IMF worries about elevated public debt in Mozambique

maputo 28mAn International Monetary Fund (IMF) staff team led by Ricardo Velloso visited Maputo from 13–27 March 2019, to conduct the Article IV consultation mission

“While it is still early to precisely assess the macroeconomic effects of Cyclone Idai and reconstruction costs, these will be very significant. The international community will have to continue playing a vital role in assisting Mozambique. In this context, the IMF will consider the authorities’ request for emergency financial assistance under the IMF Rapid Credit Facility (RCF),” Velloso added.

“Inflation remains subdued, reflecting tight monetary policy, and exchange rate and food price stability. International reserves at the Bank of Mozambique are relatively comfortable, covering over six months of next year’s non-megaproject imports.”

“The fiscal policy effort was significant in 2017-18. Subsidies on fuel and wheat prices were eliminated, an automatic fuel price adjustment mechanism was adopted, and electricity and public transportation tariffs were adjusted, bringing those prices close to cost recovery levels. Despite these efforts, the overall fiscal deficit in 2018 remained relatively high.”

“The mission welcomes the implementation of the strategy to clear the stock of domestic payments arrears to suppliers and advises the authorities to avoid new arrears by strengthening commitment controls. It also encourages the authorities to develop a strategy to clear the backlog of VAT refunds.”

“The mission welcomes cabinet approval of the SOE Law regulations and recommends strengthening controls over SOE debt issuance. The new agency envisaged in the SOE Law, once created, should exert strong financial oversight over the entire sector. However, in this area, time is of the essence. The authorities should speed up the preparation and implementation of recovery, restructuring and/or privatization plans of SOEs in distress to limit risks to the budget.”

“While the mission supports the drive for fiscal decentralisation, it recommends a gradual transfer of revenue and spending responsibilities to sub-national levels of government in line with their capacity to maintain the quality of delivery of public goods and services. It also stresses the importance of implementing fiscal decentralization without increasing overall fiscal deficits given the challenges posed by the elevated level of public debt.”

“On the monetary front, the mission encourages the Bank of Mozambique to continue reducing the policy rate, albeit cautiously, while ensuring that inflation expectations remain well anchored. Lower real interest rates would help increase bank credit flows to the private sector, particularly SMEs, fostering economic activity and job creation, as well as financial inclusion. It recommends maintaining exchange rate flexibility as a shock absorber and preserving an adequate level of international reserves. The mission welcomes the Bank of Mozambique resolve to enhance supervision, enforce prudential requirements and upgrade the regulatory framework to ensure financial stability.”

“The mission encourages the authorities to continue taking steps to strengthen governance, transparency and accountability. It welcomes their ongoing efforts, with IMF technical assistance, to prepare a diagnostic report of governance and corruption challenges in areas most relevant for economic activity. The mission strongly recommends publication of this diagnostic report shortly after completion.”

“To accelerate inclusive and private sector-led growth, the mission recommends removing impediments to private sector investments and employment, adopting reforms to improve the business climate, and strengthening social safety nets."

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