mozambique-on-the-brink

Mozambique is not in total crisis – but it is faltering. There has been no currency crash, no hyperinflation, no bank run. But over the past decade the main indicators of the country’s economic health have severely eroded.

 

An IMF assessment in early 2026 was remarkably blunt: public debt is unsustainably high, the external balance of payments is weak, and policy makers have limited options. Since then, tensions in the Middle East have further disrupted supply chains and dramatically raised global fuel prices. This is a major shock for small import-dependent economies, like Mozambique.

 

For ordinary Mozambicans, the deterioration in conditions over the past decade shows up in higher poverty, unreliable public services and a labour market that offers few decent opportunities – especially for the young.

 

Without careful adjustments now and a deliberate shift toward growth and job creation outside extractives – the part of the economy that actually employs most Mozambicans – today’s pressures will keep building until a large economic correction becomes unavoidable and under far worse conditions.

 

A slow squeeze

 

The country’s present condition is one of vulnerable stagnation. Since the hidden debt crisis of 2016, real GDP growth outside the extractive sector has hovered around 2 per cent, barely matching population growth. In per capita terms, the non-extractive economy has flatlined for a decade. Average real incomes outside mining and gas (or the public sector) have gone essentially nowhere.

 

Fiscal deficits of 4-6 per cent of GDP have been financed increasingly by domestic banks. But as both the IMF and World Bank have warned, that model is now reaching a breaking point. Banks can only absorb so much government debt before they run out of willingness – or capacity – to lend. When that happens, the government faces a choice between defaulting, printing money, or slashing spending abruptly. None is painless.

 

Evidence of these pressures is plain to see. Over a year ago, the global rating agency S&P classified local-currency debt as “selective default”. This is a formal determination that the government had failed to meet its obligations to domestic creditors on the original terms, even if it continued paying.

 

By late 2025, arrears had extended to short-term treasury bills – government IOUs that mature within months and are supposed to be the safest instruments in the domestic financial system. When a government struggles to repay even these, it signals serious fiscal distress.

 

On top of this, a decade of crisis management has displaced any serious thinking about growth. The government’s wage bill and debt service dominate spending, leaving chronic underinvestment in infrastructure, education, and agriculture.

 

Payments under the basic social subsidy programme have become highly irregular. Poverty has increased, with around two thirds of the population now below the poverty line. Demographic pressures are intensifying.

 

The exchange rate question

 

The metical has been held stable against the US dollar since 2021, but in real terms it has appreciated by over 20 per cent, eroding export competitiveness. Foreign exchange shortages are now pervasive.

 

The policy response has been administrative: raising exporter surrender requirements, tightening banks’ foreign exchange position limits, restricting overseas card usage. These measures treat symptoms, but the underlying misalignment only deepens.

 

The overvalued exchange rate functions as a tax on the non-resource economy. Recent fuel shortages and panic buying provide a visible demonstration of the mounting costs.

 

The politics of adjustment

 

Research shows roughly half of all university graduates find employment in the public sector, and having a public sector job is one of the best predictors of not being poor.

 

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Exchange rate adjustment poses a parallel dilemma. A depreciation would raise the cost of imported food and fuel, hitting urban households directly, and any price increase would spark calls to hike minimum wages.

 

But as pressures mount, there is a growing risk of compounding distortions. So far, the temptation has been to respond with new administrative controls, including import restrictions, tighter capital controls, and preferential credit allocation.

 

The ongoing handling of the fuel price shock illustrates the pattern. Rather than adjust pump prices promptly, the government has held prices fixed, leaving distributors to manage a mounting shortfall through supply rationing.

 

Each temporary fix may ease immediate pressures, but tends to deepen the underlying misalignment, push activity into informal channels, and narrow future options.

 

Feasible pathways

 

Path 1: Muddle through and wait for the gas. This is the current trajectory. Fiscal adjustment occurs passively, driven by financing constraints rather than strategy. The hope is that LNG revenues could materialise from the early 2030s. Mozambique’s Rovuma Basin holds an estimated 100 trillion cubic feet of recoverable natural gas. But only one offshore platform (Coral South) is currently producing. Even if the 2030 timeline holds, continued stagnation would further erode public services, weaken institutions, and deepen social frustration.

 

Path 2: Gradual, growth-first adjustment. The most economically coherent path. The central premise: restoring non-extractive growth must take priority, even at the cost of short-term macroeconomic discomfort. Key elements would include:

 

• a phased depreciation of the metical to restore competitiveness, supported by clear communication and strengthened social protection
• acceptance of temporarily higher inflation, with policy focused on preventing second-round effects rather than suppressing the initial price shift
• a fiscal framework centred on spending quality and revenue efficiency
• wage bill containment through hiring restraint, attrition, and systematic payroll audits to eliminate ghost workers and improper payments
• re-engagement with external partners under a credible IMF programme framework; and
• an evidence-based and financially viable medium-term growth strategy targeting agricultural productivity, labour-intensive exports and a predictable regulatory and macroeconomic environment.

 

Path 3: Forced correction. If external shocks bite deeper, a large adjustment may be imposed suddenly – involving disorderly exchange rate movement, abrupt fiscal contraction, and potential banking sector stress.

 

The narrow path

 

There is no easy option. Every adjustment has visible losers, while the benefits remain uncertain, delayed, and diffuse.

 

But one priority stands out: boosting growth beyond extractive sectors. Without it, fiscal consolidation is self-defeating, job creation will remain grossly inadequate, and social pressures will only intensify.

 

This growth strategy must be grounded in data, evidence and honest debate. Mozambique has not lacked for projects or initiatives, but it has lacked consistent use of rigorous data to identify what drives productivity and job creation.

 

The window for a controlled, policy-driven adjustment is narrowing fast. The alternative is not stability. It is adjustment under far worse conditions, at higher cost.

 

Via The Conversation