Mozambique Budget Proposal 2017: All eyes are on fiscal consolidation in 2017

The Mozambican Economy

All eyes are on fiscal consolidation in 2017

Budget execution for 1H 2016 reflects deceleration in real GDP growth

The budget execution report for the first half of this year showed that the collection of revenues remains close to the levels of 2015, but that the government is spending more than it did a year ago. The significant increase in non-tax revenues as well as other revenues has been able to offset a lower collection of tax receipts namely those related to goods and services such as VAT. This reflects the slowdown in economic activity this year, with the government's current projection lowered once again to 3.9% from previous forecasts of 7% (initial budget) and 4.5% (revised budget). It is also significantly lower than 6.6% recorded in 2015. However, current expenditures rose markedly, namely on wages and goods and services and, more importantly, on interest payments due to the depreciation of the metical and the strong concentration of loan payments due in the period. Overall, the budget deficit (before grants) reached 6.7% of GDP in annualized terms (vs. 3.1% in 1H 2015). 

2017 budget assumes economic recovery and lower inflation

The government's 2017 budget proposal foresees (1) some recovery in economic activity at home, (2) a deceleration in inflation levels and (3) higher foreign direct investment in the country. This translates into an acceleration of real GDP growth to 5.5% in 2017 (in line with the IMF's latest forecast) and inflation slowing to 15.5% from 18% this year. The recovery in economic activity is based on the consolidation of peace in the country and an improvement in the confidence levels between Mozambique and its main international partners through an increase in financial transparency. The government also hopes that higher foreign direct investment will help reduce the country's external account deficit.

Fiscal consolidation efforts expected to continue

The Mozambican authorities aim to continue their fiscal consolidation policy next year by containing public spending levels and improving the collection of domestic receipts. The government also plans to restructure part of the public debt in order to ensure its sustainability. Meanwhile, the efforts to reform the country's tax system and modernize the tax administration and tax collection procedures are expected to continue in 2017. This includes the revision of the import tariff system as well as the VAT code in order to promote higher domestic production. On the other hand, the government will continue to prioritize spending on the education, healthcare, social work, agriculture and infrastructure sectors.  

Sharp fall in grants places 2017 budget deficit projection at 9% of GDP

The budget proposal foresees a deficit forecast (before grants) of 10.7% of GDP, lower than the 11.3% expected this year. However, due to the significant decline in the amount of grants anticipated next year, the deficit estimate (after grants) stands at 9% of GDP (vs. 8.7% in 2016). The government plans to finance the budget with a higher share of public receipts, but lower domestic financing. Domestically, tax revenues will continue to represent the bulk of public financing needs whereas, on the external front, the government hopes to offset the fall in grants with higher external financing. Meanwhile, in terms of spending, the local authorities aim to lower the relative weight of current expenditures while capital expenditures are expected to represent less of the total spending next year.