Abstract
IMF Country Report No. 22/358
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IMF Country Report No. 22/358
THE REPUBLIC OF MOZAMBIQUE
FIRST REVIEW UNDER THE THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY, AND REQUEST FOR MODIFICATION OF THE MONETARY POLICY CONSULTATION CLAUSE, AND FINANCING ASSURANCES REVIEW—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF MOZAMBIQUE
December 2022
In the context of the First Review Under the Three-Year Arrangement Under the Extended Credit Facility, and Request for Modification of the Monetary Policy Consultation Clause, and Financing Assurances Review, the following documents have been released and are included in this package:
A Press Release including a statement by the Chair of the Executive Board.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on November 21, 2022, following discussions that ended on September 16, 2022, with the officials of the Republic of Mozambique on economic developments and policies underpinning the IMF arrangement under the Extended Credit Facility. Based on information available at the time of these discussions, the staff report was completed on November 4, 2022.
A Statement by the Executive Director for the Republic of Mozambique.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2022 International Monetary Fund
Press Release
PR22/403
IMF Executive Board Concludes the First Review under the Extended Credit Facility Arrangement for the Republic of Mozambique
FOR IMMEDIATE RELEASE
The IMF Executive Board completed the first review under the Extended Credit Facility (ECF) arrangement for Mozambique, providing the country with access to SDR 45.44 million (about US$59.26 million).
The three-year ECF arrangement aims to support the economic recovery, reduce public debt and financing vulnerabilities, and foster higher and more inclusive growth through structural reforms.
All end-June 2022 program performance criteria, indicative targets and the structural benchmark were met. The monetary policy stance and proactive tightening since early 2021 are deemed appropriate to address higher than expected inflation.
Washington, DC — November 21, 2022: The Executive Board of the International Monetary Fund (IMF) concluded the first review under the three-year ECF arrangement for Mozambique.1 The Board also completed the financing assurances review and approved the authorities’ request for modification of conditionality. 2 This allows for the immediate disbursement of SDR 45.44 million (about US$59.26 million), usable for budget support, bringing Mozambique’s total disbursements under the ECF arrangement to SDR 113.6 million (about US$150million).
Growth is projected to increase in 2022, with the strengthening economic recovery despite the worsening international economic environment and rising commodity prices, reflecting a strong vaccination campaign and full lifting of COVID-related restrictions in July 2022. Inflation has risen to double digits, driven by global fuel and food prices and tropical storms that impacted domestic food supply in the second quarter. Fiscal developments in 2022 are broadly aligned with expectations, with strong revenue and contained spending. Large liquefied natural gas (LNG) investments are driving the current account. The first LNG project started production in November 2022. Program implementation has been strong, despite the challenging environment, with completion of important program commitments in the areas of fiscal governance and anti-corruption.
Risks to the outlook are significant but balanced. Passthrough of fuel and food inflation to other prices, social unrest, terrorism activity in the north and natural disasters are downside risks, balanced by upside risks from the strengthening recovery, strong prospects for LNG demand, and scope for higher-than-expected non-LNG growth in the medium-term.
Following the Executive Board discussion, Mr. Bo Li, Deputy Managing Director and Acting Chair, made the following statement:
“The economic recovery is strengthening, supported by a successful COVID vaccination campaign. Program performance has been strong, with all quantitative targets and the structural benchmark met at end-June. While the outlook remains positive, driven by large liquefied natural gas (LNG) projects, significant risks remain, including from adverse climate events and fragile security situation. Governance weaknesses and debt vulnerabilities also pose challenges. In that context, continued capacity development and donor support remain imperative for Mozambique to achieve its development objectives.
“Solid revenue performance and spending restraint helped align fiscal outcomes with program objectives. The authorities’ fiscal policy reforms will contribute to medium-term fiscal consolidation. A broader VAT base will help secure buoyant and diversified revenues independent of commodity prices. Reforming public sector remuneration will improve efficiency in delivering public services and create space for other spending priorities over time. Revenue administration and public financial management reforms are also essential to achieve fiscal policy objectives.
“The draft Sovereign Wealth Fund law is a welcome step to develop a transparent, accountable, and efficient framework for managing LNG receipts. Additional efforts are needed to mitigate revenue volatility, continue strengthening public investment management, and integrating natural resource revenues into the broader fiscal framework.
“The monetary policy stance and proactive tightening since early 2021 are appropriate to manage inflation expectations. The Monetary Policy Consultation Clause (MPCC) upper inflation band was breached due to the rise in global fuel and food prices and the impact of domestic floods on food production. Continued caution is warranted to ensure adherence to program targets on reserves going forward. Additional exchange rate flexibility would help absorb external shocks.
“Progress continues across the governance and anti-corruption agenda. The authorities are implementing their action plans to address shortfalls in the AML/CFT framework and Mozambique’s grey listing by the Financial Action Task Force. Amending the public probity law and continued implementation of recommendations from the audit of COVID spending are near-term priorities.
“The climate policy agenda is being articulated and efforts should continue in integrating climate resilience criteria in public investment and project selection.”
Mozambique: Selected Economic Indicators, 2019–23
Mozambique: Selected Economic Indicators, 2019–23
| 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|
| National Income and Prices | |||||
| Nominal GDP (MT billion) | 963 | 983 | 1,033 | 1,142 | 1,292 |
| Real GDP growth (percentage change) | 2.3 | -1.2 | 2.3 | 3.8 | 5.0 |
| Consumer price index (percentage change, end of period) | 3.5 | 3.5 | 6.7 | 15.0 | 8.5 |
| Government Operations (percent of GDP) | |||||
| Total revenue | 29.0 | 23.9 | 25.7 | 25.7 | 25.9 |
| Total expenditure and net lending | 29.8 | 32.9 | 31.5 | 33.2 | 33.3 |
| Overall balance, after grants | 0.3 | -5.4 | -4.8 | -3.7 | -3.9 |
| Primary Balance after grants | 3.5 | -2.3 | -2.1 | -0.2 | -0.7 |
| Public sector debt | 99.0 | 120.0 | 107.0 | 102.9 | 101.4 |
| of which: external | 79.4 | 97.8 | 82.8 | 77.6 | 75.9 |
| Money and Credit | |||||
| Reserve money (percentage change) | 19.1 | 9.0 | -14.4 | -5.1 | 11.2 |
| M3 (Broad Money) (percentage change) | 12.1 | 23.6 | 2.8 | 2.3 | 11.8 |
| Credit to the economy (percentage change) | 5.0 | 14.8 | 3.0 | 3.0 | 11.5 |
| Credit to the economy (percent of GDP) | 24.0 | 27.0 | 26.5 | 24.6 | 24.3 |
| External Sector (percentage change) | |||||
| Merchandise exports | -10.2 | -23.1 | 55.6 | 38.9 | -2.5 |
| Merchandise exports, excluding megaprojects | 8.3 | -22.0 | 42.7 | 14.7 | 8.6 |
| Merchandise imports | 9.5 | -12.9 | 33.2 | 70.1 | -35.5 |
| Merchandise imports, excluding megaprojects | 9.3 | -4.5 | 37.8 | 10.2 | -0.6 |
| External current account, after grants (percent of GDP) | -19.1 | -27.3 | -23.6 | -41.5 | -14.7 |
| Net international reserves (millions of U.S. dollars, end of period) | 3,605 | 3,493 | 2,927 | … | … |
| Gross international reserves (millions of U.S. dollars, end of period) | 3,884 | 4,070 | 3,470 | … | … |
Mozambique: Selected Economic Indicators, 2019–23
| 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|
| National Income and Prices | |||||
| Nominal GDP (MT billion) | 963 | 983 | 1,033 | 1,142 | 1,292 |
| Real GDP growth (percentage change) | 2.3 | -1.2 | 2.3 | 3.8 | 5.0 |
| Consumer price index (percentage change, end of period) | 3.5 | 3.5 | 6.7 | 15.0 | 8.5 |
| Government Operations (percent of GDP) | |||||
| Total revenue | 29.0 | 23.9 | 25.7 | 25.7 | 25.9 |
| Total expenditure and net lending | 29.8 | 32.9 | 31.5 | 33.2 | 33.3 |
| Overall balance, after grants | 0.3 | -5.4 | -4.8 | -3.7 | -3.9 |
| Primary Balance after grants | 3.5 | -2.3 | -2.1 | -0.2 | -0.7 |
| Public sector debt | 99.0 | 120.0 | 107.0 | 102.9 | 101.4 |
| of which: external | 79.4 | 97.8 | 82.8 | 77.6 | 75.9 |
| Money and Credit | |||||
| Reserve money (percentage change) | 19.1 | 9.0 | -14.4 | -5.1 | 11.2 |
| M3 (Broad Money) (percentage change) | 12.1 | 23.6 | 2.8 | 2.3 | 11.8 |
| Credit to the economy (percentage change) | 5.0 | 14.8 | 3.0 | 3.0 | 11.5 |
| Credit to the economy (percent of GDP) | 24.0 | 27.0 | 26.5 | 24.6 | 24.3 |
| External Sector (percentage change) | |||||
| Merchandise exports | -10.2 | -23.1 | 55.6 | 38.9 | -2.5 |
| Merchandise exports, excluding megaprojects | 8.3 | -22.0 | 42.7 | 14.7 | 8.6 |
| Merchandise imports | 9.5 | -12.9 | 33.2 | 70.1 | -35.5 |
| Merchandise imports, excluding megaprojects | 9.3 | -4.5 | 37.8 | 10.2 | -0.6 |
| External current account, after grants (percent of GDP) | -19.1 | -27.3 | -23.6 | -41.5 | -14.7 |
| Net international reserves (millions of U.S. dollars, end of period) | 3,605 | 3,493 | 2,927 | … | … |
| Gross international reserves (millions of U.S. dollars, end of period) | 3,884 | 4,070 | 3,470 | … | … |
Title page
REPUBLIC OF MOZAMBIQUE
FIRST REVIEW UNDER THE THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY, AND REQUEST FOR MODIFICATION OF THE MONETARY POLICY CONSULTATION CLAUSE, AND FINANCING ASSURANCES REVIEW
November 4, 2022
EXECUTIVE SUMMARY
Context. The economic recovery is strengthening, as a successful vaccination campaign and recovery from COVID-related restrictions dominate headwinds from the worsening international economic environment. Growth is projected at 3.8 percent this year, rising to 5 percent in 2023 as the first liquefied natural gas (LNG) project enters production. Food and fuel prices have pushed inflation to double digits. Monetary policy has been proactive, including a further 200bps increase in the policy rate in September 2022. Credit conditions remain tight, while financial sector buffers built before the pandemic have underpinned banking sector resilience. Fiscal outcomes have been in line with expectations. The current account deficit is lower than forecast (though it still widens due to LNG infrastructure imports), as exports have been stronger than anticipated. International reserves have declined faster than anticipated due to higher imported fuel prices.
Outlook and risks. Risks from the conflict in the north of the country have abated somewhat, with local populations beginning to return to affected areas. But security risks and population displacement remain critical challenges. Natural disasters and structural food insecurity are significant risks. The government has been passing through international fuel price increases gradually and aims to put in place measures to mitigate the impact of price rises on public transport users, while tight monetary policy is expected to keep inflation expectations in check. Upside risks arise from the strengthening recovery, strong prospects for LNG, and scope for higher-than-expected non-LNG growth in the medium-term.
Program performance. All performance criteria, indicative targets and the structural benchmark for end-June 2022 were met. The monetary policy consultation clause (MPCC) inflation consultation band was breached in June 2022, reflecting higher international food and fuel prices as well as the effects of floods in Mozambique. A consultation letter is annexed to the staff report. Staff proposes a change to the indicative target on the ceiling for the domestic debt stock to reflect delays in disbursements of grants from a development partner and anticipation of issuance in the second quarter given eased market conditions at that time. Progress continued across the broader structural agenda, including in the fiscal and anti-money laundering areas. A minor modification to the structural benchmark establishing quarterly commitment ceilings is proposed to align the measure with practical implementation and moving the completion date from end-December 2022 to end-January 2023. The target completion date for the structural benchmark on the submission to Parliament of the Public Probity Law was moved from end-December 2022 to end-June 2023.
Strategy and prospects. Macroeconomic prospects remain similar to program approval, and performance criteria for the second review have not been modified. Key reforms will be finalized and implemented for the second review, including with respect to the VAT, the public sector wage bill, and public financial management. A sovereign wealth fund law expected to be submitted to Parliament in November will help manage natural resource wealth efficiently and transparently.
Approved By
Abebe Selassie (AFR) and Anna Ilyina (SPR)
An IMF team comprising Alvaro Piris (head), Samuel Delepierre, Mai Farid, Samuel Mann, Dominique Simard (all AFR), and Gaëlle Pierre (SPR) held discussions with the Mozambican authorities during a mission to Maputo September 5-16, 2022. The mission met with the Honorable Mr. Adriano Maleiane, Prime Minister, the Honorable Mr. Ernesto Max Tonela, Minister of Economy and Finance; Bank of Mozambique Governor Rogério Zandamela; senior officials, members of parliament and private sector representatives. The team was assisted in Maputo by Alexis Meyer Cirkel, resident representative; Esther Palacio, TA coordinator; Edson Manguinhane, local economist; and Béatrice Rangel, assistant. Jorge Essuvi (OED) participated in some meetings. Research assistance was provided by Jimena Montoya and Tebo Molosiwa. Ms. Fausa Aliu provided secretarial assistance.
Contents
CONTEXT
PROGRAM PERFORMANCE
RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK
POLICY DISCUSSIONS
A. Fiscal Policy and Structural Reforms
B. Reducing Debt Vulnerabilities
C. Monetary and Financial Sector
D. Structural Reforms
PROGRAM MODALITIES AND OTHER ISSUES
STAFF APPRAISAL
BOX
1. The Fuel Price Setting Mechanism
FIGURES
1. Growth and Living Standards
2. COVID-19 Pandemic, Growth and Inflation
3. Monetary and Financial Developments
4. Selected External Sector Developments
5. Fiscal Developments
TABLES
1. Selected Economic and Financial Indicators, 2019–27
2a. Government Finances, 2019–27 (Billions of Meticais)
2b. Government Finances, 2019–27 (Percent of GDP)
2c. Government Finances, 2019–27 (Percent of non-LNG GDP)
3. Monetary Survey, 2019–2027
4a. Balance of Payments, 2019–27 (Millions of U.S.)
4b. Balance of Payments, 2019–27 (Percent of GDP)
5. External Financing Needs and Sources, 2021-27
6. Financial Soundness Indicators for Commercial Banks and Deposit Takers, 2018–22
7. Risk Assessment Matrix
8. Indicators of Capacity to Repay the Fund, 2022-2032
9. Schedule of Disbursements Under the ECF Arrangement, 2022-2025
10. Composition of Public Debt and Debt Service by Creditor, 2021-2023
ANNEX
I. Consultation with the IMF Executive Board on the Missed Inflation Target Under the MPCC
APPENDIX
I. Letter of Intent
Attachment I. Memorandum of Economic and Financial Policies
Attachment II. Technical Memorandum of Understanding
Arrangements under the ECF provide financial assistance that is more flexible and better tailored to the diverse needs of low-income countries (LICs), including in times of crisis (e.g., protracted balance of payments problems).
The 36-month ECF arrangements was approved in May 2022 (Press Release).
