Mozambique: CTA urges the State to settle outstanding invoices - around $400M worth
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Mozambican businesses have accused the government of absorbing credit that should be going to the private sector, with the result that corporate investment will shrink, adversely affecting economic growth in the medium to long term.
The economic and financial crisis that has plagued the Mozambican economy since the spring of 2016 following the disclosure of illicit debts contracted by state-owned public companies, has been the source of a growing budget deficit.
This situation makes it necessary to promote fiscal consolidation through fiscal austerity measures and higher tax rates. This increasing deficit is mainly explained by the increase in the cost of debt service, which has worsened with the rise in international interest rates, according to the Confederation of Economic Associations of Mozambique (CTA).
In order to finance the budget deficit, the state essentially borrows domestically, since direct support to the state budget by external donors has been suspended since April 2016, and external investors have been afraid of investing in the country due to the high risk associated with the instability of the main performance variables of the Mozambican economy.
According to the CTA, an increase in the government’s domestic debt affects financing in the economy and discourage private sector growth. This phenomenon is known as the ‘crowding-out effect’, or the shifting effect of public spending that occurs when the increase in the public deficit financed through domestic debt results in higher interest rates and reduced credit to the private sector.
In the case of Mozambique, the budget deficit grew between 2016 and 2018 by 15 percent, from 69.6 billion to about 80 billion meticais. Over the same period (2016-2018), the active interest rate for medium-term loans (maturity up to two years) increased by 7.31 percentage points from 19.41 percent in January 2016 to 26.72 percent in April 2018.
This signals the verification of the crowding-out effect, given that, since October 2016, the portion of domestic credit lent to the government has increased and the portion lent to the private sector tends has fallen.
“The main implication of this situation lies in the fact that, if the government continues to absorb the credit that should be going to the private sector, corporate investment will tend to reduce and this will adversely affect economic growth in the medium term and long term,” the CTA says.
It is important for Filipe Nyusi’s executive to take this into account in the structuring of the state’s financing sources, because if the financing obstacle to the private sector grows, companies do not grow and consequently cannot pay taxes, which will have negative implications for the pursuit of fiscal consolidation as well as economic sustainability.
In this context, it is recommended that the Bank of Mozambique strengthen its lines of intervention through a more expansive monetary policy or by directly rationing credit to the private sector.
However, the CTA analysis continues, the reduction of lending rates is not enough, since this effort is not immediately reflected in interest rates, and companies do not have collateral like the government’s public bonds to compete in obtaining financing from commercial banks.
By Edson Arante
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