Journal Issue

IMF Policy Paper: IMF Executive Board Approves US$176 Million Exogenous Shocks Facility for Mozambique and Completes Fourth Review Under the Policy Support Instrument

International Monetary Fund
Published Date:
August 2009
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The Executive Board of the International Monetary Fund (IMF) today approved a 12-month, SDR 113.6 million (about US$176 million) for Mozambique under the IMF’s Exogenous Shocks Facility (ESF) to cushion the country from the effects of the global economic downturn. The approval enables Mozambique to draw immediately an amount equivalent to SDR 85.2 million (about US$132 million). The IMF financing will help Mozambique offset the deterioration of its balance of payments, which has been undermined by the global economic downturn. The ESF is designed to provide policy support and financial assistance on concessional terms to eligible low-income countries facing temporary exogenous shocks.

The IMF Executive Board also completed the fourth review of Mozambique’s economic performance under the three-year Policy Support Instrument (PSI). The PSI for Mozambique was approved on June 18, 2007 (See Press Release No 07/135) to support the nation’s economic reform efforts. It is aimed at consolidating macroeconomic stability and at achieving sustained economic growth and poverty reduction through the pursuit of prudent macroeconomic policies as well as promoting structural reforms. The strategy to achieve this goal remains set in the Mozambican authorities’ national poverty reduction strategy, Plano de Acgao para Redugao da Pobreza Absoluta (PARPA II).

Following the Executive Board’s discussion of Mozambique, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

“Mozambique continued with a strong macroeconomic performance in 2008. A flexible policy response to higher fuel and food import prices helped to mitigate the impact of internal and external shocks in a challenging external environment. As Mozambique remains vulnerable to the global economic slowdown, international and domestic developments will need to be closely monitored.

“Mozambique’s strong track record of prudent macroeconomic policy implementation has provided room for an easing of fiscal and monetary policy in the near-term while remaining within its prudent medium-term strategy. In this context, the authorities’ commitment to expenditure restraint in the approach to elections is welcome.

“In the medium-term, steps to enhance domestic revenue mobilization and to improve public financial management will contribute importantly to further strengthening macroeconomic stability. Avoiding recourse to domestic financing of the budget will provide room for credit to the private sector. Strengthened monetary policy formulation and implementation will help to maintain low inflation. Intensified efforts to diversify the sources of growth and to accelerate structural reforms will boost Mozambique’s competitiveness, promote investment, and improve financial intermediation.

“Closer attention to a broader basket of currencies that is more reflective of Mozambique’s trading patterns, could help to redress the overvaluation of the currency in real effective terms, which could have adverse impact on Mozambique’s competitiveness and economic diversification.

“Mozambique has continued to advance on its structural reform agenda. Fiscal and monetary operations have been strengthened and an enhanced business environment for both domestic and foreign investment is targeted. Mozambique candidacy for adherence to the Extractive Industries’ Transparency Initiative is welcome.

“Mozambique has made significant progress towards developing and strengthening the financial sector and improving banking operations. The authorities have committed to move ahead quickly to assess and finalize an action plan to further strengthen the financial sector, including risk monitoring, home-host cooperation on banking supervision, and crisis management arrangements,” added Mr. Kato.

Statement by Samuel Itam, Executive Director for Republic of Mozambique June 30, 2009


1. My Mozambican authorities appreciate the continued support by the Fund and the constructive policy dialogue and advice by staff. They are committed to implementing reforms and to macroeconomic stability, as is evidenced by the satisfactory performance under the PSI arrangement since its inception. However, Mozambique is vulnerable to the global economic and financial crisis, and mitigating measures are necessary to meet the challenges and ensure that economic growth and macroeconomic stability are sustained. In this context, my Mozambican authorities are requesting a twelve-month arrangement under the high access component of the ESF.

2. The overall implementation of the PSI arrangement in the second half of 2008 was satisfactory. All quantitative assessment criteria (ACs) to end-December 2008 were met. Implementation of the two structural benchmarks for end-March 2009—the approval of a PFM vision paper and the issuance of a decree streamlining the business inspection process—were delayed and both are now expected to be implemented by end-July 2009. In this regard, the authorities request Directors’ support for the completion of the fourth review of the PSI.

Recent economic developments

3. Macroeconomic performance during 2008 was good, despite pressures from the high fuel and food prices in mid-2008 together with the onset of the global economic crisis in late 2008. The economy is estimated to have expanded by 6.8 percent in 2008, with a particularly good performance in agriculture, construction, transport and communications and financial services. Inflation fell faster, from a peak of 13 percent in February 2008 to 6.2 percent in December 2008 and 3 percent in May 2009, mainly because of the sharp drop in import prices. The current account balance in 2008 was adversely affected by higher imports because of increases in international prices. However, because of high private capital inflows, an increase in gross international reserves was recorded for the year. The real effective exchange rate appreciated, but part of this appreciation has been reversed in the first months of 2009.

4. The Government’s fiscal policy was revised in July 2008 to incorporate measures to mitigate the social impact of higher fuel and food prices. Domestic financing of the budget for the year was 0.8 percent of GDP lower than envisaged because of better than envisaged domestic revenues, from personal income tax, and lower than budgeted recurrent spending on goods and services. However, the late disbursements of funds for externally financed investment projects accounted for the overall low expenditure execution rate that was only 88 percent of the program. The multiplicity of accounting procedures, as well as the integration of projects into the budget, also influenced the rate of budget execution. In this regard, it should be noted that expenditure in PARPA’s priority sectors accounts for almost two thirds of the total approved budget.

5. Monetary policy in 2008 aimed at price stability. The target for reserve money was revised to accommodate the projected increase in inflation due to higher import prices. The Bank of Mozambique (BM) was able to contain reserve money growth in part due to strong fiscal performance. The BM and commercial banks have improved their management of the seasonal surge in currency demand over the festive season. Net international reserves were in line with revised projections and the program target was met.

6. Structural reforms to strengthen the management and transparency of mineral resources, hence maximizing the benefits to Mozambique, are on track. The authorities’ request to become a candidate for adherence to the EITI was approved last May.

7. The strategy for the improvement of the business environment was approved by Cabinet, after which the following reforms were implemented: (i) elimination of the minimum capital and bank deposit requirement for the creation of companies; (ii) introduction of the simplified licensing regime; and (iii) approval of the new Code of Tax Benefits. In the meantime, the authorities are committed to persevere with the improvement of the business environment, with a view to attract investments for the productive sectors, along with the associated creation of employment. These structural reforms are focused on: (i) the streamlining of business inspections, particularly in the areas of labor and finance, (ii) the contracting of foreign workers, taking into account the relevant regulation; and (iii) the costs of doing international business.

Outlook and policy response for 2009/10

8. My authorities’ policy thrust in 2009/10 is to carefully monitor the impact of the global economic crisis on Mozambique’s macroeconomic prospects and to implement appropriate policies to mitigate its effects. Against the backdrop of a highly uncertain global outlook, economic prospects for 2009 have deteriorated, and GDP growth is now projected to be far below the trend of the last few years. The external shocks will have adverse impacts on the balance of payments, with the overall position projected to deteriorate by nearly US$400 million in 2009, as the trade deficit widens, foreign direct investment contracts, and foreign borrowing by the private sector is curtailed. To this end, the authorities have intensified their efforts to mobilize external financing.

9. On the fiscal side, revenues in 2009 are projected to be lower by 1.2 percent points of GDP compared with what was envisaged in the program (though by only -0.3 percent of GDP compared with the outturn for 2008). The authorities will maintain the domestic expenditure envelope in nominal terms broadly as previously envisaged and in line with budgeted levels. Therefore, relative to GDP, total spending will rise by about 5.2 percent of GDP compared with the outturn for 2008 (but will decline by -1.3 percent of GDP with respect to the envisaged program for 2009). To fill the financing gap, the authorities intend to increase net domestic financing to about 1.8 percent of GDP, higher than previously

envisaged. The authorities’ perseverance with macroeconomic stability and the relatively low public debt over the last years provide ample fiscal space. In any event, the increase in net domestic financing is expected to be temporary.

10. The BM will ease monetary policy modestly to accommodate the expansion in domestic financing of the budget. The 12-month inflation at the end of 2009 is expected to remain broadly the same as at the end of 2008 on account of a modest increase in international fuel and food prices and because of the recent depreciation of the exchange rate. The monetary framework makes room for broad money to expand for continued financial deepening, including private sector credit growth. The weak external environment will have a large adverse impact on Mozambique’s external balances. As a result, the BM’s gross external reserves are projected to fall by more than US$200 million during 2009, reducing the NIR from 4.4 to 3.9 months of imports cover.

11. The recent FSAP update found considerable progress in the financial sector since 2003, though much work is needed in the areas of financial deepening. The FSAP makes recommendations in the areas of access to finance, banking supervision, and liquidity management, the non-bank financial sector (pension and insurance), and the payments system. The authorities will finalize an action plan to implement these recommendations and will form a task force to monitor implementation. BM will seek TA from the World Bank and the IMF to strengthen crisis preparedness and contingency planning, as well as improve its remedial action framework for banks in difficulty.

12. Mozambique has made considerable progress in several areas of its reform agenda. The authorities will now concentrate on activities related to the public sector reform program, in particular the wage policy, strengthening social security and the pension system, and the anti-corruption strategy. They also intend to intensify reforms to improve the business environment for the private sector, particularly the SMEs. A third strand relates to the decentralization process. In this area, the current challenge is the existing capacity at the districts for implementing financial decentralization. The authorities plan to expand the gains of PFM reforms so far at the central level to the district level and improve transparency in the allocation of resources.

13. At the end of April 2009, the authorities and the Program Aid Partners (PAPs)—the G-19—completed the annual joint review of the general budget support mechanism. The joint review concluded that there was satisfactory performance in various areas, but both the authorities and the PAPs agreed on areas that require more attention and improvement. Thirty days later, the PAPs made their commitments for the next budget cycle 2010— US$472 million for general budget support. The authorities are grateful and encouraged by this support, particularly with the current financial crisis.


14. My Mozambican authorities remain committed to implementing prudent policies and persevering with the structural reforms. Mozambique is being affected by the weak economic

performance in its major trading partners and by fluctuations in international commodity prices which is affecting the country’s main exports. Considering their domestic capacity constraints, the authorities have responded to the crisis with a comprehensive set of policies and are ready to take more measures, if necessary, to sustain growth and macroeconomic stability. In this context, the authorities are mindful of both the short- and medium-term horizons when tackling the challenges arising from the current global crisis. Facing these challenges will require additional capacity. In this regard, the authorities would like to count on the support of both the Fund and other development partners to provide TA and enhanced policy discussions in the implementation of the PARPA, which would transform the economy and improve the well-being of the population.

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