Six years after the suspension of financial aid to Mozambique, the Board of Directors of the International Monetary Fund (IMF) announced in early May the approval of the resumption of support to Mozambique’s State Budget through an Extended Financing Program until 2025.
Since June 2016, the IMF was one of the international partners that suspended direct financial support to the State Budget following the discovery of undeclared debts of the State and Public Enterprises, amounting to USD 2.7 billion. Since then, the IMF has only provided aid following the cyclones in 2019 and later during the covid-19 pandemic in 2020, in order to support the Government to mitigate the socio-economic impact of these extraordinary events.
The value of the Extending Funding Program amounts to about USD 470 million, which will be made available to the State over the next three years (2022-2025). This Program will focus on economic growth, fiscal sustainability and management and governance reforms of Public Finance, important pillars for economic development and fighting inequality. The approval of this program was conditioned by the implementation of a set of reforms in public administration, namely:
- Creation of reforms in the wage bill of public employees, leading to the convergence of their weight on GDP to levels observed in other countries in the region;
- Creating reforms to address the long-term structural challenges of public resource management and governance, as well as structural reforms in the management of fiscal resources, where an important step should be the implementation of a Sovereign Wealth Fund and its regulation
- Publication of an audit report regarding the application of the funds received for the support in combating the covid-19 pandemic;
- Amendments to the laws on Public Probity and on Combating Money Laundering and Terrorist Financing;
- Transparency in debt management and natural resource exploitation revenues, which are the key areas identified in the 2019 Diagnostic Report on Transparency, Governance and Corruption prepared by the Government with IMF support.
In summary, the Program aims to support the promotion of good governance through public reforms that address long-term structural challenges in the management of public resources . It also intends to maintain the pace of structural reforms to improve the management of fiscal resources from the exploitation of natural resources, fight corruption, macroeconomic stability and control public debt. In addition, this Extended Fund Program may also help ease financial pressures in a context of economic recovery, support the authorities’ agenda to reduce poverty and restore equitable and sustainable growth.
Prospects with IMF recovery
It is a general understanding that with the announcement of this agreement, doors are opening for other donors, who are slowly announcing the resumption of budget support, such as the World Bank, the European Union, and the African Development Bank. This program, which strengthens the IMF’s confidence in the current government, may contribute to the leverage of the economy in an economic scenario still characterized by high uncertainties.
It opens the door to other donors, who are gradually announcing the resumption of their support for the Budget
At the same time, by the end of March, several financing agreements through donations from the World Bank were ratified, amounting to USD 1.2 billion. Part of this support has already been included in the State Budget for 2022, with the Government estimating an increase in the grants item to more than 7% of GDP, compared to less than 2% in 2021. The IMF’s recovery is expected to boost the implementation of higher value-added projects, which will have greater potential to help rebuild long-term credibility with international partners.
The return of the remaining partners will help broaden the Government’s sources of funding, thereby improving the liquidity of the national accounts, and contribute to reducing pressure on current debt service. Although it is difficult to quantify the indirect economic impact of the IMF’s return, the reality is that it should be much higher than the USD 470 million announced. In particular, the IMF’s technical and financial support under this program should speed up the implementation of the structural reforms that the country needs and help re-establish an environment of stability and confidence until the definitive start of the gas projects in the Rovuma Basin.
Finally, the improved future outlook should lead to improvements in the rating outlook by the international agencies, with Moody’s recent change of the Outlook from ‘stable’ to ‘positive’ having been noted, which will contribute to the reduction of risk perception by investors, the reduction of financing costs and, eventually, the resumption of the Treasury to financing in the external markets.