## 1mozea2022001 ## Source details **Canonical URL:** [1mozea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1mozea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1mozea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1mozea2022001.pdf.json) --- ### Executive summary — context and high-level objectives - Three-year ECF arrangement aims to support the economic recovery, reduce public debt and financing vulnerabilities, and foster higher and more inclusive growth through structural reforms. - Recovery drivers and headwinds: - Successful vaccination campaign; recovery from COVID-related restrictions. - Worsening international environment, higher food and fuel prices, and natural disasters are material headwinds. - Security situation in the north improved but remains a challenge with population displacement and reconstruction needs. - Health and humanitarian indicators: - Over 15 million people (42 and 97 percent of the total and target populations, respectively) had received at least one shot by end-September 2022. - 40.9 percent of the population were fully vaccinated. - Terrorist attacks since 2017 have displaced 945,000 people. - Acutely food insecure people increased to about 1.5 million (4.7 percent of the population). - Fuel price mechanism and stabilization fund: - Rules-based fuel price setting mechanism (ARENE/IMOPETRO) applied; gradual passthrough in 2022 in response to >20 percent rise in international oil prices. - Liability of about $170 million (1 percent of GDP) had accumulated in the stabilization fund at end-August 2022. - Agreement to settle liability and return to rules-based system expected, likely with a new contribution in the fuel price structure. ### Program performance (status to end-June 2022) - Compliance: - All performance criteria (PCs), indicative targets (ITs), and the structural benchmark for end-June 2022 were met. - PCs on the floors on the domestic primary budget balance and the stock of net international reserves of the Bank of Mozambique (BM) were met by wide margins. - No newly contracted non-concessional external debt, nor accumulation of new public and publicly-guaranteed external payment arrears. - ITs on the present value of new external debt, the ceiling on the domestic debt stock and the floor on social spending were met. - Structural benchmark on submission to parliament of AML/CFT legislation was met. - MPCC breach and consultations: - Inflation breached the MPCC upper-band in June 2022: inflation reached 10.8 percent in June. - A formal consultation letter is annexed to the staff report. - Structural benchmark/target adjustments proposed: - Change to the indicative target on the ceiling for the domestic debt stock to reflect delays in grant disbursements and anticipated issuance. - Minor modification to the structural benchmark establishing quarterly commitment ceilings: move completion date from end-December 2022 to end-January 2023. - Target completion date for submission to Parliament of the Public Probity Law moved from end-December 2022 to end-June 2023. - Program modality: - Macroeconomic prospects remain similar to program approval; performance criteria for the second review have not been modified. ### Near-term economic developments and outlook — growth, LNG timeline, and key projections - Real GDP growth (annual percentage change, Text Table 2): - 2022: 3.8 - 2023: 5.0 - 2024: 8.3 - 2025: 5.1 - 2026: 5.0 - 2027: 15.6 - GDP per capita (US$) (Text Table 2): - 2022: 541 - 2023: 582 - 2024: 629 - 2025: 651 - 2026: 676 - 2027: 774 - LNG project timeline and impacts: - Coral South offshore platform (first LNG project) begins production in 2022/2023 with staff projecting onshore LNG projects in 2027 and 2029, with large positive impacts on growth, fiscal revenues, and the current account. - US$4.4 billion (25 percent of GDP) in imports for the Coral South LNG project recorded in Q1 2022. ### Inflation dynamics and monetary policy - Inflation developments: - Inflation rose to 10.8 percent in June 2022. - Annual inflation reached 12 percent in August and remained at 12 percent in September 2022. - CPI components: diesel and gasoline prices increased by 42 percent and 26 percent, respectively, between January and September 2022. - Transport prices contributed 3.8 percentage points to inflation in September (up from 1.4 percentage points in January). - Reduced domestic food supply and global food price increases contributed 5.9 percentage points to inflation. - Inflation at end-2022 is projected at 15 percent, based on completion of fuel price adjustment and passthrough. - Core inflation (excluding food and fuel) around 5-7 percent year-on-year. - Monetary policy actions: - BM raised the policy rate (MIMO) in March 2022 by 200 basis points to 15.25 percent, and again by 200bp in September 2022. - Since January 2021, BM increased the policy rate by 700bp. - Real interest rates are among the highest in the region. - MPCC projected path (selected): - End-December 2022 midpoint: 15.0 percent, symmetric band ±3 percent. - End-March 2023 midpoint: 14.0 percent, ±2 percent. - End-June 2023 midpoint: 11.5 percent. - End-December 2023 midpoint: 9 percent. - End-March 2025 midpoint: 6 percent. ### External sector, reserves, and current account (selected figures) - Gross international reserves (months of next year's non-megaproject imports, Text Table 2): - 2022: 3.7 - 2023: 3.8 - 2024: 4.2 - 2025: 4.3 - 2026: 4.9 - 2027: 5.0 - Current account balance (percent of GDP, Text Table 2): - 2022: -41.5 - 2023: -14.7 - 2024: -35.5 - 2025: -38.9 - 2026: -40.9 - 2027: -27.1 - Current account balance excluding megaprojects and indirect imports (percent of GDP): - 2022: -16.2 - 2023: -19.3 - 2024: -17.0 - 2025: -16.5 - 2026: -16.4 - 2027: -16.2 - International reserves developments: - Gross international reserves fell to US$2.6 billion at end-September (3.4 months of projected 2023 non-megaprojects imports), down from US$3.5 billion at end-December 2021. ### Fiscal developments, budget execution, and major fiscal projections - Primary fiscal balance after grants (percent of GDP, Text Table 2): - 2022: -0.2 - 2023: -0.7 - 2024: 0.0 - 2025: 0.8 - 2026: 2.3 - 2027: 3.1 - Public sector debt (percent of GDP, Text Table 2): - 2022: 102.9 - 2023: 101.4 - 2024: 102.6 - 2025: 101.5 - 2026: 97.6 - 2027: 81.9 - 2022 fiscal execution and drivers: - Overall balance forecast for 2022 widened by 0.1 percent of GDP versus program projections, to reach -3.7 percent of GDP. - Total revenue projected at 25.7 percent of GDP in 2022; personal and corporate income tax collection forecast at 10.7 percent of GDP. - Upfront cost of public sector remuneration reforms: MT 9.6 billion in 2022. - Current spending on subsidies and transfers expected at 3.7 percent of GDP (versus 2.8 percent in program), reflecting fuel price support measures. - Under-execution of capital spending: total capital spending for the year estimated at 6.7 percent of GDP (shortfall in externally financed investment by about a quarter of the budgeted amount). - 2023 budget projections: - Revenues forecast at 26 percent of GDP. - Expenditure expected at 33 percent of GDP (versus 31.8 percent at program), with higher goods and services spending largely due to election-related costs. - Investment spending expected to recover to 8.1 percent of GDP. - Primary balance (after grants) expected to be achieved in 2024. ### VAT and public wage bill reforms (fiscal consolidation measures) - VAT reform: - Modified list of VAT exemptions to keep agricultural and renewables inputs exempt. - VAT rate reduced by one percentage point to 16 percent in 2023 (compared to the half point cut in 2023, and a further half point cut in 2024, envisaged at program approval). - Reform preserves exemptions on a ‘basic basket’ consumed by low-income households. - Net yield from VAT and excise reforms is 0.9 percent of GDP, versus 1.1 percent previously. - Amended VAT law expected to be submitted to parliament in November 2022 (prior action, MEFP ¶20). - Full implementation of elimination of VAT exemptions and zero-ratings from January 1, 2023 (structural benchmark). - Public employment and compensation reform: - Reform expected to reduce the wage bill from 14.6 percent of GDP in 2022 to 10.6 percent of GDP over time. - Upfront cost of MT 9.6 billion (0.7 percent of GDP) in 2022; full year cost of MT 19.2 billion from 2023. - Only one in three leaving public employees will be replaced in 2023 and 2024 except in health, education, agricultural extension, and administration of justice (structural benchmarks). - Base pay rises in 2023 set below inflation; compensating measures and supplementary budget if costs rise above forecasts. ### Public financial management, revenue administration, and digitalization - Revenue administration digitalization: - Integrated electronic tax system (e-tributação) extended to all taxes and tax offices by end-2023 (structural benchmark). - Electronic filing and payment interface (Portal do Contribuinte) to be fully implemented by June 2023 (structural benchmark). - As of end-August 2022, Portal do Contribuinte covered 37 percent of total taxpayers in VAT and small taxes, and 72 percent of large taxpayers. - Objective: cover 60 percent of total taxpayers by end-2023. - VAT refund arrears and securitization: - VAT refund arrears amounting to MT 35.2 billion at end-June 2022. - An adjustor proposed to the domestic debt IT to reflect planned securitization to clear VAT refund arrears. - e-SISTAFE and procurement: - New financial programming and budgetary planning tools to be operationalized in e-SISTAFE and implemented in all spending units by end-December 2022 (structural benchmark). - All stages of expenditure chain to be incorporated into e-SISTAFE; procurement to require valid commitment notes before delivery. - Establish a cash management committee by end-2022 and map all public sector bank accounts. ### Debt strategy, sovereign exposures, and external borrowing plans - Debt distress and LNG implications: - At program approval risk of debt distress assessed high but sustainable forward-looking given prospective LNG revenues. - One-year postponement of resumption of first onshore LNG project anticipated; minor downward effect on ENH’s debt path. - Forecast GDP growth in 2026 revised down by 8.8 percentage points relative to original program scenario; public debt to GDP for 2026-27 is over 10 percentage points higher. - Sovereign guarantees and ENH exposures: - Current sovereign guarantee associated with project stands at $43 million (0.2 percent of GDP); could rise to a maximum $2.5 billion as development proceeds. - Under financing terms, 90 percent of revenue generated by the Coral South platform accruing to ENH will be used to repay creditors. - External borrowing program (May 9, 2022 to December 2023, Text Table 5): - By sources of debt financing: 710 USD million (100 percent) — Concessional debt 710 (100); Non-concessional debt: 0 (00). - Creditor composition: Multilateral 370 (52); Bilateral 340 (48). - Uses of debt financing: Infrastructure 710 (100). - Medium-Term Debt Strategy (MTDS) targets: - Increase external financing share from 30 per-cent in 2022 to 55 per-cent in 2025. - Increase domestic debt with maturities over 5 years from 5 percent in 2022 to 25 percent in 2025. - Government plans to seek external financing exclusively on concessional terms per program targets. ### Banking sector, financial inclusion, and safeguards - Banking sector resilience: - System-average capital adequacy ratios: 26.1 percent (end-August 2022; regulatory minimum 12 percent). - NPLs: 9.1 percent (end-August 2022; below end-June 2022 figure of 10 percent). - Credit conditions remain tight; credit extension mostly to larger enterprises and formal sector wage earners. - New movable property collateral registry launched July 2021 expected to help SME lending. - Financial inclusion: - Bank account ownership rose to 31.2 percent in June 2022 (from 30.7 percent in June 2021). - Basic Bank Account law approved to reduce documentation requirements and reduce legal age to open an account from 21 to 18 years. - Central bank safeguards and transparency: - BM strengthened internal audit and compliance; published overdue audited financial statements for 2021 and committed to timely publications (MEFP ¶27). - Reviewing internal controls in currency operations with TA under a twinning arrangement with Norges Bank. - Recommended legal amendments to BM mandate, autonomy and governance planned to be submitted to parliament by June 2024 (MEFP ¶25). ### Risks, scenarios, and policy implications - Key risks: - Security risks and population displacement in the north. - Natural disasters and structural food insecurity. - Upside risks: stronger-than-expected LNG demand and higher non-LNG growth. - Fiscal and structural policy priorities (for second review and implementation): - Fiscal policy: mobilize additional revenue, rebalance expenditure, implement VAT and public sector wage bill reforms. - PFM: complete key reforms and strengthen governance and transparency. - Natural resource management: submit sovereign wealth fund law (planned submission timelines noted). - Debt vulnerability reduction: sustain measures to reduce public debt and financing vulnerabilities. - Social protection: targeted measures to mitigate fuel price impacts on vulnerable public transport users (cash transfers and discounts). - Contingency measures and program conditionality: - Program monitoring via bi-annual reviews, quantitative performance criteria, indicative targets, and structural benchmarks. - Authorities committed to refrain from new non-concessional external borrowing and to provide timely data for program monitoring. ### IMF financing, disbursement schedule and capacity to repay - Schedule of Disbursements Under the ECF Arrangement, 2022-2025 (Table 9): - 30.0 percent of quota = 68.16 Million SDR — Available May 9, 2022. - 20.0 percent of quota = 45.44 Million SDR — Available September 15, 2022. - 20.0 percent of quota = 45.44 Million SDR — Available March 15, 2023. - 20.0 percent of quota = 45.44 Million SDR — Available September 15, 2023. - 20.0 percent of quota = 45.44 Million SDR — Available March 15, 2024. - 20.0 percent of quota = 45.44 Million SDR — Available September 15, 2024. - 20.0 percent of quota = 45.44 Million SDR — Available March 15, 2025. - Total: 150.0 percent of quota = 340.8 Million SDR. - Capacity to repay: - Under baseline, outstanding obligations to the Fund based on existing and prospective drawings would peak at 3.7 percent of GDP in 2024, or about 23.7 percent of gross international reserves. - Downside risks include failure of onshore LNG projects, natural disasters, and fiscal risks that could reduce debt service capacity. ### Annex — MPCC consultation on missed inflation target (select) - Inflation deviation: - June 2022 CPI inflation 10.8 percent, 0.8 percentage points above MPCC upper bound of 10.0 percent. - Drivers: war in Ukraine (surge in global food and fuel prices), domestic floods damaging harvests in March 2022, and recovering aggregate demand. - Diesel and gasoline increased by 27 percent and 20 percent respectively between January and June 2022; wheat flour up 13.0 percent; wheat bread up 32.9 percent over same period. - Overall food price inflation reached 15.9 percent year-on-year in June 2022, contributing 5.3 percentage points to headline inflation. - Policy response: - BM increased policy rate by 200bp in March 2022 (to 15.25 percent) and by 200bp in September 2022; cumulative 700bp since January 2021. - Monetary policy tightening intended to contain inflation expectations and guide inflation towards BM’s medium-term objective. - Inflation outlook in baseline (Annex): - Peak at 15.0 percent at end-2022, decelerating to 8.5 percent at end-2023, then to 6.0 percent in 2024 and 5.5 percent in 2025. - BM will closely monitor developments and stand ready to respond to inflationary shocks. *Source: EXECUTIVE SUMMARY, 1mozea2022001 (Republic of Mozambique — IMF staff report, September 5-16, 2022 mission).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - The three-year ECF arrangement aims to support the economic recovery, reduce public debt and financing vulnerabilities, and foster higher and more inclusive growth through structural reforms. - Recovery drivers and headwinds: - Successful vaccination campaign and recovery from COVID-related restrictions have strengthened the recovery. - Worsening international economic environment, higher food and fuel prices, and natural disasters are material headwinds. - Security situation in the north has improved but remains a critical challenge with population displacement and reconstruction needs. - Health and humanitarian indicators: - Over 15 million people (42 and 97 percent of the total and target populations, respectively) had received at least one shot by end-September 2022, and 40.9 percent of the population were fully vaccinated. - Terrorist attacks since 2017 have displaced 945,000 people. - The number of acutely food insecure people increased to about 1.5 million (4.7 percent of the population). - Fuel price policy: - A rules-based fuel price setting mechanism adopted in 2017 (ARENE/IMOPETRO framework) was applied, but with gradual passthrough in 2022 in response to a rise in international oil prices exceeding 20 percent. - A liability of about $170 million (1 percent of GDP) had accumulated in the stabilization fund at end-August 2022. - An agreement to settle the liability and return fully to the rules-based system is expected, likely incorporating a new contribution in the fuel price structure to compensate the liability over time. ### Program performance - Compliance with program targets: - All performance criteria (PCs), indicative targets (ITs), and the structural benchmark for end-June 2022 were met. - PCs on the floors on the domestic primary budget balance and the stock of net international reserves of the Bank of Mozambique (BM) were met by wide margins. - No newly contracted non-concessional external debt, nor accumulation of new public and publicly-guaranteed external payment arrears. - The ITs on the present value of new external debt, the ceiling on the domestic debt stock and the floor on social spending were met. - The structural benchmark on submission to parliament of AML/CFT legislation was met. - Monetary policy consultation clause (MPCC): - Inflation breached the MPCC upper-band in June 2022 (inflation reached 10.8 percent in June). - A formal consultation letter is annexed to the staff report. - Structural benchmark adjustments proposed: - Change to the indicative target on the ceiling for the domestic debt stock to reflect delays in grant disbursements and anticipated issuance in the second quarter and November 4, 2022. - Minor modification to the structural benchmark establishing quarterly commitment ceilings to align with practical implementation and move the completion date from end-December 2022 to end-January 2023. - Target completion date for the structural benchmark on submission to Parliament of the Public Probity Law moved from end-December 2022 to end-June 2023. - Program modality: - Macroeconomic prospects remain similar to program approval; performance criteria for the second review have not been modified. ### Recent economic developments and outlook - Growth and LNG timeline: - Real GDP growth projected at 3.8 percent in 2022, rising to 5.0 percent in 2023 as the first LNG project (Coral South offshore platform) begins production. - Staff forecasts two onshore LNG projects to start production in 2027 and 2029 with positive impacts on growth, fiscal revenues, and the current account. - Real GDP growth by year (Text Table 2): 2022: 3.8; 2023: 5.0; 2024: 8.3; 2025: 5.1; 2026: 5.0; 2027: 15.6 (annual percentage change). - GDP per capita (US$) by year (Text Table 2): 2022: 541; 2023: 582; 2024: 629; 2025: 651; 2026: 676; 2027: 774. - Inflation dynamics and monetary policy: - Inflation developments: - Inflation rose to 10.8 percent in June 2022. - Annual inflation reached 12 percent in August and remained at 12 percent in September 2022. - CPI components: diesel and gasoline prices increased by 42 percent and 26 percent, respectively, between January and September 2022. - Transport prices (fuels, vehicles, and transport services) contributed 3.8 percentage points to inflation in September (up from 1.4 percentage points in January). - Reduced domestic food supply and global food price increases contributed 5.9 percentage points to inflation. - Inflation at end-2022 is projected at 15 percent, based on completion of adjustment of domestic to international fuel prices and passthrough to transport prices. - Core inflation (excluding food and fuel) remains around 5-7 percent year-on-year. - Monetary policy actions: - The Bank of Mozambique (BM) raised the policy rate (MIMO) in March 2022 by 200 basis points to 15.25 percent, citing increases in expected inflation and gathering economic momentum, and again by 200bp in September 2022. - Since January 2021, the BM has increased the policy rate by 700bp. - Real interest rates are among the highest in the region. - External sector and reserves: - The current account deficit is lower than forecast though it still widens due to LNG infrastructure imports; exports have been stronger than anticipated. - International reserves have declined faster than anticipated due to higher imported fuel prices. - Gross international reserves (in months of next year's non-megaproject imports): 2022: 3.7; 2023: 3.8; 2024: 4.2; 2025: 4.3; 2026: 4.9; 2027: 5.0 (Text Table 2). - Current account balance (percent of GDP) from Text Table 2: 2022: -41.5; 2023: -14.7; 2024: -35.5; 2025: -38.9; 2026: -40.9; 2027: -27.1. - Current account balance excluding megaprojects and indirect imports (percent of GDP): 2022: -16.2; 2023: -19.3; 2024: -17.0; 2025: -16.5; 2026: -16.4; 2027: -16.2. - Fiscal developments: - Primary fiscal balance after grants (percent of GDP) by year (Text Table 2): 2022: -0.2; 2023: -0.7; 2024: 0.0; 2025: 0.8; 2026: 2.3; 2027: 3.1. - Public sector debt (percent of GDP) by year (Text Table 2): 2022: 102.9; 2023: 101.4; 2024: 102.6; 2025: 101.5; 2026: 97.6; 2027: 81.9. - The overall balance forecast for 2022 widened by 0.1 percent of GDP compared to program projections, to reach -3.7 percent of GDP. - Total revenue is projected at 25.7 percent of GDP in 2022, supported by overperformance of personal and corporate income tax collection (forecast at 10.7 percent of GDP). - Expenditure pressures: - Costs related to humanitarian and security situation in the north, social support payments (partly related to COVID support early in 2022), and the upfront cost of the public sector remuneration reforms of MT9.6 billion in 2022 contributed to pressures. - Overall expenditure has been maintained within the 2022 budget, reflecting lower investment spending. - Social mitigation measures: - Government plans to partially offset rising fuel prices for vulnerable households via cash transfers and discounts at point of sale for public transport users for six months. - Interim measures: the price per journey has not been adjusted in the Maputo metropolitan area, and a monthly transfer is paid to registered public transport providers. - Banking and financial sector: - Credit conditions remain tight. - Financial sector buffers built before the pandemic have underpinned banking sector resilience. ### Risks, scenarios, and policy implications - Risks: - Security risks and population displacement in the north remain critical challenges despite some abatement. - Natural disasters and structural food insecurity are significant risks. - Upside risks include a strengthening recovery, strong prospects for LNG, and scope for higher-than-expected non-LNG growth in the medium-term. - Policy and reform priorities (to be finalized and implemented for the second review): - Fiscal policy: mobilize additional revenue, rebalance expenditure, and implement VAT and public sector wage bill reforms. - Public financial management: complete key reforms and strengthen governance and transparency. - Natural resource management: a sovereign wealth fund law expected to be submitted to Parliament in November is intended to help manage natural resource wealth efficiently and transparently. - Debt vulnerability reduction: sustain measures to reduce public debt and financing vulnerabilities. - Social protection: implement targeted measures to mitigate the impact of fuel price increases on vulnerable public transport users. - Program conditionality and implementation: - Key reforms will be finalized and implemented for the second review, including with respect to VAT, the public sector wage bill, and public financial management. - Continued capacity development (CD) support from IMF and other development partners is noted. *Source: EXECUTIVE SUMMARY, 1mozea2022001 (Republic of Mozambique — IMF staff report, September 5-16, 2022 mission).* ### 10. Budget financing needs are covered ### 10. Budget financing needs are covered ### Budget financing and domestic debt - International and domestic financing sources are covering budget needs. - World Bank approved budget support (Development Policy Financing) of US$300 million in July 2022. - The EU is expected to disburse a budget grant of US$50 million this year. - Projected net domestic financing in 2022 is broadly unchanged from 2021 at 3.8 percent of GDP. - Reliance on short-term T-bills has increased (to net issuance of 1.9 percent of GDP from 1.3 in 2021). - Use of US$163 million of the 2021 SDR allocation reduced pressure on the debt market and interest costs, with limited net issuance of longer-term bonds. - Use of a further US$147 million of the SDR allocation in 2023 will support spending on social protection (including displaced people) and alleviate domestic financing pressures. - Authorities committed to transparency and accountability of budgetary execution, including financed by the SDR allocation. - Domestic debt markets remained tight, with coverage falling below full placement on several occasions, despite high real interest rates. ### Large LNG investments and the current account - US$4.4 billion (25 percent of GDP) in imports for the Coral South LNG project, including the offshore platform, were recorded in the first quarter of 2022. - Higher commodity prices and volumes increased exports, notably of coal and electricity. - The current account deficit for large, foreign investment-led natural resource projects (“megaprojects”) is fully financed through trade credits and FDI. - The non-megaproject current account deficit has narrowed as the increase in imports, especially fuels, was compensated by higher exports (prices and volumes for minerals and foods) and is expected to be lower at end-2022 than 2021. - Compared to program projections, the current account deficit is lower due to the lower-than-expected trade deficit. - Over the medium term, differences in the current account are driven by the one-year postponement of the resumption of onshore LNG projects. ### Risks to the outlook - Risks are significant but balanced. - Downside risks: - Inflation driven by exogenous shocks to food and fuel prices; passthrough to other prices or emergence of wage pressures could de-anchor expectations and contribute to social unrest. - Natural disasters related to climate change. - Intensification of terrorist activity in the north of the country. - Upside risks: - Demand for LNG surpassing expectations over the medium-term. - Over the longer term, non-hydrocarbon growth may exceed the current conservative projection of 4 percent. ### Fiscal policy execution, projections, and reforms - Budget execution is consistent with program objectives based on end-June 2022 data. - Tax revenue is aligned with 2022 projections, supported by robust personal and corporate income tax collection. - Current spending on subsidies and transfers is expected to be higher than in the program (3.7 percent of GDP, versus 2.8 percent) partly reflecting fuel price support measures. - Under-execution of capital spending mainly reflects a shortfall in externally financed investment (by about a quarter of the budgeted amount), with total capital spending for the year now estimated at 6.7 percent of GDP. - Overall, spending is expected to remain within budgeted ceilings. - The authorities announced an economic reactivation package (Pacote de Aceleração Económica—PAE) to be implemented over 2023-24 to enhance the business environment and better align tax policy with development priorities. - The 2023 budget: - Revenues forecast at 26 percent of GDP. - Expenditure expected at 33 percent of GDP (versus 31.8 percent at program), with higher goods and services spending largely due to election-related costs. - Investment spending expected to recover to 8.1 percent of GDP. - Primary balance (after grants) expected to be achieved in 2024, as in the original program. ### VAT and wage bill reforms - VAT reform: - Modified list of VAT exemptions to ensure agricultural and renewables inputs remain exempt. - VAT rate reduced by one percentage point to 16 percent in 2023 (compared to the half point cut in 2023, and a further half point cut in 2024, envisaged at program approval). - Reform preserves exemptions on a ‘basic basket’ of goods and services consumed by low-income households. - Authorities are eliminating exemptions on additional domestic services and implementing an excise tax reform in addition. - Net yield from the VAT and excise reforms is 0.9 percent of GDP, versus 1.1 percent previously. - Amended VAT law expected to be submitted to parliament in November 2022 (prior action, MEFP ¶20). - Full implementation of elimination of VAT exemptions and zero-ratings identified through the 2022 prior action will become effective on January 1, 2023 (structural benchmark). - Reform of public employment and compensation: - Wage bill reform unifies and makes fairer compensation across the public sector. - Reform expected to reduce wage bill from 14.6 percent of GDP in 2022 to 10.6 percent of GDP over time. - Upfront cost of MT 9.6 billion (0.7 percent of GDP) in 2022, and a full year cost of MT 19.2 billion from 2023. - Changes to mapping rules and parliamentary amendments in October 2022 to keep costs within the original envelope. - Only one in three leaving public employees will be replaced in 2023 and 2024, except in health, education, agricultural extension, and administration of justice (structural benchmarks for end-December 2022 and end-December 2023). - Base pay rises in 2023 have been set below inflation. - Risks remain; compensating measures and a supplementary budget will be used if costs rise above forecasts. - Next steps include a functional review of public employment with World Bank support in 2023-24. ### Public resource management and revenue administration reforms - Revenue administration: - Integrated electronic tax system extended to all taxes and tax offices by end-2023 (structural benchmark). - Electronic filing and payment interface expected to be fully implemented by June 2023 (structural benchmark). - Modernizing taxpayer registry and enhancing links and interoperability with other public registries by end-2022 (MEFP ¶34). - Improved risk assessment for mining and gas taxation and enhanced capacity to gather and crosscheck third-party information (MEFP ¶35). - VAT reform expected to include a twelve-month limit for taxpayers to claim refunds and ensure adequate resources for refunds (MEFP ¶20). - Public financial management: - New financial programming and budgetary planning tools to be operationalized in e-SISTAFE and implemented in all spending units by end-December 2022 (structural benchmark, MEFP ¶38). - Public procurement stages added to e-SISTAFE; suppliers required to show valid commitment notes before delivering goods and services (MEFP ¶38). - Government plans to integrate all spending within e-SISTAFE by end-2022 and establish limits on quarterly expenditure commitments (proposed modified structural benchmark for January 2023, MEFP ¶38). - Establish a cash management committee by end-2022 and map all public sector bank accounts (MEFP ¶39). - Full integration over time of climate resiliency criteria in public investment planning and project selection (MEFP ¶40). ### Fiscal statistics and government finance (selected figures from Text Table 3) - Total revenue: 25.0 (2022 Program Approval), 25.7 (2022 Proj.), 25.4 (2023 Program Approval), 25.9 (2023 Proj.) - Tax revenue: 20.6 (2022 Program Approval), 21.8 (2022 Proj.), 20.6 (2023 Program Approval), 21.8 (2023 Proj.) - Income and profits: 10.5, 10.7, 10.5, 10.7 - VAT: 6.4, 7.4, 7.3, 7.9 - Total expenditure and net lending: 32.4, 33.2, 31.8, 33.3 - Current spending: 24.7, 26.1, 24.2, 24.8 - Wage bill: 14.2, 14.6, 14.2, 14.1 - Interest on public debt: 3.4, 3.5, 3.0, 3.2 - Subsidies and transfers: 2.8, 3.7, 2.8, 3.0 - Capital Spending: 7.3, 6.7, 7.3, 8.1 - Primary balance (after grants): -0.2, -0.2, -0.6, -0.7 - Overall balance (after grants): -3.6, -3.7, -3.6, -3.9 - Domestic primary balance: 0.2, 0.2, 1.1, 0.7 - GDP (billions of Meticais): 1173, 1142, 1318, 1292 ### Reducing debt vulnerabilities and debt strategy - At program approval the risk of debt distress was assessed to be high but debt sustainable forward-looking given prospective LNG revenues. - Staff expect a one-year postponement of resumption of the first onshore LNG project (TotalEnergies, Area 1, Golfinho), with a minor downward effect on ENH’s debt path. - Reflecting delays: - Forecast GDP growth in 2026 is revised down by 8.8 percentage points relative to the original program scenario, rising commensurately in 2027. - Public debt to GDP for 2026-27 is over 10 percentage points higher. - Delayed investment and exports alter current account projections sharply in those years, postponing convergence of key liquidity and solvency indicators to thresholds. - Government has not contracted any new non-concessional debt nor extended new debt guarantees. - Government expects to start repaying the reconciled amount of its arrears with Brazil at the end of 2022, once the agreement is ratified by Brazil’s parliament. - Government is working to resolve pre-HIPC arrears with five countries. - Sovereign exposure related to LNG projects: - Current sovereign guarantee associated with project stands at $43 million (0.2 percent of GDP). - This could rise to a maximum $2.5 billion as project development proceeds. - Repayment of exploration and development debt related to the offshore platform (ENI, Area 4, Coral South) began production in October. - Under financing terms, 90 percent of revenue generated by the platform accruing to ENH will be used to repay creditors. - ENH’s equity stake in Area 1 and 4 projects is funded by its partners; ENH is considering refinancing this debt given its high costs. - External borrowing plan for July-December 2022 is unchanged compared with program approval. - Loans under negotiation are concessional and have NPVs well within the program cumulative target set for December 2022. - Includes a concessional project loan from the World Bank of US$200 million to support digitalization. - For 2023, government negotiating a new concessional project loan of US$200 million from the World Bank—to support implementation of the economic reactivation package—and seeking to finance critical infrastructure projects. - Projected external borrowing program (May 9, 2022 to December 2023, Text Table 5): - By sources of debt financing: 710 USD million (100 percent) - Concessional debt, of which: 710 (100) - Multilateral debt: 370 (52) - Bilateral debt: 340 (48) - Non-concessional debt: 0 (00) - By Creditor Type: 710 (100) - Multilateral: 370 (52) - Bilateral - Paris Club: 190 (27) - Bilateral - Non-Paris Club: 150 (21) - Uses of debt financing: Infrastructure 710 (100) ### Medium-Term Debt Strategy (MTDS) - Published in July; aims to increase share of concessional external financing and lengthen maturities of domestic debt. - Debt service costs have increased, especially due to domestic debt. - Strategy aims to shift to longer maturities and attract other investors, including pension funds and insurance companies; an investor survey was launched. - Ambitious goals: - Increase share of external financing from 30 per-cent in 2022 to 55 per-cent in 2025. - Increase share of domestic debt with maturities over 5 years from 5 percent in 2022 to 25 percent in 2025. - According to program targets and debt sustainability, the government plans to seek external financing exclusively on concessional terms. ### Monetary policy, reserves, and banking sector - Banco de Moçambique (BM) proactively tightened monetary policy to contain inflation expectations. - Monetary policy stance remains appropriate given high inflation and risk of second-round effects from external price shocks. - Exchange rate against the US dollar has been de facto stabilized with historically low volatility since July 2021; it has appreciated against the South African rand. - Parallel exchange market spread has remained below 5 percent since March 2022. - Market participants report limited and brief queuing for FX supply. - Over the medium term, as public sector deficits and debt decline and pressures ease, reductions in the policy rate will become more feasible. - Continued reforms to deepen interbank and FX markets and greater exchange rate flexibility would provide a buffer against external shocks. - International reserves: - Gross international reserves fell to US$2.6 billion at end-September (or 3.4 months of projected 2023 non-megaprojects imports), down from US$3.5 billion at end-December 2021. - Program targets for net international reserves are unchanged. - Banking sector indicators (end-August 2022): - System-average capital adequacy ratios: 26.1 percent (regulatory minimum is 12 percent). - NPLs: 9.1 percent (below the end-June 2022 figure of 10 percent). - NPL heterogeneity across banks driven partly by exposures to SOEs impacted by the pandemic. - Credit extension mostly to larger enterprises and formal sector wage earners. - New collateral registry (movable property) launched in July 2021 expected to help expand lending to SMEs over the medium term. *Source: 1mozea2022001 - 10. Budget financing needs are covered* ### 25. Financial inclusion is gradually increasing. Bank account ownership rose to 31.2 percent in ### 25. Financial inclusion is gradually increasing. Bank account ownership rose to 31.2 percent in ### Financial inclusion and digital payments - Bank account ownership rose to 31.2 percent in June 2022, compared with 30.7 percent in June 2021. - Parliament approved a Basic Bank Account law that: - allows all banks to create accounts with fewer formal documentation requirements (addressing a constraint for low-income groups), - reduces the legal age to open a bank account from 21 to 18 years. - The BM is reforming the payment system law (MEFP ¶4 7) and has reached agreement on interoperability with mobile payments providers to facilitate use of digital money, e-commerce and digitalization of government benefits. - An evaluation of the 2016-2022 National Financial Inclusion Strategy, expected by end-June 2023, will inform the successor strategy. ### Structural reforms (Sovereign Wealth Fund, public investment, climate) - Sovereign Wealth Fund (SWF) law preparation is well advanced (structural benchmark, Dec 2022, MEFP ¶29). - Draft law envisages dividing resource flows between the SWF and the budget. - The BM will manage resources transferred to the SWF, following transparency and accountability rules broadly aligned with the Santiago Principles. - Next steps include developing regulations to integrate the SWF law with Treasury management and the medium-term fiscal framework to manage residual volatility in fiscal revenues. - Prospects for scaling up public investment in the medium term underscore the importance of improving public investment management, including with World Bank support. - Climate policy agenda: - Council of Ministers approved a plan to address financial risks from natural disasters. - World Bank is completing a Country Climate and Development Report (CCDR, expected to be finalized by end-2022). - Focus on adaptation measures, including strengthening climate resilience criteria in the selection of public investment projects (included in PFM reforms under the program). ### Governance, AML/CFT, public probity, and audit follow-up - AML/CFT: - Authorities are implementing a comprehensive action plan to address gaps identified in the June 2021 report of the Eastern and Southern Africa Anti-Money Laundering Group (MEFP ¶46), and in the updated action plan adopted by the Financial Action Task Force (FATF) Plenary in October 2022 following Mozambique’s inclusion on the FATF list of jurisdictions under increased monitoring (‘grey listing’). - The amended AML/CFT laws include a definition of beneficial ownership consistent with the FATF standards, and targeted financial sanctions for terrorism financing. - The risk-based supervision framework is being supported by Bank of France CD. - Public probity law: - Law is being amended to clarify coverage, strengthen the definition of conflict of interest and establish reporting procedures. - Requires submission of declarations of financial interests by public servants. - Submission to parliament is expected by end-June 2023 (revised from December 2022, structural benchmark). - COVID audit follow-up: - An audit of COVID related spending was completed in May 2022. - Authorities are implementing an action plan built on the audit recommendations through the Ministry of Finance general inspectorate. - A PFM strategy to strengthen budget execution in emergencies is expected by end-June 2023 (MEFP ¶37). ### Program modalities, targets, and monetary/ fiscal settings - Performance criteria and indicative targets proposed for June, September and December 2023; MPCC bands proposed to be raised for the remainder of the program. - Proposed floors on the domestic primary surplus: - MT 5.3 billion for end-June 2023, - MT 2.0 billion for end-September 2023 (IT), - MT 7.5 billion for end-December 2023. - Proposed inflation (MPCC) path and bands: - End-December 2022 midpoint based on projected inflation (15.0 percent) and a symmetric band of ±3 percent, - ±2 percent around 14.0 percent at end-March 2023, - 11.5 percent at end-June 2023, - 10.5 percent at end-September 2023, - 9 percent at end-December 2023, - 8.5 percent for end-March 2024, - 7.5 percent for end-June or end-September 2024, - 6.5 percent for end-December 2024, - 6 percent for end-March 2025. - Change to indicative targets on ceiling for domestic debt stock: - Proposed ceiling MT 320 billion at end-Jun 2023, raised by MT 34 billion relative to the initial IT. - IT ceilings of MT 328 billion at end-Sep 2023 and MT 350 billion at end-Dec 2023 are proposed. - An adjustor is proposed to the IT ceiling of domestic debt to reflect planned securitization to clear VAT refund arrears amounting to MT 35.2 billion at end-June 2022 (MEFP ¶36). - Minor modifications to structural benchmarks: - Quarterly commitment ceilings instrument changed from budget execution decree to budget execution circular issued in January 2023 (affects assessment timing). - Structural benchmark on submission of public probity law moved from end-December 2022 to end-June 2023. ### Financing, public gross financing needs and sources (text table excerpts) - Program financing status: - Program is fully financed, with firm commitments for the next twelve months and good prospects for adequate financing for the remainder of the program period. - Disbursements will be used for budget support. - Budget support also provided by World Bank (commitments of US$550 million over 2022-2024) and the European Union (US$50 million). - Text Table 6. Public Gross Financing Needs and Sources of Financing, 2022-25 (Millions of US dollars) - Gross financing needs: 2022 1,505; 2023 2,068; 2024 2,072; 2025 2,108 - Domestic primary deficit (exc. deficit reduction measures) 2022 142; 2023 556; 2024 454; 2025 278 - Debt service 2022 1,359; 2023 1,512; 2024 1,618; 2025 1,830 - Interest payments 2022 623; 2023 633; 2024 719; 2025 707 - MLT amortization 2022 736; 2023 878; 2024 900; 2025 1,123 - Deficit reducing measures 2022 185; 2023 703; 2024 798; 2025 920 - VAT reform0118126133 - Wage bill management185586672788 - Sources of financing 2022 1,320; 2023 1,364; 2024 1,275; 2025 1,188 - Budget grants3501501000 - World Bank3001501000 - European Union50000 - Domestic MLT borrowing5061,0431,4961,223 - o.w. SDR allocation2109300 - Domestic ST borrowing (net)335-86-429-86 - Drawdown of deposits107135-16-11 - IMF15512312462 - (in percent of quota)51%41%41%20% - Net Float-132000 - Memorandum - Domestic primary balance (baseline)2 42.7147.5343.4718.1 - Net issuance of domestic debt577586682528 ### Capacity to repay and risks - Capacity to repay the Fund remains adequate but subject to risks (Table 8). - Under the baseline scenario, outstanding obligations to the Fund based on existing and prospective drawings would peak at 3.7 percent of GDP in 2024, or about 23.7 percent of gross international reserves. - Downside risks include failure of the onshore LNG projects, natural disasters, and fiscal risks that could reduce the government’s debt service capacity. - Risks are mitigated by authorities’ strong track record of servicing Fund obligations, policy measures envisaged in the program and smooth phasing of disbursements. ### Central Bank safeguards, technical assistance, and data - BM progress on 2020 safeguards assessment: - Strengthened internal audit and compliance procedures. - Published overdue audited financial statements for 2021 and committed to timely publications going forward (MEFP ¶27). - Reviewing internal controls in currency operations with ongoing TA under a twinning arrangement with Norges Bank. - Recommended legal amendments to strengthen BM’s mandate, autonomy and governance arrangements planned to be submitted to parliament by June 2024 (MEFP ¶25). - CD alignment and data adequacy: - CD prioritizes PFM reforms, fiscal policy, revenue administration, natural resource management, governance and fiscal transparency, monetary policy implementation, and government, real, and financial sector statistics. - Mozambique is a high intensity user of Fund TA with a solid implementation record. - Data provision is broadly adequate for program monitoring. ### Staff appraisal: macro outlook, policy assessment, and reform priorities - Macroeconomic outlook and policy response: - Economic recovery is strengthening; growth in real GDP in the first half of 2022 was moderately stronger than expected, with recovery in services, industry, and agriculture. - Rising inflation driven by global fuel and food prices and domestic floods is being addressed through increased monetary policy interest rates. - Widening current account deficit is due to imports related to LNG projects. - Risks to the outlook are significant but relatively balanced by good prospects for growth and natural gas exports. - Program performance and monetary stance: - All quantitative program targets and the structural benchmark were met at end-June, while the MPCC inflation band was breached. - PCs on the domestic primary balance, net international reserves and debt variables, and ITs on social spending and the stock of domestic debt were met. - Monetary policy tightening since early 2021 is estimated to be sufficient to contain inflation and guide it towards the BM’s medium-term objective; staff supports BM’s proactive approach including additional tightening if needed. - Faster-than-anticipated decline in international reserves highlights the need for caution; authorities stand ready to take additional policy steps if needed. - Over the medium term, deeper financial, money and foreign exchange markets and fiscal consolidation would allow additional exchange rate flexibility to strengthen resilience to shocks. - Fiscal and institutional reforms: - Authorities implementing fiscal reforms to contribute to medium-term consolidation: - Broadening VAT base to secure a buoyant and diversified, non-LNG, source of revenue. - Reform of public sector remuneration to improve efficiency and rebalance public outlays toward growth-enhancing spending; authorities committed to restrain wage rises near-term and keep reform costs within the original envelope. - Revenue administration and PFM reforms: - Digitizing revenue administration, linkages with other public registries, and tax interface with the public expected to strengthen revenue collection. - Budget execution reforms to incorporate all stages of the expenditure chain within the electronic financial management system to improve budget discipline and reduce supplier arrears. - Strengthening SOE management and oversight to prevent expenditure overruns, increase transparency, and reduce fiscal risk. - Institutional strengthening: - Draft SWF law is an important step toward transparent, accountable management of LNG receipts. - Regulations implementing the SWF law and strengthening public investment rules and practice are next steps to articulate the fiscal framework and mitigate volatility in budget revenues. - Continued implementation of AML/CFT action plans and FATF updated action plan adoption are important to address Mozambique’s grey listing. - Amendment of the public probity law and implementation of recommendations from the audit of COVID spending are priorities in the months ahead. *Source: IMF staff report (excerpted content).* ### 41. Staff supports the completion of the first review under the ECF arrangement, the ### 41. Staff supports the completion of the first review under the ECF arrangement, the ### Program status and conditionality - Staff supports completion of the first review under the ECF arrangement. - Staff supports the requests for modification of the MPCC from end-September 2022 to end-June 2023. - Staff supports the structural benchmarks (SBs) on the submission of the public probity law and the quarterly commitment limits for end-December 2022 and the indicative target (IT) for end-June 2023. - Staff supports completion of the financing assurances review. ### Macroeconomic outlook and living standards (select findings) - Real GDP: 2.3 (2019); -1.2 (2020); 2.3 (2021); 3.8 (2022 est.); 3.8 (2023 prog.); 5.0 (2024 proj.); 5.0 (2025 proj.); 8.3 (2026 proj.); 8.3 (2027 proj.). - Real GDP, excl. extractive industries: 2.7 (2019); -0.1 (2020); 2.3 (2021); 3.4 (2022 est.); 3.4 (2023 prog.); 3.8 (2024 proj.); 3.7 (2025 proj.); 4.0 (2026 proj.); 4.1 (2027 proj.). - Nominal GDP (billions of meticais): 963 (2019); 983 (2020); 1,033 (2021); 1,173 (2022 est.); 1,142 (2023 prog.); 1,318 (2024 proj.); 1,292 (2025 proj.); 1,523 (2026 proj.); 1,509 (2027 proj.). - GDP per capita (US dollars): 508 (2019); 454 (2020); 492 (2021); 547 (2022 est.); 541 (2023 prog.); 573 (2024 proj.); 582 (2025 proj.); 614 (2026 proj.); 629 (2027 proj.). - Living standards: "A series of shocks has lowered growth in GDP since 2015." "The pandemic slowed the upward trend in living conditions, which remain below SSA comparators." "Life expectancy improved through 2020... and gender disparities have declined." "While poverty has been reduced, the decline has stalled in recent years... and inequalities were acute as of 2014." ### COVID-19 pandemic, growth and inflation (select findings) - "The latest COVID wave has had a small overall impact... and vaccination rates are high." - "The recovery broadened and picked up pace through the first half of the year." - "While the PMI suggest a modest deceleration following Russia’s invasion of Ukraine." - Consumer prices (end of period): 3.5 (2019); 3.5 (2020); 6.7 (2021); 9.0 (2022 est.); 15.0 (2023 prog.); 7.0 (2024 proj.); 8.5 (2025 proj.); 6.3 (2026 proj.); 6.1 (2027 proj.). - Consumer prices (annual average): 2.8 (2019); 3.1 (2020); 5.7 (2021); 8.5 (2022 est.); 10.7 (2023 prog.); 7.7 (2024 proj.); 11.5 (2025 proj.); 6.5 (2026 proj.); 7.3 (2027 proj.). - Inflation drivers: "Inflation has picked up... driven by food and fuel prices." ### Monetary and financial developments - Policy rate (MIMO): 12.75 (2019); 10.25 (2020); 13.25 (2021); 15.25 (2022 est.); 17.25 (latest noted). - "The policy rate was increased in March and September 2022... maintaining the contemporaneous real policy rate as the highest in the Southern African Development Community (SADC)." - Exchange rate: "The exchange rate has been stable against the US dollar since July 2021." - Liquidity management: "Liquidity is managed through open market operations, with larger volumes around the time of policy rate increases." - Credit developments: "Credit growth is relatively subdued, with some recovery in July 2022." - Reported overall NPLs and provisioning rates remained relatively steady, while COVID forbearance measures have been lifted. - Monetary aggregates (select): Reserve money 19.1 (2019, 12-month percent change); 9.0 (2020); -14.4 (2021); -5.1 (2022); 11.7, 11.2, 13.8, 14.0, 11.7, 11.5, 13.4, 15.2, 14.5, 11.2 (series entries appear in Table 3). - Broad Money (M3) 12.1 (2019, 12-month percent change); 23.6 (2020); 2.8 (2021); 12.0 (2022); percent of GDP for M3: 48.6 (2019); 58.9 (2020); 57.6 (2021); 56.8 (2022). ### External sector developments - Current account balance (Percent of GDP): -19.1 (2019); -27.3 (2020); -23.6 (2021); -44.9 (2022 est.); -41.5 (2023 prog.); -39.0 (2024 proj.); -14.7 (2025 proj.); -37.6 (2026 proj.); -35.5 (2027 proj.). - Excluding megaprojects (Percent of GDP): -24.9 (2019); -28.0 (2020); -34.7 (2021); -31.4 (2022); -33.9 (2023); -28.7 (2024); -31.7 (2025); -26.0 (2026); -29.3 (2027). - Gross international reserves (millions of US dollars, end of period): 3,884 (2019); 4,070 (2020); 3,470 (2021); 3,076 (2022 est.); 2,905 (2023 prog.); 3,263 (2024 proj.); 3,031 (2025 proj.); 3,613 (2026 proj.); 3,389 (2027 proj.). - Months of next year's non-megaproject imports: 7.5 (2019); 5.8 (2020); 4.5 (2021); 4.2 (2022); 3.7 (2023); 4.4 (2024); 3.8 (2025); 4.7 (2026); 4.2 (2027). - FX interventions and spot exchange rate series are reported (Jan-19 to Jul-22). ### Fiscal developments and medium-term projections - Total revenue (Percent of GDP): 29.0 (2019); 23.9 (2020); 25.8 (2021); 25.7 (2022); 25.0 (2023); 25.7 (2024); 25.4 (2025); 25.9 (2026); 25.1 (2027). - Total expenditure and net lending (Percent of GDP): 29.8 (2019); 32.9 (2020); 31.3 (2021); 31.5 (2022); 32.4 (2023); 33.2 (2024); 31.8 (2025); 33.3 (2026); 29.1 (2027). - Overall fiscal balance, before grants (Percent of GDP): -0.7 (2019); -9.0 (2020); -6.7 (2021); -8.0 (2022); -8.2 (2023); -6.4 (2024); -7.4 (2025); -4.0 (2026); -5.0 (2027). - Overall fiscal balance, after grants (Percent of GDP): 0.3 (2019); -5.4 (2020); -4.8 (2021); -3.6 (2022); -3.7 (2023); -3.6 (2024); -3.9 (2025); -2.8 (2026); -3.3 (2027). - Primary fiscal balance, after grants (Percent of GDP): 3.5 (2019); -2.3 (2020); -2.1 (2021); -0.2 (2022); -0.2 (2023); -0.6 (2024); -0.7 (2025); 0.3 (2026); 0.0 (2027). - Nominal stock of total public sector debt (Percent of GDP): 99.0 (2019); 120.0 (2020); 107.0 (2021); 101.4 (2022); 102.9 (2023); 102.1 (2024); 101.4 (2025); 99.2 (2026); 102.6 (2027). - Of which: external (Percent of GDP): 79.4 (2019); 97.8 (2020); 82.8 (2021); 77.6 (2022); 77.6 (2023); 78.5 (2024); 75.9 (2025); 76.2 (2026); 77.6 (2027). ### External financing, balance of payments, and reserves - Current account balance (millions of US dollars): -2,934 (2019); -3,869 (2020); -3,730 (2021); -8,120 (2022 est.); -7,408 (2023 prog.); -7,616 (2024 proj.); -2,895 (2025 proj.); -8,096 (2026 proj.); -7,779 (2027 proj.). - Financial account balance (millions of US dollars): 4,524 (2019); 4,014 (2020); 3,136 (2021); 7,441 (2022 est.); 6,562 (2023 prog.); 7,565 (2024 proj.); 2,764 (2025 proj.); 8,230 (2026 proj.); 7,845 (2027 proj.). - Net foreign direct investment (millions of US dollars): 3,410 (2019); 3,035 (2020); 5,102 (2021); 2,529 (2022 est.); 3,055 (2023 prog.); 2,226 (2024 proj.); 1,490 (2025 proj.); 2,306 (2026 proj.); 2,900 (2027 proj.). - Memorandum: Months of next year's imports of goods and services (excl. MP): 7.5 (2019); 5.8 (2020); 4.5 (2021); 4.2 (2022); 3.7 (2023); 4.4 (2024); 3.8 (2025); 4.7 (2026); 4.2 (2027). ### External financing needs and sources (select) - Financing requirements (millions of US dollars): 4,230 (2021 prel.); 8,448 (2022); 3,727 (2023); 8,550 (2024); 9,805 (2025); 10,962 (2026); 9,005 (2027). - Financing sources (millions of US dollars): 4,271 (2021); 7,944 (2022); 3,454 (2023); 8,326 (2024); 9,743 (2025); 10,962 (2026); 9,005 (2027). - Financing gap (millions of US dollars): 265 (2021); 0 (2022); 427 (2023); 732 (2024); 246 (2025); 200 (2026); 0 (2027). - Net foreign direct investment (millions of US dollars, table 5): 5,102 (2021); 3,055 (2022); 1,490 (2023); 2,900 (2024); 3,095 (2025); 3,093 (2026); 1,192 (2027). ### IMF financing and schedule of disbursements - Table 9: Schedule of Disbursements Under the ECF Arrangement, 2022-2025: - 30.0 percent of quota = 68.16 Million SDR — Available May 9, 2022: Executive Board approval of the three year ECF arrangement. - 20.0 percent of quota = 45.44 Million SDR — Available September 15, 2022: Observance of the performance criteria for June 30, 2022 and completion of the first review under the arrangement. - 20.0 percent of quota = 45.44 Million SDR — Available March 15, 2023: Observance of the performance criteria for December 31, 2022 and completion of the second review under the arrangement. - 20.0 percent of quota = 45.44 Million SDR — Available September 15, 2023: Observance of the performance criteria for June 30, 2023 and completion of the third review under the arrangement. - 20.0 percent of quota = 45.44 Million SDR — Available March 15, 2024: Observance of the performance criteria for December 31, 2023 and completion of the fourth review under the arrangement. - 20.0 percent of quota = 45.44 Million SDR — Available September 15, 2024: Observance of the performance criteria for June 30, 2024 and completion of the fifth review under the arrangement. - 20.0 percent of quota = 45.44 Million SDR — Available March 15, 2025: Observance of the performance criteria for December 31, 2024 and completion of the sixth review under the arrangement. - Total: 150.0 percent of quota = 340.8 Million SDR. ### Risk Assessment Matrix — risks, likelihood, impact and policy responses (select) - Intensifying spillovers from Russia’s war in Ukraine: Likelihood High; Horizon ST; Impact Low. Policy response: Structural reforms to improve economic efficiency and enhance diversification. - Commodity price shocks: Likelihood High; Horizon ST; Impact High. Policy response: Well-targeted subsidies for the needy and users of goods subject to higher prices. - Systemic social unrest: Likelihood Medium; Horizon ST, MT; Impact High. Policy response: Well-targeted subsidies for the needy and users of goods subject to higher prices. - De-anchoring of inflation expectations: Likelihood Medium; Horizon ST, MT; Impact Medium. Policy response: Tighten monetary policy as needed. - Natural disasters related to climate change: Likelihood High; Horizon ST, MT; Impact High. Policy responses include: Address infrastructure gaps; Develop social safety nets; Investment in climate resilient infrastructure and agriculture; Strengthen institutions to manage climate change risk. - Deterioration in security situation in Mozambique: Likelihood Medium; Horizon ST, MT; Impact High. Policy responses: Enhance security and socioeconomic policies in northern region; Continue drive for durable peace and implementation of reforms. - Local Covid-19 outbreaks: Likelihood Medium; Horizon ST, MT; Impact Medium. Policy responses: Enhance health and social protection spending; Partial use of international reserves to cover external needs; Mobilize additional grants and concessional loans from development partners. - Cyberthreats: Likelihood Medium; Horizon MT; Impact Low. Policy response: Develop and implement a cybersecurity risk regulatory and supervisory framework for the Bank of Mozambique. ### IMF obligations and capacity to repay (select) - Obligations to the Fund based on existing credit (in millions of SDRs, principal): 9.47 (2022); 18.93 (2023); 30.85 (2024); 20.39 (values appear in table 8 sequence). - Outstanding Fund credit based on existing drawings (end-of-period, in millions of SDRs): 399.49 (2022); 380.56 (2023); 372.04 (2024); 332.28 (2025); 269.80 (2026); 200.50 (2027); 124.39 (2028); 56.80 (2029); 20.45 (2030); 6.82 (2031); 0.00 (2032). - Outstanding Fund credit based on existing and prospective drawings (end-of-period, in millions of SDRs): 444.93 (2022); 516.88 (2023); 599.24 (2024); 604.92 (2025); 542.44 (2026); 473.14 (2027); 383.40 (2028); 284.00 (2029); 197.66 (2030); 129.50 (2031); 68.16 (2032). - Use of IMF credit (Net Use of IMF Credit in millions of SDRs): 94.66 (2022); 71.94 (2023); 82.36 (2024); 5.68 (2025); -62.48 (2026); -69.30 (2027); -89.74 (2028); -99.40 (2029); -86.34 (2030); -68.16 (2031); -61.34 (2032). *Source: Republic of Mozambique — IMF staff report and accompanying tables and figures.* ### Annex I. Consultation with the IMF Executive Board on the ### Annex I. Consultation with the IMF Executive Board on the Missed Inflation Target Under the MPCC ### Inflation deviation from the consultation band - In June 2022, CPI inflation increased to 10.8 percent, 0.8 percentage points above the upper bound of the inflation consultation band of 10.0 percent, agreed under the ECF. - Primary drivers of the breach (second quarter of 2022): - Exogenous external shock: the war in Ukraine (started at end-February 2022) prompted a surge in global food and fuel prices. - Exogenous domestic shock: adverse weather events that affected domestic agricultural output in March 2022 (flooding associated with tropical storms), damaging the harvest in the first half of 2022. - Recovering aggregate demand as COVID-related restrictions were lifted. - Specific price movements and contributions: - Diesel and gasoline prices increased by 27 percent and 20 percent, respectively, between January and June 2022. - Diesel and gasoline jointly weigh about 7 percent in the CPI basket and contributed 2.2 percentage points to headline inflation. - Contribution of transport prices (including the prices of vehicles and transport services, in addition to fuel) increased from 1.4 percentage points in January to 2.9 percentage points in June. - Price of wheat flour increased by 13.0 percent between January and June 2022. - Price of wheat bread increased by 32.9 percent between January and June 2022. - Wheat-derived products have a total weight of 4.3 percent in the CPI basket. - Overall food price inflation (including both imported and domestically produced products) reached 15.9 percent year-on-year in June 2022, contributing 5.3 percentage points to headline inflation. ### Policy response - Monetary policy actions taken by Banco de Moçambique (BM): - In March 2022, BM increased the policy rate (MIMO) by 200bp, from 13.25 percent to 15.25 percent. - A second 200bp increase was implemented in September 2022. - Since January 2021, BM has cumulatively increased the policy rate by 700bp. - Real interest rates are described as among the highest in the region. - Policy intent and assessment: - The March 2022 increase aimed to proactively forestall risks of de-anchoring inflation expectations while avoiding undermining the recovery of demand. - The monetary policy tightening since the start of last year is estimated to be sufficient to effectively contain inflation and guide it towards the BM’s medium-term objective. - Additional program and fiscal reform measures referenced (high-level): - Announcement of a package of economic activation measures (Pacote de Activação Económica) to support private investment and reduce the drag from the less favorable international environment. - VAT reform: VAT rate will be cut from 17 to 16 percent in 2023—½ a point more than previously agreed. - Management of public resources and structural reforms (AML/CFT law passage, public financial management reforms, FX market reforms, sovereign wealth fund legislation expected). ### Inflation outlook and scenarios - Observed and trimmed indicators: - In August 2022, headline inflation stood at 12.1 percent year-on-year. - CPI excluding fruit, vegetables and administered prices remained at 6.8 percent year-on-year in August 2022. - Baseline scenario assumptions: - Predicated on an expected moderation in international food and fuel prices in 2023. - Recognizes second-round effects from the increase in food and fuel prices to date that add inflationary pressure. - Relies on a relatively tight policy stance to lower demand and guide expectations. - Quantified inflation path in baseline: - After peaking at 15.0 percent at the end of 2022, inflation is expected to decelerate to 8.5 percent at the end of 2023. - Followed by a further deceleration towards 6.0 percent in 2024 and 5.5 percent in 2025. - Contingency and monitoring: - Given remaining uncertainties around the war in Ukraine, the global and domestic economic outlook and future inflationary developments, BM closely monitors the economic situation both globally and domestically and stands ready to respond accordingly in fulfilment of the price stability objective. ### Program context, performance, and commitments - ECF and program objectives: - IMF Executive Board approved a three-year arrangement under the Extended Credit Facility (ECF) on May 9, 2022. - The ECF supports Mozambique’s Economic and Financial Program 2022-2025 (EFP) to foster sustainable and inclusive growth, reduce public debt and financing vulnerabilities, and create space for priority investments in human capital, climate adaptation and infrastructure. - Performance to June 2022: - All four quantitative performance criteria met for the period to June 2022 (floor on the domestic primary balance, floor on net international reserves (NIR), ceiling on new non-concessional external debt, and continuous performance criterion on non-accumulation of external debt arrears). - All three indicative targets met (ceilings on the present value of new external debt and on the stock of domestic debt, and a floor on social spending). - Structural benchmark for the first review met: amended anti-money laundering (AML) law submitted to Parliament (passed by Parliament in May 2022). - Specific fiscal figures for end-June 2022 (reported elsewhere in the document): - Floor of the primary budget balance met at MT 3.8 billion compared to a target of MT -2.6 billion. - Indicative target on the ceiling on the stock of domestic debt met at MT 250.7 billion, relative to a program target of MT 253 billion. - The floor on net international reserves of the Bank of Mozambique (BM) was met, adjusted by the amount of the delayed disbursement of the European Union (EU) grant of EUR 50 million that was initially expected at end-June but is now expected later in 2022. - Requests and program adjustments: - Request approval by the IMF Executive Board of completion of the first review and related disbursement of SDR 45.44 million. - Request modification of the MPCC to reflect inflationary pressures and the policy response. - Request extending the test dates for the SBs on the quarterly commitment limits and the submission of the public probity law from end-December 2022 to end-January 2023 and end-June 2023, respectively, and modifying the IT for end-June 2023. - Request an additional adjustor for the IT setting a ceiling on domestic debt to reflect the planned securitization of past VAT refund arrears. - Program monitoring to continue through six-monthly reviews, prior actions, quantitative performance criteria (QPC), indicative targets (ITs), and structural benchmarks (SBs) as described in the attached MEFP and Technical Memorandum of Understanding (TMU). ### Growth and near-term outlook - Real GDP: - Following the recovery in 2021 of 2.3 percent, real GDP growth in 2022 is projected to reach 3.8 percent. - The acceleration in growth is primarily driven by rising agricultural production, mining, and services. - The start of LNG production in Q4 of 2022 is expected to meaningfully contribute to real GDP growth from 2023 onwards. *Source: Annex I. Consultation with the IMF Executive Board on the Missed Inflation Target Under the MPCC (Banco de Moçambique), November 4, 2022.* ### 11. Global inflationary pressures are creating new challenges. Inflation has accelerated ### 11. Global inflationary pressures are creating new challenges. Inflation has accelerated ### Inflation dynamics and monetary policy - Inflation accelerated sharply in 2022, reaching 12.1 percent (y/y) in August. - Measures for core inflation have remained relatively more stable at around 6 to 7 percent. - The BM’s proactive monetary policy response is expected to keep inflation expectations and second-round effects well controlled. - The BM will maintain its current, cautious monetary policy stance in 2022 and stands ready to take further action as appropriate to ensure that inflation expectations remain well-anchored within single digits. - Over the medium term, as financing conditions improve and fiscal pressures abate, the BM will explore scope for easing policy to allow for lower real lending rates and higher credit growth subject to: - continuing moderate inflation expectations, settling between 5 and 6 percent, and - financial sector strength. ### Inflation projections - Consumer price inflation is projected to peak at around 15 percent in December 2022, before moderating to 8.5 percent at end-2023. ### External accounts and reserves - The current account deficit widened significantly due to the import of the LNG offshore platform. - Higher fuel prices led to a growing fuel import bill, the main reason for the steady decline in international reserves: - from 4.5 months of goods and services (excluding megaprojects) at end-2021 - to 3.7 months at end-August 2022. ### Fiscal position and projections for 2022 - The government expects an improvement in the fiscal position in 2022. - Primary deficit after grants, on a modified cash basis, is expected to decline: - from MT 21.2 billion (2.1 percent of GDP) in 2021 - to MT 2.7 billion (0.2 percent of GDP) in 2022. - The overall deficit after grants, on a modified cash basis, is projected to decline: - from MT 49.3 billion (4.8 percent of GDP) in 2021 - to MT 42.9 billion in 2022 (3.8 percent of GDP). - Drivers of improvement include projected budget support grants in 2022 (including US$300 million from the World Bank) and use of MT 13.4 billion of the 2021 Special Drawing Rights (SDR) allocation, and less reliance on domestic debt. ### Social protection and poverty reduction - An updated National Development Strategy will be submitted to Parliament by March 2023. - The National Strategy for Basic Social Security 2016-2024 aims to strengthen social protection and outlines macroeconomic and financial policies to support poverty reduction. - Government budget allocation for social protection programs: - MT 6.8 billion in 2023 (0. 5 percent of GDP), with an indicative target of an increase of around MT 1 billion in 2023. - INAS aims to increase the number of beneficiaries and expand the social protection program. - Improvements planned: digitalization, enhancing cash controls by reconciling payments with e-SISTAFE. - Expansion and integration of social support programs: - linking registered vulnerable households to other social support programs or other sectors (e.g., SUSTENTA agricultural support program), - exploring scope for supporting rehabilitation of families displaced by conflict in the North, - developing a single, cross-government registry of vulnerable households with World Bank support, hoped to be completed by end 2023 (subject to financial constraints). - Cost efficiency of delivering support and development of conditional social transfer schemes remain a priority. - Support to vulnerable households was provided through mobile money for the first time during the pandemic (in areas with cellphone coverage). - Identification of beneficiaries and capacity to log payments made in real time continues to improve. ### Growth outlook and LNG impact - Medium-term non-LNG growth is conservatively expected to stabilize at around 4 percent per annum, assuming no spillovers from LNG production. - Government believes there is scope to increase this level of growth through: - working with the young population, - ensuring availability of ample arable land, - improving access to water and energy resources, - investing in human capital (health, education, social protection), - investing in more climate-resilient infrastructure. - Mozambique is set to become a major global LNG producer; LNG production is expected to have a significant impact on overall economic growth. - Timeline and expected impacts: - Production at the ENI-led Coral South project began in October 2022, generating an estimated addition to economic growth in 2023 of about 1.3 percentage points, rising further in 2024 and 2025. - The Total Energies-led Mozambique LNG project is expected to start production in 2027. - A third, ExxonMobil-led project (Rovuma LNG) is expected to follow in 2029. - Risks from rapid LNG growth include an appreciating exchange rate that could undermine non-hydrocarbon competitiveness, asset price inflation, and other distortions. ### Public debt vulnerabilities and fiscal consolidation strategy - High level of public debt and objective to reverse rising debt-to-GDP ratio (106.7 percent at end-2021) and reduce external public debt risks. - Aim to achieve a primary surplus by 2024 from a primary balance after grants of -2.1 percent of GDP in 2021. - Measures to underpin this goal include: - Public employment and compensation reforms: - State public sector wage bill was 14.1 percent of GDP in 2021 and exceeds regional and peer averages. - 2021 parliamentary reforms unified multiple pay scales and supplementary pay components into a unique scheme to facilitate movements and rebalance compensation towards basic wages. - Expected savings achieved through revising wage increase formula and freezing wage supplements in nominal terms. - Reforms expected to have an upfront cost of MT 9.6 billion (0.7 percent of GDP) in 2022, and a full year cost of MT 19.2 billion from 2023 (the net cost is lower because of expected higher income tax). - Legal amendments modifying mapping criteria were passed by Parliament in October 2022 to contain costs within the original envelope; if costs rise above the envelope, existing mechanisms or a supplementary budget in the first half of 2023 will be used. - Measures to restrain wage bill pressure include replacing one out of three leaving employees except in education, health, justice administration bodies, and agriculture; attrition rule to be monitored and maintained in 2023 and 2024 (structural benchmark). - Further measures: evaluating functional structures to reduce duplication, encouraging early retirement, implementing reforms to the EGFAE Statute determining retirement age. - Contingency funds: the 2023 budget will provide for contingency funds to address risks identified in the Report on Fiscal Risks for 2023. - VAT reform: - Broadening the VAT base by eliminating some VAT exemptions and domestic zero-ratings while maintaining exemptions and zero-ratings on basic items and exemptions for agricultural and renewables sectors. - Necessary legal changes to implement elimination of VAT exemptions and zero-ratings expected to be made in November 2022 to be effective January 1st, 2023 (prior action). - Legal changes also reduced the tax rate to 16 percent and modified the window during which VAT refunds can be claimed to 12 months (¶37). - Revenue administration and public financial management (PFM): - With IMF and partner technical assistance, continue to improve efficiency of tax administration (¶¶32 to 37) and PFM (¶¶38 to 43). ### Public debt management strategy - Strengthening institutional capacity for public debt management at MEF, including publishing quarterly and annual debt reports covering stocks, on-lending, and state guarantees, including for most SOEs. - Transition to a new database encompassing external, domestic and on-lending to SOEs. - Medium-term debt strategy centers on: - increasing the share of external financing from 30 to 55 percent in 2025, and - increasing the share of domestic debt instruments with maturities greater than 5 years from 5 to 25 percent in 2025. - MEF is assessing capacity of institutional investors to absorb public debt issuances. ### Governance, transparency, and public resource management - With IMF technical assistance, the government has strengthened capacity to analyze fiscal risks and created a fiscal risk unit in the MEF that publishes regular reports. - BM continues to implement recommendations from the IMF’s 2020 Safeguards Assessment. Key governance reforms and benchmarks: - Reform of the public probity law: - Office of the Attorney General is amending the law to clarify applicability, strengthen definition of conflict of interest, require submission of declarations of financial interests by new public servants upon hiring, and establish published procedures for reporting conflicts of interest. - Amended law to be submitted to Parliament by end-June 2023 (structural benchmark). - Beneficial ownership in natural resource companies: - New regulations of the Commercial Code require all firms to register and identify beneficial owners at a centralized registry (Registo das Entidades) using the definition in the new AML law (consistent with FATF standards). - Government will make legal and regulatory changes necessary to ensure beneficial ownership information is publicly accessible at the registry by end-June 2023. - Improvement of property registries for public officials: - Ministry of Justice will strengthen enforcement of asset declaration rules through a law to be submitted to Parliament by June 2023. - COVID-19 spending transparency: - Tribunal Administrativo prepared an independent audit of 2020 COVID-19 spending with IMF technical assistance; government prepared and published a report assessing findings and recommendations together with the external audit consolidated report. - A second independent audit is covering COVID-19 spending in 2021 and follow-up on implementing past recommendations; government internal control entities monitor implementation via an internal MEF action plan. - BM Organic law revision: - Revisions to be finalized in consultation with the IMF and the draft law submitted to Parliament by June 2024. - Revised law will explicitly state BM’s financial stability and macroprudential functions and strengthen limits on monetary financing of the budget, while improving BM’s autonomy, governance, and accountability. - BM internal audit modernization: - Peer review External Quality Assessment by the Central Bank of Brazil was undertaken in August 2022 against the IPPF. - Next steps include revision of core internal audit regulation. - Implementation of 2020 Safeguards Assessment recommendations will continue; 2022 audited annual reports are expected to be published in April 2023. ### Managing LNG resources and sovereign wealth fund (SWF) - Government priorities for LNG wealth: manage gas resources well and transparently, ensure fiscal revenues are spent and invested efficiently and effectively, and maintain robust monetary and financial frameworks to avoid macroeconomic distortions. - SWF design and governance: - Draft law creating an SWF has been prepared following public consultation. - Investments of the SWF’s resources will be managed by the BM and observe high standards of accountability and transparency. - SWF will invest in foreign assets to manage macroeconomic consequences of high revenue flows and address intergenerational equity. - Draft law includes a revenue repartition rule dividing LNG-related fiscal revenues between the SWF and the budget based on projected revenues rather than actual receipts to enable proper budget planning and counteract petroleum price volatility. - Methodology for calculating projected revenues will be detailed in regulations and include a mechanism for multi-year smoothing by applying a moving average of petroleum revenues. - Regulations will be prepared by June 2023. - Rules and conditions for using SWF resources in emergencies will be transparent. - Government will submit the SWF law to the Parliament by end-December 2022 (structural benchmark). ### Revenue administration modernization - The Revenue Administration (Autoridade Tributária, AT) is modernizing tax collection through an integrated electronic tax filing system (e-tributação). - E-tributação coverage as of end-August 2022: - 45 percent of income tax collections, - 100 percent of VAT and simplified tax collections. - The system is linked with e-SISTAFE, resulting in automatic classification and faster transfer of resources to the CUT (treasury single account). *Source: 1mozea2022001 - 11. Global inflationary pressures are creating new challenges. Inflation has accelerated* ### 32. The AT will extend e-tributação to other taxes (tax on vehicles, tax on national ### 1mozea2022001 - 32. The AT will extend e-tributação to other taxes (tax on vehicles, tax on national ### Tax administration digitalization and e-tributação - The AT will extend e-tributação to other taxes (tax on vehicles, tax on national reconstruction, stamp duties (IS), property taxes (SISA), and inheritance and donation tax) by end-2023. - The AT will extend the transversal modules (fiscal execution, bankruptcies, payments by installments, risk profiles, claims and recourse, refunds and compensations, litigation and tax audits) by end-2023. - Structural benchmark: the AT will fully implement e-tributação for all taxes and in all tax offices by end 2023, with an objective of achieving a tax coverage of 70 percent of total tax revenue collected by the AT. - The full list of taxes currently collected through e-tributação is: Imposto sobre o Valor Acrescentado (IVA), Imposto Simplificado para Pequenos Contribuintes (ISPC), Imposto sobre o Rendimento das Pessoas Singulares (IRPS), Imposto sobre o Rendimento das Pessoas Colectivas (IRPC), Imposto sobre a Produção Petrolífera (IPP), Imposto sobre a Produção Mineira (IPM), Imposto sobre a Superfície (ISS), Imposto sobre a Renda do Recurso Mineiro (IRRM), Taxa sobre os Combustíveis (TsC). ### Portal do Contribuinte and taxpayer electronic filing - Structural benchmark: the AT will continue to develop a digital interface (Portal do Contribuinte) to allow all taxpayers to file and pay all taxes electronically by end-June 2023. - As of end-August 2022, the Portal do Contribuinte covered 37 percent of total taxpayers in VAT and small taxes, and 72 percent of large taxpayers. - By end-2023, objective: allow all taxpayers to file and pay electronically, and cover 60 percent of total taxpayers. - In the context of COVID-19-related restrictions, the AT has simplified procedures for taxpayers to process payments through banks. ### Taxpayer registry modernization and interoperability - The AT is cleaning and updating the taxpayer registry, removing duplicated taxpayers. - The AT is verifying the registry for 90 of the largest 100 taxpayers, with the remining 10 to be completed by end-December 2022. - The AT is enhancing links and interoperability with other public registries, including the civil registry and commercial banks; future involvement will include utility companies. - Work is ongoing to create a unique identification number for individuals for civil and fiscal purposes. ### Compliance, risk management, and audits - A reform proposal for the internal structure of the AT is expected to be approved by the Council of Ministers by end-December 2022. - A risk management committee was created to strengthen compliance, and design procedures for taxes and customs across all value chains, with a focus on mining and gas taxation. - The committee will be integrated into the revised organizational structure of the AT and has started using a mining and gas risk assessment matrix to perform audits of extractive companies. ### VAT refund mechanism and arrears clearance - The MEF will submit a VAT law to Parliament in November 2022 that limits the period for taxpayers to claim refunds to twelve months; past this deadline, the refund will be carried-forward and credited against future VAT liabilities. - MEF will submit a strategy by end-June 2023 to clear the current stock of VAT refund arrears, amounting to MTS 35.2 billion at end-June 2022. - In 2022, the government is retaining 16.5 percent of the share of VAT gross collection for the payment of refunds; this rate will remain the same in the 2023 budget. ### Public Financial Management (PFM) strategy and reforms - The government’s second PFM strategy will be completed by end-June 2023. - Main objective: guide PFM reforms in a prioritized and coordinated manner, including strengthening budgetary execution norms for emergency spending. ### e-SISTAFE integration and procurement - All stages of the expenditure chain will be incorporated into e-SISTAFE by end-2022 to enhance budget execution control, budget discipline and budget transparency. - Current use: e-SISTAFE manages procurement of goods and services by central government, representing 17.3 percent of procured expenditure (goods and services, public investment, and works). - By January 2023, the government will commence managing all public investment procurement undertaken by central government entities through e-SISTAFE. - All central government entity procurement will be fully managed through e-SISTAFE by June 2023. ### Commitment limits and financial programming tools - Establish ex-ante quarterly commitment limits for all expenditure units from January 2023; these limits will allow real-time recording of expenditure transactions and issuance of commitment notes in e-SISTAFE. - The cash management committee will establish the quarterly Treasury Budget determining limits on quarterly commitments; this will operationalize in e-SISTAFE and eliminate ex-ante weekly commitment limits for 2023 (proposed modified structural benchmark for January 2023). - New financial programming tools in e-SISTAFE (modulo de programação financeira) finalized: annual Orçamento de Tesouraria and quarterly Plano de Tesouraria. - Structural benchmark: full implementation of these tools in all spending units by end December 2022. ### Cash management and Treasury single account (CUT) - With IMF support, by end-2022 the government will set up an interdepartmental cash management committee and a cash management unit within the Treasury. - The MEF will map all public sector bank accounts by June 2023 as part of enhancing the coverage and functioning of the treasury single account (Conta Única do Tesouro—CUT). - Treasury cash management will be enhanced with a forecasting tool being developed within e-SISTAFE. ### Public investment management and climate resilience - Revised SISTAFE law regulation mandates appraisals for capital expenditures above US$30 million. - Adoption of the new electronic platform (e-SNIP) and revised manual (Manual Geral de Identificação, formulação e avaliação de Projetos) to list, assess and approve investment projects. - All new capital spending in the 2022 and 2023 budgets went through the assessment procedures. - Government will continue strengthening planning and project selection, including climate-change resilience criteria, with World Bank support. ### SOE oversight and indebtedness monitoring - IGEPE prepared a mapping of all existing SOEs and subsidiaries and is preparing consolidated 2020 accounts to be published by December 2022, to be subject to external audit. - IGEPE monitors the level of indebtedness of national SOEs and sends their borrowing thresholds to the MEF for harmonization with the treasury (in accordance with article 30, number 3 of the Decree 10/2019, February 26) at the beginning of each fiscal year. - MEF is creating a task force to monitor implementation and supervision of reimbursements of on-lending agreements. - Government intends to regulate municipal SOEs’ borrowing in a decree to be approved by the Council of Ministers by December 2023. - Debt Directorate of the MEF will strengthen oversight of national and municipal SOEs borrowing, on-lending agreements, PPPs and public guarantees, with data published in annual debt and fiscal risk reports, including SOEs borrowing thresholds for the year ahead. ### Fiscal transparency and fiscal risks reporting - Government will continue to publish the medium-term fiscal framework (annually), debt management reports (quarterly and annual) and fiscal risks statements (annually). - Fiscal risk statement already covers fiscal risks from SOEs and pensions; coverage will be expanded to report on PPPs in 2023. ### Monetary and financial sector reform highlights - Bank of Mozambique (BM) continues building the basis for an inflation targeting framework, aiming for a forward-looking monetary policy based on a policy interest rate (MIMO). - BM is working on deepening interbank and FX markets; a new regulation for the derivatives market was issued in April 2021. - BM is in the process of adhering to the FX Global Code by 2023. - Monetary operations: BM plans to improve forecasting processes, including near-term forecasts for agricultural and non-agricultural GDP, and enhance liquidity provision to the interbank market conditioned on strengthened government cash flow management. - FX market reform: reference exchange rate determination will be revised to capture actual volume-weighted market transactions rather than quoted rates and will be operational by end-2023; new FX derivatives regulation permitted resumption of derivatives transactions. ### Financial stability, supervision, and AML/CFT - Banks report strong capital and liquidity positions on aggregate reflecting capital requirement increases implemented in 2017; BM is monitoring asset quality dispersion and quality of restructured loans. - BM is revising prudential regulations to allow transition from Basel II to Basel III capital accords by end-2023. - With IMF TA support, BM is developing regulatory and supervisory framework for cyber security risks, including on-site assessments by end-September 2023. - Measures to address AML/CFT deficiencies (from June 2021 mutual evaluation and FATF Post Observation Period Report) include: - Strengthening framework for collecting and holding beneficial ownership information (in line with FATF definition). - Implementation of risk-based AML/CFT supervision framework started in September 2022; AML/CFT Service within BM’s Prudential Supervision Department expected to be fully operational by end-June 2023. - Supervision manual for risk-based supervision expected to be finalized and distributed to all supervisors by end-2022. - Strengthening information exchange framework: GIFiM has signed MoUs with several regional and international counterparts and continues to strengthen domestic and international links. - BM has signed MoUs with GIFiM, IGJ, and ISSM; BM cooperates with Attorney General’s office and law enforcement under Criminal Proceeding Code and Organic Law requirements. - A law addressing ML risks in non-governmental organizations has been submitted to parliament. - BM will conduct an awareness program to microfinance institutions throughout the country, expected to be concluded by end-2023. ### Payment system, financial inclusion, and crisis management - Evaluation of implementation of 2016-2022 National Financial Inclusion Strategy expected by end-June 2023; recommendations will inform new strategy. - BM is reforming the payment system law with IMF TA; draft law expected to be submitted to parliament by end-2023 to strengthen BM powers and improve financial inclusion. - Crisis management framework: regulations governing recovery and resolution planning approved; BM issued guidelines on implementation of resolution powers covered by banking law. - BM is reforming Deposit Guarantee Fund Regulation with KfW TA, aiming to align functions with new resolution framework; expected finalization by end-2023. ### Risks and contingencies - Downside risks include growth setbacks from commodity price or global trade shocks, natural disasters, procyclical fiscal tightening due to lack of financing, deterioration in banks’ asset quality, and delays in important reforms due to political and institutional constraints. - Dominant medium-term risks: recurrent natural disasters and deterioration of the security situation, leading to further delays in the LNG projects, or full withdrawal of the current investors. - If these risks materialize, authorities stand ready to adjust policies in close consultation with IMF staff. ### Improving economic statistics and reconciliation - Produce quarterly national accounts (QNA) by expenditure: complete an evaluation of data sources for current and constant price estimates by end-2022 and publish QNA series by expenditure by end-2023. - Resume publishing changes in inventories in the annual national accounts by expenditure at constant prices by June 2023. - Resume publishing economic activity indicators (monthly industrial production and quarterly economic climate indicators) with no more than a two-month lag. - BM and MEF will reconcile government deposits and implement a formal process of reconciling flows and stocks regularly to explain identified differences. ### Program design, financing and monitoring - Ultimate responsibility for program monitoring and coordination: Ministry of Economy and Finance (MEF) and Bank of Mozambique (BM). - Program monitoring by IMF Executive Board via bi-annual performance criteria (end-June and end-December), continuous performance criteria, indicative targets, and a Monetary Policy Consultation Clause (MPCC) for end-June 2022, end-September 2022, end-December 2022, end-March 2023, end-June 2023, and end-December 2023. - Second, third and fourth reviews scheduled on or after March 15, 2023, September 15, 2023, and March 15, 2024, respectively. - Government commitments include: - Refrain from extending new guarantees or entering new non-concessional external borrowing contracts, with specified exceptions related to ENH and LNG development projects. - Adhere to quantitative performance criteria (QPC) on the floor on the domestic primary budget balance, the ceiling on new non-concessional external debt contracted or guaranteed by the public sector (continuous criterion), the floor on the stock of net international reserves of the BM, and the zero ceiling on the accumulation of new public and publicly guaranteed external payment arrears (continuous criterion). - Adhere to indicative targets (IT) on the ceiling on the present value of new external debt, the ceiling on domestic debt stock, and the floor on social spending. - Prepare an external borrowing plan to facilitate assessment of QPCs and ITs on external debt. - Monetary policy transition targets for annual headline inflation: - 12.5 percent at end-September 2022, and 15.0 percent at end-December 2022, with a symmetric band of ±3 percent around the objective; - 14.0 percent at end-March 2023, 11.5 percent at end-June 2023, 10.5 percent at end-September 2023, 9 percent at end-December 2023, 8.5 percent at end-March 2024, 7.5 percent at end-June and end-September 2024, 6.5 percent at end-December 2024, and 6.0 percent at end-March 2025, with a symmetric band of ±2 percent. - If inflation breaches specified bands at program test dates, complete a consultation with the IMF’s executive board analyzing reasons, policies undertaken, and corrective actions. - Not introduce or intensify restrictions on payments and transfers for current international transactions, multiple currency practices, or bilateral payment agreements inconsistent with Article VIII; and not introduce or modify import restrictions for balance of payments purposes. - Adopt any new financial or structural measures necessary for policy success, in consultation with the IMF. *Source: IMF staff report (Republic of Mozambique).* ### 55. The government estimate that the financing needs for the 2022-2024 program will be ### 1mozea2022001 - 55. The government estimate that the financing needs for the 2022-2024 program will be ### Financing and budget support - The authorities expect US$600 million in budget support from other development partners, of which US$550 million from the World Bank. - Text Table 1: Baseline Projection of Selected Variables (In Million of US dollars; Cumulative on an annual basis) - Budget Grants and loans: End-Jun. 2022: 52.6; End-Sep. 2022: 52.6; End-Dec 2022: 351.6; End-Mar 2022: 0; End-Jun. 2023: 0; End-Sep. 2023: 0; End-Dec. 2023: 150 - Exceptional Receipts: End-Jun. 2022: 0; End-Sep. 2022: 0; End-Dec 2022: 0; End-Mar 2022: 0; End-Jun. 2023: 0; End-Sep. 2023: 0; End-Dec. 2023: 0 ### Government policy commitments and transparency - The government believes the policies in the MEFP provide a foundation for sustaining growth, reducing inflation, and alleviating poverty, and stands ready to take additional measures if required. - The government will provide IMF staff with information needed to assess progress in implementing the program as specified in the TMU and will consult with Fund staff on any measures as needed. - The government intends to make the Letter of Intent and the TMU available to the public and authorizes the IMF to arrange for them to be posted on the IMF website, subsequent to Executive Board approval. ### Request to IMF Board and loan disbursement - The government requests Board approval of the policies set forth in the MEFP and disbursement of the second loan installment, totaling SDR 45.44 million, out of a total three-year arrangement of SDR 340.8 million. ### Quantitative Performance Criteria (QPC) and Indicative Targets — selected figures from Table 1 - Performance Criteria (Floors/Ceilings and key figures as reported): - Floor on domestic primary budget balance (Billions of meticais): values shown include -2.0, 2.7, 1.6, 5.3, 2.0, 7.5 (as presented in Table 1). - Ceiling on new non-concessional external debt contracted or guaranteed by the public sector: 0 across listed test dates. - Floor on the stock of net international reserves of the BM (US$ millions): 2000, 2000, 2200, 2200, 2200, 2200 (as presented in Table 1). - Ceiling on the accumulation of new public and publicly-guaranteed external payment arrears (US$ million): 0 across listed test dates. - Inflation bands (MPCC: upper/mid-point/lower-band, percent) — selected entries from Table 1: - Upper-band: 10.0, 15.5, 10.0, 18.0, 8.0, 16.0, 13.5, 12.5, 11.0 - Mid-point: 7.0, 12.5, 7.0, 15.0, 6.0, 14.0, 11.5, 10.5, 9.0 - Lower-band: 4.0, 9.5, 4.0, 12.0, 4.0, 12.0, 9.5, 8.5, 7.0 - Indicative Targets: - Present value of new external debt (US$ million): 217, 294, 862, 153, 204, 36 (as presented in Table 1). - Ceiling on domestic debt stock (Billions of meticais): 257, 270, 278, 320, 328, 350 (as presented in Table 1). - Floor on social spending (Billions of meticais): 3.8, 5.8, 1.7, 3.4, 5.1, 6.8 (as presented in Table 1). - Memo items: - External concessional borrowing: 26.6, 35.4 - Budget grants (US$ million): 52.6, 349.6, 0.0, 0.0, 0.0, 150.0 (as presented in Table 1). ### Prior Actions and Structural Benchmarks — key measures and timelines - Prior action: - Submit to parliament an amended VAT law to implement the elimination of VAT exemptions and zero-ratings effective January 1st, 2023 to enhance revenue mobilization. - Structural benchmarks (selected): - Submit to Parliament an amended AML/CFT law to align beneficial ownership definition with the FATF AML/CFT international standard and strengthen targeted financial sanctions framework — Met, End-June 2022 (Governance and Anti-Corruption). - Submit to Parliament an amendment to the Public Probity Law to clarify application, strengthen conflict of interest definition, require submission of declarations of financial interests by new public servants upon hiring, and establish published procedures for reporting conflicts of interest — Proposed change from end-December 2022 to End-June 2023 (Improve governance and strengthen efficiency of public spending). - Submit to Parliament the law on the Sovereign Wealth Fund on LNG resources — End - Dec 2022 (LNG Revenue Management). - Fully implement elimination of VAT exemptions and zero-ratings identified through the 2022 prior action — Jan. 1 2023. - Include in the 2023 budget document and implementing documents a public service hiring limit of one out of three leaving employees except in education, health, justice administration and agriculture — End-December 2022; repeat for 2024 budget — End-December 2023. - Extend implementation of the new e-tax system to all taxes and tax administration offices — End - Dec 2023. - Implement the digital interface (Portal do contribuinte) to allow all taxpayers to file and pay all taxes electronically — End - Jun 2023. - Establish quarterly Treasury Budget to determine limits on quarterly commitments and eliminate ex-ante weekly commitment limits in the budget law for 2023 and corresponding budget execution circular — Proposed change from end-December 2022 to end-January, 2023. - Fully implement in all spending units e-SISTAFE tools for budgetary planning (annual) and financial programming (quarterly) — End - Dec 2022. ### Technical Memorandum of Understanding (TMU) — definitions and monitoring provisions - TMU purpose: - Spells out concepts, definitions, and data reporting procedures referenced in the LOI and MEFP of November 4, 2022, and describes information requirements to monitor performance under the ECF-supported program. - Quantitative performance criteria (QPC) listed in Table 1: - Floor on domestic primary budget balance. - Floor on the stock of Net International Reserves (NIR) of the Bank of Mozambique (BM). - Zero ceiling on accumulation of new public and publicly-guaranteed external payment arrears. - Ceiling on new non-concessional external debt contracted or guaranteed by the public sector. - Domestic primary balance definition and components: - Government: central government including budget and extrabudgetary public entities as defined in GFSM 2014, paragraphs 2.85–2.89. - Total government revenue: sum of tax revenue and non-tax revenue recorded on a cash basis; LNG revenue and exceptional receipts shown separately. - LNG revenues: all revenues from the LNG sector, including royalties, profit share, CIT, dividends from state’s participations and all other LNG-related tax or revenues. - Grants: project grants and budget grants as per GFSM 2014 paragraph 5.101. - Total government expenditure: wages and salaries (gross), goods and services, transfers, other current outlays, interest payments, and capital expenditure recorded on a commitment basis. - Primary expenditure: total government expenditure minus interest payments. - Domestic primary expenditure: primary expenditure minus externally financed capital expenditure. - Exceptional receipts: sale/placement/privatization of Government assets; taxation on contracts; granting or renewal of licenses; resolution of disputes between foreign companies and Government; and any other exceptional receipts. - Adjusters to the domestic primary balance: - If budget grants or loans exceed programmed amounts, or in event of exceptional receipts, the floor can be adjusted downward by: - 75 percent of the excess amount in 2022, - 60 percent of the excess amount in 2023, - 50 percent of the excess amount in 2024. - In the event of a natural disaster, the floor can be adjusted downward by up to MTS 3.7 billion drawing on the capital gains Treasury account (“Mais valías”) at the Central Bank. - Net International Reserves (NIR) definition and calculation: - NIR = total gross official international reserves minus official short-term reserve liabilities. - Gross official international reserves include BM’s holdings of monetary gold (excluding amounts pledged), SDRs, BM holdings of convertible currencies in cash or in nonresident financial institutions, and Mozambique’s reserve tranche position with the IMF. - Exclusions from gross official usable international reserves: pledged/swapped/encumbered reserve assets (including collateral/guarantees), precious metals other than gold, assets in nonconvertible currencies and illiquid foreign assets. - Gross official reserve liabilities: outstanding liabilities of the BM to the IMF (excluding SDR allocations), convertible currency liabilities of the BM to nonresidents with original maturity up to and including one year, and commitments to sell foreign exchange from derivatives. - Adjustors to the NIR floor: - Downward by any shortfall in budget grants and loans relative to the program baseline excluding IMF budget support. - Downward to accommodate higher external outlays linked to relief from natural disasters. - Upward for any implicit or explicit reimbursement of past public or publicly guaranteed debt service as a result of refinancing of obligations (e.g., related to MAM or Proindicus). - Monitoring currency conversion: - NIR is monitored in U.S. dollars; assets and liabilities in other currencies converted into dollar equivalents using exchange rates specified in Text Table 2. - Definition and treatment of external payment arrears: - External payment arrears defined as the difference between amounts required to be paid under the contract and the amount actually paid after the payment deadline (including any grace period). - External debt service obligations matured and unpaid after 30 days are considered “program” arrears for performance criteria requirements. - The performance criterion on public and publicly-guaranteed external payment arrears is cumulative in gross terms from May 9, 2022 and applies on a continuous basis. - Debt ceiling and definition of debt: - Ceiling applies to the present value (PV) of new external non-concessional debt contracted or guaranteed by the public sector; applies also to debt contracted or guaranteed for which value has not yet been received. - Exclusions: operations resolving arrears to Angola, Bulgaria, Iraq, Libya, and Poland that reduce outstanding stock; court/arbitral decisions and related debt operations with respect to government guarantees on existing external debt in dispute as of Dec 31, 2021 that result in more favorable terms to the guarantor. - Debt defined per paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No. 15688-(14/107), Dec 5, 2014). Debt forms include loans, suppliers’ credits, and leases (with lease payments valued at present value at inception for program purposes). - Program Exchange Rates (Text Table 2; currency unit per US dollar; source: March 18, IMF and Federal Reserve): - SDR: 0.723999 - EUR: 1.1044 - JPY: 119.17 - CNY: 6.3609 - INR: 76.03 - KRW: 1212.2 *Source: Mozambican authorities; and IMF Staff. (Extracted from the MEFP and TMU text provided.)* ### 16. In accordance with the definition of debt set out above, arrears, penalties and judicially ### 1mozea2022001 - 16. In accordance with the definition of debt set out above, arrears, penalties and judicially ### Definition of debt and coverage - Arrears, penalties and judicially awarded damages arising from failure to pay under a contractual obligation that constitutes debt are also debt. - Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. - Public sector debt for the debt limit ceiling covers public and publicly guaranteed debt. The public sector comprises the central government, the central bank, and Empresa Nacional de Hidrocarbonetos (ENH). - Government control of an entity will be assessed according to the methodology defined in GFSM 2014, Chapter 2. - For program purposes, a ‘guaranteed debt’ is an explicit promise by the public sector to pay or service a third-party obligation (involving payments in cash or in kind). - Public sector external debt includes foreign-currency denominated obligations of the National Government of Mozambique, and foreign-currency denominated obligations of the Central Bank of Mozambique contracted on behalf of the national government (excluding newly contracted financing from the IMF and the General SDR allocation). ### Contracting of debt and treatment of credit lines - A debt is considered contracted when all conditions for its entry into effect have been met, including approval by the Council of Ministers. - Contracting of credit lines (which can be drawn at any time and entered into effect) with no predetermined disbursement schedules or with multiple disbursements will also be considered as contracting of debt. - The ceiling applies also to debt contracted or guaranteed for which value has not yet been received. Operations that resolve arrears to Angola, Bulgaria, Iraq, Libya, and Poland and result in reduction in outstanding stock of debt are excluded from the ceiling. ### Present value calculation and concessionality - A debt is concessional if it includes a grant element of at least 35 percent. - The grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. - The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. - For debts with a grant element equal or below zero, the PV will be set equal to the nominal value of the debt. - The discount rate used is the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97). - The calculation of concessionality takes into account all aspects of the debt agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees. - Grant element of external debts in currencies other than the U.S. dollar will be calculated in U.S. dollar terms at program exchange rates. - For variable-rate debts expressed as benchmark plus fixed spread, the PV is calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract. - Program reference rate for the six-month USD SOFR is 1.52 percent and will remain fixed for the duration of the program. - Spreads specified: - The spread of six-month Euro EURIBOR over six-month USD SOFR is -200 basis points. - The spread of six-month JPY OIS over six-month USD SOFR is -150 points. - The spread of six-month GBP SONIA over six-month USD SOFR is -100 basis point. - For currencies other than Euro, JPY, and GBP, the spread over six-month USD SOFR is -100 basis points. - Where the variable rate is linked to a benchmark other than six-month USD SOFR, a spread reflecting the difference between the benchmark rate and the six-month USD SOFR (rounded to the nearest 50 basis points) will be added. ### External debt definition and PV ceiling - External debt for the ceiling is any debt contracted or guaranteed by the public sector on non-concessional terms denominated in foreign currency (i.e., currency other than the Metical). - External debts in currencies other than the U.S. dollar will be converted in U.S. dollars at program exchange rates. - An indicative target (ceiling) applies to the PV of new external debt contracted or guaranteed by the public sector, as defined in paragraphs 14–16. ### Domestic debt definition, target and adjustors - Domestic debt is defined as provided in Mapa da Divida, covering T-bills, T-bonds, loans from the Bank of Mozambique excluding onlending from the additional SDR allocation received in August 2021 (MT 20.5 billion), and “Other” (“Outros”). - The indicative target (ceiling) applies to the nominal value of domestic debt by the central government denominated in metical. - Data on domestic debt will be reported in the “Mapa de divida interna” prepared by the MEF and in the weekly and monthly data received from the BM. - Adjustors to the domestic debt IT: - If budget grants or loans are lower than the programmed amount, the ceiling on the stock of domestic debt will be adjusted upward by the amount of the shortfall. - The ceiling on the stock of domestic debt will be adjusted upwards by the amount of MT 35 billion of securitized VAT arrears to be repaid by the Treasury. ### Indicative target (IT) on the floor on social spending - Social spending is defined as transfers to INAS from the budget (through the treasury single account, i.e., not including transfers to INAS through project grants or project loans from external partners). - The IT is on execution of spending (rather than allocation). Monitoring is through the table on quarterly spending provided by the MEF. - Adjustor for social spending IT: - Should expenditure compression be needed, social spending would be adjusted to the extent that it is reduced proportionally less than other domestically financed primary spending such that its ratio increases compared to the previous year. ### Monetary Policy Consultation Clause (MPCC) - Authorities will complete a consultation with the Executive Board focusing on: (i) the stance of monetary policy and whether the Fund-supported program remains on track; (ii) reasons for program deviation, taking into account compensating factors; and (iii) proposed remedial actions if necessary, if the end-of-period year-on-year headline inflation falls outside specified bands. - Inflation bands and trigger points: - ±3 percentage point range around the 12.5 percent mid-point target band value for end-September 2022, or 15.0 percent for end-December 2022, - ±2 percentage point range around the 14.0 percent mid-point target band value for end-March 2023, 11.5 percent for end-June 2023, 10.5 percent for end-September 2023, or 9 percent for end-December 2023, - ±2 percentage point range around the 8.5 percent mid-point target band value for end-March 2024, 7.5 percent for end-June or end-September 2024, or 6.5 percent for end-December 2024, - ±2 percentage point range around the 6.0 percent mid-point target band value for end-March 2025. ### Structural benchmarks and prior actions (high-level) - Prior Actions (as specified in Table 2 of the MEFP): - Make the necessary legal changes to implement the elimination of VAT exemptions and zero-ratings to ensure the reform is effective starting on January 1st, 2023. - Structural benchmarks (selected, as specified in Table 2 of the MEFP): - Submit to Parliament an amendment to the Public Probity Law to: (i) clarify to which individuals the various requirements apply; (ii) strengthen the definition of conflict of interest; (iii) require submission of declarations of financial interests by new public servants upon hiring; (iv) establish published procedures for reporting conflicts of interest, by end-June 2023. - Submit to Parliament the law on the Sovereign Wealth Fund on LNG resources by end-December 2022. - Fully implement the elimination of VAT exemptions and zero-ratings identified through the 2022 prior action by (i) adopting the revised VAT law and (ii) making effective the implementation decree to the VAT law by January 1, 2023. - Include in the 2023 and 2024 budget documents the public service hiring limit of one out of three leaving employees except in the sectors of education, health, justice administration, and agriculture. - Fully extend the implementation of e-tributação to all taxes and tax offices by end-2023. - Implement the digital interface (Portal do contribuinte) to allow all taxpayers to file and pay all taxes electronically by end-June 2023. - Fully implement in all spending units e-SISTAFE tools, Orçamento de Tesouraria for budgetary planning (annual) and Plano de Tesouraria for financial programming (quarterly) by end-December 2022. - Through the applicable budget execution circular for management of the 2023 budget, implement the establishment of ex-ante quarterly commitment limits for all expenditure units, operationalized in e-SISTAFE, and eliminate ex-ante weekly commitment limits for 2023. (Proposed modified structural benchmark for January 2023). ### Reporting procedures to the IMF and data templates - Data on all variables subject to quantitative performance criteria and indicative targets and information on progress towards structural benchmarks will be transmitted regularly to the IMF per Attachment 1. Revisions to data will be forwarded within 5 days after being made. - Fiscal data reported: Mapa Fiscal (MEF). - Debt data reported: - Domestic debt: Mapa de Divida; Mapa de projeçao de divida interna. - External debt: Mozambique External Loans Government Guaranteed Public Debt Having DOD Outstanding For Year Ending (each year); External Debt Service Projection by creditor and project; Tabela 8a and Tabela 8b; Newly contracted debt terms (as per the IMF tool on the PV of new debt). - ENH reporting (through MEF) — quarterly updates ahead of each quarterly deadline on: - Actual and projected carry disbursements or balance, broken down by carry agreement and creditor. - Interest accumulated. - Modifications to terms or relief granted (for example, a delay in interest accumulation). - Balance on the State guarantee according to the debt drawdown (Area 1). - Revisions to capex and project costs. - ENH will inform the IMF of new debt negotiations and provide term details once negotiations are completed. - For projects under production phase ENH data will be expected quarterly on: - Actual and projected production quantities. - Actual and projected prices. - Actual and projected operating costs. ### Summary of key reporting periodicities and deadlines (selected) - Inflation (CPI INE): Monthly, 10 days after the end of the month. - Fiscal data (Mapa Fiscal, MEF): Monthly, 50 days after the end of the month. - Table with social transfers to INAS (MEF): Quarterly, 50 days after the end of the quarter. - Public debt (Mapa de Divida, MEF): Quarterly, 50 days after the end of the quarter. - Mapa de projeçao de divida interna (MEF): Quarterly, 50 days after the end of the quarter. - Total new contracted or guaranteed external project loans (MEF): Data will be provided to the IMF on a continuous basis. - Total other new contracted or guaranteed external concessional debt (MEF): Quarterly. Within 50 days after the end of the quarter. - Total new Eurobond issuances (MEF): Data will be provided to the IMF on a continuous basis. - Total new other non-concessional external debt contracted or guaranteed (MEF): Quarterly. Within 50 days after the end of the quarter. - Change in external arrears, including interest and principal, and penalties: Data will be provided to the IMF on a continuous basis. - Gross Reserves and reserve components (BM): Monthly, 30 days after end of month. - External cash flow to compute international reserves (BM): Monthly, 40 days after end of month. - LNG debt and production (ENH/MEF): Quarterly. Within 20 days after the end of the quarter. *Source: Republic of Mozambique TMU and related sections, as provided in the supplied content.* ### 4. All quantitative performance criteria (QPCs) were met, some with large margins. This ### 1mozea2022001 - 4. All quantitative performance criteria (QPCs) were met, some with large margins. This ### Program performance and quantitative targets - All quantitative performance criteria (QPCs) were met, including: - the QPC on the floor of the primary budget balance; - the QPC on the floor of net international reserves; - the ceiling on new non-concessional external debt contracted or guaranteed by the public sector; - the ceiling on the accumulation of new public and publicly guaranteed external payment arrears. - The Monetary Policy Consultation Clause (MPCC) was marginally breached as inflation increased to 10.8 percent at end-June 2022, compared to the upper bound of 10 percent. - Banco de Moçambique (BM) continued to tighten monetary policy and stands ready to further tighten conditions as needed; the authorities request modification of the monetary policy consultation clause based on projected inflation for the rest of the program. - The indicative target on the floor on social spending was met by a large margin. - The ceiling on the stock of domestic debt was met. - Structural benchmark (SB) progress: - Parliament passed amendments to the AML/CFT law in May 2022. - Significant progress on forward-looking SBs, including revision of the public probity law and the law to establish the Sovereign Wealth Fund. ### Recent economic developments and outlook - GDP growth projections: - 2.3 percent in 2021. - 3.8 percent in 2022, reflecting a rebound in aggregate demand and increased mining and services activity. - 5.0 percent in 2023, reflecting expected acceleration from LNG production after the first shipment in November 2022. - Overall growth projected to average 6.1 percent over the period 2023–2025. - Risks to the medium-term outlook: - slowdown in advanced economies and emerging markets; - tightening global financial conditions; - volatile commodity prices; - climate shocks; - delays in the implementation of the LNG megaprojects. - Inflation and external sector: - Inflation accelerated sharply in 2022, reaching 12.1 percent year-on-year in September. - Current account deficit widened significantly due to higher imports of equipment to support LNG developments. - International reserves projected to remain comfortable at medium-term levels of 4 months of non-megaproject imports, buoyed by rising gas export earnings. ### Fiscal policy and debt management - Fiscal strategy: - Government committed to fiscal consolidation to reduce public debt vulnerabilities and create fiscal space for priority investment in human capital and climate resilient infrastructure. - Reform of the VAT regime by eliminating some exemptions and domestic zero-ratings, while maintaining exemptions and zero-ratings on basic items and for the agricultural and renewables sectors. - VAT rate reduction planned from 17 percent to 16 percent. - Shorten the window during which VAT refunds can be claimed to reduce VAT reimbursement arrears. - Tax administration and revenue measures: - Modernizing the taxpayer registry and enhancing interoperability with other public registries, including the civil registry and commercial banks. - Continued rollout of an integrated electronic tax filing system (e-taxation) to collect receipts from major tax categories, including VAT and income taxes, in all tax offices and large taxpayer offices. - Public expenditure and wage bill reforms: - Limiting new hires of public servants except in education, health, agriculture sectors and the judiciary. - Parliament concluded necessary amendments to public wage bill legislation in October 2022 to allow measures to better manage cost of public sector employment and limit the wage bill below 12 percent of GDP in the medium-term. - Plan to unify pay scales and supplementary wage components into a unique scheme and allow only one replacement out of three leaving (retiring) civil servants. - Debt management: - Debt strategy focus areas: - prioritizing multilateral and bilateral credits with more favorable conditions; - mapping and continued monitoring of SOEs to reduce state exposure to guaranteed debt; - debt restructuring, especially with non-Paris Club creditors. - With World Bank and IMF capacity development, authorities improving regular reporting of debt and publishing detailed quarterly public sector debt reports with stock levels, intra-agency on-lending, and state guarantees. - Setting clear, entity-specific debt limits approved by the Council of Ministers. ### Monetary, exchange rate, and financial sector policies - Monetary policy: - BM remains committed to tightening monetary conditions to bring inflation back to target. - Since January 2021, BM has cumulatively increased the policy rate by 700 basis points and stands ready to further tighten monetary policy in a transparent and clearly communicated manner. - BM refining its framework to implement a forward-looking monetary policy framework based on a policy interest rate (MIMO) to signal stance and achieve single-digit inflation in the medium term. - Exchange rate policy: - BM to continue allowing exchange rate flexibility as a shock absorber while making strategic interventions to smooth disorderly market conditions. - Reforms in the FX market intended to improve transparency and price discovery; reference exchange rate determination being revised to capture actual volume-weighted market transactions rather than quoted rates. - Parliament approved a new FX law to allow gradual removal of restrictions on international capital and financial account transactions. - Banking sector and supervision: - Banking sector described as well capitalized, liquid, and positioned to absorb credit losses and a liquidity squeeze if the crisis is short-lived. - BM will continue implementing prudential rules to support safety and soundness, ensure adherence to loan classification and provisioning standards. - Prudential regulations being revised to allow transition from Basel II to Basel III capital accords by end-2023. - With IMF technical support, BM developing regulatory and supervisory framework for management of cybersecurity risks. - Financial inclusion and payments system: - Financial inclusion remains a priority under the 2016–2022 National Financial Inclusion Strategy. - Parliament approved the Basic Account Law in October 2022 to simplify requirements and reduce costs of opening bank accounts for low-income households. - Interoperability among mobile payments providers improved flexibility in transaction settlement. - Government implementing initiatives to improve feasibility, transparency and security of the national payments system; reform of the payment system law will strengthen this. ### Governance and structural reforms - Audit and accountability: - Supreme Audit Tribunal prepared an independent audit of COVID-19 spending in 2020, identifying shortcomings in procurement and spending execution; Attorney General’s Office opened investigations linked to possible criminal violations. - Government implementing remedial measures, including introducing appropriate legislative amendments based on audit recommendations. - AML/CFT framework: - Progress includes Council of Ministers approval of a strategy against money laundering and financing of terrorism and amendments introducing the beneficial ownership regime. - The country has been placed on the FATF Grey List. - Authorities committed to fully implement additional measures; implementing risk-based supervision framework and establishing the AML/CFT Service within BM’s Prudential Supervision Department expected to be fully operational by end-June 2023, finalized with the introduction of a manual for risk-based supervision. - Natural resource revenue management: - Considering adopting a fiscal rule to mitigate risks from commodity price volatility. - Establishing a sovereign wealth fund (SWF) to manage resource flows from LNG; following public consultation, a draft law creating the SWF being prepared for submission to the National Assembly by end-2022. - SWF investments to be managed observing highest standards of accountability and transparency. ### Conclusion and authorities’ outlook - Authorities appreciate Fund engagement and technical support and are determined to implement appropriate fiscal and monetary policies and structural reforms to set the economy on a higher growth trajectory. - Authorities remain optimistic that Fund support under the ECF arrangement will help implement sound macroeconomic policies that deliver short to medium-term payoffs and seek Executive Directors’ support in completing the first review under the ECF arrangement. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mozea2022001.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mozea2022001.pdf_