Mozambique faces challenging outlook as growth slows down

14 Décembre 2017

Maputo, Mozambique, December  (Infosplusgabon) - Mozambique’s growth continues to slow down and the outlook remains challenging, requiring an urgent re-balancing of the policy mix to ensure durable macroeconomic stability and enhance inclusive growth prospects, an International Monetary Fund (IMF) mission observed on Thursday.

According to Michel Lazare, who led the IMF staff team on the mission from 30 November-13 December, growth is expected to decline to about 3 percent in 2017, compared to 3.8 percent in 2016.

In a statement on the team’s findings, Lazare noted that 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. Also, the external position improved allowing the Bank of Mozambique (BM) to accumulate significant amounts of foreign exchange reserves.

Regarding fiscal policy, he said that 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,” Lazare said

.

“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 has urged Mozambican authorities to further consolidate the 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,” the statement said.

Over the medium term, according to the IMF team, a sustained fiscal effort would 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’ programme 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, the team suggested.

“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 state-owned enterprises that pose significant fiscal and financial sector risks,” the mission’s statement pointed out.

The IMF staff team visited Mozambique to complete discussions under the 2017 Article IV Consultation.

FIN/INFOSPLUSGABON/VIO/ GABON 2017

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