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Mozambique economic update: Setting the stage for recovery

COVID-19 continues to spread globally, with a second wave now resurfacing. Mozambique has been spared the worst of the pandemic so far but confirmed cases have been growing rapidly since the lifting of the State of Emergency in early September.

The country has taken unprecedented measures to contain the spread of the virus, although at the expense of bringing the economy to a near standstill. It has now started to gradually reopen its economy amid high socio-economic fallouts.

Issued by the World Bank, this Economic Update explores the implications of COVID-19 for the economy, businesses and households. It makes recommendations for moving forward—in the short-term relief phase, as well as over the medium and longer-term to ‘build back better’. The global pandemic has taken a heavy toll on the economy.

In 2020, Mozambique is expected to experience its first economic contraction in nearly three decades. COVID-19 hit the economy as it was attempting to recover from the slowdown triggered by the hidden debt crisis and the tropical cyclones in 2019.

Real gross domestic product (GDP) is projected to decline by 0.8% in 2020, compared to a pre-COVID estimate of 4.3%, as external demand falls, domestic lockdown measures disrupt supply chains and depress domestic demand, and liquified natural gas (LNG) investments are delayed.

COVID-19 has jeopardised years of hard-won development gains, with about 850,000 people projected to slip into poverty in 2020 (as measured by the international poverty line of $1.90 per day). The pandemic is further delaying Mozambique’s already slow progress towards the Sustainable Development Goals (SDGs), undoing the substantial gains made on health and education, among others.

While there is great uncertainty about the path of the pandemic, the economy is expected to gradually recover from 2021 as aggregate demand rebounds and LNG investments and extractive production gain momentum.

Despite the expected recovery, the development and widespread deployment of COVID-19 vaccines will be at the core of resilient recovery. The economy cannot recover fully until mobility is restored, hence the critical importance of ensuring broad, rapid and affordable access to vaccines once they come onstream.

Fiscal challenges are significant, and the crisis will further delay fiscal consolidation efforts. The fiscal deficit will increase substantially in 2020, owing to lower fiscal revenues and COVID-19- related expenditures. This is in a context of debt overhang, a growing wage bill and rising military spending.

Mozambique is in debt distress with debt-to-GDP projected to surge this year due to the balance sheet effect of currency depreciation and falling GDP. Once the COVID-19 crisis has receded, fiscal consolidation will be central to generate the fiscal space needed for recovery measures. Further progress in improving debt management and transparency, combined with debt restructuring, will be crucial to enhance debt sustainability.

Finally, the slowdown in foreign direct investment and capital inflows has tightened external constraints. The current account deficit will increase sharply this year due to poor export performance and increased imports of LNG-related services.

The economic downturn in key trading partners, and the commodity price slump, represent key sources of external risk. In addition, if left unchecked, the large influx of foreign currency to finance LNG projects in the coming years could erode Mozambique’s external competitiveness.

Read full Mozambique economic update: Setting the stage for recovery

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