-classified to “in distress”.
- PV of external public debt in terms of GDP projected about 67 percent in 2017 (Baseline), threshold 40 percent; projected to remain above threshold until 2026 under baseline.
- PV of debt in terms of exports: 2016 level 238 percent; 2017 about 176.7 percent; projected peak about 248.4 percent in 2022.
- PV of debt in terms of revenues: 2016 about 330 percent; expected to fall to 265 percent in 2017; remain above prudent threshold for almost eight years.
- External public debt service in terms of revenues: about 27 percent in 2017; projected to peak at Mozam Eurobond redemption at 44 percent; falls below 20 percent threshold in 2026.
- External public debt expected to peak in 2023 at 370.8 percent of GDP under baseline assumptions.

### External arrears and default status
- Mozambique in default, accumulating external arrears since 2016.
- Stock of external arrears (End-2017, Millions of U.S. dollars):
  - Commercial debt total: 592.86
    - Mozam: 97.90
    - MAM: 343.06
    - Proindicus: 151.90
  - Bilateral debt: 116.80
  - Total: 709.66
- Arrears under bilateral discussions: $94 million (Libya, Iraq, Angola, Bulgaria and Poland); arrears about $23 million to Brazil on a $125 million state-guaranteed borrowing.
- Contractual penalty fees on missed payments not yet included in arrears estimate used in baseline.

### Megaproject assumptions and risks (LNG, ENH)
- ENH holds 15 percent in Area 1 (Anadarko-led); planned development cost ~ $25 billion (about $15 billion debt financed); ENH liable for 15 percent (~guarantee could be about $2¼ billion).
- ENH holds 10 percent in Area 4 (ENI-led); planned development cost ~ $7 billion (about $4.5 billion debt financed); ENH’s 10 percent share ~ $700 million.
- DSA includes ENH shares without increasing gross financing needs because debt service expected to be serviced from project revenues.
- Ensuring LNG production materializes is crucial to return debt ratios to prudent levels.

### External position and REER assessments
- EBA-lite indicates overvaluation in range of 15 to 20 percent over the medium term absent new policy action.
- REER movements: depreciated ~32 percent between end-December 2014 and end-December 2016; appreciated ~8 percent in 2017.
- EBA-lite results (selected):
  - Current Account Approach 2017: current account gap -8.4 (percent of GDP) → Overvaluation 23.9 (percent).
  - External Sustainability Approach 2017: current account gap -9.2 → Overvaluation 26.3 (percent).
  - Index REER Approach (2017): Overvaluation -11.5 (percent).
  - EBA concludes metical overvalued 15 to 20 percent medium term (2018–2023); misalignment expected to decline by 2025 as LNG production starts.

### Reserves adequacy
- Assessment prudent reserve cover: 5.0 months of non-megaproject imports.
- End-2017 reserves projected to cover 5¼ months of non-MP imports, up from 4.6 months at end-2016, albeit on the back of accumulation of external arrears.
- Path of reserves of 5.0 months of non-MP imports needed going forward.

### Policy implications from DSA
- Authorities should ambitiously implement fiscal consolidation to address external imbalance and place public debt on a sustained downward trajectory.
- Extreme caution on new debt contracting: avoid non-concessional external loans; strictly limit new loans in line with LNG revenue expectations.
- Strengthen debt management and oversight: strengthen debt unit capacity and oversight over SOEs.

---

### Macroeconomic Outlook, Tables, and Key Statistics (Selected exact values)

### Selected macro indicators (excerpts)
- Nominal GDP (MT billion): 689 (2017 Prel.), 802 (2018), 875 (2019), 949 (2020), 1,026 (2021), 1,108 (2022), 1,195 (2023).
- Real GDP growth (selected): 2016: 3.8; 2017: 3.0/3.7 (authorities vs staff); 2018: 3.0; 2019: 2.5; 2020: 2.4; 2021: 2.3; 2022: 2.2; 2023: 9.9 (later entry).
- Consumer price index (annual average): 19.2 (2017), 15.3 (2018), 6.7 (2019), 5.7 (2020), 5.5 (2021–2023).
- Exchange rate, MT per US dollar, eop: 71.0 (2017); per.avg. 61.1 (2017).
- External current account, after grants (Percent of GDP): -39.2 (2016), -16.1 (2017), -16.9 (2018), -44.6 (2019), -66.6 (2020), -91.0 (2021), -116.4 (2022), -117.7 (2023).
- Months of projected imports of goods and nonfactor services: 3.5 (2016), 3.9 (2017), 2.8 (2018), 2.2 (2019), 1.6 (2020), 1.2 (2021), 1.5 (2022), 2.0 (2023).
- Total nominal public debt (Percent of GDP): 128.3 (2016), 112.0 (2017), 121.8 (2018), 130.1 (2019), 136.7 (2020), 143.1 (2021), 149.3 (2022), 137.5 (2023).
  - External (Percent of GDP): 103.7 (2016), 85.2 (2017), 95.3 (2018), 101.3 (2019), 106.0 (2020), 110.6 (2021), 114.3 (2022), 107.4 (2023).

### Balance of Payments (selected millions of U.S. dollars)
- Current account balance: -4,424 (2018), -2,039 (2019), -2,424 (2020), -6,700 (2021), -10,461 (2022), -14,910 (2023).
- Exports, f.o.b.: 3,329 (2018), 4,258 (2019), 5,031 (2020), 5,401 (2021), 5,334 (2022), 5,487 (2023).
- Imports, f.o.b.: 4,733 (2018), 4,872 (2019), 5,540 (2020), 8,931 (2021), 11,682 (2022), 15,241 (2023).
- Net international reserves (end of period): 1,753 (2018), 2,297 (2019), 2,573 (2020), 2,588 (2021), 2,385 (2022), 2,214 (2023).

---

### Implementation, Governance, and Reform Priorities

### Implementation of past IMF recommendations (Annex I)
- Fiscal:
  - Eliminate subsidies on fuel and wheat; reintroduce automatic fuel price adjustment.
  - 2018 budget includes measures to contain wage bill and safeguard revenues.
  - Decree approved to regulate issuance and management of public debt and guarantees (November 2017); new SOEs Law approved.
- Monetary and exchange rate:
  - Tight monetary policy reduced annual inflation to about 7.2 percent in December 2017.
  - FX market law (December 2017) allows exporters/investors to keep 100 percent of proceeds in foreign currency.
  - BM changed operational target to short-term interest rates in April 2017.
- Financial sector:
  - BM preparing a new bank resolution framework to enhance resolution powers.
- Structural reforms:
  - Authorities evaluating a fiscal responsibility law; national strategy for financial inclusion launched in 2016; national committee operationalized in 2017.
  - E-money and banking infrastructure being promoted under BM oversight.

### Governance, transparency, and IMF–World Bank joint recommendations
- Key actions and dates (selected):
  - Submit Fiscal Responsibility Law: Action date End-2018.
  - Issue decree to regulate issuance/management of public sector debt and guarantees: Action date End-November 2017.
  - Approve regulations implementing new SOEs Law: Action date End-June 2018.
  - Adopt IMF Government Finance Statistics standard: Action date End-January 2019.
  - Strengthen parliamentary and public oversight: Action dates End-September 2018 to end-2019 (continuous).
  - Support accountability and resolve unreported loans of EMATUM, Proindicus, and MAM: Action date End-2017.

### Division of labor with World Bank and planned TA/support
- Fund to lead on debt management, PFM TA, tax administration reforms, and financial stability TA.
- Bank to lead on public pension reforms, social safety net design, project investment management, and financial sector development.
- Joint work program: PFM, tax policy review, public sector salary reforms, social protection design, and natural resource wealth management support.

---

### Risk Assessment and Recommended Policy Responses (selected)
- Global and regional risks:
  - Retreat from cross-border integration; policy/geopolitical uncertainties; tighter global financial conditions.
  - Responses: anchor macro stability; diversify exports; maintain exchange rate flexibility; rebuild fiscal buffers and reserves; strengthen supervision and bank resolution framework.
- Mozambique-specific high-priority risks:
  - Deterioration in security; failure of peace negotiations; protracted hidden debt uncertainty; increasing fiscal risks from non-performing SOEs and government arrears; delays in megaprojects; commodity price volatility; extreme climate events.
  - Responses: sign peace agreement by end-2017; adopt balanced policy package addressing fiscal risks; strengthen governance, transparency, and accountability; implement AML/CFT measures; enhance bank resolution and deposit guarantee schemes; enforce asset quality reviews and provisioning; advance structural reforms for diversification and inclusive growth; implement social safety nets.

*Italic: Source — IMF staff report excerpts and DSA update (cr1865).*

### 1. Adjustment Scenario ___________________________________________________________________________ 8

### 1. Adjustment Scenario

### Background and macroeconomic context
- Growth slowed from 6.6 percent in 2015 to 3.8 percent in 2016 and is projected to barely reach 3.0 percent in 2017.
- A series of shocks contributed to the slowdown: lower commodity prices, adverse weather, and disclosure in April 2016 of undisclosed borrowing by Proindicus and MAM and earlier discovery of Ematum borrowing.
- Hidden debt comprised about $1.1 billion (Proindicus and MAM) and $0.3 billion of smaller bilateral loans — a total of $1.4 billion or around 11 percent of 2015 GDP; Ematum borrowing of $0.85 billion was discovered in 2014.
- Fiscal policy remained fairly loose in 2017; the overall 2017 fiscal deficit (modified cash basis) is estimated at around 8.2 percent of GDP (compared to 7.6 percent of GDP in 2016).
- Monetary policy tightened significantly from October 2016 to stabilize the FX market, lower inflation, and strengthen net international reserves.
- Public debt rose to distressed levels: public sector debt-to-GDP reached 128.3 percent at end-2016 (including domestic debt of 24.6 percent of GDP).
- Sovereign external arrears on public and publicly guaranteed external debt service reached $709.7 million by end-2017, including $94 million under bilateral discussions (Libya, Iraq, Angola, Bulgaria and Poland).

### Recent economic developments and sector vulnerabilities
- Inflation and monetary developments:
  - Maputo inflation index fell to 7.2 percent (y/y) in December; a broadly-based index measured 5.7 percent (from 26 percent in November 2016).
  - Average inflation remained 15.3 percent in 2017.
  - Bank of Mozambique (BM) shifted operational target to MIMO in April 2017 and initiated easing totaling three policy rate cuts by 225 basis points to 19.5 percent in December; reserve requirements reduced by 150 basis points to 14 percent.
  - The policy rate reached 12 percent in real terms in December 2017.
- Credit and financial sector:
  - Y/y domestic credit to the economy contracted by 12 percent in nominal terms (December 2017); deposits in domestic currency grew by 13 percent till November.
  - NPLs more than doubled, reaching 11.4 percent in September 2017.
  - Reported regulatory capital-to-risk weighted assets ratio increased to 20.2 percent in September 2017.
  - Two bank resolutions in 2016: Moza Banco (6 percent of assets) put under official administration; Nosso Banco (less than 1 percent of assets) liquidated.
- External sector:
  - Current account deficit narrowed in 2017, helped by a one-off capital gain tax ($350 million or 2.8 percent of GDP) from sale of 50 percent of ENI’s stake in Coral South to Exxon Mobil and a 12.7 percent of GDP megaproject current account surplus driven by coal exports.
  - Non-megaproject trade: exports of goods fell by almost 8 percent and imports grew by 3.3 percent y/y in 2017.
  - Net FDI in the non-megaproject economy fell to about $1.3bn in 2017 (half of $2.6bn in 2015).
- Reserves and FX:
  - International reserves at end-2017 equivalent to 5.5 months of non-megaproject imports.
  - Gross international reserves (end of period) reported as 1,988; 2,532; 2,808; 2,823; 2,619; 2,447; 3,447; 2,876; 3,083; 3,079; 3,092; 4,304 (SEI Table values).
- Governance:
  - Disclosure of hidden debt led to misreporting under PSI and breach of Article VIII, Section 5; PSI and SCF lapsed.
  - Kroll audit summary published in June 2017; critical information gaps remain on use of loan proceeds.
  - Authorities approved a decree establishing a framework to contract public debt and issue guarantees and sent a draft SOE law to Parliament; work started with IMF/World Bank on an action plan to strengthen governance, transparency, and accountability.

### Outlook and risks
- Baseline scenario (no further policy action from 2018):
  - Real GDP expected to further decelerate and inflation to remain at current levels.
  - Fiscal deficit would expand, leading to further accumulation of domestic arrears and crowding out of the private sector.
  - Banking sector health would deteriorate with rising NPLs.
  - Non-megaproject current account deficit expected to widen from 2018 and remain elevated over the medium term — around 30 percent of GDP (or 17 to 18 percent of GDP when adjusting for imports of domestic firms used to supply mega-projects).
  - Absence of a real depreciation could result in a loss of reserves.
- Debt sustainability:
  - External debt rating assessed as “in distress”; total public debt on an unsustainable path.
  - PV of external PPG debt to GDP ratio largely exceeds the 40 percent prudent threshold for about eight years under the baseline (no restructuring).
  - External debt service to government revenues averages about 30 percent over the medium term.
  - Domestic debt reached about 25 percent of GDP in 2017; PV of total public debt-to-GDP expected to peak at 126 percent by 2022 (benchmark 56 percent).
- Risks (broadly balanced):
  - Downside risks: deterioration in security conditions; further loosening of expenditures; increased debt service including from loss-making SOEs; unavailability of domestic financing; delays in megaprojects; policy inaction reducing confidence and posing additional risks to banking sector.
  - Upside risks: recovery in commodity prices; new oil and gas discoveries; resolution of hidden debt issue; reengagement with donors; start of natural gas production toward 2023 boosting growth and fiscal revenues.
- Without strong policy adjustments, rising risk of disorderly adjustment over the medium term.

### Adjustment Scenario (policy alternative summarized)
- Key policy elements:
  - Fiscal tightening targeting a zero-primary balance by 2022 through a combination of spending and tax measures (mostly elimination of tax exemptions).
  - Gradual depreciation in the real effective exchange rate to stabilize the external sector.
  - Cautious normalization of monetary policy with further cuts in the interest rate aligned with fiscal consolidation and an inflation target of 5-6 percent over the medium term.
  - Structural reforms including an action plan to strengthen governance and accountability.
- Expected impacts:
  - Improved fiscal and external balances; creation of fiscal space for social and development needs; reduced arrears accumulation; downward path for domestic debt.
  - Return of confidence and strengthened regulation in the banking sector would crowd-in private credit, reduce banks’ exposure to sovereign risks, and decrease government borrowing costs.
  - Fiscal retrenchment would limit near-term growth gains, but normalization of monetary policy, correction of overvaluation (positive impact on exports), and FDI inflows would offset negative short-term impacts and improve medium-term growth potential.
- SEI scenario indicators (selected exact values from adjustment and baseline projections, annual percentage change or percent of GDP as provided):
  - Real GDP growth: 2016: 3.8; 2017: 3.0; 2018: 3.0; 2019: 2.5; 2020: 2.4; 2021: 2.3; 2022: 2.2 (Baseline) and Adjustment: 2018: 2.8; 2019: 3.0; 2020: 3.3; 2021: 3.8; 2022: 4.4.
  - Consumer price index (end of period): 2017: 21.1; 2018: 7.2; 2019: 6.5; 2020: 5.5; 2021: 5.5; 2022: 5.5 (Baseline); Adjustment path shows convergence to 5.8, 6.8, 6.5, 6.2, 6.0, 5.8 across 2017–2022 in the table.
  - Credit to the economy (annual change): 2016: 12.6; 2017: -10.4; Adjustment projections show recovery: 2018: 2.9; 2019: 2.8; 2020: 2.7; 2021: 2.3; 2022: 2.1 (Baseline) and stronger growth under Adjustment (2018–2022: 6.3; 7.6; 8.4; 10.1; 10.9).
  - Overall balance after grants (modified cash basis, percent of GDP): 2016: -7.6; 2017: -8.2; Baseline 2018–2022: -7.5; -10.8; -9.9; -9.6; -10.6; Adjustment 2018–2022: -7.1; -7.1; -5.1; -3.5; -3.2.
  - Primary Balance after grants (percent of GDP): 2016: -4.6; 2017: -4.5; Baseline 2018–2022: -3.2; -5.1; -5.5; -6.4; -7.6; Adjustment 2018–2022: -2.8; -1.8; -1.1; -0.3; 0.0.
  - Total nominal public debt (percent of GDP): 2016: 128.3; 2017: 112.0; Baseline 2018–2022: 121.6; 130.0; 136.5; 142.1; 145.9; Adjustment 2018–2022: 125.4; 127.2; 129.3; 131.8; 130.1.

### Policy discussions and priorities
- Urgent need to rebalance policy mix to ensure durable macroeconomic stability while enhancing growth and reducing poverty and inequality.
- Core priorities identified:
  - Fiscal adjustment to restore fiscal sustainability and align deficits with financing availability while containing public debt.
  - Normalization of monetary policy and addressing challenges in the financial sector.
  - Strengthening governance and transparency, addressing institutional weaknesses and corruption underlying hidden loans, and advancing other structural reforms to generate growth and employment.

*Source: IMF staff report — "1. Adjustment Scenario" (excerpted content).*

### 18.      The 2018 budget targets a reduction in the overall deficit after grants to 3.8 percent of

### 18.      The 2018 budget targets a reduction in the overall deficit after grants to 3.8 percent of

### 2018 budget objectives and composition
- Budget target: overall deficit (after grants) of 3.8 percent of GDP.
- Budget assumptions:
  - GDP growth of 5.3 percent.
  - GDP deflator of 10.5 percent.
  - Non-resumption of direct budget support by donors.
  - Higher transfers: 0.6 percent of GDP (mostly military pensions and social protection).
  - Higher election spending: 0.6 percent of GDP.
- Revenue and spending measures in the budget:
  - New excises (e.g., soft drinks, plastic bags).
  - New customs and tariffs (e.g., surcharges on imports of electrical conductors, new telephone call service rates).
  - Spending measures targeting the wage bill (reductions in specific allowances and bonuses).
  - The 2018 budget does not incorporate the full debt service obligations on external and domestic debt.
- Table of budget (percent of GDP):
  - Total revenue: Budget 22.5, Proj. 22.1
  - Tax revenue: Budget 18.8, Proj. 18.6
  - Nontax revenue: Budget 3.6, Proj. 3.5
  - Total expenditure and net lending: Budget 27.9, Proj. 30.9
  - Current expenditure: Budget 18.5, Proj. 22.0
  - Compensation to employees: Budget 9.3, Proj. 11.1
    - of which: Social Insurance: Budget 0.0, Proj. 0.5
  - Goods and Services: Budget 3.1, Proj. 4.1
  - Interest on public debt: Budget 3.3, Proj. 4.3
    - Domestic: Budget 2.0, Proj. 2.3
    - External: Budget 1.4, Proj. 2.0
  - Subsidies and Transfers: Budget 2.8, Proj. 2.5
  - Capital expenditure: Budget 8.0, Proj. 5.6
    - Domestically financed: Budget 3.3, Proj. 3.2
    - Externally financed: Budget 4.7, Proj. 2.4
  - Net lending: Budget 1.4, Proj. 3.2
  - Overall balance (modified cash basis), before grants: Budget -5.4, Proj. -8.8
  - Grants received: Budget 1.7, Proj. 1.3
    - of which: budget support: Budget 0.0, Proj. 0.0
  - Overall balance (modified cash basis), after grants: Budget -3.8, Proj. -7.5
  - Primary balance (modified cash basis), after grants: Budget -0.4, Proj. -3.2
  - Memorandum items: Nominal GDP (Billions of Meticais) Budget 992, Proj. 875

### Staff assessment and alternative projections
- Staff view: 2018 budget targets are unlikely to be achieved.
- Staff estimate for 2018 overall deficit (considering slower growth, conservative yields for deficit reducing measures, and full debt service obligations): overall deficit would reach 7.6 percent of GDP (down from an estimate of 8.2 percent of GDP in 2017).
- Staff estimates of authority-proposed measures in the 2018 budget:
  - 0.4 percent of GDP in new excise tax measures.
  - 0.1 percent of GDP in specific taxation on mining and petroleum activities.
  - 0.3 percent of GDP in wage bill savings measures.

### Medium-term outlook and risks
- Without new policy measures, fiscal stance is unsustainable over the medium term and would not bend the trajectory of the primary deficit.
- Risk of further accumulation of arrears if fiscal stance persists.
- Staff recommended anchor: target a zero-primary balance by 2022.
  - Rationale: consistent with putting debt on a downward trajectory while realistic given political economy considerations.
  - Financing assumption: no recourse to central bank overdraft and no accumulation of arrears.
  - Achieved through a combination of spending and tax policy deficit reducing measures.
- Fiscal multipliers assumption: 0,5 (staff assumption).

### Adjustment scenario and required measures
- Adjustment scenario: yields by measure (Percent of GDP)
  - All measures: 2019 3.5, 2020 4.5, 2021 6.2, 2022 7.4
  - A. Tax revenue measures: 2019 1.9, 2020 1.9, 2021 1.9, 2022 1.9
  - B. Wage bill rationalization measures: 2019 0.9, 2020 1.6, 2021 2.3, 2022 2.7
  - C. Other measures: 2019 1, 2020 0.7, 2021 1.0, 2022 2.0 (and additional listed sequence -1.8, -1.1, -0.3, 0.0 appears in source table context)
- Staff-identified measures to support objective:
  - Revenue measures: broaden tax base and improve revenue administration.
    - 2018 Budget measures: Reviewing the Excise Tax Code (ICE) as proposed; specific taxation on mining and petroleum activities.
    - Staff proposed measures: Removing VAT exemptions in line with FAD technical assistance; revising the VAT refund mechanism by clearing backlog through securitization and enforcing funding of a sub-account with a fixed percentage of VAT receipts to repay exclusively new VAT refund claims.
  - Spending measures: wage bill rationalization and other expenditure controls.
    - Identified spending and tax policy measures from IMF technical assistance; remaining unidentified measures could come from wage bill, revenue administration, and other tax policy measures.
  - Timing constraint: changes in tax base or tax rates approved during the course of the year can only take effect in the next year; hence only further spending cuts feasible in 2018.

### Social protection implications and recommendations (Box 2)
- Structure of non-contributory social protection system:
  - PSSB (Programa Subsidio Social Basico): main cash transfer for elderly and disabled.
  - PASP (Programa de Acção Social Produtiva): public works program for extremely poor households.
  - PASD (Programa de Apoio Social Directo): temporary support for poor households with adults temporarily unable to work.
- Coverage and spending:
  - Households covered increased from 287,000 in 2011 to 549,565 households in 2017.
  - Coverage still relatively low: around 19% of people living below the poverty line.
  - PSSB benefits: range from 310 Meticais (around $5) per month for individuals to 620 Meticais (around $10) per month to elderly people with four dependents.
  - 2018 budget allocation for PSSB: increase from around 1.7 billion Meticais in 2017 to around 3.2 billion Meticais in 2018.
  - Overall spending on all three programs set to increase by around 2 billion Meticais (or around 0.2 percent of GDP) in 2018.
  - Increase mostly implies higher benefit amounts rather than number of households (households covered set to increase by around 12 percent).
  - Overall cost remains low, below 0.5% of GDP.
- Staff recommendations to mitigate impact of fiscal measures on vulnerable households:
  - Increase social assistance spending.
  - Deep reforms to operational aspects: (a) streamline criteria and approaches to targeting poorest households (e.g., proxy means tests); (b) institute a single registry of all beneficiaries and integrate into e-INAS; (c) adopt a formal electronic payment system through outsourcing for all cash-based benefit programs.

### Domestic arrears, cash management, and expenditure control
- Stock of domestic arrears: around 3.7 percent of GDP at end 2016.
- Priority: validate arrears and gradually clear them after discussions with creditors and agreement on clearance modalities.
- 2018 Budget measures: reducing some bonuses and allowances as proposed.
- Staff short-term measures to contain wage spending growth:
  - Contain wage growth, streamline allowances and bonuses, curtail overtime pay, and use attrition.
- Staff medium-term structural reforms for sustainable savings and efficiency:
  - Structural pay reforms to align job requirements with compensation.
  - Systematic review of compensation to simplify it.
  - Functional reviews and restructuring of government entities.
  - Strengthen wage bill budgeting, execution and control.
- Recommendations to prevent accumulation of new arrears:
  - Address cash management flaws, lack of expenditure control, and transparency.
  - Timely record spending in the information management system at each stage of the spending process.
  - Streamline network of spending units.
  - Enforce budget ceilings.
  - Optimize government liquidity management.

### Authorities’ views on fiscal stance
- Ministry recognized desirability of reducing fiscal deficit over medium term but preferred a more gradual deficit reduction path than staff recommended.
- Ministry concerned about potential crowding out of private sector from fiscal stance.
- Ministry noted that loosening monetary stance would help reduce public debt service costs and encourage private sector investment.

### Monetary policy, foreign exchange management, and financial sector resilience
- Central bank operational change (April 2017): operational target moved from monetary aggregates to a short-term interest rate (MIMO).
  - Interbank money market follows signals of the MIMO rate despite excess banking system liquidity.
  - Monetary Policy Committee faces challenge of pacing MIMO rate cuts amid rapid disinflation and fiscal risks.
  - Staff recommendation: cautious but decisive cuts in the policy rate.
- Liquidity management challenges:
  - Absence of BM-issued security for monetary policy purposes complicates sterilization.
  - Reduced reserve requirements and banks near sovereign risk exposure limits reduce sterilization success.
  - BM FX interventions create additional sterilization needs.
  - Staff recommendations: be cautious in further lowering reserve requirements; remove restriction on banks' access to standing lending facility (only twice a week); explore issuing certificates (CDs) for monetary policy.
- Exchange rate and FX developments:
  - Nominal exchange rate appreciated by 24 percent since October-2016 and broadly stable since June 2017.
  - BM net selling operations rare since late 2016; BM became a net buyer.
  - Inflows from primary export activities (notably coal) increasing FX availability while demand is low.
  - Staff encourages reliance on exchange rate flexibility as absorber of external shocks and development of robust FX strategy limiting central bank interventions to addressing excessive volatility.
  - External Balance Assessment (EBA) concludes the metical is overvalued given current and projected fundamentals under current policies.
- FX market law reform (December 2017):
  - Exporters and investors may keep 100 percent of proceeds in foreign currency.
  - Expected effects: minimize forex risks to exporters, mitigate capital flight, reduce transaction costs; risk of higher dollarization and lower FX flows directly to BM.
  - Authorities should consider higher reserve requirements on deposits in foreign currency and minimum liquidity requirements in FX.
- Monetary and financial regulatory measures (selected actions):
  - Adopted MIMO rate (April 2017).
  - Revoked limit for credit card use abroad (April 2017).
  - Changed reserve requirement base from daily to monthly average (June 2017).
  - Broadened investor base for primary T-bill issuance to include non-bank financial institutions (June 2017).
  - Implemented new FX market regulation (December 2017).
  - Increased minimum capital adequacy ratio to 12 percent and minimum social capital value to Mt. 1.7 billion phased to 2020 (April 2017).
  - Introduced minimum liquidity ratio fixed at 25 percent of short-term liquid assets (June 2017).
  - Required banks to publish quarterly selected FSIs on solvency and liquidity (effective March 2017).
  - Introduced a Standardized Prime Interest Rate for bank lending (‘Indexante Unico’) with Mozambique Bank Association (effective June 2017).
- Financial sector conditions and risks:
  - High real returns and low risks of placing extra-balances at central bank constrain credit growth.
  - Increase in minimum capital requirements reduces marginal profitability of intermediation.
  - Banks continue to hold significant capital and liquidity buffers; heterogeneity across institutions exists.
  - Nonperforming loans (NPLs) increased from 5.5 percent of total loans at end-2016 to 11.4 percent in September (year implied by source).

_Italic: Source — IMF staff report excerpt on Mozambique fiscal and monetary policy (2018)._

### 2017. Several factors underlie this deterioration (Box 4). Staff encouraged the authorities to remain

### Box 4. Nonperforming Loan Sensitivity Analysis

### NPL deterioration and causes
- The level of nonperforming loans in the Mozambican banking system doubled to 11.4 percent in September 2017 since end-2016, on average.
- Several factors underlie this deterioration: (i) enhanced credit risk supervision, (ii) the slow economy, (iii) the rise in real interest rates, and (iv) the arrears of the public sector.
- In December 2017, the deposit facility of the BM earned 7 percent in real terms.

### Provisioning and current mitigation
- Provisioning remains considerable at 79 percent of NPLs, composed of:
  - 58 percent in specific provisions (down from 78 percent at end-2016),
  - 11 percent in general provisions,
  - 10 percent prudential provisions beyond those required by IFRS.
- The main mitigating factor against NPL deterioration is this high level of provisioning.

### Sensitivity analysis and scenarios (2018-19)
- The mission conducted a sensitivity analysis under three scenarios of portfolio deterioration for 2018-19:
  - Baseline: under current trends.
  - Second: low credit growth with fast NPL increase.
  - Third: credit recovery.
- All three scenarios result in material provisioning needs and additional capital requirements.
- The system would remain solvent, though capital adequacy buffers would be eroded and some banks would require additional capital.
- Implication: The BM must remain watchful of banks’ portfolio performance through enforcement of loan classification rules, collateral valuation, and opportune provision building.

### Sovereign exposure and market effects
- Exposure of banks to sovereign risk is estimated at 25 percent of total assets by end September 2017.
- Given this high and rising exposure, some institutions cannot further accumulate claims on the government and, at times, the weekly T-bill market auctions have been deserted.

### Exposure to loss-making SOEs and capital impact
- In 2016, the ten largest non-financial SOEs experienced rising losses as bank debt and loan rates increased.
- A debt sustainability test based on SOEs’ debt stock at end-2016 relative to a cash flow proxy suggests about half of those SOEs have a substantial debt overhang.
- If banks should fully provision for debt at risk, the banking system’s capital adequacy ratio would drop by about 5 percentage points to 16 percent, with a few banks close to or below the minimum required ratio.
- Banks have started to reflect higher SOE loan risk in loan classification and provisioning, but supervisory authorities should ensure such prudent practices are entrenched and that banks build capital buffers (for instance through earnings retention).

### Bank resolution framework and safety net
- Weaknesses in the legal framework complicated the resolutions of Moza and Nosso Banco.
- Moza was sold to the BM’s pension fund in the absence of other reputable buyers; Moza is currently run by professional bankers and is gradually recovering.
- Staff encouraged authorities to:
  - establish a policy to ensure independent governance and adequate surveillance,
  - prepare a divestment strategy for the medium term,
  - enhance the resolution powers of the BM through a new bank resolution framework,
  - strengthen the deposit insurance scheme.
- The Fund stands ready to continue providing technical assistance in these areas.

### Central bank law and monetary policy recommendations
- The 1992 central bank law allows lending to the government interest-free yearly-loans up to 10 percent of revenue collected in the penultimate year.
- Staff recommended that, as a first best, the new law ban credit to the government or strictly limit it as a second best.
- Staff encouraged reliance on exchange rate flexibility as a shock absorber.
- The MPC decision in December 2017 to lower the policy rate by 150 basis points was welcomed; monetary policy can be further eased while remaining cautious given the fiscal stance.

### Financial inclusion and standards transition
- Staff commended efforts to promote financial inclusion within the 2016-2022 National Strategy.
- Mobile banking and electronic currency could play a key role in extending transaction networks and opportunities in rural areas.
- Mozambique adopted IFRS in 2007 and will transition to IFRS9 in 2018; the change includes a move toward impairment modelling and should be carefully phased-in to avoid unintended consequences.

### Authorities’ views on financial sector priorities
- The BM concurred with staff’s views and committed to modernize central banking, strengthen regulation and prudential supervision, and seek TA support for key legal reforms.
- The BM emphasized need to remain vigilant to macrofinancial risks in an environment of low growth, high real interest rates, and tight financial conditions.
- The BM agreed to further develop capacities in macroprudential surveillance and communications, producing a biannual stability report and regularly publishing Financial Soundness Indicators (FSIs).

*Source: IMF staff report excerpts.*

### 58.      Steadfast implementation of financial sector and monetary regime reforms is essential

### 58.      Steadfast implementation of financial sector and monetary regime reforms is essential

### Macrofinancial risks and vulnerabilities
- Authorities must remain vigilant vis-à-vis the risks stemming from a prolonged period of high real interest rates, low growth, rapid increase in public domestic debt, and accumulation of public sector arrears.
- These risks could:
  - Weaken non-mining activity;
  - Cause higher NPLs and SOEs financial distress;
  - Increase banks sovereign risk exposure;
  - Pressure public finances through high borrowing costs and contingent liabilities.
- Staff supports the BM’s efforts to enhance supervisory capacities and the bank resolution framework.

### Monetary regime and central bank reform
- The evolving monetary regime should build on:
  - Enhanced communications;
  - Increased technical capacities;
  - A reformed central bank law with a clear mandate, granting operational autonomy, precluding or strictly limiting lending to the government and strengthening accountability.

### Financial sector governance, SOEs, and anti-corruption
- Staff welcomes the authorities’ commitment in principle to improve governance, transparency, and accountability, but stresses the need to strengthen implementation and enforcement going forward.
- While Mozambique has a sound anti-corruption legal framework in place, staff recommends that the authorities strengthen its enforcement.
- Staff urges the authorities to redouble efforts aimed at fighting corruption.
- Reforming the SOE sector and implementing a robust action plan to strengthen governance, transparency, and accountability is crucial.
- The authorities should consider a strategy to deal with SOEs over indebtedness to mitigate spillovers to the financial system.

### Audit transparency and public debt management
- Addressing the missing information in the audit report requires decisive action by the government.
- Bridging the information gaps that remain after the completion of the audit of three public companies involved in the hidden loans would help restore confidence and encourage private investment.
- Staff urges the government to provide full clarity on the use of the proceeds of the Ematum, Proindicus, and MAM loans.
- Staff welcomes the authorities’ approval of a decree establishing a framework to contract public debt and issue guarantees, and the submission to Parliament of a new SOE law.

### Structural reforms, inclusive growth, and financial inclusion
- Further progress on the structural reform agenda will be important to support higher and more inclusive growth, job creation, and further reduction of poverty and inequality.
- Restructuring and attracting private sector participation in ailing SOEs will be key to:
  - Improve efficiency;
  - Reduce financial losses and related fiscal costs and vulnerabilities.
- Implementation of further steps in strengthening the business climate and governance will be important to support private investment and job creation.
- Continued efforts to foster financial deepening and inclusion through the national strategy already laid out are encouraged.

*Source: IMF staff report (paragraphs 58–61).*

### 62.      It is recommended that the next Article IV consultation take place on the standard

### cr1865 - 62.      It is recommended that the next Article IV consultation take place on the standard

### Growth and External Developments
- Mozambique’s growth outlook weakened relative to SSA countries; Real GDP Growth (Percent) series shown for 2008–2018 with "Proj." appended for 2018.
- Terms of trade improved "despite recent gains in terms of trade due to higher international coal prices."
- The metical recovered after a sharp depreciation starting in 2015 (Nominal and Real Effective Exchange Rates, Index, Average 2010=100).
- Merchandise Trade (Millions of U.S. dollars) chart shows:
  - Exports by megaprojects and other exports, and imports by megaprojects and other imports across 2008–2018 (Proj.).
- Current account developments:
  - "As a result, the current account deficit narrowed..."
  - Current Account Balance and Foreign Direct Investment (Percent of GDP) series for 2008–2018 (Proj.).
- Reserve coverage:
  - "Reserve cover, months" and "Reserve cover, months of projected imports, excluding megaprojects" series through 2017 (Proj.) indicate recovery in reserve coverage excluding mega projects.

### Inflation, Monetary and Financial Developments
- Monetary policy tightened from Oct ’16 in response to high inflation.
- Tightening helped stabilize the exchange rate market.
- Monetary policy operations:
  - Open market operations issuing T-bill mopped out liquidity.
  - Positive numbers indicate liquidity injection in Monetary Policy Operations Mix (Billions of meticais).
- Government borrowing and central bank credit:
  - Increased government borrowing cost despite recurrence to short-term credit from the central bank.
  - Government Borrowing Cost and Central Bank Credit display Advances in local currency (lhs), Government securities holdings by depository corporations (lhs), and other series (Billions of meticais).
- Credit and monetary aggregates:
  - "Credit and monetary aggregates growth slowed down and has started to fall in real terms since May 2017."
  - Credit Growth to the Economy (Percent change, y-o-y) series shown; Credit to the economy indicators in tables below.
- Financial sector:
  - "The financial sector signaled vulnerabilities halted with the resolution of two banks."
  - Financial Soundness indicators (selected excerpts):
    - Regulatory capital to risk-weighted assets (CAR) series (2013–2017) with values including 16.9, 15.1, 17.0, 15.8, 16.5, 5.3, 8.8, 8.5, 20.5, 20.2.
    - Nonperforming loans to total gross loans series includes values such as 2.9, 3.2, 4.3, 4.6, 6.3, 5.8, 5.5, 7.1, 11.2, 11.4.
    - Return on Equity (ROE) values include 21.0, 21.6, 20.4, 14.2, 14.0, 12.8, 10.1, 31.1, 40.6, 35.7.

### Selected External Sector Developments
- Exchange rate pressures eased in line with tight monetary policy.
- Backed with a recovery in coal export volumes and prices.
- Deposits are recovering with the Bank of Mozambique reducing its FX interventions.
- Despite a strengthening of the US dollar, overall reserves stabilized.
- Indicators and notable values:
  - Nominal depreciation of selected currencies vs the US dollar (Percent; between End-December 2014 20-October 2017): Mozambique 84.0; South Africa -14.3; Kenya 1.7; Tanzania -40.3; Nigeria -31.8; Zambia 56.0; Angola -2.3.
  - Net International Reserves (Millions of U.S. dollars) series shows levels across 2013–2017 and projections.
  - Central bank Net FX sales series (Net Central Bank Foreign Exchange Sales, Million of U.S. dollars) across 2013–2017.
  - Banks Foreign Currency Deposits (Millions of U.S. dollars) and Nominal Exchange Rate (Metical/U.S. dollar) series shown for 2013–2017.

### Fiscal Developments
- Public Debt:
  - "Public Debt has been rising fast because of the disclosure of hidden loans, and stabilized following the metical appreciation."
  - Total Public Debt Composition (Percent of GDP) series for 2009–2018 (Proj.).
- Fiscal policy stance:
  - "Fiscal policy remains loose with the overall deficit remaining large."
  - Overall balance, after grants (Percent of GDP) remains large negative in 2009–2018 (Proj.).
- Revenue and expenditures:
  - "Revenue collection continue to weaken ... coupled with an increase in expenditures."
  - Total revenue and Total expenditure and net lending series (Percent of GDP, 2009–2018 (Proj.)) displayed.
- Key fiscal table highlights (Table 1 and Table 2 excerpts):
  - Nominal GDP (MT billion): 689 (2017 Prel.), 802 (2018), 875 (2019), 949 (2020), 1,026 (2021), 1,108 (2022), 1,195 (2023).
  - Nominal GDP growth: 16.5 (2017), 16.4 (2018), 9.0 (2019), 8.4 (2020), 8.1 (2021), 8.0 (2022), 7.9 (2023).
  - Real GDP growth: 3.8 (2017), 3.0 (2018), 3.0 (2019), 2.5 (2020), 2.4 (2021), 2.3 (2022), 2.2 (2023), 9.9 (later entry).
  - Consumer price index (annual average): 19.2 (2017), 15.3 (2018), 6.7 (2019), 5.7 (2020), 5.5 (2021–2023 repeated).
  - Exchange rate, MT per US dollar, eop: 71.0 (2017) and per.avg. 61.1 (2017).
  - External current account, after grants (Percent of GDP): -39.2 (2016), -16.1 (2017), -16.9 (2018), -44.6 (2019), -66.6 (2020), -91.0 (2021), -116.4 (2022), -117.7 (2023).
  - Months of projected imports of goods and nonfactor services: 3.5 (2016), 3.9 (2017), 2.8 (2018), 2.2 (2019), 1.6 (2020), 1.2 (2021), 1.5 (2022), 2.0 (2023).
  - Total nominal public debt (Percent of GDP): 128.3 (2016), 112.0 (2017), 121.8 (2018), 130.1 (2019), 136.7 (2020), 143.1 (2021), 149.3 (2022), 137.5 (2023).
  - Of which: external (Percent of GDP): 103.7 (2016), 85.2 (2017), 95.3 (2018), 101.3 (2019), 106.0 (2020), 110.6 (2021), 114.3 (2022), 107.4 (2023).

### Selected Tables and Key Statistics (excerpts)
- Table 1 (Selected Economic and Financial Indicators, 2016–23) key lines:
  - Merchandise exports: -2.5 (2017), 27.9 (2018), 18.1 (2019), 7.4 (2020), -1.2 (2021), 2.9 (2022), 2.8 (2023), 29.7 (later column).
  - Merchandise exports, excluding megaprojects: -32.5 (2017), -7.9 (2018), 7.5 (2019), 6.7 (2020), 6.6 (2021), 7.3 (2022), 7.4 (2023), 7.8 (later).
  - Merchandise imports and imports excluding megaprojects with corresponding series including -37.5, 2.9, 13.7, etc.
  - Terms of trade: 1.9 (2017), 3.2 (2018), 0.0 (2019), -0.4 (2020–2021), -0.7 (2022), 0.0 (2023).
- Table 2 (Government Finances, Billions of Meticais) key lines:
  - Total revenue ¹: 165.6 (2018 Est.), 201.1 (2019), 193.1 (2020), 209.0 (2021), 224.8 (2022), 242.0 (2023), 260.1, 299.9.
  - Total expenditure and net lending: 223.1 (2018 Est.), 257.6 (2019), 270.3 (2020), 322.9 (2021), 333.5 (2022), 355.6 (2023), 393.9, 444.4.
  - Overall balance (modified cash basis), before grants 2: -66.7 (2018 Est.), -56.5 (2019), -77.2 (2020), -113.9 (2021), -108.7 (2022), -113.6 (2023), -133.9, -144.4.
  - Grants received: 14.5 (2018 Est.), 12.6 (2019), 11.4 (2020), 11.0 (2021), 7.3 (2022), 7.0 (2023), 6.8, 6.5.
  - Primary balance (modified cash basis), after grants 2: -32.0 (2018 Est.), -14.1 (2019), -28.1 (2020), -48.6 (2021), -56.7 (2022), -71.1 (2023), -90.9, -104.9.

### Balance of Payments and External Financing (Table 5a / 5b excerpts)
- Current account balance (Millions of U.S. dollars): -4,424 (2018), -2,039 (2019), -2,424 (2020), -6,700 (2021), -10,461 (2022), -14,910 (2023), -19,849, -22,462.
- Trade balance for goods (Millions of U.S. dollars): -1,404 (2018), -614 (2019), -509 (2020), -3,529 (2021), -6,347 (2022), -9,753 (2023), -13,780, -13,776.
- Exports, f.o.b. (Millions of U.S. dollars): 3,329 (2018), 4,258 (2019), 5,031 (2020), 5,401 (2021), 5,334 (2022), 5,487 (2023), 5,640, 7,314.
- Imports, f.o.b. (Millions of U.S. dollars): 4,733 (2018), 4,872 (2019), 5,540 (2020), 8,931 (2021), 11,682 (2022), 15,241 (2023), 19,420, 21,090.
- Financial account balance (Millions of U.S. dollars): 3,631 (2018), 1,816 (2019), 1,949 (2020), 5,996 (2021), 9,753 (2022), 14,250 (2023), 20,494, 22,312.
- Net foreign direct investment (Millions of U.S. dollars): 3,093 (2018), 1,538 (2019), 1,771 (2020), 5,185 (2021), 8,387 (2022), 12,284 (2023), 3,379, 724.
- Financing Gap (Millions of U.S. dollars): -292.0 (2018), -651.6 (2019), -655.0 (2020), -621.7 (2021), -405.6 (2022), -388.8 (2023), -253.0, -932.1.
- Net international reserves (end of period, Millions of U.S. dollars): 1,753 (2018), 2,297 (2019), 2,573 (2020), 2,588 (2021), 2,385 (2022), 2,214 (2023), 3,214, 4,100.
- Months of projected imports of goods and nonfactor services: 3.5 (2018), 3.9 (2019), 2.8 (2020), 2.2 (2021), 1.6 (2022), 1.2 (2023), 1.5, 2.0.
- Memorandum: Current account balance (percent of GDP): -39.2 (2018), -16.1 (2019), -16.9 (2020), -44.6 (2021), -66.6 (2022), -91.0 (2023), -116.4, -117.7.

### Risk Assessment Matrix — Key Risks and Policy Responses
- Global and regional risks:
  - Retreat from cross-border integration (Relative Likelihood: Medium; Time Horizon: ST, MT; Impact: Medium).
    - Policy responses:
      - Anchor macroeconomic stability; diversify exports; improve business environment.
  - Policy and geopolitical uncertainties (Relative Likelihood: Medium–High; Time Horizon: ST, MT).
    - Policy responses:
      - Maintain exchange rate flexibility; advance structural reforms; rebuild fiscal buffers and reserves.
  - Tighter global financial conditions and pressures on bank business models (Relative Likelihood: High; Time Horizon: ST, MT; Impact: High).
    - Policy responses:
      - Up-front fiscal consolidation; strengthen supervisory and regulatory framework; improve corporate governance; address bank resolution framework weaknesses.
- Weaker-than-expected global growth (Relative Likelihood: High/Medium/Low depending on scenario; Time Horizon: MT/ST).
  - Policy responses:
    - Diversify exports; focus on revenue mobilization; improve business environment; develop infrastructure.
- Lower energy prices (Relative Likelihood: Low; Time Horizon: ST, MT; Impact: Low).
  - Policy responses:
    - Contain recurrent expenditure via fuel price automatic adjustment mechanism; allow greater exchange rate flexibility; support adjustment with tighter monetary stance; advance structural reforms.
- Cyber-attacks (Relative Likelihood: Medium; Time Horizon: ST, MT; Impact: Medium).
  - Policy responses:
    - Prioritize cybersecurity; secure financial networks and data; strengthen operational risk mitigation.
- Mozambique-specific risks (high priority):
  - Deterioration in security; failure of peace negotiations; protracted hidden debt uncertainty; increasing fiscal risks including non-performing SOEs and government expenditure arrears; recurrence of banking sector stress; delays in megaprojects; commodity price volatility; extreme climate events.
  - Relative Likelihood: High/Medium; Time Horizon: ST, MT; Impact: High for many risks.
  - Policy responses:
    - Drive for signing the peace agreement by end-2017; adopt balanced policy package to address fiscal risks; strengthen governance, transparency, and accountability; implement targeted anti-money laundering measures; implement financial reforms including banking resolution and deposit guarantee scheme; enhance operational independence of monetary authorities; conduct asset quality reviews and adjust provisioning; step up risk-based supervision; advance structural reforms for diversification and inclusive growth; address infrastructure gaps and institute social safety nets.

*Source: Mozambican authorities and IMF staff estimates and projections.*

### Annex I. Implementation of Past IMF Recommendations

### Annex I. Implementation of Past IMF Recommendations

### Fiscal
- Recommendations:
  - Attain a pace of fiscal consolidation to ensure debt sustainability and contribute to required external adjustment.
  - Contain wage bill increase through a deceleration in the pace of new hiring and stronger administrative controls on salary payments and bonuses.
  - Reform fuel and wheat subsidies, and reinstate automatic fuel price adjustment mechanism to address future subsidies while strengthening the social safety net.
  - Monitor fiscal risks and public enterprises and continue to strengthen debt management.
- Implementation and outcomes:
  - While the government eliminated subsidies on fuel and wheat, and reintroduced an automatic price adjustment mechanism for fuel, significant spending pressures from debt service and wages resulted in an overall increase in the fiscal deficit.
  - The 2018 budget proposal includes measures to contain the wage bill and safeguard revenues.
  - Authorities approved a decree establishing a framework to contract public debt and issue guarantees in November 2017 and approved a new SOEs Law.

### Monetary and Exchange Rate
- Recommendations:
  - Decisive actions to curb inflation through a cycle of monetary tightening and stabilize the foreign exchange market by addressing FX market distortions.
  - Continue to strengthen the Bank of Mozambique (BM) analytical tools and monetary policy operations framework.
- Implementation and outcomes:
  - Tight monetary policy reduced annual inflation to about 7.2 percent in December 2017.
  - Monetary tightening helped stabilize the FX market over the last 3 quarters (relative to the reporting period).
  - A new FX market law introduced in December 2017 allows exporters and investors to keep 100 percent (as opposed to 50 percent) of proceeds in foreign currency.
  - In April 2017, BM changed its operational target from monetary aggregates to short-term interest rates.
  - BM continued to strengthen its monetary policy framework.

### Financial sector
- Recommendations:
  - Implement reforms to strengthen bank supervision and crisis management tools.
- Implementation and outcomes:
  - The BM is preparing a new bank resolution framework that enhances its resolution powers with tools designed to deal with systemic failures.

### Structural reforms
- Recommendations:
  - Start to develop a strong medium-term fiscal framework and a formal fiscal rule.
  - Enhance transparency in natural resource wealth management.
  - Improve the business environment to promote enterprises, job creation and deepening financial inclusion.
- Implementation and outcomes:
  - Authorities are evaluating the merits of a fiscal responsibility law and actions to enhance transparent and efficient use of natural resource as part of an action plan to strengthen governance, transparency and accountability.
  - A national strategy for financial inclusion was launched in 2016 and a National Committee operationalized to steer initiatives with stakeholders in 2017.
  - E-money and banking infrastructure is being promoted under BM oversight.

### External Sector Assessment — key findings and projections
- Overall assessment:
  - External position improved reflecting stabilization of the exchange rate, lower inflation, and higher net international reserves, but remains substantially weaker than the level consistent with medium term fundamentals.
  - EBA-lite methodology indicates an overvaluation in the range of 15 to 20 percent over the medium term in the absence of new policy action.
  - The misalignment would gradually decline over time as LNG gas production begins around 2023.
- Data and measurement caveats:
  - External assessments are subject to considerable uncertainty due to data limitation surrounding megaproject-related activities.
  - Staff estimated a current account and net international investment position unrelated to megaprojects using the approach from the 2015 Article IV External Sector Assessment.
- Non-megaproject (non-MP) current account and IIP:
  - Staff estimates show the non-megaproject-related current account narrowed to 17.9 percent of GDP in 2017.
  - The narrowing was aided by a one-off capital gain tax associated with the sale of 50 percent of ENI’s stake in the Coral South natural gas field to Exxon Mobil: about $352.6 million, x percent of GDP.
  - Non-megaproject external position worsened from about 10% on average in 2011-2012 to 18 percent and 22 percent in 2015 and 2016, respectively.
  - Non-MP-related IIP peaked at 67 percent of GDP in 2012 and deteriorated through 2013–2016; staff expect the non-MP-related IIP to gradually recover starting with 2017.
- Megaprojects and their impact:
  - Megaproject direct investment inflows collapsed to an average of about $1.3 billion in 2015-2017 from an average of $4 billion in 2012-14.
  - Megaproject trade balance improved significantly, producing a 12.7 percent of GDP current account surplus for the megaproject economy.
  - Megaproject imports of services contracted by about 55 percent as many on-going projects were completed in 2016; surge in coal prices and export volumes boosted megaproject exports.
  - In absence of high megaproject investment activity, high non-megaproject-related current account deficits (i.e. above 10 percent of GDP) are unlikely to be sustainable.
- Projections:
  - Current account deficit (non-MP) is expected to remain at elevated levels of 15 to 18 percent of GDP from 2018 to 2024, and stabilize around 10 percent of GDP in 2025 with gas projects coming into full production.
  - The current account deficit (excluding megaproject-related flows) is projected to contract from the 2016 level of 22 percent of GDP to about 18 percent of GDP in 2017, and 20 percent of GDP in 2018.
  - The non-MP-related IIP is expected to gradually recover starting with 2017 and continue to improve over the medium term as activity in the traditional economy shrinks in percent of GDP.
- Financial account and capital flows:
  - The non-megaproject financial account deteriorated in 2017; private sector FDI and loan inflows collapsed in 2017 and are projected to remain low.
  - The non-megaproject financial account in 2017 is expected to net below $1 billion in inflows after a much better performance in 2015 and 2016 ($4.5 billion, and $2.7 billion, respectively).
  - No evidence so far of capital flight; currency and deposits and trade credits of the traditional economy recorded a net inflow in 2017. Megaprojects’ transactions continue to drive “other” financial account flows.
- Exchange rate valuation and REER:
  - The real effective exchange rate (REER) depreciated sharply by about 32 percent between end-December 2014 and end-December 2016, then appreciated by about 8 percent in 2017.
  - EBA-lite results indicate:
    - Current Account Approach: 2017 current account gap -8.4 (percent of GDP) → Overvaluation 23.9 (percent).
    - Current Account Approach: 2019 (after exchange rate pass-through to trade) current account gap -8.9 → Overvaluation 25.4 (percent).
    - Current Account Approach: 2025 current account gap 0 → Overvaluation 0.0 (percent).
    - Index REER Approach (2017): Overvaluation -11.5 (percent) (table shows "..." for current account gap).
    - External Sustainability Approach: 2017 current account gap -9.2 → Overvaluation 26.3 (percent).
    - External Sustainability Approach: 2019 (after exchange rate pass-through to trade) current account gap -10.0 → Overvaluation 28.6 (percent).
    - External Sustainability Approach: 2025 current account gap -0.3 → Overvaluation 0.9 (percent).
  - The EBA concludes the metical is overvalued in a range of 15 to 20 percent over the medium term (2018-2023).
  - The misalignment is expected to decline by 2025 as LNG gas projects come into full production and the non-MP current account narrows to 10 percent by 2025.
- Reserves adequacy:
  - Assessment judged 5.0 months of non-megaproject imports to be a prudent reserve cover.
  - End-2017 reserves are projected to cover 5¼ months of non-MP imports, up from 4.6 months at end-2016, albeit on the back of accumulation of external arrears.
  - A path of reserves of 5.0 months of non-MP imports will be needed going forward to withstand increasing possibility of export shocks.
- Policy implications:
  - Stabilization of the metical and net international reserves, if not accompanied by policy adjustment measures in 2018, are likely not to be safeguarded over the medium term (2018-2023).
  - Adjustment scenario assumes the real exchange rate would depreciate over the medium term to allow the exchange rate channel to act as a shock absorber.

### Governance and fiscal management actions (selected IMF recommendations and timelines)
- Submit to the National Assembly a draft law on Fiscal Responsibility Law
  - Action date: End-2018
  - Description: Law to maintain fiscal stability and ensure debt sustainability; warrant fiscal transparency; establish forward-looking and performance oriented financial management; ensure accountability to parliament; anchored on a sustainable medium-term debt strategy; encompass creation of a Sovereign Wealth Fund (SWF) and fiscal rule(s); regulations adopted within six months for SWF implementation.
  - Macroeconomic relevance: Strengthening fiscal sustainability, transparency and accountability (PFM).
- Issue a decree to regulate issuance and management of public sector debt and government guarantees
  - Action date: End-November 2017
  - Description: Decree to require central government borrowing and contingent liabilities to be contracted by the Minister of Finance with approval processes, ex-ante consultation of Banco de Moçambique, disclosure requirements, and regular reconciled public sector debt records; loans/guarantees not meeting requirements deemed legally invalid.
  - Macroeconomic relevance: Strengthening public debt management (PFM).
- Approve regulations implementing the new SOEs Law
  - Action date: End-June 2018
  - Description: Regulations to define state-ownership consistent with GFS international standards, designate an entity to manage/co-ordinate SOEs, set borrowing limits, reporting obligations, compensation rules, and dividend policy.
  - Macroeconomic relevance: Strengthening SOE management and mitigating fiscal and financial risks (PFM).
- Strengthen SOEs oversight
  - Action date: End-2018
  - Description: Map and publish list of all SOEs, clarify institutional arrangements for unified SOE management and oversight, adopt regulations/guidelines to regulate SOE borrowing.
  - Macroeconomic relevance: Strengthening SOE management and mitigating fiscal and financial risks (PFM).
- Prepare recovery and/or restructuring plans for SOEs in financial distress
  - Action date: End-2018
  - Description: Identify SOEs in financial distress and prepare financial/fiscal risk assessments and recovery/restructuring plans.
  - Macroeconomic relevance: Strengthening SOE management and mitigating fiscal and financial risks (PFM).
- Submit to the National Assembly a draft law for Government Autonomous Entities
  - Action date: End-2018
  - Description: Law to provide borrowing limits, harmonize financial reporting, limit capacity to create/hold shares in other public bodies, and require registration.
  - Macroeconomic relevance: Strengthening fiscal risks and public debt management (PFM).
- Adopt a strategy to monitor and resolve arrears with suppliers and VAT refunds
  - Action date: End-2017
  - Description: Strategy to include mandatory recording of commitments and verification steps in the e-SISTAFE system from January 1, 2018; system to capture stock, age, and composition of arrears; audit of arrears including non-budgetary arrears.
  - Macroeconomic relevance: Clarifying fiscal position and strengthening fiscal risk management (PFM).
- Maintain an updated register of government assets and adopt procedures and rules to transfer and dispose of government’s real assets
  - Action date: End-2018
  - Description: Register to include financial assets, fixed assets, land and subsoil assets.
  - Macroeconomic relevance: Strengthening asset liability management and transparency (PFM).

### IMF–World Bank joint recommendations on authorities' action plan (selected transparency and accountability items)
- Adopt the IMF’s Government Finance Statistics standard
  - Action date: End-January 2019
  - Description: Include economic, administrative and functional classification for budget formulation, execution and reporting.
  - Macroeconomic relevance: Strengthening fiscal transparency (PFM).
- Strengthen parliamentary oversight on public finance
  - Action date: End-September 2018
  - Description: Annex to each initial draft budget law to include (a) summary statement for each SOE, (b) similar report for each government autonomous entity, and (c) an assessment of fiscal risks consolidating contingent liabilities and mitigation strategy.
  - Macroeconomic relevance: Strengthening fiscal risk management and oversight (PFM).
- Strengthen public oversight on public finance
  - Action date: Continuous and end-2019
  - Description: Publish reconciliations of changes to fiscal forecasts and deviations; quarterly information on arrears in budget execution reports; quarterly and annual debt reports on domestic and external public debt including guarantees; economic feasibility studies of major public investments above a threshold; and State's participation in extractive industries sector with full disclosure by end-2019.
  - Macroeconomic relevance: Strengthening fiscal transparency (PFM).
- Strengthen public oversight on SOE performance
  - Action date: Continuous
  - Description: Publish annual external Audit Reports of majority-controlled SOEs on their websites and publish a comprehensive annual report on SOE portfolio performance including compliance with corporate governance standards and information on all financial relations with government by end September of each year.
  - Macroeconomic relevance: Strengthening fiscal risk management and oversight (PFM).
- Enhance transparent and efficient management of natural resources
  - Action dates: End-2018, 2019 and 2020
  - Description: (a) clarify and disclose rules regarding financial relationship between government and sector SOEs by end-2018; (b) disclose direct and indirect State participation in extractive industries sector by end-2019; (c) implement roadmap to disclose beneficial ownership in extractives sector by end-2020.
  - Macroeconomic relevance: Strengthening fiscal transparency (PFM).
- Submit to the National Assembly all legislative amendments necessary to support transparency reforms
  - Action date: End-2018
  - Description: May include changes in the SISAFE Law governing public financial management.
  - Macroeconomic relevance: Strengthening fiscal transparency (PFM).
- Support accountability and resolve unreported loans of EMATUM, Proindicus, and MAM
  - Action date: End-2017
  - Description: Actions include reporting components to Administrative Tribunal and Attorney General; provide information on use of loan proceeds and overpricing; support Attorney General investigations; ensure transfer to the State of security-related assets of the three companies; consider viability and possible liquidation once restructuring of government’s private debt is completed.
  - Macroeconomic relevance: Strengthening fiscal accountability (PFM).
- Support anti-corruption and governance efforts by strengthening legal and institutional framework
  - Action date: End-2019
  - Description: Bring anti-corruption laws in line with international standards; criminalize UNCAC offences with dissuasive sanctions; implement verifiable public asset disclosure of public officials; enforce accountability mechanisms for public managers; ensure independence and capacity of anti-corruption agencies, courts and judiciary inspections; simplify administrative procedures; upgrade civil service recruitment and promotion systems.
  - Macroeconomic relevance: Strengthening fiscal accountability (PFM).

*Source: Annex I. Implementation of Past IMF Recommendations (cr1865).*

### 1.       Growth and inflation. GDP data recently published by Mozambique’s National

### 1.       Growth and inflation. GDP data recently published by Mozambique’s National

### Growth and inflation
- Economy grew by 3.7 percent in 2017, driven by a recovery in agriculture and mining activity (notably coal).
- Non-mining non-agricultural growth decelerated in 2017 to 1.8 percent (from 3.5 percent in 2016).
- Staff projection for 2017 was 3.0 percent real growth; differences mainly reflect an upward revision of growth performance in the first three quarters in a limited number of sectors.
- Maputo inflation index fell to 6.3 percent (y/y) by end-January.
- National inflation index declined to 3.8 per-cent (y/y) by end-January.

### Monetary and banking sector
- Credit to the economy declined year-on-year by 12.8 percent in nominal terms (January 2018 data).
- Banks’ nominal average rates for 1-year loans around 28 percent.
- Banks’ nominal average rates for 1-year deposits around 18 percent.
- Average inflation is expected to remain in single digits in 2018.
- Real interest rates remain elevated.

### Government revenues
- Revenue collection in 2017 reached 213.9 billion Meticals.
- Staff projection for 2017 revenues was 201.1 billion Meticals.
- Outturn exceeded staff projections by 12.8 billion Meticals (about 1.6 percent of GDP).
- Overperformance mostly from non-tax revenues (~1.4 percent of GDP), reflecting large unexpected dividends from the Bank of Mozambique and the railway authority CFM (Caminhos de Ferro de Moçambique).

### Government expenditures and fiscal deficit
- Fiscal accounts are on a cash basis and do not reflect partial non-payment of debt service or domestic arrears.
- Total primary expenditure (excluding interest) in 2017 amounts to around 230.5 billion Meticals.
- Primary expenditure is slightly higher than staff projection by 2.5 billion Meticals (or 0.3 percent of GDP).
- Overall deficit shown by the fiscal accounts is about 5.4 percent of GDP (reflecting revenue overperformance and low debt servicing on a cash basis).

### Anadarko natural gas project
- On February 20, Anadarko announced it had sold about 10 percent of the future production of its natural gas field to EDF.
- Including previously signed sales contracts, Anadarko has sold about one half of the volume of production it needs to sell before a final investment decision can be considered.
- Approval of the project’s development plan by the council of ministers occurred a few weeks prior to the report.
- Staff projects a final investment decision in mid-2019.

### Policy developments
- Monetary Policy Committee (MPC) decision (26 February): policy rate lowered by 150 basis points to 18.0 percent.
- MPC increased reserve requirements in foreign currency by 800 basis points to 22.0 percent effective on March 7.
- MPC kept reserve requirements in domestic currency constant at 14.0 percent.
- Debt restructuring: Ministry of Finance to resume discussions with private creditors in London on March 20; government intends to present a proposal aimed at bringing Mozambique’s debt back to sustainable levels.

### Implications and staff appraisal
- Recent developments include several one-off factors (e.g., non-tax revenues); macro-projections for 2018 and the medium term remain largely valid.
- Fiscal accounts for 2017 confirm that the deficit remains high and that sustained fiscal consolidation efforts are needed.
- MPC decisions are in line with staff advice.

*Source: cr1865 — Staff Report excerpt, February 27, 2018.*

### 4.  The teams agreed on the following division of labor:

### 4. The teams agreed on the following division of labor

### Debt management and investment planning reforms
- The Fund will:
  - Continue to play a key role in building government capacity to assess debt sustainability and define a coherent debt strategy through TA and continued support from HQ.
  - Provide TA support to strengthen debt management capacity and help authorities improve debt management and public investment selection process.
- The Bank will:
  - Provide on-site assistance to strengthen debt management capacity.
  - Continue providing technical assistance for enhancing project investment management and medium-term debt strategy.

### Public financial management (PFM) reform
- The Fund will:
  - Continue support through regular TA missions from FAD and its AFRITAC South regional office in Mauritius.
  - Use Fund missions to assess progress in this field.
- The Bank will:
  - Provide ongoing consultation from its local office and supervision missions of projects under implementation in this area.

### Tax administration reforms
- The Fund will take the lead and provide support through ongoing advice based on regular TA missions from FAD and AFRITAC South.
- The Bank will advance reforms in the context of its business environment policies and portfolio, and its program on natural resources (MAGTAP).

### Social safety net reform and pensions
- The Bank will take the lead through continued TA in the design of more comprehensive and performing safety nets, in cooperation with other development partners and international organizations (including UNICEF and ILO).
- The Fund will play its role in identifying the fiscal space for the safety nets.
- The Bank is also taking the lead in public pension reforms.
- Results will be discussed among collaborators on a regular basis to inform policy discussions with the authorities.

### Natural resource wealth management
- The Fund will provide TA under the Topical Trust Fund for Managing Natural Resource Wealth (TTF-MNRW) on:
  - The fiscal regime of the extractive sector, revenue forecasting, and natural resource statistics.
- The Bank will support Mozambique’s implementation of EITI through its Multi-donor Trust Fund (MDTF) and fund it through the MAGTAP project.

### Investment climate reform
- The Bank will take the lead in working with government to enhance the investment climate by cutting red tape and simplifying the legal and regulatory framework.
- Results will be shared on an ongoing basis and discussed during Fund program review missions.

### Financial sector stability and development
- The Fund will continue to help the Bank of Mozambique build capacity to assess risks to financial stability of the banking sector.
- The Bank will take the lead in supporting financial sector development and reforms including:
  - Enhanced financial inclusion, competition, consumer protection, and financial literacy.
- Results of respective work will be shared and discussed regularly.

### Information requests between teams
- Fund team requests:
  - To be kept informed of progress in the above macro-critical structural reform areas.
  - Timing: when milestones are reached; and during Fund program missions.
- Bank team requests:
  - To be kept informed of the Fund's assessments of macroeconomic policies and prospects, analytical work on areas under the Fund’s lead, and recommendations of Fund TA missions.
  - Timing: in the context of Fund missions, and at least semi-annually.

### Planned activities (May 2017–April 2018) — headline items
- Bank Work Program highlights:
  - FSTAP project support to financial sector reforms — Ongoing.
  - Structural reforms: procurement, decentralization, business environment, financial sector — Ongoing.
  - Support on targeted, sustainable safety net measures (including public works system) — Ongoing.
  - Mozambique Economic Update — Ongoing (March 2016 noted in source).
  - TA on public investment management — Ongoing.
- Fund Work Program highlights:
  - TA up mission on PFM — Dec. 2017; expected delivery date Dec. 2017.
  - Capacity building to administer revenue from extractive industries — Oct. 2017; expected delivery date Nov. 2017.
  - MNRW-TTF: FARI, macro fiscal issues — Sept. 2017; expected delivery date Oct 2017 / Nov. 2017 / Oct. 2017 (as listed).
  - Developing a Forecasting and Policy Analysis System (FPAS) — Sept. 2017.
  - TA on national accounts statistics — Aug. 2017; expected delivery date Aug. 2017.
  - TA on financial stability and Communication — Nov. 2017; expected delivery date Nov. 2017.
- Joint Work Program highlights:
  - PFM: continue to monitor consolidation and expansion of e-SISTAFE — Ongoing.
  - Policy advice on public sector salary reforms (incl. pensions) — Ongoing.
  - Review of tax policy — TBD.
  - TA on Fiscal Risks Management — TBD.
  - Policy advice on natural resource wealth management — Ongoing.
  - Social Protection: Design of programs and assessment of fiscal space — Ongoing.

### Statistical issues (as of February 6, 2017)
- Assessment of Data Adequacy for Surveillance:
  - General: Data provision has some shortcomings, but is broadly adequate for surveillance.
  - Weaknesses exist particularly in national accounts, government finance, balance of payments, and external debt statistics.
  - Authorities participating in the Enhanced Data Dissemination Initiative (EDDI) funded by DFID.
- Real sector statistics:
  - National accounts prepared by INE in accordance with the 1993 System of National Accounts (1993 SNA).
  - July 2014: INE released a revised annual GDP series for 1991-2013 switching base year from 2003 to 2009.
  - July 2015: partly revised GDP series improving measurement of investments and imports for natural resource projects.
  - INE’s household income and expenditure survey 2015-2016 needs incorporation to strengthen national accounts.
  - CPI developments: revamped CPI for Maputo released Feb. 2011; national index integrating Maputo, Beira, and Nampula released April 2006.
  - Outstanding issues: housing market rent sample, coverage expansion to Quelimane and Greater Maputo, insufficient sectoral labor market and employment data.
- Monetary and financial statistics:
  - Significant improvements in compilation of monetary statistics.
  - Need for more granular measures of commercial banks’ foreign assets and liabilities.
  - 2004 work plan to implement the Monetary and Financial Statistics Manual (MFSM) and develop an integrated monetary database (IMD).
  - November 2007: IMD completed enabling accurate monthly monetary statistics.
- Balance of payments (BOP) and IIP:
  - With STA assistance and DFID support under EDDI, BM has made significant progress; migration to BPM6 finalized.
  - IIP compiled and disseminated on a quarterly basis.
  - Further strengthening needed: IT improvements, accuracy and coverage (trade credit and advances, public and publicly-guaranteed private sector external debt), foreign liability positions of non-megaprojects, compilation of imports of domestic enterprises supplying megaprojects.
- External debt statistics:
  - Improvements achieved under 2010-13 PSI-supported program, but further strengthening required.
  - Debt unit needs capacity strengthening to oversee entire public debt portfolio including SOEs and cooperation-agreement loans.
  - Delays in confirmation from creditors/line ministries can lead to significant revisions in stock figures.
  - Strengthening debt office capacity needed to ensure timely recording of disbursements in external debt database.

### Data reporting and dissemination
- Mozambique participates in the enhanced General Data Dissemination System but has not launched its NSDP; metadata are updated infrequently.
- Reporting to STA:
  - Does not report fiscal data for publication in the International Financial Statistics (IFS) but reports some revenue data for the Government Finance Statistic Yearbook (GFSY).
  - Reports monthly monetary data to STA using standardized reporting forms (SRFs); enhanced data published in the IFS Supplement.
  - Since 2007, BM compiles and reports comprehensive IIP data in the Balance of Payments Statistics Yearbook.

### Table of Common Indicators Required for Surveillance (As of February 6, 2018) — selected entries (dates preserved exactly)
- Exchange Rates: Date of latest observation Jan. 2018; Date received Jan. 2018; Frequency of Data D; Frequency of Reporting W; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation Jan. 2017; Date received Jan. 2018; Frequency W W W.
- Reserve/Base Money: Date of latest observation Jan. 2017; Date received Jan. 2017; Frequency D W D.
- Broad Money: Date of latest observation Dec. 2017; Date received Jan. 2018; Frequency M M M.
- Central Bank Balance Sheet: Date of latest observation Dec. 2017; Date received Jan. 2017; Frequency M M M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation Dec. 2017; Date received Jan. 2018; Frequency M M M.
- Interest Rates: Date of latest observation Dec. 2017; Date received Jan. 2018; Frequency M M M.
- Consumer Price Index: Date of latest observation Dec. 2017; Date received Jan. 2018; Frequency M M M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government and Central Government: Date of latest observation 2017 Q3; Date received Jan 2018; Frequency of Data M, Q; Frequency of Reporting Q; Frequency of Publication Q.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 2017 Q3; Date received Jan 2018; Frequency Q Q Q.
- External Current Account Balance: Date of latest observation 2017 Q3; Date received Dec. 2017; Frequency Q I I.
- GDP/GNP: Date of latest observation 2017 Q3; Date received Feb. 2017; Frequency Q Q I.
- Gross External Debt: Date of latest observation 2015; Date received Dec. 2016; Frequency A I I.
- International Investment Position: Date of latest observation 2016; Date received Sept. 2017; Frequency A A A.

### Debt Sustainability Analysis — key findings and numbers
- Mozambique’s debt is currently in distress; total public debt is on an unsustainable path.
- Drivers of deterioration:
  - Delayed fiscal policy response to weaker commodity prices.
  - Limited control on SOE borrowing that resulted in large undisclosed external debt of about $1.4 billion.
  - Real exchange rate depreciation 48 percent since end-2014 (even after accounting for the appreciation in 2017).
- DSA update findings:
  - PV of external public and publicly guaranteed (PPG) debt relative to GDP (and relative to exports and revenues), and the ratio of external debt service relative to revenues, surpass by more than 50 percent the prudent thresholds for several years.
  - Sovereign accumulating substantial external and domestic arrears:
    - External arrears about 5 percent of GDP.
    - Total domestic arrears could be ranging from 2.5 to 4.5 percent of GDP.
- Restoring debt sustainability would involve:
  - Bringing Mozambique’s external debt risk rating to “moderate” over the medium term (3-4 years).
  - Reducing overall public debt and financing needs to prudent levels.
- Restructuring and project risks:
  - In 2016 authorities announced plans to restructure their commercial debt but progress has been slow.
  - Any restructuring needs to consider risk of prolonged delays in LNG project implementation, which is the major driver of growth and debt reduction over the longer term.
  - Substantial downside risks to authorities’ financing plans, notably regarding official concessional financing for the authorities’ investment plan, which still needs to be contracted.

### Debt stock and composition (Text Table 1 excerpt, Public sector debt, Percent of GDP)
- Public sector debt 2013 53.1; 2014 62.4; 2015 88.1; 2016 128.3; 2017p 112.0
- Public sector external debt (incl. guarantees) (A+B+C) 2013 47.0; 2014 55.8; 2015 76.4; 2016 103.7; 2017p 85.2
- A. Bank of Mozambique-IMF 2013 1.1; 2014 1.1; 2015 1.9; 2016 2.2; 2017p 1.3
- B. General Government 2013 36.3; 2014 44.8; 2015 62.4; 2016 88.9; 2017p 72.7
  - Multilateral creditors, excl IMF 2013 21.1; 2014 20.8; 2015 22.8; 2016 39.1; 2017p 29.9
  - Bilateral creditors 2013 15.2; 2014 20.8; 2015 30.9; 2016 42.3; 2017p 32.2
    - Paris Club 2013 2.6; 2014 3.3; 2015 5.1; 2016 7.8; 2017p 6.7
    - Banks 2013 0.0; 2014 3.2; 2015 3.3; 2016 7.5; 2017p 5.4
    - EMATUM/Mozam Eurobond 2013 0.0; 2014 3.2; 2015 3.3; 2016 7.5; 2017p 5.4
  - Other public sector : ENH (Coral LNG project) 2013 0.0; 2014 0.0; 2015 0.0; 2016 0.0; 2017p 5.2
- C. Government guaranteed external debt 2013 9.5; 2014 9.9; 2015 12.1; 2016 10.8; 2017p 5.9
  - EMATUM 2013 5.3; 2014 2.2; 2015 2.7; 2016 0.0; 2017p 0.0
  - Proindicus 2013 3.9; 2014 3.9; 2015 4.8; 2016 6.2; 2017p 3.6
  - MAM 2013 0.0; 2014 3.4; 2015 4.2; 2016 4.1; 2017p 2.0
  - Other guarantees 2013 0.3; 2014 0.4; 2015 0.4; 2016 0.5; 2017p 0.3
- Public sector domestic debt (incl. guarantees) 2013 6.2; 2014 6.5; 2015 11.7; 2016 24.6; 2017p 26.7
- External arrears on external PPG 2013 0.0; 2014 0.0; 2015 0.0; 2016 1.9; 2017p 5.3

*Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA); February 22, 2018.*

### 2.      The macroeconomic outlook is expected to deteriorate compared to the previous Article IV DSA

### 2.      The macroeconomic outlook is expected to deteriorate compared to the previous Article IV DSA

### Macroeconomic outlook: baseline findings
- Real GDP growth projected at 3 percent in 2017 (compared to 7.2 percent in the previous Article IV DSA); the 2016 outcome was also lower than projected in 2015.
- Growth reflects ongoing slowdown after previously undisclosed loans were revealed and donor budget support disbursements were frozen; also reflects adverse weather conditions in 2016.
- Substantial tightening of monetary policy stabilized the exchange rate market in late 2016 and in 2017 and supported correction of external imbalances.
- Output growth is not expected to recover over the medium term as fiscal policy is assessed to remain loose, and domestic arrears to suppliers are expected to accumulate to about 20 percent of GDP by 2023 as domestic financing is expected to reach its limits by end-2018.
- Growth expected to recover only in 2023 on the back of the start of production of natural gas projects.
- Overall fiscal deficit (on a modified cash basis, excluding the 2017 one-off capital gain tax revenue) expected to reach 8.2 percent of GDP in 2017, up from 7.6 percent in 2016, and to deteriorate further by 2023.
- Current account deficit projected to increase to over 118 percent of GDP by 2023 reflecting a surge in imports of goods and services mainly related to construction of processing facilities for liquefied natural gas (LNG).
- Approximately one third of all imports related to such investments are financed by (frontloaded) FDI with the remainder financed by private debt.

### Risks to the outlook
- Near-term risks:
  - Disorderly adjustment due to a drying up of financing the fiscal deficits.
  - Projected fiscal gap too large to be financed through continuous accumulation of arrears even if authorities reduced spending.
  - Accumulation of domestic and external arrears could crowd out the private sector in credit markets and reduce confidence, with potentially worse effects on growth and the external sector than the baseline assumes.
  - Risk that external sector stabilization is sustained only through prolonged monetary policy action.
- Medium-term risks:
  - Substantial delay in implementation of the Anadarko LNG project is the main risk.
  - Substantial downside risks to authorities’ external financing plans related to still-to-be-contracted concessional financing for the development investment plan.
- Upside/mitigating factors:
  - Expansion in the coal and LNG sectors.
  - Further recovery of commodity prices.
  - New oil and gas discoveries from recently extended exploration rights.
  - Other FDI projects or initiation of phase 2 of the natural gas projects.

### Financing stance and external disbursement assumptions
- Authorities have scaled back considerably contracting of government external debt; projections assume a prudent stance on new borrowing retained in the medium term.
- Negotiations of large projects financed on non-concessional terms put on hold since the second half of 2017.
- New disbursements from multilateral and bilateral creditors assumed to be in line with ongoing projects or previously signed but not yet disbursed loans.
- New borrowing for pipeline projects assumed to gradually resume contracting with multilateral and bilateral creditors largely from 2020 onwards as LNG exports approach coming on stream.
- Financing assumptions aligned with long-term output growth projections driven by LNG exports from 2023 onwards.
- Significant risks related to availability of financing, particularly for large concessional official financing over the medium term; if negative risks materialize in 2018, external financing would need significant downward revision.
- Text Figure 3 (described) shows assumed external disbursements and financing assumptions up to 2023.

### External arrears, default status, and debt stock
- Mozambique is currently in default, having started to accumulate external arrears in 2016.
- Projections assume arrears on defaulted loans will continue to accumulate over the projection horizon.
- Sovereign arrears incurred on the Mozam Eurobond coupon and on the debt service of Proindicus and MAM.
- March 2016 debt service payments on Ematum and Proindicus were met but required a $200 million loan from the Bank of Mozambique directly to the government.
- Overall stock of external arrears on public and publicly guaranteed external debt reached $710 million at end-2017.
- Text Table 2: Mozambique: Stock of External Arrears (Millions of U.S. dollars) — End-2017
  - Commercial debt: 592.86
    - Mozam: 97.90
    - MAM: 343.06
    - Proindicus: 151.90
  - Bilateral debt: 116.80
    - Paris Club: Brazil: 22.93
    - Non-Paris Club: 93.87
  - Total: 709.66
- Arrears under bilateral discussion with five official creditors amounting to $94 million (Libya, Iraq, Angola, Bulgaria and Poland) and arrears amounting to about $23 million to Brazil on a $125 million state-guaranteed borrowing by the state-owned airport company for which the guarantee has been called.
- Contractual penalty fees or rates on missed payments have not yet been included in the estimate for the stock of arrears reflected in the baseline.
- Government is servicing all remaining multilateral and bilateral external debt obligations; authorities plan to hold off on making payments on the defaulted loans while negotiations continue.

### Debt restructuring status
- Government announced a debt restructuring in October 2016 and initiated discussions with selected creditors.
- No significant progress made to date; projections do not include any assumptions on the debt restructuring.
- Authorities hired reputable financial and legal advisors in spring 2016 to initiate discussions.
- Restructuring efforts focused on the MAM and Proindicus loans, and the Mozam (ex-Ematum) Eurobond, and potential re-profiling of highly non-concessional bilateral loans.
- Based on authorities’ reporting, an agreement reached with China and India on re-scheduling debt service payments on several bilateral loans; new schedule included in baseline assumptions.

### LNG projects, ENH guarantees, and contingent liabilities
- ENH holds a 15 percent share in the Area 1 natural gas project developed by an Anadarko-led consortium; planned development cost for LNG processing facilities and associated investments around $25 billion, of which about $15 billion will be debt financed.
- ENH liable for 15 percent of this debt; guarantee required by consortium could amount to about $2¼ billion.
- Equity borrowing from partners about $1.5 billion would increase the PPG debt stock in line with disbursement plans.
- Guarantee could be called only if the project was not completed or if there were extraordinarily lengthy delays in project completion.
- ENH also holds a 10 percent share in the Area 4 natural gas projects developed by the ENI-led consortium; planned development cost around $7 billion, of which about $4.5 billion is debt financed.
- ENH’s 10 percent share amounting to about $700 million would increase the PPG debt as it represents borrowing from external partners.
- ENH shares in Area 1 and Area 4 included in the DSA without increasing gross financing needs because debt service will be serviced out of projects’ revenues from ENH share in profits.
- Notes on guarantees and project timing:
  - No guarantee would be needed for ENH’s equity share which will be financed by the Anadarko-led consortium with repayments coming out of LNG revenues during the first years of operation.
  - Agreements plan a two-year buffer between expected completion date for facilities and the deadline at which guarantee could be called; if force majeure is involved, buffer increases to three years.
  - Risks from adverse gas price movements mitigated by long-term sales contracts with gas off-takers.

### Evolution of selected macroeconomic indicators (Previous DSA vs Current DSA)
- Real GDP growth (%) — Previous DSA (PSI, 5th review) vs Current DSA:
  - 2014: 7.2 vs 7.4
  - 2015: 6.3 vs 6.6
  - 2016: 6.5 vs 3.8
  - 2017: 7.2 vs 3.0
  - 2018: 8.3 vs 3.0
  - 2019: 7.6 vs 2.5
  - 2020: 7.5 vs 2.4
  - 2021: 33.9 vs 2.3
  - 2022: 14.0 vs 2.2
  - 2023: ... vs 9.9
- Nominal GDP (US$ billion) — Previous DSA vs Current DSA:
  - 2014: 17.0 vs 16.9
  - 2015: 15.2 vs 14.8
  - 2016: 14.8 vs 11.3
  - 2017: 16.4 vs 12.7
  - 2018: 18.4 vs 14.3
  - 2019: 20.5 vs 15.0
  - 2020: 22.8 vs 15.7
  - 2021: 31.4 vs 16.4
  - 2022: 36.7 vs 17.1
  - 2023: ... vs 19.1
- Overall fiscal deficit (%GDP) — Previous DSA vs Current DSA:
  - 2014: 10.6 vs 10.7
  - 2015: 6.0 vs 7.2
  - 2016: 4.0 vs 7.6
  - 2017: 4.3 vs 5.5
  - 2018: 4.4 vs 7.5
  - 2019: 4.2 vs 10.8
  - 2020: 4.3 vs 9.9
  - 2021: 1.3 vs 9.6
  - 2022: 2.0 vs 10.6
  - 2023: ... vs 9.9
- Current account deficit (% GDP) — Previous DSA vs Current DSA:
  - 2014: 34.1 vs 38.2
  - 2015: 30.2 vs 40.3
  - 2016: 33.1 vs 39.2
  - 2017: 55.4 vs 16.1
  - 2018: 73.2 vs 16.9
  - 2019: 80.8 vs 44.6
  - 2020: 90.4 vs 66.6
  - 2021: 73.2 vs 91.0
  - 2022: 65.5 vs 116.4
  - 2023: ... vs 117.7
- FDI (% of GDP) — Previous DSA vs Current DSA:
  - 2014: 28.9 vs 29.6
  - 2015: 25.2 vs 26.1
  - 2016: 30.6 vs 27.8
  - 2017: 28.3 vs 12.4
  - 2018: 27.3 vs 12.6
  - 2019: 27.4 vs 34.8
  - 2020: 27.1 vs 53.7
  - 2021: 18.9 vs 75.2
  - 2022: 16.6 vs 20.0
  - 2023: ... vs 4.0

### Medium- and long-term macroeconomic assumptions (2017–2037)
- Real GDP growth:
  - Not expected to recover and remain around a 2.2-2.5 percent range over the medium term, supported mainly by expansion in coal mining and infrastructure investments, including LNG manufacturing.
  - Sharp increase in growth in 2023 reflects assumed first natural gas production plant start; overall GDP growth will moderate once LNG production reaches full capacity in 2028.
  - Risks include public and private investment not achieving expected payoffs and the possibility of Dutch disease.
- LNG sector assumptions:
  - LNG plants totaling 13 onshore trains and 4 floating trains (FLNG) assumed under construction from late 2017 through 2027.
  - First onshore train and first floating train assumed to start production in 2023; remaining trains sequentially thereafter; final train starts production in 2029.
  - By 2029 the value of production could approach $40 billion.
  - Total investment from 2017 projected at $110 billion.
  - Schedule and size highly ambitious and subject to significant implementation risks and changes in gas market conditions; first final investment decision made by investors at end-2017.
- Consumer price inflation projected to gradually slow to authorities’ target range of 5–6 percent over the medium term.
- Exports:
  - Export value growth projected positive (27.6 percent) in 2017 due to coal exports; traditional exports decreased by 8.7 percent in 2017.
  - Medium-term exports expected to fall back to around 3 percent until LNG exports start, which cause large increases starting in 2023 (over 50 percent export value growth on average during 2023-26).
  - From the late 2020s onwards export growth to fall back to the 2-3 percent range.
- Imports:
  - Non-megaproject economy imports projected to contract only slightly in 2017 supported by metical appreciation.
  - Total imports would grow by more than 35 percent on average during 2019-22 due to LNG investment.
  - Non-megaproject imports remain subdued growing by about 5 percent on average until 2023; increase to about 8 percent on average during 2024-28; subsequently around 3 percent.
- External current account:
  - Projected to peak at a deficit of over 118.5 percent of GDP by 2023 driven by imports for LNG investment.
  - Doubling of this peak relative to previous DSA results from lower GDP and metical depreciation.
  - Deficit primarily financed through FDI and private external borrowing.
  - Large LNG exports under revised baseline imply it would subsequently turn into surplus during the mid-2020s and early 2030s.
  - Non-megaproject current account deficit (excluding all megaproject-related activity) projected to narrow but remain around 15 to 18 percent of GDP over the medium term (from 22 percent of GDP in 2016), and mechanically decline to 9.7 percent by 2025 given LNG impact on GDP.
- Fiscal assumptions:
  - Primary fiscal deficit (on a modified cash basis) stood at 6.4 percent of GDP in 2015, decreased to 4.6 percent of GDP in 2016.
  - Projected to remain at 4.5 percent of GDP in 2017 (excluding the one-off 2017 capital gains tax revenues), narrow to 3.2 percent with the 2018 Budget, then reverse to deficits of 5-7.5 percent of GDP during 2019-2022.
  - Primary fiscal balance expected to stay in deficit beyond 2023 and revert to balance by late 2020s.
  - Fiscal revenues during the first few years of gas production limited because of large cost recovery for continuous investments; by the late 2020s fiscal revenues from gas projects would account for more than half of total fiscal revenues (assumed fiscal revenues remain broadly constant as a percentage of GDP after boost to real GDP from LNG production).

*Source: IMF staff calculations and projections as presented in the DSA chapter.*

### 8.      The risk rating of Mozambique’s external PPG is re-classified to “in distress”, while total

### 8.      The risk rating of Mozambique’s external PPG is re-classified to “in distress”, while total

### Re-classification and near- to medium-term external PPG indicators
- All five public external debt indicators breach their respective thresholds in the near and/or medium-term under the baseline.
- Four indicators breach their thresholds by more than 50 percent of their respective threshold for several years.
- PV of external public debt in terms of GDP:
  - Projected at about 67 percent in 2017 (Baseline Scenario, Table 1), compared to 38.4 percent in the previous Article IV DSA and a threshold of 40 percent.
  - Projected to remain above the threshold until 2026, when under baseline assumptions real GDP would jump by more than 75 percent from 2023 to 2025 taken together due to the LNG projects production.
  - If the LNG projects were to be delayed, this indicator could be expected to remain above the prudent threshold until LNG investment commences.
- PV of debt in terms of exports:
  - 2016 level: 238 percent (versus 129 percent in the previous Article IV DSA).
  - Projected to fall to about 176.7 percent in 2017 as exports recover with completion of the Nacala rail corridor underpinning coal exports.
  - Projected to peak at about 248.4 percent in 2022 as coal exports stabilize and non-megaproject exports remain subdued.
  - Expected to fall below its 150 percent threshold by 2024 once LNG projects come into production.
  - Risks from possible renewed commodity price shocks, particularly coal, would weaken this indicator over the medium term.
- PV of debt in terms of revenues:
  - 2016: about 330 percent (versus 147 percent in the previous Article IV DSA).
  - Expected to fall to 265 percent in 2017.
  - Projected to deteriorate and stay at elevated levels above the prudent threshold for almost eight years.
  - Projected to decline below its 250 percent prudent threshold by 2024.
- External public debt service in terms of revenues:
  - Deteriorated dramatically to about 27 percent of revenues in 2017 from 12½ percent in the previous Article IV DSA.
  - Steep payments on the MAM, and Proindicus loans, and the Ematum refinancing play a significant role.
  - Projected to peak at the time of the Mozam Eurobond redemption at 44 percent.
  - Only consistently falls below its 20 percent threshold in 2026, after which it would be in the 8-9 percent of revenue range.
- External public debt service in terms of exports:
  - Projected to stay slightly below threshold in the near-term.
  - Has a 1-single breach of the threshold in the medium term at the time of the Mozam Eurobond redemption reaching 26.4 percent (or 6.4 percentage points above the 20 percent threshold).

### Long-term outlook and drivers (LNG projects and arrears)
- External debt is mainly driven by assumptions on the LNG projects.
- External debt expected to peak in 2023 at 370.8 percent of GDP (compared to 232 percent of GDP in the previous November Article IV DSA update).
- Heightening of the peak driven by metical depreciation lowering the dollar value of GDP while nominal LNG investment stays the same.
- Changes in public debt also driven by external arrears on PPG debt, assumed to still accumulate until that time.
- ENH borrowing from external partners increases public debt by about 20 percentage points at the peak in 2023 (see Text Table 4).

### Private external debt and megaprojects
- Private external debt expected at 57.5 percent of GDP at end 2017 (versus 43 percent in the previous Article IV DSA update).
- Resulting vulnerabilities are relatively low as much of such debt is owed by megaprojects that receive revenues in foreign currency.
- Many private debts are owed to parent companies, attenuating risks further.
- Regulation limits banks’ net open positions to less than 20 percent, containing direct depreciation impacts on bank profits, though higher NPLs could cause significant impact.
- By 2022 private external debt is expected to quadruple relative to GDP driven by large LNG investments, then decline again into the late 2020s as initial LNG revenues are devoted to amortizations.

### Sensitivity to exchange rate and other stress tests
- Exchange rate shocks are the most significant sensitivity for external debt and debt service ratios.
- A 30 percent further nominal depreciation of the metical in 2018 relative to projections would:
  - Increase the PV of external public debt to GDP ratio by another 40 percentage points (to 105 percent) in that year relative to 2017.
  - Increase external debt service relative to government revenue to 40 percent in 2018 (from 29 percent in absence of such a shock).
- Other standard stress tests (e.g., GDP growth one standard deviation below historical averages) are more benign but may not capture current risks well because projected growth is already well below historical averages.
- A shock to growth relative to the baseline of four standard deviations is modeled with real GDP growth at 2.3 percent in 2018 and 2019 (versus a baseline of 3 percent and 2.5 percent, respectively); the impact is more modest.

### Public sector debt sustainability, composition and servicing
- Total public debt increased due to external debt and a significant increase in domestic debt.
- External public debt expected to stay slightly below 80 percent of total public debt.
- Domestic debt expected to increase to about 26 percent of GDP in 2017 and 2018 (of which about 60 percent in government securities, while the rest is SOEs domestic debt).
- Nominal public debt at end-2016: 128.3 percent of GDP (of which 10 percent of GDP in SOEs domestic debt, not previously included in projections), compared to 73 percent of GDP in the previous Article IV DSA.
- Present value of total public debt at the 5 percent DSA discount rate would be 104 percent of GDP (more than double the value projected in the previous Article IV DSA).
- PV of debt surpasses the 56 percent of GDP prudent benchmark in the near and medium term until 2025.
- Public debt servicing challenges:
  - Total public debt service projected to consume over 50 percent of public revenue in 2018, 2019 and 2020 (this includes rollover of domestic treasury bills and bonds).
  - Under the baseline, domestic arrears to suppliers expected to accumulate reaching about 20 percent of GDP by 2023.
- Inclusion in the DSA coverage of a selected number of SOEs for which data was available due to strong macro-financial linkages between government, SOEs, and banks.

### Conclusions and policy recommendations
- Ensuring that LNG production materializes is crucial to underpin long-run debt sustainability; LNG-driven increases to GDP and revenues hold potential to eventually return debt ratios to prudent levels and support development.
- Re-establishing macroeconomic stability is paramount to:
  - Re-instil confidence,
  - Support the economy at a critical juncture,
  - Return debt to sustainability,
  - Contain downside risks to financing plans, notably for still-to-be-contracted concessional official financing.
- Authorities should ambitiously implement fiscal consolidation to address external imbalance and place public debt on a sustained downward trajectory.
- Extreme caution warranted regarding new debt contracting:
  - Avoid non-concessional external loans.
  - Strictly limit contraction of new loans in line with expectations on LNG revenues.
  - Focus on most urgent projects with high development impacts including maintenance to safeguard productive capacity.
  - Improve project selection and efficiency of public investment spending, better prioritization of projects and their financing.
  - Some loans already approved may need to be postponed or cancelled to prioritize higher-impact projects.
- Strengthen debt management and oversight:
  - Strengthen the debt unit (capacity and clout) to exercise effective oversight over the entire public debt portfolio and implement strong safeguards.
  - Substantially strengthen oversight over SOEs.

*Source: IMF staff assessment as presented in the DSA update.*

### 18.      The authorities concurred with staff’s assessment regarding the revision in the external

### 18. The authorities concurred with staff’s assessment regarding the revision in the external

### Authorities’ assessment and positions
- The authorities concurred with staff’s assessment regarding the revision in the external debt risk rating, and the debt sustainability assessment.
- They recognized the need for reducing financing needs as well as reaching a balanced primary deficit over the medium term.
- The authorities expressed reservations on:
  - the pace of fiscal adjustment recommended by the staff, and
  - the medium-term growth projections under the baseline, which the authorities considered too conservative.

### Intended policy actions to restore debt sustainability
- Implement the fiscal measures envisaged in the 2018 Budget.
- Actively resume discussions for the restructuring of external public debt owed to private creditors, a process initiated in October 2016.
- Resume bilateral discussions with six official creditors: Libya, Iraq, Angola, Bulgaria, Poland, and Brazil.

### Key programmatic emphasis
- Reduce external financing needs and achieve a balanced primary deficit over the medium term.
- Pursue debt restructuring negotiations in parallel with fiscal consolidation measures.

*Source: Statement by Mr. Mkwezalamba, Executive Director for Mozambique and Mr. Tivane, Senior Advisor to Executive Director; February 27, 2018.*

### 1. Introduction

### 1. Introduction

### Recent Economic Developments and Outlook
- Economic growth:
  - Historical average growth: 7.5 percent.
  - Growth in 2016: 3.8 percent.
  - Real GDP growth in 2017 (National Institute of Statistics): 3.7 percent.
  - Authorities’ 2017 projection for 2017: 3.8 percent.
  - Fund staff growth projections for 2017 and 2018: 3.0 percent.
  - Authorities’ expectation for 2018: maintain 2017 momentum due to moderate recovery in mining, agriculture, and transport; and improved business confidence.
- Inflation:
  - December 2016: 19.2 percent.
  - December 2017: 15.11 percent.
  - Average inflation for 2018 estimated at 7.7 percent.
- External sector and reserves:
  - Current account deficit: 39.2 percent of GDP in 2016; estimated to narrow to 16.1 percent of GDP in 2017.
  - Reserve position at end-December 2016: 4.7 months of import cover.
  - Reserve position at end-December 2017: 6 months of non-mega project imports.
  - Reserve position for 2018: expected to remain stable, equivalent to nearly 6 months of import cover.
- Key drivers of 2016–17 slowdown and partial recovery:
  - Shocks: fall in commodity prices, weather-related shocks (floods), security concerns (central and northern regions), transport and logistics bottlenecks for coal exports, shortage of foreign exchange.
  - 2017 recovery drivers: improved commodity prices (aluminum and coal), uptick in coal production and exports, rebound in agriculture from benign rainfall, better transport logistics due to cessation of military hostilities.

### Policy Priorities and Reforms
- Overarching objectives:
  - Address macroeconomic imbalances, raise potential growth, curb poverty and inequality, and strengthen institutions.
  - Intensify efforts to gather support from domestic stakeholders, IFIs, and development partners.

- Fiscal policy — objectives and fiscal aggregates:
  - Authorities committed to fiscal consolidation via improved domestic revenue mobilization, enhanced public financial management, and timely debt restructuring.
  - 2018 budget targets:
    - Fiscal revenue: 22.5 percent of GDP in 2018 (from 23 percent of GDP in 2017).
    - Total expenditures and net lending: 28.1 percent of GDP in 2018 (estimate of 31.7 percent of GDP in 2017).
  - Deficit-reducing measures enacted/announced:
    - Phasing out of fuel and wheat subsidies.
    - Adopting an automatic fuel price adjustment formular.
    - Reducing bonuses, relocation subsidies, and housing allowances.
    - These measures expected to reduce the wage bill and goods and services by about 0.8 percent of GDP in 2018.
- Fiscal transparency, governance, and accountability measures undertaken:
  - Strengthening the Debt Management Unit and creating a Fiscal Risk Management Unit in the Ministry of Economy and Finance in the second half of 2016; unit is staffed and fully functional.
  - Completion of the Kroll Audit Report and submission of recommendations to the Attorney General’s Office (AGO) in July 2017; AGO submitted matters to the Office of Public Prosecutor in January (year implied) and continues investigations.
  - Cabinet Decree issued in November 2017 to regulate issuance and management of public debt and guarantees, including:
    - Requirement that all central government borrowing and contingent liabilities be contracted by the Minister of Economy and Finance on behalf of the central government.
    - Disclosure of loans and guarantees approved, including feasibility studies and assessment of fiscal risks.
    - Regular update of public sector debt records reconciled with creditors on a quarterly basis.
  - Completion in December 2017 of a strategy to validate and gradually clear arrears to suppliers through securitization.
  - Measures to prevent accumulation of arrears: streamlining expenditure units; enforcing budget ceilings with increased audits of budget execution by line ministries; strengthening government liquidity management.
- Fiscal measures planned in 2018:
  - Submit to the National Assembly a draft law on Fiscal Responsibility by end-2018.
  - Approve regulations to implement the new Public Enterprises Act by end-June 2018.
  - Submit to the National Assembly a draft law for Public Investment Management by end-2018.
  - Step up debt restructuring efforts while assessing financing needs; Ministry of Economy and Finance scheduled to present to commercial creditors in London on Tuesday, March 20, 2018, to update on economic developments and present key elements of proposed debt restructuring.
  - Implement fiscal structural reforms to improve domestic revenue mobilization: widen tax base, reduce tax exemptions, improve revenue administration.
  - Initiate discussions to establish a sovereign wealth fund to manage revenues from LNG exploration over the medium term.

- Monetary, exchange rate, and financial sector policies:
  - Policy objectives: achieve price stability, smooth exchange rate volatility, rebuild reserve buffers, and ensure monetary normalization consistent with fiscal consolidation.
  - Banco de Moçambique (BM) actions:
    - Raised policy rate by 600 basis points to 23.25 percent in October 2016.
    - Initiated easing in December 2017: cut policy rate by 150 bp to 19.5 percent.
    - Monetary Policy Committee cut policy rate by 150 bp to 18 percent at meeting on Monday, February 26, 2018.
  - BM commitments:
    - Rely on exchange rate as a shock absorber.
    - Rebuild reserve buffers.
    - Ensure monetary policy normalization remains consistent with faster fiscal adjustment to achieve debt sustainability.
    - Review Central Bank Act, Foreign Exchange Act, and Credit Institutions Act to enhance BM independence and strengthen legal framework for monetary policy.
  - Financial sector resilience measures:
    - Upgrade institutional capacity for enhanced oversight and enforcement of macro-prudential regulations to address risks from increased NPLs and high banking sector exposure to sovereign securities and SOEs.

- Structural reforms:
  - Objectives: accelerate economic transformation and diversification, reduce poverty and inequality, improve policy institutions, manage risks from future natural gas revenues.
  - Anticipated natural gas production/exportation expected from 2023 onwards presents opportunities and Dutch disease risks without adequate institutions.
  - Prioritized measures to ease bottlenecks and improve competitiveness:
    - Easing registration and licensing of economic activities.
    - Expediting issuance of permits for small businesses.
    - Strengthening legal framework for enforcement of contracts.
    - Increasing access to electricity, predominantly in rural areas.
    - Upgrading the movable collateral registry.
    - Improving credit access by SMEs.
  - Additional priorities:
    - Bridge infrastructure financing gap to foster broad-based growth.
    - Accelerate implementation of the Financial Deepening and Inclusion Strategy (2016–22).
    - Revamp implementation of the Strategy for Fighting Corruption.
    - Improve data gaps in fiscal reporting and national accounts.
    - Continue steadfast implementation of the AML/CFT framework.

### Conclusion
- Authorities’ commitment:
  - Advance reform and development agenda to achieve sound macroeconomic fundamentals, lay foundations for accelerated growth, and upgrade institutions.
  - Consider the Fund’s continued engagement and policy advice essential to support these efforts.

*Source: IMF staff report (1. Introduction).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1865.pdf_