Press Release No. 15/580

Press Release: IMF Executive Board Completes Fifth PSI Review, Approves US$282.9 Million Credit Facility and Concludes 2015 Article IV Consultation with Mozambique

December 18, 2015

On December 18, 2015, the Executive Board of the International Monetary Fund (IMF) completed the fifth review of Mozambique’s economic performance under the program supported by the Policy Support Instrument (PSI)¹.

In completing the review, the Executive Board approved the authorities request for waiver and modification of three assessment criteria for December 2015 to account for the changed environment and revised microeconomic projections.

The Board also approved Mozambique’s request for an SDR 204.5 million, (about US$282.9 million) Standby Credit Facility to supplement the PSI to augment reserves and maintain macroeconomic stability, with a first SDR 85.2 million disbursement (about US$117.9 million) available immediately. The SCF aims to alleviate the external balance of payments shocks, and through strengthening macroeconomic stability, to achieve the government’s goals on poverty reduction and inclusive growth.

The Executive Board approved the PSI for Mozambique on June 24, 2013 (see Press Release No. 13/231).

Following the Executive Board’s discussion, Mr. Min Zhu, Deputy Managing Director and Acting Chair, issued the following statement:

“Despite challenges, Mozambique’s economic growth continues to be robust and inflation remains low. However, lower commodity prices and a decline in foreign exchange inflows have generated a temporary balance of payments gap. The authorities have taken strong policy measures to preserve macroeconomic stability. Continued implementation of prudent policies under the standby credit facility will be essential to ensure debt sustainability, safeguard against external shocks, as well as promote strong and inclusive growth.

“The authorities’ front-loaded corrective measures, including a tightening of the 2016 budget deficit and of the monetary policy stance in 2015, as well as a reform of the foreign exchange market should help to stabilize the economy. Rigorous implementation of the budget, enhanced VAT management, close monitoring of fiscal risks, and allowing for continued exchange rate flexibility will be key to restoring macroeconomic stability. The central bank should stand ready to further tighten liquidity conditions as needed. Work on an action plan to improve the profitability of the EMATUM fishing company should be fast tracked to reduce its risk to the government budget.

“Significant progress has been made on structural reforms. To make Mozambique’s strong growth performance more inclusive and broad based, the reform agenda needs to focus on enhancing public financial management, including budget controls and fiscal transparency, and developing the institutional framework and building capacity to prepare for the management of natural resource wealth. Priority should also be given to reforming the energy sector, improving access to financial services, and strengthening the business environment. A vigorous debt management strategy will be crucial to address the challenges of significant infrastructure gaps at a time when debt vulnerabilities have been rising.”

The Executive Board also completed the 2015 Article IV Consultation with Mozambique.

Despite lower commodity prices and a weaker global environment, Mozambique’s economic prospects remain positive given planned massive investment in natural resources. While GDP growth averaged 7 percent over the last five years, Mozambique’s per-capita income ($624 in 2014) and human development index (178 out of 187 countries) remain low. There is a need to continue implementing policies that support fiscal sustainability, infrastructure investment, and inclusive growth.

Mozambique’s economic outlook remains robust. Growth of 6.3 percent is expected in 2015, and remains below potential at 6.5 percent in 2016, mainly due to a stagnant mining sector and substantially tighter fiscal and monetary policies. Over the medium term, growth is projected to recover to 7.5–8 percent, supported by massive investment in natural gas projects and higher coal production if key agreements can be reached for coal and gas sector development. Inflation is expected to increase towards the BM’s medium target of 5–6 percent, due to the recent depreciation of the metical and adjustments in administered prices.

Balance of payments pressures are increasing and the exchange rate has depreciated substantially. While the overall current account is improving due to a decline in import-intensive megaproject investments (given the end of the gas exploration phase), the non-megaproject current account has continued to worsen, intensifying pressures in the foreign exchange market. Foreign exchange market pressures, first experienced in late 2014 and early 2015, subsided during April–July but have since re-emerged. The non-megaproject current account deficit largely drives these pressures in the domestic foreign exchange market. During July 2014–June 2015, this deficit worsened by $1.7 billion compared to the previous 12 months. This deterioration was caused by lower commodity prices and declining FDI and external aid, while imports remained dynamic owing to strong domestic demand fueled by expansionary fiscal and monetary policies. The depreciation of the metical has so far not had a noticeable impact on import demand.

The fiscal consolidation agreed under the PSI program has been implemented by the new administration. Following election-related fiscal slippages in 2014, the 2015 budget started to place public finances on a more sustainable path through a reduction of about 1.5 percent of GDP (excluding one-off factors in 2014) in public spending. The main objective of fiscal policy in 2016 is to ensure debt sustainability and contribute to the required external adjustment.

Executive Board Assessment²

Executive Directors noted that while Mozambique’s economic growth remains robust, lower commodity prices and a decline in foreign direct investment and donor support have adversely affected the economy and generated a temporary balance of payments gap. Directors commended the actions taken by the authorities to maintain macroeconomic stability and agreed that continued strong commitment to prudent policies and deeper structural reforms under the Fund-supported program is essential to reduce vulnerabilities and foster sustainable and inclusive growth.

Directors supported the tighter monetary policy stance and encouraged the authorities to take further action, as needed, to curb inflationary pressures and improve the foreign exchange market. Continued exchange rate flexibility would help safeguard foreign reserves and absorb the impact of external shocks. Directors supported the efforts to strengthen the financial sector and encouraged the authorities to fully implement their Financial Sector Development Strategy so as to improve access to small and medium-sized enterprises.

Directors commended the authorities for substantially scaling back external borrowing in light of rising risks of debt distress. Going forward, they called for rigorous budget implementation by strengthening the management of VAT, reducing wage bill growth, and closely monitoring fiscal risks, especially those arising from government guarantees and public enterprises. Directors highlighted the urgent need to develop an action plan to improve the profitability of the EMATUM fishing company.

Directors commended the progress on structural reforms, including on the mining and hydrocarbon legislation which should facilitate further investments in the large natural gas projects. They encouraged a renewed focus on enhancing budget controls and fiscal transparency and developing the institutional framework and building capacity to prepare for the management of natural resource wealth. Directors welcomed the recent adjustments in electricity tariffs and advised the authorities to accelerate fuel subsidy reforms, while protecting the most vulnerable segments of the population.

Directors emphasized that fostering financial inclusion and improving the business environment would help make Mozambique’s strong growth more inclusive and broad-based. They called for greater emphasis on the effective use of public resources, transparent investment project analysis and prioritization, and vigorous debt management strategy, given the significant infrastructure gaps and rising debt vulnerabilities.

¹ The PSI is an instrument of the IMF designed for countries that do not need balance of payments financial support. The PSI helps countries design effective economic programs that, once approved by the IMF's Executive Board, signal to donors, multilateral development banks, and markets the Fund's endorsement of a member's policies (see http://www.imf.org/external/np/exr/facts/psi.htm). Details on Mozambique’s PSI program are available at http://www.imf.org/mozambique.

² At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.