IMF Staff Completes 2017 Article IV Mission to Mozambique

IMF News, December 14, 2017

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A staff team from the International Monetary Fund, led by Michel Lazare, visited Mozambique during November 30-December 13, 2017 to complete discussions under the 2017 Article IV Consultation.
End-of-Mission press releases convey preliminary findings; staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.
The Executive Board meeting on Mozambique’s Article IV Consultation is tentatively scheduled for end-February 2018.

Growth is expected to decline to about 3 percent in 2017, compared to 3.8 percent in 2016.
Tight monetary policy successfully reduced annual inflation to about 7 percent in November 2017 and the exchange rate has stabilized over the last 6 months.
The external position improved, allowing the Bank of Mozambique (BM) to accumulate significant amounts of foreign exchange reserves.
The large financing needs of the Treasury combined with a tight monetary policy continue to press market interest rates higher, depressing credit availability to the private sector—particularly to SMEs—and affecting economic activity, employment, and socio-economic conditions.

The Government eliminated subsidies on fuel and wheat.
Significant spending pressures stemming from debt service and wages, as well as weaker-than-anticipated revenue collection, are expected to result in an overall fiscal deficit exceeding 8 percent of GDP.
The mission welcomes efforts to reduce the fiscal deficit, in particular through measures related to the wage bill and revenues proposed in the 2018 budget.
Fiscal policy recommendations:
- Further consolidate the fiscal position by eliminating VAT and other tax exemptions that could help mobilize additional revenues.
- Reduce current spending while protecting outlays to social and infrastructure spending.
- Align the public investments program considering project feasibility, absorption capacity constraints, and debt sustainability.
- Progress discussions with creditors on a debt restructuring initiated by the authorities in October 2016 to restore debt sustainability.
- Over the medium term, sustain fiscal effort to lower deficits and limit further accumulation of public domestic and external debt, including arrears to creditors and suppliers.

Given larger than expected recent declines in inflation, there is space for faster monetary easing.
While the loose fiscal stance continues to put pressure on market interest rates, the mission encourages the central bank to reassess the pace of policy rate cuts given the large unexpected declines in inflation.
As fiscal policy consolidates, further monetary policy rate changes should go in tandem with expected inflation and the evolution of key risks.

The mission welcomes the central bank's strong resolve to enhance supervision, enforce prudential requirements and upgrade the regulatory framework to ensure financial sector stability.
Decisive action to restructure financially-weak state-owned enterprises (SOEs) is important to contain fiscal and financial sector risks.

The mission urges the authorities to take decisive steps to strengthen the business environment and to restructure financially-weak SOEs that pose significant fiscal and financial sector risks.
The mission commends the authorities for submitting to Parliament the SOE law and for approving a decree providing a regulatory framework to the issuance of public debt and guarantees.
The mission encourages the authorities to continue developing their action plan to strengthen governance, transparency, and accountability.
Regarding the follow up to the audit of Ematum, Proindicus and MAM companies, the mission reiterates the need to fill the information gaps in the audit report and takes note of the Government’s recommendation to wait for the outcome of the ongoing investigations by the Prosecutor General Office.

The team met with Prime Minister Carlos Agostinho do Rosario, Economy and Finance Minister Adriano Maleiane, Bank of Mozambique Governor Rogerio Zandamela, and other sectoral ministers, parliamentarians, representatives of the Judiciary, senior government officials, private sector, trade unions, civil society representatives, as well as with development partners.
The mission thanked the authorities for constructive discussions and warm hospitality.

Source: IMF press release, December 14, 2017.