MAPUTO– The International Monetary Fund (IMF) has warned that Mozambique’s economic growth is likely to decline, while its public debt continues to grow.

This pessimistic outlook results from an assessment made by the IMF’s Executive Board following its annual Article Four consultations with the Mozambican government which concluded on March 5.

A statement from the IMF board notes that Mozambique’s growth decelerated in 2016 to 3.8 per cent (from 6.6 per cent in 2015) and the latest data show that the economy grew by 3.7 per cent in 2017, driven by a recovery in agriculture and mining activity.

It adds that a tight monetary stance, coupled with exchange rate appreciation, led to a steep fall in inflation to 6.3 per cent in January 2018, from a peak of 26 per cent in November 2016. However, the 2017 fiscal deficit on a modified cash basis (inclusive of external and domestic arrears) is estimated to have increased to around 8.2 per cent of GDP compared with 7.6 per cent of GDP in 2016, mainly because of continued spending pressures, including from a higher wage bill and high debt service costs.

The IMF notes, however, that the current account deficit continued to shrink in 2017, which it attributes to a boom in mining exports and to a contraction in mega-project imports of services.

The IMF regards Mozambique as heavily debt-distressed since the stock of public sector debt-to-GDP reached 128.3 per cent at end-2016.

However, this is only true if Mozambique intends to pay those debts. The key factor in the debt distress is the over two billion dollars of illicit loans from European banks (Credit Suisse and VTB of Russia) to the security-related companies Ematum (Mozambique Tuna Company), Proindicus and MAM (Mozambique Asset Management). These loans enjoyed illegal guarantees given by the previous government, leaded by President Armando Guebuza, which the present government is not honouring.

Mozambique has repeatedly defaulted on payments of the Ematum, Proindicus and MAM debts, and has told creditors they must renegotiate the debt.

The IMF welcomed the government’s plans to resume discussions with private creditors and stressed that making progress in debt restructuring discussions would be an important step towards restoring debt sustainability.

The IMF says that without further policy action, real GDP growth is expected to further decline over time while inflation would remain at current levels.

The fiscal deficit would expand, leading to further accumulation of public debt and crowding out of the private sector. Banks’ rising exposure to the government, combined with high interest rates, create potential macro-financial vulnerabilities, the IMF says.

The IMF Board argued that a steadfast fiscal consolidation effort aimed at closing the primary deficit is essential to ensure fiscal sustainability. It stressed the need to broaden the tax base by eliminating VAT (Value Added Tax) and other tax exemptions and to reduce current spending, while protecting outlays to social protection and infrastructure projects.