Republic of Mozambique: Staff Report for the 2017 Article IV Consultation
Author: International Monetary Fund. African Dept.
Publication Date:
07 Mar 2018
eISBN:
9781484345597
Language:
English
Keywords:
ISCR; CR; deficit; debt; railway authority Cfm; economy; debt service; decrease government borrowing costs; capital adequacy ratio; government liquidity management; government arrears; Debt service; Arrears; Credit
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2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique

Abstract

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique

Background

1. Mozambique’s economy faces serious macroeconomic challenges. Despite a loose monetary/fiscal policy mix through mid-2016, the economy slowed from 2015 because of a series of shocks, including lower commodity prices and adverse weather conditions. The economic situation deteriorated further following the disclosure in April 2016 of undisclosed borrowing by the Proindicus and MAM public companies and the ensuing freeze in donor budget support.1 Growth has continued to slow and fiscal policy has remained fairly loose in 2017. Public debt has been rising at an unsustainable pace and debt has remained in distress with several payments on external borrowing missed.

2. Monetary policy has carried the burden of adjustment. Tight monetary policy since October 2016 has helped rebalance the foreign exchange market, lower inflation, and strengthen net international reserves. The government eliminated fuel and wheat subsidies, reintroduced automatic adjustment of fuel prices, and raised electricity and public transportation prices. However, significant spending pressures are expected to result in an overall 2017 fiscal deficit exceeding 8 percent of GDP (on a modified cash basis.2) The large financing needs of the Treasury combined with a restrictive monetary stance to stabilize inflation continues to press market interest rates higher, depressing credit availability to the private sector—particularly to SMEs—and affecting economic activity, employment, and socio-economic conditions.

3. Mozambique’s financial sector has come a long way since the volatility observed in 2016. The instability created by the resolution of Moza Banco and Nosso Banco has abated. The system is currently characterized by an increasing gap between credit growth and monetary aggregates and high government financing needs. The rapid disinflation and returned stability in the FX market have left real interest rates in domestic currency at elevated levels. Private credit demand has contracted, which resulted in high liquidity for the balance sheet of the system being allocated to government securities. Vulnerabilities remain related to rising NPLs, increasing government expenditures arrears and debt sustainability of SOEs.

4. Serious governance issues remain to be addressed. The disclosure of hidden debt in April 2016 resulted in misreporting under the Policy Support Instrument (PSI) and breach of obligations under Article VIII, Section 5. The PSI 6th review and the Standby Credit Facility (SCF) 1st review did not take place as scheduled and both the PSI and the SCF lapsed. The authorities agreed in September 2016 to allow an independent audit of the undisclosed loans by Kroll, a risk management company. The completion of the Kroll audit report and the publication of its summary in June 2017 are important steps towards greater transparency. However, critical information gaps remain unaddressed regarding the use of the loan proceeds. In response to staff request to receive clarity on the use of the money, the Government recommended waiting for the outcome of the ongoing investigation by the Prosecutor General Office. Meanwhile, the authorities have approved a decree establishing a framework to contract public debt and issue guarantees and sent to Parliament a draft SOE law. They have initiated work with IMF/World Bank staff assistance on an action plan to strengthen governance, transparency, and accountability.

5. A durable peace agreement seems within reach. On February 7, 2018, President Nyusi announced that an agreement had been reached with the opposition party, Renamo, on draft amendments to the Constitution that foster decentralization and allow the designation of provincial governors representing opposition parties. Discussions aimed at integrating Renamo fighters in the army are continuing. The September 2017 Congress of the ruling party (Frelimo) confirmed President Nyusi as the party’s candidate for the 2019 presidential elections. On the downside, several shootouts involving armed Islamic fundamentalists and the police occurred in the North, in the area where natural gas megaprojects will be built.

6. Implementation of past IMF policy advice has been mixed (Annex I). Advice on fiscal policy was partially followed, (e.g. fuel subsidies), but the recommended fiscal consolidation was not achieved. In line with staff advice, Bank of Mozambique (BM) maintained a tight monetary stance to curb inflationary pressures and help stabilize the foreign exchange market.

Recent Economic Developments

7. GDP performance has remained weak and inflation plummeted. Growth decelerated in 2016 to 3.8 percent (from 6.6 percent in 2015).3 It is projected to barely reach 3.0 percent in 2017, mainly due to a surge in coal production and a modest rebound in agriculture activity.4 A tight monetary stance, coupled with an exchange rate appreciation, led to a steep fall in (y/y) inflation to 7.2 percent in December as measured by the Maputo inflation index and 5.7 percent using a broadly-based index (from a high of 26 percent in November 2016). Average inflation remained in double digits at 15.3 percent in 2017.

8. Fiscal policy remained loose in 2017. Following several years of large deficits, the 2017 fiscal deficit (on a modified cash basis) is estimated to have increased to around 8.2 percent of GDP (compared to 7.6 percent of GDP in 2016). This excludes the one-off capital gain tax revenue ($350 million or 2.8 percent of GDP) for the sale of 50 percent of ENI’s stake in the Coral South natural gas field to Exxon Mobil. The implied primary deficit of around 4.5 percent remain broadly unchanged relative to 2016. Such a high fiscal deficit reflects both rigidity and persistence of spending pressures.

9. In response to then high inflation and depreciating exchange rate, the Bank of Mozambique (BM) considerably tightened monetary policy from October 2016.5 This tightening increased demand for domestic currency and helped stabilize the exchange rate and rebalance the foreign exchange market.6 Since June 2017, broad stability has returned to the foreign exchange market. International reserves increased because of the accumulation of external arrears and of occasional interventions by the BM. At end 2017, reserves reached a level equivalent to 5.5 months of non-megaproject imports. In April 2017, the BM changed its operational monetary target to a short-term interest rate (MIMO)7 and started a cautious easing cycle totaling three policy rate cuts by 225 basis points to 19.5 percent in December (SIP Chapter 1).8 In the same period, reserve requirements were reduced by 150 basis points to 14 percent.

10. The current policy mix has resulted in a sharp decline in credit to the economy. The rapid reduction in inflation in the last year led to high real interest rates and higher demand for deposits and lower demand for credit in domestic currency. In December 2017, the policy rate reached 12 percent in real terms while y/y domestic credit to the economy contracted by 12 percent in nominal terms whereas deposits in domestic currency grew by 13 percent till November. The resulting gap between credit to the private sector and monetary aggregates in domestic currency has helped finance the governments’ significant funding needs, albeit at a higher cost.

11. Following a period of instability that led to the resolution of two banks, in 2017 the system is showing lower volatility, but vulnerabilities persist. In 2016 the banking system concluded a cycle of fast credit growth (Figure 1),9 which had increased the banks’ vulnerability. In this context, the BM had to resolve two banks: Moza Banco, the fourth largest bank with 6 percent of assets, was put under official administration while another bank, Nosso Banco, holding less than 1 percent of assets, was liquidated after failing to comply with capitalization requirements. NPLs have more than doubled, reaching 11.4 percent in September 2017, but overall, banks seem well capitalized with reported regulatory capital-to-risk weighted assets ratio increasing to 20.2 percent in September 2017. Vulnerabilities remain due to exposure to the public sector, substantial government and SOEs’ arrears with suppliers, sluggish economic growth and high real interest rates.

Figure 1.
Figure 1.

Mozambique: Impact of Global Developments

Citation: IMF Staff Country Reports 2018, 065; 10.5089/9781484345597.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.
uA01fig01

Mozambique: Credit Gap

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 065; 10.5089/9781484345597.002.A001

Source: Mozambique authorities and IMF staff estimates

12. The current account deficit has continued to narrow in 2017. An essential factor in this narrowing was the one-off inflow in income associated with the capital gain tax (see above). It was also due to a 12.7 percent of GDP megaproject current account surplus. This surplus resulted from a boom in coal export volumes and prices, and to the 55 percent contraction in megaproject imports of services as many of the on-going projects were completed in 2016. The non-megaproject trade balance of goods deteriorated, with exports of goods falling by almost 8 percent, and imports growing by 3.3 percent, year-on-year in 2017. At the same time, net foreign direct investment in the non-megaproject economy continued to fall to about $1.3bn in 2017, half of the $2.6bn inflows registered in 2015.

13. Mozambique’s public debt is in distress. The stock of public sector debt-to-GDP reached 128.3 percent at end-2016, including domestic debt (24.6 percent of GDP). Sovereign arrears have been incurred on the Mozam Eurobond coupon and on the debt service of Proindicus and MAM, as well as on two loans from Brazil to the state-owned airports company, Aeroportos de Mozambique (AdM), for which the state-guarantee has been called. The overall stock of external arrears on public and publicly guaranteed external debt service reached $709.7 million by end-2017, including arrears under bilateral discussions with five official creditors amounting to $94 million (Libya, Iraq, Angola, Bulgaria and Poland).10 The authorities are currently servicing all other multilateral and bilateral external debt obligations. Discussions between the government and private creditors have not progressed since the government announced in October 2016 its intention to restructure the private external debt.

Outlook, and Risks: Challenges Ahead

14. The outlook remains challenging. Absent further policy action (baseline scenario) real GDP is expected to further decelerate while inflation would remain at current levels (Figure 2). This would result from a policy mix marked by a loose fiscal stance and a restrictive monetary stance. Absent new fiscal measures, the fiscal deficit would expand leading to further accumulation of domestic arrears and crowding out of the private sector. The health of the banking sector would deteriorate, with NPLs rising further. However, investment in the large natural gas megaprojects would support growth.

Figure 2.
Figure 2.

Mozambique: Inflation, Monetary and Financial Developments

Citation: IMF Staff Country Reports 2018, 065; 10.5089/9781484345597.002.A001

Sources: Central Bank of Mozambique
uA01fig02

Mozambique: Sector Contribution to Growth, 2014–2023

Citation: IMF Staff Country Reports 2018, 065; 10.5089/9781484345597.002.A001

Source: Mozambique authorities and IMF staff estimates

15. The baseline scenario would result in widening current account deficits and mounting pressures on external reserves. The non-megaproject current account deficit is expected to widen from 2018 and remain at elevated levels over the medium term (to about 30 percent of GDP, and respectively, 17 to 18 percent of GDP, when adjusting further for imports of domestic firms that are used to supply mega-projects). As the non-megaproject current account deficit is the main driver of future pressures in the domestic foreign exchange market over the next 5 years or so (as LNG projects get implemented), the absence of a real depreciation of the exchange rate could result in a loss of reserves.11 The external position is substantially weaker than the level consistent with medium-term fundamentals and desirable policies.

16. Mozambique’s total public debt is on an unsustainable path. The updated debt sustainability analysis (see attached DSA) shows that Mozambique’s external debt rating is “in distress”, and total public debt is on an unsustainable path. All debt burden indicators, except the ratio of external debt service to exports, surpass prudent thresholds for several years. Under the baseline scenario, which does not assume any debt restructuring, the PV of external public and publicly guaranteed debt (PPG) to GDP ratio largely exceeds the 40 percent prudent threshold for about eight years, while external debt service to government revenues remains on average at about 30 percent over the medium-term. Moreover, significant vulnerabilities related to domestic debt, which reached about 25 percent of GDP in 2017, are rapidly escalating. The PV of total public debt to GDP ratio is expected to peak at 126 percent by 2022, well above the 56 percent benchmark.

17. Risks are broadly balanced (see Risk Assessment Matrix). Downside risks include a deterioration in security conditions; further loosening of expenditures; increased debt service, including from loss making SOEs, unavailability of domestic financing, and delays in megaprojects. Further policy inaction could lead to reduced confidence in the government ability to honor its commitments, posing additional risks to the banking sector. A recovery in commodity prices; new oil and gas discoveries; resolution of the hidden debt issue, and reengaging with donors in a more transparent and business friendly environment constitute upside risks. Furthermore, the start of natural gas production toward 2023 would boost growth performance and, over time, fiscal revenues. Overall, if downside risks materialize, the long-term viability of this baseline scenario would become questionable. Without strong policy adjustments, the outlook entails a rising risk of disorderly adjustment over the medium term. This calls for policy action, including through a tightening of the fiscal stance (see Box 1).

Adjustment Scenario

In the baseline scenario, no further policy actions are taken by the authorities from 2018. This box presents an alternative scenario in which policy adjustment, in line with Fund advice, is implemented. The scenario is designed to illustrate the policy trade-offs and the importance of policy implementation to lower risks. Fiscal policy would be tightened, targeting a zero-primary balance by 2022 achieved through a combination of spending and tax policy deficit reducing measures (mostly through the elimination of tax exemptions); a gradual depreciation in the real effective exchange rate needed to stabilize the external sector (see Annex 2, External Sector Assessment); a cautious normalization of monetary policy with further cuts in the interest rate in line with the pace of fiscal consolidation and the inflation target of 5–6 percent range over the medium term.

Overall, a consistent fiscal and monetary policy mix would improve fiscal and external balances, create fiscal space to meet social and development needs, reduce arrears accumulation, bring domestic debt onto a downward path, foster capital inflows to support investment and rebuild reserves. The banking sector, supported by a return of confidence and strengthened regulation, and lower financing needs of the government, would crowd-in credit to the private sector, reduce banks’ exposure to sovereign risks and decrease government borrowing costs. In parallel, structural reforms, including adopting the action plan to strengthen governance and accountability (see below) will further support inclusive growth and poverty reduction. Fiscal retrenchment would limit the positive impact on growth in the near term, but other positive factors, including the normalization of monetary policy, the gradual correction of the overvaluation (with a positive impact on exports), and FDI inflows would offset the negative impact of fiscal consolidation and improve growth potential over the medium term.

Mozambique: SEI Baseline and Adjustment Scenario, 2016–22

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

Net of verified VAT refund requests.

Modified cash balances and includes payment arrears.

Excludes a 2.7 percent of GDP one-off 2017 capital gains tax revenues

Includes the participation of ENH (national hydrocarbon company) in the LNG gas projects.

Policy Discussions: Maintaining Macroeconomic Stability

The current economic situation requires an urgent rebalancing of the policy mix to ensure durable macroeconomic stability, while enhancing growth prospects and making inroads in reducing poverty and income inequality. Discussions focused on the need for: (i) fiscal adjustment to restore fiscal sustainability and bring the fiscal deficit in line with financing availability while containing public debt; (ii) normalization of monetary policy and challenges in the financial sector, and (iii) strengthening governance and transparency, including by addressing the institutional weaknesses and corruption underlying the hidden loans, while advancing other structural reforms to generate growth and employment.

A. Fiscal Policy: Strengthening the Fiscal Position

18. The 2018 budget targets a reduction in the overall deficit after grants to 3.8 percent of GDP.12 The budget assumes a non-resumption of direct budget support by donors, higher transfers (0.6 percent of GDP, mostly military pensions and social protection), and higher election spending (0.6 percent of GDP).13 Those increases are offset by deficit-reducing measures on both the revenue and spending fronts. Proposed tax policy measures include the introduction of new excises (e.g., soft drinks, plastic bags) and new customs and tariffs (e.g., surcharges on imports of electrical conductors, new telephone call service rates). Spending measures mainly target the wage bill (reductions in specific allowances and bonuses). In addition, the 2018 budget does not incorporate the full debt service obligations on external and domestic debt.

Mozambique: Government Finances, 2018

(percent of GDP)

article image
Source: Mozambique authorities and IMF staff estimates.

19. However, in staff’s view, the 2018 budget targets are unlikely to be achieved. On the back of slower growth (relative to the budget), based on conservative yields for the deficit reducing measures, and considering full debt service obligations, staff estimates that the 2018 overall deficit would reach 7.6 percent of GDP down from an estimate of 8.2 percent of GDP in 2017.14

20. Beyond 2018, and absent new policy measures, the fiscal stance would be unsustainable over the medium term. While the policy measures undertaken in the 2018 budget proposal are encouraging, they are not sufficient to bend the trajectory of the primary deficit. Such a fiscal stance may result in further accumulation of arrears.

21. Fiscal consolidation is needed. Staff recommended targeting a zero-primary balance by 2022 (Text table 1). This anchor would be consistent with putting debt on a downward trajectory while being realistic given political economy considerations.15 Financing of the underlying deficit does not assume recourse to central bank overdraft and accumulation of arrears. It would be achieved through a combination of spending and tax policy deficit reducing measures. 16,17 Meanwhile, the impact of these measures on the most vulnerable households would be mitigated through increases in social assistance spending (Box 2).

Mozambique: Adjustment Scenario Yield by Measure

(Percent of GDP)

article image
Source: IMF staff estimates

Other measures could include, for example, other tax policy and tax administration measures, streamlining of transfers to SOEs, rationalization of spending on goods and services.

Social Protection

Mozambique’s non-contributory social protection system comprises mainly three programs. These include (a) the PSSB (Programa Subsidio Social Basico), the main program, which is a cash transfer mechanism aimed at elderly and disabled people; (b) the PASP (Programa de Acção Social Produtiva), a public works program for extremely poor households; and (c) the PASD (Programa de Apoio Social Directo), a temporary support program for poor households with adults who are temporarily unable to work.

Mozambique’s social protection system has improved its coverage in recent years, benefiting from increased domestic financing. Following past assessments of the social protection system showing that the system was not responsive to emerging vulnerabilities, the government has invested significant resources to improve coverage. The numbers of households covered under the three main social protection programs has increased from 287,000 in 2011to 549,565 households in 2017. Nevertheless, the level of coverage is still deemed relatively low (around 19% of people living below the poverty line), especially compared to comparator countries. The National Strategy for Basic Social Security (ENSSB) 2016–2024 approved by the Council Ministers in 2016 suggests a shift from a targeted, charity focus to a rights-based universal benefit approach.

Improvements in the generosity of social protection benefits are also underway. Benefits under these social assistance programs tend to be very low. For instance, in the case of the PSSB, benefits range from 310 Meticais (around $5) per month for individuals to 620 Meticais (around $10) per month to elderly people with four dependents. Nevertheless, there have been efforts to increase the benefit amount over the years, especially in the case of the PSSB. More recently, the 2018 budget which was approved by parliament, envisages a significant increase in the allocation for social protection programs. For the PSSB, the budget allocation is set to increase from around 1.7 billion Meticais in 2017 to around 3.2 billion Meticais in 2018. Overall, spending on all three programs is set to increase by around 2 billion Meticais (or around 0.2 percent of GDP) in 2018. The increase in the budget allocation in 2018 mostly implies an increase in the amount of benefit rather than the number of households covered (which is set to increase by around 12 percent). Overall cost remains low, below 0.5% of GDP, far below the average in the region regarding cash transfer programs.

Overall, while the observed progress is encouraging, there are still a number of areas where social protection can be improved. Despite the positive steps, there are still major gaps in coverage and the generosity of benefits. For instance, the amount allocated to PSSB beneficiaries is still not enough to cover for basic needs of poor households. Similarly, the coverage of beneficiaries is still relatively low. The government should continue efforts to improve coverage and generosity further, and reduce program fragmentation. Furthermore, as suggested by the World Bank and UN agencies as ILO and UNICEF, deep reforms should also address key operational aspects including: (a) streamlining criteria and approaches to targeting the poorest households (e.g., proxy means tests); (b) instituting a single registry of all beneficiaries and integrating it into e-INAS, the management information system build with support from ILO, to improve monitoring and efficiency; and (c) adopting a formal electronic payment system, through outsourcing, for all cash-based benefit programs.

22. Achieving the proposed fiscal targets would require resolute fiscal efforts.

  • Revenue measures should aim at broadening the tax base and improving revenue administration.

    2018 Budget measures

    • • Reviewing the Excise Tax Code (ICE) as proposed in the 2018 budget proposal that was submitted to Parliament.

    • • Specific taxation on mining and petroleum activities.

    Staff proposed measures

    • • Removing VAT exemptions in line with the recommendations stipulated in the FAD technical assistance.

    • • Revising the VAT refund mechanism, by clearing the backlog of VAT refund claims through securitization and enforcing the funding of a sub-account with a fixed percentage of VAT receipts to repay exclusively new VAT refunds claims.

23. Addressing existing domestic arrears should be a key priority. The stock of domestic arrears reached around 3.7 percent of GDP at end 2016.18 Validating these arrears and gradually clearing them should be a priority. This should proceed after discussions with creditors and after reaching agreement on clearance modalities.

  • 2018 Budget measures

    • • Reducing some bonuses and allowances as proposed in the 2018 budget proposal.

  • Staff proposed measures

    • • In the short-term, the growth of wage spending can be contained using short-term measures that address wage levels or employment: containing wage growth, streamlining allowances and bonuses, curtailing overtime pay, and attrition.

    • • Over the medium-term, structural reforms need to be implemented in order to induce sustainable and permanent savings in the wage bill, and improve the efficiency and efficacy of wage spending: structural pay reforms to align job specific requirements with compensation, systematic review of compensation aiming at simplifying it, functional reviews and restructuring of government entities, and strengthening wage bill budgeting, execution and control.

24. Preventing the accumulation of new domestic arrears requires addressing cash management flaws, lack of expenditure control, and transparency. Staff urged the authorities to timely record spending in the information management system at each stage of the spending process. Other recommendations to regain control over expenditures and reduce the stock of arrears are as follows: (i) streamlining the network of spending units (ii) enforcing budget ceilings; and (iii) optimizing government liquidity management.

25. Authorities’ Views. While the ministry recognized that reducing the fiscal deficit over the medium term was desirable, it was concerned about staff’s views on the pace of the adjustment and intends to follow a more gradual deficit reduction path. The ministry expressed doubts about crowding out of the private sector as a result of the fiscal stance. They noted that a loosening of the monetary stance would help reduce public debt service costs and encourage private sector investment.

B. Monetary Policy and Foreign Exchange Management: Measured Normalization and Stability

26. From April 2017, the central bank changed its operational target from monetary aggregates to a short-term interest rate (SIP Chapter 1). Thus far, the interbank money market appears to follow the signals of the MIMO rate despite excess liquidity of the banking system (Figure 3). Given the rapid disinflation the Monetary Policy Committee (MPC) faces the challenge of pacing MIMO’s rate cuts while accounting for fiscal risks. At the same time, sustaining a prolonged period of high real interest rates risks further weakening non-mining non-agriculture economic activity, possibly worsening NPLs, and increasing pressure on borrowing costs. Staff recommended cautious but decisive cuts in the policy rate.

Figure 3.
Figure 3.

Mozambique: Selected External Sector Developments

Citation: IMF Staff Country Reports 2018, 065; 10.5089/9781484345597.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.

27. The absence of a BM-issued security for monetary policy purposes, brings additional challenges to liquidity management by the central bank. As reserve requirements have been reduced and banks are near their exposure limits to sovereign risk, sterilization operations have become less successful. Interventions of the BM in the FX market have created additional needs to sterilize liquidity. Looking ahead, staff recommended cautiousness in further lowering reserve requirements level. The BM should remove the restriction on banks access to the standing lending facility (only twice a week) and explore issuing certificates (CDs) for monetary policy.

uA01fig03

Policy and Money Market Interest Rates

Citation: IMF Staff Country Reports 2018, 065; 10.5089/9781484345597.002.A001

Source: Bank of Mozambique.

28. The exchange rate has appreciated in nominal terms by 24 percent since October-2016 and has been broadly stable since June 2017. BM’s net selling operations have become rare since late 2016 and BM has become a net buyer. Inflows from primary exports activities—notably coal—are bringing increasing FX availability to the market, while demand is low. Staff encouraged the authorities to rely on exchange rate flexibility as an absorber of external shocks and to develop a robust FX strategy that further deepens the market and strengthens financial stability while limiting central bank interventions to addressing excessive volatility. The External Balance Assessment (EBA) concludes that the metical is overvalued given current and projected fundamentals over the medium term under current policies (Annex 2).

29. A new FX market law was introduced in December 2017 allowing more flexibility in the management of exports proceeds. Staff supports the authorities’ intentions to partially liberalize the capital account. The BM’s reform allows exporters and investors to keep 100 percent of proceeds in foreign currency.19 These reforms are expected to minimize forex risks to exporters, mitigate capital flight, and reduce transaction costs. They, however, include a risk of higher dollarization and will result in lower FX flows going directly to the BM. The authorities must remain vigilant and consider whether higher reserve requirements on deposits in foreign currency, and minimum liquidity requirements in FX, may be warranted.

30. Authorities’ Views. The BM concurred with the mission on the need to reevaluate the pace of interest rates normalization and on relying on the exchange rate as shock absorber. The BM stressed that high interest rates were instrumental to rapid disinflation in 2017 and that fiscal consolidation is needed to complete the monetary policy normalization and achieve a balanced policy mix that can sustain growth with price and financial stability. Furthermore, the BM stated that it would let the exchange rate clear the market in case of excess demand for FX. It also noted that macroprudential measures against dollarization are in place, such as ex-ante provisioning for non-exporters borrowing in dollars.

C. Strengthening Resilience and Containing Financial Sector Risks

31. The central bank is committed to implementing further monetary and financial sector reforms to gain structural resilience (Box 3). The central bank continues to strengthen its governance, organization, analytical tools and monetary and FX operation framework with cooperation of Norges Bank and IMF technical assistance. The plan intends to enhance financial stability analysis, reporting, communication; modernize the national payment system and oversight; and improve currency cash management. The financial regulatory framework is being strengthened to mitigate vulnerabilities and enhance bank resolution capacity.

Monetary and Financial Sector Regulatory Measures

Monetary

  • Adopted an indirect monetary policy instrument: the MIMO rate in April 2017.

  • Revoked the limit of 700 thousand Mts. per person for the use of credit cards abroad in April 2017 introduced in December 2015.

  • Changed the reserve requirement base of calculation from daily to monthly average, starting in June 2017.

  • Broadened the investor base for primary issuance of T-bills to include non-bank financial institutions effective in June 2017.

  • Implemented new foreign exchange market regulation in December 2017.

Financial

  • Approved the national strategy for financial inclusion 2016–2022 in March 2016 and operationalized the National Committee on Financial Inclusion with two working groups in mid-November 2017.

  • Increased the minimum capital adequacy ratio (to 12 percent) and the minimum social capital value (to Mt. 1.7 billion) to be phased in until 2020 in April 2017.

  • Introduced a minimum liquidity ratio fixed at 25 percent of short-term liquid assets in June 2017.

Transparency and competition

  • Required banks to publish quarterly selected FSIs on solvency and liquidity effective March 2017.

  • Revised methodology for calculating the foreign exchange reference rate and related regulation in April 2017.

Introduced a Standardized Prime Interest Rate for bank lending (‘Indexante Unico’) jointly with the Mozambique Bank Association effective June 2017.

32. The current environment constrains credit growth. Banks are placing their extra-balances in domestic currency at the central bank in the form of excess reserves, or via reverse repos in the overnight market. The currently high real returns and low risks of those liquidity placement options constrain credit growth.20 Moreover, the increase in minimum capital requirements, to be phased in over three years, while welcome for the overall strengthening of the system, reduces at the margin the profitability of intermediation in the current circumstances.

33. The banking system continues to hold significant capital and liquidity buffers. New regulations to increase the CAR and establish minimum liquidity requirements were put in place in 2017. While reports indicate that banks remain liquid, well capitalized, and profitable on average (Table 6), there is heterogeneity across institutions. In addition, nonperforming loans (NPLs) have increased substantially, from 5.5 percent of total loans at end-2016 to 11.4 percent in September 2017. Several factors underlie this deterioration (Box 4). Staff encouraged the authorities to remain watchful of loan classification, collateral valuation, and provisioning.

Table 1.

Mozambique: Selected Economic and Financial Indicators, 2016–23

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

Net of verified VAT refund requests.

Modified cash balances and includes payment arrears.

It includes accummulation of the stock of arrears on debt service the authorities stopped payments, and announced restructuring. Also Includes the participation of ENH (national hydrocarbon company) in the LNG gas projects.

Table 2.

Mozambique: Government Finances, 2016–23

(Billions of Meticais)

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

VAT presented on a net basis (collection minus requested VAT refunds).

Modified cash balances include an adjustment for payment arrears

Exceptional financing for the debt service subject to restructuring (EMATUM, Proindicus, MAM, and six official creditors)

Table 3.

Mozambique: Government Finances, 2016–23

(Percent of GDP)

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

VAT presented on a net basis (collection minus requested VAT refunds).

Modified cash balances include an adjustment for payment arrears

Exceptional financing for the debt service subject to restructuring (EMATUM, Proindicus, MAM, and six official creditors)

Table 4.

Mozambique: Monetary Survey, 2016–19

(Billions of Meticais, unless otherwise indicated)

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