Republic of Mozambique Staff Report for the 2013 Article IV Consultation, Sixth Review Under the Policy Support Instrument, Request for a Three-Year Policy Support Instrument and Cancellation of Current Policy Support Instrument

The staff report for the 2013 Article IV Consultation for the Republic of Mozambique focuses on the development agenda and appropriate policy priorities to successfully transition to a resource-rich era. These priorities include skillful medium-term management of the impact of developing coal and gas resources, high public investment spending on growth, external competitiveness, and through increased commercial borrowing, on debt sustainability and investment planning. Mozambique has a high rate of public investment of which more than half is financed domestically. The authorities are working to strengthen their project selection and economic profitability analysis capacity, and to assess the impact of related borrowing on public debt.

Abstract

The staff report for the 2013 Article IV Consultation for the Republic of Mozambique focuses on the development agenda and appropriate policy priorities to successfully transition to a resource-rich era. These priorities include skillful medium-term management of the impact of developing coal and gas resources, high public investment spending on growth, external competitiveness, and through increased commercial borrowing, on debt sustainability and investment planning. Mozambique has a high rate of public investment of which more than half is financed domestically. The authorities are working to strengthen their project selection and economic profitability analysis capacity, and to assess the impact of related borrowing on public debt.

Recent Developments and Program Performance

A. Macroeconomic Developments

1. The Mozambican economy registered strong growth in 2012, but floods in early 2013 have diminished prospects slightly. Preliminary data suggest that real GDP rose by 7.4 percent in 2012. This was broad-based and led by the start-up of coal production and exports, agriculture, construction and financial services. In early 2013, severe floods destroyed agricultural crops in the South and severely damaged infrastructure (roads, railways and the power transmission line to South Africa). Real GDP is nevertheless projected to grow by 7 percent in 2013 reflecting a further boost in coal exports with improvements in rail transport capacity and the implementation of other large infrastructure projects.

MEFP ¶2

2. Inflation remains moderate but food prices have risen recently due to the flood impact. Inflation had come down rapidly in 2012, supported by lower-than-expected prices of imported food and stable administered prices (fuels, public transport, utilities). Year-on-year inflation fell to 2.2 percent in 2012, the lowest rate in SADC, but rose to 5.1 percent in April 2013 reflecting flood-related food price increases. Combined with the monetary easing since 2012, CPI inflation is projected to rise to about 6 percent by end-2013, in line with the authorities’ medium-term objective.

uA01fig01

Mozambique: CPI Projections

(12-month change, percent)

Citation: IMF Staff Country Reports 2013, 200; 10.5089/9781475573855.002.A001

3. Mining operations dominate external sector developments. The significant weakening of the external current account in 2012 was caused by a spike in imports of services, reflecting large investments in gas exploration, that were only partly compensated by the start-up of coal exports and a significant increase in traditional exports (by 16 percent). Foreign direct investment doubled in 2012 and related imports of services resulted in a current account deficit of 36 percent of GDP. While this reduced the import cover of international reserves, the authorities continued to accumulate reserves on the back of strong exports and capital inflows (FDI and foreign borrowing).

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Mozambique: Interest Rates

(Percent)

Citation: IMF Staff Country Reports 2013, 200; 10.5089/9781475573855.002.A001

Source: Mozambican authorities

B. Monetary response

4. The growth of broad money and credit to the economy accelerated in 2012, though commercial banks’ lending rates remain high. The Bank of Mozambique (BM) adopted a looser policy stance, lowering its policy lending rate eight times by a cumulative 6.5 percentage points since late 2011. M3 growth reached 29 percent while credit to the economy accelerated to 18 percent at end-2012, led by credit to households for consumer durables. Growth in lending to small and medium-sized enterprises (SMEs) is limited by banks’ perception of a paucity of safe lending opportunities in the private sector. Despite some mopping up of liquidity in late 2012, the BM could not fully neutralize the effect of higher-than-programmed bank deposits at the central bank on reserve money. The assessment criterion was missed by Mt 1 billion or 3 percent of reserve money, which is a minor deviation relative to the large uncertainties affecting money demand. The corresponding indicative target for March 2013 was also exceeded (by Mt 1.6 billion or 4 percent of reserve money) against the backdrop of a weak cash return to the banking system in the post-flood period, and large accumulation of government deposits in commercial banks.

Program Performance

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met not met

5. Net international reserves (NIR) exceeded program targets in 2012, but fell back in early 2013. Reserve accumulation in 2012 exceeded the end-year target slightly and gross reserves reached $2.8 billion. However, in early 2013 flood-related lower exports and higher imports and delays in aid disbursements ($45 million against $194 million) resulted in a drawdown of NIR by about $0.3 billion to 3.8 months coverage of 2013 non-megaproject imports, below the end-March indicative target.

C. Fiscal response

6. Fiscal performance was largely consistent with the program in 2012, notwithstanding higher capital spending and some overrun in bank credit to the government late in the year. Revenue was slightly below the indicative target as one-off capital gains tax receipts offset therevenue impact of lower-than-expected inflation and transition problems in customs with the introduction of a single trade window in the second quarter. However, an overrun in grant-financed investment and spending on special programs late in the year led the overall deficit and government domestic borrowing (NCG) to exceed their end-year targets. The authorities took some corrective action to tighten expenditure control. Priority spending exceeded its indicative target at end-2012, reflecting the authorities’ continued efforts to implement their poverty reduction strategy.

7. Fiscal performance in early 2013 reflected a number of different factors. The government restrained other current expenditure in favor of emergency spending on flood mitigation, but protected priority spending (March indicative target was met). It limited externally-financed capital spending when some donor budget support was delayed over governance concern1 (generating a $150 million shortfall). Donor support should resume with the remedial actions being taken by the authorities. Fiscal revenue, boosted by large capital gains windfall receipts ($224 million), significantly exceeded the March indicative target. These factors combined to a much lower-than-programmed flow of NCG in the first quarter (target met).

D. Structural Reforms

8. The authorities continued their structural reform agenda and focused on debt management and financial stability and development (see Table 9). The structural benchmark on adopting an Annual Domestic Borrowing Plan was met on time in January. The submission to the Council of Ministers of the draft Financial Sector Development Strategy (FSDS) was delayed to March and swiftly approved thereafter. The Financial Sector Contingency Plan was approved by the BM in early April and implementation is starting.

Table 1.

Mozambique: Selected Economic and Financial Indicators, 2010-18

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Sources: Mozambican authorities; and IMF staff estimates and projections.

Net of verified VAT refund requests.

Consistent with DSA definition, the nonconcessional Portuguese credit line is included under the external debt.

Includes disbursements of IMF resources under the ESF and August 2009 SDR allocation.

Table 2.

Mozambique: Government Finances, 2010-13

(Billions of Meticais)

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Sources: Mozambican authorities; and IMF staff estimates and projections.

VAT presentation was changed to a net basis (collection minus requested VAT refunds). CR 13/1 show ed gross VAT revenues and refunds as an expenditure item.

Residual discrepancy between identified sources and uses of funds.

Revenue minus noninterest current expenditure minus locally financed capital expenditure and locally financed net lending.

Table 3.

Mozambique: Government Finances, 2010-18

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Sources: Mozambican authorities; and IMF staff estimates and projections.

VAT presentation was changed to a net basis (collection minus requested VAT refunds). CR 13/1 showed gross VAT revenues and refunds as an expenditure item.

Residual discrepancy between identified sources and uses of funds.

Revenue minus noninterest current expenditure minus locally financed capital expenditure and locally financed net lending.

Table 4.

Mozambique: Monetary Survey, 2010-13

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Sources: Bank of Mozambique; and IMF staff estimates and projections.
Table 5.

Mozambique-Balance of Payments, 2010-18

(Millions of U.S. dollars, unless otherwise specified)

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Sources: Data from Government of Mozambique and projections by IMF staff.

Includes net portfolio investment and other investment assets.

The ratio to short term debt is not presented due to availability of the data.