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23 March 2018

The Mozambican Economy

The Mozambican Economy

Lower (growth) for longer

Stuck in a lower-growth environment

After recording an average growth of 7% during 2006-16, the latest figures showed that Mozambique remained stuck in a lower economic growth environment last year. According to preliminary estimates, real GDP expanded 3.7% in the period, which is slightly less than the 3.8% in 2016. This reduced growth came despite the marked increase in coal and aluminum exports, the country's main tradeable goods, in 2017. However, this was insufficient to offset the impacts of softer demand from both the private and public sectors, reduced investment levels and high cost of credit. Weaker investor sentiment after the hidden debts revelation also hindered economic growth. 

Monetary policy easing to support economic growth

Banco de Moçambique's tighter monetary policy measures and the improvement in the country's external position helped to stabilize the exchange rate of the metical, leading inflation levels to fall to 5.65% in 2017 from 23.67% in the previous year. A stronger export performance also allowed the central bank to accumulate significant amounts of foreign exchange reserves, which covered about seven months of imports of goods and services (excluding the mega-projects) at the end of 2017. Currently, there is room for faster monetary easing that could help improve credit conditions for the private sector, particularly to SMEs, and support economic activity.

Fiscal consolidation key to restoring macro stability

The government's budget proposal for 2018 incorporates a 5.3% growth assumption, which we believe is optimistic bearing in mind the country's immediate challenges. These challenges include a stronger response from the local authorities in terms of implementing fiscal consolidation measures to lower deficits and return public debt to a more sustainable trajectory over the medium-term. In particular, the government plans to (1) limit the admission of new employees to the public sector, (2) control staff costs and spending on goods and services, (3) postpone some projects like the rehabilitation and construction of public buildings and (4) manage public debt levels.

On the latter, the government recently met debt holders, kicking off what promises to be quite challenging (and likely prolonged) restructuring negotiations judging from the response it received from the majority of these investors. Effective steps on this restructuring remain crucial to restore macroeconomic stability in the country. 

Central bank announces new measures 

The central bank introduced new capital and liquidity rules after having to intervene in four financial institutions (three of them ceasing to exist) in less than a year. These measures to improve transparency, regulation and supervision aim to ensure greater stability in the local financial system. New foreign exchange control rules were also announced at the end of 2017 that introduce significant changes. These include the end of the obligation to convert 50% of export earnings into meticais (the funds can remain in foreign currency) and certain measures to facilitate the entry of FDI.

Stuck at a crossroad

Mozambique remains at a crossroad and its near term growth perspectives lackluster considering the track-record over the last decade. Although the steps recently taken towards a sustainable peace process and the developments in the LNG sector are clearly positive for economic activity and investment, they are insufficient to reverse the current trend of lower growth that the country has fallen into in recent years.