Mozambique’s Economy Faces Challenges Amid Global Financial Turmoil

Mozambique has been experiencing strong economic growth over the past decade, driven by exports of natural resources such as aluminum, electricity, gas, cotton, tobacco, and shrimp. The country has achieved an average annual real GDP growth rate of 7.5%, with macroeconomic stability and structural reforms playing a key role.

Economic Performance

According to the International Monetary Fund (IMF), Mozambique’s economic performance has been supported by prudent fiscal policy, which has focused on maintaining debt sustainability and limiting domestic borrowing. The country’s monetary policy has also been oriented towards price stability through reserve money targeting in a relatively flexible exchange rate regime.

Financial Sector Development

The financial sector has seen significant development, with the authorities implementing a comprehensive financial sector strategy based on the 2003 Financial Sector Technical Assistance Project (FSTAP). This project aimed to strengthen several aspects of the financial sector and has garnered substantial donor support and foreign direct investment.

Challenges Amid Global Financial Turmoil

However, recent global financial turmoil has clouded Mozambique’s economic outlook and increased macro-financial risks. The country’s economy is now exposed to significant risk through real sector linkages, as lower growth in developed economies could affect Mozambique not only through lower external demand but also through declines in foreign direct investment (FDI) and external aid flows.

Transmission Channels

In a statement, the IMF warned that Mozambique’s financial sector may be vulnerable to market and liquidity risks through indirect linkages. The country’s reliance on commodity exports and external financing makes it susceptible to real sector linkages, which could dampen growth prospects and increase credit risks for banks.

There are two major transmission channels through which the global financial turmoil could affect Mozambique’s economy:

Financial Sector Linkages

• Direct exposure of local banks to securities losses or illiquid asset and funding markets
• Exposure to counterparties’ with severe losses or illiquidity
• Sudden stop of capital inflows
• Contagion through parent banks’ balance sheets

Real Sector Linkages

• Domestic borrowers default due to a decline in income caused by a drop in external demand and/or in export commodity prices
• Domestic borrowers default due to a sudden stop of capital flows and its impact on income, liquidity, interest rates, and exchange rates

Response to the Crisis

In response to the crisis, the authorities are working closely with international partners, including the World Bank and donors, to assess the risks and develop strategies to mitigate them. The country’s financial sector is expected to remain resilient in the face of global challenges, but vigilance is necessary to ensure that the economy continues to grow and prosper.