Republic of Mozambique: Fourth Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria—Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
15 Jun 2012
eISBN:
9781475504521
Language:
English
Keywords:
ISCR; CR; authority; executive board discussion; real GDP; borrowing intention; creating flow; debt indicator; financing gap; sustainability indicator; service-to-revenue ratio; Public and publicly-guaranteed external debt; Depreciation; debt vulnerability; sustainability analysis
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The Mozambican economy recorded a strong performance in 2011, showing little sign of being affected by the global turmoil. Given the declining trend in foreign aid in the medium term, the government is tapping more into nonconcessional borrowing to close the infrastructure gap. To promote inclusive growth, the government has launched a series of initiatives to implement the Poverty Reduction Strategy including an overhaul of social protection programs. Reform momentum needs to be maintained, as implementation challenges are enormous and administrative capacity and coordination need to be upgraded.

Abstract

The Mozambican economy recorded a strong performance in 2011, showing little sign of being affected by the global turmoil. Given the declining trend in foreign aid in the medium term, the government is tapping more into nonconcessional borrowing to close the infrastructure gap. To promote inclusive growth, the government has launched a series of initiatives to implement the Poverty Reduction Strategy including an overhaul of social protection programs. Reform momentum needs to be maintained, as implementation challenges are enormous and administrative capacity and coordination need to be upgraded.

I. Underlying Dsa Assumptions

5. This DSA is consistent with the macroeconomic framework outlined in the Staff Report for the Fourth Review under the Policy Support Instrument. Compared to the previous DSA,11 this update includes:

  • a. A revised medium-term macroeconomic framework. It takes into account a temporary, albeit small, dent in economic growth in 2012 as a result of the global downturn, but a slightly improved outlook over the medium to long term as a result of booming investment and production in the mining and hydrocarbon sectors. The analysis also assumes, like in the past, that Mozambique will continue its prudent macroeconomic policy mix, with a broadly stable domestic primary fiscal deficit, helped by a sustained revenue administration effort. The external current account deficit is projected to gradually improve, as buoyant growth of exports from megaprojects in the natural resource sector is likely to outpace import growth. Stronger-than-previously-projected FDI inflows, reflecting the booming mining sector and new discoveries in the hydrocarbon sector, should continue over the medium term before tapering off in the long run.

  • b. A revised public investment profile. This reflects slower-than-previously-projected disbursements of the nonconcessional external borrowing (NCB) contracted at the time of the previous DSA, revised projections reflecting new NCB contracted recently, and the proposed increase in the NCB ceiling to US$1.5 billion under the IMF-supported program to finance projects considered critical under the authorities’ public investment plan. The loans contracted under the NCB ceiling are assumed to be disbursed throughout the next four years.12 Disbursements under the Portuguese credit line have also been updated reflecting realized disbursements.

  • c. Revised grant financing projections, reflecting a lower grant component in external financing in line with the increase of the NCB ceiling.

Text Table 1.

Evolution of selected macroeconomic indicators between DSA updates

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Portuguese credit line.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new disbursements).

II. External Debt Sustainability Analysis

6. Under the baseline scenario, all debt indicators remain well below their respective thresholds, including in the longer term, but external debt remains vulnerable to exchange rate volatility (Table 1 and Figure 1). The debt indicators are projected to increase over the next few years, as the authorities temporarily step up their borrowing to address the country’s infrastructure gap. Stress tests reveal that Mozambique’s external debt is particularly vulnerable to a one-time depreciation of the exchange rate and a negative exports shock.13

7. The debt sustainability indicators also seem sensitive to a recurrence of past macroeconomic performance. However, as indicated in previous DSAs, basing the analysis on a recurrence of developments of the last ten years does not take into account the significant structural changes in the Mozambican economy in the post-civil war period and the considerable improvements in the macroeconomic environment under successive Fund-supported programs, all of which have lessened the likelihood of a repeat of the past economic performance. Among other things, there has been a shift in the structure of the economy, particularly in the last five years, as large private capital inflows in the natural resources sector supported a surge in exports and a sharp fall in the current account deficit. The significant surge in capital inflows in recent years is expected to continue over the medium term, reflecting the current expansion of investment and output in the mining sector and additional gas-related discoveries which will trigger further investment and output growth over the long term.14 Therefore, staff does not consider the historical scenario a reliable indicator of future debt distress in Mozambique as it underestimates future growth prospects and current account improvements linked to the positive impact from investment in the natural resource sector.

8. In a scenario under which nonconcessional resources are not used productively, external debt indicators would deteriorate, but remain well below their respective thresholds. The customized high investment-low growth scenario assumes that foreign financing and related spending remain unchanged relative to the baseline in nominal terms. However, it assumes a much lower impact on GDP growth over the projection period from the public investment projects compared to the baseline. Although debt burden indicators are projected to remain below the indicative thresholds, the substantial increase relative to the baseline underscores the importance of selecting projects with high economic returns, particularly when using non concessional financing.

III. Public Sector Debt Sustainability

9. The evolution of public debt indicators (including domestic debt) mirrors that of the external indicators because of the predominance of external debt (Table 3a and Figure 2). The medium-term increase in public debt reflects the temporary surge in public investment financed by external borrowing on non-concessional terms. However, over the longer term, the public debt stock projections also assume a marginal increase in domestic debt from about 2.2 percent of GDP at end-2010 to 5.7 per-cent of GDP in 2032.7

10. Over time, since the surge in public investment is expected to taper off, the primary deficit should moderate as well. However, as scenario A2 shows, continued high primary deficits could pose a risk to public debt sustainability.

IV. Conclusions

11. Mozambique’s external debt dynamics continue to show a low risk of debt distress. Its external and public debt levels are expected to remain well below the respective indicative thresholds for debt distress, as the government plans to temporarily increase public investment financed by external borrowing on non-concessional terms. Nonetheless, debt vulnerability will increase, as debt ratios under stress tests and under the high-investment/low growth scenario approach the relevant thresholds. This emphasizes the need for the authorities to continue to pursue prudent macroeconomic policies and structural reforms to boost their debt management and project selection capacity, building on the initial reform steps in those areas under their IMF-supported program and those implemented with World Bank assistance.

Figure 1.
Figure 1.

Mozambique: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2012-20321

Citation: IMF Staff Country Reports 2012, 148; 10.5089/9781475504521.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2022. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock.
Table 1.

External Debt Sustainability Framework, Baseline Scenario, 2009-20321

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.

Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2012-2032

(In percent)

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Sources: Country authorities; and staff estimates and projections.

The stress test A2 (borrowing in less concessional terms) has not been included in this case (in line with the 2010 and 2011 DSAs). Given the commercial financing terms already included in the baseline for the investment projects, this scenario would yield unrealistic results, as marginal borrowing under this shock is calculated on the average terms of new borrowing; therefore assuming harsher terms than Mozambique would actually face in the need to cover a financing gap.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Figure 2.
Figure 2.

Mozambique: Indicators of Public of Public Debt Under Alternative Scenarios, 2012-20321

Citation: IMF Staff Country Reports 2012, 148; 10.5089/9781475504521.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2022.2/ Revenues are defined inclusive of grants.
Table 3a.

Mozambique: Public Sector Debt Sustainability Framework, Baseline Scenario, 2009-2032

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 3b.

Mozambique: Sensitivity Analysis for Key Indicators of Public Debt, 2012-2032

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

9

In line with the 2010 Staff Guidance Note, a full joint LIC DSAs is expected to be prepared once every three years for PRGT-eligible IDA-only countries. In between, short annual updates are expected to be produced unless macroeconomic conditions since the last full DSA have significantly changed. See Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low-Income Countries (www.imf.org) and IDA/SECM2010-0029.

10

The DSA presented in this document is based on the standard low-income countries (LIC) DSA framework. See Debt Sustainability in Low-Income Countries: Further Considerations on an Operational Framework, Policy Implications (www.imf.org) and IDA/SECM2004/0629. Under the Country Policy and Institutional Assessment (CPIA), Mozambique is rated as a medium performer, with an average rating of 3.71 during 2008–10, and the DSA uses the indicative threshold for countries in this category.

11

See IMF Country Report No. 11/149.

12

To date, authorities have signed three nonconcessional loans: (i) in December 2010, a loan from China amounting US$66 million to modernize Maputo airport; (ii) in April 2011, a loan from Brazil for the construction of Nacala airport of US$80 million, and (iii) in February 2012, a US$300 million loan from China for the construction of a ring road around Maputo.

13

In line with the last two DSAs, the standard export shock has been tailored to capture Mozambique’s true vulnerability from an export shock. This is represented by the historical volatility of prices of aluminum, which accounts for roughly half of Mozambique’s export proceeds.

14

For a more detailed explanation of the impact of different megaprojects, see IMF CR No. 11/350, Annex II.

7

This is not expected to affect the availability of credit to the private sector.

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Cover IMF Staff Country Reports
Republic of Mozambique: Fourth Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria: Staff Report; Debt Sustainability Analysis; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Mozambique.
Author: International Monetary Fund
Volume/Issue:
Volume 2012: Issue 148
Publisher:
International Monetary Fund
ISBN:
9781475504521
ISSN:
1934-7685
Pages:
97
DOI:
https://doi.org/10.5089/9781475504521.002