MOZAMBIQUE’S economy is under mounting pressure as political unrest and fiscal mismanagement exacerbate the country’s debt crisis. Deadly protests following contested elections have added to existing challenges, with escalating violence, delayed natural gas projects, and spiralling debt threatening economic stability.
S&P Global Ratings downgraded Mozambique’s local currency debt to CCC on October 18, citing fiscal pressures and a high debt burden. According to analyst Leon Bezuidenhout, without significant fiscal reforms or unexpected revenue gains, Mozambique faces tough choices, including restructuring its debt or postponing domestic payments.
The government’s reliance on domestic bonds to plug budget deficits has sharply increased since losing access to international debt markets in 2016. Local currency debt has doubled since 2020, reflecting growing dependence on internal borrowing. However, recent attempts to manage liabilities—such as offering longer-term bonds—indicate that liquidity concerns are evolving into solvency risks as major repayments loom.
Protests over disputed election results have added fuel to the fire. The unrest has heightened the fiscal burden, including inflated civil-service salaries and growing security costs in Cabo Delgado, a region plagued by militant violence.
Violence in Cabo Delgado has also stymied progress on the country’s promising liquefied natural gas (LNG) projects. The TotalEnergies-led $20bn LNG development, which was expected to bring significant economic benefits, remains stalled. Economic losses from the unrest are estimated at $390 million—about 2.2 percent of Mozambique’s GDP.
The delays in LNG production have deprived the government of vital revenue needed to alleviate its fiscal strain, making it harder to fund public services or invest in economic growth.
Despite the Mozambican metical’s stable exchange rate, its overvaluation—estimated at up to 40 percent—suggests looming devaluation risks. The International Monetary Fund (IMF) highlighted Mozambique’s ‘de facto stabilised arrangement,’ noting a backlog of $440 million in unmet foreign exchange demand as of October.
This currency overvaluation, coupled with rising domestic debt, puts the government in a precarious position. A potential devaluation could exacerbate inflation and undermine purchasing power, further straining public finances.
A way forward
Mozambique’s fiscal challenges demand urgent and strategic solutions. Significant fiscal adjustments, reduced public-sector overspending, and efforts to restore investor confidence are critical to stabilising the economy. Without these measures, the country risks prolonged economic hardship and deepened reliance on unsustainable debt.
In the long term, resolving political instability and ensuring the security of natural gas projects will be vital to unlocking Mozambique’s economic potential. For now, the country’s debt crisis underscores the dangerous interplay of political unrest, fiscal mismanagement, and overdependence on volatile domestic markets.
