The recently announced technical agreement between the IMF and the Mozambican Government on a three year program, to be supported by the extended financing instrument, in which the General State Budget (GSB) will benefit from $470 million, has divided the opinions of some analysts as to the real benefits arising from this support.
The disastrous social impacts of the measures imposed on the country in order to benefit from IMF and World Bank financing in the late 1980s and first half of the 1990s are still present in the memories of many. However, the long-term economic gains have translated into greater macroeconomic stability with a less volatile metical and double-digit economic growth for several years.
The economic reforms introduced allowed the country to become attractive to international capital and to capture important volumes of Foreign Direct Investment (FDI) in almost all sectors of the economy.
The unveiling of the hidden debts in 2016, which led to the cancellation of the program of direct financial support to the GSB by the IMF and other bilateral and multilateral lenders, as well as the default and restructuring in the Ematum Bonds which were then converted into sovereign bonds, led to successive falls in Mozambique’s rating by the main rating agencies (Standard & Poor’s, Fitch and Moody’s) until reaching the junk category. It should be noted that the rating assigned to the country by these rating agencies was already in a downward trend between 2013 and 2015, i.e. even before the discovery of the “debts”.
Last March, Fitch maintained Mozambique’s rating at “CCC” and Moody’s maintained it at “Caa2” having improved the outlook from stable to positive. This means that the country, according to these agencies, remains in an “extremely speculative” category, and such a scenario aggravates the cost of doing business in Mozambique. Foreign and some domestic investors assign a sovereign risk premium in line with Mozambique’s international market rating, which means that the indebtedness of domestic public and private entities is expensive and in line with the country’s low rating, and will become cheaper as the rating improves.
The upgrade in rating from “extremely speculative” to “investment grade” requires far-reaching structural reforms.
The most relevant fact of this new agreement with the IMF is that it demonstrates to the donor community that there are conditions for negotiating and approving new bilateral and multilateral GBS programs
Although the specific details of the new agreement reached with the IMF are not in the public domain, communiqués published by the Fund and the Ministry of Economy and Finance (MEF) report that the financing program will support reforms including the approval of the Sovereign Wealth Fund Law, the publication of the audit report on the management of Covid-19 funds, amendment of the Public Probity Law and the legislation on Money Laundering and Countering the Financing of Terrorism.
The program also addresses transparency in public debt management and the natural resources sector, identified as key areas in the 2019 Diagnostic Report on Transparency, Governance and Corruption, prepared by the Government with IMF support. The most relevant fact of this new agreement with the IMF is that it demonstrates to the donor community that there are conditions to negotiate and approve new bilateral and multilateral GBS programs.
The reform package made public states that the main objectives of the medium-term program will be economic growth, fiscal sustainability, and reforms in the management and governance of public finances. The measures include reforms in tax administration and VAT policy.
The reform of the state wage bill currently underway is mentioned as an action that should reduce pressure on public finances and lead to a convergence of the wage bill, relative to GDP, to average levels observed in the region.
An important goal advanced by the Minister of Economy and Finance to the press is to reduce the “Public Debt/GDP” ratio from the current around 113% to 60%, an ambitious target even when compared to pre-2016 levels (37% in 2012, 50% in 2013, 64% in 2014 and 87% in 2015).
The good management of fiscal, monetary and exchange rate policies will certainly contribute to the upgrade of Mozambique’s rating in the international financial market, leading to higher volumes of FDI, domestic investment and external support, and promote further growth of the economy
There are several factors that constitute a high risk for the achievement of the program’s objectives, with emphasis on the impacts of bad weather and the current situation of the State’s business fabric.
The financing of investments to restore public infrastructures destroyed by climatic events as well as the support mechanisms for the affected populations must be the target of mitigation financial instruments that protect the State Budget. The budgetary risk arising from the financial situation of some public companies is very significant and it is hoped that measures will be taken to change the current scenario. It is the Mozambicans who must take ownership of these and other reforms which are central to the country’s development.
The management of monetary policy and international reserves must continue to be prudent and responsible, with the objective of controlling the evolution of price levels and the balance of payments in a context of increased uncertainty resulting from the Russia-Ukraine conflict. Low and stable inflation and a comfortable balance of International Reserves (covering more than four months of imports, excluding major projects) will allow for the adoption of an expansive monetary policy in the medium term, where the price of money will be lower and the central bank can be more active in the foreign exchange market to protect the national currency from perverse shocks. The good management of fiscal, monetary, and exchange rate policies will certainly contribute to raising Mozambique’s rating in the international financial market, leading to higher volumes of FDI, domestic investment, and external support, and promote further growth of the economy.
Finally, the private sector also has a key role to play in this new stage that is beginning. The constant capacity building of the sector and the adoption of best practices in corporate governance and international financial reporting standards (IFRS) are just some of the aspects that can help our companies to be better positioned to participate in the development and exploration of the mega natural gas projects.