Press Release No. 19/198

IMF Executive Board Concludes 2019 Article IV Consultation with the Republic of Mozambique

June 4, 2019

On June 3, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Mozambique.

Mozambique’s economic situation had been improving until Tropical Cyclones Idai and Kenneth hit the country in March and April, respectively. Economic growth was recovering gradually and becoming broader based, and inflation reached low single digits. Economic activity is expected to decelerate sharply in 2019 due to the supply shock to productive capacity, but it should rebound to pre-cyclone levels by 2020. The IMF Executive Board approved in April US$118 million in emergency assistance under the Rapid Credit Facility (RCF). The authorities are committed to macroeconomic stability while fostering inclusive growth and addressing governance challenges.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ reform efforts in the run up to Tropical Cyclones Idai and Kenneth and regretted the losses, including in human lives, from the two cyclones. Against this background, Directors called for continued progress in Mozambique’s policy and institutional settings to achieve durable macroeconomic stability and inclusive growth, address governance challenges, manage reconstruction and build resilience against external shocks, including from extreme climate events.

Directors welcomed the reallocation of lower priority spending in the annual budget to emergency assistance and reconstruction. However, given the magnitude of the needs, they also looked forward to further support by the international community, catalyzed by IMF’s financial support. In that context, they noted the importance of allocating cyclone‑related grants to one‑off spending in the affected areas to protect, inter alia, the fiscal position as cyclone‑related aid is phased out over time.

Directors commended the authorities’ commitment to gradual fiscal consolidation over the medium term, while protecting social and critical infrastructure outlays to ensure durable macroeconomic stability. They noted that creating fiscal space, through domestic revenue mobilization and reducing spending inefficiencies, would also be crucial to better prepare and deal with the consequences of future extreme climate events.

Directors welcomed the authorities’ commitment to bring debt risk to moderate levels over the medium term and the important steps taken to strengthen public debt management and transparency. While welcoming the agreement in principle with private creditors on debt relief, Directors called for the adoption and implementation of a debt strategy and stressed the importance of strengthening oversight of the entire public debt portfolio, including for state‑owned enterprises, to put public debt‑to‑GDP ratios on a clear declining path.

Directors commended Bank of Mozambique’s gradual and cautious normalization of monetary policy while remaining vigilant about possible second‑round effects on inflation of the cyclone‑induced supply shock. They stressed the importance of maintaining exchange rate flexibility as a shock absorber and preserving an adequate level of international reserves. They also encouraged the Bank of Mozambique to continue to enhance its supervisory capacity, modernize the bank resolution framework, and strengthen the monetary policy regime building on enhanced communications, increased technical capacities and a reformed, modern central bank law.

Directors urged the authorities’ continued focus on improving governance, transparency and accountability, including to reduce vulnerabilities to corruption. In that context, they welcomed the authorities’ ongoing preparation, with IMF technical assistance, of a diagnostic report on the main governance and corruption challenges and strongly encouraged its publication. They also called for continued progress in strengthening the AML/CFT framework and enhanced focus on transparency on natural resource management.

Directors commended ongoing efforts to increase the country’s resilience to natural disasters including through the National Resilience Strategy with support from the World Bank and encouraged the authorities to integrate climate change resilience within their broader development agenda.

Directors also called for further structural reforms to support inclusive growth, job creation and poverty reduction, including by fostering competition and improving the business climate. They also welcomed the authorities’ plans to establish a Sovereign Wealth Fund to support productivity‑enhancing investments as part of their natural resource management strategy.