On March 5, 2018, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation [1]
with the Republic of Mozambique.
In recent years, Mozambique’s economy has been adversely affected by
the fall in commodity prices and adverse weather conditions, as well as
by the issue of undisclosed loans in the spring of 2016 and the ensuing
freeze in donor support. Growth decelerated in 2016 to 3.8 percent
(from 6.6 percent in 2015) and the latest data show that the economy
grew by 3.7 percent in 2017, driven by a recovery in agriculture and
mining activity (due to a surge in coal production). A tight monetary
stance, coupled with exchange rate appreciation, led to a steep fall in
inflation to 6.3 percent (year on year) in January 2018, from a peak of
26 percent in November 2016. However, the 2017 fiscal deficit on a
modified cash basis (i.e., including external and domestic arrears) is
estimated to have increased to around 8.2 percent of GDP compared to
7.6 percent of GDP in 2016, mainly due to continued spending pressures,
including from a higher wage bill and high debt service costs.
[2]
The external current account deficit continued to narrow in 2017. This
was due to a boom in mining exports and to a contraction in megaproject
imports of services. Another factor was the one-off inflow in income
associated with the capital gain tax from the sale of ENI’s stake in
the Coral South natural gas field to Exxon Mobil. Debt remains in
distress as the stock of public sector debt-to-GDP reached 128.3
percent at end-2016, with several debt payments missed, including on
the Mozam Eurobond.
The outlook remains challenging. Absent further policy action, real GDP
growth is expected to further decline over time while inflation would
remain at current levels. The fiscal deficit would expand, leading to
further accumulation of public debt and crowding out of the private
sector. Banks’ rising exposure to the government, combined with high
interest rates, create potential macrofinancial vulnerabilities.
Executive Board Assessment [3]
Executive Directors noted that Mozambique’s economy is facing difficult
challenges. While inflation has declined rapidly, real GDP growth
remains weak and macroeconomic imbalances are growing. Directors
stressed the need for a rebalancing of the policy mix to ensure durable
macroeconomic stability and for advancing structural reforms to support
inclusive growth.
Directors noted that a steadfast fiscal consolidation effort aimed at
closing the primary deficit is essential to ensure fiscal
sustainability. They urged the need to broaden the tax base by
eliminating VAT and other tax exemptions and to reduce current
spending, while protecting outlays to social protection and
infrastructure projects. Directors welcomed the authorities announced
plans to resume discussions with private creditors and stressed that
making progress in debt restructuring discussions would be an important
step towards restoring debt sustainability.
Given the reduction in inflation and the high real interest rates,
Directors welcomed the recent decision to reduce the monetary policy
rate. Directors felt that fiscal consolidation could provide room for
further cautious easing of monetary policy, thus rebalancing the policy
mix. They encouraged the authorities to maintain exchange rate
flexibility to help mitigate shocks.
Directors observed that implementing financial sector and monetary
regime reforms is essential to strengthen resilience and mitigate
risks. They welcomed the central bank’s efforts to enhance its
supervisory capacity, modernize the bank resolution framework, and to
revise the central bank law to provide it with a clear mandate and
operational autonomy.
Directors welcomed the authorities’ action plan to improve governance,
transparency, and accountability. They noted that while Mozambique has
a sound anti‑corruption legal framework in place, strengthening
implementation and enforcement going forward is key to fighting
corruption. Directors welcomed the approval of a decree establishing a
framework for contracting public debt and issuing guarantees. They
stressed that providing full clarity on the use of the proceeds of the
previously undisclosed loans contracted by three public companies will
be critical to restoring confidence and encouraging private investment.
Directors called for a renewed effort to strengthen the business
climate and governance to boost private investment and job creation to
support inclusive growth and further reduce poverty and inequality.
They noted that restructuring ailing state‑owned enterprises will be
key to improving efficiency, and reducing financial losses.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country's economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.
[2] This excludes the one-off capital gain tax revenue ($350 million or
2.8 percent of GDP) accrued due to the sale of 50 percent of ENI
Africa share in the Coral South natural gas field to Exxon Mobil.
[3] At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country's authorities. An
explanation of any qualifiers used in summings up can be found
here:
http://www.imf.org/external/np/sec/misc/qualifiers.htm
.