Press Release No. 17/493

IMF Staff Completes 2017 Article IV Mission to Mozambique

December 14, 2017

• Fiscal consolidation is essential to restore macroeconomic stability, while preserving critical social and infrastructure spending.
• Given larger than expected recent declines in inflation, there is space for faster monetary easing.
• Decisive action to restructure financially-weak state-owned enterprises (SOEs) are important to contain fiscal and financial sector risks.

A staff team from the International Monetary Fund, led by Michel Lazare, visited Mozambique during November 30-December 13, 2017 to complete discussions under the 2017 Article IV Consultation. At the conclusion of the visit, Mr. Lazare issued the following statement:

“Mozambique’s growth continues to slowdown and the outlook remains challenging, requiring an urgent rebalancing of the policy mix to ensure durable macroeconomic stability and enhance inclusive growth prospects.

“Tight monetary policy successfully reduced annual inflation to about 7 percent in November 2017 and the exchange rate has stabilized over the last 6 months. The external position improved allowing the Bank of Mozambique (BM) to accumulate significant amounts of foreign exchange reserves. Growth, however, is now expected to decline to about 3 percent in 2017, compared to 3.8 percent in 2016. Regarding fiscal policy, while the Government eliminated subsidies on fuel and wheat; significant spending pressures stemming from debt service and wages, as well as weaker-than-anticipated revenue collection are expected to result in an overall fiscal deficit exceeding 8 percent of GDP. The large financing needs of the Treasury combined with a tight monetary policy to stabilize inflation continues to press market interest rates higher, depressing credit availability to the private sector—particularly to SMEs—and affecting economic activity, employment, and socio-economic conditions.

“On the fiscal front, the mission welcomes efforts made by the Government to reduce the fiscal deficit, in particular through measures related to the wage bill and revenues that are proposed in the 2018 budget. However, in the absence of additional policy actions the outlook for 2018 and the medium term remains challenging, especially given the continued weakening of revenue collection and the rigidity of recurrent spending pressures. The mission urges the authorities to further consolidate its fiscal position by eliminating VAT and other tax exemptions that could help mobilize additional revenues and by reducing current spending, while protecting outlays to social and infrastructure spending.

“On the monetary front, while the loose fiscal stance continues to put pressure on market interest rates, the mission encourages the central bank to reassess the pace of policy rate cuts given the large unexpected declines in inflation.

Over the medium term, a sustained fiscal effort will be required to lower deficits and limit further accumulation of public domestic and external debt, including arrears to creditors and suppliers. As such, besides containing the growth of current spending, the mission urged the authorities to align the public investments’ program considering project feasibility, absorption capacity constraints, and debt sustainability. Progress in the discussions with creditors on a debt restructuring that were initiated by the authorities in October 2016 would be an essential contribution to restore debt sustainability. As fiscal policy consolidates, the mission recommends that further monetary policy rate changes go in tandem with expected inflation and the evolution of key risks. As for the financial sector, the mission welcomes the central bank strong resolve to enhance supervision, enforce prudential requirements and upgrade the regulatory framework to ensure financial sector stability.

On the structural front, the mission urges the authorities to take decisive steps to strengthen the business environment and to restructure financially-weak SOEs that pose significant fiscal and financial sector risks. The mission commends the authorities for submitting to Parliament the SOE law and for approving a decree providing a regulatory framework to the issuance of public debt and guarantees. In this context, the mission encourages the authorities to continue developing their action plan to strengthen governance, transparency, and accountability. Regarding the follow up to the audit of Ematum, Proindicus and MAM companies, the mission reiterates the need to fill the information gaps in the audit report and takes note of the Government’s recommendation to wait for the outcome of the ongoing investigations by the Prosecutor General Office.

“We would like to thank the authorities for constructive discussions and warm hospitality. The Executive Board meeting on Mozambique’s Article IV Consultation is tentatively scheduled for end-February 2018.”

The team met with Prime Minister Carlos Agostinho do Rosario, Economy and Finance Minister Adriano Maleiane, Bank of Mozambique Governor Rogerio Zandamela, and other sectoral ministers, parliamentarians, representatives of the Judiciary, senior government officials, private sector, trade unions, and civil society representatives, as well as with development partners.