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September 24, 2018

Innovative Approaches to Improving Fiscal Risks Management

  Moz
Posted by Esther Palacio[1]

The main objective of the IMF’s capacity building programs is to help countries overcome new challenges in economic and fiscal policy. However, standard two-week technical assistance (TA) missions composed of international experts are not always an effective solution, even when they deliver policy analysis and recommendations that are well-informed by the experiences and practices of other countries. In many cases, a deep understanding of the underlying challenges facing the recipient country, combined with a well-balanced mixture of assistance, can prove to be more effective.

In Mozambique, the government in partnership with the IMF and two donors has been trying out a collaborative and broader approach to delivering TA. A program of measures to improve macro-fiscal and risk management functions is backed by a resident advisor (financed by Belgium and implemented by the IMF) and to cover related current and capital expenditure (provided by Ireland). The solution was facilitated by the IMF TA coordinator based in Mozambique, and aims at building capacity to mitigate increasing fiscal risks, which were seriously threatening the country’s macroeconomic stability.[2]

The story of this innovative approach to providing TA goes back several years. In 2014, following a request by the Government, the IMF conducted a Fiscal Transparency Evaluation, the first in Africa (see http://blog-pfm.imf.org/pfmblog/2015/05/mozambiques-fiscal-transparency-evaluation.html). The report noted the lack of both public information on fiscal risks and a government strategy to mitigate such risks. It highlighted the analysis and management of fiscal risks as one of the weakest areas of the evaluation. Nevertheless, the government had little incentive at that time to improve fiscal risks management as the Mozambican economy was booming, with an annual growth rate of around 7 percent, and fiscal conditions were relatively benign.

However, since late-2014, fiscal risks started to materialize amid the deterioration of the domestic and international economic environment, prompted by lower commodity prices, loose macroeconomic policies, and weak public financial management. In early 2016, the country struggled to complete the fifth review under its Policy Support Instrument program with the IMF, and requested an 18-month arrangement under the Standby Credit Facility. When IMF Deputy Director Carla Grasso visited the country in March 2016, she promised to contribute through further and more innovative TA, to help the authorities overcoming these fiscal challenges.

Unfortunately, the outlook deteriorated even more in April 2016, when the government defaulted on $US 2 billion of illegal, hidden loans to a tuna fishing and national security project implemented by three newly-created SOEs (EMATUM, Proindicus, and MAM). As a result, the IMF program, and many other donor loan- and grant-based projects (including budget support) were put on stand-by or terminated, drastically reducing external disbursements. Inflation picked up, international reserves shrank, and the exchange rate depreciated. Mozambique’s public debt position deteriorated rapidly, creating uncertainty about the country’s economic and financial prospects over the medium term.

Responding to this situation required immediate action on several fronts. One of the key areas that the government needed to address was strengthening fiscal risks management. How to find effective solutions, however, was not so clear. Despite substantial efforts by the IMF and the World Bank to strengthen the government’s capacity through short-term TA, it was apparent that the recommendations were poorly absorbed and the impact of the reforms was generally low. Bilateral donors were willing to contribute to improve fiscal risks management but did not have the required expertise. More substantial, comprehensive, and tailored support that would be sustained over the long term was needed but could only be achieved through a flexible approach to TA delivery and multi-party collaboration, under the government’s leadership.

This innovative approach included the following elements. First, the minister established a Fiscal Risks Unit (FRU) and requested IMF support to bring in an international expert. While this support was being arranged with financing from Belgium, IMF short-term experts and the resident TA coordinator assisted in preparing and publishing the Mozambique’s first Fiscal Risks Statement. This statement was positively perceived as a step forward to improve fiscal transparency. Ireland then came on board to empower the FRU with more qualified local staff and financial resources.

The unit produces regular fiscal risks analysis and measures deviations from mid-term fiscal projections. It is preparing a macro-fiscal forecasting manual and is gradually strengthening its capacity to mitigate fiscal risks, thus contributing to macroeconomic stability.

The road to significantly strengthen fiscal risks management is long and full of challenges, but the IMF’s partnership with the Mozambican authorities, and its innovative approach to technical assistance delivery, will go a long way in assisting the authorities to overcome the challenges in this critical area.

[1] IMF TA Coordinator and PFM Advisor, Mozambique.

[2] Capital Magazine – Mozambique, February 2018, No. 114. “The Government wants to strengthen its capacity to improve fiscal risks management”.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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