A staff team from the International Monetary Fund, led by Michel Lazare, visited Mozambique during October 14-28, 2015 to complete discussions towards the completion of the fifth review under the three-year Policy Support Instrument (PSI) approved in June 2013 (see Press Release No. 13/231) and under the 2015 Article IV Consultation, and reach understandings on a new program to be supported under the IMF’s Stand-by Credit Facility (SCF).
The team met with Prime Minister Carlos Agostinho do Rosario, Economy and Finance Minister Adriano Maleiane, Bank of Mozambique Governor Ernesto Gove, and other sectoral ministers, senior government officials, the private sector, civil society, and development partners.
At the conclusion of the visit, Mr. Lazare issued the following statement:
“The Mozambican authorities and the IMF team completed the Article IV Consultation discussions and reached a staff-level agreement for completing the fifth review under the PSI-supported program. In addition, they have reached a staff-level agreement on an 18-month economic framework through 2017 that could be supported with SDR 204.48 million (about US$286 million) under the IMF’s SCF, subject to approval by IMF management and the Executive Board. The Executive Board meeting is tentatively scheduled for mid-December 2015.
“Economic activity in 2015 has remained solid, though new challenges have emerged and require decisive policy action. In the mission’s views, growth will reach 6.3 percent in 2015 and is projected to accelerate slightly to 6.5 percent in 2016. Inflation is currently still low at about 2 percent, but is expected to increase towards 5-6 percent over the next few months due to the recent depreciation of the metical, and required adjustments in administered prices. Over the medium term (2017-20), growth could average 8 percent owing to positive prospects of massive investments in extractive industries, especially liquefied natural gas.
“While medium-term prospects remain positive, short-term challenges have become more complex. As other countries in the region, Mozambique is currently experiencing an external shock associated with the drop in commodity prices, lower growth in trading partners, and delays in investment associated with large natural resource projects. Excessively expansionary policies in 2014 (especially on the fiscal side) also contributed to the current difficulties the country is facing. Imports have continued to grow at a fast pace at 17 percent year-on-year, while exports have stagnated. Capital inflows have also declined substantially compared to a year ago. This has created pressures in the foreign exchange market and has caused a sharp decline in international reserves and a depreciation of the metical.
“Against this backdrop, performance in implementing the IMF-supported PSI program was mixed. While some end-June 2015 quantitative program targets were met, 3 assessment criteria and one indicative quantitative target were missed. The same criteria and target were also missed at the end of September 2015. Delays were also incurred in the implementation of a number of structural reforms supported under the PSI.
“Subject to approval by the IMF management and the Executive Board, the team and the authorities agreed on a strong corrective policy package to put the program back on track and manage the above mentioned shocks to the balance of payments. This policy package would involve further fiscal consolidation in 2016 to continue to preserve debt sustainability and contribute to the needed external adjustment. Monetary policy tightening and substantial moderation in credit expansion is also required. The team commended the Bank of Mozambique for the recent decision to tighten monetary policy and recommended a continuation of the tightening cycle. In addition, efforts to reduce the current fragmentation of the foreign exchange market are necessary to generate greater incentives for banks to mobilize foreign exchange from their depositors. The team also discussed a range of structural reforms to help manage fiscal risks, eliminate arrears on VAT refunds, make public spending more efficient and transparent, and support more inclusive growth, including through greater financial deepening.
“The team believes that the authorities’ economic program, together with the agreed policy package, is strong and adequate to respond to the temporary external shocks that the Mozambique economy is going through at the moment.
“We would like to thank the authorities for the constructive policy discussions and warm hospitality.”
Source: International Monetary Fund (IMF)