Consumer prices in the southern African country have dropped from as high as 23.7 percent to 7.15 percent thanks largely to a recovery in the metical currency, reducing the cost of imports. Mozambique has cut its lending rates by a cumulative 100 basis points so far this year, to 22 percent.

"On the monetary front, while the loose fiscal stance continues to put pressure on market interest rates, the mission encourages the central bank to reassess the pace of policy rate cuts given the large unexpected declines in inflation," said IMF official Michel Lazare.

Lazare said the government should do more to address its fiscal deficit because current measures such as cutting its wage bill might not be enough.

"The mission urges the authorities to further consolidate the fiscal position by eliminating VAT and other tax exemptions that could help mobilize additional revenues," he said in a statement.

The IMF mission team expects Mozambique's economic growth to be about 3 percent in 2017, compared to 3.8 percent in 2016, Lazare said.

Mozambique, one of the world's poorest countries, discovered substantial offshore gas reserves seven years ago and hopes to become a major exporter of liquefied natural gas.