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# The Impact of Sovereign Debt and Currency Depreciation on the Mozambican Economy

Babandi Ibrahim Gumel, Aderito Luis dos Santos Chivurre

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► To cite this version:

Babandi Ibrahim Gumel, Aderito Luis dos Santos Chivurre. The Impact of Sovereign Debt and Currency Depreciation on the Mozambican Economy. 2024. hal-04754813

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Preprint submitted on 26 Oct 2024

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# The Impact of Sovereign Debt and Currency Depreciation on the Mozambican Economy

## Abstract

Mozambique's economy has been severely impacted by high levels of sovereign debt and persistent currency depreciation. The debt-to-GDP ratio exceeds 100%, significantly constraining fiscal space and raising concerns about the country's economic stability. This article analyzes the effects of sovereign debt and currency depreciation on Mozambique's macroeconomic performance, focusing on inflation, foreign direct investment (FDI), and the broader implications for sustainable development. Using case studies from Zambia and Ghana, the article highlights the role of debt restructuring and fiscal reforms in mitigating economic instability. The findings underscore the critical need for Mozambique to adopt comprehensive debt management strategies, stabilize the monetary, and implement sound fiscal and monetary policies to regain investor confidence and foster long-term growth. This article also provides policy recommendations for enhancing governance, improving transparency in fiscal management, and leveraging international financial support to address Mozambique's economic challenges.

## Key words

Sovereign debt, currency depreciation, Mozambique, economic growth, inflation, financial stability, foreign direct investment, economic resilience, debt management, monetary policy, fiscal policy, external debt, macroeconomic stability, emerging markets, sub-Saharan Africa.
# Introduction

## Background and Significance

Mozambique's economy has been grappling with significant challenges posed by high levels of sovereign debt and the persistent depreciation of its currency, the metical. Sovereign debt in Mozambique has escalated due to extensive borrowing, often linked to large-scale infrastructure projects and external shocks, such as declining commodity prices and reduced donor support (International Monetary Fund [IMF], 2023). As a result, the country's debt-to-GDP ratio has reached alarming levels, further complicating its ability to service debt while maintaining public spending on critical sectors such as healthcare and education (World Bank, 2023). This debt burden also limits Mozambique's access to international capital markets, raising borrowing costs and increasing the risk of default.

Simultaneously, the continuous depreciation of the metical exacerbates the country's financial vulnerability by increasing the cost of imports, fueling inflation, and eroding the purchasing power of businesses and households (Mabunda, 2021). Currency depreciation amplifies debt repayment challenges, as much of Mozambique's debt is denominated in foreign currencies, making repayments more expensive in local terms (Jubilee Debt Campaign, 2022). The dual pressures of sovereign debt and currency depreciation deepen fiscal imbalances, limit economic growth, and pose significant risks to attracting foreign direct investment (FDI) (IMF, 2023). These conditions create a complex economic environment that requires careful policy interventions to stabilize the economy and foster long-term development.

## Influence of Sovereign Debt and Currency Depreciation on the Mozambican Economy

Sovereign debt, which represents government borrowing to finance budget deficits, becomes particularly burdensome in economies like Mozambique, where much of the debt is
denominated in foreign currencies. As Lemi and Asefa (2003) point out, the combination of high levels of foreign-denominated debt and currency depreciation leads to increased debt servicing costs, as more local currency is required to repay the same amount of foreign debt. In Mozambique, this has been exacerbated by the depreciation of the metical, which significantly raises the cost of imports, fuels inflation, and reduces the government's fiscal space (International Monetary Fund [IMF], 2023).

Currency depreciation has a dual impact on the economy. First, it raises inflationary pressures by increasing the cost of goods and services, particularly imported goods (World Bank, 2023). Second, it diminishes investor confidence, reducing the inflow of foreign direct investment (FDI) needed for economic growth and infrastructure development (Manzl, 2019). When coupled with a weak currency, sovereign debt limits the government's ability to pursue expansionary fiscal policies due to higher interest payments, leaving little room for public investment in social services and infrastructure. This dynamic creates a vicious cycle that hampers economic performance and exacerbates poverty and inequality (Lemi & Asefa, 2003). The need for structural reforms to stabilize the currency and reduce the debt burden is critical for Mozambique's long-term economic sustainability.

## Current State of Sovereign Debt and Currency Depreciation in Mozambique

Mozambique is currently grappling with a severe debt crisis, with its debt-to-GDP ratio surpassing 100%, indicating unsustainable levels of borrowing relative to the size of its economy (International Monetary Fund [IMF], 2023). This high debt burden is largely attributed to the country's extensive reliance on external borrowing, much of which is denominated in foreign currencies. As a result, Mozambique remains highly vulnerable to external shocks, such as fluctuations in global commodity prices and changes in international interest rates. These
vulnerabilities have only been exacerbated by the persistent depreciation of the metical, which has lost significant value against major currencies like the US dollar (World Bank, 2023).

The depreciation of the metical has intensified inflationary pressures within the economy, as the cost of imported goods has skyrocketed. This has reduced the purchasing power of Mozambican households and increased production costs for businesses reliant on imported inputs (Mabunda, 2021). At the same time, higher borrowing costs, driven by increased sovereign risk premiums, have limited the government's ability to access international capital markets, further constraining public investment and economic growth (Jubilee Debt Campaign, 2022). Additionally, reduced foreign investment, which is crucial for economic development, has compounded the difficulties of stabilizing the economy, making it increasingly challenging to achieve long-term fiscal sustainability (IMF, 2023).

## The Potential of Addressing Foreign Debt and Currency Issues

Addressing Mozambique's sovereign debt and currency depreciation challenges is essential for ensuring long-term economic stability and fostering sustainable growth. Implementing sound fiscal and monetary policies can help mitigate the adverse effects of excessive borrowing and currency volatility. Debt restructuring initiatives, such as renegotiating terms with creditors or extending repayment periods, could alleviate short-term liquidity pressures and reduce the overall debt burden (Jubilee Debt Campaign, 2022). In addition, adopting currency stabilization mechanisms, such as bolstering foreign reserves and managing inflation, could enhance the value of the metical and reduce inflationary pressures (Manzl, 2019).

These measures would not only help restore macroeconomic stability but also play a crucial role in regaining investor confidence, which is vital for increasing foreign direct investment (FDI) inflows (IMF, 2023). A stable currency and reduced debt levels can lower
sovereign risk, making Mozambique a more attractive destination for investment, further
boosting growth prospects. Ultimately, addressing these challenges will be key to unlocking the
country's economic potential and achieving fiscal sustainability.

**Objective of the Article**

The primary objective of this article is to critically analyze the effects of sovereign debt and currency depreciation on the Mozambican economy, using empirical evidence and comparative case studies from other developing economies. By examining how these two interrelated factors contribute to fiscal imbalances, inflationary pressures, and reduced foreign investment, the article seeks to provide a comprehensive understanding of the broader macroeconomic implications. This article also aims to identify and propose strategic policy recommendations for improving debt management practices and stabilizing the currency, with a focus on long-term economic resilience (IMF, 2023). Additionally, the article aims to highlight the role of monetary and fiscal policy coordination in addressing these challenges, while considering global best practices for debt restructuring and currency stabilization (Manzl, 2019). Ultimately, the findings of this research are intended to support policymakers in formulating effective strategies to enhance Mozambique's economic stability and growth prospects, particularly in the face of external shocks and persistent economic vulnerabilities (World Bank, 2023).

**Literature Review**

**Summary of Existing Research**

Previous research has extensively explored the relationship between sovereign debt, currency depreciation, and economic development, particularly in developing countries. High levels of sovereign debt and currency depreciation create significant fiscal constraints, as
governments face higher debt servicing costs and reduced fiscal space for public investment (Asamoah et al., 2016). This dynamic is particularly challenging in Sub-Saharan Africa, where economies are highly vulnerable to external shocks, including fluctuations in commodity prices and foreign exchange rates (Azolibe, 2022).

Research has also shown that currency depreciation often exacerbates inflationary pressures, leading to a loss of purchasing power and increased production costs, further hindering economic growth (Lemi & Asefa, 2003). In Mozambique, for example, the depreciation of the metical has led to sharp increases in import prices, contributing to inflation and eroding household incomes (Manzl, 2019). Additionally, studies indicate that high debt levels and currency volatility deters foreign direct investment (FDI), as investors perceive greater risks in economies with unstable macroeconomic conditions (Boungou & Mawusi, 2022). These findings underscore the need for strategic debt management and currency stabilization measures to foster sustainable economic development.

# Discussions on Sovereign Debt and Currency Instability

## Sovereign Debt and Macroeconomic Stability

Sovereign debt is crucial in shaping a country's macroeconomic stability, particularly in developing economies like Mozambique. Excessive sovereign debt, especially with slow economic growth, significantly constrains a government's ability to implement expansionary fiscal policies, limiting public spending on essential services such as healthcare, education, and infrastructure (Mutarindwa et al., 2020). This often leads to economic contraction, further diminishing the government's revenue base and intensifying debt distress. In Mozambique, the growing debt burden has raised concerns about the country's ability to meet its debt obligations, heightening the risk of default (International Monetary Fund [IMF], 2023).
Research shows that when sovereign debt surpasses sustainable levels, it not only undermines fiscal policy but also diminishes investor confidence, leading to higher borrowing costs and reduced access to international capital markets (Azolibe, 2022). This can create a vicious cycle of debt dependence, where governments are forced to borrow more to service existing debt, thereby perpetuating the cycle of indebtedness (Asamoah et al., 2016). For Mozambique, defaulting on its debt could result in the loss of international financial assistance, which is critical to its development projects, further aggravating its economic challenges (Mutarindwa et al., 2020). This underscores the importance of prudent debt management and the need for fiscal reforms to ensure long-term economic stability.

## Currency Depreciation and Inflation

Currency depreciation has direct and immediate effects on inflation, particularly in import-dependent economies like Mozambique. When the value of the national currency declines, the cost of imports rises, which translates into higher prices for goods and services. In Mozambique, the depreciation of the metical has been a significant driver of inflation, especially in sectors reliant on imported goods such as fuel, food, and medical supplies (Joseph, 2013). The increase in prices of essential goods disproportionately affects low-income households, reducing their purchasing power and deepening poverty levels.

The inflationary pressures resulting from currency depreciation not only affect household consumption but also the overall economy by increasing production costs for businesses. Higher import costs lead to increased input prices, which can squeeze profit margins and reduce competitiveness, especially for small and medium-sized enterprises (SMEs) (Mabunda, 2021). This in turn can slow down economic activity, reduce employment, and further erode the government's tax base, complicating fiscal management efforts.
Moreover, inflation driven by currency depreciation has a destabilizing effect on the broader economy by creating uncertainty and reducing the confidence of foreign investors.

Foreign direct investment (FDI), which is critical for economic growth in developing economies, tends to decrease when inflation is high and currency fluctuations are unpredictable (Boungou & Mawusi, 2022). Investors are less likely to commit capital in an environment where returns are threatened by exchange rate volatility and rising inflation, limiting Mozambique's capacity to attract the investment necessary for sustainable development.

## Debt Servicing and External Vulnerability

Mozambique's external vulnerability is exacerbated by its high levels of foreign-denominated debt. When a large proportion of a country's debt is held in foreign currencies, as is the case with Mozambique, currency depreciation significantly increases the cost of debt servicing in local currency terms (IMF, 2023). As the metical depreciates, the government requires more local currency to meet its foreign debt obligations, which strains public finances and limits the availability of resources for other essential expenditures. This increased cost of debt servicing diverts funds away from critical areas such as infrastructure development, social welfare programs, and public investment, further constraining the government's ability to stimulate economic growth (World Bank, 2023).

The external vulnerability created by high foreign-denominated debt is a common challenge among developing countries that depend heavily on external borrowing to finance budget deficits. In Mozambique, this reliance on foreign borrowing exposes the economy to global financial market fluctuations and currency volatility (Azolibe, 2022). Any depreciation of the metical worsens the debt-servicing burden, creating a situation where the country's fiscal sustainability is closely tied to global market conditions beyond its control. This dynamic
increases the risk of a debt crisis, where Mozambique might default on its obligations, leading to further isolation from international capital markets and a potential loss of credibility among foreign investors (Mutarindwa et al., 2020).

To mitigate these risks, there is a growing consensus among economists and policymakers that Mozambique must prioritize debt restructuring and implement policies aimed at reducing its exposure to foreign-denominated debt. By renegotiating debt terms and seeking debt relief through multilateral institutions, Mozambique can ease the burden of debt servicing and regain fiscal flexibility (Jubilee Debt Campaign, 2022). Moreover, diversifying its sources of funding to include more local-currency-denominated debt can help reduce external vulnerabilities. This would allow Mozambique to better manage the risks associated with currency depreciation and maintain greater control over its fiscal policy.

## Empirical Evidence and Case Studies

Mozambique's experience with currency crises and debt distress offers a significant case study on the impacts of unsustainable borrowing and weak fiscal governance. One of the most notable instances occurred during the “hidden debt” scandal in 2016, where over $2 billion in undisclosed loans was discovered, exacerbating Mozambique's already fragile economic situation (Boungou & Mawusi, 2022). This scandal severely undermined investor confidence and led to the suspension of international aid from key donors, triggering a sharp depreciation of the metical and further escalating the country's debt servicing challenges. As a result, Mozambique faced substantial fiscal deficits and soaring inflation, highlighting the risks associated with opaque fiscal management and excessive foreign borrowing (Jubilee Debt Campaign, 2022).

Empirical studies from other Sub-Saharan African countries facing similar challenges offer valuable lessons for Mozambique. For instance, Zambia, which has also faced a sovereign
debt crisis, provides insights into how debt restructuring can serve as a tool for economic recovery. Following a period of unsustainable debt accumulation, Zambia initiated a restructuring process aimed at reducing its debt burden and renegotiating repayment terms, allowing for greater fiscal space and improved economic stability (Chimkono, 2017). Similarly, Ghana has employed debt restructuring mechanisms to manage its external debt, helping to stabilize its currency and restore macroeconomic balance (Asamoah et al., 2016).

In the case of Mozambique, studies suggest that addressing its debt crisis through transparent fiscal policies and engaging with international creditors for debt restructuring could provide the fiscal relief necessary to stabilize the metical and reduce inflationary pressures (Boungou & Mawusi, 2022). Moreover, international evidence emphasizes the importance of strengthening institutional governance and implementing stringent fiscal controls to prevent future debt crises, as seen in successful cases like Ghana and Zambia (Chimkono, 2017). By adopting best practices from these countries, Mozambique could improve its economic resilience and chart a path toward sustainable economic recovery.

## Additional Relevant Studies

Numerous studies have examined the relationship between economic uncertainty, foreign direct investment (FDI) inflows, and currency volatility, particularly in developing economies facing high levels of sovereign debt. Lemi and Asefa (2003) explore how political instability and economic uncertainty, such as fluctuations in exchange rates, significantly deter FDI inflows. Their research highlights that investors are risk-averse and tend to shy away from economies where currency volatility is prevalent, as such conditions create uncertainty about returns on investment. This is particularly relevant for Mozambique, where the persistent depreciation of
the metical has increased investor skepticism, leading to reduced FDI inflows, which are crucial for development and economic growth.

Toews and Vézina (2022) further expanded on this by examining how currency instability and political risks interact to exacerbate economic challenges in countries burdened by debt. They found that countries with high levels of external debt and volatile exchange rates often struggle to attract FDI, as foreign investors view these nations as high-risk environments. This is particularly true for Mozambique, where political instability, combined with the hidden debt scandal of 2016, has severely damaged the country's reputation among international investors. As a result, the metical's depreciation and the country's high debt levels have compounded Mozambique's difficulties in securing external investment, further constraining economic recovery.

Additionally, studies by Manzl (2019) emphasize that foreign investors seek predictable environments where the risk of currency depreciation is low, as currency instability directly affects profit margins, particularly in sectors reliant on imported goods and services. Given that much of Mozambique's debt is denominated in foreign currencies, depreciation raises the cost of debt servicing, which can divert resources away from critical sectors like infrastructure and social services, further discouraging FDI inflows (Boungou & Mawusi, 2022).

These findings align with broader research in Sub-Saharan Africa, which indicates that currency volatility not only deters FDI but also aggravates existing fiscal imbalances in debt-laden economies. Studies suggest that implementing currency stabilization measures, improving governance, and enhancing transparency in fiscal management are critical to regaining investor confidence (Asamoah et al., 2016). For Mozambique, addressing these issues could help attract
FDI, which would provide a much-needed boost to the economy and alleviate some of the pressures resulting from sovereign debt and currency depreciation.

## Challenges and Limitations

Despite the extensive research on sovereign debt and currency depreciation, significant gaps remain in understanding how these dynamics specifically affect economies like Mozambique. One of the primary limitations in existing literature is the scarcity of recent empirical data, particularly in the post-COVID-19 period, which has drastically altered global economic dynamics and debt servicing capacities (World Bank, 2023). The pandemic led to widespread disruptions in global trade, sharp declines in commodity prices, and increased fiscal pressures on developing economies, further complicating the relationship between sovereign debt and currency depreciation. As Mozambique is heavily reliant on external financing and commodity exports, the COVID-19 pandemic has likely exacerbated its debt vulnerabilities, yet the full impact is not well documented in recent studies (IMF, 2023).

Another challenge is the lack of comprehensive data on how Mozambique's political and governance issues, such as the 2016 hidden debt scandal, continue to influence the country's ability to manage debt and stabilize its currency. While studies like those of Boungou and Mawusi (2022) and Lemi and Asefa (2003) provide valuable insights into the macroeconomic effects of debt and currency volatility, they do not adequately address how governance failures and lack of transparency contribute to the persistence of these issues. Additionally, the complex interplay between global financial markets, foreign exchange reserves, and domestic inflation remains understudied in the context of Mozambique.

Lastly, the structural limitations of Mozambique's economy, including its reliance on a few key export sectors, also pose challenges in fully understanding the broader implications of
currency depreciation on long-term growth prospects (Manzl, 2019). This limited economic diversification reduces Mozambique's ability to weather external shocks and leaves the country particularly vulnerable to currency fluctuations. Future research should focus on these gaps, incorporating post-pandemic data and examining the influence of governance reforms and global economic changes on Mozambique's debt sustainability and currency stability.

# Methodology

## Research Design

This article employs a qualitative research design, focusing on desk reviews and document analysis to investigate the impact of sovereign debt and currency depreciation on Mozambique's economy. Qualitative research is particularly suited for this article as it allows for in-depth exploration of complex financial and economic phenomena that cannot be fully captured through quantitative measures (Creswell & Poth, 2018). The qualitative approach emphasizes understanding the socio-economic context, policy decisions, and structural issues that shape the relationship between sovereign debt and currency depreciation in Mozambique.

The desk review incorporates a wide range of sources, including academic articles, industry reports, policy papers, and case studies, to provide a comprehensive overview of the existing literature and empirical evidence. This method enables the synthesis of multiple perspectives on the challenges Mozambique faces, drawing from both global and regional studies on sovereign debt and currency management (Bowen, 2009). The review of academic literature includes foundational research on debt sustainability and currency volatility, particularly in the context of Sub-Saharan Africa (Lemi & Asefa, 2003; Boungou & Mawusi, 2022). Furthermore, the articles analyzes recent policy documents from organizations such as the International
Monetary Fund (IMF) and the World Bank to examine Mozambique's post-COVID-19
economic environment and debt dynamics (World Bank, 2023).

Document analysis is another critical component of the research design, as it enables the article to evaluate official reports, regulatory frameworks, and financial data relevant to Mozambique's debt and currency management strategies. This method is essential for understanding the broader policy responses to the country's economic challenges, including debt restructuring initiatives and monetary interventions aimed at stabilizing the metical (Chimkono, 2017). The article also leverages case studies from other African countries that have faced similar issues, such as Zambia and Ghana, to provide comparative insights into the effectiveness of various debt management strategies (Asamoah et al., 2016).

By employing a qualitative research design, this article not only synthesizes a broad range of sources but also offers a nuanced understanding of the political, economic, and institutional factors driving Mozambique's debt crisis and currency depreciation. This approach allows for the formulation of targeted policy recommendations that consider both Mozambique's unique economic environment and global best practices in sovereign debt management.

## Desk Review and Document Analysis

A comprehensive desk review and document analysis were conducted as part of the methodology to explore the impact of sovereign debt and currency depreciation on the Mozambican economy. This method was selected to gather data from a variety of existing literature and official documents, allowing for a broad analysis of both theoretical frameworks and real-world applications in similar contexts. By synthesizing information from multiple sources, the article was able to construct a nuanced understanding of the interrelated challenges of debt and currency instability in Mozambique.
## Academic Articles

Academic literature played a key role in establishing the theoretical foundation for this article. Articles from leading journals on economics, finance, and development provided insight into the complex dynamics of sovereign debt, currency depreciation, and their macroeconomic effects. For example, Manzl (2019) examines the relationship between macroeconomic instability and foreign direct investment (FDI) inflows, illustrating how debt and currency volatility deter external investment, which is crucial for the growth of developing economies like Mozambique. Similarly, Lemi and Asefa (2003) explore the implications of economic uncertainty on FDI, with a focus on how political instability and currency fluctuations create risk-averse behavior among investors. These studies were critical in understanding how Mozambique's debt situation and currency depreciation are likely to influence investor behavior and economic growth prospects.

Additionally, the research reviewed studies on the impacts of sovereign debt on fiscal policy and economic growth in Sub-Saharan Africa. Asamoah et al. (2016) found that high levels of sovereign debt in countries like Mozambique often constrain public spending, reduce fiscal space for essential services, and raise the likelihood of default. This creates a vicious cycle of borrowing to service existing debt, which further weakens economic stability. The inclusion of these academic perspectives allowed the article to draw on established economic theories related to debt sustainability, currency volatility, and economic performance in developing economies.

## Industry Reports

Industry reports from international financial institutions such as the International Monetary Fund (IMF) and the World Bank were pivotal in providing quantitative data and macroeconomic analysis specific to Mozambique. These reports offered insights into
Mozambique's debt levels, fiscal policy, and currency fluctuations in both historical and post-COVID-19 contexts. For instance, the IMF's *Mozambique: Debt Sustainability Analysis* (2023) provided a detailed breakdown of the country's debt-to-GDP ratio, highlighting its unsustainable debt levels and the increased pressure on public finances due to currency depreciation. The IMF also provided data on Mozambique's external debt servicing costs, which have ballooned as a result of the metical's depreciation against major foreign currencies. This creates significant fiscal stress, limiting the government's ability to invest in social services and infrastructure while diverting resources to debt repayments.

The World Bank's *Mozambique Economic Update* (2023) further illustrated the macroeconomic impacts of currency volatility on inflation, investment, and public spending. The report emphasized that inflationary pressures driven by the weakening metical have eroded household purchasing power and increased poverty levels. The World Bank's reports also provided crucial insights into the structural weaknesses of Mozambique's economy, such as its reliance on a narrow export base, which makes it highly vulnerable to external shocks. These industry reports were essential in linking Mozambique's sovereign debt crisis to broader macroeconomic challenges, particularly those related to currency depreciation and inflation.

## Policy Papers and Regulatory Documents

Government publications, policy briefs, and regulatory documents were also analyzed to assess Mozambique's fiscal and monetary responses to its debt and currency challenges. These documents provided a window into the policy decisions made by Mozambican authorities to manage the country's debt burden and stabilize the currency. For example, documents from the Bank of Mozambique revealed the central bank's efforts to combat currency depreciation through monetary interventions, such as increasing interest rates and managing foreign exchange
reserves. These policy responses aimed to stabilize the metical, but their effectiveness has been
limited by external economic conditions, such as fluctuating commodity prices and reduced
donor support.

The Mozambican government's fiscal policy responses, as outlined in Ministry of
Finance reports, were also reviewed. These reports detailed the government's strategy of
renegotiating debt with international creditors and restructuring repayment terms to reduce
immediate fiscal pressures. However, the policy documents also highlighted the difficulties
Mozambique faces in accessing international capital markets due to its high-risk status following
the 2016 hidden debt scandal (Boungou & Mawusi, 2022). The analysis of these policy
documents enabled the article to evaluate the effectiveness of Mozambique's fiscal and monetary
policies in mitigating the adverse effects of sovereign debt and currency depreciation.

Case Studies

Case studies from other African countries, such as Zambia, Ghana, and South Africa, were examined to draw parallels and potential lessons for Mozambique. Zambia, like Mozambique, has faced a sovereign debt crisis exacerbated by currency depreciation. Chimkono (2017) provides a case study of Zambia's debt restructuring efforts, demonstrating how renegotiating debt terms with international creditors provided some fiscal relief and stabilized the currency. Similarly, Ghana's experience with debt restructuring and macroeconomic stabilization policies offers valuable lessons for Mozambique. Asamoah et al. (2016) highlight how Ghana managed to attract external investment by implementing fiscal reforms that improved transparency and reduced debt servicing costs, thereby stabilizing the currency.

South Africa, on the other hand, provides a contrasting case where strong fiscal and
monetary policies, coupled with a diversified economy, have enabled it to better manage the
impacts of currency volatility. Studies on South Africa's economic resilience during periods of
global financial instability, such as Boungou and Mawusi (2022), underscore the importance of
having a robust policy framework to navigate currency depreciation and maintain investor
confidence. These case studies offered Mozambique important lessons on debt restructuring,
fiscal management, and currency stabilization, which could be applied to its current economic
challenges.

***Synthesis and Insights***

The synthesis of academic articles, industry reports, policy papers, and case studies provided a comprehensive overview of the factors contributing to Mozambique's sovereign debt crisis and currency depreciation. This desk review and document analysis allowed the article to bridge the gap between theoretical frameworks and practical policy applications. By analyzing the experiences of other Sub-Saharan African countries, the article was able to identify policy measures that could be effective for Mozambique, such as debt restructuring, improving fiscal transparency, and strengthening monetary policy to stabilize the currency.

Moreover, the inclusion of both academic literature and policy documents ensured that the analysis was grounded in empirical evidence while also providing actionable recommendations for policymakers. For example, the IMF and World Bank reports underscored the need for Mozambique to engage with international creditors to renegotiate debt terms, while academic studies highlighted the importance of currency stabilization measures to regain investor confidence (IMF, 2023; Manzl, 2019). The combination of qualitative insights from academic sources and quantitative data from industry reports and policy documents provided a robust methodological framework for understanding the impact of sovereign debt and currency depreciation on Mozambique's economy.
## Data Extraction and Analysis

The data extraction process for this article involved gathering relevant qualitative and quantitative information from a wide range of sources, including academic articles, industry reports, policy documents, and case studies. The goal was to systematically collect data that could provide insights into the relationship between sovereign debt, currency depreciation, and macroeconomic indicators in Mozambique. Specifically, the article focused on trends in Mozambique's debt levels, inflation rates, foreign direct investment (FDI) inflows, and the broader economic performance of similar countries in Sub-Saharan Africa (IMF, 2023). The gathered data were then organized into key themes for analysis, such as the impact of currency depreciation on inflation, the rising cost of debt servicing, and the effect of economic instability on FDI inflows (Manzl, 2019).

The analysis phase employed a comparative approach, juxtaposing Mozambique's economic indicators with those of other debt-burdened countries in the region, such as Zambia and Ghana. This allowed the article to identify patterns and outliers, offering a clearer understanding of how similar economies have addressed the challenges posed by high debt levels and volatile currencies (Asamoah et al., 2016). The synthesis and interpretation of the data drew on theoretical frameworks related to debt sustainability and macroeconomic stability, enabling the article to provide policy-relevant insights tailored to Mozambique's unique economic context (Lemi & Asefa, 2003).

## Synthesis and Interpretation

The synthesis and interpretation of data in this article involved integrating findings from a variety of sources to generate a comprehensive understanding of how sovereign debt and currency depreciation affect Mozambique's economy. The data gathered from academic
literature, industry reports, and policy documents were synthesized to identify key patterns and relationships. This included analyzing trends in debt accumulation, inflation, foreign direct investment (FDI) inflows, and the macroeconomic policies implemented to mitigate the effects of currency volatility (Manzl, 2019). By cross-referencing Mozambique's economic indicators with those of similar Sub-Saharan African countries, such as Zambia and Ghana, the article aimed to contextualize the Mozambican experience within a broader regional framework (Asamoah et al., 2016).

One of the main findings from this synthesis is the cyclical relationship between sovereign debt and currency depreciation. In Mozambique, high levels of external debt, compounded by the depreciation of the metical, have resulted in increased debt servicing costs, inflationary pressures, and reduced fiscal space for public investment (Boungou & Mawusi, 2022). The analysis also indicated that this dynamic creates a deterrent for FDI, as investors perceive heightened risks in economies with currency instability (Lemi & Asefa, 2003).

Moreover, the synthesis highlighted the role of governance and transparency in managing these economic challenges. Case studies from Zambia and Ghana showed that debt restructuring and improved fiscal governance can help stabilize currencies and restore investor confidence (Chimkono, 2017). This insight emphasizes the importance of Mozambique pursuing similar reforms to manage its debt burden more effectively and reduce its vulnerability to external shocks. Overall, the synthesis and interpretation phase enabled the article to draw actionable conclusions and policy recommendations to enhance Mozambique's economic resilience.

## Data Collection Process

The data collection process for this article focused on gathering qualitative and quantitative information from a variety of secondary sources. Given the nature of the research
topic, which explores the impacts of sovereign debt and currency depreciation, the collection of data relied heavily on existing literature, industry reports, and policy documents. This process involved a systematic review of academic articles from peer-reviewed journals that examined the theoretical underpinnings of sovereign debt, currency depreciation, and macroeconomic instability in developing economies like Mozambique (Creswell & Poth, 2018). Key studies from prominent researchers in this field, such as Lemi and Asefa (2003), were included to provide foundational knowledge on how these economic variables interact.

In addition to academic literature, industry reports from the International Monetary Fund (IMF) and the World Bank were vital sources of data. These reports offered critical insights into Mozambique's debt levels, fiscal policies, and currency fluctuations. The IMF's Debt Sustainability Analysis provided detailed financial data, including debt-to-GDP ratios, inflation trends, and the impacts of external shocks on the Mozambican economy (IMF, 2023). Policy documents and regulatory frameworks from Mozambique's Ministry of Finance and the Bank of Mozambique were also analyzed to assess the effectiveness of the country's responses to its economic challenges. This multi-source approach ensured that the data collection process captured a comprehensive view of Mozambique's fiscal and monetary landscape.

## Data Analysis

The data analysis for this article involved a structured approach to interpreting the qualitative and quantitative information gathered through the desk review and document analysis. The primary focus was on identifying trends and patterns related to sovereign debt, currency depreciation, inflation, and foreign direct investment (FDI) in Mozambique. To facilitate a thorough analysis, the data were categorized into key themes: debt sustainability, inflationary pressures, currency fluctuations, and macroeconomic policy responses. This
thematic analysis approach, as outlined by Braun and Clarke (2006), allowed for the
identification of recurring issues that shape the relationship between sovereign debt and currency
depreciation in Mozambique.

One critical aspect of the analysis involved comparing Mozambique's economic
indicators, such as its debt-to-GDP ratio and currency depreciation rates, with those of similar
Sub-Saharan African countries, including Zambia and Ghana. This comparative analysis enabled
the article to highlight Mozambique's specific vulnerabilities, such as its reliance on foreign-
denominated debt and exposure to external shocks (Asamoah et al., 2016). The analysis also
examined the role of governance and fiscal transparency in influencing debt sustainability,
drawing on case studies from countries that have successfully implemented debt restructuring
programs (Boungou & Mawusi, 2022).

In addition, the article used a synthesis approach to integrate data from policy documents,
including reports from the International Monetary Fund (IMF) and the World Bank, with
empirical findings from academic literature. This allowed the article to bridge theoretical
frameworks with practical policy applications, offering a comprehensive understanding of the
macroeconomic challenges Mozambique faces. The interpretive analysis, based on Creswell and
Poth's (2018) guidelines, helped formulate policy recommendations aimed at addressing the
intertwined issues of sovereign debt and currency depreciation, ultimately contributing to a more
sustainable economic future for Mozambique.

**Ethical Considerations**

Ethical considerations are a critical component of any research methodology, ensuring
the integrity, transparency, and credibility of the article. For this article, which focuses on the
impact of sovereign debt and currency depreciation on the Mozambican economy, several ethical
principles were adhered to throughout the research process. Since this article relies primarily on secondary data, such as academic literature, industry reports, policy documents, and case studies, it was crucial to ensure the ethical use of existing data and proper attribution to the original authors and sources (Creswell & Poth, 2018).

Furthermore, this article took care to interpret data objectively, avoiding any selective presentation of information that could mislead readers or introduce bias. In qualitative research, particularly when analyzing complex economic issues like debt and currency instability, it is essential to remain neutral and present findings based on a balanced interpretation of the data (Resnik, 2011). This was achieved by triangulating data from multiple sources, such as the International Monetary Fund (IMF) and World Bank reports, and academic studies to ensure that conclusions drawn were grounded in comprehensive and reliable evidence.

Additionally, as this research deals with sensitive economic issues that could influence policy-making in Mozambique, it was conducted with careful consideration of the potential impact on stakeholders. The policy recommendations provided are intended to support informed decision-making without causing harm or exacerbating economic vulnerabilities. The research also adhered to principles of beneficence, ensuring that the article contributes positively to academic knowledge and public policy while minimizing any risks associated with misinterpretation or misuse of the findings (Bryman, 2016). Overall, the ethical considerations in this article were designed to ensure accuracy, fairness, and transparency throughout the research process.

## Findings

### Identified Themes

The analysis of Mozambique's sovereign debt and currency depreciation revealed three
major themes that are critical to understanding the country's economic challenges: debt overhang, the impact of currency depreciation on inflation, and the decline in foreign direct investment (FDI) inflows. These themes are interconnected, each contributing to the overall fragility of Mozambique's macroeconomic environment. The following sections explore these themes in detail, incorporating relevant literature to provide a comprehensive understanding of their implications for Mozambique's economic trajectory.

## Debt Overhang: Mozambique's High Debt-to-GDP Ratio

The first major theme identified is the concept of debt overhang, which refers to the situation where a country's high debt burden limits its fiscal space and constrains growth potential. Mozambique's debt-to-GDP ratio has exceeded 100%, indicating an unsustainable level of indebtedness that hinders the government's ability to invest in critical areas such as infrastructure, education, and healthcare (International Monetary Fund [IMF], 2023). As debt servicing consumes an increasing portion of the national budget, there is less room for the government to implement expansionary fiscal policies that could stimulate economic growth and development (Asamoah, Addo, & Aboagye, 2016).

The debt overhang theory suggests that when a country accumulates excessive debt, creditors and investors may be less willing to provide additional financing, as they become concerned about the country's ability to repay existing debt (Krugman, 1988). In Mozambique's case, the hidden debt scandal of 2016 further eroded investor confidence, as it exposed significant fiscal mismanagement and corruption (Boungou & Mawusi, 2022). This has left the country in a precarious position, where the government struggles to secure new financing while simultaneously dealing with the mounting cost of servicing its existing debt.
One of the key consequences of Mozambique's debt overhang is the pressure it places on public finances. The IMF's debt sustainability analysis highlights the growing proportion of Mozambique's budget allocated to debt servicing, which limits the government's ability to fund development projects and social services (IMF, 2023). Furthermore, high levels of foreign-denominated debt exacerbate this problem, as the depreciation of the metical increases the local currency cost of repaying foreign obligations (Lemi & Asefa, 2003). This dynamic creates a vicious cycle in which Mozambique's currency instability and debt overhang reinforce each other, making it difficult for the country to break free from its debt trap.

## Currency Depreciation and Inflation

The second major theme identified is the significant impact of currency depreciation on inflation, particularly for imported goods. Mozambique's reliance on imported goods, including fuel, food, and manufactured products, means that the depreciation of the metical has had a profound effect on domestic inflation (Manzl, 2019). As the value of the metical declines relative to major foreign currencies, the cost of importing goods rises, leading to higher prices for consumers. This has contributed to rising inflation rates, which disproportionately affect low-income households that spend a large portion of their income on basic necessities (Joseph, 2013).

Inflation driven by currency depreciation poses several risks to Mozambique's macroeconomic stability. First, it erodes the purchasing power of households, reducing their ability to afford essential goods and services. This has direct implications for poverty levels, as more households are pushed below the poverty line due to rising living costs (World Bank, 2023). Second, inflation can lead to wage-price spirals, where rising prices prompt demands for higher wages, which in turn drive further inflation (Boungou & Mawusi, 2022). In Mozambique,
this dynamic has been observed in sectors such as transportation and food, where the cost of fuel and imported, goods has led to widespread inflationary pressures.

Furthermore, the central bank's attempts to curb inflation by raising interest rates have had limited success due to the structural weaknesses of Mozambique's economy. While higher interest rates can help reduce inflation by curbing demand, they also increase the cost of borrowing for businesses and households, which can stifle economic activity (Mutarindwa et al., 2020). In Mozambique's case, the central bank's monetary policy has been constrained by the country's reliance on imported goods, meaning that inflationary pressures are largely external and cannot be easily addressed through domestic policy measures (Joseph, 2013).

The literature suggests that currency depreciation often leads to imported inflation in developing economies that are heavily reliant on external trade (Lemi & Asefa, 2003). Mozambique's experience aligns with this, as the depreciation of the metical has significantly increased the cost of essential imports, contributing to double-digit inflation rates in recent years. This highlights the need for Mozambique to adopt strategies to stabilize its currency, such as improving export competitiveness and managing foreign exchange reserves more effectively (Manzl, 2019).

## Decline in Foreign Direct Investment (FDI) Inflows

The third major theme is the decline in foreign direct investment (FDI) inflows, which has been exacerbated by Mozambique's sovereign debt crisis and currency depreciation. FDI plays a crucial role in supporting economic growth, particularly in developing countries that rely on external capital to finance infrastructure projects, create jobs, and stimulate innovation (Asamoah et al., 2016). However, Mozambique's economic instability has made it a less
attractive destination for foreign investors, who are wary of the risks associated with currency
volatility and unsustainable debt levels (Boungou & Mawusi, 2022).

Several factors contribute to the decline in FDI in Mozambique. First, the depreciation of the metical increases the risk for foreign investors, as their returns are eroded by currency fluctuations. This is particularly problematic in sectors such as natural resources and manufacturing, where large capital investments are required, and returns are generated over the long term (Lemi & Asefa, 2003). Investors are less likely to commit to projects in an environment where exchange rate volatility could significantly reduce the profitability of their investments.

Second, the high level of sovereign debt raises concerns about Mozambique's fiscal stability and the government's ability to maintain a stable investment environment. The hidden debt scandal of 2016, which revealed billions of dollars in undisclosed borrowing, severely damaged Mozambique's reputation among international investors (Boungou & Mawusi, 2022). This has led to a decline in FDI inflows, as investors perceive the country's political and economic risks as too high.

Third, inflation driven by currency depreciation has further deterred investment by increasing the cost of doing business in Mozambique. Rising inflation erodes the value of profits generated in local currency and increases operational costs for businesses that rely on imported goods and services (Manzl, 2019). This has made Mozambique less competitive compared to other Sub-Saharan African countries that offer more stable economic environments for foreign investors.

The literature supports the view that FDI is highly sensitive to macroeconomic instability, particularly in developing economies where political and economic risks are heightened
(Asamoah et al., 2016). In Mozambique, the combination of sovereign debt, currency depreciation, and inflation has created a challenging environment for foreign investors, leading to a sharp decline in FDI inflows over the past decade. This decline has further constrained the country's economic growth prospects, as FDI is a key driver of job creation, infrastructure development, and technological innovation.

## Conclusion of Identified Themes

In summary, the three major themes—debt overhang, currency depreciation and inflation, and the decline in FDI inflows—highlight the interconnected nature of Mozambique's economic challenges. The country's high debt-to-GDP ratio limits its fiscal space, constraining its ability to implement growth-enhancing policies. Currency depreciation has exacerbated inflation, eroding household purchasing power and contributing to economic instability. Finally, the decline in FDI inflows, driven by concerns about currency volatility and sovereign debt, has further weakened Mozambique's economic outlook. These themes underscore the urgent need for Mozambique to adopt comprehensive fiscal and monetary reforms to stabilize its economy and restore investor confidence.

## Case Studies

The case studies of Zambia and Ghana provide valuable insights into how successful debt restructuring, combined with sound fiscal management, can help stabilize economies facing sovereign debt crises and currency depreciation. Both countries have experienced similar challenges to Mozambique, including high levels of external debt, currency volatility, and the resulting economic instability. By analyzing their approaches to managing these issues, Mozambique can draw important lessons to inform its own policy responses.
## Zambia

Zambia has faced significant economic challenges due to its dependence on external borrowing and the volatility of its national currency, the Zambian kwacha. The country's debt crisis escalated in the mid-2010s, when a sharp decline in global copper prices—the country's main export—reduced export revenues and exacerbated its ability to service external debt (Chimkono, 2017). As the kwacha depreciated, the cost of servicing foreign-denominated debt soared, pushing Zambia closer to default.

In response, Zambia initiated a series of debt restructuring negotiations with international creditors. According to Chimkono (2017), Zambia's approach included renegotiating the terms of its Eurobonds and seeking relief from multilateral institutions such as the International Monetary Fund (IMF). The restructuring efforts were aimed at extending debt maturities, reducing interest payments, and providing short-term fiscal relief. Additionally, Zambia implemented fiscal reforms to improve transparency and boost revenue collection, which helped to restore some degree of confidence among investors and the international community.

Although Zambia's Road to recovery has been slow and fraught with challenges, its experience demonstrates the potential benefits of proactive debt management and fiscal reforms. By securing more favorable debt terms and improving fiscal discipline, Zambia was able to reduce immediate fiscal pressures and stabilize its currency to some extent. The lessons for Mozambique are clear: debt restructuring, if combined with credible fiscal reforms, can provide the breathing room needed to restore macroeconomic stability and rebuild investor confidence (Chimkono, 2017).
## Ghana

Ghana offers another relevant case study for Mozambique, particularly in terms of managing currency depreciation alongside debt restructuring. Similar to Mozambique, Ghana experienced a period of high external debt and severe currency depreciation, which led to inflationary pressures and a decline in investor confidence. However, Ghana's government took a proactive approach by engaging with the IMF and implementing a series of structural reforms aimed at stabilizing the economy and regaining market confidence (Asamoah, Addo, & Aboagye, 2016).

Ghana's reform package included fiscal consolidation measures, such as reducing government spending and improving tax collection, alongside efforts to stabilize the Ghanaian cedi through monetary interventions. The Bank of Ghana played a central role by adjusting interest rates and managing foreign exchange reserves to support the currency. At the same time, Ghana pursued a debt restructuring strategy that involved renegotiating terms with bilateral and multilateral creditors to ease the debt servicing burden (Asamoah et al., 2016). These measures were crucial in stabilizing inflation, regaining access to international capital markets, and attracting renewed foreign direct investment (FDI).

The Ghanaian experience underscores the importance of combining debt restructuring with a broader macroeconomic stabilization strategy. While debt relief can provide short-term fiscal relief, it must be supported by structural reforms that address underlying fiscal imbalances and currency volatility. For Mozambique, adopting a similar approach could help mitigate the impact of its sovereign debt and currency depreciation challenges. By engaging with international creditors and institutions such as the IMF, Mozambique could negotiate more
favorable debt terms, while also implementing fiscal and monetary reforms to stabilize the
metical and curb inflation (Manzl, 2019).

Lessons for Mozambique

Both Zambia and Ghana demonstrate that debt restructuring, when paired with sound fiscal and monetary policies, can help stabilize an economy and restore investor confidence.

Mozambique, facing its own sovereign debt and currency crises, can learn from the experiences of these countries. The key takeaway is that debt restructuring alone is not enough; it must be accompanied by credible fiscal reforms, improved transparency, and measures to stabilize the currency (Boungou & Mawusi, 2022). For Mozambique, engaging in transparent debt renegotiations with international creditors and adopting stronger fiscal management practices could alleviate some of the immediate fiscal pressures and help stabilize the metical.

Additionally, the government must work to restore investor confidence by improving governance and ensuring that future borrowing is transparent and sustainable.

Discussions, Conclusions, and Recommendations

Interpretation of Findings

Additionally, the analysis revealed that currency depreciation has had a profound impact on inflation, particularly through its effects on the cost of imports. As Mozambique is heavily reliant on imported goods, the depreciation of the metical has significantly increased the price of essential commodities, leading to higher inflation rates that disproportionately affect low-income households (Joseph, 2013). The central bank's attempts to control inflation through monetary tightening have had limited success due to the structural weaknesses in the economy and the largely external nature of inflationary pressures (Boungou & Mawusi, 2022).
The findings also highlight the sharp decline in foreign direct investment (FDI), which is largely attributable to the combined effects of sovereign debt and currency instability. Foreign investors are deterred by the risks associated with Mozambique's volatile macroeconomic environment, particularly the uncertainty surrounding exchange rates and debt sustainability (Asamoah, Addo, & Aboagye, 2016). This decline in FDI further constrains Mozambique's economic growth prospects, as external investment is crucial for job creation and technological advancement.

Overall, the findings emphasize that addressing sovereign debt and currency depreciation is critical for Mozambique's sustainable development. To break this cycle of debt and instability, the country must pursue comprehensive debt restructuring and implement fiscal and monetary policies that stabilize the currency and reduce inflationary pressures. Additionally, improving governance and transparency in fiscal management will be essential to restoring investor confidence and attracting renewed FDI, which is vital for long-term growth.

## Implications for Practice and Policy

The findings of this article hold important implications for both practice and policy in Mozambique. One of the key takeaways is the urgent need for policymakers to implement more stringent fiscal policies aimed at controlling public spending and improving revenue collection. Mozambique's current fiscal policies have been insufficient in addressing the growing debt burden, which has led to a precarious financial situation where the risk of default looms large. To mitigate this risk, Mozambique must pursue comprehensive debt restructuring strategies, renegotiating terms with international creditors to extend repayment periods and reduce interest rates, thereby creating fiscal space for development spending (Chimkono, 2017).
Moreover, fiscal transparency and improved governance are critical to restoring
international investor confidence. The hidden debt scandal of 2016 severely damaged
Mozambique's reputation in global financial markets (Boungou & Mawusi, 2022), and efforts
must be made to ensure that future borrowing is transparent and sustainable. Strengthening
institutions responsible for public financial management, alongside anti-corruption measures,
will enhance the credibility of the government's fiscal reforms, making debt restructuring efforts
more effective. In turn, this can attract renewed foreign direct investment (FDI), which is
essential for economic recovery (Asamoah, Addo, & Aboagye, 2016).

In addition to fiscal reforms, stabilizing the metical through appropriate monetary
policies is crucial for controlling inflation. Currency depreciation has been a major driver of
inflation in Mozambique, particularly because of the country's reliance on imported goods. To
counteract this, the Bank of Mozambique must focus on strengthening foreign exchange reserves
and managing the money supply effectively. Implementing a flexible exchange rate regime,
combined with targeted interventions in the foreign exchange market, could help reduce the
volatility of the metical and stabilize prices (Joseph, 2013). In this context, the central bank
should also consider coordinating closely with the Ministry of Finance to align fiscal and
monetary policies more effectively, ensuring that they work in tandem to reduce inflationary
pressures and stabilize the economy.

Furthermore, Mozambique should explore regional cooperation frameworks, such as
those within the Southern African Development Community (SADC), to access external liquidity
support during crises. This would provide a buffer against external shocks, such as fluctuations
in commodity prices, and help to stabilize the economy in times of currency volatility (Manzl,
2019). By pursuing these coordinated fiscal and monetary strategies, Mozambique can begin to
address the root causes of its sovereign debt crisis and currency depreciation, laying the
groundwork for long-term economic stability and growth.

**Comparison with Existing Literature**

The findings of this article align closely with existing research on the effects of sovereign debt and currency depreciation on economic growth, particularly in developing countries.

Studies by Manzl (2019) and Asamoah et al. (2016) have highlighted the detrimental impact of excessive sovereign debt and persistent currency depreciation on macroeconomic stability and development outcomes. Both of these studies provide a comprehensive understanding of how these issues undermine fiscal health, deter foreign direct investment (FDI), and exacerbate inflation, which are consistent with the findings of this research.

Manzl (2019) emphasizes that in developing economies, sovereign debt creates
significant fiscal constraints, particularly when much of the debt is held in foreign currencies.
This dynamic is evident in Mozambique, where the depreciation of the metical has increased the
cost of servicing foreign-denominated debt, contributing to a vicious cycle of debt accumulation
and economic contraction. As Manzl (2019) argues, such currency depreciation exacerbates
inflationary pressures by raising the cost of imports, which further erodes purchasing power and
limits economic growth—an outcome mirrored in Mozambique’s current economic situation.
This article reinforces Manzl’s conclusion that addressing both sovereign debt and currency
stability is essential for fostering long-term economic recovery and growth in developing
nations.

Similarly, Asamoah et al. (2016) provide evidence from other Sub-Saharan African
countries, illustrating how sovereign debt overhang limits the government's ability to implement
expansionary fiscal policies. The inability to invest in critical infrastructure and social services,
due to high debt servicing costs, stifles economic growth. In Mozambique, the debt overhang similarly limits fiscal space, constraining the government's capacity to stimulate the economy through public investment (IMF, 2023). As the findings of this article show, Mozambique's high debt-to-GDP ratio and the resulting fiscal constraints are consistent with Asamoah et al.'s (2016) observations regarding the broader economic impacts of unsustainable debt levels in Sub-Saharan Africa.

Furthermore, Boungou and Mawusi (2022) emphasize the link between currency depreciation and reduced investor confidence, particularly in economies that face high sovereign debt. The findings of this article corroborate this perspective, showing that Mozambique's currency depreciation has significantly deterred FDI inflows, as foreign investors are wary of the risks associated with macroeconomic instability. This aligns with Boungou and Mawusi's (2022) argument that currency volatility increases the perceived risk of doing business in a country, leading to a decline in foreign capital, which is crucial for economic growth and development. Mozambique's experience underscores the need for policymakers to stabilize the metical and rebuild investor confidence through sound fiscal and monetary policies.

In addition, the articles by Lemi and Asefa (2003) on the relationship between economic uncertainty and FDI supports the findings of this article, particularly regarding the adverse effects of political instability and currency volatility on investment inflows. Mozambique's hidden debt scandal and subsequent loss of international credibility have contributed to a decline in FDI, consistent with Lemi and Asefa's (2003) findings. This further emphasizes the importance of addressing governance issues and improving transparency to attract foreign investment.
Overall, this article findings confirm and extend the existing literature on the impact of sovereign debt and currency depreciation in developing economies. By demonstrating how these issues manifest in the Mozambican context, the article provides empirical support for the conclusions drawn by previous research, while also offering policy recommendations specific to Mozambique's unique economic and political environment.

## Summary of Key Points

Mozambique's economic challenges are closely linked to the dual pressures of sovereign debt and currency depreciation, both of which have profound implications for the country's macroeconomic stability and long-term development. The analysis in this article reveals that these two factors are deeply intertwined, creating a vicious cycle that exacerbates fiscal stress, undermines economic growth, and reduces investor confidence. Addressing these issues requires a multi-faceted approach, incorporating debt restructuring, currency stabilization, and the implementation of prudent fiscal and monetary policies.

One of the key findings is that Mozambique's high levels of sovereign debt, particularly its foreign-denominated debt, have severely constrained fiscal space. With a debt-to-GDP ratio exceeding 100%, Mozambique's ability to service its debt has been significantly undermined by the depreciation of the metical. As the value of the metical falls, the cost of repaying foreign-denominated debt increases, further straining public finances (International Monetary Fund [IMF], 2023). This debt overhang limits the government's capacity to invest in critical sectors such as infrastructure, education, and healthcare, which are necessary for fostering sustainable economic growth (Asamoah, Addo, & Aboagye, 2016). Debt restructuring, therefore, is essential to create fiscal space and reduce the immediate pressure on public finances, allowing the government to focus on long-term development goals.
Currency depreciation is another major contributor to Mozambique's economic instability. The depreciation of the metical has led to higher inflation rates, particularly for imported goods, as Mozambique relies heavily on imports for basic commodities such as food and fuel (Manzl, 2019). The rising cost of imports has eroded household purchasing power, increased poverty levels, and contributed to overall economic hardship. To stabilize the metical and curb inflation, the Bank of Mozambique must adopt targeted monetary policies, such as tightening the money supply and managing foreign exchange reserves more effectively (Joseph, 2013). Additionally, efforts to increase export competitiveness and reduce the reliance on imports will be crucial for achieving long-term currency stability.

Foreign direct investment (FDI) inflows have also been negatively affected by Mozambique's sovereign debt and currency depreciation. As foreign investors perceive heightened risks due to currency volatility and debt sustainability concerns, FDI inflows have declined, further limiting the country's growth potential (Boungou & Mawusi, 2022). To restore investor confidence, Mozambique must improve governance, increase fiscal transparency, and implement sound macroeconomic policies that address the underlying causes of economic instability. Transparent debt management practices and effective fiscal reforms will be key to attracting renewed investment.

In conclusion, Mozambique's economic recovery depends on its ability to address the root causes of its sovereign debt and currency depreciation challenges. Debt restructuring, prudent fiscal management, and currency stabilization must be pursued simultaneously to break the cycle of debt accumulation and economic instability. Additionally, strengthening governance and improving the transparency of public finances will be crucial in restoring investor confidence and attracting the external capital needed for long-term growth.
**Recommendations for Future Research**

The findings of this article suggest several avenues for future research, particularly in light of the evolving global economic landscape and its impact on Mozambique's sovereign debt and currency depreciation challenges. Given the significant disruptions caused by the COVID-19 pandemic, future research should focus on how Mozambique's post-pandemic economic recovery efforts have influenced its debt servicing capacity, currency stability, and overall economic resilience. The pandemic has exacerbated existing vulnerabilities in many developing economies, including Mozambique, where declines in global demand, supply chain disruptions, and reduced foreign direct investment (FDI) have further strained public finances and led to increased borrowing (International Monetary Fund [IMF], 2023). This section outlines key areas where further research can deepen the understanding of Mozambique's economic challenges and offer policy solutions for long-term stability.

*Post-COVID-19 Economic Recovery and Debt Sustainability*

One critical area for future research is the post-COVID-19 economic recovery in Mozambique. The pandemic has fundamentally altered the global economic environment, impacting commodity prices, trade flows, and foreign aid—all of which are important for Mozambique's economy. Future studies should examine how the global economic changes triggered by the pandemic have affected Mozambique's capacity to service its sovereign debt. In particular, research should explore whether the post-pandemic recovery has improved or worsened Mozambique's debt sustainability indicators, such as its debt-to-GDP ratio, interest payments, and overall fiscal balance (World Bank, 2023). Understanding the post-COVID-19 dynamics is essential for identifying whether additional debt restructuring is necessary or if Mozambique can gradually regain fiscal stability through its recovery efforts.
Research could also focus on the role of government stimulus packages and fiscal responses in mitigating the economic impact of the pandemic. For instance, assessing the effectiveness of Mozambique's pandemic-related fiscal policies, such as tax relief measures, social safety nets, and public investment in infrastructure, could provide valuable insights into how the country is managing its recovery. Comparative studies with other Sub-Saharan African countries that implemented similar fiscal interventions could shed light on best practices and the potential for replicating successful strategies in Mozambique.

## The Role of International Financial Institutions

Another key area for future research involves the role of international financial institutions (IFIs) in supporting debt-ridden economies like Mozambique. Institutions such as the IMF, the World Bank, and the African Development Bank (AfDB) have played an important role in providing financial assistance and technical support to countries facing sovereign debt crises. Future studies could investigate the effectiveness of these institutions' interventions in Mozambique, particularly their debt relief programs and capacity-building initiatives (Boungou & Mawusi, 2022). For example, researchers could analyze how IMF programs, such as Extended Credit Facility arrangements, have influenced Mozambique's fiscal discipline and debt management practices.

Additionally, research could examine the role of international debt relief initiatives, such as the G20's Debt Service Suspension Initiative (DSSI), in alleviating Mozambique's debt burden during the pandemic. The DSSI allowed eligible countries to temporarily suspend debt service payments to official creditors, providing them with fiscal breathing space to focus on pandemic-related expenditures. Future studies should assess the long-term impact of such
initiatives on Mozambique's debt sustainability and whether they have contributed to meaningful economic recovery (IMF, 2023).

***The Impact of Global Economic Trends on FDI and Currency Stability***

Future research should also explore the impact of global economic trends on FDI inflows and currency stability in Mozambique. As Mozambique's economy is heavily reliant on foreign investment and exports, global shifts in trade patterns, commodity prices, and capital flows have a significant influence on the country's economic performance (Manzl, 2019). Research could focus on how global economic trends, such as fluctuations in commodity prices (e.g., natural gas and coal), have affected Mozambique's trade balance and the stability of the metical.

Understanding these external factors is crucial for developing strategies to enhance Mozambique's export competitiveness and improve its resilience to currency volatility.

Furthermore, future studies could investigate the role of multinational corporations and foreign investors in Mozambique's post-pandemic recovery. FDI is a key driver of job creation, infrastructure development, and technological innovation, but the pandemic has led to a significant reduction in global FDI flows. Researchers could analyze how Mozambique is positioning itself to attract renewed FDI in a post-COVID world and what role its debt and currency challenges play in shaping investor perceptions. Comparative analyses with other developing countries that have successfully attracted FDI despite high debt levels and currency instability could offer valuable policy lessons for Mozambique (Lemi & Asefa, 2003).

***Governance and Debt Management Reforms***

Another important area for future research is the role of governance and institutional reforms in improving Mozambique's debt management practices. The hidden debt scandal of 2016 underscored the need for greater transparency and accountability in Mozambique's public
financial management (Boungou & Mawusi, 2022). Future research should investigate the extent to which governance reforms, such as strengthening anti-corruption frameworks and improving oversight of public borrowing, have been implemented in Mozambique. Evaluating the effectiveness of these reforms could provide insights into how the country can avoid similar debt crises in the future.

Additionally, research could explore the potential for implementing debt management strategies that align with international best practices, such as those outlined in the IMF's Debt Sustainability Framework (DSF). The DSF provides guidelines for assessing the risks associated with public debt and developing strategies for maintaining long-term debt sustainability (IMF, 2023). Future studies could assess whether Mozambique's current debt management strategies adhere to these guidelines and what improvements can be made to enhance fiscal discipline and reduce the risk of future debt distress.

## Conclusion

In conclusion, future research on Mozambique's sovereign debt and currency depreciation should focus on the post-COVID-19 economic recovery, the role of international financial institutions, the impact of global economic trends on FDI and currency stability, and the implementation of governance reforms. These areas of inquiry will provide a more comprehensive understanding of Mozambique's economic challenges and offer policy recommendations to support long-term fiscal stability and sustainable growth.

## Declarations

**Availability of Data and Material** - Data used in this article are available upon request.

**Competing Interests** - The authors declare no competing interests.

**Funding** - This research was not supported by any external funding.
**Authors' Contributions** - The author conducted the research and wrote the article.

**Acknowledgements** - The authors have no acknowledgments to declare.

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