Mozambique's Public Debt Sustainability Improves for Second Straight Year

Mozambique's Ministry of Economy and Finance announced that the country's public debt sustainability has improved for the second consecutive year, decreasing from 78% to 73% of GDP, excluding debts from the national oil and gas company ENH. The progress is attributed to several factors, including the stability of the metical currency, investments in natural resource projects, and continued support from international cooperation partners.

The government has implemented measures to broaden the tax base, modernize revenue collection, and allocate a portion of tax revenue from natural resources to infrastructure development in the provinces where extraction takes place. The World Bank praised Mozambique's efforts to maintain sound fiscal policy, adopt stronger controls on public debt, and improve domestic revenue collection. These actions are expected to keep pressures on public spending under control and ensure the stability of public accounts.

Why this matters: Mozambique's improving debt sustainability is a positive sign for the country's economic stability and development prospects. It reflects the government's commitment to fiscal responsibility and could attract further investment and international support.

However, the Ministry of Economy and Finance also released a report warning that the continued growth of domestic debt could threaten the reversal process and make the debt unsustainable 'in this generation'. The report states that if domestic debt continues to grow at the current rate over the next five years, the breakdown of the 'stock' could balance out by 2029 at 50% domestic and 50% external, with a portfolio dominated by purely commercial instruments. This would jeopardize the chances of reversing the unsustainable debt situation.

The cost of domestic financing has driven a continuous upward adjustment of the weighted average interest rate on the government's loan portfolio, from 5% in 2021 to 6.5% in 2023, representing a cumulative increase of 150 basis points in two years. The refinancing risk, reflected in the growing concentration of public debt maturities in the short-term horizon, represents the greatest vulnerability, with just over a third of all the country's debt maturing within a year.

The Ministry of Economy and Finance report concludes that this overloaded cycle of domestic debt maturities increases the risk of a scenario materializing over the course of the year in which dealing with overdue installments through commercial refinancing will be the only option available to the government. This would force banks to increase spread premiums and put interest rates on a new cycle of acceleration, further exacerbating the debt situation.

Key Takeaways

• Mozambique's public debt decreased from 78% to 73% of GDP in 2022.
• Measures to broaden tax base, modernize revenue collection, and allocate resource taxes to infrastructure.
• Domestic debt growth could make debt unsustainable by 2029, with 50% domestic and 50% external.
• Domestic financing costs have driven up interest rates from 5% in 2021 to 6.5% in 2023.
• Refinancing risk with over a third of debt maturing within a year, increasing default risk.