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Mozambique Economic Update: Facing Hard Choices

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  • December 2016


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STORY HIGHLIGHTS
  • The second Mozambique Economic Update (MEU) assesses the country’s economic developments since the recent revelation of $1.4 billion in previously undisclosed loans
  • The report highlights the depth of the economic downturn and notes that although the policy response is picking-up pace and the prospects for growth are sound, a sharper focus on fiscal adjustment in the medium term is needed to restore fiscal sustainability
  • Recommendations from the report include implementing reforms to strengthen debt management and manage fiscal risks from state-owned enterprises

MAPUTO, December 12, 2016 – Mozambique’s economic outlook is uncertain as it faces an ongoing economic downturn compounded by the fallout from the discovery of hidden debts earlier this year, according to the World Bank’s latest economic analysis for the country.

While low commodity prices, drought and conflict contributed to economic slowdown, the Mozambique Economic Update (MEU): Facing Hard Choices says the discovery of $1.4 billion in previously undisclosed commercial borrowing has dented confidence in the country, and derailed its track record for high growth and economic stability. Following three consecutive quarters of slowing economic activity in 2016, the MEU forecasts gross domestic product (GDP) growth for the year at 3.6%.  

According to the report, the metical depreciated by 42% against the U.S. dollar in the first 10 months of the year. The weaker metical accelerated the pace of inflation, which reached 25% in October. Food price inflation increased to 40%, making the high food prices the most acutely felt symptom of the ongoing economic downturn by Mozambicans, according to the MEU.

The report also notes that foreign direct investment and exports are projected to fall by 17% and 8%, respectively, in 2016.

 



Rebuilding confidence and restoring stability

The MEU notes that the policy response picked up pace in the second half of 2016. The government’s revised budget for 2016 was a first step in adjusting the fiscal framework to the new realities. The Banco de Moçambique, Mozambique’s central bank, also stepped-up its monetary tightening regime, the report notes, and there are signs that pressures on the external position are easing as imports have declined and the metical has remained relatively stable since October 2016. The initiation of an independent audit of the Empresa Moçambicana de Atum (EMATUM), Mozambique Asset Management (MAM), and Proindicus loans is a key step in rebuilding confidence, according to the report.

“Mozambique maintains its prospects for growth in the coming years, but the immediate challenge remains for policy makers to sharpen the focus on restoring fiscal sustainability, whilst ensuring that future wealth spurs growth in the non-megaproject economy,” said Shireen Mahdi, World Bank senior country economist for Mozambique.

Mozambique’s gas production prospects shape expectations for a recovery in growth to 6.6% by 2018, according to the MEU. In the meantime, the report notes that existing megaprojects are showing resilience and may benefit from a boost in the near term from an improving outlook for key commodity prices.

To restore confidence and economic stability, the MEU highlights the wide agenda that lies ahead for the Mozambican government. In the short-term, the report says much rests on the outcome of the debt negotiations initiated by the government, and the transparent handling of the independent audit.

In addition, report recommendations include the following key items:

  • Set a medium-term framework for restoring fiscal sustainability, anchored by a target for reducing debt and a credible fiscal adjustment program
  • Enhance financial sector surveillance and the strengthening of crisis management instruments, particularly if further monetary tightening is in the pipeline in the near-term
  • Manage fiscal risks and contingent liabilities better
  • Implement reforms to develop effective oversight over state-owned enterprises and other public entities, along with reforms to overhaul the framework for managing guarantees