## 1mozea2019002 ## Source details **Canonical URL:** [1mozea2019002](https://www.imf.org/-/media/files/publications/cr/2019/1mozea2019002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1mozea2019002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1mozea2019002.pdf.json) --- ### Focus of the Consultation - Increase fiscal space to face urgent emergency assistance and reconstruction needs following cyclones. - Implement gradual fiscal consolidation over the medium-term to, together with debt relief, put public debt-to-GDP ratios on a clear downward path and create fiscal space for future natural disasters. - Normalize the monetary policy stance. - Strengthen and deepen the financial sector. - Strengthen governance, transparency and accountability frameworks while markedly improving the business climate and social safety nets. ### Key Policy Recommendations - Increase fiscal space in the near term to respond to urgent needs in areas affected by the cyclones by, inter alia, reallocating lower priority spending in the annual budget to emergency assistance and reconstruction. - Create fiscal buffers, including to help deal with future natural disasters, by implementing gradual fiscal consolidation over the medium term and finalizing the debt restructuring with private creditors in line with the authorities’ debt strategy. - Rely to the maximum extent possible on grants and highly concessional loans for budget financing. - Normalize monetary policy, by cautiously reducing the policy rate. - Strengthen financial sector resilience by: - enhancing the bank resolution framework, - modernizing the banking system and central bank laws, - revamping supervisory capacities, and - strengthening risk-based supervision. - Strengthen the governance framework and fight corruption. - Increase the economy’s resilience and preparedness to adverse weather events that are becoming more frequent and intense due to climate change. ### Background and Immediate Impact of Cyclones - Tropical Cyclone Idai made landfall on March 15 near Beira; floods are estimated to have ruined around 800 thousand hectares of crops. - The Government estimated emergency assistance needs and reconstruction costs at around US$1.5 billion (10 percent of GDP). - TC Kenneth struck on April 25 the northern province of Cabo Delgado; no preliminary estimate of economic impact and reconstruction costs from TC Kenneth was available in the report. - The IMF Executive Board approved on April 19 US$118 million in emergency assistance under the Rapid Credit Facility (RCF). ### Recent Economic Developments (pre-Idai) — Selected Findings - Growth decelerated to 3¼ percent in 2018 because of lower mining growth; non-mining real GDP growth accelerated to 2¾ percent in 2018, from 2 percent in 2017. - Inflation declined from a peak of 26½ percent (y/y) in November 2016, to 3¼ percent (y/y) in April 2019; excluding administrated price increases, inflation stood at 2½ percent (y/y) in April 2019. - Primary fiscal deficit was about 2 percent of GDP in 2018, compared to 4¾ percent of GDP in 2016; overall fiscal deficit remained 5½ percent of GDP in 2018. - Stock of public and publicly guaranteed debt, including domestic debt, reached about 110½ percent of GDP at end-2018. - Stock of arrears on public and publicly guaranteed external debt reached about US$1.2 billion at end-2018. - Monetary policy: policy rate reduced by a total of 750 basis points since April 2017, to 14¼ percent. - Banking sector: NPLs reached 11 percent of total loans in February (provisioning at 99 percent). Credit to the economy declined by 2½ percent (y/y) in nominal terms in February. - Current account: deteriorated to 30½ percent of GDP in 2018, from 20 percent of GDP in 2017; non-megaproject current account deficit narrowed to 25¾ percent of GDP in 2018 (from 28½ percent in 2017). - International reserves rebuilt to 5¾ months of next year’s non-megaproject imports at end-March. ### Impact on 2019 Outlook and Near-Term Projections - Real GDP growth in 2019 projected to decelerate to 1.8 percent owing mainly to losses to agricultural production and disruptions to transport, communications and services. - Inflation projected to pick up to 8½ percent (y/y) by end-2019 due to adverse supply shock to food availability in Beira and neighboring districts. - Primary fiscal deficit after grants projected to reach to 2½ percent of GDP in 2019 due to lower tax collections in cyclone-hit areas and higher spending related to emergency relief and reconstruction. - Non-megaproject current account deficit estimated to widen after TC Idai to around 27 percent of GDP in 2019. - External financing: external grants expected to cover most of the external financing shortfall; remaining BOP gap for 2019 to be closed with the recent RCF disbursement. ### Medium-Term Outlook and Assumptions - Growth: - Rebound strongly in 2020 in response to recovery in agricultural production and reconstruction; reach 4 percent annually in 2021-22. - Very sharp acceleration in growth projected for 2023-24 reflecting the start of LNG production; non-LNG activity assumed to grow at 4 percent per year. - Inflation: return to pre-cyclone levels after the supply shock runs its course as the Bank of Mozambique continues to normalize monetary policy while standing ready to act against second-round effects. - Fiscal: primary fiscal deficit after grants projected to improve in line with authorities’ fiscal consolidation plans. - Current account: non-megaproject current account deficit projected to narrow to 12½ percent of GDP over the medium term. - International reserves: projected to remain broadly stable at comfortable levels amid exchange rate stability. ### Risks and Vulnerabilities - Downside risks: - Weak policy implementation, particularly of planned gradual fiscal consolidation. - Delays in rebuilding projects due to limited implementation capacity. - Inability to mobilize enough financing for reconstruction, especially external grants. - Negative impact from TC Kenneth (not included in baseline). - Increase in NPLs due to cyclone impacts on households and businesses. - Deterioration in security in the North; backtracking of peace negotiations; loosening of expenditure control before elections; delays in LNG megaprojects. - Upside risks: - New oil and gas discoveries. - Quicker resolution of ongoing debt renegotiations. - Closer reengagement with donors. - Faster progress on improving governance. ### External Spillovers and Regional Transmission - Disruptions to port services due to TC Idai have somewhat limited outward spillover effects to Zimbabwe, Malawi and Zambia since only about 5 percent of transit trade takes place through Beira’s port. - Inward spillovers from large swings in energy prices and global growth slowdown could be tangible, affecting Mozambique’s oil imports as well as its coal and aluminum exports. - Additional international assistance under consideration totaling about US$580 million, including: - (i) €30 million from Germany; - (ii) €90 million from the EU; - (iii) US$350 million from the World Bank; and - (iv) US$100 million from the African Development Bank. ### A. Fiscal and Debt Sustainability — findings and staff recommendations - Near-term fiscal stance and financing: - Staff recommended capping the primary fiscal deficit after grants at 2½ percent of GDP in 2019. - The annual budget is consistent with a primary fiscal deficit of 1½ percent of GDP in 2019, but TC Idai would lead to a primary fiscal deficit of 2½ percent of GDP in 2019. - The higher deficit of 2½ percent would be in line with available financing without resorting to arrears accumulation or central bank financing. - Staff stressed allocating higher grants to one-off spending in cyclone-affected areas to protect the primary fiscal deficit after grants and the authorities’ debt strategy. - Financing composition and debt issuance: - Given that public debt is in distress, authorities should rely to the maximum extent possible on grant financing and highly concessional loans. - Issuance of government debt and guarantees should strictly follow the new approval procedures established in the December 2017 decree. - Access to the BM’s overdraft window should be strictly contained within legal limits. - Medium-term consolidation: - Staff recommended eliminating the primary fiscal deficit after grants by 2022 through a combination of: - revenue-enhancing measures (i.e., eliminating VAT exemptions except for basic goods), and - spending rationalization (i.e., review and reform of wage and hiring policies in the public sector). - Tax administration reforms to boost revenue collection should continue. - Impact on the most vulnerable to be mitigated through increases in social spending assistance. - Fiscal yield of measures (percent of GDP) — staff estimates: - All Measures: 2020 = 0.8; 2021 = 0.8; 2022 = 0.3 - A. Tax revenue measures: 2020 = 0.8; 2021 = 0.6; 2022 = 0.0 - Remove VAT exemptions on select food products, public works and: 2020 = 0.8; 2021 = 0.6; 2022 = 0.0 - B. Wage bill rationalization measures: 2020 = 0.0; 2021 = 0.2; 2022 = 0.3 - Debt strategy and outlook: - Authorities are adopting a comprehensive debt strategy aimed at bringing down debt levels to moderate risk of debt distress over the medium term. - Mozambique’s debt remains in distress as debt restructuring discussions are ongoing with international private creditors. - Accounting for the authorities’ debt restructuring strategy and future borrowing largely reflecting state participation in the sizable LNG development, debt is deemed sustainable. - The PV of external public and publicly guaranteed (PPG) debt relative to GDP is projected to surpass prudent thresholds for a few years but is expected to remain on a gradual declining path; PV of external PPG debt relative to exports would remain close to the prudent threshold. - Both debt service ratios (to exports and revenue) are projected to remain below their respective thresholds during the projection period. - Debt management, SOE oversight, and arrears: - Debt management and oversight need to be strengthened: the debt unit of the Ministry of Economy and Finance needs enhanced capacity and clout. - Oversight over the entire SOE sector needs strengthening, building on the new SOE Law and its regulation. - Staff welcomed the implementation of a strategy to clear domestic payments arrears to government suppliers. - The stock of domestic payments arrears stood at about 2½ percent of GDP at end-2017 of which about 1¾ percent of GDP has been validated. - About half of the validated arrears was cleared in 2018 and the remainder will be cleared by end-2019. - To avoid further accumulation of arrears, authorities should adopt immediate measures to strengthen commitment controls and recreate all stages of a healthy spending chain, while gradually improving cash management in line with IMF TA recommendations. - Staff encouraged tackling the backlog of VAT refunds by developing and implementing a strategy to eliminate the backlog over time. - SOE governance and fiscal risks: - Cabinet approval of the SOE Law regulation welcomed; strict implementation of controls on SOE ability to issue debt emphasized. - Creation of the new agency envisaged in the SOE Law to exert strong financial oversight over the entire SOE sector is critical. - Speeding up preparation and implementation of recovery, restructuring or privatization plans of SOEs in distress remains essential. - Staff welcomed publication of the 2019 fiscal risks assessment and encouraged regular updates and expansion of scope and quantitative data. - Fiscal decentralization: - Should be gradual and pursued on a fiscal deficit neutral basis. - Staff recommended a gradual transfer of revenue and spending responsibilities to subnational levels in line with their capacity. - Authorities should prepare a public finance decentralization draft law in harmony with other administrative decentralization laws. - Authorities’ stated commitments: - Contain the primary fiscal deficit after grants at around 2½ percent of GDP in 2019 and eliminate it by 2022. - Implement a debt strategy to bring down debt risk via debt restructuring with significant debt relief, emphasis on grants and highly concessional borrowing, and gradual medium-term fiscal consolidation. - Strengthen debt management capacities and oversight over the SOE sector. ### B. Monetary and Exchange Rate Policies — findings and recommendations - Monetary policy normalization: - Staff welcomed gradual and cautious normalization, emphasizing vigilance for possible second-round inflation effects from the cyclone-induced supply shock. - A Selected Issues Paper indicates the neutral real interest rate for Mozambique is in the range of 4¾percent to 7¾ percent. - Sterilization and liquidity management: - Sterilization operations are becoming less successful; staff encouraged the BM to consider other options to sterilize excessive structural liquidity including long-term reverse repos as opposed to short-term T-bills. - Reserve requirements and de-dollarization: - BM increased reserve requirements on foreign currency deposits from 14 percent in January 2018 to 36 percent in February 2019. - Staff recommended any further increases be carefully considered and explained to market participants. - Exchange rate and forex market strategy: - Staff recommended developing a strategy to deepen the forex market, maintaining exchange rate flexibility as a shock absorber and preserving adequate international reserve cover. - External sector assessment finds Mozambique’s external position in 2018 was substantially weaker than implied by medium-term fundamentals—the real effective exchange rate was overvalued in the range of 10 percent to 20 percent at end-2018. - Since the beginning of the year, the metical has depreciated by 4½ percent against the U.S. dollar and 5 percent against the rand, in nominal terms. ### C. Financial Sector — resilience, vulnerabilities, and reforms - Central bank reforms and capacity building: - BM committed to implementing further monetary and financial sector regulatory measures and continues to strengthen governance and operations with Norges Bank and IMF TA. - Phase I delivered 18 missions, 1 study tour and 1 workshop from October 2017 until April 2019. - Regulatory and supervisory measures: - Financial regulatory framework strengthened: limits/procedures for LTV and DTI ratios, risk concentration limits, and methodology to identify systemic institutions. - Staff advised BM to remain watchful of banks’ portfolio performance and to upgrade loan classification and provisioning rules. - Revamp supervisory capacities urgently: increase staff, refocus supervision toward key risks, empower supervisors to follow up on findings at the BM Board level, and improve offsite supervision, enforcement and risk-based supervision. - Continue engagement with home supervisors of foreign-owned banks on recovery and resolution plans and publish Financial Stability Indicators (FSIs) regularly. - Financial inclusion and digital finance: - Efforts to promote financial inclusion within the National Strategy 2016-22 commended. - Mobile banking, electronic currency and digital finance could extend transaction networks and create opportunities for rural populations, women entrepreneurs, and micro, small and medium-sized businesses. - Monetary and financial sector regulatory measures (selected items): - Norms on exporter accounts (March 2018); norms for oil and gas companies (September 2018); conditions to exchange export revenue and other foreign inflows (October 2018). - Code of conduct for credit institutions (March 2018); prudential limits for risk concentration (April 2018); LTV and DTI ratios (October 2018); systemically important domestic bank institutions (October 2018). - Regulation on publicity of products and financial services (March 2018); review of the Standardized Prime Interest rate for Bank Lending (September 2018). - Safeguards assessment: - BM committed to undertaking a safeguards assessment in connection with the RCF disbursement. - Previous 2016 assessment recommended legal amendments to strengthen the central bank mandate and governance; these require reform of the central bank law and have yet to be implemented. ### Financial Sector Vigilance and Central Bank Governance (BM commitments) - BM committed to remain vigilant of macrofinancial risks, strengthen regulation and prudential supervision, modernize governance and operations. - BM agreed to closely monitor financial system exposure to SOEs and government securities. - BM confirmed commitment to continue improving bank resolution tools, strengthening the safety net, and improving risk-based supervision. - Staff supports BM efforts and welcomes the decision to undertake a safeguards assessment in connection with the RCF disbursement. - The evolving monetary policy regime should build on enhanced communications, increased technical capacities and reformed central bank law granting operational autonomy to the BM and strictly limiting central bank lending to the government. ### Structural Policies: Governance, Anti-corruption, and Institutional Reforms - Staff urged authorities to continue strengthening governance, transparency and accountability, and reduce vulnerabilities to corruption. - Authorities preparing, with IMF TA, a diagnostic report on governance and corruption vulnerabilities; publication of the diagnostic report soon after finalization is strongly encouraged. - Effective implementation of the AML/CFT framework emphasized to support financial-sector integrity. ### Climate Change, Natural Disasters, and Resilience - Integrating climate change into the developmental agenda is essential given Mozambique’s vulnerability to natural disasters. - Public action and legal frameworks referenced include: - Revised Law on Managing Natural Disasters (15/2014); - Government Plan 2015-19; - National Climate Change Strategy 2013-2025; - Master Plan for Risk and Disaster Reduction 2017-2030. - With World Bank support, the government is preparing a National Resilience Strategy. - Staff welcomes reallocations in the annual budget to emergency assistance and reconstruction after TC Idai and Kenneth, noting the bulk of these costs will have to be covered by external grants. ### Natural Resource Management and LNG-related Policy Recommendations - Mozambique poised to become a key producer and exporter of LNG with significant economic impact. - Staff recommended: - Strengthening the medium-term fiscal framework. - Gradually transitioning the fiscal anchor. - Considering fiscal rules to save for future generations part of upcoming LNG-related fiscal revenue. - A sovereign wealth fund could be considered to underpin transparency. - Possible fiscal anchors include a non-resource (non-LNG) primary fiscal balance; new fiscal anchor and framework should be chosen and developed and should become integral part of annual budgets over the next three-to-five years. ### Structural Reforms to Boost Investment, Jobs, and Competitiveness - Structural reforms necessary for diversified and sustained inclusive growth and to support poverty reduction. - Key constraints: underdeveloped infrastructure, corruption, ambiguous regulations, unresolved public sector arrears, and tight and expensive access to credit. - Mozambique ranks 138 out of 190 countries in the 2018 installment of the Ease of Doing Business. - Staff urged authorities, in consultation with the World Bank, to adopt reforms to improve the business climate, including strengthening governance, fighting corruption, fostering competition, restructuring ailing SOEs, and strengthening social safety nets. ### Data, IMF Technical Assistance, and Capacity Development Priorities - Data provided to the Fund are broadly adequate for surveillance; authorities encouraged to address data gaps in fiscal reporting, national accounts, prices, BOP and financial sector data. - Mozambique receives significant IMF TA, including to strengthen PFM systems, revenue mobilization, macroeconomic statistics, central banking and financial supervision. - Capacity development priorities include: - Consolidating PFM reforms and fiscal decentralization. - Modernizing tax policy and revenue administration. - Strengthening governance and modernizing central bank operations. - Enhancing compilation and dissemination of government finance and real sector statistics. ### Staff Appraisal: Macroeconomic Policy Mix, Debt Strategy, and Recommendations - Continued rebalancing of the policy mix is needed to ensure durable macroeconomic stability. - Gradual fiscal consolidation aimed at eliminating the primary fiscal deficit over the medium term is essential. - Staff welcomes authorities’ intention to consolidate by eliminating VAT exemptions and reducing recurrent spending, particularly on wages, while protecting social and critical infrastructure outlays. - Proper allocation of higher cyclone-related grants to one-off spending in affected areas recommended to protect the primary fiscal deficit after grants and the authorities’ debt strategy as aid is phased out. - Creating fiscal space to prepare for future natural disasters requires achieving significant debt relief in ongoing discussions with private creditors to put public debt-to-GDP ratios on a clear declining path. - Strengthening oversight of the entire public debt portfolio and improving the process of evaluating and granting guarantees are important. - Maintain exchange rate flexibility as a shock absorber and preserve adequate international reserve cover; forex market intervention should be limited and fully sterilized. - Further structural reforms will support higher inclusive growth, job creation, reductions of poverty and inequality, attract FDI, and support private investment. *International Monetary Fund — Article IV consultation and RCF request mission report (May 15, 2019).* ### 2020. In April, the IMF Executive Board approved US$118 million in emergency assistance ### 2020. In April, the IMF Executive Board approved US$118 million in emergency assistance ### Focus of the Consultation - Increase fiscal space to face urgent emergency assistance and reconstruction needs following cyclones. - Implement gradual fiscal consolidation over the medium-term to, together with debt relief, put public debt-to-GDP ratios on a clear downward path and create fiscal space for future natural disasters. - Normalize the monetary policy stance. - Strengthen and deepen the financial sector. - Strengthen governance, transparency and accountability frameworks while markedly improving the business climate and social safety nets. ### Key Policy Recommendations - Increase fiscal space in the near term to respond to urgent needs in areas affected by the cyclones by, inter alia, reallocating lower priority spending in the annual budget to emergency assistance and reconstruction. - Create fiscal buffers, including to help deal with future natural disasters, by implementing gradual fiscal consolidation over the medium term and finalizing the debt restructuring with private creditors in line with the authorities’ debt strategy. - Rely to the maximum extent possible on grants and highly concessional loans for budget financing. - Normalize monetary policy, by cautiously reducing the policy rate. - Strengthen financial sector resilience by: - enhancing the bank resolution framework, - modernizing the banking system and central bank laws, - revamping supervisory capacities, and - strengthening risk-based supervision. - Strengthen the governance framework and fight corruption. - Increase the economy’s resilience and preparedness to adverse weather events that are becoming more frequent and intense due to climate change. ### Background and Immediate Impact of Cyclones - Tropical Cyclone Idai made landfall on March 15 near Beira, causing significant loss of life and widespread damage to crops and physical infrastructure; floods are estimated to have ruined around 800 thousand hectares of crops. - The Government estimated emergency assistance needs and reconstruction costs at around US$1.5 billion (10 percent of GDP). - TC Kenneth struck on April 25 the northern province of Cabo Delgado; no preliminary estimate of economic impact and reconstruction costs from TC Kenneth was available in the report. - The IMF Executive Board approved on April 19 US$118 million in emergency assistance under the Rapid Credit Facility (RCF). ### Recent Economic Developments (pre-Idai) — Selected Findings - Growth decelerated to 3¼ percent in 2018 because of lower mining growth; non-mining real GDP growth accelerated to 2¾ percent in 2018, from 2 percent in 2017. - Inflation declined from a peak of 26½ percent (y/y) in November 2016, to 3¼ percent (y/y) in April 2019; excluding administrated price increases, inflation stood at 2½ percent (y/y) in April 2019. - Primary fiscal deficit was about 2 percent of GDP in 2018, compared to 4¾ percent of GDP in 2016; overall fiscal deficit remained 5½ percent of GDP in 2018. - Stock of public and publicly guaranteed debt, including domestic debt, reached about 110½ percent of GDP at end-2018. - Stock of arrears on public and publicly guaranteed external debt reached about US$1.2 billion at end-2018. - Monetary policy: policy rate reduced by a total of 750 basis points since April 2017, to 14¼ percent. - Banking sector: NPLs reached 11 percent of total loans in February (provisioning at 99 percent). Credit to the economy declined by 2½ percent (y/y) in nominal terms in February. - Current account: deteriorated to 30½ percent of GDP in 2018, from 20 percent of GDP in 2017; non-megaproject current account deficit narrowed to 25¾ percent of GDP in 2018 (from 28½ percent in 2017). - International reserves rebuilt to 5¾ months of next year’s non-megaproject imports at end-March. ### Impact on 2019 Outlook and Near-Term Projections - Preliminary projection: real GDP growth in 2019 would decelerate to 1.8 percent owing mainly to losses to agricultural production and disruptions to transport, communications and services. - Inflation projected to pick up to 8½ percent (y/y) by end-2019 due to adverse supply shock to food availability in Beira and neighboring districts. - Primary fiscal deficit after grants projected to reach to 2½ percent of GDP in 2019 due to lower tax collections in cyclone-hit areas and higher spending related to emergency relief and reconstruction. - Non-megaproject current account deficit estimated to widen after TC Idai to around 27 percent of GDP in 2019. - External financing: external grants expected to cover most of the external financing shortfall; remaining BOP gap for 2019 to be closed with the recent RCF disbursement. ### Medium-Term Outlook and Assumptions - Growth: rebound strongly in 2020 in response to recovery in agricultural production and reconstruction; reach 4 percent annually in 2021-22. - Very sharp acceleration in growth projected for 2023-24 reflecting the start of LNG production; non-LNG activity assumed to grow at 4 percent per year. - Inflation: return to pre-cyclone levels after the supply shock runs its course as the Bank of Mozambique continues to normalize monetary policy while standing ready to act against second-round effects. - Fiscal: primary fiscal deficit after grants projected to improve in line with authorities’ fiscal consolidation plans. - Current account: non-megaproject current account deficit projected to narrow to 12½ percent of GDP over the medium term. - International reserves: projected to remain broadly stable at comfortable levels amid exchange rate stability. ### Risks and Vulnerabilities - Downside risks: - Weak policy implementation, particularly of planned gradual fiscal consolidation. - Delays in rebuilding projects due to limited implementation capacity. - Inability to mobilize enough financing for reconstruction, especially external grants. - Negative impact from TC Kenneth (not included in baseline). - Increase in NPLs due to cyclone impacts on households and businesses. - Deterioration in security in the North; backtracking of peace negotiations; loosening of expenditure control before elections; delays in LNG megaprojects. - Upside risks: - New oil and gas discoveries. - Quicker resolution of ongoing debt renegotiations. - Closer reengagement with donors. - Faster progress on improving governance. *International Monetary Fund — Article IV consultation and RCF request mission report (May 15, 2019).* ### 12. Spillovers: Mozambique has marginal trade and financial flows with countries in the region ### 12. Spillovers: Mozambique has marginal trade and financial flows with countries in the region ### External spillovers and regional transmission - Disruptions to port services due to TC Idai have somewhat limited outward spillover effects to Zimbabwe, Malawi and Zambia since only about 5 percent of transit trade takes place through Beira’s port. - Inward spillovers from: - large swings in energy prices, and - global growth slowdown could be tangible, affecting Mozambique’s oil imports as well as its coal and aluminum exports. - International assistance in response to the cyclone: Additional assistance—on top of what already has been disbursed—of about US$580 million is being considered, including: - (i) €30 million from Germany; - (ii) €90 million from the EU; - (iii) US$350 million from the World Bank; and - (iv) US$100 million from the African Development Bank. ### Authorities’ views on outlook and risks - Authorities broadly agreed with staff’s assessment of the outlook and risks. - Growth and inflation expectations: - Authorities expect GDP growth in 2019 in the range of 2 percent to 2½ percent. - Both staff and authorities expect inflation to accelerate to 8½ percent (y/y) by end-2019 due to the cyclone-induced supply shock and to gradually ease as the economy recovers. - External support: - Authorities agree on the importance of external support mostly in the form of grants for reconstruction efforts. - Debt and external sector: - Authorities broadly agreed with staff’s debt sustainability analysis and external sector assessment. ### A. Fiscal and Debt Sustainability — findings and staff recommendations - Near-term fiscal stance and financing: - Staff recommended capping the primary fiscal deficit after grants at 2½ percent of GDP in 2019. - The annual budget is consistent with a primary fiscal deficit of 1½ percent of GDP in 2019, but TC Idai would lead to a primary fiscal deficit of 2½ percent of GDP in 2019. - The higher deficit of 2½ percent would be in line with available financing without resorting to arrears accumulation or central bank financing. - Staff stressed allocating higher grants to one-off spending in cyclone-affected areas to protect the primary fiscal deficit after grants and the authorities’ debt strategy. - Financing composition and debt issuance: - Given that public debt is in distress, authorities should rely to the maximum extent possible on grant financing and highly concessional loans. - Issuance of government debt and guarantees should strictly follow the new approval procedures established in the December 2017 decree. - Access to the BM’s overdraft window should be strictly contained within legal limits. - Medium-term consolidation: - Staff recommended eliminating the primary fiscal deficit after grants by 2022 through a combination of: - revenue-enhancing measures (i.e., eliminating VAT exemptions except for basic goods), and - spending rationalization (i.e., review and reform of wage and hiring policies in the public sector). - Tax administration reforms to boost revenue collection should continue (improve taxpayers’ registry and electronic information systems, enhance tax compliance from large taxpayers with adequate risk analysis, and strengthen extractive industry tax management). - Impact on the most vulnerable to be mitigated through increases in social spending assistance. - Fiscal yield of measures (percent of GDP) — staff estimates: - All Measures: 2020 = 0.8; 2021 = 0.8; 2022 = 0.3 - A. Tax revenue measures: 2020 = 0.8; 2021 = 0.6; 2022 = 0.0 - Remove VAT exemptions on select food products, public works and: 2020 = 0.8; 2021 = 0.6; 2022 = 0.0 - B. Wage bill rationalization measures: 2020 = 0.0; 2021 = 0.2; 2022 = 0.3 - Debt strategy and outlook: - Authorities are adopting a comprehensive debt strategy aimed at bringing down debt levels to moderate risk of debt distress over the medium term. - Mozambique’s debt remains in distress as debt restructuring discussions are ongoing with international private creditors. - Accounting for the authorities’ debt restructuring strategy and future borrowing largely reflecting state participation in the sizable LNG development, debt is deemed sustainable. - The PV of external public and publicly guaranteed (PPG) debt relative to GDP is projected to surpass prudent thresholds for a few years but is expected to remain on a gradual declining path; PV of external PPG debt relative to exports would remain close to the prudent threshold. - Both debt service ratios (to exports and revenue) are projected to remain below their respective thresholds during the projection period. - Debt management, SOE oversight, and arrears: - Debt management and oversight need to be strengthened: the debt unit of the Ministry of Economy and Finance needs enhanced capacity and clout. - Oversight over the entire SOE sector needs strengthening, building on the new SOE Law and its regulation. - Staff welcomed the implementation of a strategy to clear domestic payments arrears to government suppliers. - The stock of domestic payments arrears stood at about 2½ percent of GDP at end-2017 of which about 1¾ percent of GDP has been validated. - About half of the validated arrears was cleared in 2018 and the remainder will be cleared by end-2019. - To avoid further accumulation of arrears, authorities should adopt immediate measures to strengthen commitment controls and recreate all stages of a healthy spending chain, while gradually improving cash management in line with IMF TA recommendations. - Staff encouraged tackling the backlog of VAT refunds by developing and implementing a strategy to eliminate the backlog over time. - SOE governance and fiscal risks: - Staff commended cabinet approval of the SOE Law regulation and emphasized strict implementation of controls on SOE ability to issue debt, particularly for SOEs in financial distress. - Creation of the new agency envisaged in the SOE Law to exert strong financial oversight over the entire SOE sector is critical. - Speeding up preparation and implementation of recovery, restructuring or privatization plans of SOEs in distress remains essential. - Staff welcomed publication of the 2019 fiscal risks assessment and encouraged regular updates and expansion of scope and quantitative data. - Fiscal decentralization: - Should be gradual and pursued on a fiscal deficit neutral basis. - Staff recommended a gradual transfer of revenue and spending responsibilities to subnational levels in line with their capacity. - Authorities should prepare a public finance decentralization draft law in harmony with other administrative decentralization laws. - Authorities’ stated commitments: - Contain the primary fiscal deficit after grants at around 2½ percent of GDP in 2019 and eliminate it by 2022. - Implement a debt strategy to bring down debt risk via debt restructuring with significant debt relief, emphasis on grants and highly concessional borrowing, and gradual medium-term fiscal consolidation. - Strengthen debt management capacities and oversight over the SOE sector. ### B. Monetary and exchange rate policies — findings and recommendations - Monetary policy normalization: - The BM faces the challenge of resetting monetary policy amid a significant supply shock and external/domestic risks. - Staff welcomed gradual and cautious normalization, emphasizing vigilance for possible second-round inflation effects from the cyclone-induced supply shock. - If second-round effects do not materialize, normalization could include additional policy rate cuts, possibly with pauses to assess market reactions. - A Selected Issues Paper indicates the neutral real interest rate for Mozambique is in the range of 4¾percent to 7¾ percent. - Sterilization and liquidity management: - Sterilization operations are becoming less successful; staff encouraged the BM to consider other options to sterilize excessive structural liquidity including long-term reverse repos as opposed to short-term T-bills. - Reserve requirements and de-dollarization: - Noting the recent decision to significantly increase reserve requirements on foreign currency deposits, staff recommended any further increases be carefully considered and explained to market participants. - Such increases reduce the banking sector’s capacity to supply credit and could add to forex market pressures. - Effective de-dollarization requires a track record of strong macroeconomic fundamentals combined with incentives to increase local currency use. - The BM increased reserve requirements on foreign currency deposits from 14 percent in January 2018 to 36 percent in February 2019. - Exchange rate and forex market strategy: - Staff recommended developing a strategy to deepen the forex market, maintaining exchange rate flexibility as a shock absorber and preserving adequate international reserve cover. - Forex market intervention should be limited to avoiding excessive exchange rate volatility and should be fully sterilized to avoid affecting liquidity in local currency. - External sector assessment (Annex II) finds Mozambique’s external position in 2018 was substantially weaker than implied by medium-term fundamentals—the real effective exchange rate was overvalued in the range of 10 percent to 20 percent at end-2018—underscoring the need for real exchange rate adjustment supported by fiscal adjustment and structural reforms to bring the non-megaproject current account deficit in line with its estimated norm. - Since the beginning of the year, the metical has depreciated by 4½ percent against the U.S. dollar and 5 percent against the rand, in nominal terms, contributing to close the estimated overvaluation. - Authorities’ views: - Agreed with staff on a cautious approach to monetary normalization and vigilance regarding second-round inflation effects. - Noted BM would maintain exchange rate flexibility and preserve adequate international reserve cover. - Financial de-dollarization a priority; additional increases in reserve requirements on foreign currency deposits to be considered as circumstances permit. ### C. Financial sector — resilience, vulnerabilities, and reforms - Central bank reforms and capacity building: - The BM is committed to implementing further monetary and financial sector regulatory measures to enhance resilience and continues to strengthen governance and operations with Norges Bank and IMF TA. - Progress in the first phase of the project includes strengthening central bank governance, improving monetary and exchange rate policy operations and communications, enhancing financial stability analysis, modernizing the national payments system, and making cash management more efficient. - The initiative delivered 18 missions, 1 study tour and 1 workshop from October 2017 until April 2019. - Regulatory and supervisory measures: - Financial regulatory framework strengthened to mitigate vulnerabilities, including limits/procedures to calculate loan-to-value and debt-to-income ratios, defining risk concentration limits, and improving methodology to identify systemic banking institutions. - Staff advised the BM to remain watchful of banks’ portfolio performance through strong enforcement of loan classification rules, collateral valuation and timely provision building. - Monitor the impact on the banking system of the government’s plan to clear domestic payments arrears, particularly on NPLs and credit growth. - Upgrade loan classification and provisioning rules, and address weaknesses in legal framework for crisis management, bank resolution and safety nets. - Supervisory focus on containing risks from bank exposures to the public sector, by strengthening regulations on concentration risks and requiring realistic capital adequacy risk weights for loans to SOEs. - Additional provisioning should be required as necessary, on a case by case basis. - Revamp supervisory capacities urgently: increase staff, refocus supervision toward key risks, empower supervisors to follow up on findings at the BM Board level, and improve offsite supervision, enforcement and risk-based supervision. - Continue engagement with home supervisors of foreign-owned banks on recovery and resolution plans and publish Financial Stability Indicators (FSIs) regularly. - Financial inclusion and digital finance: - Staff commended efforts to promote financial inclusion within the National Strategy 2016-22. - Mobile banking, electronic currency and digital finance could extend transaction networks and create opportunities for rural populations, women entrepreneurs, and micro, small and medium-sized businesses. - Fees structure should be carefully assessed to bring innovative and cost-efficient solutions; staff encouraged partnerships to promote understanding of Fintechs. - Monetary and financial sector regulatory measures (Box 1) — selected items: - Monetary: - Norms on specific accounts opened by exporters to receive revenues or income from foreign investment (March 2018). - Norms and complementary procedures for operations of oil and gas companies (September 2018). - Conditions to exchange export revenue of goods and services, foreign investment income and other foreign inflows (October 2018). - Financial: - Code of conduct for credit institutions and financial corporations (March 2018). - Prudential limits for risks concentration with counterparts (April 2018). - Determination of loan-to-value (LTV) and debt-service-to-income (DTI) ratios (October 2018). - Systemically important domestic bank institutions (October 2018). - Transparency and competition: - Regulation on publicity of products and financial services (March 2018). - Review of the Standardized Prime Interest rate for Bank Lending (Indexante Único) (September 2018). - Safeguards assessment: - The BM is committed to undertaking a safeguards assessment in connection with the RCF disbursement. - The previous 2016 assessment recommended legal amendments to strengthen the central bank mandate and governance, including establishment of an independent oversight body; these require reform of the central bank law and have yet to be implemented. *Italic: IMF Staff report — Chapter 12: Spillovers and policy discussions* ### 32. The BM expressed its strong commitment to remain vigilant of macrofinancial risks, ### 1mozea2019002 - 32. The BM expressed its strong commitment to remain vigilant of macrofinancial risks, ### Financial sector vigilance, supervision, and central bank governance - The BM expressed a strong commitment to remain vigilant of macrofinancial risks, continue strengthening regulation and prudential supervision, and continue modernizing its governance framework and operations. - The BM agreed to closely monitor financial system exposure to SOEs and government securities. - The BM confirmed its commitment to continue improving bank resolution tools, strengthening the safety net, and improving risk-based supervision. - The BM expressed satisfaction with the technical assistance provided under the Norges Bank and IMF multiyear project. - Staff supports the BM’s efforts to enhance supervisory capacities and the bank resolution framework. - The evolving monetary policy regime should build on enhanced communications, increased technical capacities and reformed central bank law that, inter alia, grants operational autonomy to the BM, precludes or strictly limits central bank lending to the government, and strengthens BM governance and accountability. - Staff welcomes the BM’s decision to undertake a safeguards assessment in connection with the RCF disbursement. ### Structural policies: governance, anti-corruption, and institutional reforms - Staff urged the authorities to continue taking steps to strengthen governance, transparency and accountability, including to reduce vulnerabilities to corruption (Annex III). - The authorities are preparing, with IMF TA, a diagnostic report on governance and corruption vulnerabilities on areas most relevant for economic activity; this report would provide a roadmap for further reform. - Key areas covered include fiscal governance and transparency, market regulation, central bank governance, and AML/CFT. - Staff stressed that effective implementation of the AML/CFT framework would support financial-sector integrity and be critical for governance and anti-corruption efforts. - Authorities broadly agreed with staff’s views and recommendations and committed to address governance and corruption vulnerabilities and to complete, publish and implement the forthcoming diagnostic report’s recommendations. - Publication of the diagnostic report soon after its finalization is strongly encouraged. ### Climate change, natural disasters, and resilience - Integrating climate change into the developmental agenda is essential given Mozambique’s vulnerability to natural disasters. - Public action and legal frameworks referenced: - Revised Law on Managing Natural Disasters (15/2014). - Government Plan 2015-19. - National Climate Change Strategy 2013-2025. - Master Plan for Risk and Disaster Reduction 2017-2030. - With World Bank support, the government is preparing a National Resilience Strategy. - Substantial support is still needed to improve socio-economic infrastructure resilience; evidence suggests small, low-cost initiatives can be effective. - Staff welcomes reallocations in the annual budget to emergency assistance and reconstruction after TC Idai and Kenneth, noting that the bulk of these costs will have to be covered by external grants and urging international community participation. ### Natural resource management and LNG-related policy recommendations - Mozambique is poised to become a key producer and exporter of LNG, with significant impact on its economy. - Staff welcomed a high-level international conference (co-organized by the BM and the IMF) to raise awareness and discuss tradeoffs and policy issues related to large natural gas reserves. - The conference took place during March 27-28 and was attended by approximately 180 participants. - Staff recommended: - Strengthening the medium-term fiscal framework. - Gradually transitioning the fiscal anchor. - Considering fiscal rules to save for future generations part of upcoming LNG-related fiscal revenue. - A sovereign wealth fund could be considered to underpin transparency. - Possible fiscal anchors include a non-resource (non-LNG) primary fiscal balance; the new fiscal anchor and framework should be chosen and developed and should become an integral part of the annual budgets over the next three-to-five years. ### Structural reforms to boost investment, jobs, and competitiveness - Structural reforms are necessary for diversified and sustained inclusive growth and to support poverty reduction. - Key constraints identified: underdeveloped infrastructure, corruption, ambiguous regulations, unresolved public sector arrears, and tight and expensive access to credit. - Mozambique ranks 138 out of 190 countries in the 2018 installment of the Ease of Doing Business. - Staff urged authorities, in consultation with the World Bank, to adopt reforms to improve the business climate. - Recommendations include strengthening governance, fighting corruption, fostering competition, improving the business climate, restructuring and attracting private sector participation in ailing SOEs, and strengthening social safety nets. ### Data, IMF technical assistance, and capacity development priorities - Data provided to the Fund are broadly adequate for surveillance, but authorities are encouraged to address data gaps: - Strengthen compilation and dissemination for reporting fiscal data. - Improve national accounts and prices compilation. - Improve BOP and financial sector data, including coverage of imports by domestic firms supplying megaprojects and finalizing the compilation of the other financial corporations’ survey (pension funds and insurance companies). - Mozambique receives significant IMF TA, including to strengthen PFM systems, revenue mobilization, macroeconomic statistics, central banking and financial supervision (Annex IV). - Going forward, capacity development will support: - Consolidating PFM reforms and fiscal decentralization. - Modernizing tax policy and revenue administration. - Strengthening governance and modernizing central bank operations. - Enhancing compilation and dissemination of government finance and real sector statistics. ### Staff appraisal: macroeconomic policy mix, debt strategy, and recommendations - Continued rebalancing of the policy mix is needed to ensure durable macroeconomic stability. - Gradual fiscal consolidation aimed at eliminating the primary fiscal deficit over the medium term is essential. - Staff welcomes authorities’ intention to consolidate over time by eliminating VAT exemptions and reducing recurrent spending, particularly on wages, while protecting social and critical infrastructure outlays. - Given forthcoming aid related to TC Idai and Kenneth, it will be important to properly allocate higher grants to one-off spending in affected areas to protect the primary fiscal deficit after grants and the authorities’ debt strategy as cyclone-related aid is phased out. - Creating fiscal space to prepare for future natural disasters requires achieving significant debt relief in ongoing discussions with private creditors to put public debt-to-GDP ratios on a clear declining path. - Adopting and implementing a debt strategy to bring Mozambique’s debt risk to moderate levels over the medium term remains a priority. - Strengthening oversight of the entire public debt portfolio and improving the process of evaluating and granting guarantees are important. - The authorities must remain vigilant of risks from a prolonged period of high real interest rates and rapid increase in public domestic debt. - Maintaining exchange rate flexibility as a shock absorber and preserving adequate international reserve cover is important. - Forex market intervention should continue to be limited to managing excessive exchange rate volatility and should be fully sterilized to avoid affecting liquidity in local currency. - Further structural reforms will support higher inclusive growth, job creation, reductions of poverty and inequality, attract FDI, and support private investment and job creation. *1mozea2019002 - 32.* ### 48. It is recommended that the next Article IV consultation take place on the standard 12- ### 1mozea2019002 - 48. It is recommended that the next Article IV consultation take place on the standard 12- ### Growth and Inflation - Growth decelerated because of mining, but became broad based with non-mining accelerating. - Inflation continued to decline despite increase in administrative prices. - So far, the cyclone has only affected inflation in Beira. - Maputo and Beira are the main contributors to inflation in Mozambique (city contributions shown as year-on-year percentage change: Maputo, Beira, Nampula, Mozambique). Key statistics (from Figure 1 visuals): - Consumer prices (end of period): 23.7 (2016), 5.6 (2017), 3.5 (2018), 8.5 (2019), 6.5 (2020), 5.5 (2021), 5.5 (2022), 5.5 (2023), 5.5 (2024). - Consumer prices (annual average): 19.9 (2016), 15.1 (2017), 3.9 (2018), 5.6 (2019), 7.6 (2020), 6.0 (2021), 5.5 (2022), 5.5 (2023), 5.5 (2024). ### Monetary and Financial Developments Findings: - Monetary policy started a cautious easing cycle after inflation stabilization within single digits. - The metical has been broadly stable against the dollar. - Excess liquidity is mopped through T-Bill issuance and reverse repos. - Government borrowing cost remains high while recurrence to central bank credit has fallen. - Credit growth has started to recover slowly in the last quarter of 2018 in response to lower borrowing costs. - The banking sector remains well capitalized, notwithstanding relatively high NPLs. Key statistics (from Figure 2 and Table 3): - Monetary Policy Operations Mix: net issuance series for T-bills, reverse repos, net FX sales, standard lending net of deposit facility (Billions of meticais; monthly series shown). - Bilateral Exchange Rates (metical / US$): moz/zaf (rhs) displayed across Jan-14 to Mar-19. - Regulatory capital to risk-weighted assets (Dec-18 to Mar-19 examples from Table 5): 23.8 (Dec-18), 23.2 (Jan-19), 23.2 (Feb-19). - Nonperforming loans to total gross loans (selected): 12.6 (Dec-17), 11.1 (Dec-18), 11.3 (Feb-19). - Reserve money 12-month percent change: 35.2 (2016), 4.7 (2017), 21.8 (2018), 16.3 (2019), 7.5 (2020). - Policy lending rate (end-of-period): 23.25 (2016), 19.50 (2017), 14.25 (2018), 14.25 (2019). ### External Sector Developments Findings: - The non-megaproject current account continued narrowing, while the exchange rate stabilized. - The central bank has intervened to moderate FX volatility, and international reserves have stabilized. Key statistics (from Figure 3, Table 4a/4b): - Net international reserves (millions of U.S. dollars, end of period): 1,962 (2016), 3,297 (2017), 3,079 (2018), 2,905 (2019), 2,991 (2020), 3,078 (2021), 3,251 (2022), 3,407 (2023), 3,506 (2024). - Net international reserves (millions of US dollars, end of period, Table 4a): 1,727 (2016), 3,062 (2017), 2,844 (2018), 2,670 (2019), 2,756 (2020), 2,843 (2021), 3,016 (2022), 3,172 (2023), 3,271 (2024). - Current account balance (Millions of U.S. dollars): -4,247 (2016), -2,512 (2017), -4,371 (2018), -8,748 (2019), -11,142 (2020), -11,245 (2021), -14,380 (2022), -13,116 (2023), -9,526 (2024). - Current account balance (Percent of GDP): -39.0 (2016), -20.0 (2017), -30.4 (2018), -58.0 (2019), -66.7 (2020), -62.9 (2021), -75.6 (2022), -61.6 (2023), -39.3 (2024). - Net foreign direct investment (Millions of U.S. dollars): 3,093 (2016), 2,293 (2017), 2,692 (2018), 2,796 (2019), 3,532 (2020), 3,585 (2021), 4,543 (2022), 3,638 (2023), 3,279 (2024). ### Fiscal Developments Findings: - The debt situation is improving as the fiscal effort is helping reduce financing pressures. - Revenue collection is recovering and current expenditures have been contained. Key statistics (from Figure 4, Table 2a/2b): - Total revenue (Percent of GDP): 24.1 (2016), 26.2 (2017), 24.2 (2018), 24.0 (2019), 25.1 (2020), 25.8 (2021), 25.9 (2022), 26.3 (2023), 25.2 (2024). - Total expenditure and net lending (Percent of GDP): 32.2 (2016), 31.4 (2017), 31.2 (2018), 37.0 (2019), 34.7 (2020), 32.6 (2021), 30.6 (2022), 30.0 (2023), 26.9 (2024). - Overall fiscal balance, after grants (Percent of GDP): -7.3 (2016), -3.4 (2017), -5.5 (2018), -6.5 (2019), -4.8 (2020), -3.7 (2021), -2.6 (2022), -1.8 (2023), 0.1 (2024). - Nominal stock of total debt (Percent of GDP): 137.6 (2016), 110.4 (2017), 110.5 (2018), 117.0 (2019), 111.4 (2020), 109.0 (2021), 109.2 (2022), 102.1 (2023), 89.8 (2024). - Nominal GDP (billions of meticais): 687 (2016), 804 (2017), 876 (2018), 946 (2019), 1,084 (2020), 1,198 (2021), 1,314 (2022), 1,515 (2023), 1,781 (2024). - Total revenue (Billions of Meticais, Table 2a): 165.6 (2016), 211.1 (2017), 212.1 (2018), 226.9 (2019), 271.5 (2020), 309.2 (2021), 340.9 (2022), 397.8 (2023), 449.4 (2024). - Total expenditure and net lending (Billions of Meticais, Table 2a): 221.3 (2016), 252.4 (2017), 273.1 (2018), 350.5 (2019), 376.0 (2020), 390.0 (2021), 402.2 (2022), 453.8 (2023), 479.7 (2024). ### Selected Economic and Financial Indicators (Table 1 highlights) - Real GDP (Percentage change): 3.8 (2016), 3.7 (2017), 3.3 (2018), 1.8 (2019), 6.0 (2020), 4.0 (2021), 4.0 (2022), 9.2 (2023), 11.5 (2024). - Real GDP, excl. mining: 3.3 (2016), 2.1 (2017), 2.8 (2018), 1.2 (2019), 5.8 (2020), 3.7 (2021), 3.9 (2022), 3.9 (2023), 4.0 (2024). - GDP (billions of US dollars): 10.9 (2016), 12.6 (2017), 14.4 (2018), 15.1 (2019), 16.7 (2020), 17.9 (2021), 19.0 (2022), 21.3 (2023), 24.2 (2024). - GDP per capita (US dollars): 379 (2016), 426 (2017), 475 (2018), 484 (2019), 522 (2020), 544 (2021), 564 (2022), 615 (2023), 682 (2024). - Gross domestic investment (Percent of GDP): 38.1 (2016), 39.2 (2017), 48.7 (2018), 76.8 (2019), 88.3 (2020), 87.0 (2021), 92.9 (2022), 85.8 (2023), 75.0 (2024). - Gross international reserves (millions of US dollars, end of period): 1,962 (2016), 3,297 (2017), 3,079 (2018), 2,905 (2019), 2,991 (2020), 3,078 (2021), 3,251 (2022), 3,407 (2023), 3,506 (2024). - Months of next year's non-megaproject imports: 4.2 (2016), 6.8 (2017), 5.5 (2018), 5.1 (2019), 5.2 (2020), 5.1 (2021), 4.9 (2022), 4.8 (2023), 4.7 (2024). ### Monetary Survey (Table 3 highlights) - Net foreign assets (Bank of Mozambique, Billions of Meticais): 119.5 (2016), 175.2 (2017), 169.4 (2018), 162.5 (2019), 173.7 (2020). - Reserve money (Billions of Meticais): 99.9 (2016), 104.6 (2017), 127.3 (2018), 148.1 (2019), 159.3 (2020). - Money and quasi money (M3, Billions of Meticais): 367.2 (2016), 385.8 (2017), 428.1 (2018), 460.4 (2019), 504.7 (2020). - Credit to the economy (Billions of Meticais): 261.4 (2016), 225.7 (2017), 219.9 (2018), 232.2 (2019), 253.8 (2020). ### Balance of Payments (Table 4a/4b highlights) - Trade balance for goods (Millions of U.S. dollars): -1,405 (2016), -498 (2017), -973 (2018), -2,507 (2019), -2,631 (2020), -2,254 (2021), -2,951 (2022), -1,781 (2023), 410 (2024). - Exports, f.o.b. (Millions of U.S. dollars): 3,328 (2016), 4,725 (2017), 5,196 (2018), 5,465 (2019), 5,763 (2020), 6,141 (2021), 6,294 (2022), 7,781 (2023), 10,039 (2024). - Imports, f.o.b. (Millions of U.S. dollars): 4,733 (2016), 5,223 (2017), 6,169 (2018), 7,971 (2019), 8,394 (2020), 8,395 (2021), 9,245 (2022), 9,562 (2023), 9,630 (2024). - Financial account balance (Millions of U.S. dollars): 3,274 (2016), 3,538 (2017), 3,644 (2018), 7,827 (2019), 10,638 (2020), 10,754 (2021), 14,106 (2022), 12,836 (2023), 8,976 (2024). ### Financial Soundness Indicators for Banking Sector (Table 5 highlights) - Regulatory capital to risk-weighted assets: 8.8 (Dec-16), 7.8 (Mar-17), 19.9 (Jun-17), 19.7 (Sep-17), 21.5 (Dec-17), 19.8 (Mar-18), 21.4 (Jun-18), 22.4 (Sep-18), 23.8 (Dec-18), 23.2 (Jan-19), 23.2 (Feb-19). - Nonperforming loans to gross loans: 5.7 (Dec-16), 7.1 (Mar-17), 11.2 (Jun-17), 11.4 (Sep-17), 12.6 (Dec-17), 12.6 (Mar-18), 12.6 (Jun-18), 13.0 (Sep-18), 11.1 (Dec-18), 11.2 (Jan-19), 11.3 (Feb-19). - Return on Equity: 9.9 (Dec-16), 31.9 (Mar-17), 41.5 (Jun-17), 36.8 (Sep-17), 32.0 (Dec-17), 41.5 (Mar-18), 33.7 (Jun-18), 30.7 (Sep-18), 29.8 (Dec-18), 26.0 (Jan-19), 24.4 (Feb-19). - Liquid assets (broad measure) to total assets: 31.3 (Dec-16), 34.6 (Mar-17), 38.3 (Jun-17), 33.2 (Sep-17), 37.0 (Dec-17), 37.8 (Mar-18), 37.2 (Jun-18), 37.3 (Sep-18), 39.3 (Dec-18), 27.7 (Jan-19), 37.1 (Feb-19). ### Risk Assessment Matrix — Key Risks and Policy Responses (Table 6) Risks and staff-assessed responses include: - Rising protectionism and retreat from multilateralism (Relative Likelihood: High; Time Horizon: ST, MT; Impact: Medium) - Policy responses: Anchor macroeconomic stability; diversify exports; improve business environment; mobilize foreign investors through appropriate fiscal and monetary policy mix and structural reforms. - Weaker-than-expected global growth (Relative Likelihood: High; Time Horizon: ST, MT; Impact: Medium) - Policy responses: Maintain exchange rate flexibility; rebuild fiscal and external buffers; diversify exports; improve business environment; develop infrastructure. - Large swings in energy prices (Relative Likelihood: Medium; Time Horizon: ST, MT; Impact: Low) - Policy responses: Maintain fuel price automatic adjustment mechanism; maintain exchange rate flexibility; accelerate structural reforms. Mozambique-specific risks identified as ST/MT with High impact: - Deterioration in security - Policy response: Enhance security, particularly in the LNG development related region. - Backtracking of peace negotiations - Policy response: Continue drive for durable peace and implementation of reforms. - Increasing fiscal risks including non-performing SOEs and government expenditure arrears (Relative Likelihood: High; Time Horizon: ST, MT; Impact: High) - Policy responses: Implement balanced package of policies and reforms to address fiscal risks; adopt an adequate medium-term fiscal framework; strengthen cash management and commitment controls; restructure SOEs in financial distress. - Recurrence of banking sector stress (Relative Likelihood: Medium/Low; Time Horizon: MT; Impact: High) - Policy responses: Implement financial reforms including banking resolution; strengthen the deposit guarantee scheme and banking regulation and supervision; enhance operational independence of the monetary authorities; conduct asset quality reviews; step up risk-based supervision. - Potential complications in the resolution of debt issues (Relative Likelihood: Medium/High; Time Horizon: ST; Impact: High) - Policy response: Further rebalancing of the policy mix. - Delay in implementation of megaprojects (Relative Likelihood: Medium; Time Horizon: MT; Impact: High) - Policy response: Structural reform to support economic diversification and inclusive growth. - Extreme climate events (Relative Likelihood: High/Medium; Time Horizon: ST, MT; Impact: High) - Policy responses: Address infrastructure gaps and income/developmental disparities among regions; institute appropriate social safety nets. *Sources: Mozambican authorities; Bank of Mozambique; 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. - Remove VAT exemptions, except for basic basket goods, Strengthen VAT administration. - Contain wage bill increase through a deceleration in the pace of new hiring and stronger administrative controls on salary payments and bonuses. - Avoid further accumulation of arrears by adopting critical reforms to strengthen cash management, commitment controls, and recreate all stages of a healthy spending chain, including adopting a strategy to clear over time domestic payments arrears to suppliers. - Rely to the maximum extent possible on grant financing and highly concessional loans Contain within legal limits access to the BM overdraft window. - Monitor fiscal risks and public enterprises and continue to strengthen debt management. - Status / Implementation: - The government eliminated subsidies on fuel and wheat, and reintroduced an automatic price adjustment mechanism for fuel, and is committed to eliminating the fiscal primary deficit by 2022. This is to be achieved by eliminating VAT exemptions and reform of wages and hiring policies. - The government adopted a strategy to clear domestic suppliers’ arrears. Half of the outstanding amount has been settled and the remaining amount is to be securitized. The authorities are working closely with the Fund to strengthen the commitment controls and improving cash management to avoid further accumulation of arrears. - The cabinet approved SOE Law regulations, including strengthening controls on SOE ability to issue debt, and creates a new agency envisaged in the SOE Law to exert strong financial oversight over the entire SOE sector. - The authorities prepared a 2019 fiscal risk assessment report. ### Monetary and Exchange Rate - Recommendations: - Continue easing monetary policy at a cautions pace. - Enhance exchange rate flexibility. - Continue to strengthen governance and modernize BM operations. - Status / Implementation: - Monetary policy eased cautiously while keeping inflation anchored in single digits. The policy rate has been cut by 750 basis points to 14¼ percent. Authorities are committed to preserving exchange rate flexibility and to continue upgrading the monetary policy framework. ### Financial - Recommendations: - Implement reforms to strengthen bank supervision, crisis management tools, bank resolution framework and safety net. - Increase financial inclusion. - Strengthen the AML/CFT framework. - Status / Implementation: - The central bank is preparing a new bank resolution framework that enhances its resolution powers with tools designed to deal with systemic failures. - Authorities are making progress implementing the National Strategy for Financial Inclusion 2016-22 and launched the Project “One District, and One Bank.” ### Structural - Recommendations: - Improve governance and transparency, including enhancing transparency in natural resource wealth management. - Develop a strong medium-term fiscal framework and a formal fiscal rule. - Improve the business environment to promote enterprises, and job creation. - Status / Implementation: - Prepared a diagnostic report on governance, transparency, and accountability with IMF TA. - Organized a high-level international conference to raise awareness and start discussions on the main tradeoffs and policy issues related to the development of Mozambique’s large natural gas reserves. - Proposed a package of reforms covering legislation to improve the business environment. *Source: Annex I. Implementation of Past IMF Recommendations (content unit: 1mozea2019002).* ### Annex IV. Capacity Development Strategy ### Annex IV. Capacity Development Strategy ### CD strategy overview - Mozambique receives significant TA to strengthen public finance management, revenue mobilization, statistics, central banking and financial supervision. - Effectiveness has been medium-to-high, improving overtime, and being supported in the field by long-term resident advisors in the Ministry of Economy and Finance and in the Bank for Mozambique, as well as by a long-term TA coordinator and advisor in the IMF Resident Representative Office. ### A. CD Strategy focus areas - Consolidating public finance management (PFM) reforms. - Modernizing tax policy and revenue administration. - Strengthening governance and modernizing the central bank. - Enhancing the compilation and dissemination of government finance and real sector statistics. ### B. Key overall CD priorities going forward - Public Finance Management - Strengthening legislation, processes, and institutions for the upcoming decentralization of provinces and districts. - Improving control spending, cash management, expenditure arrears clearance, fiscal risk management, oversight of SOEs and natural resources wealth management. - Tax Policy and Revenue Administration - Broadening the revenue base and improving tax compliance (including by simplifying tax exemptions and improving VAT refund function). - Supporting fiscal consolidation and developing a strong revenue administration for the extractive industry sector to strengthen revenue mobilization. - Monetary/Macroprudential policy and Central Bank Operations - Strengthening central bank governance, organization and management. - Improving monetary and exchange rate policy, operations and communications. - Enhancing financial stability analysis, reporting, communications and the financial stability framework. - Modernizing the national payment system and its oversight function. - Improving currency cash management. - Note: This priority is carried out within phase II of the project with Norges Bank and the Fund to build enhanced capacity at the Bank of Mozambique to strengthen governance and support the BM modernization efforts. The phase I started in October 2017 and will end in December 2019 and Phase II will cover 2020-21. - Government finance and real sector statistics - Strengthening compilation and dissemination for reporting fiscal data by aligning the fiscal map with the GFS Framework-Government Operation Statement. - Improving methodology of national accounts data. ### C. Main risks and mitigation - Key constraints: Low capacity and reform resistance. - Mitigation measures: - Adopt a sequenced approach and dedicate resources to ensure full understanding of reform proposals and buy-in from the authorities. - Ensure good alignment to strategic views and improved management for reform implementation. - Include hands-on capacity building to seek lasting improvements in units’ work regardless of staff turnover, foster cross-unit coordination, and mitigate negative impacts of reforms. - Long-term resident coordinator at the resident representative office and the resident advisors will regularly engage at relevant levels to ensure proper implementation of recommendations, sustain external complementary support to the reforms, and frequently reach out to other TA providers. - Risk of donor overlap and inefficiencies: frequent engagement with other TA providers to reduce overlap. ### D. Authorities’ views - Senior officials from the Ministry of Finance, Bank of Mozambique, Tax Authority and the Statistical Agency were consulted and expressed satisfaction with IMF TA (resident advisors and peripatetic HQ/AFS visits). - Authorities concurred with the CD priorities listed above. - Requests and timing: - The Ministry of Finance requested that a timetable of TA missions be prepared soon considering that presidential elections are scheduled for October 2019. - TA on fiscal decentralization would be highly appreciated before July, when preparations for the 2019 budget are likely to start. ### Technical Assistance (2016–2019) — highlights - Long-term and mission-based TA across Fiscal Affairs, ICD, Legal, Monetary and Capital Markets, Statistics, and AFRITAC South (AFS). - Long-term TA advisor and coordinator (2016–2019) (jointly with AFS): Long-term support to fiscal reforms (including PFM, revenue administration, debt management, natural resources wealth management) — counterparts: MEF, AT, MIREME, MAEFP. - Long-term Resident Advisor (September 2017 to 2019): Strengthening macro-fiscal projections and improve fiscal risks management — counterpart: MEF. - Selected Fiscal Affairs TA (2016–2019): - March 2019 Mission: Extractive industry (EI) fiscal modelling and risk assessment; compliance – capacity building — counterparts: MEF, AT, MIREME, INAMI, INP, BM. - March 2019 Peripatetic Expert Assignment: Revenue Reforms Management, strategic planning and management — counterparts: AT/MEF. - February 2019 Mission: Fiscal decentralization, expenditure controls and cash management — counterpart: MEF. - Multiple missions on EI fiscal modelling, tax gap analysis, revenue reforms, VAT processes, e-tax implementation, and expenditure control among others (2016–2019). - Selected Monetary and Central Bank TA (2016–2019): - October 2017 Mission (Jointly with MCM and AFS): Developing a Forecasting and Policy Analysis System (FPAS) — counterpart: BM. - March 2019 Mission: Monetary Policy: Macro econometric forecasting using Matlab — counterpart: BM. - Missions on Cash Currency Management, Financial Stability (FSR), Developing Monetary Policy Report (MRP), liquidity forecasting, oversight of financial market infrastructures and RTGS implementation (2017–2019). - Central bank governance, reorganization follow-up, risk management and internal audit — multiple missions in 2018–2019. - Selected Statistics and AFRITAC South TA (2016–2019): - Government Finance Statistics (GFS): August–September 2018 Mission — counterparts: MEF, INE. - National Accounts improvements, External Sector Statistics, Monetary and Financial Statistics; Financial Soundness Indicators — multiple missions (2016–2018). - AFRITAC South support to customs PCA function, expenditure chain restoration, fiscal projections, leadership and capacity building (2016–2018). ### Joint World Bank–IMF work program, 2018–19 — macro-critical structural reform areas - Debt management and investment planning - Strengthen capacity to manage fiscal risks and ensure value for money; implement a new medium-term debt strategy. - Public financial management - Consolidate PFM achievements; extend PFM framework to national and subnational governments; regularly identify, monitor and mitigate fiscal risks; enhance control of public spending; track and reduce arrears. - Tax administration - Implement modern e-tax system, improve taxpayer registry, facilitate electronic tax payment, strengthen large taxpayers’ unit, expand tax base to informal sector, and enhance revenue management with performance indicators. - Social safety nets - Rationalize and expand health insurance coverage; strengthen higher education and vocational training; strengthen National Social Security Fund and create new private sector pension system; improve targeting of social protection. - Natural resource wealth - Strengthen legal and regulatory frameworks, contract and revenue management capacity in view of coal and gas projects; Mozambique remains full membership of the Extractive Industries Transparency Initiative (EITI). - Investment climate - Address weaknesses in governance, access to finance, power supply, tax and regulatory systems, and contract enforcement to lower costs of doing business and broaden the productive base. - Financial sector stability and development - Strengthen continuous supervision, capacity to identify vulnerabilities, and improve financial intermediation and access to credit; implement 2013-22 Financial Sector Development Strategy. *Annex IV. Capacity Development Strategy, Staff Report for the 2019 Article IV Consultation — Information Annex* ### 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 - Both institutions will assist the authorities in strengthening their debt management capacity, with TA support and on-site assistance, and will contribute to implement reform priorities defined in government DeMPA action plan. - The Fund will continue to play a key role in building government capacity to assess debt sustainability and improve debt management. - The Bank will continue providing technical assistance for enhancing project investment management and medium-term debt strategy. ### Public financial management reform - The Bank and the Fund will cooperate in the field to strengthen and enforce PFM systems and improve public sector fiscal risks management. - Support modalities: - In-situ TA coordinator and advisors. - Regular TA missions from FAD, and AFRITAC South regional office in Mauritius. - Planned World Bank multi-donor PFM trust fund. - Bank ongoing consultation from its local office and supervision missions of projects under implementation in this area. - Fund missions to provide opportunities to assess progress. ### 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 collaboration with the IMF, in the context of its program on natural resources (MAGTAP) and program four results in PFM. ### Social safety net reform - 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 identify the fiscal space for the safety nets. - Results will be discussed regularly among collaborators to inform policy discussions with the authorities. - The Bank is also taking the lead in public pension reforms. ### Natural resource wealth - The Fund will provide TA under the Topical Trust Fund for Managing Natural Resource Wealth (TTF-MNRW) on: - fiscal regime of the extractive sector, - revenue forecasting, - natural resource statistics. - The Bank is supporting Mozambique’s implementation of EITI through its Multi-donor Trust Fund (MDTF), funds it through the MAGTAP project, and will support policy dialogue through the Economic Management for Inclusive Growth Program. ### 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 through enhanced financial inclusion, competition, consumer protection, and financial literacy. - Results will be shared and discussed regularly. ### Requests for information 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. ### Teams' work programs (May 2018–April 2019) — summary of major activities and timing - Bank Work Program (selected items) - 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. - Country Economic Memorandum and Mozambique Economic Update — Ongoing. - TA on public investment management — Ongoing. - TA and policy advice on disaster risk management — Ongoing. - Fund Work Program (selected items) - Capacity building on PFM and fiscal risks — 2018-19; Ongoing. - Capacity building on revenue mobilization — 2018-19; Ongoing. - Capacity building to natural resources wealth management (MNRW-TTF), including fiscal modelling (FARI), revenue administration and macro fiscal issues — 2018-19; Ongoing. - Modernizing governance and Central Bank Operations (Phase I) — 2018-19; Ongoing; Expected delivery date: Oct. 2020. - Governance diagnostics — Nov. 2018; Feb. 2019; 2019. - TA on statistics GFS, MFS/FSI and NA — 2018-19; Ongoing. - Joint Work Program (selected items) - Support to PFM, revenue mobilization and fiscal decentralization — Ongoing. - Policy advice on public sector salary reforms (incl. pensions) — Ongoing. - TA and policy advice on debt management, SOE and Fiscal Risks Management — Ongoing. - Policy advice on natural resource wealth management — Ongoing. - Social Protection: Design of programs and assessment of fiscal space — Ongoing. ### Statistical issues (As of April 30, 2019) - Assessment of Data Adequacy for Surveillance — General - Data provision is broadly adequate for surveillance. - Authorities encouraged to address data gaps: strengthen compilation and dissemination for reporting fiscal data, improve national accounts, balance of payments and financial sector data, and finalize compilation of the other financial corporations survey. - 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 with a switch from 2003 to 2009 as the base year. - July 2015: partly revised GDP series released, improving measurement of investments and imports for natural resource projects. - Recent household income and expenditure survey conducted in 2015-2016 needs to be incorporated. - Revamped consumer price index for Maputo released in February 2011 based on 2008–09 household survey weights. - National CPI integrating Maputo, Beira, and Nampula released in April 2006. - Outstanding issues: improve housing market rent sample, expand coverage to Quelimane and Greater Maputo, and address insufficient sectoral labor market and employment data. - Monetary and financial statistics - BOM regularly reports monthly monetary data for the central bank and other depository corporations using SRFs; these are inputted in the IMD used by AFR and STA. - A December 2018 TA mission found monetary data fully in line with the MFSMCG methodology. - Mission advanced work towards a quarterly other financial corporations’ survey; more disaggregated information needed from insurance corporations. - Monthly FSIs currently compiled by BOM for internal use are fully consistent with the FSI Compilation Guide methodology. - December 2018 mission recommended BOM disseminate monthly FSIs on its website and report them to STA for IMF publication. - Mozambique reports some FAS series including mobile money and the two UN indicators for SDG Target 8.10.1. - Balance of payments - With STA assistance via DFID-funded EDDEI, BM migrated to BPM6; BOP and IIP statistics disseminated based on BPM6. - IIP compiled and disseminated quarterly. - Areas needing further strengthening: - information technology (data warehouse and on-line analytical processing tools), - accuracy and BPM6 consistency for trade credit and advances and public and publicly-guaranteed private sector external debt, - data quality for foreign liability positions of non-megaprojects, - compilation of imports of domestic enterprises supplying megaprojects. - Work progressing to identify imports of domestic firms directly related to providing services to megaprojects. - External debt statistics - Notable improvement in debt management under 2010-13 PSI-supported program, but further improvements needed. - Debt unit capacity needs strengthening to oversee entire public debt portfolio, including SOEs and cooperation agreement loans, and to implement strong safeguards. - Delays in confirmation from creditors or line ministries can cause significant revisions to stock figures; strengthening of the debt office is needed for timely recording of disbursements. ### Data Standards and Reporting - Mozambique participates in the enhanced General Data Dissemination System; full implementation pending dissemination of a National Summary Data Page. - DFID financed an IMF mission on the Enhanced General Data Dissemination System in April 2017. - Reporting to STA: - Mozambique does not report fiscal data for publication in the IFS but reports some revenue data for the GFSY. - Mozambique reports monthly monetary data to STA using SRFs; these enhanced data are 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 May 08, 2019) — selected entries (dates preserved) - Exchange Rates: Date of latest observation: Mar. 2019; Date received: Mar. 2019; 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: Mar. 2019; Date received: Mar. 2019; Frequency of Data: W; Frequency of Reporting: W; Frequency of Publication: W. - Broad Money: Date of latest observation: Mar. 2019; Date received: Mar. 2019; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M. - Consumer Price Index: Date of latest observation: Feb. 2019; Date received: Mar. 2019; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M. - Revenue, Expenditure, Balance and Composition of Financing – General Government and Central Government: Date of latest observation: 2018 Q4; Date received: Feb. 2019; 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: 2018 Q4; Date received: Mar. 2019; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q. - External Current Account Balance: Date of latest observation: 2018 Q4; Date received: Feb. 2018; Frequency of Data: Q; Frequency of Reporting: I; Frequency of Publication: I. - GDP/GNP: Date of latest observation: 2018 Q4; Date received: Feb. 2018; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: I. - Gross External Debt: Date of latest observation: 2017; Date received: Jun. 2018; Frequency of Data: A; Frequency of Reporting: I; Frequency of Publication: I. - International Investment Position: Date of latest observation: 2018; Date received: Feb. 2019; Frequency of Data: A; Frequency of Reporting: A; Frequency of Publication: A. ### Statement highlights and macroeconomic developments - Vulnerability to climate shocks - Tropical Cyclone Idai struck central region near Beira in March 2019. - Tropical Cyclone Kenneth made landfall in April 2019 in Cabo Delgado. - Post-Idai Post Disaster Needs Assessment (PDNA) estimates post-Idai reconstruction financing needs at $2.9 billion. - Authorities planned an International Donors’ Conference in Beira from May 31 to June 1, 2019. - Recent economic developments and outlook - Real GDP growth slowed from 3.7 percent in 2017 to 3.3 percent in 2018 due to declines in agriculture, mining and transport. - Economic growth is expected to moderate to 2.5 percent in 2019 owing to the impact of the recent cyclones. - Growth is expected to remain positive going forward, in line with a rebound in consumption and investment related to liquified natural gas projects. - Inflation declined from a peak of 26½ percent at end-November 2016 to 3¼ percent at end-April 2019. - Inflation is projected to pick up to about 7 percent in 2019 as supply shocks from the cyclones pass through the economy. - Inflation pressures expected to dissipate and remain within the Bank of Mozambique’s target range of 6-8 percent. - Current account deficit, excluding mega projects, widened to 30.4 percent of GDP at end-December 2018 from 20 percent of GDP at end-December 2017, largely due to increased imports of intermediate and capital goods including fuel and continued declines in key commodity exports (coal and aluminum). - Gross international reserves declined from about 6.8 months of import cover at end December 2017 to nearly 5.5 months of imports at end December 2018. *Source: Republic of Mozambique — IMF staff report content (as provided).* ### 9. The authorities’ medium-term fiscal strategy aims to intensify fiscal consolidation ### 9. The authorities’ medium-term fiscal strategy aims to intensify fiscal consolidation ### Fiscal strategy and objectives - Aim to intensify fiscal consolidation through improved revenue collection and enhanced public expenditure efficiency. - Objective to place debt on a sustainable path while improving the oversight of state-owned enterprises (SOEs). - Plan to build robust fiscal management systems and strengthen project management capacities. - As part of preparations for effective management of natural gas revenues expected after 2023, the authorities are considering adopting a fiscal rule to mitigate risks stemming from commodity price volatility. - Intend to establish a Sovereign Wealth Fund to support productivity-enhancing investments. ### Progress and measures implemented (FY2017/18 and onward) - Progress achieved over FY2017/18: - Streamlining recurrent expenditures, notably the wage bill and goods and services. - Phasing out fuel and wheat subsidies together with the introduction of an automatic fuel price-adjustment mechanism. - Scaling back of capital expenditures. - Continued implementation of strategy to address domestic payments arrears. - Plans to rationalize lower priority spending to address post-disaster financing needs. - Commitment to achieving a zero primary fiscal balance by 2022. - Reliance on grants and highly concessional financing to reduce fiscal pressures and help curb debt vulnerabilities in the medium term. ### Debt management and fiscal risk oversight - Commitment to bringing debt levels to moderate risk of debt distress over the medium term. - Positive steps taken to improve transparency of evaluating and granting government guarantees. - Strengthening the recently-created Fiscal Risk Assessment Unit in the Ministry of Economy and Finance. - Plans to upgrade debt management capacity while strengthening oversight of fiscal risks emanating from SOEs. - Ongoing good faith discussions with commercial creditors to achieve timely debt restructuring. ### Public financial management and decentralization - Acceleration of public financial management reforms to support medium-term fiscal consolidation and improve policy credibility. - Pursuit of fiscal decentralization in a fiscally-responsible manner. - Intend to submit to parliament a public finance decentralization draft law in harmony with the set of administrative decentralization laws already approved by Parliament. - Legislative steps aimed to improve quality of delivery of public goods and services through a gradual transfer of revenue and spending responsibilities to Provinces. ### Monetary, exchange rate, and financial sector policies - Monetary policy stance emphasizes price stability, financial sector resilience and ensuring exchange rate flexibility. - Bank of Mozambique (BM) has pursued a cautious easing of monetary policy in line with the softening inflationary pressures. - BM will monitor potential second round effects of the cyclone induced supply shocks as normalization of monetary policy continues. - Preparing amendments to the Central Bank Act and a new Banking Law to enhance crisis management, bank resolution, and safety nets. - BM will implement measures to ensure adequate capital buffers in the banking sector while accelerating the shift to risk-based supervision. - Authorities will strengthen the AML/CFT framework; preparations for the 2019 AML/CFT evaluation by the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG) under the revised AML/CFT international standard are at an advanced stage. - Financial deepening and inclusion prioritized to support broad-based growth, accelerate poverty reduction, and improve distributional outcomes. - Continued implementation of the National Strategy for Financial Inclusion (2016-2022) to promote access to financial services in all districts and to leverage benefits of the digital revolution. ### Structural reforms and governance - Implementation of structural reforms, including governance reforms, viewed as essential to improve medium- to long-run growth prospects. - Plans to intensify enforcement of existing laws aimed at fighting corruption and reinforcing the primacy of the rule of law. - Work towards completion, publication, and implementation of the diagnostic report on governance, transparency, and accountability with IMF technical assistance. - Attorney General’s Office to continue cooperative work with bilateral partners to expedite investigations related to the undisclosed loans. - Intend to prepare and submit to Parliament a Law to permit recovery of assets related to corruption practices. - Near-term structural priorities to address competitiveness challenges: - Enhance capacity development initiatives aimed at supporting skills development. - Promote public investments in agriculture and fisheries, mining, and transportation sectors to lift comparative advantage. - Deploy policy measures to reduce labor market rigidities and create a friendly business environment. ### Conclusion - Authorities determined to advance reform agenda to achieve durable macroeconomic stability, support broad-based growth, improve distributional outcomes, and strengthen institutional capacity. - Appreciation expressed for the Fund’s continued engagement and policy advice and thanks to the international community and development partners for supporting resilience building efforts to mitigate the impact of climate change. *Source: 1mozea2019002 - 9. The authorities’ medium-term fiscal strategy aims to intensify fiscal consolidation* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1mozea2019002.pdf_