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

uA01fig02

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.
uA01fig03

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.

Table 4b.

Mozambique: Balance of Payments, 2016–24

(Percent of GDP)

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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.

Table 5.

Mozambique: Financial Soundness Indicators for Banking Sector, 2016–191

(In percent; unless otherwise indicated)

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Source: Bank of Mozambique (BM).

Banking sector referes to deposit corporations.

Includes deposits at parent banks.

Table 6.

Mozambique: Risk Assessment Matrix1

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The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term (ST)” and “medium term (MT)” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

Annex I. Implementation of Past IMF Recommendations

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Annex II. External Sector Assessment

The external position of Mozambique in 2018 was substantially weaker than implied by medium-term fundamentals and desirable policies. While the non-megaproject current account deficit narrowed in 2018, it remained high at 15¼ percent of GDP, vis-à-vis an estimated current account deficit norm of 9 percent of GDP. The EBA methodologies indicate an overvaluation of the real effective exchange rate in the range of 10 percent to 20 percent in 2018. This overvaluation, however, is likely to correct with LNG megaprojects production.

1. External sector assessments for Mozambique are subject to considerable uncertainty due to data limitation surrounding megaproject activities. While the authorities produce accurate external sector data for the megaprojects themselves, only exploratory data are available for domestic firms that are exclusively focused on supporting megaprojects’ activity.1 To describe better the country’s core or traditional economy, staff has estimated a current account balance and a net international investment position unrelated to the megaprojects (both directly and indirectly or induced), following the same approach used in the previous Article IV external sector assessments.2,3

2. Staff estimates show that the non-megaproject current account deficit narrowed from 18 percent in 2017 to 15¼ percent of GDP in 2018. This was achieved mainly due to lower imports of services and less than expected imports of goods in the last quarter of 2018.

3. A drop in non-megaproject FDI is likely to have contributed to the narrowing of the non-megaproject current account deficit in 2018. While megaproject FDI picked up from US$900 million in 2017 to US$2 billion in 2018, non-megaproject FDI contracted from a peak of US$2¾ billion in 2015 to US$700 million in 2018. As a result, lower imports could be at least in part attributed to a decline in non-megaproject FDI.

4. The non-megaproject current account deficit is projected to narrow to 12½ percent in 2019 and stabilize thereafter, thereby improving Mozambique’s non-megaproject IIP. Since 2017, monetary policy tightening has helped lower inflation and stabilize the forex market. The projected reduction in the non-megaproject current account deficit in 2019 would come from a commitment by the authorities to fiscal prudence and maintaining international reserve holdings. Over the medium term, the non-megaproject current account deficit is expected to stabilize at around 12½ percent, before further narrowing from 2025 onward, as natural gas megaprojects come into production (Figure 1, left graph). Therefore, the non-megaproject IIP is expected to continue, over the medium-term, the recovery that started in 2017 as activity in the traditional economy shrinks as a share of GDP (Figure 1, right graph).

Figure 1.
Figure 1.

Mozambique: External Current Account and International Investment Position

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

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

5. The non-megaproject financial account deteriorated in 2018. Non-megaproject FDI fell in 2018 and are projected to remain relatively low, while private sector loans, currency and deposits, and trade credits recorded net inflows. Total financial inflows of the traditional economy amounted to around US$3¾ billion in 2018, down from US$4½ billion in 2017 and are projected to stabilize at around US$4½ over the medium term.

6. In 2018, the metical was overvalued in the range of 10 percent to 20 percent which is expected to correct in the long run due to the impact of LNG production. The real effective exchange rate (REER) depreciated sharply by 29 percent between 2014 and 2016. However, following the stabilization of the forex market, it appreciated by about 13 percent during 2017–18. Using the EBA-lite current account model, the current account norm (excluding megaprojects) is estimated at a deficit of 9 percent of GDP. This compares to an estimated non-megaproject current account deficit of 15¼ percent of GDP in 2018, predominately explained by more than warranted fiscal deficit and decline in reserves, implying a REER gap of 18 percent using an elasticity of -0.38. The REER approach indicates an overvaluation of the REER of only 6¾ percent in 2018. The external sustainability approach, which seems less relevant for a country like Mozambique that is undergoing significant structural change and must rely to a significant extent on foreign savings for its development, shows a current account gap of 12.8 percent of GDP, implying a REER gap of 34 percent using similar elasticity as in the current account model. The estimated overvaluation of the metical, however, is expected to correct as the current account deficit as a share of GDP is projected to narrow in the long run due to the impact LNG production.

uA01fig07

Nominal and Real Effective Exchange Rates

(Index, Average 2010=100)

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

Estimates of the Valuation of the Metical using EBA-lite Approaches, 2018

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Source: IMF staff estimates. Update with revised EBA-Lite 2.0

The EBA considers a non-megaproject current account, which is further adjusted by indirect megaproject imports by domestic firms to supply megaprojects (estimated).

As in past analyses, the Tokarick (2010) elasticity is used to translate the current account gap into the im plied valuation, because it is derived on a small country assumption (see EBS/13/76, p. 81).

Based on stabilizing the non-MP related IIP position estimated by end-2018 level at 143 percent of GDP.

7. International reserves are broadly adequate. At end-2018, gross international reserves stood at US$3.1 billion, down from $3.3 billion in 2017, covering 5.9 months of next year’s non-megaproject imports of goods and services (not adjusted for indirect or induced megaproject imports). The assessment of reserve adequacy is limited by the unavailability of data on short-term external debt. In 2019, international reserves are projected to remain stable, with a downside risk. The IMF’s metric to assess reserve adequacy in credit-constrained economies, with assumed cost of holding reserves of 4 percent, indicates a reserve cover for Mozambique of 5.6 months of non-megaproject imports.

Annex III. Governance and Corruption Challenges

1. Addressing Mozambique’s governance and corruption vulnerabilities will have potentially a large positive impact on inclusive growth prospects. As the country gets prepared to reap in the medium- and long-term significant fiscal revenue from natural resource deposits, poor governance and corruption can derail prospects for these windfalls to bring shared prosperity and inclusive growth. The government has thus embarked on reforms to restore trust and requested IMF TA to prepare a diagnostic of governance and corruption challenges, which they plan to publish by mid-year.

2. Legislative and institutional measures have been adopted and are underway to strengthen governance, transparency and accountability, but more work is needed. The government has adopted a national plan and various laws to help fight corruption. However, a lack of effective implementation attributable in part to low technical capacity, inadequate budgets, insufficient institutional autonomy, and poor oversight undermine these efforts. Governance and corruption challenges are systemic due to the heavy involvement of the state in various economic sectors, and the lack of transparency in government processes, contracting, and outcomes.

3. Rule of Law. The court system lacks automation, transparency of processes, and specialization of judges, and there are significant bottlenecks in judicial caseloads, particularly in district and provincial courts. A recent development has been the introduction of commercial sections within six of the provincial courts for commercial issues such as insolvency, bankruptcy, and commercial debt. However, judicial accountability is seen as weak, and businesses have low expectations of legal redress. Proposed recommendations include finalizing and implementing insolvency regulations and digitizing the property registry and making it accessible to the public.

4. Market Regulation and Business Environment. Businesses remain hampered by excessive bureaucracy in terms of complexity, duplication, and opaqueness, and by cumbersome tax and customs requirements. Starting a business requires too many steps, although a simplified procedure is now in place for micro, small, and medium-sized enterprises. The corporate registry is not electronic, not easily accessible, and does not cover critical information like beneficial ownership, which is also fundamental for AML/CFT efforts. Digitizing and making it accessible to the public as well as consolidating the licensing process for all economic activities are key to improving transparency and reducing red tape. Public access to information is uneven, with requests routinely being either ignored or rejected without explanation. Adopting guidance and reporting on compliance with public requests for access to information is essential.

5. Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT). The authorities have taken steps to address deficiencies in the AML/CFT framework, though improvements are still needed, particularly to strengthen its effectiveness. The Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) 2011 review found Mozambique was not compliant with most of the 40+9 Financial Action Task Force (FATF) recommendations. Recent progress reports still show deficiencies. The country will be assessed against the AML/CFT updated international standards in late 2019–2020. Some of the challenges for AML/CFT tools supporting anti-corruption efforts include ensuring that financial institutions and Designated Non-Businesses and Professions (DNFBP) take appropriate measures to identify Politically-Exposed Persons in their customer due diligence process and take enhanced measures when needed; implementing effective registration and supervision of DNFBPs as well as filing of Suspicious Transactions Reports (STRs); and enhancing accurate collection and transparency of beneficial ownership information.

6. Fiscal Governance and Transparency. Despite a good track record of implementing reforms in revenue administration, public financial management (PFM) and fiscal transparency (e.g., new SOE Law and decree regulating public debt and guarantees), vulnerabilities to corruption remain. Main challenges include ensuring real-time recording of the commitment and verification of public expenditures, strengthening transparency and sustainability of public debt and investment decisions, and strong SOEs oversight. Annual disclosure of fiscal risks, strengthening procurement transparency, and ensuring compliance of key PFM processes are crucial.

7. Extractive Sector Governance. The petroleum and mining fiscal regimes were improved in 2014, and the authorities are gradually improving fiscal modelling and risk assessment capacities. However, tax administration and oversight capacity in the extractives sector are weak, perhaps resulting in below potential performance. The complexities of State participation in this sector, as both shareholder and regulator, combined with the strong involvement of the political elites and civil servants as private owners and actors, give rise to serious potential conflicts of interest. In line with Extractive Industries Transparency Initiative (EITI) requirements, beneficial ownership in license applications and State participation should be fully disclosed by 2020. Moreover, the government is encouraged to improve transparency in the award of mining licenses through the publication of evaluation criteria, final bid awards and contracts in an easily accessible manner. License application process should be made fully electronic and publicly accessible.

8. Central Bank Governance and Operations. The Bank of Mozambique (BM) has been implementing a set of reforms to improve its governance and operations with IMF TA. The main reforms are related to improvement of internal controls and BM autonomy and governance structure. Amending the BM Organic Law to strengthen the BM mandate and reviewing its organizational and decision-making structure are key recommendations.

9. Financial Sector Oversight. The BM has been strengthening oversight of the financial sector through new regulations to increase capital and liquidity requirements and stepping up the enforcement of prudential requirements. Reviewing the banking law to modernize the safety net and crisis management framework, in line with international best practice, will be essential.

10. Anti-Corruption Framework. Mozambique has a relatively comprehensive anti-corruption legislative framework in place. While it is highly recommended to amend the Public Probity Law and adopt regulations to strengthen and clarify some provisions such as those focusing on the prevention of conflicts of interest, more important than additional legal reforms is the uniform and effective implementation of the existing laws. Going forward, enhancing procedures for pursuing corruption cases, strengthening the framework for reporting conflicts of interest, and amending the asset declaration system to digitize processes, facilitate transparency and reinforce compliance will be critical.

Annex IV. Capacity Development Strategy

Mozambique receives significant TA to strengthen public finance management, revenue mobilization, statistics, central banking and financial supervision. Effectiveness has been medium-to-high, improving overtime, and being supported in the field by long-term resident advisors in the Ministry of Economy and Finance and in the Bank for Mozambique, as well as by a long-term TA coordinator and advisor in the IMF Resident Representative Office.

A. CD Strategy

The CD strategy for Mozambique focuses on: consolidating public finance management (PFM) reforms, modernizing tax policy and revenue administration; strengthening governance and modernizing the central bank; and enhancing the compilation and dissemination of government finance and real sector statistics.

B. Key Overall CD Priorities Going Forward

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C. Main Risks and Mitigation

Low capacity and reform resistance are key constraints, which may be overcome by adopting a sequenced approach and dedicating resources to ensure full understanding of the reform proposals and buy-in from the authorities. Good alignment to strategic views and improved management are crucial for reform implementation. The CD strategy should include hands-on capacity building to seek lasting improvements in units’ work regardless of staff turnover, foster cross-unit coordination, and mitigate any negative impact of reforms. The reform momentum is subject to changes, and other assistance provided by donors might result in overlaps and inefficiencies. The long-term resident coordinator at the resident representative office and the resident advisors will regularly engage at relevant levels to ensure proper implementation of the recommendations, sustain external complementary support to the reforms, and frequently reach out to other TA providers.

D. Authorities’ Views

Senior officials from the Ministry of Finance, Bank of Mozambique, Tax Authority and the Statistical Agency were consulted. They have expressed satisfaction with TA provided by the IMF both through the Fund resident advisors in the field as well as with the peripatetic visits from HQs and AFS. Moreover, they have concurred with the CD priorities listed above. The Ministry of Finance requested that a timetable of TA missions is prepared soon considering that presidential elections are scheduled for October 2019. TA on fiscal decentralization would be highly appreciated before July, when preparations for the 2019 budget are likely to start.
1

Total estimated needs associated with TC Idai are expected to amount to US$800 million this year and are projected to decline to US$500 million in 2020 and US$200 million in 2021.

2

See EBS/19/21 (Box 2) and SM/18/38, Enhancing Resilience to Climate Change in Mozambique: Risks and Policy Options, pp. 66–78.

3

This included borrowing by two SOEs, Proindicus and MAM, disclosed in April 2016, for about US$1.4 billion. Borrowing of US$850 million from a third SOE, Ematum, was discovered at an early stage in 2014 (this loan was later repackaged and floated as Mozambique’s first and only Eurobond). The loans were provided by Credit Suisse and VTB, and channeled through an UAE-based shipbuilding company, Privinvest.

4

See IMF Debt Sustainability Analysis (EBS/19/21, Sup.1).

5

For the rationale for focusing the discussion on the non-megaprojects current account and non-megaprojects imports, see Annex II, footnotes 1–3.

6

In Beira, inflation (y/y) accelerated to 7½ percent in April, from 4¼ in February.

7

The authorities are seeking external grants to minimize recourse to further debt accumulation. The international community has responded rapidly by pledging support. Additional assistance—on top of what already has been disbursed—of about US$580 million is being considered, including: (i) €30 million from Germany; (ii) €90 million from the EU; (iii) US$350 million from the World Bank; and (iv) US$100 million from the African Development Bank.

8

For details, see SM/18/32, Box 2.

9

For details, see EBS/19/21.

10

The stock of domestic payments arrears stood at about 2½ percent of GDP at end-2017 of which about 1¾ percent of GDP has been validated. About half of the validated arrears was cleared in 2018 and the remainder will be cleared by end-2019.

11

For further details on PFM reform issues, see Annex III (paragraph 6) and Annex IV.

12

A Selected Issues Paper presents estimates of the neutral real interest rate for Mozambique applying several methods used in the literature. Results indicate that this rate is in the range of 4¾percent to 7¾ percent.

13

The BM increased reserve requirements on foreign currency deposits from 14 percent in January 2018 to 36 percent in February 2019.

14

They include: (i) prudential measures to internalize currency risk such as an active management of reserve requirement differentials, higher provisions for foreign currency loans, and tighter limits on banks’ net open positions; (ii) developing the capital market in local currency; and (iii) requiring only the use of local currency for payments to the government, including taxes and fees.

15

The initiative delivered 18 missions, 1 study tour and 1 workshop from October 2017 until April 2019. See Capacity Development Strategy (Annex IV) and IMF Technical Assistance (Informational Annex, pp.8–9).

16

In this connection, the BM is reviewing, with IMF support, the central bank law and is also working with the World Bank and the IMF on revisions to the banking law. Strengthening the deposit insurance scheme is also warranted.

17

See Selected Issues Paper on “Natural Gas Revenues in Mozambique: Trade-offs and Opportunities” which, inter alia, supports the need to embed counter-cyclical policies, both as part of natural resource wealth management but also to limit the so-called natural resource wealth curse thus ensuring diversified and inclusive development.

18

President Nyusi opened the conference that took place during March 27–28 and was co-organized by the BM and the IMF. It was attended by approximately 180 participants, including senior government officials, private sector representatives and Mozambique’s development partners.

19

Possible fiscal anchors include a non-resource (non-LNG) primary fiscal balance that is more suitable to deal with external shocks common to commodity-based economies. Ideally, the new fiscal anchor and framework should be chosen and developed and should become an integral part of the annual budgets over the next three-to-five years.

1

For instance, there are domestic firms engaged in extraction and processing of coal that exclusively sell their services to coal megaprojects. Data available for the coal sector in 2013 suggest that imports of the so-called megaprojects related domestic firms were larger than that of the coal megaprojects themselves.

2

The presence of extremely large megaprojects and their related imports has no potential bearing on BM’s international reserves (megaproject imports are fully financed through special investment vehicles outside the country and included in the balance of payments statistics for completeness). The non-megaproject current account is therefore the appropriate concept to assess the Mozambique’s external position.

3

This approach also involves making additional adjustments to the non-megaproject current account by estimating and deducting megaprojects’ indirect or induced imports within the traditional economy.

1

This priority is carried out within phase II of the project with Norges Bank and the Fund to build enhanced capacity at the Bank of Mozambique to strengthen governance and support the BM modernization efforts. The phase I started in October 2017 and will end in December 2019 and Phase II will cover 2020–21.

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Cover IMF Staff Country Reports
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.
Volume/Issue:
Volume 2019: Issue 166
Publisher:
International Monetary Fund
ISBN:
9781498319997
ISSN:
1934-7685
Pages:
66
DOI:
https://doi.org/10.5089/9781498319997.002

Vulnerability to Natural Disasters and Climate-induced Events

Inflation, Food Prices and Exchange Rate

(Percentage change)

Policy Rate, Domestic Currency Credit and Nonperforming Loans¹

(Percent)

Current Account Deficit and Reserve Coverage

Sectoral Contribution to Growth, 2014–24

(Percent)

Mozambique: Ease of Doing Business Survey, 2019

(100= most favorable; 0=least favorable)
Figure 1.

Mozambique: Growth and Inflation
Figure 2.

Mozambique: Monetary and Financial Developments
Figure 3.

Mozambique: Selected External Sector Developments
Figure 4.

Mozambique: Fiscal Developments
Figure 1.

Mozambique: External Current Account and International Investment Position

Nominal and Real Effective Exchange Rates

(Index, Average 2010=100)