Mozambique

major macro economic indicators

(e): Estimate (f): Forecast *Grants included

RISK ASSESSMENT

Growth driven by extractive activities, particularly gas megaprojects

Economic growth will remain robust in 2024, thanks mainly to the extractive sector (11% of GDP in 2022), with coal, bauxite and liquefied natural gas (LNG), in particular. At the end of 2023, ENI's Coral Sul offshore gas platform, located 80km off the coast, reached full capacity; the multinational is also planning to build a second platform, Coral Norte, in 2024. In addition, massive security measures in the north of the northern province of Cabo Delgado could enable two other LNG projects to be resumed. TotalEnergies could, for example, relaunch its USD 23 billion Mozambique LNG project in 2024, and a final investment decision from ExxonMobil is expected in 2025, ensuring strong growth prospects in the medium to long term. Growth will also be underpinned by a recovery in non-extractive activities, with a boost to aluminium production and construction. However, given the tight credit conditions, non-extractive activity will be below potential. Private consumption (64% of GDP) and domestic investment will also continue to suffer from high interest rates. Moreover, as the country is highly vulnerable to climate change, the repercussions of El Niño represent a risk for the agricultural sector (25% of GDP, but home to almost 80% of the population). Public spending will focus on security, particularly in relation to Cabo Delgado, where onshore LNG extraction projects are concentrated, and development-related infrastructure.
In 2024, inflation will ease as the fall in world food and fuel prices is passed on to domestic prices. Despite below-potential non-extractive activity, ongoing fiscal consolidation and waning inflation, the Central Bank maintained relatively high interest rates and reserve requirements. The aim has been to defend the metical's anchorage and combat imported inflation. It is expected to loosen monetary policy slowly. In May 2022, the IMF approved a three-year USD 456 million arrangement under the Extended Credit Facility (ECF). This programme marks the end of the freeze on relations with the IMF, and other partners, following the so-called hidden debt scandal that emerged in 2016. The planned structural reforms will support the country's development (diversification of the economy, improved resilience to climate change, creation of a sovereign wealth fund to manage future LNG revenues).

Continued fiscal consolidation and deterioration of the current account in connection with gas projects

The government will pursue fiscal consolidation in 2024 despite the prospect of elections. It plans to increase revenue mobilisation (25% of GDP) by broadening the VAT base, introducing personal income tax measures and digitising tax collection. Revenues will also benefit from an increase in income from exports (mainly coal and aluminum) combined with the return of external budgetary aid (2% of GDP in 2024). In addition, gas will gradually add to public revenues, amounting to 0.2% of GDP in 2024. Despite continued spending on wages (14.6% of GDP) and security, the primary budget balance should be in surplus. However, interest payments on public debt will increase from 3.3% of GDP in 2023 to 4.2% in 2024, and will contribute to the overall budget deficit. This will be financed by concessional external financing and domestic bond issues. According to the IMF, public debt, the external share of which will represent 75% in 2024, presents a high risk of over-indebtedness. The two main creditors are the World Bank and China, which hold 29% and 17%, respectively. On the other hand, it is expected to be sustainable in the future thanks to spin-offs from gas projects. With 77% of its public debt denominated in foreign currencies, the country is exposed to currency risk. However, thanks in part to tight monetary policy, the metical has been stable against the US dollar since July 2021.
The current account will widen significantly in 2024. Excluding trade linked to LNG projects, the current account deficit would be smaller, estimated at 28.1% of GDP. Imports linked to LNG megaprojects explain the deterioration in the trade balance. Despite the boom in mining and gas production, exports will not be able to offset the explosion in imports, especially as they will suffer from a fall in aluminum prices. Interest payments on foreign debt, both public and private, and dividends from gas production will exceed foreign aid and expatriate remittances. The current account deficit will be financed by external borrowing (concessional for the public sector) and by substantial FDI in the gas sector (6.5% of GDP in 2023). Private external debt accounts for 63% of total external debt (160.3% of GDP in 2024), which can be explained by the major gas and hydroelectric projects.

The situation in Cabo Delgado continues to give cause for concern, and international intervention is called for

Given fragmented main opposition party, Resistência Nacional Moçambicana (Renamo), the dominance of the ruling party, Frente de Libertação de Moçambique (Frelimo), led by President Filipe Nyusi, is assured in 2024. Frelimo's landslide victory in the October 2023 municipal elections (56 out of 65 municipalities), despite opposition protests, foreshadows what could happen in the general elections scheduled for October 2024. On the Frelimo side, Mr. Nyusi was re-elected party president and is seeking a third term as President, which would require a constitutional amendment to remove the current two-term limit.
Since 2017, Mozambique has been facing an Islamist insurgency in Cabo Delgado. The insurgency is fueled by social tensions (poverty and a population that does not benefit from the gas windfall) and religious tensions (marginalisation and relocation of Tanzanian Islamist networks in the province). To keep the situation under control, the government is collaborating with the United States and the European Union, which are providing military training, as well as with Rwanda and the Southern African Development Community (SADC), which are sending troops. Despite massive security measures and a relatively calm period in 2023, further unrest broke out in November 2023 that continues to this day. On the international front, the European Union will support the economic development of the country, including Cabo Delgado, and help maintain security to facilitate investment in LNG by European multinationals (Eni and TotalEnergies).

Last updated: March 2024