Sovereign debt and uncertainty in the Mozambican economy

This paper studies the impact of uncertainty and debt crisis on the dynamics of the Mozambican economy over the last two decades. Investment boom and accelerated growth did not take place until peace and economic reforms were assured, helped by the role of the Paris Club creditors as senior lenders, which averted the adverse impact of a debt overhang. Innovations to private consumption and to income are positively and strongly correlated. Current account has shown persistent deterioration while private consumption is not strongly correlated with uncertainty. These facts suggest that neither the permanent-income and life-cycle theories, nor the precautionary-saving and liquidity-constraint hypotheses can fully explain macroeconomic dynamics displayed by data. In light of this evidence, a simple dynamic model with stochastic income is presented. The model predicts that at low levels of wealth, uncertainty becomes unimportant in consumption decisions; and that when consumption is close to survival requirements, uncertainty drives the economy to wealth depletion.