9 million Mozambicans live below the poverty line – what’s wrong with the state budget and how to fix it

Mozambique ranks at bottom 20 With human development index. It measures a country’s progress based on key dimensions such as a long and fit life and a decent standard of living. Nearly two-thirds of Mozambicans – 18.9 million people – live below national poverty line of $0.70 per day.

The country also has difficulties financing public spending, persistent state budget deficits . At the same time, it does not operate all the funds provided for in the budget.

Mozambique’s repeated budget deficits are not surprising. The country has rapidly growing populationincreases needs of the poor population, ruined infrastructureAND very limited revenue generation.

In recent research on the credibility of Mozambique’s budget, we examined how the government’s challenges in meeting revenue and expenditure targets are harming the overall economy. And we suggest solutions.

In our study, we focused on public spending on the social sector. This included education, health, social protection and public works (including water and sewage). All are imperative to creating human capital and reducing poverty. The social sector is responsible for 40% of planned expenses. Education is the largest and accounts for about 20% of the total pie.

Our study introduces – and successfully tests – a basic method that can be easily applied by budgetary oversight entities. This includes the Parliament’s budgetary oversight unit and the Court of Auditors. It can also be used by planning units in ministries, especially the Ministry of Finance. Finally, it can be used by civil society budget watchdogs because they rely on public information.

Its adoption will provide tools to improve budget management, which in turn will lead to more reliable budget implementation.

Assessment of public finance management

The Public spending and financial responsibility The program was initiated in 2001 by the European Commission, the International Monetary Fund, the World Bank and the governments of France, Norway, Switzerland and the United Kingdom. The goal was to improve fiscal performance. It has conducted 533 assessments in 155 countries, including 47 countries in sub-Saharan Africa. Ten evaluations were completed in Mozambique.

The program defines budget credibility as the degree to which the government budget is realistic and implemented as intended. A credible budget provides assurance to a range of stakeholders about the predictability of public spending and services. This includes taxpayers, donors and lenders, companies that supply government, public sector workers and recipients of public services.

A question about credibility

We used publicly available government budget data to measure the credibility of Mozambique’s budget. We looked at both planned expenses and their actual implementation.

The Public Spending and Financial Responsibility Program has identified several weaknesses in its previous evaluations. These included deviations, sector-specific volatility, revenue shortfalls and interim budget adjustments.

However, these conclusions did not address the underlying causes of budget discrepancies. The assessments therefore did not allow for in-depth analysis.

in ours testWe carefully analyzed the credibility of the budget, measured by type of expenditure and financial year.

The Court’s findings showed continued failure to deliver budgeted expenditure. This occurred even in years when income was sufficient. There were significant differences across sectors. For example, education and health budgets have shown relatively reliable budgets compared to public works, social protection and general non-social spending.

Comparison of types of expenses revealed engaging patterns. Examples include capital expenditure in social sectors (such as schools, health care facilities, water and sewage). They were mainly financed from external funds and were more volatile and less reliable than current expenses. Current expenditure includes teachers’ salaries and, more generally, total salaries.

We also found clear indications of a reallocation of resources outside normal budgetary rules. For example, we have come across the suggestion that funds originally intended for investments were redirected to finance current expenses.

Finally, we found no sturdy evidence that mid-year budgetary adjustments improved credibility. This was in line with the public expenditure and financial responsibility reporting.

Causes and potential solutions

The government of Mozambique’s budget account attributes fiscal inconsistencies to two main factors.

On the one hand, slower economic growth and incompetent tax collection lead to revenue shortfalls. On the other hand, there were overspends due to a number of events. These include natural disasters, health shocks (such as Covid-19), inflation, exchange rate fluctuations and delays in donor disbursements. Administrative and logistical issues also played a role and delayed projects.

The government has taken steps to reduce these gaps. These include:

• creation of a reserve fund within the novel state fund

• increasing tax collection

• initiated the VAT reform. It was proposed by the IMF.

These efforts are accompanied by measures to address spending overruns. These include improving transparency and accountability in public budgets. They also include efforts to reduce overall public sector wage spending.

Our test recommends additional strategies to raise budget credibility:

Sectoral concentration: better targeting of spending in social sectors. This includes education, health, social protection and social work. And streamline related budgeting processes

Improved investment management: strengthening supervision mechanisms over externally financed projects. The aim would be to limit the diversion of funds for unplanned purposes. And better alignment with long-term development goals

Reassessment of budget adjustments: focus mid-year budget adjustments on strategic reallocation rather than ad hoc adjustments

Improved monitoring: implement a system that will enable the Ministry of Economy and Finance to identify areas requiring improvement, potential quick benefits and best practices

Budget credibility is crucial to Mozambique’s economic development and public confidence. Effective budget management ensures transparency, predictability and accountability. All are imperative for sustainable growth.

This is a modified version of the blog, Budget credibility in Mozambique – challenges and solutionsoriginally published by UNU-WIDER.

Extended discussion on topics discussed on the blog, Understand Mozambique’s budget credibility issues and solutionswas published by the International Growth Center (IGC).