Mozambique faces a fragile economic outlook and its government must communicate its policy objectives more clearly.
The Executive Board of the International Monetary Fund (IMF) has announced that the Mozambican government faces increasingly difficult financing conditions due to the vulnerability of the country’s debt, both domestic and foreign.
According to an IMF team, that visited Mozambique three months ago, the government faces increasingly difficult financing conditions with delays in debt servicing, and “with delays in debt servicing, the holding of government bonds by national banks – the main source of financing for the large and persistent fiscal deficits – has stagnated. Net external financing has been negative.”
Given restrictive financing conditions, the IMF estimates that the fiscal deficit will have decreased significantly in 2025, falling to 4.5 per cent of Gross Domestic Product (GDP), compared to 6.2 per cent in 2024, largely due to reduced expenditure on goods, services and capital projects.
“Primary fiscal deficits are expected to remain around two per cent of GDP until 2029, but are likely to increase due to growing interest payments. Economic growth, driven by the mining sector, may remain modest, at around two per cent, reflecting weak credit growth”, the IMF says.
The financial institution also claimed that inflation will likely exceed the Bank of Mozambique’s single-digit target in the medium term, stimulated by monetary financing of large fiscal deficits.
However, the IMF believes that the country has been recording some positive developments “such as low inflation, adequate foreign exchange reserves, the resumption of the Liquefied Natural Gas (LNG) project by TotalEnergies and partners, and the removal of Mozambique from the Financial Action Task Force’s (FATF) grey list.”
According to the IMF, the LNG sector offers substantial potential in the medium term, with production expected to begin in 2030. Until then, the current account deficit is expected to remain high, reflecting LNG-related imports and obligations related to foreign debt servicing.
If the government hoped that the IMF would announce a new loan, it was disappointed. Instead, the Fund called for “fiscal consolidation” to reduce financing needs and restore debt sustainability, as well as to create fiscal space to finance vital social and development needs.
“Fiscal consolidation demands control over payroll expenditure, broadening of tax base, improvement of public finance management, addressing the fiscal risks of state-owned companies and the pension system, and strengthening debt management and transparency, while protecting vulnerable groups”, the group says.
Some of this is standard IMF demand for lower public sector wages. Not for the first time, the IMF wants to square the circle – lower wages, but protection of the groups that depend on those wages.
The IMF also calls for “greater exchange rate flexibility” which will supposedly allow the economy to adjust to changing external conditions and support growth. “Structural reforms must be strengthened, focusing on governance, transparency, and accountability, while promoting a more conducive environment for private sector development”, the IMF demands.
Some of this is a thinly disguised call for devaluation of the Mozambican currency, the metical. Orthodox economists repeatedly claim that the metical is overvalued. There have been around 63 meticais to the US dollar since 2021. This artificial exchange rate has been blamed for the current shortage of foreign currency.
But any sharp devaluation would almost certainly lead to higher food prices, and undermine the government’s fight against inflation.
Source: AIM
