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21 December 2023

The Mozambican Economy: Start of LNG Production Lifts Economic Outlook

Government forecasts real GDP growth of 5.5% in 2024

Economic activity in the country is expected to decelerate to 5.5% in 2024 following a quicker than anticipated expansion of 7.0% this year. Despite this deceleration, real GDP growth is expected to remain above the 4.0% annual average recorded in the last decade (2014-23). It is also anticipated to surpass the forecast for Sub-Saharan Africa (4.0%). Growth will continue to be mainly driven by the fast acceleration in activity in the extractive industry (18.6% vs. 60.8% in 2023) resulting from the start of production and export of LNG from the Coral Sul FLNG Project in Area 4 of the Rovuma Basin. All the major sectors of the Mozambican economy, such as agriculture and fishing, transport, retail, and manufacturing are also expected to improve relative to 2023. Inflation, which continues to mostly reflect the higher costs of food and non-alcoholic beverages, should remain in the single digits thanks to the stability of the metical exchange rate and the proactive monetary policy followed by the central bank.

Revenues from LNG sector should peak at US$ 6 billion annually in the 2040s

The government recently unveiled a long-awaited bill (that has already been approved by parliament) to manage a sovereign wealth fund (SWF) that will oversee revenues from what it expects will amount to US$ 91.7 billion in natural gas exports in the coming decades. The new law states that 40% of public receipts from LNG exports will go to the SWF for the first 15 years, with the rest allocated to the national budget. After that period, receipts will be evenly split between the SWF and the annual budget. The government expects that revenues will peak at more than US$ 6 billion annually in the 2040s. The receipts will be crucial for the country’s public finances and to help repay its US$ 900 million Eurobond that starts maturing from March 2028. The creation of the SWF was also a prerequisite from the IMF, which last year agreed to a US$ 456 million economic program with Mozambique. 

Budget deficit is expected to widen in 2024

The 2024 budget proposal assumes that the government will reach a deficit equivalent to -4.9% of GDP after grants (higher than -4.4% projected for 2023). This evolution is largely explained by the significant increase in debt payments (+30.9%) and public investment (+47.1%) expected in 2024. The latter is justified by the higher financing for investment projects and the rehabilitation project of the National Road 1 financed by the World Bank. Income taxes and taxes on goods and services are anticipated to represent once again most of the total proceeds. The government also expects to receive the initial revenues from the LNG sector, although this is still relatively modest at only 0.3% of GDP.

Favorable outlook, but several risks persist

The Mozambican economy is expected to continue to grow above the average of Sub-Saharan Africa in the coming years thanks to the contribution of the LNG projects and an improved performance in other key sectors. Despite the positive outlook, several risks remain, mainly due to adverse climate events (and the impact they may have on food insecurity and prices) and a fragile security situation in some parts of the country. Fiscal consolidation and narrowing the fiscal deficit gap also remain crucial, namely towards bringing the public debt ratio to a lower level in the medium-term. Monetary policy has been appropriate in containing inflation and rebuilding reserves, but careful monitoring is still warranted due to potential external risks. All in all, the Mozambican authorities will need to continue to push through the reform agenda to help promote sustained economic growth and increase resilience to external shocks.