National Budget Review for Mozambique

Infrastructure and investment in FY2016/17

In December 2016, the Mozambican Finance Ministry announced it would be spending a third more than initially budgeted for FY2017, with a total national budget allocation of USD 3.5 billion, due to a decline in supply of domestic and foreign loans. In fact, according to the IMF, the country had budgeted for a deficit of 11% to GDP, at a time when it still enjoyed financial support from the institution – prior to the announcement of the government’s undisclosed debt.

 

The Mozambican government’s debt problems have spiralled to crisis levels in recent years. In FY2016, the government made a surprise announcement regarding USD 1.4 billion in undisclosed debt that it could not pay timeously. The response from institutions such as the IMF and World Bank was stern, with both institutions opting to suspend financial assistance to Mozambique. The country’s overall debt owed to foreign creditors, stood at an estimated USD 9.86 billion at the end of FY2016, or 80% of GDP according to the IMF1. Mozambique’s government debt levels increased at a rapid rate, rising from 37.9% of GDP in FY2011 to 74.8% in FY2015 according to CABRI2. In the FY2017, following the uncovering of undisclosed debt, government debt to GDP will reach an alarming 112%. The increase in budget allocations targeted at repaying government loans will exert more strain on the treasury and subsequently reduce proposed funding for infrastructure projects in the short to medium term.

 

In FY2015, GDP growth was fairly robust at 6.3%, although this came from a low base. The best performing sectors were: agriculture 5.9%, energy 13.9% and communications at 4.3%. According to the World Bank, Mozambique’s GDP grew by 5.8% in FY2016 and is projected to rebound to 7.1% in FY2017. However, FY2017 figures are merely estimates and largely hinge on gas and coal production investment projects attracting foreign investment.

 

Mozambique ought to enhance industrialisation initiatives and infrastructure projects in order to enhance trade relations, particularly with its SADC member states. In the short to medium term, Mozambique’s Treasury has to avoid falling into a debt trap by prioritising austerity measures, while systematically reducing government debt levels. In February 2017, the concessional arm of the AfDB, the African Development Fund (ADF), approved two USD 69.6 million transport sector investment risk participations under its Private Sector Credit Enhancement Facility (PSF). The risk participations will include investment projects in Ghana, Malawi and Mozambique. The purpose of these projects aims to promote regional integration and trade through infrastructure development projects. In the short term, as a result of the country’s constrained fiscal budget, Mozambique will require more assistance in the form of similar initiatives in order to meet the shortfall in government funding allocated to infrastructure investment in FY2017.

 

Since the launch of the PSF scheme in 2015, the cumulative amount of exposures approved has reached USD 420 million or 62% of the total allocated to the program3. The PSF scheme specifically targets a broad range of sectors including: transport, energy, industrial, agriculture and financial sectors.

 

Mozambique should explore strengthening trade ties with its neighbour, South Africa. A few years ago the South African government, under the Department of Trade and Industry (DTI), implemented the Avoidance of Double Taxation Agreement and the Agreement on One Stop Border Posts. The aim of the agreements was to improve trade relations between the two countries, particularly as members of the SADC. The creation of the Maputo Development Corridor Initiative (MCLI), linking the port of Maputo with South Africa’s industrial heartland, symbolises the importance of bilateral ties between the South African and Mozambican governments. The primary strategic focus of MCLI is the active engagement of South African, Mozambican and Swaziland governments in trade activities and encouraging public-private partnerships within the region. Trade relations can be further strengthened in future, earmarking the MCLI as the first choice for regional importers and exporters within the region and among SADC member states.

 

Since the 2014 election of FRELIMO leader, Filipe Nyusi, as president, political stability in Mozambique remains fragile. His election was contested by the opposition party, RENAMO, and has since led to sporadic tensions, resulting in violent incidents across the country. The political climate remains unstable as both parties have failed to reach consensus on other major issues such as the disarmament of RENAMO’s residual armed forces which took part in the civil war, and the sharing of state power. Present indications infer the FRELIMO government does not intend to enter power sharing talks or any kind of dialogue with the ‘rebel group’ and instead would wish to see RENAMO disarmed and defeated. Unfortunately, RENAMO has no plans to disarm unless all of its grievances with the current government are settled, which may lead to further tensions in the short to medium term. Foreign investors will be watching the situation with keen interest and any sign of a potential removal of the current government by RENAMO will inevitably lead to capital flight.

 

Despite the seemingly difficult challenges Mozambique faces, there are numerous opportunities for economic growth over the longer term. Large capital flows are expected to pick up in the natural gas sector from 2017 to 2020, although export gains and a subsequent reduction of the current account deficit aided by the industry are only expected by 2022. Mozambique’s economic growth is off of a low base and the issues inhibiting growth are largely structural. Proper economic planning, anchored on sustainable and inclusive growth, is necessary for the country to move up the stages of development. Nonetheless, as is the case in rest of Africa, there are promising opportunities for foreign investors and private sector participants within the Mozambican economy. The key lies in sensible government policy and creating an environment which will encourage private capital to be disbursed amongst various sectors.


1 International Monetary Fund
2 Collaborative Africa Budget Reform Initiative
3 African Development Bank


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