I. Introduction

1. Our Mozambican authorities thank staff for their continued engagement and candid policy discussions during the 2019 Article IV consultation. They also appreciate the Fund’s swift response to their request for emergency financing under the Rapid Credit Facility (RCF) to support post-disaster reconstruction efforts and catalyze additional donor support.

2. Mozambique continues to make progress in improving its policy and institutional settings to achieve durable macroeconomic stability and inclusive growth. At the same time, the authorities continue to make efforts to calibrate the policy mix to insulate the economy against external shocks including, commodity price volatility, extreme climate events, and the tightening of global financial conditions. Going forward, they are determined to broaden structural reforms to support inclusive and sustainable growth, maintain macroeconomic stability, improve fiscal and debt sustainability, bolster productivity growth, and strengthen governance.

3. The authorities recognize that preserving peace remains essential to unlocking the country’s growth potential and improving the country’s investment appeal. In this regard, they are committed to leveraging the country’s democratic experience by accelerating the integration of the residual forces of the Renamo Party into the army, security forces and civil society, and completing the decentralization process.

II. Vulnerability to Climate Shocks

4. Mozambique remains highly vulnerable to climate-related shocks due to its geographical location and topography. In March 2019, Tropical Cyclone Idai struck the central region near the port city of Beira leaving a trail of destruction on its path. Immediately thereafter, in April 2019, Tropical Cyclone Kenneth made landfall in the northern Province of Cabo Delgado destroying entire villages and displacing thousands of people, in a country already struggling with the consequences of a drought. The growing frequency and intensity of the climate change shocks has placed immense pressure on the economy and its ability to tackle development challenges. In addition, the weak socio-economic infrastructure and heavy reliance on rainfed subsistence agriculture, amplifies the impact of adverse weather conditions on vulnerable households.

5. The authorities are intensifying efforts to increase the country’s resilience to natural disasters. In this context, they have developed the National Climate Change Strategy (2013-2015) and the Master Plan for Risk and Disaster Reduction (2017–2030). In response to the recent disasters, the authorities have completed a Post Disaster Needs Assessment (PDNA), which estimates the post-Idai reconstruction financing needs at $2.9 billion. Support from development partners remains essential to restore infrastructure and bring the economy on a recovery footing. In this respect, they plan to hold an International Donors’ Conference in the city of Beira, from May 31 to June 1, 2019.

III. Recent Economic Developments and Outlook

6. Following a series of shocks in 2015–2016, economic recovery has begun to emerge. Nonetheless, real GDP growth slowed down from 3.7 percent in 2017 to 3.3 percent in 2018 due to a decline in economic activity in the agriculture, mining and transport sectors. Economic growth is expected to further moderate to 2.5 percent in 2019 owing to the impact of the recent cyclones. Going forward, growth is expected to remain positive, in line with a rebound in consumption and investment related to the liquified natural gas projects.

7. Inflation declined from a peak of 26½ percent at end-November 2016, to 3¼ percent at end-April 2019, reflecting a tight monetary policy stance and subdued food prices. As the supply shocks occasioned by the two cyclones pass through the economy, inflation is projected to pick up to about 7 percent in 2019. Going forward, inflation pressures are expected to dissipate and remain within the Bank of Mozambique’s target range of 6–8 percent.

8. The current account deficit, excluding mega projects, widened to 30.4 percent of GDP at end-December 2018 from 20 percent of GDP at end-December 2017. This was largely due to an increase in imports of intermediate and capital goods, including fuel. At the same time, key commodity exports (coal and aluminum) continued to decline. Consequently, gross international reserves declined from about 6.8 months of import cover at end December 2017 to nearly 5.5 months of imports at end December 2018.

IV. Fiscal Policy and Public Financial Management

9. The authorities’ medium-term fiscal strategy aims to intensify fiscal consolidation through improved revenue collection and enhanced public expenditure efficiency. Concomitantly, the authorities aim to place debt on a sustainable path while improving the oversight of state-owned enterprises (SOEs). To achieve these objectives, they will build robust fiscal management systems, and strengthen project management capacities. As part of the preparations for the effective management of natural gas revenues expected after 2023, the authorities are considering adopting a fiscal rule to mitigate risks stemming from commodity price volatility. Similarly, they intend to establish a Sovereign Wealth Fund to support productivity-enhancing investments.

10. The authorities have made progress in advancing fiscal consolidation measures over the FY2017/18, including, among others, streamlining recurrent expenditures, notably the wage bill and goods and services; the phasing out of fuel and wheat subsidies together with the introduction of an automatic fuel price-adjustment mechanism; and scaling back of capital expenditures. They continue to press ahead with the implementation of the strategy to address domestic payments arrears. Going forward, they plan to rationalize lower priority spending to address post-disaster financing needs. They remain committed to achieving a zero primary fiscal balance by 2022, which along with the reliance on grants and highly concessional financing will reduce fiscal pressures and help curb debt vulnerabilities in the medium term.

11. The authorities are committed to bringing debt levels to moderate risk of debt distress over the medium term. In this respect, they have taken positive steps to improve the transparency of the process of evaluating and granting government guarantees. In addition, they are stepping up efforts to strengthen the recently-created Fiscal Risk Assessment Unit in the Ministry of Economy and Finance. Further, they plan to upgrade debt management capacity while strengthening the oversight of fiscal risks emanating from SOEs. In parallel, good faith discussions with commercial creditors to achieve timely debt restructuring are continuing.

12. To support medium term fiscal consolidation efforts and improve policy credibility, the authorities will accelerate public financial management reforms and pursue fiscal decentralization in a fiscally-responsible manner. In this respect, they intend to submit to parliament a public finance decentralization draft law in harmony with the set of administrative decentralization laws already approved by Parliament. These legislative steps aim to improve the quality of delivery of public goods and services through a gradual transfer of revenue and spending responsibilities to Provinces.

V. Monetary, Exchange Rate, and Financial Sector Policies

13. The authorities’ monetary policy stance emphasizes price stability, financial sector resilience and ensuring exchange rate flexibility. To this effect, the Bank of Mozambique (BM) has pursued a cautious easing of monetary policy in line with the softening inflationary pressures. The normalization of monetary policy will remain as the BM continues to monitor the potential second round effects of the cyclone induced supply shocks.

14. As part of an effort to strengthen the monetary policy framework and the Bank of Mozambique’s operational autonomy, the authorities are presently preparing amendments to the Central Bank Act and preparing a new Banking Law to enhance crisis management, bank resolution, and safety nets. At the same time, the BM will implement measures to ensure adequate capital buffers in the banking sector while accelerating the shift to risk-based supervision. To enhance financial sector resilience, the authorities will strengthen the AML/CFT framework. In this connection, preparations for the 2019 AML/CFT evaluation by the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG) under the revised AML/CFT international standard are at an advanced stage.

15. The authorities view financial deepening and inclusion as important to support broad-based growth, accelerate poverty reduction, and improve distributional outcomes. To this end, they are committed to continue implementing the National Strategy for Financial Inclusion (2016–2022) to promote access to financial services in all districts. They believe that this strategy will position the country well to leverage benefits conferred by the digital revolution.

VI. Structural Reforms

16. The authorities view the implementation of structural reforms including governance reforms, as essential to improve the country’s growth prospects in the medium to long run. To this end, they intend to intensify efforts to enforce existing laws aimed at fighting corruption and reinforcing the primacy of the rule of law. More importantly, they expect to work towards the completion, publication, and implementation of the diagnostic report on governance, transparency, and accountability with IMF technical assistance. At the same time, the Attorney General’s Office will continue to work cooperatively with bilateral partners with a view to expedite the ongoing investigations related to the undisclosed loans. Similarly, the authorities intend to prepare and submit to Parliament a Law to permit recovery of assets related to corruption practices.

17. To address the competitiveness challenges, near-term structural priorities include enhancement of capacity development initiatives aimed at supporting skills development and the promotion of public investments in the agriculture and fisheries, mining, and transportation sectors to lift the country’s comparative advantage. Similarly, the authorities will continue to deploy policy measures to reduce labor market rigidities and create a friendly business environment.

VII. Conclusion

18. The Mozambican authorities are determined to advance their reform agenda to achieve durable macroeconomic stability, support broad-based growth, improve distributional outcomes, and strengthen institutional capacity. They greatly appreciated the Fund’s continued engagement and policy advice and wish to thank the international community and development partners for supporting the country’s resilience building efforts to mitigate the impact of climate change.