Republic of Mozambique: Second Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria; Staff Report; Debt Sustainability Analysis; Press Release; and Statement by the Executive Director for Republic of Mozambique

This paper discusses Mozambique’s Second Review Under the Policy Support Instrument (PSI) and Request for Modification of Assessment Criteria. Mozambique’s economy remains buoyant and recovered quickly from the severe floods in early 2013. Growth is estimated at 7 percent for 2013, with strong performance in coal mining, construction, transport, communications, and financial services. Inflation remains low notwithstanding accommodative monetary policy and rapid credit expansion. The real effective exchange rate was broadly stable in 2013 and a nominal appreciation against the South African rand helped to limit inflation. Program performance to date has been broadly satisfactory. The IMF staff recommends the completion of the second PSI review.

Abstract

This paper discusses Mozambique’s Second Review Under the Policy Support Instrument (PSI) and Request for Modification of Assessment Criteria. Mozambique’s economy remains buoyant and recovered quickly from the severe floods in early 2013. Growth is estimated at 7 percent for 2013, with strong performance in coal mining, construction, transport, communications, and financial services. Inflation remains low notwithstanding accommodative monetary policy and rapid credit expansion. The real effective exchange rate was broadly stable in 2013 and a nominal appreciation against the South African rand helped to limit inflation. Program performance to date has been broadly satisfactory. The IMF staff recommends the completion of the second PSI review.

Background and Recent Developments

1. Mozambique’s economy remains buoyant and recovered quickly from the severe floods in early 2013. Growth is estimated at 7 percent for 2013, with strong performance in coal mining, construction, transport and communications and financial services. Inflation remains low notwithstanding accommodative monetary policy and rapid credit expansion. The real effective exchange rate was broadly stable in 2013 and a nominal appreciation against the South African rand helped to limit inflation.

MEFP ¶2

A01ufig03

Mozambique: CPI Projections

(12-month change, percent)

Citation: IMF Staff Country Reports 2014, 148; 10.5089/9781498318426.002.A001

2. Fiscal performance was stronger than earlier projected. The estimated overall deficit (after grants) was 2.8 percent of GDP compared to 4.6 percent programmed, largely reflecting lower current spending (0.7 percentage points of GDP) and higher than expected grants (1.1 percentage points). Lower current spending resulted from delayed and lower budget support. With project support grants much higher than expected and lower project loans, investment spending was on target.

3. The external current account deficit narrowed in 2013 to an estimated 39 percent of GDP mainly reflecting a larger trade deficit that was more than offset by lower service imports and higher transfer receipts. Foreign direct investment (FDI) continued strong at about $5 billion, mostly for megaprojects. The Bank of Mozambique (BM) continued to build net international reserves (NIR) to cover about 4½ months of projected imports of non-megaproject goods and services.

4. Program performance to date has been broadly satisfactory. All assessment criteria (AC) and all but one indicative target (IT) through end-December 2013 were met—the exception being the IT for expenditure in priority sectors, which according to the authorities was missed due to delays in the disbursement of donor flows. Two of the three structural benchmarks for end-February and end-March 2014 were met, and the third with a brief delay (MEFP Tables 1-2).

Table 1.

Mozambique: Selected Economic and Financial Indicators, 2011-19

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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, 2011-141

(Billions of Meticais)

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

VAT presentation was changed to a net basis (collection minus requested VAT refunds).

Residual discrepancy between identified sources and uses of funds.

5. The political and security environment has improved. The February political agreement between the government and the opposition party Renamo paved the way for Renamo’s participation in the mid-October general elections. Moreover, the selection of the ruling Frelimo party’s presidential candidate, former Defense Minister Filipe Nyusi, removed the uncertainties about the Frelimo leadership candidate. Violent attacks and kidnappings have declined in early 2014, improving the overall security environment.

Figure 1.
Figure 1.

Mozambique: Impact of Global Developments

Citation: IMF Staff Country Reports 2014, 148; 10.5089/9781498318426.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.
Figure 2.
Figure 2.

Mozambique: Inflation and Monetary Developments

Citation: IMF Staff Country Reports 2014, 148; 10.5089/9781498318426.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.
Figure 3.
Figure 3.

Mozambique: Fiscal Developments

Citation: IMF Staff Country Reports 2014, 148; 10.5089/9781498318426.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.

Economic Outlook and Policy Discussions

A. Outlook and Risks

6. Mozambique’s economic outlook remains favorable. In 2014, growth is projected to accelerate to 8.3 percent with increasing coal production and infrastructure construction. Inflation is projected to remain within the BM’s target range of 5-6 percent, but there are upside risks due to inflationary pressures in the region, the expansionary fiscal policy stance in 2014 and accommodative monetary policy. In the medium term, growth is projected at 8 percent. The large investments in natural resource projects financed by FDI and private funding will continue to dominate the balance of payments, further widening the current account deficit to 50 percent of GDP over the next 4-5 years as the construction of the gas liquefaction plants picks up.

MEFP ¶ 4

7. Notwithstanding the favorable outlook, Mozambique is exposed to risks. These include exogenous shocks like climate disasters, commodity price shocks and global demand for its major export or import commodities (coal, gas, fuel), or financing risks for megaprojects; staff see these risks as low to moderate. Other risks appear contained, including shifts in donor sentiments, political tensions in an election year, governance weaknesses, and fiscal risks stemming from public enterprises (SOEs) and public-private partnerships (PPPs).

8. In view of this outlook, staff and the authorities updated understandings on a macroeconomic policy mix for 2014 consistent with the objectives of the three-year PSI-supported program. The main objectives are to maintain growth and render it more inclusive, preserve a low-inflation environment while facilitating credit to the economy, maintain fiscal sustainability, and support an expansion in public and private investment, including in priority social programs.

MEFP ¶ 5-14

Mozambique: Key Fiscal Indicators

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Sources: Mozambican authorities and IMF staff estimates and projections.

B. Fiscal Policy and Reforms

9. Since the adoption of the expansionary 2014 budget in late 2013 that was described in the first PSI review, the fiscal outlook has improved. Additional windfall revenue of $520 million (3 percent of GDP) was received in March, the last such windfall expected from recent sales of shares in natural gas projects. The authorities are preparing a supplementary budget to cover the new spending commitments entered into in the political agreement with Renamo ($36 million, mostly for hiring additional election staff, but on a permanent basis, thus further inflating the wage bill) and for investment projects left incomplete with the withdrawal of some donor resources last year ($25 million) due to inadequate progress in implementing these projects. As a result, the overall fiscal deficit (after grants) is now projected to widen from 2.8 percent of GDP in 2013 to 9.2 percent in 2014, which is projected to be financed in full from external sources. Most of this funding is either already in hand (EMATUM), or project financing, i.e. project execution will reflect the disbursement of the financing, and if there were significant shortfalls in foreign funding the project execution would be delayed.

Tax Revenue

10. Total revenue is projected to remain at about 27 percent of GDP in 2014. Abstracting from capital gains tax windfalls and small but rising coal royalties, the underlying tax effort in 2014 is projected to increase by about 1 percentage point of GDP, of which about half reflects changes in the tax code (Box 1), including tax equalization of various financial instruments, and the other half represents increased tax collection efforts.

Mozambique: Contributions to Tax Revenues

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Sources: Mozambican authorities and IMF staff estimates and projections.

Changes to Mozambique Tax Code in 2014

The Revenue Authority estimates that tax changes effective in 2014 will add about 0.5 percent of GDP to tax revenue. While changes to corporate income tax focus mainly on clarifying the existing treatment of capital gains from the natural resource sector, changes to personal income taxes were simplified to broaden the tax base. The main changes are:

Corporate income tax
  • Capital gains resulting from a direct or indirect transfer between nonresidents of assets located in Mozambique are deemed subject to Mozambican taxes, regardless of where the sales takes place and regardless of whether the transfer is gratuitous or against compensation.

  • Interest payments and other forms of remuneration on loans granted to shareholders of a company are not tax deductible if they exceed the domestic interbank reference rate plus 2 percent. Similarly, interest income from treasury securities, listed debt securities, or interbank placements is subject to a 20 percent withholding tax.

  • Income of non-resident entities, including providers of services related to maintenance and freight of aircraft, is subject to a 10 percent withholding tax.

Personal income tax
  • Employment income will be taxed through a final withholding tax.

11. Staff reiterated past advice to establish an explicit budget rule for the use of windfall or above-budget revenue. In effect, the authorities operate a stabilization account in parallel to Treasury execution, but they consider that its formalization should be left to the new government.

12. The authorities continue to strengthen revenue administration. They prepared a note on the validation of VAT refund requests as of end-2013 (structural benchmark for March 2014) and intend to process and pay or securitize valid requests by end-2014. They are also working to present/implement VAT on a net basis in/from the 2015 budget. Other efforts are ongoing, albeit somewhat slow, and include strengthening the large taxpayer unit, broadening e-tax and tax payments via banks for VAT and the simplified small tax payer regime, and reforms of transfer price provisions. The revised fiscal regime for the new mining and hydrocarbon laws have been submitted to the Council of Ministers in March, albeit staff continued to voice concerns over some provisions that do not reflect best international practice.

MEFP ¶ 16,20

Expenditure

13. Total expenditure is projected to rise by 6 percentage points of GDP in 2014 compared to 2013 largely as anticipated during the first PSI review, reflecting a combination of one-off and longer-term factors.

MEFP ¶ 12

  • Two percentage points of GDP of the increase in expenditure ($350 million) reflects the bringing on to the budget of the quasi-fiscal operations of EMATUM (tuna company). While this is understood to be related to maritime security operations, for lack of detail on its composition, staff has included this as current spending. The authorities indicated that such spending will be covered in the regular treasury execution reports. To address concerns on the transparency of the operation, the Ministry of Finance will monitor EMATUM’s operations—funded in 2013 with $500 million in government-guaranteed international borrowing—on a quarterly basis and publish its audited accounts.

    MEFP ¶ 23

  • Other current spending is projected to rise by 1 percent of GDP, reflecting mostly the direct cost of the elections. Staff noted concern over the ballooning wage bill that stands at 11 percent of GDP, and the authorities agreed that efforts would be needed in the future to limit further increases and bring the wage bill down to 8–9 percent of GDP over the medium term.

  • Public investment expenditure is projected to increase further by 2½ percentage points to 16 percent of GDP in 2014, a very high level by international comparison. While acknowledging Mozambique’s infrastructure gap, staff observed that capacity is being stretched. Ensuring value-for-money would suggest a more moderate pace of capital spending while investment selection, implementation and monitoring capacity is being built, particularly for commercially-funded projects. Staff also advised taking into account that new infrastructure required adequate budgeting for recurrent maintenance expenditure, an area already underserved at present. The authorities noted they have already taken some steps to strengthen investment management and agreed that greater efforts in this area were warranted. They indicated that difficulties in recruiting and retaining qualified staff were a major constraint.

Fiscal Anchors and Public Debt Sustainability in Mozambique

Mozambique’s public debt level remains sustainable, but fiscal risks are on the rise. Total public debt in Mozambique has been rising fast since it received debt relief (HIPC in 2001 and MDRI in 2005-6). Public debt is expected to reach 57 percent of GDP in 2014, about 21 percent of GDP higher than the sub-Saharan African average. Public debt is also above the threshold that the Fund typically uses to assess fiscal vulnerabilities for low-income countries (40 percent of GDP for countries at medium capacity).1 The debt sustainability analysis (DSA) suggests that public debt will remain sustainable, assuming some fiscal consolidation beginning in 2015. Without adjustment, fiscal deficits at the projected 2014 level (about 9.2 percent of GDP) would drive up Mozambique’s public debt by 3–4 percent of GDP per year.

What would be an appropriate fiscal anchor to prevent Mozambique encountering debt sustainability problems? The domestic primary balance (which excludes grants, interest spending and externally-financed capital expenditures) has so far been the main fiscal indicator. While it has the advantage of being under the control of the authorities, it does not set limits on external borrowing to finance capital spending. Staff noted that it does not provide a direct link to debt sustainability, limiting its effectiveness as a fiscal anchor when debt is rising fast. To begin a discussion of alternatives, staff noted that the overall fiscal balance (i.e. total revenues and grants minus total spending) measures the net financial position (i.e. whether the government is accumulating or reducing financial wealth), and is more adequate to anchor public debt on a sustainable path. The increasingly larger share of the budget funded from revenue, combined with greater donor coordination, would make the use of this indicator more relevant for policy makers.

Prior to the expected arrival of substantial revenues from the ongoing LNG projects (by around 2022), an overall fiscal deficit of 5-6 percent of GDP would seem appropriate for Mozambique. One reason is that an overall fiscal deficit of about 6 percent of GDP would help stabilize public debt.2 To illustrate this, under current projections of gradual fiscal consolidation, this deficit level would be achieved by 2018, stabilizing public debt at the 2014 level. While there are risks, this debt level would be sustainable and provide enough flexibility to avoid a larger and more disruptive fiscal adjustment. Reducing the deficit slightly (towards the 5 percent level) would allow Mozambique to build some buffers against shocks and fiscal vulnerabilities (from 2017 on). This is necessary because the DSA is based on the maintenance of relatively favorable interest rate-growth differential (i.e. high growth and low interest rates) that may be difficult to sustain over time. Also, fiscal indicators only cover the central government at a time when fiscal risks from the ambitious PPP program, and contingent liabilities from public enterprises, are on the rise.

It does not seem advisable to run larger fiscal deficits in anticipation of natural resource revenues.3 First, Mozambique is still several years away from becoming a resource-rich country, and there is uncertainty on the magnitude and temporal profile of these resource revenues. Second, public spending levels are already high, there are absorptive capacity constraints, and adequate efficiency of spending needs to be ensured. Finally, Mozambique will need to define its fiscal framework to manage resource wealth, and, once resource revenues becomes significant, shift from the overall fiscal balance to a fiscal anchor more appropriate at that point (e.g. non-resource primary balance).

1 See 2013 Low-Income Countries Global Risks and Vulnerabilities Report. http://www.imf.org/external/np/pp/eng/2013/090613.pdf2 The debt-stabilizing primary deficit is about 4.5 percent of GDP. With average interest payments at 1.5 percent of GDP, the debt-stabilizing overall fiscal deficit is about 6 percent of GDP.3 See IMF country report 13/200, Appendix V “Natural Gas, Public Investment and Debt Sustainability.”

14. Meeting priority spending targets has proven a challenge repeatedly in the past. The 2014 targets for priority spending seek to reflect the historical implementation rate on projects, to provide a more accurate indication of the likely execution of such spending. After delays in donor disbursements in the last quarter of 2013, some disbursements were released at the end of the year, but came too late to be spent in 2013 and thus provide some additional margin for priority spending in 2014.

A01ufig04

Mozambique: Medium Term Outlook of Government Finances

(in percent of GDP)

Citation: IMF Staff Country Reports 2014, 148; 10.5089/9781498318426.002.A001

Sources: Mozambique authorities, and staff projections.

Medium-term fiscal outlook and risks

15. Fiscal policy over the medium term should ensure debt sustainability while allowing the authorities to address development challenges. A gradual process of fiscal consolidation will be necessary to ensure that debt accumulation remains within appropriate bounds. As laid out in Box 2, targeting an overall fiscal deficit (after grants) of 5-6 percent of GDP and a small domestic primary surplus would be an appropriate anchor for Mozambique in the medium term. Staff noted that this seemed feasible as (i) revenue efforts were expected to continue; (ii) submitting public investment projects to a more rigorous assessment process would likely result in some moderation in the pace of external borrowing; (iii) one-off spending in 2014 mainly related to bringing on-budget the quasi-fiscal operations of EMATUM and to the elections, which would not continue in 2015; and (iv) the authorities acknowledged that the wage bill and purchases of goods and services should rise by less than the projected 14 percent growth in nominal GDP. The authorities agreed that the 2014 fiscal stance was expansionary and that some consolidation would be needed beginning in 2015. They noted that preparations for the 2015 budget had not yet begun, and that specific decisions on the medium-term fiscal stance would need to be taken by the new government. At the same time, they considered fiscal sustainability a key objective of their medium-term fiscal program.

16. The recent fiscal transparency assessment highlighted the presence of considerable fiscal risks. The risks stem from reliance on donor support for external financing, susceptibility to exogenous shocks from natural disasters, activities of public enterprises, major and multi-annual contracts for infrastructure, guarantees granted, contingent liabilities and quasi-fiscal activities. Apart from risks to external financing, no fiscal risk is recognized or analyzed in budget documents, and there is no strategy for managing them. To address this, the authorities agreed with the staff ‘s recommendation to set up a fiscal risk unit in the Ministry of Finance to better understand the risks, particularly those arising from government guarantees, the operations of public enterprises, and PPPs. While this will take time, the authorities are taking some steps to strengthen the financial oversight over public enterprises, and agreed to build capacity to assess and monitor PPPs. The Risk Unit will be tasked with preparing a comprehensive statement on fiscal risks for inclusion in the annual budget documents.

MEFP ¶ 24

C. Monetary Policy and Financial Sector Reforms

17. The BM’s recent monetary policy stance has sought to balance price stability and private sector credit growth. The cuts in the BM’s deposit and lending rates in 2013 had little impact on banks’ rates, as the monetary transmission mechanisms are weak reflecting major structural constraints in a banking system dominated by 3 or 4 large banks. Staff noted that reforms to promote competition, transparency, and financial literacy such as the establishment of private credit registries, should over time help lower the credit risk to banks and the cost to borrowers. Staff pointed out that credit growth remained brisk; the authorities noted that household credit was generally backed by salaries and that business credit was picking up from a low base and was slowing down so that risks were low. Staff advised, and the authorities agreed, that they needed to be vigilant and dampen the planned monetary and credit expansion if inflation rises significantly over the medium-term target of 5-6 percent. The authorities are also strengthening the BM’s inflation analysis and forecasting capacity, and continue to improve its communications on monetary policy decisions.

MEFP ¶ 7,25,26

A01ufig05

Credit Growth (year-on-year, percent)

Citation: IMF Staff Country Reports 2014, 148; 10.5089/9781498318426.002.A001

Source: Mozambique authorities.

18. Reforms will also continue to enhance bank supervision and crisis management tools. Quarterly stress testing is envisaged, and data collection is being improved to address the main obstacle identified by Fund technical assistance. The definition of non-performing loans was aligned to international standards as of January 2014. The BM will continue to develop risk-based surveillance, and began implementing Basel II standards in January 2014. The banking system is resilient, but credit portfolio concentration remains the main source of risk. Work is proceeding slowly on making the Financial Sector Contingency Plan and the Deposit Insurance Fund operational. A new Payment Systems Oversight Unit in the BM will perform on-site inspections and will produce a monthly report to the BM Board; the first annual oversight report will be completed by end-November 2014 (structural benchmark).

MEFP ¶ 27

19. Follow-up has been slow on the Financial Sector Development Strategy (FSDS) approved a year ago. A draft National Financial Inclusion Strategy is planned for end-2014. The law on the creation of private credit registry bureaus [was] submitted to Parliament in February 2014 (structural benchmark). A draft Movable Collateral Bill, which will supplement the existing immovable collateral framework and facilitate credit to small and medium-sized enterprises, is expected to be submitted to the Council of Ministers by end-December 2014 (structural benchmark). Regulations to implement the Law on Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) approved in August 2013 were submitted to the Council of Ministers in March 2014.

MEFP ¶ 28

MEFP ¶ 29

D. Investment Planning and Debt Management

20. Capacity development in investment planning, project evaluation and debt management is ongoing. The Ministry of Planning and Development is working with line ministries to revise the Integrated Investment Plan, adding a summary description and appropriate financial information for each new project included in the 2014 budget and envisaged for 2015 so as to inform debt sustainability analysis (DSA), the medium-term budget framework, and the annual budget process (structural benchmark for end-June 2014).

MEFP ¶ 14

A01ufig06

PV of debt-to-GDP ratio

(Percent)

Citation: IMF Staff Country Reports 2014, 148; 10.5089/9781498318426.002.A001

1/ Most extreme shock is a combination of real GDP and export value growth at historical averages minus one standard deviation in 2014-15.

21. Mozambique remains at moderate risk of debt distress. Staff has prepared a DSA in collaboration with the authorities and the World Bank (see Supplement 1 to this report). The main changes since the last DSA was prepared in 2013 are: the use of a 5 percent discount rate, the incorporation of the commercial borrowing through EMATUM ($850 million or 6 percent of GDP in 2013) with a government guarantee, and delays in other borrowing plans. As in the last DSA, the impact of the standard shocks is heightened because of the structural change in the Mozambican economy since 2011with the large-scale exploitation of coal and discovery of natural gas, which have resulted in a large increase in related imports and the current account deficit, which are largely FDI-financed. The debt and debt-service profiles are similar to the last DSA, and highlight the need for the government to proceed with caution in contracting new borrowing.

22. The authorities have requested an increase in the non-concessional borrowing ceiling under the program of $300 million. The authorities’ planned commercial borrowing is for the three infrastructure investments detailed in the DSA, for which the upgraded investment assessments in line with the June 2014 structural benchmark have been completed. The amount requested is within the amount originally envisaged in the PSI to facilitate scaling-up of investment and the DSA update implies that there is room for the additional non-concessional borrowing while maintaining debt at sustainable levels over the medium term. While the authorities voiced a strong preference for a program ceiling only on commercial borrowing, staff noted Mozambique’s sizeable volume of concessional borrowing in recent years and advised to focus on overall borrowing as providing a better indicator of emerging fiscal and debt sustainability concerns.

E. PRSP Progress Report

23. The authorities’ PRSP progress report (EBD/14/17) indicates that good progress has been made towards the end-2014 targets of the current PRSP (PARP) covering 2011–14. The new government is expected to prepare a successor PRSP next year. The Monitoring and Evaluation Unit in the Ministry of Planning and Development maintains a detailed matrix of indicators defined in cooperation with donors that is used to monitor progress by sectors and regions. These indicators cover mainly the objectives of (i) increasing production and productivity in agriculture and fisheries; (ii) employment creation; and (iii) human and social development. The remaining two objectives are governance and macroeconomic and fiscal management; the progress report does not touch on these as they are covered in an annual report on economic and social development that accompanies the budget proposal. Among the first three objectives, most progress was achieved on agricultural production, but less on the other two areas. While the progress report links the latter loosely to the lackluster global economy, staff noted that growth in Mozambique has been relatively strong, but should be made more inclusive in terms of employment including through small and medium-sized enterprises. The authorities plan to conduct the next household expenditure survey during 2014–15.

Program Issues

24. Modifications are proposed for three assessment criteria (ACs) for June 2014, including the continuous AC on nonconcessional external borrowing, and for the two indicative targets (ITs) for June, as well as the indicative targets for September-December to reflect the March windfall revenue and an increase in the ceiling on nonconcessional borrowing; new ACs are proposed for December 2014. Modifications are proposed to one structural benchmark to clarify the action sought to enable on-line tax declarations (for VAT and ISPC), and one new benchmark for end-December 2014 is proposed to clear the backlog of end-2013 VAT refund requests, a macro-critical revenue administration reform.

Staff Appraisal

25. Mozambique’s performance under the PSI-supported program remains broadly satisfactory. Economic policies helped to support growth while maintaining low inflation. All assessment criteria were met. However, priority spending in 2013 fell short of program targets and it will be important to improve expenditure execution going forward to ensure that such a shortfall is temporary. The implementation of the structural reform agenda is ongoing.

26. Implementation of the Poverty Reduction Strategy continues to progress, though little analysis is available beyond the matrix of indicators that the authorities are monitoring. Making growth more inclusive by generating more employment is clearly a major challenge, demonstrating the importance of improvements to human capital and the enabling environment for small and medium-sized enterprises that are typically the main source of employment creation.

27. Mozambique’s economic outlook remains strong, yet there are external and domestic risks. The economy has been relatively insulated from global developments and the natural resource projects continue to attract large scale foreign investment. External risks (climate disaster, commodity prices, loss of FDI, drop in global demand) are low to moderate, and domestic risks appear contained (pre-election tensions, governance and fiscal risks).

28. The policy stance for 2014 is expansionary, and fiscal consolidation will be needed in the medium term. The budget envisages a significant expansion in spending related to holding the elections, Ministry of Defense operations, and public investment while revenue is benefitting from further large windfall revenues. The monetary policy stance is accommodative, but needs to be vigilant, with an eye to keeping inflation to its medium-term target and building foreign reserves to maintain an adequate import cover.

29. Structural reforms across a broad spectrum of areas are envisaged under the PSI-supported program, and their implementation could be invigorated. This includes in particular ongoing PFM reforms and the identification of fiscal risks. Strengthening institutional capacity will be important to prepare for managing the future LNG boom and make growth more inclusive. Progress has been made toward modernizing the fiscal and monetary policy regimes, and ongoing efforts to build capacity in macroeconomic analysis and management should be continued.

30. External borrowing can be used to fund the country’s vast infrastructure needs, but should reflect transparent project selection based on the country’s economic and social priorities and preserve debt sustainability. The expected gradual move from traditional donor financing to commercial borrowing requires the authorities to take charge of project analysis and selection, and monitor project implementation closely to ensure value-for-money. Transparency of decision-making and adherence to due process in investment planning, selection and financing need to be strengthened, and the authorities should be vigilant of the related debt dynamics.

31. Staff recommends the completion of the second PSI review. Program performance has been broadly satisfactory to date. The attached MEFP outlines the macroeconomic objectives and policies for the period ahead as well as modifications to the end-June assessment criteria to reflect the higher than anticipated fiscal revenues. Staff supports the authorities request to increase the NCB ceiling as this is in line with the PSI objective of facilitating a scaling up in infrastructure investment and it remains consistent with the DSA.

Table 3.

Mozambique: Government Finances, 2011-191

(Percent of GDP)

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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).

Residual discrepancy between identified sources and uses of funds.

Table 4.

Mozambique: Monetary Survey, 2011-14

(Billions of meticais, unless otherwise specified)

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