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IMF Believes in Reforms Made after Hidden Debts and Assures that “This is No Time for Austerity”

IMF Believes in Reforms Made after Hidden Debts and Assures that “This is No Time for Austerity”

The International Monetary Fund (IMF) believes in the reforms carried out in Mozambique after the hidden debts process in order to prevent something similar from happening again, says the IMF country representative.

“The focus is to think about the reforms that have been made,” Alexis Meyer-Cirkel said, days after approving the $470 million financing agreement with Mozambique to be applied until 2025, the first after the discovery of the corruption case in 2016.

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The list of reforms that gives confidence to the IMF includes a 2019 report on corruption and measures to tackle it, advances in the State Financial Administration System (Sistafe), the creation of organic directorates that control fiscal risks, as well as legislative initiatives such as the state business sector law.

“Risks always exist, but it is important to remember that this dynamic of strengthening institutions has been happening, with changes in codes and laws,” he mentioned.

There is more disclosure of information, in the case of public debt, or the recent audit of the use of funds to address covid-19 – in which the IMF was one of the donors – and more publications means more transparency, Alexis Meyer-Cirkel added.

“The question now is execution and implementation,” meaning a chapter of new reforms that the government is committed to in the financial agreement established with the IMF.

In an interview released by Lusa, the IMF representative in Mozambique said that these commitments do not foresee a tax hike, nor other types of austerity measures. “There is no tax increase,” he mentioned, “the idea is to broaden the tax base and even lower levels at the margin of some rates.”

“This is not a time for fiscal tightening, that is not the path of the program,” he said, admitting “adjustments, yes, but aimed at increasing the efficiency” of revenue collection, as well as distribution by those who “contribute” and thus “lead to the fall of public debt and debt stability.”

A fiscal tightening now would compromise growth, he acknowledged.

Macroeconomic stability, inclusive growth, and strengthening of public finance management institutions are the IMF’s objectives with the program that has been prepared thanks to a technical assistance to the country that has never stopped and that has accompanied domestic policies.

The details of the agreement should be published before the end of the month and derive from the 29 measures indicated by the government in the 2019 corruption diagnostic report, including new anti-money laundering and terrorist financing laws (approved this month by Parliament), reforms to the public probity and fiscal management law, advances in the digitalization of taxation, and continued evolution of Sistafe.

“All of this improves budget transparency and management,” which in the IMF’s view “will help infrastructure creation and industrialization of the country, in a wave of development that should create more jobs and attract informal workers to the tax base, broadening it. Mozambique is at the end of a series of historical shocks: hidden debts, climate shocks, pandemics, terrorism, shocks of very large magnitude that the State managed to cope with without compromising fiscal and debt stability” – despite the debt being at a “high” level (102% of GDP).Therefore, “the road has to be traveled with caution,” he said, stressing that “macro stability is something you only value when you lose it.”

The invasion of Ukraine by Russia “generates pressure on prices,” both of agricultural commodities and fuels, which affects the price basket “also in Mozambique.”

The IMF predicts that inflation should reach 9% this year, and slow to 7% by 2023. Alexis Meyer-Cirkel said that the central bank “reacted quite prudently in March” by raising the monetary policy rate to 15.25%, when assessing inflationary risks.

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The IMF representative considered that the institution “has done an excellent management of monetary policy. I have every confidence that the Bank of Mozambique will continue to make this assessment.”

The IMF expects the Mozambican economy to grow 3.8 percent this year, according to updated forecasts made in April, a more optimistic outlook than that of the Mozambican government itself, whose State Budget for 2022, approved in December (before the war in Ukraine), is based on a rise in Gross Domestic Product (GDP) of 2.9 percent.

For 2023, the IMF predicts an acceleration of the economy, to grow 5%.

Expectations are very much centered on the advancement of gas exploration projects in the Rovuma basin, off Cabo Delgado, in the north of the country, with the first export expected in the coming months from the Coral Sul floating platform.

This is, however, the unit with the smallest volume and whose gas has been sold for two decades to the BP oil company.

The major project, which will bring large revenues to the state, was suspended due to the armed insurgency in Cabo Delgado, but the IMF expects it to resume and go into production in 2026.

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