The Mozambican authorities are appreciative of the Fund’s continuous engagement and value their support under the Policy Support Instrument (PSI) arrangement. The authorities also appreciate the candid exchange of views with staff during discussions for the second review under the PSI.
2. Recent Economic Developments
The prudent implementation of the authorities’ economic strategy has resulted in an impressive improvement in the country’s economic and financial performance in recent years. As a result, in spite of the difficult global environment and floods earlier in 2013, the Mozambican economy grew by 7.0 percent driven by increased activity in the extractive industries, financial services and construction sectors. The inflation environment remains benign. The current account deficit improved in 2013, due mainly to lower service imports and higher transfer receipts. Gross international reserves accumulated by the Bank of Mozambique (BM) are equivalent to 4.5 months of imports of goods and non financial services.
Fiscal policy in 2013 was expansionary as the authorities increased spending on infrastructure and access to basic social services to mitigate the impact of floods in early 2013. Revenue performance was in line with the program, thanks to the receipt in August 2013 of $400 million (2.1 percent of GDP) capital gains taxes from the sale of shares in extractive industries sectors. The overall fiscal deficit including grants was estimated at 2.8 percent of GDP, lower than the program target of 4.6 percent of GDP.
The primary objective of Mozambique’s monetary and exchange rate policies over the past few years was to anchor inflationary expectations and achieve exchange rate stability. As a result, the average annual inflation in 2013 was 4.2 percent, compared to a target of 7.0 percent. My authorities remain committed to enhancing the monetary policy framework to improve liquidity management, increase accessibility to a wide range of financial instruments tailored to small and medium size firms, and pursuing the implementation of the Financial Sector Development Strategy (FSDS) which aims to foster financial inclusion and spur competitiveness in traded sectors.
3. Program Performance
Against the background of a difficult global environment and floods in early 2013, the authorities maintained macroeconomic stability and satisfactorily performed under the PSI. The program performance since the first review remains broadly on track. All quantitative assessment criteria and all indicative targets through end-December were observed, except the target for priority sectors expenditure, which was missed due to delays in the disbursement of donor funds. The structural benchmarks for end-February and end-March 2014 were met, although one with a brief delay.
4. Economic Outlook and Policies
My authorities’ economic agenda in the near to medium term is to strengthen macroeconomic and structural policies to promote inclusive economic growth, create more jobs, spread the benefit of growth more widely and thereby reduce inequality. Consequently, they are determined to invest in key infrastructure and sectors that have high economic and social returns as well as expansionary economic benefits. To this end, economic growth is projected to accelerate to 8.3 percent in 2014, supported by buoyant dynamics in extractive industries and construction sectors. Inflation is projected to remain within the range of 5-6 percent and the exchange rate is expected to remain stable. The major risks to maintaining inflation within the target range of the BM are the expansionary fiscal policy in 2014, the accommodative monetary policy and the region’s inflationary pressures. To cope with these risks and increase the economy’s resilience to shocks, the authorities will continue to increase the allocation of resources to the development of infrastructure and also boost investments and human capital.
4.1 Fiscal Policy
My authorities remain committed to maintaining sustainable fiscal policy over the medium to long-term. In this regard, revenue collection efforts will be enhanced by further strengthening tax administrative measures, and changes in the tax code. Other ongoing revenue enhancing measures include the strengthening of the large taxpayer unit, broadening of e-tax and tax payment via banks for VAT coupled with the simplification of the small tax payer regime, and reforms of transfer price provisions. In addition, efforts are being made to establish a fiscal rule for the use of the windfall revenue. Accordingly, the Mozambican authorities have established a stabilization account to supplement any shortfalls in future revenue collection. The approval of the execution of the fiscal rule is envisaged in 2015.
To bring public finances to a sustainable path, the authorities plan to gradually reduce expenditure from around 42 percent of GDP in 2014 to about 34 percent of GDP in 2019. Most of the reduction would be achieved as expenditures return to a normal path after the implementation of one-off outlays on elections and maritime security in 2014. Additionally, the Mozambican authorities plan a measured reduction of the wage bill in 2015 and beyond. The authorities also expect that expenditures on goods and services and investments would grow more slowly than GDP.
To increase fiscal space while maintaining debt sustainability in the medium term, the authorities remain committed to continue enhancing public financial management by strengthening project selection instruments, improving public debt management, extending the use of the single treasury account (CUT), and expanding the roll out of salary payments through direct transfer to bank accounts.
4.2 Monetary and Exchange Rate Policy
The authorities’ monetary policy framework will focus on anchoring inflationary expectations, improving liquidity management and strengthening financial surveillance. To accomplish these objectives, the BM will continue to enhance the use of open market operations and reinforce the framework for liquidity forecasting. Furthermore, the BM will improve the coordination work with the Ministry of Finance and the Stock Exchange to make T-Bonds attractive as collateral in money market operations.
The BM will maintain the floating exchange rate regime, intervening in the exchange rate market to smoothen volatilities in the foreign exchange market and build up international reserves. The BM will reinforce the implementation of the New Exchange Rate Law and continue to strengthen the framework for reserve management.
4.3. Financial Sector Policies
My authorities remain committed to pursuing the agenda on financial deepening and inclusion in order to create more opportunities and support private sector development and job creation. To this end, the authorities approved in 2013 the FSDS spanning the period 2013-2022. The FSDS aims amongst other objectives to maintain financial sector stability, increase access to financial services and products and eliminate structural constraints, specifically those that limit financial intermediation and access to financial services. Ongoing structural reforms to comply with the FSDS’ objectives include developing a National Financial Inclusion Strategy by end-December 2014; drafting specific regulations governing mobile banking services by June 2014 and establishing the legal basis for insolvency procedures. Finally, the authorities intend to improve risk-based supervision and adopt Basel II to make the financial system robust.
My authorities would like to reiterate their commitment to pursue their comprehensive agenda of macroeconomic and structural reforms aimed primarily to unleash the economy’s growth potential and gradually remove the structural bottlenecks to economic development. Despite the uncertainty in the global economic environment and adverse impact of exogenous shocks, economic performance under the new three year PSI remains strong. Structural reforms across a broad spectrum of areas are largely on track. Going forward, Mozambique stands ready to continue the fruitful engagement with the IMF to enhance the macroeconomic policy framework in the context of the natural resource boom, building on lessons from the country’s current and past experiences. Furthermore, they are willing to engage with other international financial institutions to effectively mobilize adequate resources to fill the gap in infrastructure financing without compromising debt sustainability and macroeconomic stability. My authorities seek the Executive Board’s approval of their request for the completion of the second review under the PSI and modification of assessment criteria.