Republic of Mozambique: First Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria—Staff Report; Press Release

KEY ISSUESContext and outlook. Mozambique's macroeconomic outlook remains favorable andthe PSI-supported program is broadly on track. All assessment criteria were met andmost indicative targets, but there was some slippage on structural reforms. Economicgrowth is robust and inflation remains moderate. In spite of risks stemming from theuncertain global economy, growth is expected to be sustained in the medium term bythe natural resource boom and infrastructure investment. A recent governmentguarantee for large-scale borrowing by a public enterprise has raised transparency andprioritization issues that point to the need to strengthen investment and macroeconomicplanning. New risks associated with the political/security environment haveemerged.Short-term policy framework. The main short-term challenge is to maintain thegrowth momentum and to contain the fiscal expansion envisaged in 2014, reflectingboth election year pressures and the spending of one-off revenue windfalls and ofexternal borrowing. Key fiscal priorities include improving VAT administration, usingwindfall revenue to build buffers and invest, strengthen investment implementationcapacity, and ensure transparency and adherence to due process for investmentselection and borrowing. Monetary policy will need to be vigilant and monitor inflationdevelopments closely.Medium-term challenges. Structural reforms along a broad policy spectrum shouldbe implemented vigorously to foster sustained and more inclusive growth. With foreignaid likely to decline over the medium term, increased nonconcessional borrowing canprovide additional resources for improving physical infrastructure and human capital.Further strengthening debt management and investment planning and implementationare essential to ensure the efficiency of investment and borrowing. Completion of thenew mining and hydrocarbon legislation, the related fiscal regimes, andimplementation regulations would facilitate the economic development ofMozambique's natural resources.