Following three consecutive quarters of slowing economic activity in 2016, Mozambique’s GDP growth for 2016 is estimated at 3.6 percent down from 6.6 percent in 2015.

The country is navigating a complex crisis. An ongoing economic downturn, brought about by low commodity prices, drought, and conflict, has been compounded by the fallout from the discovery of hidden debts in April 2016, according to the second edition of the Mozambique Economic Update (MEU): Facing Hard Choices, released today.

High public debt levels, coupled with the revelation of $1.4 billion in previously undisclosed borrowing, make Mozambique one of the African countries with the highest public debt-to-GDP ratios. The country has faced successive downgrades by credit ratings agencies, which have further weakened investor confidence. Foreign direct investment and exports are declining, projected to fall by 17 percent and 8 percent respectively in 2016. Fiscal consolidation and monetary tightening are also contributing to the slowdown in growth. 

The metical depreciated by 42 percent against the US dollar in the first ten months of the year, faring worse than other African commodity exporters including Angola and Nigeria. The weaker metical accelerated the pace of inflation, which reached 25 percent in October, making a higher cost of living the symptom of the downturn most acutely felt by Mozambicans.

“The increase in prices is particularly sharp for the poor. Since April, inflation is estimated to have been approximately 9 percent higher for the poorest 40 percent of the population than for the average Mozambican,” said Shireen Mahdi, World Bank Senior Country Economist for Mozambique.

Rebuilding confidence and restoring stability

According to the report, the policy response has picked up pace in the second half of 2016. A revised budget for 2016 was a first step in adjusting the fiscal framework to the new realities. The Central Bank of Mozambique, stepped-up its monetary tightening regime. There are now signs that pressures on the external position are easing as imports have declined and the metical has remained relatively stable since October 2016.

In addition, the initiation of an independent audit of the Empresa Moçambicana de Atum (EMATUM), Mozambique Asset Management (MAM), and Proindicus loans is a key step in rebuilding confidence. However, a sharper focus on fiscal adjustment in the medium term is still needed to restore fiscal sustainability.

The Economic Update notes that Mozambique’s gas production prospects shape expectations for a recovery in growth to 6.6 percent by 2018. In the meantime, existing megaprojects are showing resilience and may benefit from a boost in the near term from an improving outlook for key commodity prices.

However, the report highlights the wide agenda that lies ahead in restoring confidence and economic stability. In the short term, much rests on the outcome of the debt negotiations initiated by the Government of Mozambique and the transparent handling of the independent audit. Beyond this, key items on the agenda include setting a medium-term framework for restoring fiscal sustainability, anchored by a target for reducing debt and a credible fiscal deficit.

Enhancing financial sector surveillance and the strengthening of crisis management instruments is also a priority, particularly if further monetary tightening is in the pipeline in the near term. Moreover, the current economic circumstances highlight the need to manage fiscal risks and contingent liabilities better. In this regard, the MEU emphasizes the need for reforms to develop effective oversight over state-owned enterprises and other public entities, along with reforms to overhaul the framework for managing guarantees.

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The World Bank’s biannual Mozambique Economic Update (MEU) series is designed to present timely, concise assessments of current economic trends in Mozambique in light of the country’s broader development challenges. Each edition includes a section on recent economic developments and a discussion of Mozambique’s economic outlook, followed by focus section(s) analyzing issues of particular importance. The focus sections for this edition address debt, inflation and fiscal risk from public corporations.

The MEU series seeks both to inform discussions within the Bank and to contribute to a robust debate among government officials, the country’s international development partners, and civil society regarding Mozambique’s economic performance and key macroeconomic policy challenges.