The Mozambican Economy: Trying to Return to More Solid Ground

Economic activity expected to improve in 2021

The 2021 budget proposal recently announced by the government assumes that real GDP growth will improve to 2.1% next year as the economic sectors currently being more affected by the Covid-19 pandemic are anticipated to see a rebound in growth. This forecast compares with a downwardly revised 0.8% growth projection for 2020 (the worst on record in many years) after economic activity contracted 0.8% in H1 from a year earlier. That said, the government admits downside risks to this forecast, namely related to a possible prolonged impact from the pandemic and the recent instability in the central part of the country and Cabo Delgado region delaying the execution of LNG projects. The budget proposal also assumes that inflation will remain in single-digits, despite the risk of some volatility in the exchange rate of the metical against the currencies of the country’s main trading partners and higher oil prices in international markets. This low inflation rate environment should allow the central bank to keep monetary policy accommodative to support economic growth.    

Better manage public accounts and reduce public debt

The government remains focused on implementing measures to will help to increase and diversify domestic revenue sources and on the rationalization of public spending considering the limited available receipts and a new reality imposed by Covid-19. Still, the authorities will continue to prioritize investments in key areas (education, healthcare, agriculture and infrastructures) and focus on generating employment to ensure the well-being of the population. Another key priority is the management of public debt, including the creation of mechanisms to better manage SOEs. The aim is to gradually reduce public debt to more sustainable levels over the medium-term.  

Budget deficit to decline after surging in 2020

The 2021 budget proposal foresees a recovery in public revenues and a slight decline in expenditures when compared with the 2020 revised budget forecasts. This reflects the favorable contribution of an expected improvement in economic growth together with a correction in spending levels following their strong increase this year aimed at mitigating the impact of Covid-19. Grants are also anticipated to fall by double-digits, as direct budget support returns to more normalized levels. This means the government projects a budget deficit (after grants) corresponding to 6.1% of GDP. It compares with a revised estimate of -13.5% this year and a reported -2.7% in 2019.

Debt service relief to continue (possibly beyond 2021)

Mozambique asked foreign creditors for debt service relief in order to allocate much-needed funds to several areas of the economy more affected by Covid-19. This relief did not include the Eurobonds in the so-called “hidden debt” case, as negotiations with private creditors for the restructuring of this debt allegedly took two years and the government wants to avoid further instability. Mozambique also asked China for relief on interest payments on its debt (amounting to US$ 1.3 billion) and, according to the government, is awaiting a response. Meanwhile, the IMF announced earlier this month a second six-month tranche of debt service relief for 28 countries, including Mozambique. This means that debt service relief will last until April 2021 and could even be extended for an additional year (April 2022). These are positive news, as the latest figures provided by the government suggest that the first tranche of debt service relief (April through October 2020) provided savings corresponding to nearly 1% of GDP this year.