Statement by Mr. Mkwezalamba, Executive Director for Mozambique and Mr. Tivane, Senior Advisor to Executive Director, February 27, 2018

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


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

1. Introduction

On behalf of our Mozambican authorities, we thank staff for their continued engagement and policy advice as well as the candid policy discussions during the 2017 Article IV Consultation. Despite the challenging macroeconomic environment, the authorities continue to make headway in addressing the multiple shocks the country experienced over the past two years, notably the fall in commodity prices, weather-related shocks, and security concerns predominantly in the central and northern regions of the country. In addition, the steady rise in debt levels resulted in mounting fiscal pressures, weakening in business confidence, and the freezing of budget support by development partners. In this regard, they are intensifying efforts aimed at addressing the macroeconomic imbalances, while invigorating implementation of far-reaching structural reforms to lift potential growth, curbing the incidence of poverty and inequality, and strengthening institutions. They broadly agree with staff that renewed policy efforts are essential to sustain the reform momentum, as well as gather the required support from a wide spectrum of domestic stakeholders, International Financial Institutions (IFIs), and development partners.

2. Recent Economic Developments and Outlook

Economic activity slowed down from a historical average of 7.5 percent to 3.8 percent in 2016, on the back of disruptions to agricultural production caused by floods, subdued commodity prices, bottlenecks in transport and logistics primarily for exportation of coal, and the shortage of foreign exchange to finance critical imports. According to the latest estimates from the National Institute of Statistics, real GDP in 2017 grew by 3.7 percent, broadly in line with the authorities’ projections set at 3.8 percent. This performance was driven by improved commodity prices, an uptick in production and exports of coal, a rebound in agriculture activity stemming from a benign rainfall season, and better transportation logistics owing to the cessation of military hostilities across the country. Although staff’s growth projections for 2017 and 2018 are set at 3.0 percent, the authorities expect the growth momentum witnessed in 2017 to be maintained in 2018. This is on account of a moderate recovery in the mining, agriculture, and transport sectors; and enhanced business confidence occasioned by declining inflation expectations as well as a rebalanced foreign exchange market.

Inflation declined significantly from 19.2 percent in December 2016 to 15.11 percent in December 2017, reflecting subdued aggregate demand, stable exchange rate, and a tight monetary policy stance. As a result, the average inflation for 2018 is estimated to decline to a single-digit space of 7.7 percent.

The current account deficit is estimated to narrow to 16.1 percent of GDP in 2017, from 39.2 percent of GDP in 2016, owing to a rebound in international commodity prices, particularly for aluminum and coal. Consequently, the reserve position improved at end-December 2017 to 6 months of non-mega project imports, against an import cover of 4.7 months at end-December 2016. For 2018, the reserve position is expected to remain stable, equivalent to nearly 6 months of import cover.

3. Policy Priorities and Reforms

To tackle the prevailing macroeconomic challenges, the authorities are making determined efforts geared at implementing macro-critical structural reforms to improve the fiscal position, gradually address the bottlenecks to broad-based growth, and upgrade institutions. Concerted policy efforts have been made to improve the macroeconomic conditions, accelerate dialogue with the opposition parties to achieve long-lasting peace, and create an adequate set of institutions to lift the primacy of the rule of law and strengthen democracy in Mozambique.

Fiscal Policy

The authorities are committed to foster fiscal consolidation, through implementation of reforms aimed at improving domestic revenue mobilization, enhancing public financial management, and stepping-up efforts toward achieving timely debt restructuring. They, therefore, broadly agree with staff that steadfast policy actions aimed at accelerating the pace of fiscal consolidation remain critical to ease the fiscal pressures over the short and medium term. In this regard, on the back of limited fiscal space for financing development expenditures and servicing debt, the authorities’ 2018 budget approved by the National Assembly in December 2017 seeks to continue efforts to consolidate public finances. The fiscal revenue is projected at 22.5 percent of GDP in 2018, from 23 percent of GDP in 2017, whilst total expenditures and net lending is targeted at 28.1 percent of GDP in 2018, down from an estimate of 31.7 percent of GDP in 2017. In addition, they have undertaken a set of deficit-reducing measures over the past few months, including: (i) phasing out of fuel and wheat subsidies; (ii) adopting an automatic fuel price adjustment formular; and (iii) reducing bonuses, relocation subsidies, and housing allowances. These measures are expected to reduce the wage bill and goods and services by about 0.8 percent of GDP in 2018.

The authorities are also mindful that efforts to ease the fiscal pressures and put debt dynamics on a sustainable path would require sustained efforts to improve fiscal transparency, governance, and accountability. To this end, they have recently undertaken a set of measures, including the following:

  • i. Strengthening the Debt Management Unit and creating a Fiscal Risk Management Unit in the Ministry of Economy and Finance in the second half of 2016, with IMF and World Bank support. The unit is already staffed and fully functional;

  • ii. Completion of the Kroll Audit Report and submission of its recommendations to the Attorney General’s Office (AGO) in July 2017. The AGO submitted to the Office of Public Prosecutor in January this year matters that warrant further legal action, and continues with investigations on issues that are under its purview to help address queries on how the proceeds from the undisclosed loans were used;

  • iii. A Cabinet Decree to regulate the issuance and management of public debt and guarantees was issued in November 2017. The decree requires, among others, that all central government borrowing and contingent liabilities be contracted by the Minister of Economy and Finance on behalf of the central government. The decree also calls for disclosure of loans and guarantees approved, including feasibility studies and assessment of fiscal risks; and regular update of public sector debt records reconciled with creditors on a quarterly basis; and

  • iv. Completion in December 2017 of the strategy aimed at validating and gradually clearing arrears to suppliers, through securitization. In addition, the authorities are pursuing measures to prevent accumulation of arrears in line with staff’s recommendations, including: (i) streamlining the network of expenditures units, (ii) enforcing budget ceilings through measures aimed at increasing regular audits to the budget execution by line ministries; and (iii) strengthening government liquidity management.

To strengthen the implementation of the Government Action Plan which seeks to improve fiscal transparency, governance, and accountability, the authorities intend to undertake the following measures in 2018:

  • v. Submit to the National Assembly a draft law on Fiscal Responsibility by end-2018;

  • vi. Approve regulations aimed at implementing the new Public Enterprises Act by end-June 2018;

  • vii. Submit to the National Assembly a draft law for Public Investment Management by end-2018;

  • viii. Stepping up efforts aimed at accelerating debt restructuring, while considering the country’s financing needs to advance its development agenda. The Ministry of Economy and Finance is scheduled to make a presentation to Mozambique’s commercial creditors on Tuesday, March 20, 2018 in London to provide an update on the recent economic developments and present the key elements of the proposed debt restructuring; and

  • ix. Implementing fiscal structural reforms to improve domestic revenue mobilization, particularly through implementation of measures to widen the tax base, reduce tax exemptions, and improve revenue administration. Further, the authorities have started discussions to establish a sovereign wealth fund to help the country manage the substantial inflow of revenues accruing from the LNG exploration over the medium term.

Monetary, Exchange Rate, and Financial Sector Policies

Monetary and exchange rate policies in the short and medium terms remain geared towards achieving price stability and smoothening exchange rate volatility. Accordingly, the Banco de Moçambique (BM) has significantly tightened the monetary policy stance to anchor the heightened inflation pressures coupled with widened external imbalances that crippled the economy since the second quarter of 2016. In this connection, the BM raised its policy rate by 600 basis points (bp) to 23.25 percent in October 2016.

Following a steep decline in inflation expectations coupled with a gradual rebalancing of the foreign exchange market, the BM initiated a cycle of monetary easing in December 2017, and cut its policy rate by 150 bp to 19.5 percent. The Monetary Policy Committee (MPC), at its recent meeting held on Monday, February 26, 2018, further cut the policy rate by 150 bp to 18 percent with the aim of increasing the supply of domestic credit, to stimulate private consumption and investment. The BM is firmly committed to relying on the use of the exchange rate as a shock absorber, and rebuild reserve buffers.

The BM will also continue with efforts aimed at ensuring that monetary policy normalization remains consistent with a faster path of fiscal adjustment needed to achieve debt sustainability. Likewise, to enhance the BM independence and strengthen the legal framework for the conduct of monetary policy, the authorities are currently undertaking reviews of the Central Bank Act, Foreign Exchange Act, and the Credit Institutions Act. To strengthen financial sector resilience, while addressing the risks arising from the increased NPLs as well as the high exposure of the banking sector to sovereign securities and state-owned enterprises (SOEs), the BM will continue to upgrade its institutional capacity for enhanced oversight and enforcement of macro-prudential regulations

Structural Reforms

The authorities attach great importance on the need to calibrate structural priorities to accelerate economic transformation and diversification, reduce the incidence of poverty and inequality, and improve policy institutions. They recognize that the massive production and exportation of natural gas expected from 2023 onwards, while presenting an opportunity to boost growth and accelerate socio-economic development, comes with its own challenges, including the risk of Dutch disease in the absence of adequate institutions to help the country manage revenues from natural resources. In this regard, they intend to implement measures aimed at gradually easing bottlenecks to economic competitiveness, while creating an appropriate set of incentives to improve the business environment, to unlock the country’s growth potential and spur job creation. The measures include: (i) easing registration and licensing of economic activities; (ii) expediting the issuance of permits for small businesses; (iii) strengthening the legal framework for enforcement of contracts; (iv) increasing access to electricity, predominantly in rural areas; (v) upgrading the movable collateral registry; and (vi) improving credit access by SMEs.

Further, they will advance efforts to bridge the infrastructure financing gap with a view to foster broad-based growth, accelerate the implementation of the Financial Deepening and Inclusion Strategy (2016–22), and revamp the implementation of the Strategy for Fighting Corruption. Similarly, steps intended to improve the data gaps in fiscal reporting and national accounts, alongside the steadfast implementation of the AML/CFT framework will continue to be given primacy going forward.

4. Conclusion

The Mozambican authorities are committed to advance their reform and development agenda to achieve sound macroeconomic fundamentals, layout the foundations for accelerated growth, and upgrade institutions. In this regard, they consider the Fund’s continued engagement and policy advice essential in supporting their efforts.