Budget credibility in Mozambique – challenges and solutions

Mozambique ranks in the bottom 20 of the human development index, with nearly two-thirds of its population (18.9 million people) living below the USD 0.70-a-day national poverty line. Simultaneously, the country struggles to finance public spending and consistently runs state budget deficits, accompanied by consistent underspending. Our recent study on budget credibility in Mozambique takes a deep dive into tendencies in state budgeting, exploring why the government’s challenges in meeting its revenue and expenditure targets harm the overall economy and suggesting solutions.

With a rapidly growing population, increasing needs of the poor, dilapidated infrastructure, and very limited revenue generation, it is no surprise that Mozambique frequently experiences budget deficits. In this restricted fiscal environment, budget support aid and borrowing are used to relieve state spending constraints. These challenges underscore the need for good fiscal management, including a realistic and reliable budget.

A key tool to assess and improve Public Financial Management (PFM) practices in Mozambique is the Public Expenditure and Financial Accountability (PEFA) programme. Initiated in 2001 by the European Commission (EC), International Monetary Fund (IMF), World Bank (WB), and the governments of France, Norway, Switzerland, and the United Kingdom, PEFA has to date conducted 533 assessments in 155 countries, including 47 in sub-Saharan Africa and 10 in Mozambique. PEFA aims to improve fiscal outcomes, highlighting the importance of budget credibility in fiscal management.

PEFA defines budget credibility as the extent to which the government's budget is realistic and implemented as intended (PEFA 2015). A credible budget reassures taxpayers, donors and lenders, the firms that supply for the government, public workers, and the recipients of public services on the predictability of public expenditure and services.

The credibility of Mozambique’s budget

Budget credibility in Mozambique is assessed using publicly available state budget data, encompassing both planned spending and actual execution. PEFA has identified several weaknesses: deviations, sector-specific variability, revenue shortfalls, and mid-year budget adjustments. However, these insights do not explore the origins of the underlying budget discrepancies.

In our working paper, ‘Decomposing Budget Credibility’, we further analyse PEFA’s budget credibility measure along expenditure types and the fiscal year. Our findings reveal consistent under-execution of budgeted expenditures, even in years with sufficient revenue. Significant disparities exist along sectors: education and health exhibit relatively credible budgets compared to public works, social protection, and overall non-social expenditures.

A comparison of budget credibility between types of expenditure reveals that investment expenditures in social sectors (e.g., schools, health facilities, water, and sanitation), primarily externally funded, show higher volatility and lower credibility than current expenditures (e.g., teachers’ payments and, more generally, overall salaries). Related to the previous evidence, we find a strong indication of resource reallocation outside of regular budgetary rules: in particular, we found a suggestion that resources initially allocated for investments were redirected to fund current expenditures. Finally, and in alignment with the PEFA reports, we find no strong evidence that mid-fiscal year budget adjustments improve budget reliability.

Reported causes and potential solutions

The Government of Mozambique’s State Budget Account (CGE) attributes budget inconsistencies to two main factors. On one hand, slower economic growth and inefficient tax collection lead to revenue shortfalls. On the other, expenditure overruns due to natural disasters, health shocks (e.g., COVID-19), inflation, exchange rate fluctuations, delays in donor disbursements, and administrative and logistical issues that delay project start or completion.

The Government of Mozambique is implementing strategies to mitigate these PFM vulnerabilities, such as establishing a reserve fund under the new sovereign fund, increased tax collection, and a VAT reform, as suggested by the IMF. These efforts are coupled with measures to address expenditure overruns, including improving transparency and accountability in public budgets and efforts to limit the overall public sector wage expenditure.

Our study recommends additional strategies to boost budget credibility in Mozambique:

• Sectoral focus: enhance expenditure targeting in social sectors like education, health, social protection, and social work, and improve related budgeting processes
• Enhanced investment management: strengthen oversight mechanisms for externally financed projects to reduce fund diversion to unplanned purposes and align better with long-term development goals
• Budget adjustments reassessment: focus mid-fiscal-year budget adjustments on strategic reallocation rather than ad-hoc adjustments
• Improved monitoring: implement the proposed decomposed budget credibility indicators at sectoral, budget unit, and economic expenditure levels to help the Ministry of Economy and Finance to identify areas for improvement, potential quick wins, and best practices

Budget credibility is crucial for Mozambique’s economic development and public trust. Effective budget management ensures transparency, predictability, and accountability, which are essential for sustainable growth. Addressing the persistent issues of under-execution and revenue shortfalls through improved fiscal management, strategic budget adjustments, and investment oversight can lead to a more realistic and reliable budget.

A version of this blog has been published by IGC.

Félix Mambo is a Country Economist with the International Growth Centre (IGC) in Mozambique. Prior to joining the IGC, he worked as a Research Consultant for UNICEF, supporting public finance initiatives for children and advising parliamentarians on financial oversight. Between 2016-2018 he collaborated with UNU-WIDER under the Inclusive growth in Mozambique (IGM) programme.

Ricardo Santos is a UNU-WIDER Research Fellow stationed in Maputo, Mozambique, focused on the Inclusive growth in Mozambique – scaling-up research and capacity programme and Technical Resident Advisor to the Centre of Economics and Management Studies at the Faculty of Economics of Eduardo Mondlane University.

The views expressed in this piece are those of the authors, and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.