Republic of Mozambique: First Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria-Staff Report; Press Release

KEY ISSUES Context and outlook. Mozambique's macroeconomic outlook remains favorable and the PSI-supported program is broadly on track. All assessment criteria were met and most indicative targets, but there was some slippage on structural reforms. Economic growth is robust and inflation remains moderate. In spite of risks stemming from the uncertain global economy, growth is expected to be sustained in the medium term by the natural resource boom and infrastructure investment. A recent government guarantee for large-scale borrowing by a public enterprise has raised transparency and prioritization issues that point to the need to strengthen investment and macroeconomic planning. New risks associated with the political/security environment have emerged. Short-term policy framework. The main short-term challenge is to maintain the growth momentum and to contain the fiscal expansion envisaged in 2014, reflecting both election year pressures and the spending of one-off revenue windfalls and of external borrowing. Key fiscal priorities include improving VAT administration, using windfall revenue to build buffers and invest, strengthen investment implementation capacity, and ensure transparency and adherence to due process for investment selection and borrowing. Monetary policy will need to be vigilant and monitor inflation developments closely. Medium-term challenges. Structural reforms along a broad policy spectrum should be implemented vigorously to foster sustained and more inclusive growth. With foreign aid likely to decline over the medium term, increased nonconcessional borrowing can provide additional resources for improving physical infrastructure and human capital. Further strengthening debt management and investment planning and implementation are essential to ensure the efficiency of investment and borrowing. Completion of the new mining and hydrocarbon legislation, the related fiscal regimes, and implementation regulations would facilitate the economic development of Mozambique's natural resources.