I. Introduction

1. Our Mozambican authorities thank management and staff for their timely response to the request for emergency financial assistance under the Rapid Credit Facility (RCF) to help meet urgent balance of payment (BOP) needs created by the COVID-19 pandemic. They consider the RCF important to catalyze grant and concessional financing from development partners to help contain the spread of the pandemic.

2. The impact of the pandemic on Mozambique has been severe. It has dampened economic prospects and stalled the nascent recovery from the devastating impact of two tropical cyclones that hit the country in 2019. Considering the urgent BOP needs arising from COVID-19, the authorities request emergency financing from the Fund in the amount of SDR 227.2 million (100 percent of the quota).

II. Impact of the COVID-19 Pandemic

3. The global pandemic has heightened uncertainty, with negative repercussions to the Mozambican economy. As a result, economic growth is expected to decline by 1.8 percentage points to 2.2 percent in 2020 reflecting the negative impact of the crisis on the agriculture, manufacturing, tourism and mining sectors. In turn, the contraction in economic activity and associated declines in tax revenue, will worsen the overall fiscal balance from -0.2 percent of GDP to -5.6 percent in 2020. On the external front, the decline in international commodity prices is expected to depress export earnings and widen the current account deficit to 63.3 percent of GDP from 20.7 percent in 2019.

4. To tackle the effects of COVID-19, the authorities expect disbursements from donors estimated at $491 million compared to an estimated total financing need of $700 million. The authorities have also received support from the World Bank, AfDB, Islamic Development Bank and others development partners. Most of the assistance from development partners will be in the form of budget support, hence the need to strengthen public financial management and controls. In this respect, the authorities are committed to ensuring effective and transparent use of donor resources. They will undertake an audit of crisis-mitigation spending and related procurement processes once the crisis abates and publish the results of the audit.

III. Policy Response to the Pandemic

5. To contain the pandemic and support the economy, the authorities have responded swiftly and forcefully through measures articulated in their COVID-19 National Prevention Plan. Key mitigation measures include the closure of national borders, schools, bars and restaurants, and restrictions to international flights. Further, the government is scaling up health expenditures to strengthen tracking and testing capacity. The authorities acknowledge that the financing gap created by the pandemic has placed a significant strain on the economy and they intend to continue to work closely with their development partners to secure the health of the people of Mozambique.

6. On the fiscal front, the authorities have re-allocated resources from the current budget to finance increased health sector spending. Measures adopted thus far include: i) increased spending on epidemic prevention and treatment; and ii) investments in new hospitals. In addition, to provide relief to local businesses they are offering tax relief, suspending government fees and waiving social contributions. They are also supporting households through cash transfers to the most vulnerable segments of the population and providing financial support to micro, small and medium enterprises.

7. On monetary policy, the authorities remain committed to cautious normalization of monetary policy and safeguarding financial stability. To this end, the Banco de Moçambique (BM) has announced several measures to reassure markets and build confidence through the provision of liquidity, while preserving the stability of the financial system. Specific measures include lowering reserve requirements by 150 basis points for both domestic and foreign currency to free-up liquidity in the banking sector. In addition, the central bank opened a $500 million foreign currency credit facility for commercial banks. Moreover, some regulatory provisions in the banking system have been relaxed. Further, the BM stands ready to intervene to smoothen disorderly market conditions and remains committed to exchange rate flexibility.

IV. Post-Pandemic Policy Measures

8. The authorities remain committed to safeguarding macroeconomic stability and fostering economic growth. They are determined to eliminate the primary fiscal deficit after grants by 2023 through a combination of revenue enhancing and spending rationalization measures to ensure fiscal and debt sustainability. In addition, they will continue to calibrate the policy mix to anchor inflationary expectations, preserve exchange rate flexibility, and improve financial sector resilience.

9. While Mozambique has been assessed to be in debt distress, staff’s assessment confirms that debt is sustainable in a forward-looking sense. The authorities expect substantial revenue from state participation in the sizable liquified natural gas (LNG) development, starting in 2023. Further, they are committed to fiscal consolidation to bring debt to moderate levels over time as well as strengthening debt management capacities to ensure effective oversight over the entire debt portfolio.

10. The authorities are committed to strengthen governance, in line with the recommendations of the Government’s Diagnostics Report published in August 2019. To this end, they intend to intensify efforts to enforce existing laws aimed at fighting corruption and reinforce the rule of law with IMF technical assistance. At the same time, the Attorney General’s Office will continue to work cooperatively with bilateral partners 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.

V. Conclusion

11. The Mozambican authorities greatly appreciate the provision of debt relief under the Catastrophe Containment Relief Trust (CCRT). They remain committed to pursuing policies geared at preserving macroeconomic stability. Fund assistance under the RCF would be important to complement fiscal space created by debt relief and help cushion the economy and pave the way for a potential ECF program.