An IMF assessment in early 2026 was remarkably blunt: public debt is unsustainably high, the external balance of payments is weak, and policy makers have limited options. Since then, tensions in the Middle East have further disrupted supply chains and dramatically raised global fuel prices. This is a major shock for small import-dependent economies, like Mozambique.

My analysis draws on over two decades of experience supporting economic research and policy analysis in the country. Currently, my work under the Inclusive Growth in Mozambique programme involves tracking the country’s economic performance through surveys of firms, students, and households.

The picture that emerges from this evidence is troubling. For ordinary Mozambicans, the deterioration in conditions over the past decade shows up in higher poverty, unreliable public services and a labour market that offers few decent opportunities – especially for the young.

My central argument is that muddling through is not a safe option. Without careful adjustments now and a deliberate shift toward growth and job creation outside extractives – the part of the economy that actually employs most Mozambicans – today’s pressures will keep building until a large economic correction becomes unavoidable and under far worse conditions.

A slow squeeze

The country’s present condition is one of vulnerable stagnation. Since the hidden debt crisis of 2016, real GDP growth outside the extractive sector has hovered around 2%, barely matching population growth. In per capita terms, the non-extractive economy has flatlined for a decade. Average real incomes outside mining and gas (or the public sector) have gone essentially nowhere.

Fiscal deficits of 4%-6% of GDP have been financed increasingly by domestic banks. But as both the IMF and World Bank have warned, that model is now reaching a breaking point. Banks can only absorb so much government debt before they run out of willingness – or capacity – to lend. When that happens, the government faces a choice between defaulting, printing money, or slashing spending abruptly. None is painless.

Evidence of these pressures is plain to see. Over a year ago, the global rating agency S&P classified local-currency debt as “selective default”. This is a formal determination that the government had failed to meet its obligations to domestic creditors on the original terms, even if it continued paying.

By late 2025, arrears had extended to short-term treasury bills – government IOUs that mature within months and are supposed to be the safest instruments in the domestic financial system. When a government struggles to repay even these, it signals serious fiscal distress.

On top of this, a decade of crisis management has displaced any serious thinking about growth. The government’s wage bill and debt service dominate spending, leaving chronic underinvestment in infrastructure, education, and agriculture. Schools and health facilities lack supplies, roads deteriorate, and social protection has weakened sharply.

Payments under the basic social subsidy programme have become highly irregular. Many elderly beneficiaries receive only a fraction of what they are owed. Poverty has increased, with around two thirds of the population now below the poverty line.

Demographic pressures are intensifying. Mozambique needs to absorb roughly 500 000 new labour market entrants annually by 2030, yet the formal sector generates a small fraction of new jobs. Informal work dominates and without a step-change in growth, it will only expand. Each year of stagnation adds another youth cohort to an already strained labour market. Delay does not preserve stability – it makes eventual adjustment larger and more costly.

The exchange rate question

The metical has been held stable against the US dollar since 2021, but in real terms it has appreciated by over 20%, eroding export competitiveness. Foreign exchange shortages are now pervasive. The parallel market premium reached around 14% by late 2025. Firms report severe and lengthening delays in accessing foreign exchange through formal channels.

The policy response has been administrative: raising exporter surrender requirements, tightening banks’ foreign exchange position limits, restricting overseas card usage. These measures treat symptoms, but the underlying misalignment only deepens.

The overvalued exchange rate functions as a tax on the non-resource economy. Recent fuel shortages and panic buying – driven in part by importers’ inability to secure foreign exchange and price uncertainty – provide a visible demonstration of the mounting costs.

The politics of adjustment

In practice, public sector employment has come to serve as a form of social protection for the urban middle class. Our research shows roughly half of all university graduates find employment in the public sector, and having a public sector job is one of the best predictors of not being poor.

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

Exchange rate adjustment poses a parallel dilemma. A depreciation would raise the cost of imported food and fuel, hitting urban households directly, and any price increase would spark calls to hike minimum wages. With the memory of popular violence from the 2024 elections still fresh, there is a strong bias toward the status quo.

But as pressures mount, there is a growing risk of compounding distortions. So far the temptation has been to respond with new administrative controls, including import restrictions, tighter capital controls, and preferential credit allocation.

The ongoing handling of the fuel price shock illustrates the pattern. Rather than adjust pump prices promptly, the government has held prices fixed, leaving distributors to manage a mounting shortfall through supply rationing.

Each temporary fix may ease immediate pressures, but tends to deepen the underlying misalignment, push activity into informal channels, and narrow future options.

Feasible pathways

Path 1: Muddle through and wait for the gas. This is the current trajectory. Fiscal adjustment occurs passively, driven by financing constraints rather than strategy. The hope is that LNG revenues could materialise from the early 2030s. Mozambique’s Rovuma Basin holds an estimated 100-trillion cubic feet of recoverable natural gas – among the largest discoveries globally in the past two decades. But only one offshore platform (Coral South) is currently producing. Even if the 2030 timeline holds, continued stagnation would further erode public services, weaken institutions, and deepen social frustration – and another general election must be managed. By the time resource revenues arrive, the state may lack the capacity and public trust to deploy them effectively.

Path 2: Gradual, growth-first adjustment. The most economically coherent path, though politically demanding. The central premise: restoring non-extractive growth must take priority, even at the cost of short-term macroeconomic discomfort. Key elements would include:

• a phased depreciation of the metical to restore competitiveness, supported by clear communication and strengthened social protection

• acceptance of temporarily higher inflation, with policy focused on preventing second-round effects rather than suppressing the initial price shift

• a fiscal framework centred on spending quality and revenue efficiency

• wage bill containment through hiring restraint, attrition, and systematic payroll audits to eliminate ghost workers and improper payments

• re-engagement with external partners under a credible IMF programme framework; and

• an evidence-based and financially viable medium-term growth strategy targeting agricultural productivity, labour-intensive exports and a predictable regulatory and macroeconomic environment.

Path 3: Forced correction. If external shocks bite deeper, a large adjustment may be imposed suddenly – involving disorderly exchange rate movement, abrupt fiscal contraction, and potential banking sector stress. The longer gradual adjustment is postponed, the higher this probability.

The narrow path

There is no easy option. Every adjustment has visible losers, while the benefits remain uncertain, delayed, and diffuse.

But one priority stands out: boosting growth beyond extractive sectors. Without it, fiscal consolidation is self-defeating, job creation will remain grossly inadequate, and social pressures will only intensify. Stabilisation pursued in isolation, or at the expense of growth, could be bad medicine.

This growth strategy must be grounded in data, evidence and honest debate. Mozambique has not lacked for projects or initiatives, but it has lacked consistent use of rigorous data to identify what drives productivity and job creation.

The window for a controlled, policy-driven adjustment is narrowing fast. The alternative is not stability. It is adjustment under far worse conditions, at higher cost.

Written by 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.