PESA
Mozambican Public Debt Sustainability

Mozambican Public Debt Sustainability

Mozambique’s public debt sustainability has been severely affected by the undisclosed public debt saga which broke in April 2016. This has affected projections on public debt as well as public debt sustainability in Mozambique. As a result, projections for the average public debt levels from 2015 to 2017 changed from 69.6% of GDP before the hidden debt discovery, to an average of 109.4% of GDP after the hidden debt became public[1].

In 2018 public debt was projected to have increased further to 121.8% of GDP. At these levels, public debt is far beyond the SADC limit of 60.0% of GDP[2]. In addition, public debt servicing costs increased from MZN 8.2 billion (external debt: MZN 4.1 billion, approx. USD 184.2 million) in 2015 to MZN 29.8 billion (external debt: MZN 19.6 billion, approx. USD 1.2 million) in 2017[3]. Over this period the MZN depreciated by 31.0% from an annual average exchange rate of MZN 44.9 per USD in 2015, to an average of MZN 58.8 per USD in 2017[4]. Moreover, gross international reserve cover was projected to decline from 2.8 months of import cover (USD 2.8 billion) in 2018 to an annual average of 1.7 months’ import cover (USD 3.1 billion) from 2019 to 2023[5].Therefore, Mozambique is faced with public debt sustainability challenges, especially since most of its public debt is foreign-denominated which exposes public debt sustainability to exchange rate risk. Mozambican external public debt was projected to have increased by 17.5% in 2018 to USD 13.4 billion (2017: USD 11.4 billion) which is a sign of the growing public debt challenge faced by the government of Mozambique[6].

Mozambican Public Debt Sustainability
Overview of Mozambican Public Debt Sustainability

 

Public debt was projected to growth from 121.8% of GDP in 2018 to an annual average of 139.3% of GDP from 2019 to 2023; mainly due to the increase in external debt to finance megaprojects in the oil and gas sector[7]. External debt was projected to increase from 95.3% of GDP in 2018 to an annual average of 107.9% of GDP from 2019 to 2023[8]. Hence, Mozambican public debt is currently more than double the regional public debt target in SADC limit of 60.0%. This is also more than three times the public debt target of 40.0% espoused in the Medium-term Debt Management Strategy[9].

The foregone analysis of total public debt provides a general perspective on the macro sustainability of Mozambique’s public debt. However, a deeper analysis of other sustainability indicators is needed to clearly understand the underlying drivers for sustainability of Mozambique’s public debt. From 2015 to 2017, Mozambique’s real GDP growth rate exceeded the effective interest rate, which changed in 2018. The real GDP growth rate decreased from an annual average of 4.5% from 2015 to 2017, to 3.0% in 2018[10]. The effective interest rate on Mozambican public debt increased from an average of 2.5% from 2015 to 2017, to 3.0% in 2018[11].Therefore, public debt remained sustainable until the public debt saga in 2016. As a result, the IMF and other lenders halted their financial support for the government of Mozambique which led to slower public investment and economic growth declined. In addition, the uncovering of undisclosed debt and penalties imposed by lenders led to higher public debt servicing costs

In the forward-looking medium-term from 2019 to 2021, real GDP growth rate is projected to remain below the effective interest rate. Real GDP growth was projected to decrease from 3.0% in 2018 to an annual average of 2.4% from 2019 to 2022[12]. Although, over this period the effective interest rate is projected to increase from 3.0% in 2018 to an annual average of 3.9% from 2019 to 2021[13], public debt is project to remain unsustainable in the forward-looking medium-term.

Considering the current and projected performance, Mozambique is at the brink of debt distress. External debt is mainly pointed as the source of its risk. Unless courageous, bold and objective measures and policies are put in place it will be difficult to avoid the projected scenarios. Currently Mozambique public debt is unsustainable to the point of crossing a distress threshold. The country registered a total debt of 121.8% of GDP in 2018 going beyond the SADC macroeconomic convergence target of 60.0% of GDP and the domestic target of 40.0% of GDP[14].

Forecasts point to a rising effective interest rate with a slow recovery in real GDP growth. Real GDP is projected at an annual average of 2.4% from 2019 to 2021; whereas the effective interest rate is projected at 3.9% over the same period. The ratio of debt servicing costs as a share of total government revenue is projected to decrease slightly from 51.7% in 2018 to an annual average of 50.9% from 2019 to 2023. Lastly, Mozambique is faced with high risk of public debt distress because from 2019 to 2023 external public debt is projected to constitute 77.5% of total public debt and gross foreign reserves are projected to only provide 1.7 months of import cover. This exposes public debt to exchange rate risk and the very real likelihood of the government being unable to service its debt due to high dependency on foreign debt.

 


[1] IMF 2016. Mozambique 2015 Article IV Consultation Report, International Monetary Fund: Washington, D.C. Available At: https://www.imf.org/ [Last Accessed: 29 January 2019]; IMF 2018. Mozambique 2017 Article IV Consultation Report, International Monetary Fund: Washington, D.C. Available At: https://www.imf.org/ [Last Accessed: 29 January 2019]

[2] SADC 2012. Public Debt, Southern African Development Community: Gaborone. Available At: https://www.sadc.int/ [Last Accessed: 13 February 2019].

[3] IMF 2016. Mozambique 2015 Article IV Consultation Report and IMF 2018. Mozambique 2017 Article IV Consultation Report, ibid.

[4] IMF 2018. Mozambique 2017 Article IV Consultation Report, ibid.

[5] IMF 2018. Mozambique 2017 Article IV Consultation Report, ibid.

[6] IMF 2018. Mozambique 2017 Article IV Consultation Report, ibid.

[7] IMF 2018. Mozambique 2017 Article IV Consultation Report, ibid.

[8] IMF 2018. Mozambique 2017 Article IV Consultation Report, ibid.

[9] MMoEF 2015. Estratégia de Médio Prazo para Gestão da Dívida Pública 2015-2018, Ministério da Economia e Finanças, Governo de Moçambique: Maputo, Available At: http://www.mef.gov.mz/ [Last Accessed: 14 February 2019].  

[10] IMF 2016. Mozambique 2015 Article IV Consultation Report, ibid.

[11] IMF 2018. Mozambique 2017 Article IV Consultation Report, ibid.

[12] IMF 2018. Mozambique 2017 Article IV Consultation Report, ibid.

[13] IMF 2018. Mozambique 2017 Article IV Consultation Report, ibid.

[14] MMoEF 2015. Estratégia de Médio Prazo para Gestão da Dívida Pública 2015-2018, ibid.

 

 

 


Ken Kalala Ndalamba

Role: Research Associate
Contact: ken@politicaleconomy.org.za
Ken is a Researcher specialising in strategic management, organisational development and leadership...

Advertisement

Follow PESA Online

Follow PESA Online

Follow us on some of your favourite social media.

Contact Us

Please complete the General Enquiry form and submit it to us for a response. Please use the subject “Media” for all media-related requests.