The Mozambican Economy: Better outlook ahead, despite some risks

BETTER OUTLOOK AHEAD, DESPITE SOME RISKS

Real GDP growth to accelerate in 2023-25

Economic activity is expected to continue to improve in 2023 thanks to a recovery in those sectors that were more impacted by the Covid-19 pandemic, namely tourism, construction and transports and communication. The extractive industry will also see a sharp recovery, boosted by the start of production of LNG in the Coral South Project in the Rovuma Basin in Q4 2022. Overall, the government’s 2023 budget proposal assumes that real GDP growth will improve to 5.0% (from an upwardly revised projection of 3.8% in 2022) while average annual inflation is expected to increase from 10.7% in 2022 to 11.5% this year. The authorities also expect growth to accelerate in the medium-term, reaching 8.3% in 2024 and 6.0% in 2025.  

Better management of public accounts and lower public debt

The government remains committed to the consolidation of fiscal accounts, ensuring that its implementation will safeguard economic growth and the sustainability of public accounts in the medium-term. As a result, the authorities will prioritize the implementation of measures to rationalize public spending and deepen reforms to diversify revenue sources. Another key priority is the management of public debt, including the creation of mechanisms to better manage state-owned enterprises. The aim is to gradually reduce public debt to more sustainable levels over the medium-term.  

Budget deficit is expected to decrease in 2023

The 2023 budget proposal foresees an increase in both public revenues (21.5%) and expenditures (4.8%) when compared with the 2022 budget forecasts. This reflects an improvement in tax revenues (mainly taxes on goods and services and income taxes) while, in terms of expenditures, these are expected to increase mostly on the back of higher staff costs. Expenditures on goods and services are expected to fall due to the government’s attempt to contain spending on items like fuel and communication while debt payments are also anticipated to decline (but remain at a relatively high level). Still, the modest increase in expenditures is largely explained by the lower public investment levels (-18.6%) projected for the period. Meanwhile, grants are estimated to see a sharp drop of 33.8% and represent 4.4% of GDP, as direct budget support falls from the projected figure for 2022. This means the government foresees the budget deficit (after grants) reaching 4.4% of GDP, down from a projection of -6.2% in 2022 and a reported -6.9% in 2021.

Fiscal consolidation and structural reforms remain crucial

The Mozambican government is banking on the continued improvement in economic activity in the country, together with the reforms that are being implemented to help raise public revenues and the measures to try to contain expenditures, to ensure the sustainability of public finances. That said, significant risks to the country’s outlook persist, including from adverse climate events and the fragile security situation. As a result, fiscal consolidation and narrowing the fiscal deficit gap remains crucial to bringing the public debt ratio lower in the medium-term. Reducing foreign exchange volatility will also be important, especially considering that nearly three-fourths of public debt is external debt and is denominated in foreign currency. It remains to be seen whether the Mozambican authorities will take advantage of the better outlook expected ahead to continue to push through the necessary structural reforms that will help promote sustained economic growth and increase resilience to external shocks.