Republic of Mozambique: Request for Disbursement under the Rapid Credit Facility—Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique
Author: International Monetary Fund. African Dept.
Publication Date:
29 Apr 2020
eISBN:
9781513542515
Language:
English
Keywords:
ISCR; CR; financing; financial support; financing gap; IMF financial support; emergency financing request; IMF lending tracker; IMF Deputy managing director; Debt sustainability analysis; Debt service; Credit; Global; financing needs; excl. megaprojects; financing requirement; Loans
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Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique

Abstract

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Mozambique

Background

1. Prior to the COVID-19 crisis, Mozambique was recovering from two Tropical Cyclones (TCs) which struck in 2019 and for which Mozambique benefitted from a Rapid Credit Facility (RCF) disbursement in April 2019. Mozambique remains one of the poorest countries in the world and faces multifaceted economic and climate challenges. The security situation is also challenging, including an ISIS affiliated terrorist insurgence in the north which has devasted communities and left hundreds dead.

2. In February, the authorities asked for the initiation of discussions on an ECF arrangement. A mission to initiate such discussions was planned for the second half of March but it was postponed due to travel disruptions in the wake of the COVID-19 pandemic. Discussions are expected to start later in the year when the current crisis has stabilized.

3. The COVID-19 pandemic is expected to hit Mozambique hard, and the authorities have requested emergency IMF financial assistance through the RCF. As of April 16, Mozambique had reported 29 positive cases of COVID-19 but this number is expected to increase rapidly.1 Facing a severe impact from the global pandemic, including from lower export commodity prices and volumes and a partial domestic lockdown, the authorities’ immediate priority is to ensure the health of the population and limit economic and financial disruptions to preserve macroeconomic stability. A 30-day state of emergency was declared on March 30. The authorities are seeking urgent financial assistance under the RCF to help address these immediate needs.

Pre-COVID-19 Economic Developments

4. Despite the severe impact of TCs Idai and Kenneth, the authorities maintained macroeconomic and financial stability. In 2019, economic activity decelerated to 2¼ percent driven by the adverse supply shock of the TCs and a contraction in the extractive industry. However, despite the supply shock, inflation declined to about 3 percent (y/y) in March, from 3½ percent (y/y) in December 2018, due to subdued aggregate demand, well anchored inflation expectations, and a broadly stable exchange rate. The current account deficit improved to 20¾ percent of GDP in 2019, from 30¾ percent of GDP in 2018, mainly due to much lower-than-expected megaprojects’ imports of services and a large payment (US$880 million) of one-off capital gains taxes related to the sale to Total of Occidental’s LNG operations in the country. The trade balance for goods, however, worsened driven by lower coal exports (mine flooding and lower export prices), higher megaprojects’ imports of goods and emergency relief imports. This deficit was largely financed by FDI, international aid and the RCF disbursement. Gross international reserves increased to US$3.9 billion at end-2019, from US$3.1 billion at end-2018, mainly due to the one-off capital gains taxes. In 2019, the (underlying) overall fiscal deficit, after grants and excluding one-off capital gains taxes, was contained at 5½ percent of GDP and public debt stood at almost 110 percent of GDP. On average, banks remained liquid, well capitalized and profitable. NPLs have been trending down and reached 10¼ percent of total loans in December 2019 (provisioning coverage of NPLs was comfortable at 93 percent).

Impact of the Covid-19 Pandemic

5. The impact of the COVID-19 pandemic will be significant in the short-term, dashing prospects of a nascent economic recovery. The brunt of the impact will be felt in the first half of 2020, due to lower tax revenue collections and higher spending to treat infected people and protect the most vulnerable in society, as well as production and transportation disruptions if large segments of the population have to be put in quarantine when the outbreak spreads further. In addition, the fall in international commodity prices and demand for exports will have an impact on economic growth and the availability of foreign exchange, including for the critical imports of food and medicine. Substantial and urgent BOP and fiscal financing gaps are materializing.

6. The pandemic will have a strong impact on all sectors of the economy:

  • Loss of output due to demand and supply shocks (including from virus containment measures) is currently projected to reduce 2020 real GDP growth to 2¼ percent, 3¾ percentage points below the October 2019 projection. Lower growth will be due to a combination of economic disruptions in services, transport, agriculture, manufacturing and communication coupled with a much worse external environment affecting export-oriented sectors, such as mining. Temporary inflationary pressures are likely to emerge from the supply shock and exchange rate depreciation. Credit is expected to slowdown, given a slowing economy and the adverse impact on business prospects and investment of uncertainty about the duration and intensity of the COVID-19 pandemic.

  • In the fiscal sector, the COVID-19 pandemic will lead in 2020 to a projected financing gap of about 4¾ percent of GDP due to (i) lower tax revenues (1¾ percent of GDP) given the adverse effect of lower GDP growth on revenue collections and temporary and well-targeted measures to support families, SMEs and the health sector, and (ii) higher spending to respond to the health crisis and humanitarian needs, including higher health related spending on goods and services (¾ percent of GDP), and higher cash transfers and subsidies to the poorest households as well as micro-businesses and SMEs (2¼ percent of GDP).

  • The external sector is expected to weaken, leading in 2020 to a projected financing gap of about 4¾ percent of GDP in 2020. The current account deficit excluding COVID-19 related grants and megaprojects is projected to widen to 29½ percent of GDP in 2020, from 27½ percent in 2019, mainly due to depressed export commodity prices and volumes partially offset by lower fuel imports. Gross international reserves are forecast to decline to US$3 billion by end-2020, falling by to 10 percent below the IMF’s reserve adequacy metric.

Text Table 1.

Macroeconomic Impact of COVID-19

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Sources; Moaambican authorities and IMF staff calculations.

7. Important downside risks remain. These include (i) a more pronounced than envisaged COVID-19 pandemic in Mozambique, with a sharper impact on all sectors of the economy, including even lower coal production and exports, (ii) delays in the implementation of the LNG megaprojects that have already reached their final investment decision (FID), and (iii) delayed normalization of the global economy and protracted trade disruptions. Previously identified risks remain, including (i) a deterioration in the security situation in the North, (ii) backtracking of peace negotiations with the main opposition party Renamo, and (iii) extreme climate events. In light of these risks and the distressed debt position, prudent debt management and medium term-fiscal consolidation are essential to ensure debt sustainability.

Policy Issues

The authorities’ immediate priority is to contain the spread of the COVID-19 pandemic and limit its impact on the poorest segments of society and preserve macroeconomic stability. Beyond this short-term objective, the authorities remain committed to medium-term fiscal consolidation and structural reform— including governance reform—to bolster inclusive and sustainable growth. The central bank is committed to cautious normalization of monetary policy and to safeguard financial stability.

8. Over the past few weeks, the authorities have taken the following measures to contain the crisis and mitigate its impact:

  • Prevention. Early actions included (i) the shutdown of schools from pre-school up to university, (ii) a ban of all gatherings – including religious services – of more than 50 people, (iii) a ban and cancellation of all entry visas, (iv) a 14-day mandatory quarantine for all travelers entering Mozambique, and (iv) the creation of a technical and scientific committee to advise the government in matters related to the COVID-19 pandemic. On March 30, President Nyusi declared a 30-day state of emergency that, inter alia, imposed limitations on movements within the country and border entries, (ii) banned all types of public or private events, and (iii) limited the activities of non-essential shops. Additional urgent actions include allocating sufficient resources for containment and support for the most affected.

  • Fiscal. On March 27, the government increased the budget allocation for the health sector, from about MT2 billion (0.2 percent of GDP) to about MT3.3 billion (0.3 percent of GDP). Revenue measures to ease pressures on families and the health sector are being implemented (¶6). Simplifying or postponing tax payments could also be envisaged, together with monitoring tax compliance of large taxpayers. These measures will need to be well targeted, timely and temporary. If the economic situation were to worsen, the government should prepare a contingency plan, including notably (i) further increases as needed of health spending by reallocating non-essential expenditure and limiting public wage increases and hiring of non-essential workers, and (ii) additional tax relief.

  • Monetary and financial. To ease liquidity conditions, the central bank reduced on March 16 reserve requirements by 150 basis points for both domestic currency and foreign currency deposits (to 11½ percent and 34½ percent respectively). On March 22, it announced measures to support financial markets and encourage prudent loan restructuring: (i) a foreign currency credit line of US$500 million for a period of nine months for institutions participating in the interbank foreign exchange market,2 and (ii) the waiver until December 31 of additional provisions by credit institutions and financial companies in cases of renegotiation of the terms and conditions of loans, before their maturity, for clients affected by the COVID-19 pandemic. On March 30, the central bank announced measures to easy payment system transactions and liquidity conditions by: (i) lowering fees and charges for digital transactions through commercial banks, mobile banking and e-currency, for three months, and (ii) waiving specific provision on foreign currency loans, until December 31. The central bank reduced the policy rate by 150 basis points to 11¼ percent on April 16.3

9. Beyond the immediate response to the COVID-19 pandemic, the authorities are committed to medium-term fiscal consolidation and structural reform— including governance reforms to reduce vulnerabilities to corruption —to bolster inclusive and sustainable growth:

  • Fiscal measures. During the crisis, the authorities are committed to create additional fiscal space and to increase health spending and social programs, through prioritization and reallocation. This will require, for example, a freeze of wage increases in 2020, expected to generate about ½ percent of GDP in savings, although temporary increases in benefits for health care workers could be envisaged. Over the medium term, once the crisis is resolved, the authorities will implement a VAT reform, aiming at widening the VAT base by reducing exemptions and zero-ratings to increase VAT revenue collections by about ½ percent of GDP in 2021 and an additional ¾ percent of GDP in 2022. Also, the government will implement a domestic financing strategy aimed at gradually reducing domestic debt and rebuilding government deposits.4

  • Monetary and exchange rate policies. During the crisis, the Bank of Mozambique (BM) stands ready to provide liquidity to the financial system, as needed, while ensuring that transparent information is available on eligible collateral. Staff recommends managing the foreign exchange credit line judiciously to help secure forex availability for critical fuel, food, medicine and health equipment imports. The BM is also committed to continue implementing a cautious monetary policy normalization and maintaining exchange rate flexibility as a shock absorber while allocating international reserves to the market to address disorderly market conditions.5 Staff concurs with a cautious easing bias given subdued aggregate demand and a benign inflation environment.6

  • Financial stability. The banking sector is well capitalized and liquid. It is well positioned to absorb credit losses and a liquidity squeeze if the crisis is short-lived. The BM will continue implementing prudential rules to support the safety and soundness of banks and the banking system and ensure loan classification and provisioning standards are maintained, exceptional loan restructuring is time bound without compromising the underlying information on loan quality, and the loans are clearly identified and reported. In addition, the BM will ensure capital buffers should be used first and liquidity buffers also used as needed. Once the crisis is resolved, measures to restore capital and liquidity levels above the minimum required will be discussed and executed as needed over a period considered appropriate to prevent additional stress on banks and the financial system.

  • Transparency, governance and corruption. Legislative and institutional reforms were adopted a few years ago and the country has a national plan and an adequate anti-corruption legal framework. However, a lack of effective implementation attributable in part to low technical capacity, inadequate budgets, insufficient institutional autonomy and poor oversight undermine efforts to fight corruption. The authorities are strongly committed to implementing the recommendations of the Government’s Diagnostic Report prepared with IMF TA and will undertake independent audits of crisis-mitigation health spending and related procurement processes once the pandemic abates and to publish the results. Staff strongly recommends the Government to prevent corruption and the misuse of emergency financing by strengthening transparency and accountability while putting in place effective mechanisms for the disbursement of funds.

Fund Support under the RCF

10. The authorities have requested support of 100 percent of quota under the RCF. This disbursement is equivalent to SDR227.2 million and represents 2.1 percent of GDP. It would be disbursed under the “exogenous shocks” window.

11. Mozambique meets the eligibility requirements for support under the RCF, and staff considers that access of 100 percent of quota to be appropriate:

  • Financial support under the RCF reflects Mozambique’s urgent BOP and fiscal needs following the external shock of the COVID-19 pandemic. The severe impact of the pandemic requires immediate financial support. The authorities are seeking US$700 million from the international community to fight the adverse economic effects of the COVID-19 pandemic. The RCF disbursement would close about forty-five percent of the external and fiscal financing gaps. Mozambique’s other development partners have also signaled their intention to provide support, including US$22 million in additional funds for the Pro-Saúde (Pro-Health) program, and also US$40 million from the Islamic Bank, US$170 million from the World Bank for support to the health sector and social protection, and US$ 54 million from the European Union for budget support.

  • Discussions on a new multi-year ECF supported arrangement are planned but cannot be concluded immediately. Rapid IMF involvement through the RCF is expected to play a catalytic role in securing needed external grants from development partners to help the authorities deal with the economic effects of the COVID-19 pandemic.

  • In the absence of IMF support and donors’ assistance, the fiscal gap would be closed with a much sharper drawdown of international reserves, leaving the reserve cover (4½ months of imports) significantly below the assessed adequate level (5¾ months of imports) in the 2019 Article IV consultation discussions.

  • Mozambique’s debt is assessed to remain in distress, but sustainable in a forward-looking sense. This assessment is unchanged relative to the last DSA and considers that, to a large extent, future borrowing and government guarantees reflect State participation in the sizable LNG developments. Albeit with some delay, the LNG megaprojects will proceed. The sustainability assessment is also anchored in the authorities’ strong commitment to implement fiscal consolidation and a prudent borrowing strategy. Additional debt reduction is envisaged as the government does not intend to support MAM, which will follow the normal course of commercial bankruptcy without backing, and the validity of the government guarantee on VTB’s loan to MAM is in dispute. The authorities have expressed their intention to request forbearance from creditors under the recently-announced G-20 initiative which would deliver debt service relief in the near term, thus providing an additional cushion to respond to the COVID-19 pandemic and flattening the projected sharp deterioration in debt liquidity indicators due to the COVID-19 pandemic. The authorities are committed to monitoring any new spending that would be financed by the debt service standstill and to fully disclose this information and their public sector financial commitments.

  • Mozambique continues to accumulate external debt service arrears, particularly on the “hidden loans” contracted with Credit Suisse and VTB.7 The overall stock of external arrears on public and publicly guaranteed external debt service reached US$1,375 million (about 9 percent of GDP) at end-2019.

  • Mozambique’s capacity to repay the Fund adequate in the baseline but subject to significant uncertainties and downside risks. A disbursement of 100 percent of quota would result in Fund exposure to Mozambique of 3½ percent of GDP, or 17¼ percent of international reserves. Annual repayments would peak at ⅓ percent of GDP and 1½ percent of government revenue in 2026. Risks from this exposure will be mitigated by the authorities’ excellent track record of servicing their debt obligations to the Fund.8

  • The authorities remain committed to economic policies to ensure more sustained and inclusive growth to improve development outcomes. In the current volatile and uncertain environment, the government will focus on immediate measures and prioritize social spending, including in the health sector.

Text Table 2.

Fiscal Financing Needs and Sources, 2020

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Ireland, Canada, Belgium, Switzerland, WB, WHO

Unidentified

12. Outstanding PRGT credit would reach 162½ percent of quota, of which 137½ percent for outstanding credit under the RCF,9 and total PRGT disbursements over a twelve month-period would reach 100 percent of quota.

13. A safeguards assessment required under last year’s RCF disbursement is being conducted. The safeguards assessment mission that was conducted in December 2019 found that the BM had made progress in streamlining its operations and improving its organizational structure. At the same time, it noted that governance arrangements continue to lack independent oversight over BM management and operations. The BM is committed to address the safeguards assessment mission’s recommendations, inter alia, by preparing legal reforms with IMF technical assistance to enhance autonomy and governance arrangements, formalizing an external audit selection and rotation policy, and strengthening the capacity of the internal audit function. In addition, the BM will publish the 2018 audited financial statements shortly after this audit is finalized and, going forward, will continue to publish the audited financial statements in a timely fashion.

Staff Appraisal

14. The economic and financial impact of the COVID-19 pandemic will be significant, dashing the expected recovery from TCs Idai and Kenneth. Real GDP growth has been revised significantly downward due to declines in extractive industry production and exports and disruptions to manufacturing, services, agriculture, transport and communication. The fiscal situation, that was already difficult, will deteriorate further with the need for additional spending to respond to the health and humanitarian crisis and tax revenue shortfalls due to weaker economic activity.

15. Staff supports the authorities’ policies to mitigate the impact of the COVID-19 pandemic while preserving macroeconomic and financial stability. Appropriate measures are being taken to increase health spending, help the most vulnerable, support the private sector, preserve the stability of the financial sector, and maintain the flexible exchange rate regime. Going forward, to help ensure that public debt indicators remain sustainable the authorities are committed to fiscal consolidation once the temporary shock has passed and confidence has been restored.

16. Staff encourages the authorities to take additional measures to mitigate the immediate impact of COVID-19. Timely, temporary and well-targeted fiscal measures to support health spending and provide additional tax relief should be considered. Simplifying or postponing tax payments should also be considered, together with monitoring tax compliance of large taxpayers. Going forward, to help ensure that public debt indicators remain sustainable, the staff welcomes the authorities’ commitment to fiscal consolidation once the COVID-19 shock has passed and confidence has been restored. The BM should continue implementing prudential rules to support the safety and soundness of banks and the banking system and ensure loan classification and provisioning standards are maintained, exceptional loan restructuring should be time bound, without compromising the underlying information on loan quality, and the loans are clearly identified and reported. Staff strongly recommends the Government to prevent corruption and the misuse of emergency financing, by strengthening transparency and accountability while putting in place effective mechanisms for the disbursement of funds. In this connection, the commitment to auditing how the funds were spent is welcome.

17. Against this background, staff supports the authorities’ request for a disbursement under the Rapid Credit Facility in the amount of SDR227.2 million (100 percent of quota). Staff support is based on urgent BOP and fiscal needs, and the authorities’ existing and prospective policies to address this shock, including the commitment to seek external grants and highly concessional financing for emergency assistance. Capacity to repay is adequate in the baseline but subject to significant uncertainties and downside risks. The authorities’ strong track record of repaying the Fund and commitment to fiscal consolidation in recent years are mitigating factors.

18. Discussions on a medium-term ECF arrangement are expected to take place later in the year when the current crisis has stabilized. The authorities have reiterated their strong interest in such discussions. In the meantime, they will stay engaged with staff to help them shape their medium-term fiscal consolidation strategy and structural reform agenda, with particular emphasis on governance reform.

Table 1.

Mozambique: Selected Economic and Financial Indicators, 2017–2025

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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 mid-April 2020).

Table 2a.

Mozambique: Government Finances, 2017–20251

(Billions of meticais)

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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, 2017–20251

(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, 2016–2020

(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 mid-April 2020).

Latest as of mid-April 2020.

Table 4a.

Mozambique: Balance of Payments, 2016–2025

(Millions of US dollars, unless otherwise indicated)

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Sources: Data from Government of Mozambique and projections by IMF staff. 2778.67 197 2,948 201

Includes interest payments for Ematum and previously undisclosed loans. 2,582 169 2,751

Includes repayments of previously undisclosed loans. 169.3 -527

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.

The grant for the debt service falling due in the 18 months from October 14, 2020 is subject to the availability of resources under the CCRT.

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.