A staff team from the International Monetary Fund (IMF), led by Doris Ross, visited Mozambique during October 22-November 6, 2014 to hold discussions towards the completion of the third review under the three-year Policy Support Instrument (PSI) ¹ approved in June 2013 (see Press Release No. 13/231). The team met with President-elect Filipe Nyusi, Finance Minister Manuel Chang, Planning and Development Minister Aiuba Cuereneia, Bank of Mozambique Governor Ernesto Gove, other line ministers, senior government officials, the private sector, civil society, and development partners. It also met with the presidential candidates of the three main parties. The team traveled to Tete, where it met with Governor Paulo Auade and got acquainted with the main economic challenges facing a region that exemplifies the importance of developing extractive industries while creating jobs and economic opportunities for the population, including in agriculture.

At the conclusion of the visit, Ms. Ross issued the following statement:

“Mozambique’s economic performance remains robust. Real Gross Domestic Product (GDP) growth is projected at 7.5 percent in both 2014 and 2015, reflecting strong activity in all sectors, especially extractive industries, construction, transport and communication, commerce and financial services. Risks to this outlook have increased somewhat recently with the decline in commodity prices in world markets, especially for coal, and uncertainty about the large Liquefied Natural Gas (LNG) projects. While substantial natural resource revenues are 6-10 years away, efforts are needed to put in place adequate institutional arrangements and capacity to address the large new challenges associated with this sector and the promise it holds for the country.

“Inflation remains well-contained thanks to an increase in domestic food production and a decline in import prices. Average inflation stood at just 1.4 percent in September, well below the same period last year, and is expected to remain below 3 percent for 2014 as a whole. The external current account deficit is large due to imports for big investment projects financed by foreign direct investment (FDI). International reserve coverage seems broadly adequate.

“Recent program performance is mixed. The mission urged the authorities to step up implementation of key structural reforms, especially in the public financial management (PFM) area, financial system and market development. A focus on rural infrastructure development and further improvements in the business environment should help make growth more inclusive by enhancing agricultural productivity and job creation in the private sector.

“Regarding economic policies for the rest of 2014 and 2015, the staff team and the authorities agreed on the need to maintain revenue efforts and slow the growth of public spending, including the wage bill, goods and services and investment while enhancing the efficiency of spending, in order to preserve debt sustainability in the medium term. While the 2015 budget should begin to narrow the fiscal deficit, this should be achieved in a manner that protects social spending such as basic health and education, and social assistance programs.

“The authorities are appropriately committed to (i) further strengthening their management of public resources, including by adopting a fiscal rule to improve the management of windfall revenue; (ii) enhancing the transparency and efficiency of public investment; and (iii) strengthening the management of public enterprises and disclosing the audited annual reports of the largest ones, including the Mozambican Tuna Company (EMATUM). As economic challenges become more complex, the authorities should continue to sharpen their tools to monitor and guide macroeconomic developments.

“The Bank of Mozambique’s commitment to keep money growth in check is welcome and will help to moderate the recent rapid pace of credit expansion to more prudent levels. Real interest rates in Mozambique are still high by international standards, and reforms should address the underlying structural factors to make financial markets more flexible, and thus reduce borrowing cost.

“On return to Washington D.C., the team will prepare a staff report that, upon management approval, is scheduled for discussion by the Executive Board in early January 2015.

“We would like to thank the authorities for the constructive policy discussions during this period of political transition and for their warm hospitality.”

¹ PSI is an instrument of the IMF designed for countries that do not need balance of payments financial support. The PSI helps countries design effective economic programs that, once approved by the IMF's Executive Board, signal to donors, multilateral development banks, and markets the Fund's endorsement of a member's policies (see http://www.imf.org/external/np/exr/facts/psi.htm). Details on Mozambique’s PSI program are available at http://www.imf.org/mozambique.