The Mozambican authorities appreciate the continued Fund engagement and value the constructive policy advice in the implementation of their National Development Agenda which is supported by the Policy Support Instrument (PSI) arrangement. The candid discussions held with staff during the fourth PSI review remain a valuable source of policy support in fostering sustainable development. Program performance remains broadly on track and in light of this, the authorities seek the Executive Board’s approval of their request for the completion of the fourth review and modification of the assessment criteria.
2. Recent Economic Developments and Outlook
Prudent implementation of the authorities’ economic development strategy has resulted in steady economic growth, averaging 7-8 percent over the past five years. The sources of economic growth have diversified and the incidence of poverty declined sharply, from 69.4 percent in 1996/97 to less than 54 percent in 2009, and is expected to reach 42 percent in 2014.
Economic growth in 2014 remained robust [7.4 percent], in spite of the downside risks stemming from commodity price and terms of trade shocks and the devastating impact of floods earlier in the year. This performance was driven by a rebound in agriculture and manufacturing and buoyant activity in financial sector services. Growth also remained strong in extractive sector, albeit decelerating due to a less favorable outlook in the coal market.
The medium term economic outlook remains robust and projected to be consistent with the average trend achieved over the past five years. However, boosting economic activity, particularly in sectors that generate the bulk of employment such as agriculture and manufacturing, still requires steadfast policy measures in order to reduce structural bottlenecks. In this regard, the Government’s Five Year Plan (2015-2019) identifies strategic actions geared toward unleashing the country’s growth potential. Focus is placed on employment creation, poverty reduction, and enhancing competitiveness and productivity, through augmentation of fiscal space for investment projects. Proposed reforms aim to improve the transportation logistics for small and medium sized enterprises and megaprojects, strengthen the value chain in agriculture and manufacturing sectors, bolster human capital development and create a friendly business environment.
The fiscal stance has been calibrated to support broad-based growth while preserving its sustainability. The 2014 budget law enacted in early 2015 was amended in May 2015 to increase the fiscal space for elections related-expenditures. Total revenues reached 28 percent of GDP in 2014, total expenditures including net lending amounted 40 percent of GDP, 5.1 percentage points higher than the same period of 2013, and mostly reflected transitory factors such as the need to accommodate elections-related expenditures. Revenue excluding the one-off capital gain tax is projected to rise by 0.9 percentage points of GDP in 2015; the total expenditure including net lending is projected to decline to 36.0 percent of GDP in 2015; and the overall fiscal deficit is expected to decline to 6.5 percent of GDP, from 11 percent of GDP reached in 2014.
The monetary and exchange rate policy is geared towards safeguarding price and exchange rate stability, and boosting competitiveness over the medium-term. Inflation expectations remained low for the whole 2014, in spite of supply disruptions caused by the floods earlier in the year. Annually inflation for twelve months ending in May was 1.2 percent, reflecting increased supply of agricultural products during the harvest season. Between the last quarter of 2014 and end-March 2015 there were heightened depreciation pressures, reflecting the strengthening of the US dollar vis-a-vis the Metical, a higher level of demand for imports excluding mega projects, weaker performance of non-mega projects exports, increase currency volatility in the run-up to the elections in 2014 and to some extent, the containment in budget support disbursement. To stabilize the exchange rate, the Bank of Mozambique (BM) intervened in the market by selling US$ 320 million in the last quarter of 2014, and US$ 478 million in the first quarter of 2015, which contributed to significant losses in reserves. Going forward, the BM will continue to adjust its policy to anchoring inflation expectations and improve economic competitiveness.
3. Program Performance
The authorities’ commitment to enhance implementation of macroeconomic and structural reforms has led to substantial improvements in economic conditions over the past years. The program has remains broadly on track. Two out of six end-December performance criteria (PC) were missed by a small margin namely the net credit to the government (NCG) and the reserve money growth, whilst the assessment criteria on net international reserves (NIR) deviated from the target by US$ 265 million due to the necessity to address the increase in depreciation pressures and to lessen exchange rate volatility and its pass-through to domestic prices. This has been due to an array of interrelated factors including, the adverse impact of exogenous shocks coupled with expectation-driven factors in domestic market during the election period.
The slower than anticipated return of the currency in circulation into the banking system in the first quarter of 2015, has led to higher levels of money growth, and continuing depreciation pressures arising from a sluggish decline of demand for imports. In light of this, foreign exchange market pressures continued through March 2015 and the NIR was missed by US$ 478 million, whereas the reserve money target was missed marginally by US$ 15.3 million. Going forward, the authorities will recalibrate the monetary and exchange rate policy stance to inter-alia, contain the depreciation pressures by allowing more exchange rate flexibility to help absorb the impact of external shocks. The BM has taken measures to allow the Metical to depreciate further by about 7.0 percent from March to June, and will continue to adjust its policy instruments to gradually contain the money growth to support efforts to stabilize the exchange rate.
Significant progress has been made on the structural front. The end-March structural benchmark on securitization of VAT arrears amounting US$ 500 million has been met. In order to align the Integrated Investment Plan (IIP) with the new Government’s Five Year Plan (2015-2019) and the budget preparation cycle for 2016, the authorities have rescheduled completion of the review of the IIP to end-December 2015.
4. Structural Policies
Policy priorities on the structural front envisage fostering inclusive growth, through invigoration of policies to accelerate economic diversification and transformation, enhance the fiscal stance and improve the monetary policy framework.
The medium-term fiscal strategy is envisaged to achieve fiscal consolidation through strengthening fiscal structural reforms. More importantly, the authorities will continue enhancing reforms aimed at broadening the tax base while increasing efficiency of tax administration, in particular the taxation of rents from hydrocarbon sector, and improving the management of fiscal risks. Policy reforms will continue to accelerate the pace of implementation of e-Tax module which target to increase the registration of taxpayers into the new system to 55 percent of all VAT taxpayers in 2015. In addition, enhancement of tax payments through banks and modernization of the Revenue Authority will support the efforts to enhance revenue mobilization.
The medium-term expenditure policy focuses on increasing and diversifying the provision of public goods, including augmentation of fiscal space to priority sectors for accelerating poverty reduction, fostering inclusive growth, and improving efficiency and value for money of capital expenditures. In this regard, structural reforms are geared towards containing the pace of increase of recurrent expenditure, mostly of the wage bill; strengthening capacity development to improve the decision making process on project selection, implementation and monitoring. The authorities have also revamped efforts to enhance public debt management, removing from the pipeline of priority investments all projects that had not been subject to a robust feasibility study and evaluation. Starting from the next budget cycle, all projects exceeding US$ 50 million will be subject to a mandatory technical assessment and approval by the Investment Evaluation Committee prior to its inclusion on the budget.
Monetary and Exchange Rate Policy
Monetary and exchange rate policies in the medium-term remain tailored to the objective of maintaining price and exchange rate stability. The BM will continue to strengthen the monetary policy framework and to improve the analytical capacity, including its inflation forecasting model with the technical assistance from IMF, and communication in the monetary policy decision making-process. In addition, the BM will step up ongoing measures aimed at improving liquidity forecasting, enhancing banking supervision and macro-prudential regulations and to increase financial deepening and diversification.
Financial Sector Policies
Improving financial deepening and inclusion remains critical to foster inclusive growth and sustainable development. The authorities will continue to implement their Financial Sector Development Strategy (FSDS 2013-2022) with support from the development partners. Actions will focus on reforms in areas such as financial stability, financial inclusion and education, and improvement in the debt market. Other measures to support efforts to enhance financial deepening include establishing credit registry bureaus, promoting mobile banking, steering competition in the banking sector and creating a moveable collateral registry.
5. Concluding Remarks
The Mozambican authorities would like to reassure the Board of their commitment to pursue a comprehensive reform agenda to improve macroeconomic management and unleash the country’s growth potential. Challenges remain significant, mostly related with uncertainty in the global environment and downside risks arising from exogenous shocks. Going forward, policy priorities will be centered on gradually removing the structural bottlenecks to economic competitiveness and productivity to enhance the country’s economic resilience.