A staff team headed by Michel Lazare visited Mozambique from June 16-24 to assess recent economic developments and help design corrective measures needed to prevent a further deterioration in economic performance.
The mission also aimed at evaluating the impact of the debt that was disclosed to staff in April 2016, as well as discussing measures to strengthen transparency, improve governance, and ensure accountability while avoiding recurrence of similar debt issues. The mission met with President Nyusi, Prime Minister do Rosario, the Economy and Finance Minister, the Governor of the Bank of Mozambique, other sectoral ministers, senior government officials, parliamentarians, civil society, private sector representatives and the donor community.
At the end of the mission, Mr. Lazare issued the following statement:
“Mozambique is facing difficult economic challenges. Economic growth in 2016 is expected to decline to 4.5 percent (from 6.6 percent in 2015), nearly three percentage points below historical levels, with substantial downside risks to this projection.
Inflation has been rising fast (reaching 16 percent in May). Fiscal policy in 2015 and the first half of the year has been excessively expansionary, with an increase in net credit to the government that far exceeded program targets. At the same time, the metical has depreciated by about 28 percent since the beginning of the year and international reserves have continued to decline.
“In addition, the discovery in April of $1.4 billion (10.4 percent of Mozambique’s GDP) of previously undisclosed loans has pushed the total stock of debt at end-2015 to 86 percent of GDP. According to our technical assessment, public debt is now likely to have reached a high risk of distress. Against this background, performance under the 2015-2017 Stand-by Credit Facility has been disappointing, with most assessment and performance criteria or indicative targets being missed at end-December 2015 and end-March 2016.
“The mission and the authorities agreed that this context calls for an urgent and decisive package of policy measures to avoid a further deterioration in economic performance. In particular, substantial fiscal and monetary tightening, as well as exchange rate flexibility, are needed to restore macroeconomic sustainability, reduce pressures on inflation and the balance of payments, and help alleviate pressures on the foreign exchange market while restoring balance between supply and demand on the foreign exchange market. They also agreed that adjustment should preserve critical social programs.
“The mission has made good progress in identifying with the authorities a package of measures aimed at strengthening transparency, improving governance, and ensuring accountability while, to the extent possible, avoiding recurrence of undisclosed debt. The mission agreed that recent initiatives to investigate the previously undisclosed debt, through the Attorney General and a Parliamentary Inquiry Commission, are important steps to restore confidence, though it stressed that further measures are needed. In particular, an international and independent audit of the EMATUM, Proindicus, and MAM companies would be needed – the latter two being the companies that received funding under the previously undisclosed loans.
“Further progress in the effective implementation of both the corrective macroeconomic measures and the measures aimed at strengthening transparency, improving governance, and ensuring accountability would pave the way for the resumption of program discussions at a later stage.
“The discussions were held in a cordial and constructive atmosphere, and the mission thanks the authorities for their hospitality.”