A Robust Macro-Fiscal Framework for Mozambique : Exploring the Implementation of Fiscal Rules

Overview & Synopsis

Mozambique has a challenging macro-budgetary context. The high current public expenditure, the limited space for the provision of services and public investment, underperforming public companies, the lack of access to the financial markets and the expected revenues from the exploitation of natural gas emphasize the need for a robust, sustainable and credible budgetary and fiscal framework. Between 2017 and 2022, over 90 percent of fiscal revenues were absorbed by expenditures on salaries, pensions, and debt service. By 2022, the exacerbated costs of the salary reform dragged current expenditure to more than 110 percent of fiscal revenues, effectively wiping out the space for public investment. These financial challenges are occurring simultaneously with the mounting financing needs resulting from the high exposure to climate risks, conflict and humanitarian crisis in the north of the country, as well as the demand for public services and infrastructure amid rapid population growth. Funding for the country is scarce, the risk of debt distress is high and, internally, the country is strangled by liquidity constraints and high interest rates, which are among the highest in sub-Saharan Africa. Strengthening fiscal capacity and ensuring long-term sustainability will require fundamental changes in the fiscal policy paradigm. The introduction of fiscal rules with clear objectives, constraints and institutional arrangements can ensure greater discipline, reliability, capacity, and sustainability of fiscal policy.