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Statement by Peter Ngumbullu, Executive Director for Republic of Mozambique and Joseph Tekman Kanu, Senior Advisor to Executive Director

Author(s):
International Monetary Fund
Published Date:
July 2006
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June 19, 2006

1. On behalf of my Mozambican authorities, we thank staff for their constructive dialogue with the authorities and for the well written reports which clearly identify the challenges for macroeconomic stabilization and policy options facing the country. The authorities remain confident that the Fund and other development partners will continue to assist them to ensure that the objectives of their reform agenda are achieved. Mozambique’s macroeconomic performance in 2005 continued to be strong. International reserves remained at a comfortable level, clearly reflecting continued increase in donor inflows. Program performance has been satisfactory, and all quantitative performance criteria were met while most of the real effective appreciation of the metical in 2004 was reversed during2005.

Recent Economic Developments

2. The annual average inflation rate moderated from 12.6 percent in 2004 to 6.4 percent in 2005 due to lower food prices, but the spike in domestic petroleum prices and pass-through of the exchange rate depreciation in October – November 2005 led to some acceleration in the last few months of the year. However, the economy continues to perform well in spite of these exogenous shocks, and real GDP growth remained at 7.5 percent in 2005 due largely to activities in construction, mining, communication and the transport sector, as well as contributions from the mega-projects.

3. The authorities’ increased domestic revenue effort led to an increase of 1.5 percent of GDP in revenue receipts due to the buoyancy of corporate tax collections and the substantial rise in non-tax revenues, which included mega-project dividends. The better-than-programmed fiscal consolidation efforts also led to the domestic primary deficit being narrowed by nearly 2 percent of GDP in 2005. Expenditures were lower than expected due to delay in the adoption of the 2005 budget following the general election in December 2004.

4. In order to strengthen its balance sheet, the Bank of Mozambique (BM) issued securities totaling MT 1.5 trillion in June 2005 as envisaged in the program. Improvements in the prudential ratios of the banking system resulted in fall in the ratio of non-performing loans to below 5 percent. The performance criteria on net domestic assets for end-December 2005 were also met, although broad money was higher than programmed due to greater than anticipated net foreign assets and stronger growth of the economy. The required provisioning of 50 percent of commercial banks foreign currency-denominated loans to non-exporters resulted in decline in the ratio of foreign exchange loans to total loans. Overall, commercial banks are well capitalized and profitable.

5. On the structural front, notable advances were made in the area of legal reform, leading to the approval of the new Commercial Code, the Commercial Registration Code, and the Civil Procedure Code in December 2005, while commercial sections in the judicial tribunals of the city of Maputo were also established. Despite delays in implementation of some of the envisaged reforms, the authorities remain committed to completing them and to substantially improve access to justice for all citizens.

Projected Outlook and Policies for 2006

6. The authorities’ 2006 policy framework aims at continuing with the fiscal consolidation process with view to improving the achievements already made in their macroeconomic stabilization and poverty reduction efforts and ensuring strong economic growth. The transparency efforts and monitoring of the budget execution process will be strengthened. The existing multi-disciplinary committee will help to reinforce the existing coordination between the Bank of Mozambique (BM) and the Ministry of Finance (MF), with view to reduce inflation and ensure sustainable fiscal and external position. However, a major downside risk to the macroeconomic outlook is the continued rise in international oil prices and its effects on inflation dynamics and the country’s trade deficit.

7. The fiscal program will continue to focus on improving revenue administration and strengthening public expenditure management (PEM) systems through further implementation of the e-SISTAFE. The authorities will continue to modernize tax administration and procedures and ensure effective direct budget execution for goods and services in the Ministries of Finance, Planning, Education, Agriculture, Health, and Public Works at the central and provincial levels by end-July 2006. The rollout of the Homoine version of software for the e-SISTAFE will help to ensure that off-budget project expenditures will be captured and executed through the Treasury Single Account (TSA) in order to improve the monitoring of all development activities. The allocation of an investment budget for each district will be followed by a gradual rollout of e-SISTAFE to all districts by end-September 2006. The authorities will continue to implement the fiscal decentralization strategy with due regard to sequencing, in particular the need to buttress local administrative capacity, procurement and financial reporting and auditing.

8. Monetary policy will largely remain unchanged and will continue to target base money in order to achieve the inflation target for 2006. All interest rates will remain market-determined. The absence of a liquidity overhang in the banking system, and the downward trend in non-food inflation are expected to help minimize inflationary risks. The authorities remain committed to a flexible exchange rate regime in order to help cushion against exogenous shocks and maintain a comfortable level of international reserves. Bank credit growth to the economy is projected to remain robust and will be supported by a rise in government savings and structural factors. A strengthening of the liquidity forecasting framework, and a deepening of debt markets and debt management will, with the help of TA, assist in avoiding an excessive level of interest rate volatility.

9. To ensure transparency of monetary policy, the authorities will, with Fund technical assistance, adopt by end-December 2006, a Long-Term Monetary Policy Strategy that will define the intermediate targets compatible with the base money operational target, design a new format for the monetary policy committee, and specify its communication policy. Efforts will be directed at strengthening and modernizing the supervisory and accounting functions of the central bank. The new organizational structure of the banking supervision department, consistent with the Integral Strengthening Plan for Banking Supervision, will be approved by end-December 2006. The central bank will in addition, adjust its Chart of Accounts by end-September 2006 to allow for: (i) the valuation of foreign exchange gains/losses consistent with International Financial Reporting Standards (IFRS); and (ii) the preparation of BM’s financial statements for 2005 in compliance with IFRS in parallel to the financial statement prepared under the current accounting standard.

10. The authorities are determined to provide sound financial system for effective working of the economy. In this regard, they intend to reinforce and expand the financial sector framework by implementing the integral plan for licensing of microfinance institutions (MFIs) and capacity building measures for the pension and insurance regulator. In addition, they will approve in early 2007, the new regulation on the assessment, classification and provisioning of credits, as well as regulation on integral risk management for credit institutions and finance companies.

11. The authorities thank the international community for the provision of debt relief under the MDRI which has greatly contributed to their efforts towards reducing poverty. As a result of the resources obtained through the MDRI, the authorities will substantially increase the share of spending on priority sectors, in particular education and health, as a ratio of GDP. They will continue to vigorously implement measures that will facilitate halving the NPV of public external debt to about 12 percent of GDP in 2006 from 25 percent in 2005, given that the joint Bank-Fund DSA shows sustainable debt dynamics susceptible to a ratcheting up of non-concessional external borrowing. In view of the above, the authorities are strongly committed to seeking concessional financing for the transfer of majority ownership of the Cahora Bassa dam operating company, Hidroelétrica de Cahora Bassa (HCB), so as not to increase the government’s liabilities to commercial creditors.

Given the need for infrastructure development, we encourage donors to ensure timely disbursement of resources and to facilitate concessional lending to the authorities.

12. Although proving difficult, because of the lack of provision of comparable treatment, negotiations with some large non-Paris Club bilateral creditors in the context of the enhanced HIPC Initiative are on-going. The authorities will continue to maintain contact with these creditors, as well as with their commercial creditors, in order to reach a collaborative agreement. Given that external financing appears to have been secured, the authorities expect to undertake by mid 2006, the commercial debt buyback operation with private creditors that will be consistent with comparability of treatment.

13. As regards trade, the authorities will continue with the trade liberalization process during 2006. To buttress their commitment, they have lowered in January 2006 the maximum tariff rate applicable to SADC trading partners from 25 percent to 20 percent.

A legislative authorization draft has already been submitted to the Assembly for an extension of this measure to all trading partners. They will proceed with bilateral free trade arrangements as recommended in the Action Matrix of the Diagnostic Trade Integration Study and expect to sign a bilateral free trade agreement with Zambia this year.

14. Reforms in the exchange rate and trade system will be vigorously pursued to eliminate any further delays. The authorities will submit to the Assembly by end-September 2006, the new foreign exchange law that will form the basis for accepting the obligations under Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement.

15. More effort will be directed at improving the business environment in order to promote a diversification of exports. In addition, the authorities will continue to make progress in improving access to finance for both bank credit and outreach of micro finance institutions (MFIs), as well as extend the national electricity grid to include rural areas. They intend to pursue further measures that will ensure an increase in labor market flexibility, strengthen contract enforcement and property rights, and bridge the infrastructure gap through greater private participation and public-private partnerships.

16. The authorities are aware of the structural challenges facing the economy and given the requirements for an action-oriented approach with a high level of commitment and leadership to give a clear sense of direction in pursuing these reforms, they are committed to strengthening the decentralization process, and thereby integrate activities and institutions. The strategy to be pursued will provide clear legal, regulatory, and institutional framework for revenue raising and spending responsibilities of sub national units and monitoring of their fiscal operations. Furthermore, in order to improve payroll management and identify ghost workers, the authorities will create an integrated payroll database system as it will not be possible to reconcile the existing three databases of civil servants.

Medium-Term Macroeconomic Policy Outlook

17. The authorities’ macroeconomic objectives in the medium-term are to maintain a rate of growth of about 7 percent and reduce the inflation rate through pursuit of prudent fiscal and monetary policies in the context of a flexible exchange rate system. Economic policies will be geared to promoting export-led private sector growth, while maintaining debt sustainability. The authorities will also ensure a gradual consolidation of the fiscal position, in order to increase credit to the economy and maintain a competitive exchange rate. On the basis of current net external financing projections, the domestic primary deficit is projected to decline while average revenue will increase by 0.5 percent of GDP per annum. In the event that scaling-up of external program support materializes, the authorities intend to use the available resources to finance additional expenditures on “priority” sectors to improve public expenditure management and ensure macroeconomic stability. To facilitate such a flexible approach, with the assistance of the donors they will prepare costed programs to enable achievement of the MDG targets.

18. Following the approval by the Council of Ministers in April 2006, the authorities have prepared the third annual report on the implementation of the PARPA, which together with the Five-Year Plan, have been very instrumental in the preparation of PARPA II, that covers the period 2006–09. The authorities’ medium-term priorities includes reduction of absolute poverty through implementation of policies that ensure macroeconomic stability, greater private investment, and sustainable economic growth. In view of these objectives, PARPA II clearly reveals that the authorities are on track to meet the MDGs on income poverty, infant and maternal mortality, and access to safe drinking water. They will ensure effective use of additional donor support and expand their absorptive capacity in other areas such as primary school enrollment, gender equality, and HIV/AIDS.

19. The authorities’ structural reform agenda articulated in the PARPA II includes the launching of a second wave of reforms, focusing on increasing tax collection, strengthening public expenditure management and fiscal transparency, implementation of agricultural and rural development strategy, reduction in the cost of doing business, reforming of the judicial sector and ensuring a strengthening of the financial system. More emphasis will be placed on areas of promoting human capital formation, infrastructure investments, and maximizing the net contribution of natural resources and mega projects. To this end, the authorities will implement measures to strengthen transparency of natural resource management and their exploitation, while ensuring that more benefits accrue to the country from these projects.

Conclusion

20. The developments and prospects for the Mozambican economy remain favorable and the authorities have expressed strong commitment towards program implementation, especially on the underlying macroeconomic policy framework consistent with the PARPA objectives. The authorities request completion of the fourth review and financing assurances under the PRGF arrangement including modifications to the NIR and NDA performance criteria for end-June 2006 as part of the streamlining of quantitative targets. In support and strengthening of the country’s objectives and policies, the authorities are also requesting disbursement of the fifth loan under the PRGF arrangement.

21. Finally, the authorities wish to thank the international community and the Fund for their continued support to Mozambique. They strongly commit themselves to ensure that the objectives of the macroeconomic stabilization program and PRGF are achieved.

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