Press Release No. 18/329

IMF Staff Concludes Visit to Mozambique

August 3, 2018

An International Monetary Fund (IMF) staff team led by Ricardo Velloso visited Maputo during July 25–August 3, 2018, to take stock of recent macroeconomic developments, update the macroeconomic framework for 2018-19, and provide input to the preparation of the 2019 draft budget.

At the end of the mission, Mr. Velloso issued the following statement:

“The Mozambican economy is recovering gradually. Real GDP growth reached 3¾ percent in 2017—¾ percentage point higher than projected by Fund staff in the last Article IV consultation—supported by a stronger-than-expected recovery in agriculture and significantly higher mining production. Inflation declined rapidly, from a peak of 26 percent (year-on-year) in November 2016 to about 6 percent (year-on-year) in June, reflecting tight monetary policy, exchange rate stability, and decelerating food price increases. Strong export performance and subdued import growth have helped narrow the external current account deficit, supporting a large accumulation of international reserves, which at end-June covered about 6⅔ months of next year’s projected non-megaproject imports.

“On the fiscal front, the government took important measures that helped contain the fiscal deficit: subsidies on fuel and wheat were eliminated, an automatic fuel price adjustment mechanism was adopted, and electricity and public transportation prices were increased. Responding to rapid disinflation, the Bank of Mozambique has been easing monetary policy, cutting its policy rate by a total of 600 basis points since April 2017.

“The near-term outlook is of gradual and broad-based recovery in economic activity and subdued inflation. Real GDP growth is projected in the range of 3½ percent to 4 percent in 2018, picking up to the range of 4 percent to 4½ percent in 2019. This recovery is expected to be supported by further declines in interest rates given the benign inflation outlook. Inflation is projected to remain low at 6½ percent in 2018, and to decelerate to 5½ percent in 2019. International reserves are projected to remain at comfortable levels in 2018 and 2019.

“Regarding the ongoing preparations for the 2019 budget, the mission recommended the submission of a draft budget underpinned by realistic macroeconomic assumptions, as well as prudent revenue and spending projections. On the revenue side, the mission recommended removing VAT exemptions, except for basic basket goods, and strengthening VAT administration. It advised, on the spending side, reducing the size of the wage bill as a share of GDP through moderation in wage increases, particularly for top earners in the public sector, and parsimony in additional hires, which should be limited to urgent needs in social sectors. The mission also stressed the importance to continue limiting other spending items through better prioritization, including public investment outlays.

“Given that public debt is in distress, the mission encouraged the government to rely to the maximum extent possible on external grant financing and highly concessional loans, while ensuring that issuance of debt guarantees strictly follows the new, stricter approval procedures established in December 2017. The mission welcomed the ongoing efforts to clear over time domestic payments arrears to suppliers, and adopt reforms in public financial management to avoid further accumulation of arrears. Also, it stressed the importance to eliminate over time the VAT refund backlog.

“The mission noted that there was room for the Bank of Mozambique to continue easing monetary policy, but noted that this should be done cautiously given the uncertainties in the world economy and those posed by a heavy electoral cycle in Mozambique. It encouraged the Bank of Mozambique to safeguard a comfortable level of international reserves, and maintain the flexible exchange rate regime that has served the country well.

“The mission held fruitful discussions with Minister of Economy and Finance Adriano Maleiane, Bank of Mozambique Governor Rogério Zandamela and other senior government officials, representatives from the Assembly of the Republic, private sector, and the donor community. The mission thanks the authorities for their availability and cooperation as well as the arrangements made to facilitate the mission’s work.”