Mozambique has turned to the International Monetary Fund for $286 million in emergency aid to help cushion the economy after the currency lost almost a third of its value.
The funds are tied to an 18-month program that the government must implement to help bring stability to the economy following the sharp drop in commodity prices, the Washington-based lender said in a statement on Thursday. The policy package includes curbing the budget deficit, raising interest rates and improving the way the foreign-exchange market works.
“While medium-term prospects remain positive, short-term challenges have become more complex,” the IMF said. “As other countries in the region, Mozambique is currently experiencing an external shock associated with the drop in commodity prices, lower growth in trading partners, and delays in investment associated with large natural resource projects.”
The metical has slumped 29 percent against the dollar this year, the second-worst performer of more than 30 African currencies tracked by Bloomberg after Zambia’s kwacha. The Bank of Mozambique raised its benchmark interest rate by 25 basis points to 7.75 percent on Oct. 14, the first increase since November 2011.
The IMF loan is subject to approval by the board, which is scheduled to meet in the middle of December.
The IMF said Mozambique’s economy will probably expand 6.3 percent this year, lower than the central bank’s projection of 6.5 percent and the government’s forecast of 7.5 percent. Growth is set to reach 6.5 percent in 2016, according to the lender.
“Given the economic and fiscal context, the IMF agreement will be a positive signal,” Anne Fruhauf, vice president at New York-based risk adviser, Teneo Intelligence, said in an e-mailed response to questions. “It will give the IMF greater leverage over fiscal management, though this may pose political challenges as the 2016 draft budget assumes higher growth than the IMF and seems to fall short on fiscal consolidation pledges.”
Export receipts fell 4.2 percent in the first half of the year compared with the same period in 2014, the central bank said in a report on Oct. 27. International reserves have dropped 25 percent to $2.3 billion since the end of last year, covering 3.4 months of import requirements. Increased spending on debt interest payments contributed to the depletion of reserves, the central bank said.
The economic outlook for Mozambique has worsened this year, with credit-rating companies having “punished the unwise issuance of the 2013 $850-million Ematum bond with sovereign downgrades,” Fruhauf said. Moody’s Investors Service cut Mozambique’s rating on Aug. 8 to B2 from B1, while keeping the outlook on negative.
Empresa Mocambicana de Atum SA, or Ematum, which was set up as a state-owned tuna-fishing company two years ago, borrowed $850 million on international capital markets with a state guarantee to fund a fleet of fishing boats. It later transpired the funds were also used to pay for patrol boats, leading the government to take $500 million onto its own balance sheet as defense spending. The government is now seeking to restructure the loan by extending the repayment period and negotiating lower interest rates.