A staff team from the International Monetary Fund, led by Doris Ross, visited Mozambique during February 26- March 13, 2014 to hold discussions towards the completion of the second review under the three-year Policy Support Instrument (PSI) approved in June 2013 (see Public Information Notice (PIN) 13/75). The team met with Prime Minister Vaquina, Finance Minister Chang, Planning and Development Minister Cuereneia, Bank of Mozambique Governor Gove, other line ministers, senior government officials, parliamentarians, the private sector, civil society, and development partners.
At the conclusion of the visit, Ms. Ross issued the following statement:
“Mozambique’s economic performance continues to be very strong. Despite severe floods in early 2013, GDP growth is estimated at 7 percent in 2013 and is likely to accelerate to over 8 percent in 2014. This reflects bustling activity in mining, construction, transport and communications, and financial services. Risks to this outlook remain moderate, mainly relating to international commodity prices and policy uncertainty in an election year. Average inflation was 4.2 percent in 2013 and is likely to stay anchored by the authorities’ medium-term target of 5-6 percent. Inflation seems well-contained, but there are risks associated with inflationary pressures in neighboring countries (especially in South Africa), and a highly expansionary budget. The external current account deficit is projected to reach  percent of GDP in 2014 due to imports for large investment projects financed by foreign direct investment (FDI). International reserve coverage seems adequate at 4.5 months of projected non-megaproject imports. Most quantitative and structural program objectives for end-December 2013 and early 2014 were met.
“Regarding economic policies for 2014, the staff team agrees with the objective to expand public investment, but noted that such increase should preserve debt sustainability and take into account absorptive capacity constraints. Relative to the size of its economy, public investment in Mozambique is high when compared to other countries and we urge the authorities to make substantive efforts to bring more transparency to investment priorities and decisions, ensure value-for –money, and overcome considerable weaknesses in public investment planning, project evaluation, implementation, monitoring and ex-post assessment. This is particularly important as much of the investment is financed by borrowing and public debt levels are rising.
“The fiscal stance in 2014 is expansionary, and a supplementary budget to incorporate new expenditures associated with the electoral reform will be needed. Thus the overall fiscal deficit after grants is projected to increase from 3 percent of GDP in 2013 to 9.5 percent in 2014, after taking into account one-off windfall revenue of 4 percent of GDP in 2013 and 2.9 percent in 2014 (expected).This deficit level is not sustainable over the medium term, especially as windfall revenue is not likely to recur. The staff team urged the authorities to begin a gradual fiscal adjustment in 2015, including some moderation in new hiring, and ease the wage bill down from 11 percent of GDP in 2014 toward the authorities’ medium term target of 8-9 percent.
“The Bank of Mozambique’s (BM) commitment to keep money growth in check in 2014 is welcome and will help to moderate the rapid credit expansion in 2012-13 to a more prudent pace. Vigilance may be needed to tighten monetary policy if signs of inflationary pressure emerge. Deposit and lending rates in Mozambique remain relatively high, reflecting structural factors. Reforms to promote competition, transparency and financial literacy, such as the establishment of private credit registries, should over time help lower the credit risk to banks and the cost to borrowers.
“We acknowledge the authorities’ recent efforts to bring some transparency to the operations of EMATUM, a new public company for tuna fishing, which had issued $850 million in loan participation notes in September 2013 with a full government guarantee. The inclusion in the 2014 budget of the quasi-fiscal activities of this company ($350 million) and the increase in the ceiling for government guarantees were important initial steps. The mission welcomes the authorities’ recent adoption of an action plan on fiscal transparency. It envisages close monitoring of and reporting on EMATUM’s operations, which will be critical in assessing the associated fiscal risks.
“On return to Washington D.C., the team will prepare a staff report that, upon management approval, is tentatively scheduled for discussion by the Executive Board in early May. The Board discussion is expected to complete the 2nd PSI review.
“We would like to thank the authorities for the constructive policy discussions and warm hospitality.”