Natural Gas, Public Investment and Debt Sustainability in Mozambique

Mozambique has great potential in natural gas reserves and if liquefied/commercialized the sum of taxes andother fiscal revenue from natural gas will, at its peak, reach roughly one third of total fiscal revenue. Recentdevelopments in the natural resource sector have triggered a fresh round of much needed infrastructureinvestment. This paper uses the DIGNAR model to simulate alternative public investment scaling-up plans inalternative LNG market scenarios. Results show that while a conservative approach, which simply awaits LNGrevenues, would miss significant current growth opportunities, an aggressive approach would likely meetabsorptive capacity constraints and imply a much bigger (and, in an adverse scenario, unsustainable) build-up ofpublic debt. A gradual scaling up approach represents indeed a desirable path, as it allows anticipating some,though not all, of the LNG revenue and, even in an adverse scenario, keeping public debt at sustainable levels. Structural reforms affecting selection, governance and execution of public investment projects would significantly enhance the extent to which public capital is accumulated and impact non-resource growth and, ultimately, debt sustainability.