Mozambique Economic Outlook
Economic performance and outlook
Mozambique has yet to recover from the economic downturn that started in 2015. The combination of declining prices for traditional export commodities, persistent drought effects from El Niño, internal military confrontations, and large decreases in foreign direct investment (FDI) nearly halved the past decade’s 7% GDP historical average growth to 3.8% in 2016. This drop was compounded by the 2016 governance crisis, which reduced external financing and donor support. The recovery of GDP growth to an estimated 4.7% in 2017 and a projected 5.3% in 2018 is due to increased coal exports and agricultural production; other sectors are likely to underperform.
In the financial crisis following the 2016 disclosure of secret debts worth nearly 10% of GDP, the debt-to-GDP ratio reached an estimated 125% at the end of 2016, while the metical registered a 40% devaluation against the U.S. dollar and inflation suffered a 10-fold increase to 19.8%. With a strong monetary policy tightening by the Central Bank, assisted by higher coal exports, the metical recovered 16% and stabilized, and inflation abated to 16% in September 2017. International reserves reached 5 months of import cover ($2.2 billion). After years of expenditure expansion that pushed debt to unsustainable levels, the government defaulted on its sovereign bond in January 2017. Faced with financing constraints, the government is implementing a fiscal consolidation effort. Expenditure as a share of GDP is forecast to decline from an estimated 33.9% in 2017 to 30.5% in 2018. The projected deficit after grants in 2018, excluding repayment of debt capital, is 6.9% of GDP, down from the estimated 7.1% in 2017.
Due to infrastructure improvements and rising international prices, minerals exports will be the main contributor to growth in 2017 and 2018. By end of June 2017, the mining sector registered a 59.4% year-on-year increase, driven by strong exports of coal, as well as graphite, titanium, rubies, and iron ore. Better weather patterns facilitated 2.2% growth in agricultural production, the mainstay of the economy. From a structural perspective, FDI inflows are expected to be a main growth driver. The ongoing initial development stage of the first offshore natural gas extraction project is expected to be followed by exploration projects in other offshore areas, potentially bringing FDI to over 40% of GDP, in line with 2013 levels. The pre-investment decision preparations for the large-scale onshore liquefied natural gas projects continue to progress. The projects’ sheer magnitude, estimated to double GDP within 10 years, will continue to be the main positive for Mozambique.
Discussions with the International Monetary Fund on a new support program have stalled due to the governance crisis; the fiscal position is fragile and deteriorating. Despite the fiscal consolidation effort, if international financing does not resume, the country faces challenges to its ability to continuously finance its deficit domestically; it already systematically resorts to financing from the Central Bank. The 2018 budget is silent on the restructuring of the $2.2 billion in defaulted sovereign commercial debt, which has a debt service–to-revenue ratio above 30%. Public arrears to the private sector are estimated to exceed $500 million (4% of GDP). The private sector is further strangled by high credit rates (on average 35% for a one-year commercial loan) and depressed private consumption. The result is a contracting real economy, except for the primary sector and some services. Despite the positive developments of the permanent ceasefire between opposition elements and the government, recent attacks by newly arrived terrorist groups in the gas-rich northern province cast new shadows over the investment environment.