Mozambique’s Economic Challenges Persist – Moneyweb

Mozambique is not in complete turmoil – but it is struggling. There hasn’t been a currency collapse, hyperinflation, or a bank run. However, over the last ten years, the key indicators of the nation’s economic vitality have significantly declined.

An IMF report from early 2026 was exceptionally straightforward: public debt is unsustainably high, the external balance of payments is fragile, and policymakers face limited alternatives. Since then, Middle Eastern tensions have further disturbed supply chains and drastically increased global fuel costs. This poses a substantial shock for small, import-dependent economies like Mozambique.

My insights stem from more than twenty years of experience aiding economic research and policy analysis in the country. Currently, my role under the Inclusive Growth in Mozambique program focuses on monitoring the nation’s economic performance through studies involving firms, students, and households.

The evidence paints a grim picture. For regular Mozambicans, the decline in living conditions over the past decade has manifested as increased poverty, unreliable public services, and a labour market that provides few decent opportunities – especially for the youth.

My main assertion is that simply getting by is not a viable solution. Without careful adjustments now and a conscious pivot towards growth and job creation outside the extractive sectors – which employ the majority of Mozambicans – today’s pressures will keep escalating until an unavoidable and more severe economic correction occurs.

A gradual squeeze

The current state of the country is characterized by precarious stagnation. Since the concealed debt crisis of 2016, real GDP growth outside the extractive sector has been around 2%, barely keeping pace with population growth. In per capita terms, the non-extractive economy has stagnated for a decade. Average real incomes, excluding mining, gas, and the public sector, have effectively remained stagnant.

Fiscal deficits ranging from 4-6% of GDP have increasingly relied on domestic banks for financing. However, as both the IMF and World Bank have cautioned, this model is nearing its limit. Banks can only absorb so much government debt before they exhaust their willingness – or capacity – to lend. When that occurs, the government will face a dilemma: default, print money, or sharply cut spending. None are painless options.

Read: Mozambique’s economy shrank the most in seven years due to voting unrest

These pressures are clearly visible. Over a year ago, the global rating agency S&P labeled local-currency debt as ‘selective default’. This is a formal indication that the government failed to meet its commitments to domestic creditors as per the original terms, even while continuing to make payments.

By late 2025, arrears had extended to short-term treasury bills – government IOUs meant to be the safest instruments in the domestic financial landscape. When a government struggles to repay even these, it signals acute fiscal distress.

Additionally, a decade of crisis management has stifled any meaningful discourse about growth.

The government’s wage expenses and debt service dominate spending, leading to chronic underinvestment in infrastructure, education, and agriculture.

Schools and healthcare facilities lack essential supplies, roads are in disrepair, and social protection systems have markedly declined.

Payments under the basic social subsidy programme have become highly erratic, with many elderly beneficiaries receiving only partial payments. Poverty has intensified, with approximately two-thirds of the population now living below the poverty line.

Demographic pressures are mounting. Mozambique needs to accommodate about 500,000 new labour market entrants annually by 2030, yet the formal sector produces only a small fraction of the necessary jobs.

Informal employment prevails, and without a significant growth boost, it will only increase. Each year of stagnation adds another cohort of youth to an already overstretched labour market. Delays do not ensure stability – they cause eventual adjustments to be larger and more costly.

The exchange rate dilemma

The metical has maintained stability against the US dollar since 2021, but when adjusted for inflation, it has appreciated over 20%, diminishing export competitiveness. Foreign exchange shortages are widespread. By late 2025, the parallel market premium reached around 14%. Businesses report severe, extended wait times for access to foreign exchange through official channels.

The policy response has been administrative: raising exporter surrender requirements, tightening banks’ foreign exchange limits, and restricting international card usage. These measures address symptoms, but only exacerbate underlying misalignments.

The overvalued exchange rate acts as a tax on the non-resource economy. Recent fuel shortages and panic buying – partly driven by importers’ inability to acquire foreign exchange and price unpredictability – serve as a visible indication of escalating costs.

The political landscape for adjustment

In reality, public sector jobs have become a form of social safety net for the urban middle class. Our research indicates that around half of all university graduates secure employment in the public sector, and having a public sector job is one of the strongest predictors of escaping poverty.

The public sector wage bill supports political legitimacy, which is why attempts to cut discretionary 13th-month salary payments were quickly reversed when key workers threatened to strike.

Adjusting the exchange rate poses a similar dilemma. A depreciation would increase costs for imported food and fuel, directly affecting urban households, and any price hikes would incite demands for wage increases. With memories of violence from the 2024 elections still fresh, there’s a strong tendency to maintain the status quo.

However, as pressures mount, the risk of compounding distortions grows. Thus far, the inclination has been to respond with new administrative restrictions, including import constraints, tighter capital controls, and preferential credit distribution.

The ongoing management of the fuel price crisis exemplifies this pattern. Instead of adjusting fuel prices promptly, the government has kept them fixed, requiring distributors to handle a growing deficit through supply rationing.

Each temporary solution may alleviate immediate pressures but typically deepens underlying misalignments, pushes activities into informal channels, and limits future options.

Viable pathways forward

Path 1: Muddle through and wait for gas revenues. This is the current trajectory. Fiscal adjustments occur passively, dictated by funding constraints rather than strategic planning. There’s hope that LNG revenues will begin to flow in the early 2030s.

Mozambique’s Rovuma Basin holds an estimated 100 trillion cubic feet of recoverable natural gas – among the largest global findings in the last twenty years. Yet, only the Coral South platform currently produces gas.

Even if the 2030 timeline is met, ongoing stagnation will continue to degrade public services, weaken institutions, and amplify social discontent – and another general election will need to be handled. By the time resource revenues arrive, the state may lack the capacity and public trust to utilize them effectively.

Path 2: Gradual, growth-focused adjustment. This is the most economically sound route but politically challenging. The core idea: prioritizing the restoration of non-extractive growth, even at the expense of short-term macroeconomic comfort. Key components would include:

• A phased depreciation of the metical to regain competitiveness, backed by clear communication and reinforced social safety measures;
• Acceptance of temporarily higher inflation, with policies aimed at preventing secondary effects rather than simply suppressing initial price shifts;
• A fiscal framework focused on quality spending and revenue efficiency;
• Containment of the wage bill through hiring restrictions, attrition, and systematic payroll audits to eliminate ghost workers and improper payments;
• Re-engagement with external partners under a credible IMF programme framework;
• An evidence-based and financially viable medium-term growth strategy targeting agricultural productivity, labour-intensive exports, and a predictable regulatory and macroeconomic landscape.

Path 3: Forced correction. Should external shocks intensify, a substantial adjustment may be abruptly required – involving tumultuous exchange rate shifts, sudden fiscal contractions, and potential banking sector stress. The longer gradual adjustments are delayed, the more likely this scenario becomes.

Read: TotalEnergies revives $20bn Mozambique plan,Noticias reports.

The narrow path ahead

There are no straightforward solutions. Every adjustment will produce visible detractors, while the benefits remain uncertain, postponed, and diffused.

However, one priority stands out: promoting growth beyond extractive industries. Without it, fiscal consolidation becomes counterproductive, job creation will remain drastically insufficient, and social tensions will only increase. Stabilization pursued in isolation, or at the expense of growth, could lead to unfavorable outcomes.

This growth strategy must be anchored in data, evidence, and open discussions. Mozambique has no shortage of projects or initiatives, but it has consistently failed to leverage rigorous data to pinpoint what drives productivity and job creation.

The window for a controlled, policy-led adjustment is rapidly closing. The alternative is not stability. It brings about adjustments under far worse conditions, at a higher cost.

Sam Jones, senior research fellow, World Institute for Development Economics Research (UNU-WIDER), United Nations University

This article is republished from The Conversation under a Creative Commons license. Read the original article.