Republic of Mozambique: Third Review Under the Policy Support Instrument-Staff Report and Press Release

Context and policy challenges. Mozambique's macroeconomic performance remainsrobust, with strong growth and low inflation. In spite of the heightened risks from anuncertain global outlook, growth is expected to be broad-based in the medium termand boosted by the natural resource boom and infrastructure investment.Short-term policy framework. The main short-term challenge is to maintain thegrowth momentum while preserving fiscal and debt sustainability. The 2014 fiscal stanceis expansionary, and fiscal consolidation needs to be initiated in the 2015 budget torestore prudent fiscal management. While low international prices have dampenedinflation, the Bank of Mozambique should stay vigilant and adhere to its medium-terminflation target. Key structural reform priorities include improving VAT and overall taxadministration, continuing public financial management reforms, strengthening capacityfor transparent public investment management and borrowing, and enhancing thebusiness environment and financial sector development. Completion of the LNG contractnegotiations is a critical milestone for the launch of this project, one of the largest insub-Saharan Africa.Medium-term reforms. Fiscal adjustment over the medium term will be essential topreserve debt sustainability and macroeconomic stability. This requires measures tocontain current spending pressures while bringing investment to a more sustainablelevel. Structural reforms focusing on public financial management, monetary policy toolsand banking supervision, and business facilitation should be implemented vigorously tosustain growth and render it more inclusive. With foreign aid likely to decline over themedium term, increased borrowing can provide additional resources for improving bothMozambique's physical infrastructure and human capital. To ensure the efficiency ofinvestment and borrowing, further strengthening of investment planning andimplementation, and debt management are essential.