Republic of Mozambique: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique
Author: International Monetary Fund. African Dept.
Publication Date:
18 Jun 2019
eISBN:
9781498319997
ISBN:
9781498319997
Language:
English
Keywords:
ISCR; CR; monetary policy; Executive Board assessment; supply shock; director; central bank; current account; forex market; foreign currency; Credit; Loans
Download PDF (1.2 MB)

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique

Background

1. Tropical Cyclone (TC) Idai struck on March 15 the central region of Mozambique, making landfall near the port city of Beira—the country’s second largest—resulting in significant loss of life and widespread damage to crops and physical infrastructure. The cyclone inundated entire neighborhoods and destroyed most homes, hospitals and schools in Beira. Floods are estimated to have ruined around 800 thousand hectares of crops, including for local consumption and exports. Transportation, electricity, communications and commercial activities were severely disrupted. The Government estimated emergency assistance needs and reconstruction costs at around US$1.5 billion (10 percent of GDP).1 The impact of TC Idai has been compounded by TC Kenneth that struck on April 25 the northern province of Cabo Delgado, causing additional loss of live and destruction to homes and infrastructure. Rescue and emergency assistance operations are underway in the North and there is currently no preliminary estimate of the potential economic impact and reconstruction costs due to TC Kenneth. The IMF Executive Board approved on April 19 US$118 million in emergency assistance under the Rapid Credit Facility (RCF) in the wake of TC Idai.

2. Mozambique is one of the most vulnerable countries to natural disasters and climate change.2 The country’s geographic location and topography (particularly low-lying elevation) add to the risk. Additionally, weak socio-economic infrastructure, poverty and heavy dependence on rain-fed agriculture magnify these risks, in a context of limited access to insurance. Limited preparedness and lack of adequate resources further inhibit the country’s crisis adaptation and response capacity.

uA01fig01

Vulnerability to Natural Disasters and Climate-induced Events

Citation: IMF Staff Country Reports 2019, 166; 10.5089/9781498319997.002.A001

Source: World Risk Index 2016.

3. Mozambique has made significant progress in restoring macroeconomic stability, but challenges remain. Until TC Idai hit the country, economic growth was recovering gradually and becoming broader based following a series of shocks in 2015–16, including the disclosure of hidden borrowing.3 Tight monetary policy and lower food price increases brought annual inflation down to low single digits at end-2018. The Bank of Mozambique (BM) stabilized the foreign exchange (forex) market and rebuilt its international reserves to a relatively comfortable level. However, growth is still barely above population growth and public debt remains in distress.

4. Recently, there have been important developments to hold accountable those responsible for the previously undisclosed loans. Last December, the U.S. Department of Justice indicted several individuals in connection with contracting such loans. So far, five people have been arrested or face extradition in multiple jurisdictions, including a former Mozambican Finance Minister, who is currently detained in South Africa awaiting decision on competing requests for extradition to the U.S. and Mozambique; three former Credit Suisse executives; and one executive of Privinvest, the UAE-based shipbuilder that was the sole supplier under the contracts. More recently, twenty individuals have been detained in Mozambique and formally charged with a crime by Mozambique’s Attorney-General’s Office (AGO) in connection with the case.

5. The authorities are engaged in good-faith discussions with private creditors to restructure Mozambique’s Eurobond and previously hidden loans or are taking legal measures as appropriate. An agreement in principle with a group of Eurobond holders was reached last November to provide debt service relief over the next five years and extend principal repayments by ten years. Mozambique’s AGO has notified the Proindicus lenders of the cancellation of the government guarantee in respect of the loan contracted by Proindicus with Credit Suisse and filed a lawsuit in the U.K. against Credit Suisse and others considering the indictments in the U.S. and in Mozambique that allege criminal behavior in connection with these transactions. Restructuring discussions with VTB on the MAM loan are nearly finalized. The authorities have expressly reserved their legal rights with respect to the Eurobond and guaranteed MAM loan while investigations and proceedings relating to the circumstances in which the transactions arose continue.

6. Encouraging steps toward durable peace are being taken ahead of a busy political calendar. Parliament unanimously approved constitutional amendments on decentralization and related legislation is advancing. Disarming and reintegrating the main opposition Renamo party fighters is ongoing. Municipal elections were held peacefully last October. Parliamentary and presidential elections are scheduled for October. Bouts of violence in the North continue unabated, but these attacks have so far not disrupted the pace of implementation of the LNG megaprojects in the region.

Recent Economic Development, Outlook and Risks

7. The economic situation was improving gradually before TC Idai:

  • Growth decelerated to 3¼ percent in 2018 because of lower mining growth. However, growth was broader based, with non-mining real GDP growth accelerating to 2¾ percent, from 2 percent in 2017.

  • Inflation declined from a peak of 26½ percent (y/y) in November 2016, to 3¼ percent (y/y) in April 2019, reflecting tight monetary policy and exchange rate and food price stability, despite very significant increases in administrated prices (excluding administrated price increases inflation stood at only 2½ percent (y/y) in April).

  • Fiscal policy effort has been significant. Fuel and wheat subsidies were eliminated, an automatic fuel price adjustment mechanism was adopted, and electricity and public transportation tariffs were increased in 2017–18. These efforts combined with cuts in public investment have reduced significantly the primary fiscal deficit to about 2 percent of GDP in 2018, compared to 4¾ per-cent of GDP in 2016. The overall fiscal deficit, however, remained relatively high at 5½ percent of GDP in 2018 as budget financing relied primarily on expensive domestic financing given tight monetary policy and limited availability of external financing.

  • Public debt is in distress but nonetheless sustainable. The authorities are pursuing a strategy to bring public debt to moderate risk of distress levels.4 The stock of public and publicly guaranteed debt, including domestic debt, reached about 110½ percent of GDP at end-2018. The stock of arrears on public and publicly guaranteed external debt reached about US$1.2 billion at end-2018. As noted above, the authorities are in good-faith discussions with private creditors to restructure Mozambique’s Eurobond and previously hidden loans or are taking legal measures as appropriate.

  • The BM has been cautiously easing monetary policy. Since April 2017, the monetary policy committee has cut the policy rate in response to disinflation by a total of 750 basis points, to 14¼ percent currently.

  • The banking system remains stable, and the BM has continued to address banking sector vulnerabilities. New regulations that increased capital adequacy ratios and established minimum liquidity requirements have been in place since 2017; supervision and enforcement of prudential requirements have been strengthened; and higher reserve requirements on foreign currency deposits have provided disincentives for intermediation in foreign currency. On average, banks remain liquid, well capitalized and profitable. However, NPLs reached 11 percent of total loans in February reflecting, inter alia, better classification of past-due exposures to SOEs (provisioning of NPLs was comfortable at 99 percent). Also, credit to the economy declined by 2½ percent (y/y) in nominal terms in February, as real interest rates remained elevated.

  • The current account deficit worsened in 2018. Lower exports, mainly due to mine flooding in coal production, and higher megaproject imports of services led to a deterioration in the current account deficit to 30½ percent of GDP in 2018, from 20 percent of GDP in 2017. While megaproject imports contributed to the large deficit, it was financed to a large extent by FDI. The non-megaproject current account deficit,5 however, narrowed to 25¾ percent of GDP in 2018 (from 28½ percent of GDP in 2017). International reserves have been rebuilt to a relatively comfortable level (5¾ months of next year’s non-megaproject imports at end-March).

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Inflation, Food Prices and Exchange Rate

(Percentage change)

Citation: IMF Staff Country Reports 2019, 166; 10.5089/9781498319997.002.A001

Sources: Mozambican authorities and IMF staff estimates.
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Policy Rate, Domestic Currency Credit and Nonperforming Loans¹

(Percent)

Citation: IMF Staff Country Reports 2019, 166; 10.5089/9781498319997.002.A001

Sources: Mozambican authorities and IMF staff estimates.
uA01fig04

Current Account Deficit and Reserve Coverage

Citation: IMF Staff Country Reports 2019, 166; 10.5089/9781498319997.002.A001

Sources: Mozambican authorities and IMF staff estimates.

8. The outlook for 2019 is impacted by the extensive damage from TC Idai and Kenneth. While it is too early to assess the impact of TC Kenneth on growth and inflation, preliminary projections suggest that real GDP growth in 2019 would decelerate to 1.8 percent owing mainly to losses to agricultural production and disruptions to transport, communications and services. Given the adverse supply shock to food availability in Beira and neighboring districts, inflation is projected to pick up to 8½ percent (y/y) by end-2019.6 Considering the limited room to reallocate budgetary resources, the primary fiscal deficit after grants is projected to reach to 2½ percent of GDP in 2019 due to lower tax collections in the cyclone-hit areas and higher spending related to emergency relief and reconstruction.

9. Large BOP gaps are expected. The non-megaproject current account deficit is estimated to widen after TC Idai, to around 27 percent of GDP in 2019. Replacement for locally-grown foodstuffs, such as rice and maize, and reconstruction materials along with decreases in export receipts, including from Beira’s port services, will create a significant BOP gap. While external grants are expected to cover most of the external financing shortfall, the authorities will close the remaining BOP gap projected for 2019 with the recent RCF disbursement.7

10. The outlook for the medium term is expected to improve. After decelerating sharply in 2019, growth is projected to rebound strongly in 2020 in response to a recovery in agricultural production to normal levels as well as reconstruction, and to reach 4 percent annually in 2021–22. The very sharp acceleration in growth projected for 2023–24 reflects the start of LNG production; other economic activity (non-LNG) is conservatively assumed to continue to grow at a steady rate of 4 percent per year. Inflation would return to pre-cyclone levels after the supply shock runs its course as the BM continues to normalize the monetary policy stance while standing ready to act if second-round effects on inflation are identified. The primary fiscal deficit after grants is projected to improve in line with the authorities’ fiscal consolidation plans. The non-megaproject current account deficit is projected to narrow to 12½ percent of GDP over the medium term reflecting, inter alia, fiscal adjustment. International reserves are projected to remain broadly stable at comfortable levels amid an environment of exchange rate stability.

uA01fig05

Sectoral Contribution to Growth, 2014–24

(Percent)

Citation: IMF Staff Country Reports 2019, 166; 10.5089/9781498319997.002.A001

Sources: Mozambican authorities and IMF staff estimates

11. Risks remain broadly balanced. Downside risks involve weak policy implementation, particularly with respect to planned, gradual fiscal consolidation, and delays in key rebuilding projects due to limited implementation capacity, inability to mobilize enough financing for reconstruction, especially external grants. A negative impact from TC Kenneth, not included in the baseline, is also a risk. Delays in securing financing to support reconstruction needs could constraint growth recovery. On the macrofinancial side, the cyclones may increase NPLs as households and businesses deal with lost income and assets in the affected areas. Other downside risks include a deterioration in security in the North; backtracking of peace negotiations; loosening of expenditure control in the run-up to the October elections; and delays in the LNG megaprojects. Upside risks include new oil and gas discoveries; a quicker resolution of ongoing debt renegotiations; closer reengagement with donors; and faster progress on improving governance.

12. Spillovers: Mozambique has marginal trade and financial flows with countries in the region except South Africa, where cross-border trade ties are strong. Disruptions to port services due to TC Idai have somewhat limited outward spillover effects to Zimbabwe, Malawi and Zambia since only about 5 percent of transit trade takes place through Beira’s port. On the other hand, inward spillovers from large swings in energy prices and global growth slowdown could be tangible, affecting Mozambique’s oil imports as well as its coal and aluminum exports.

Authorities’ Views

13. The authorities broadly agreed with staff’s assessment of the outlook and risks. However, they expect GDP growth in 2019 in the range of 2 percent to 2½ percent. Like staff, the authorities expect inflation to accelerate to 8½ percent (y/y) by end-2019 due to the cyclone-induced supply shock and to gradually ease as the economy recovers, underpinned by prudent monetary policy and gradual fiscal consolidation. They agreed with staff’s views on near-term prospects for the current account and the importance of external support mostly in the form of grants for reconstruction efforts. The authorities broadly agreed with staff’s debt sustainability analysis and external sector assessment.

Policy Discussions

The authorities are committed to maintaining macroeconomic stability. Fiscal policy measures include reallocating lower priority spending to emergency assistance and reconstruction and relying on grants and highly concessional loans for budget financing while pursuing significant debt relief from private creditors and gradual medium-term fiscal consolidation. The BM is continuing a cautious normalization of monetary policy while remaining vigilant of second-round effects on inflation of the cyclone induced supply shock. The authorities are committed to addressing governance challenges.

A. Fiscal and Debt Sustainability

14. Staff recommended capping the primary fiscal deficit after grants at 2½ percent of GDP in 2019. While the annual budget is consistent with a primary fiscal deficit of 1½ percent of GDP in 2019, TC Idai would lead to lower revenue and higher spending—beyond reallocation of lower priority outlays and what could be financed by external grants—and thus a primary fiscal deficit of 2½ percent of GDP in 2019. However, this higher deficit would be in line with available financing in the economy, without resorting to arrears accumulation or central bank financing. Staff stressed the importance of properly allocating higher grants to one-off spending in the cyclone-affected areas to protect, inter alia, the primary fiscal deficit after grants and the authorities’ debt strategy as cyclone-related aid is phased out over time. Given that public debt is in distress, the authorities should rely to the maximum extent possible on grant financing and highly concessional loans. Issuance of government debt and guarantees should strictly follow the new approval procedures established in the December 2017 decree. Access to the BM’s overdraft window should be strictly contained within legal limits.

15. Gradual medium-term fiscal consolidation should be pursued. To create fiscal buffers, including to deal with future natural disasters, and to help ensure that public debt-to-GDP ratios remain on a clear downward path, staff recommended eliminating the primary fiscal deficit after grants by 2022 through a combination of revenue-enhancing measures (i.e., eliminating VAT exemptions except for basic goods) and spending rationalization (i.e., review and reform of wage and hiring policies in the public sector). Tax administration reforms to boost revenue collection should continue, by improving the taxpayers’ registry and electronic information systems, enhancing tax compliance from large taxpayers with adequate risk analysis, and strengthening the extractive industry tax management. Meanwhile, the impact of these measures on the most vulnerable will be mitigated through increases in social spending assistance.8

Fiscal Yield by Measure

(Percent of GDP)

article image
Source: IMF staff estimates.

16. The authorities are adopting a comprehensive debt strategy aimed at bringing down debt levels to moderate risk of debt distress over the medium term. Mozambique’s debt remains in distress as debt restructuring discussions are ongoing with international private creditors.9 Accounting for the authorities’ debt restructuring strategy and considering that, to a large extent, future borrowing and government guarantees reflect state participation in the sizable LNG development, debt is deemed sustainable. The PV of external public and publicly guaranteed (PPG) debt relative to GDP is projected to surpass prudent thresholds for a few years but is expected to remain on a gradual declining path; and the PV of external PPG debt relative to exports would remain close to the prudent threshold. Both debt service ratios (to exports and revenue) are projected to remain below their respective thresholds during the projection period.

17. Debt management and oversight needs to be strengthened further. While the authorities have already taken important steps, including to improve the transparency of the process of evaluating and granting government guarantees, the debt unit of the Ministry of Economy and Finance needs to be strengthened with respect to both its capacity and clout to exercise effective oversight over the entire public debt portfolio and to implement stronger safeguards. In addition, building on the new SOE Law and its recently-approved regulation, oversight over the entire SOE sector needs to be strengthened.

18. Staff welcomed the implementation of a strategy to clear domestic payments arrears to government suppliers.10 However, to avoid further accumulation of arrears, the authorities should adopt immediate measures to strengthen commitment controls and recreate all stages of a healthy spending chain, while gradually improving cash management in line with IMF TA recommendations.11 Staff encouraged the authorities to tackle the backlog of VAT refunds by developing and implementing a strategy to eliminate the backlog over time.

19. Staff commended the authorities for cabinet approval of the SOE Law regulation in line with IMF suggestions. In this connection, it will be critical to strictly implement the envisaged controls on SOE ability to issue debt, particularly those SOEs in financial distress. At the same time, staff emphasized the importance of creating the new agency envisaged in the SOE Law to exert strong financial oversight over the entire SOE sector. Speeding up the preparation and implementation of recovery, restructuring or privatization plans of SOEs in distress remains essential.

20. Staff acknowledged the improvements achieved in assessing and mitigating fiscal risks and commended the authorities’ decision to publish the 2019 fiscal risks assessment. The authorities were encouraged to regularly update this assessment, on a timely basis, to better inform the budget process, and to gradually increase the scope of fiscal risks and quantitative data covered in the report. Ongoing efforts to improve fiscal projections and deepen the assessment of fiscal risks related to SOEs and fiscal decentralization (provinces and districts) are also welcome.

21. Fiscal decentralization should be gradual and pursued in a fiscal deficit neutral basis. Staff recommended a gradual transfer of revenue and spending responsibilities to subnational levels of government, in line with their capacity to execute subnational budgets and maintain the quality of delivery of public goods and services. In this vein, the authorities should prepare a public finance decentralization draft law in harmony with other, already approved administrative decentralization laws.

Authorities’ Views

22. The authorities broadly agreed with staff’s views and recommendations. They shared the need to contain the primary fiscal deficit after grants at around 2½ percent of GDP in 2019 and to eliminate this deficit by 2022. They stressed that they are implementing a debt strategy with the aim to bring down their debt risk rating to moderate levels. This would be achieved through debt restructuring that would bring significant debt relief as well as prudent financing with emphasis on grants and highly concessional borrowing and gradual medium-term fiscal consolidation. The authorities agreed with the need to further strengthen debt management capacities and oversight over the entire SOE sector, which they stressed is ongoing.

B. Monetary and Exchange Rate Policies: Prudent Normalization and Sustaining Stability

23. The BM faces the challenge of resetting monetary policy in an environment affected by a significant supply shock and external/domestic risks. Staff welcomed the gradual and cautious normalization of monetary policy while emphasizing the importance to remain vigilant about possible second-round effects on inflation of the cyclone-induced supply shock. To the extent that such second-round effects do not materialize, the process of normalization could include additional policy rate cuts, possibly intertwined with pauses to assess market reaction and recalibrate the strategy.12 At the same time, given that sterilization operations are becoming less successful, staff encouraged the BM to consider other options to sterilize excessive structural liquidity in the system, including long-term reverse repos as opposed to short-term T-bills.

24. Noting the recent, unexpected decision to significantly increase reserve requirements on foreign currency deposits, staff recommended that any further increases should be carefully considered and explained to market participants. While the recent and previous increases aimed at discouraging financial dollarization,13 such actions reduce the capacity of the banking sector to supply credit and could add to forex market pressures. Effective de-dollarization will require building a track record of strong macroeconomic fundamentals combined with incentives to increase the use the local currency.14

25. Staff recommended developing a strategy to deepen the forex market, maintaining exchange rate flexibility as a shock absorber and preserving an adequate international reserve cover. Forex market intervention should be limited to avoiding excessive exchange rate volatility and should be fully sterilized to avoid affecting liquidity in local currency. The external sector assessment (Annex II) shows that Mozambique’s external position in 2018 was substantially weaker than implied by medium-term fundamentals—real effective exchange rate was overvalued in the range of 10 percent to 20 percent at end-2018—underscoring the need for real exchange rate adjustment supported by fiscal adjustment and structural reforms to bring the non-megaproject current account deficit in line with its estimated norm. Since the beginning of the year, the metical has depreciated by 4½ percent against the U.S. dollar and 5 percent against the rand, in nominal terms, contributing to close the estimated overvaluation.

Authorities’ Views

26. The authorities broadly agreed with staff’s views and recommendations. They agreed that a cautious approach to monetary policy normalization should be followed while considering external/domestic risks to the inflation outlook and remaining vigilant about possible second-round effects on inflation of the cyclone-induced supply shock. In addition, they stressed that the BM already maintained, and would continue to maintain, exchange rate flexibility and was committed to preserving an adequate international reserve cover. The authorities noted that financial de-dollarization was a priority and, circumstances permitting, additional increases in reserve requirements on foreign currency deposits would be considered.

C. Financial Sector: Increasing Resilience and Tackling Vulnerabilities

27. The BM is committed to implementing further monetary and financial sector regulatory measures to enhance financial sector resilience (Box 1). It continues to strengthen its governance and operations with Norges Bank and IMF TA. Progress has been made in the first phase of this project,15 including to: (i) strengthen central bank governance, organization, and management; (ii) improve monetary and exchange rate policy, operations, and communications; (iii) enhance financial stability analysis, reporting, and communications; (iv) modernize the national payments systems and its oversight function; and (v) make cash management more efficient. The financial regulatory framework continues to be strengthened to mitigate vulnerabilities, including limits/procedures to calculate loan-to-value and debt-to-income ratios, defining risk concentration limits; and improving methodology to identify systemic banking institutions.

28. The BM should continue to mitigate risks arising from an environment of high interest rates and only gradual recovery of economic activity and credit. Staff advised the BM to remain watchful of banks’ portfolio performance, through strong enforcement of loan classification rules, collateral valuation and timely provision building and to follow up closely the impact on the banking system of the government’s plan to clear domestic payments arrears, particularly on NPLs and credit growth.

29. Staff welcomed the efforts to implement macroprudential surveillance and strengthening communications on financial stability issues. Nevertheless, to further enhance financial stability, it would be important to upgrade loan classification and provisioning rules, as well as address weaknesses in the legal framework for crisis management, bank resolution and safety nets.16 Supervisory efforts should focus on containing risks associated with bank exposures to the public sector, by proactively strengthening regulations on concentration risks, including requiring the use of realistic capital adequacy risk weights for loans to SOEs backed (or not) by government guarantees. Additional provisioning should be required, as necessary, on a case by case basis. Revamping supervisory capacities is urgently needed. This would include increasing the number of staff and refocusing supervision toward key risks; empowering supervisors by following up on findings (e.g., onsite inspection results) at the BM Board level; and improving offsite supervision and enforcement and strengthening risk-based supervision. Staff also encouraged the BM to continue engaging with home supervisors of foreign-owned banks to ensure recovery and resolution plans of the groups, further strengthen the prudential framework for loan loss provisioning, and regularly publish Financial Stability Indicators (FSIs).

30. Staff commended the authorities for their efforts at promoting financial inclusion within the National Strategy 2016–22. Mobile banking and electronic currency and, more generally, digital finance, could play a key role in extending the network of transactions and creating opportunities to people in rural areas, women entrepreneurs, micro, small and medium-sized businesses. The fees structure should be carefully assessed to bring in innovative and cost-efficient solutions for accessing financial services. Staff encouraged the authorities to partner with the relevant stakeholders to promote a better understanding of the role of Fintechs.

Monetary and Financial Sector Regulatory Measures

Monetary

  • Norms on specific accounts opened by exporters to receive revenues or income from foreign investment (March 2018).

  • Norms and complementary procedures for operations of oil and gas companies (September 2018).

  • Conditions to exchange export revenue of goods and services, foreign investment income and other foreign inflows (October 2018).

Financial

  • Code of conduct for credit institutions and financial corporations (March 2018).

  • Prudential limits for risks concentration with counterparts (April 2018).

  • Determination of loan-to-value (LTV) and debt-service-to-income (DTI) ratios (October 2018).

  • Systemically important domestic bank institutions (October 2018).

Transparency and competition

  • Regulation on publicity of products and financial services (March 2018).

  • Review of the Standardized Prime Interest rate for Bank Lending (Indexante Único) (September 2018).

31. The BM is committed to undertaking a safeguards assessment in connection with the RCF disbursement. The previous assessment, conducted in 2016, recommended legal amendments to strengthen the central bank mandate and improve its governance framework, including through the establishment of an independent oversight body of management/operations and strengthened autonomy and accountability provisions. These have yet to be implemented and require a reform of the central bank law.

Authorities’ Views

32. The BM expressed its strong commitment to remain vigilant of macrofinancial risks, continue strengthening regulation and prudential supervision, and continue modernizing its governance framework and operations. The BM agreed to closely monitor financial system exposure to SOEs and government securities, and it confirmed its commitment to continue improving bank resolution tools, strengthening the safety net, and improving risk-based supervision. The BM expressed satisfaction with the technical assistance provided under the Norges Bank and IMF multiyear project.

D. Structural Policies: Strengthening Governance and Resilience to Natural Disasters while Supporting Inclusive Growth

33. Staff urged the authorities to continue taking steps to strengthen governance, transparency and accountability, including to reduce vulnerabilities to corruption (Annex III). The authorities’ ongoing preparation with IMF TA of a diagnostic report on governance and corruption vulnerabilities on areas most relevant for economic activity is welcome and would provide a roadmap for further reform. Key areas covered include fiscal governance and transparency, market regulation, central bank governance, and AML/CFT. Staff stressed that an effective implementation of the AML/CFT framework would not only support the integrity of the financial sector but would be critical for governance and anti-corruption efforts as well.

34. Integrating climate change within the broader developmental agenda is essential given Mozambique’s vulnerability to natural disasters. Public action on several fronts is being taken to enhance resilience and response capacity. The revised Law on Managing Natural Disasters (15/2014) and the Government Plan 2015–19 highlight the need for reducing vulnerabilities and including preventive measures in development planning. Long-term policy defined in the National Climate Change Strategy 2013–2025 and the Master Plan for Risk and Disaster Reduction 2017–2030 provide a large set of measures to combat, adapt and mitigate climate change effects. However, substantial support is still needed to improve socio-economic infrastructure resilience. With support from the World Bank, the government is preparing a National Resilience Strategy. While these efforts are costly, particularly in context of limited fiscal space, evidence suggests that even small, low-cost initiatives can be effective in enhancing preparedness.

35. Managing natural resources wealth. Mozambique is poised to become a key producer and exporter of LNG, with significant impact on its economy.17 Staff welcomed the recent high-level international conference to raise awareness and start discussions on the main tradeoffs and policy issues related to the development of Mozambique’s large natural gas reserves.18 Staff recommended strengthening the medium-term fiscal framework, gradually transitioning the fiscal anchor, and considering fiscal rules to save for future generations part of the upcoming and very substantial LNG related fiscal revenue—a sovereign wealth fund could be considered to underpin transparency.19

uA01fig06

Mozambique: Ease of Doing Business Survey, 2019

(100= most favorable; 0=least favorable)

Citation: IMF Staff Country Reports 2019, 166; 10.5089/9781498319997.002.A001

Sources: World Bank, Doing Business 2019 & IMF staff calculations.

36. Structural reforms to remove impediments to investment and employment creation are necessary for diversified and sustained inclusive growth, and to support poverty reduction. Underdeveloped infrastructure, difficulties with corruption, and ambiguous regulations are key challenges according to the World Banks’s Ease of Doing Business Survey. The private sector also struggles with unresolved public sector arrears and tight and expensive access to credit. Staff urged the authorities to adopt, in consultation with the World Bank, a set of reforms aimed at improving the business climate (Mozambique ranks 138 out of 190 countries in the 2018 installment of the Ease of Doing Business). Structural reforms together with better institutions to manage natural resource wealth and policies to build resilience to climate change will improve Mozambique’s competitiveness and resilience, contributing also to address external sector weakness. In this context, staff advised the authorities to continue working toward meeting the sustainable development goals and to adopt reforms to improve the business climate and strengthen social safety nets.

Authorities’ Views

37. The authorities broadly agreed with staff’s views and recommendations. They are cognizant that further reforms, particularly to improve transparency and governance, are paramount to achieving higher rates of inclusive growth, reducing poverty and improving intra-generational distribution of natural resource wealth. In this context, they are committed to invigorating efforts with a view to address governance and corruption vulnerabilities, and work diligently toward the completion, publication and implementation of the recommendations of the forthcoming diagnostic report on governance and corruption challenges.

E. Data Issues and Capacity Development Strategy

38. Data provided to the Fund are broadly adequate for surveillance. The authorities are encouraged to address data gaps, including strengthened compilation and dissemination for reporting fiscal data and improved national accounts and prices compilation. Also, they should continue their efforts to improve BOP and financial sector data, including by improving the coverage of imports by domestic firms to supply megaprojects and finalizing the compilation of the other financial corporations’ survey (i.e., pension funds and insurance companies).

39. Mozambique receives significant IMF TA, including to strengthen PFM systems, revenue mobilization, macroeconomic statistics, central banking and financial supervision (Annex IV). Going forward, capacity development will support consolidating PFM reforms and the fiscal decentralization process; modernizing tax policy and revenue administration; strengthening governance and modernizing central bank operations; and enhancing the compilation and dissemination of government finance and real sector statistics.

Staff Appraisal

40. While recognizing the limited room for maneuver, staff welcomes the authorities’ efforts to reallocate lower priority spending in the annual budget to emergency assistance and reconstruction in the aftermath of TC Idai and Kenneth. As the bulk of these costs will have to be covered by external grants, staff urges the international community to participate.

41. Continued rebalancing of the policy mix is needed to ensure durable macroeconomic stability. Gradual fiscal consolidation aimed at eliminating the primary fiscal deficit over the medium term is essential. Staff welcomes the authorities’ intention to consolidate over time its fiscal position, by eliminating VAT exemptions and reducing recurrent spending, particularly on wages, while protecting social and critical infrastructure outlays. Given the forthcoming aid related to TC Idai and Kenneth, it will be important to properly allocate such higher grants to one-off spending in the affected areas to protect, inter alia, the primary fiscal deficit after grants and the authorities’ debt strategy as cyclone-related aid is phased out over time.

42. Creating fiscal space to better prepare and deal with the consequences of future natural disasters will be crucial. It is therefore of the utmost importance to achieve significant debt relief in ongoing discussions with private creditors to put public debt-to-GDP ratios on a clear declining path. The authorities’ commitment to fiscal consolidation noted above is also critical.

43. Adopting and implementing a debt strategy aiming to bring Mozambique’s debt risk to moderate levels over the medium term remains a priority. While the authorities have already taken important steps to strengthen public debt management, including to improve the process of evaluating and granting guarantees, strengthening oversight of the entire public debt portfolio to ensure that public debt-to-GDP ratios remain on a declining path will be important as well.

44. Staff welcomes the gradual and cautious normalization of monetary policy and cautions the BM to remain vigilant about possible second-round effects on inflation of the cyclone-induced supply shock. While the normalization of monetary policy could include additional policy rate cuts—possibly intertwined with pauses to assess market reaction and recalibrate the strategy—it will be important to proceed with caution due to external and domestic risks. Staff welcomes the authorities’ intention to maintain exchange rate flexibility as a shock absorber and preserving an adequate international reserve cover. While the external position of Mozambique in 2018 was substantially weaker than implied by medium-term fundamentals and desirable policies, this is likely to correct over the medium-term with an improved policy mix, structural reforms and LNG production and exports. Forex market intervention should continue to be limited to managing excessive exchange rate volatility and should be fully sterilized to avoid affecting liquidity in local currency.

45. Steadfast implementation of financial sector and monetary policy reforms is essential to strengthen resilience and mitigate macrofinancial risks. The authorities must remain vigilant of risks coming from a prolonged period of high real interest rates and rapid increase in public domestic debt. Staff supports the BM’s efforts to enhance supervisory capacities and the bank resolution framework. The evolving monetary policy regime should build on enhanced communications, increased technical capacities and reformed central bank law that, inter alia, grants operational autonomy to the BM, precludes or strictly limits central bank lending to the government, and strengthens BM governance and accountability. Staff welcomes the BM’s decision to undertake a safeguards assessment in connection with the RCF disbursement.

46. Staff recognizes the authorities’ commitment to improve governance, transparency and accountability, including to reduce vulnerabilities to corruption. The authorities’ ongoing preparation with IMF TA of a diagnostic report on governance and corruption challenges in areas most relevant for economic activity will provide a roadmap for further reforms in this area. Publication of the diagnostic report soon after its finalization is strongly encouraged.

47. Further structural reforms will be important to support higher rates of inclusive growth, job creation and further reductions of poverty and inequality. Strengthening governance and fighting corruption, fostering competition and improving the business climate will be instrumental in attracting FDI and supporting private investment and job creation. Restructuring and attracting private sector participation in ailing SOEs will be key to improve economic efficiency and contain fiscal risks.

48. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

Figure 1.
Figure 1.

Mozambique: Growth and Inflation

Citation: IMF Staff Country Reports 2019, 166; 10.5089/9781498319997.002.A001

Sources: National Institute of Statistics and IMF Staff calculations.
Figure 2.
Figure 2.

Mozambique: Monetary and Financial Developments

Citation: IMF Staff Country Reports 2019, 166; 10.5089/9781498319997.002.A001

Source: Bank of Mozambique.
Figure 3.
Figure 3.

Mozambique: Selected External Sector Developments

Citation: IMF Staff Country Reports 2019, 166; 10.5089/9781498319997.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.
Figure 4.
Figure 4.

Mozambique: Fiscal Developments

Citation: IMF Staff Country Reports 2019, 166; 10.5089/9781498319997.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.
Table 1.

Mozambique: Selected Economic and Financial Indicators, 2016–24

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

Net of verified VAT refund requests.

Modified cash balances and including arrears.

Liquidity injection standing lending facility rate (2016), Bank of Mozambique’s MIMO rate (2017, and latest as of April 2019).

Table 2a.

Mozambique: Government Finances, 2016–24

(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).

Externally financed loans to SOEs.

Modified cash balances include an adjustment for payment arrears.

Exceptional financing for external debt under renegotiation.

Table 2b.

Mozambique: Government Finances, 2016–24

(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).

Externally financed loans to SOEs.

Modified cash balances include an adjustment for payment arrears.

Exceptional financing for the external debt service under negotiations.

Table 3.

Mozambique: Monetary Survey, 2016–20

(Billions of Meticais; unless otherwise indicated)

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

Liquidity injection standing lending facility rate (2016), Bank of Mozambique’s MIMO rate (2017, and latest as of end-April 2019).

Latest as of end-April 2019.

Table 4a.

Mozambique: Balance of Payments, 2016–24

(Millions of U.S. dollars; unless otherwise indicated)

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

Includes interest payments for Ematum and previously undisclosed loans.

Includes repayments of previously undisclosed loans.

Other financial account flows include net portfolio investment; net financial derivatives; net currency and deposits; insurance, pension and standardized guarantee schemes (net); net trade credits and advances; net other accounts receivable/payable; net other equity and net special drawing rights.

Imports by domestic firms to supply megaprojects (estimated).

NIR include USD reserve deposits of commercial banks at the Bank of Mozambique. NIR do not include any disbursements by the IMF, foreign currency swaps, foreign currency liabilities of the central bank to non-residents, foreign currency deposits by resident banks, or reserve requirement deposits in foreign currency by resident banks.