UPDATE 1-Mozambique fiscal deficit seen widening to 9.5 pct -IMF

Sun Mar 16, 2014 10:34am EDT

Related Topics

* GDP forecast to expand by 8 pct this year

* Current account deficit forecast to hit 43 pct

* Presidential elections scheduled for Oct. 15 (Adds detail, background, quotes)

By Helen Nyambura-Mwaura

JOHANNESBURG, March 16 (Reuters) - Mozambique's overall budget deficit is projected to widen to 9.5 percent this year from 3 percent in 2013, the International Monetary Fund said, as the country continues its spending-driven quest for economic growth.

In a report published on its website, the IMF said the mineral-rich southern African country's economy could grow by more than 8 percent this year after expanding by about 7 percent in 2013, but warned that the deficit level is unsustainable.

The growth forecast is in line with that of the Mozambique central bank, but the IMF said the country would also have to increase spending to cover costs associated with electoral reform after a visit to the country by one of its staff teams.

The former Portuguese colony is holding elections on Oct. 15 to appoint a successor to President Armando Guebuza, who is barred from contesting after two terms in office. The ruling Frelimo party this month picked Defence Minister Filipe Nyusi as its presidential candidate.

Frelimo, the former liberation movement that has ruled since Mozambique's independence in 1975, this year agreed to expand the electoral commission after its composition was criticised by the opposition for favouring Frelimo.

The IMF's budget deficit projection takes into account a one-off tax revenue windfall equal to 4 percent of annual economic output in 2013 and another expected bonanza this year equivalent to 2.9 percent of GDP.

"This deficit level is not sustainable over the medium term, especially as windfall revenue is not likely to recur," the IMF said.

Mozambique's hopes rest largely on its coal and gas resources, with 150 trillion cubic feet of offshore gas discovered so far - enough to supply Germany, Britain, France and Italy for 15 years.

The government and international energy companies that have been drilling exploration wells have estimated that there may be potential to double that estimate.

Mozambique's north-central Tete province also has some of the world's largest untapped reserves of thermal coal for power generation and coking coal for steel production, with some of these deposits already being mined for export.

The IMF projected the current account deficit reaching 43 percent in 2014, reflecting imports for large foreign investment projects. Central bank governor Ernesto Gove had told Reuters in February he expected it to reach 36 percent of GDP this year.

FISCAL TRANSPARENCY

In its report, the IMF team said it hoped the country would closely monitor and report on the operations of a new state-controlled company, the Mozambican Tuna Company (EMATUM), which issued $850 million in government-guaranteed bonds last year.

Western donor governments had expressed concern about the transparency of the bond issue, which Mozambican ministers said would be used to buy French-built tuna fishing boats, marine patrol vessels and costal radar.

Some donors had questioned whether these should be priorities for a country that is still receiving hundreds of millions of dollars of foreign aid to combat poverty two decades after the end of a devastating civil war.

"The mission welcomes the authorities' recent adoption of an action plan on fiscal transparency," the IMF said. "It envisages close monitoring of and reporting on EMATUM's operations, which will be critical in assessing the associated fiscal risks.

Members of the opposition group Renamo, Frelimo's old civil war foe which became a political party when Mozambique embraced multi-party politics after the conflict ended, carried out armed attacks last year in parts of central and southern Mozambique.

The Renamo raids raised security worries over big investments from Brazil's Vale, London-listed Rio Tinto, Italy's Eni and U.S. oil group Anadarko . (Reporting by Helen Nyambura-Mwaura; Editing by Pascal Fletcher and David Goodman)

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