Republic of Mozambique: Second Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria; Staff Report; Press Release; and Statement by the Executive Director for Republic of Mozambique

KEY ISSUESContext and outlook. Mozambique's macroeconomic outlook remains favorable andthe PSI-supported program is broadly on track—all end-2013 assessment criteria were met and the structural reform program is on track. Economic growth is robust and inflation remains low. In spite of risks from the uncertain global outlook, growth is expected to be sustained in the medium term by the natural resource boom and infrastructure investment. Risks associated with the political/security environment moderated in early 2014, with general elections scheduled for mid-October.Short-term policy framework. The main short-term challenges are to maintain the growth momentum while preserving fiscal and debt sustainability. The 2014 fiscal stance is expansionary and inflation developments will need to be monitored closely and the central bank will need to tighten if inflation rises significantly. Key structural reform priorities include improving VAT and overall tax administration, continuing public financial management reforms, strengthening capacity for transparent public investment management and borrowing, and enhancing financial sector development.Medium-term challenges. Fiscal policy adjustment in 2015 and over the medium term will be essential to preserve debt sustainability and macroeconomic stability. Structural reforms focusing on public financial management, monetary policy tools and banking supervision, and business facilitation should be implemented vigorously to sustain growth and render it more inclusive. With foreign aid likely to decline over the medium term, increased nonconcessional borrowing can provide additional resources for improving both Mozambique's physical infrastructure and human capital. Further strengthening of investment planning and implementation, and debt management are essential to ensure the efficiency of investment and borrowing. Completion of the new mining and hydrocarbon legislation, the related fiscal regimes, and implementingregulations would facilitate the development of Mozambique's natural resources.