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GDP Growth and Public Finance in Mozambique: FY2019/20

GDP Growth and Public Finance in Mozambique: FY2019/20

Mozambique’s economy has been on a downward spiral due to slow improvements in coal and aluminium prices and reduced mining production[1]. The Mozambican economy and mining sector were severely affected by fluctuations in world commodity prices towards the end of 2014. Because coal (approx. USD 1.7 billion) and aluminium (approx. USD 1.2 billion) exports constituted 56.8% of total exports in 2018, the Mozambican economy is susceptible to external shocks caused by the commodity price fluctuations[2]. The price of coal declined by an annual average of –7.1% from USD 75.7 per MT in 2014 to USD 70.1 per MT in 2016. The price of aluminium also declined by an annual average of –4.5% from USD 1867.4 per MT in 2014 to its lowest at USD 1604.2 per MT in 2016. As a result, export earnings declined and the Mozambican Metical (MZN) depreciated by an annual average of –21.0% from MZN 31.5 per USD in 2014 to MZN 63.1 per USD in 2016[3]. Due to the MZN depreciation, pass through inflation resulted in Mozambican consumer price inflation to rise to its peak of 19.9% in 2016 which far exceeds the Bank of Mozambique’s policy target band of 5.0% to 6.0% inflation[4]. Nevertheless, coal prices recovered in 2016 and aluminium prices started recovering 2017 but this has not been sufficient to enable a recovery in real gross domestic product (GDP) growth. GDP is expected to continue declining from an average of 3.6% from 2016 to 2018, to a projected 1.8% in 2019 (2015: 6.3%)[5].

 

Figure 1: Real GDP Growth and Inflation in Mozambique (2016-2024)

Real GDP Growth and Inflation in Mozambique (2016-2024)

Sources: IMF 2019, Mozambique Request for Disbursement Under the Rapid Credit Facility; IMF 2016, Mozambique 2015 Article IV Consultation. Note: (*) Figures from 2019 onwards are projections from the IMF, 2019.

Amidst this commodity price collapse since 2014, Mozambique was embroiled in an international public mismanagement scandal. The Government of Mozambique (GoM) was found having underreported on its public debt and some Ministers were involved in misappropriation of public funds and issuing of illegal government guarantees[6]. Amongst findings of the international audit by Kroll was that the government had underreported on approx. USD 2.0 billion and still needed to provide evidence for USD 750.0 million of this, which remained unaccounted for[7]. This had a sever reputational impact on the GoM and resulting in withdrawal of capital by international financing institutions like the International Monetary Fund and other institutional and private investors[8]. As a result of this and the depreciation of the MZN, total public debt expanded rapidly from 73.6% of GDP in 2015 to an annual average of 119.5% of GDP from 2016 to 2018[9].

 

Figure 2: Sources of Government Revenue in Mozambique (2016-2024)

Sources of Government Revenue in Mozambique (2016-2024)

Sources: IMF 2019, Mozambique Request for Disbursement Under the Rapid Credit Facility; IMF 2016, Mozambique 2015 Article IV Consultation. Note: (*) Figures from 2019 onwards are projections from the IMF, 2019.

In response to the declining real GDP growth, the GoM increased public spending, partly to support the recovery in real GDP and also due to rising public debt-servicing costs. Fortunately, Mozambique has been a recipient of significant capital investment in natural gas which are long-term commitments in terms of investment.  The GoM was able to use this and the promise of increased government revenue as natural gas extraction and exports commence in 2022 to bargain with the Global Group of Mozambique’s Bondholders (GGMB) to reach an agreement after it defaulted on payment in 2016.  This has been a turbulent period for the economy and GoM has been able to achieve some stability given this difficult context. Debt-servicing costs have increased from MZN 8.4 billion (approx. 4.8% of total government revenue) in 2015 to an annual average of MZN 25.1 billion (approx. 11.7% of total government revenue) from 2016 to 2018[10].

 

Figure 3: Government Revenue and Expenditure in Mozambique (2016-2024)

Government Revenue and Expenditure in Mozambique (2016-2024)

Sources: IMF 2019, Mozambique Request for Disbursement Under the Rapid Credit Facility; IMF 2016, Mozambique 2015 Article IV Consultation. Note: (*) Figures from 2019 onwards are projections from the IMF, 2019.

In response to the declining real GDP growth the GoM increase spending by an annual average of 9.0% from MZN 127.3 billion in 2015, to an annual average of MZN 165.5 billion from 2016 to 2018[11]. However, the GoM also cut capital expenditure by an annual average of -2.6% from MZN 78.1 billion in 2015 to an average of MZN 62.0 billion from 2016 to 2018[12]. Due to the recovery in coal and copper prices, and responsive monetary policy by the Bank of Mozambique (BoM) authorities the external sector position has also improved and the MZN exchange rate has stabilised which has stemmed the surging inflation. Inflation declined from its peak of 19.9% in 2016 to 3.9% in 2018. However, these interventions have not been sufficient to support recovery in real GDP growth which is projected to continued declining in 2019. In response to the persistent declining real GDP growth rate the GoM has taken advantage of the relative stability to increase public spending further in support of real GDP growth.

 

Figure 4: Government Expenditure Composition in Mozambique (2016-2024)

Government Expenditure Composition in Mozambique (2016-2024)

Sources: IMF 2019, Mozambique Request for Disbursement Under the Rapid Credit Facility; IMF 2016, Mozambique 2015 Article IV Consultation. Note: (*) Figures from 2019 onwards are projections from the IMF, 2019.

In 2019 the GoM increased public spending by 28.3% mainly by increasing capital expenditure by 78.1% to MZN 122.2 billion and recurrent expenditure by 12.3% to MZN 212.7 billion (2018: MZN 68.6 billion; MZN 189.4 billion)[13]. In spite of the declining real GDP growth and increased spending, which has been financed through debt, the GoM has moderated total public debt slightly from an annual average of 119.5% of GDP from 2016 to 2018, to a projected 117.0% of GDP in 2019. In addition, the GoM has rebalanced its public debt towards increased dependence on domestic public which is prudent fiscal policy. Therefore, the GoM has maintained counter cyclical fiscal policy by increasing public spending in the context of declining real GDP growth. Real GDP growth is projected to recover in the medium-term.

 

Figure 5: Gross Government Debt in Mozambique (2016-2024)

Gross Government Debt in Mozambique (2016-2024)

Sources: IMF 2019, Mozambique Request for Disbursement Under the Rapid Credit Facility; IMF 2016, Mozambique 2015 Article IV Consultation. Note: (*) Figures from 2019 onwards are projections from the IMF, 2019.

Real GDP growth is projected to recover 1.8% in 2019 to an annual average of 6.9% from 2020 to 2024[14]. As real GDP recovers, the GoM is projected to moderate public spending growth to an annual average of 6.5% in the medium-term (2019: 28.3%)[15]. Although recurrent expenditure is projected to continue growing at an average of 8.2% in the medium-term, this is largely due to reduction in public debt, clearing of government arrears and bonds maturing over this period[16]. As a result, public debt is projected to decline from 111.4% of GDP in 2020 to 89.8% of GDP in 2024[17]. Although public debt is projected to decline this will be mainly domestic public debt which is projected to decline from 15.1% of GDP in 2020 to 4.1% of GDP in 2024[18]. But external public debt is also projected to decline from 96.3% of GDP in 2020 to 85.7% of GDP in 2024[19]. The fiscal deficit is also projected to narrow to an annual average of -MZN 31.3 billion (approx. -2.6% of GDP) over the medium-term from -MZN 61.6 billion (approx. 6.5% of GDP) in 2019[20]. Therefore, the GoM is expected to continue pursuing countercyclical and prudent fiscal policy in the medium which will underpin the recovery in real GDP growth and improvement in the fiscal position.

 

In response to real GDP growth declining since 2015 to a projected 1.8% in 2019, the GoM has had to increase public expenditure to stimulate aggregate demand. This has been funded largely by the public debt. The economy is expected to improve as a result of the proposed investments in natural gas. But the recent natural disasters seem to have stalled the recovery in real GDP growth as the county struggles with the aftermath. Therefore, the GoM will remain challenged by slow revenue growth forcing it to continue borrowing to deal with the deal with the aftermath of cyclones and avoid them detracting from the very strong growth prospects presented by the massive investment in the Mozambican mining sector.

 


[1] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 13 July 2019].
[2] BoM 2019. External Statistics: Balance of Payments, Bank of Mozambique: Maputo. Available At: http://www.bancomoc.mz/ [Last Accessed: 18 August 2019]; IMF 2017. Commodity Forecasts, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 13 July 2019].
[3] IMF 2016a. Mozambique 2015 Article IV Consultation Report, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 13 July 2019].
[4] IMF 2018. Mozambique: Selected Issues, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 13 July 2019].
[5] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, ibid.
[6] IMF 2016b. IMF Executive Board Considers Mozambique’s Misreporting Under the Policy Support Instrument and Breach of Obligation Under Article VIII, Section 5,  on the International Monetary Fund Website, viewed on 18 August 2019, from https://www.imf.org/.
[7] Kroll 2017. Independent Audit Related to Loans Contracted by ProIndicus S.A., EMATUM S.A. and Mozambique Asset Management S.A., Office of the Public Prosecutor of the Republic of Mozambique: Maputo. Available At:  http://www.pgr.gov.mz/ [Last Accessed: 13 July 2019].
8  IMF 2016c. Transcript of African Department Press Briefing, on the International Monetary Fund Website, viewed on 18 August 2019, from https://www.imf.org/.
[9] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, ibid.
[10] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, ibid.
[11] IMF 2016a. Mozambique 2015 Article IV Consultation Report, ibid.
[12] IMF 2016a. Mozambique 2015 Article IV Consultation Report, ibid.
[13] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, ibid. large rural poor. have to increase its public debt to deal with tghe ms to
[14] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, ibid.
[15] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, ibid.
[16] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, ibid.
[17] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, ibid.
[18] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, ibid.
[19] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, ibid.
I Ibit cyclones affecting country, especially the large rural poor. have to increase its public debt to deal with tghe ms toI Ibit cyclones affecting the country, especially the large rural poor. have to increase its public debt to deal with tghe ms to[20] IMF 2019. Mozambique Request for Disbursement Under the Rapid Credit Facility, ibid.

 

 


Michael Andina

Former Regional Analyst

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