Introduction

My Mozambican authorities are grateful to the Fund for its positive cooperation and effective support and to the staff for their very constructive role during the numerous dialogues with the authorities, both of which have been invaluable for Mozambique’s long-lasting adjustment and reform process, initiated in the second half of the 1980s. My authorities are also appreciative of the steady and multi-faceted assistance provided by their development partners over the years, which has greatly facilitated the materialization of the ambitious targets set under successive programs. The staff report provides a candid and balanced assessment of recent economic developments and my authorities generally concur with the thrust of policy recommendations and view the report to be a useful contribution to the current policy formulation.

The report sets out in clear terms the considerable progress that my Mozambican authorities have made in implementing sound economic and financial policies. The economy is now reaping the rewards of these policies in terms of macroeconomic stability and strengthened institutional framework. These conditions were essential for laying the foundations for a sustainable and higher level of growth of the economy and reduction of wide-spread poverty. Determined steps taken to deregulate the economy, that included the liberalization of the trade and exchange regime, the reform of the financial sector, and the aggressive program of privatization of public enterprises, were fundamental in enhancing the overall efficiency and competitiveness of the Mozambican economy and in creating an enabling environment for increased private sector participation. The rising inflow of foreign direct investment is a testimony of the growing confidence in the economy.

Despite the impressive growth performance during most of the 1990s decade, at an annual average rate of 5.7 percent, sustaining such rapid economic growth and ensuring better living standards for the entire population is an immense challenge facing my authorities. In this regard, while the megaprojects have an important role to play in this process, the major test will lie on the ability to attract flow of resources to small and medium scale labor-intensive productive activities, which will assist in guaranteeing a more balanced growth of the economy while at the same time expanding the prospects for creating employment opportunities. In this connection, my authorities are fully cognizant of the need to boost national savings not only to stimulate domestic investment but also to reduce foreign aid dependency.

Recent Economic Developments

The evolving resilience of the economy is attested by the manner in which the country has swiftly recovered from the devastating effects of the 2000 floods that has beset Mozambique. Economic activity recovered strongly in 2001, when GDP growth reached almost 14 percent, over 4 percentage points above the program expectations, mainly on account of buoyant agricultural production and construction activity and to which the first full year of production of the aluminum smelter megaproject made also an important contribution. The fiscal outcome turned out to be much stronger than programmed, with the domestic primary deficit being 2.4 percentage points lower than projected, as a result of better than expected performance in revenue collection and a sharp reduction, predominantly, in capital spending due to a shortfall in external financing. Delays in the disbursement of pledged external budget assistance have prompted the authorities to rely on further restrictions on the wage bill and spending on goods and services. The external current account deficit has also narrowed significantly, compared to both the program target and the outturn in 2000. The international reserves position was further strengthened. Building on past achievements on structural reforms, additional actions were taken during 2001, particularly in the area of fiscal reforms.

In the pursuit of the goals clearly set in their poverty reduction strategy paper, PARPA, my authorities have continued to attach special attention to the implementation of a wide range of social policies aimed essentially at increasing investment in human capital and social and economic infrastructure. Improvements in tracking of public expenditures have been important in enhancing the quality of social sector spending.

Conversely, progress was less reassuring in relation to price developments, where performance has fallen short of expectations, with inflation reaching nearly 22 percent by end-2001 and reversing past gains. Some difficulties also emerged in the financial sector related to the recapitalization of the two largest commercial banks, Banco International de Mocambique (BIM) and Banco Austral (BA). The government has provided the necessary support to these banks, for augmenting their capital base. One of the banks, the Banco Austral, was successfully reprivatized in 2001, after the last minute refusal by its private shareholder to participate in its recapitalization. In the course of the year, it also became apparent that the recapitalization of another bank, Banco Comercial de Mocambique effected in 2000, was insufficient and the issue will be addressed in the context of the 2002 budget.

As a result of these generally very positive developments, Mozambique has exceeded by comfortable margins all quantitative performance criteria and observed all structural benchmarks for end-September and end-December 2001, with the exception of the benchmark on reserve money.

The Medium-Term Strategy

To sustain the gains achieved so far, the medium-term strategy, as outlined in the PARPA, aims essentially at maintaining a stable macroeconomic environment supportive of sustainable high levels of growth that benefit all segments of the population, particularly those most affected by abject poverty. It also aims at giving continuity to the structural reforms to further strengthen the functioning of market mechanisms and boost private sector activity. The authorities are fully aware of the importance of fostering progress to place the public finances on a sustainable path. To this end, special emphasis will continue to be devoted to strengthening domestic resource mobilization and enhancing the efficiency of spending while meeting the expenditure priorities related to poverty-reduction programs. In support of these objectives the medium-term strategy envisages a continuation of rapid growth at an average of 8 percent through 2010. Inflation is expected to be contained within a range of 5 to 7 percent. The projected reduction in the primary fiscal deficit (excluding bank restructuring costs) from 5.6 percent in 2001 to 2.5 percent in 2005 is regarded as necessary to reduce reliance on foreign assistance. The planned improvements in domestic savings will also assist in narrowing the external current account deficit to 11 percent of GDP by 2005, from 23.6 percent in 2001. While no significant changes are anticipated in this strategy, some adjustments to the macroeconomic framework are expected to occur once the full impact of the HIV/AIDS as well as of the postponement of a megaproject, are incorporated in the PARPA projections.

Policy Course in 2002

The policies envisaged in the program for 2002 have been formulated in line with the government’s poverty reduction strategy described in the PARPA, which was endorsed by the Boards of the Fund and the World Bank in September of 2001. Like other countries in Southern Africa, Mozambique has been facing both the social and economic adverse effects of the severe drought that is afflicting the region. While the full assessment of the impact of this natural disaster is being carried out, the authorities have decided to adopt a less ambitious approach than would have been the case, in setting the key macroeconomic goals for 2002. The economy is projected to still grow at a robust pace of 9 percent against the 12 percent initially estimated and the 12-month inflation rate is projected to be reduced back down to 8 percent.

As fiscal consolidation will remain one of the major challenges facing economic policy in the medium-term, the authorities’ intention is to continue to guide their fiscal policy to progressively reducing fiscal imbalances. To this end, a further reduction in the domestic primary deficit (excluding the bank restructuring costs) to 3.4 percent of GDP is envisaged for 2002, followed by additional declines in subsequent years. The authorities realize the importance of increased revenue mobilization efforts and they intend to explore additional feasible avenues that would assist in the materialization of this objective. They are ready to consider the staff’s suggestion to increase the petroleum excise tax, but would first like to ascertain its impact on poverty, especially on the prices of some transportation means used by a large majority of the people, which could further erode their already meager income. Accordingly, this issue has been made the subject of a poverty and social impact assessment, which is currently being conducted. The authorities will continue with the policy of improved monitoring and controlling public spending. Resources will also continue to be channeled with priority towards social programs with direct impact on poverty alleviation envisaged in the PARPA. The fact that the wage bill will be contained to its budgeted amount despite the higher-than expected inflation and an increase of 22 percent in the minimum wage that resulted from the tri-partite negotiations in May 2002, corroborates the authorities’ determination to maintain a tight lid on other expenditures. The authorities also intend to maintain the momentum of the tax reform initiated under previous programs, through the implementation of the new income tax law. With a view to improve transparency and accountability of the budgetary process important reforms were introduced in public expenditure management. A plan is being designed to introduce reforms in the public sector aimed at improving its effectiveness.

The measures in the fiscal area are to be complemented by keeping a tight rein on monetary expansion so as to be consistent with the projected decline in inflation. The growth of broad money is expected to slow down to 19 percent from about 30 percent in 2001. As a result of the substantive tightening of the monetary stance adopted in mid-2001 and continued into 2002, inflationary pressures are showing signs of subsiding. According to the latest developments, inflation has been kept in line as envisaged in the program, during the first five months of 2002. In May, the accumulated inflation was of 0.9 percent, while the 12-month inflation stood at 19.5 percent. These positive developments were made possible among other factors, by the significant slow down in monetary expansion and greater stability in the exchange rate against the US dollar. In addition, the central bank will continue to work closely with the treasury to improve the coordination between the monetary and fiscal policies and linking government spending to foreign exchange sales, which will assist to better control liquidity management and hence inflationary pressures.

My authorities were particularly concerned with the problems that recently emerged in the banking system. As a result, the monetary authorities are paying particular attention to strengthening the role of banking supervision, improving regulations, and tightening enforcement. These include measures to strictly enforce the observance of capital adequacy ratios, mandatory adherence to International Accounting Standards, and strict regulations on connected lending. Measures are also being taken to reinforce the capabilities of the supervision department through recruitment of new staff, training of the existing ones, and installation of a new information system. Recognizing the value of the Financial Sector Assessment Program, the authorities have already requested to participate in it and hope to be able to benefit from an FSAP soon.

Having reached the completion point under the enhanced HIPC Initiative, the authorities are keenly interested in further strengthening their debt management capacity. To this end, they have requested the assistance of foreign consultants who on the basis of the existing capability in managing the debt will be formulating a post-HIPC debt strategy to be proposed to the authorities. In moving in this direction, it is important to my authorities to see some progress being made towards the resolution of the outstanding debt to non-Paris Club creditors. However, despite the authorities’ continuous efforts to persuade these creditors to accord HIPC comparable terms in rescheduling the debt, apart from a few exceptions, there has been no progress. With no positive prospects in view to rapidly resolve these pending issues, the authorities do not see much merit in maintaining an escrow account as suggested by the staff.

Conclusion

Despite the very extensive period of time in which the economy has gone through a process of adjustment and reform, my authorities continue to believe that only through the pursuit of sound policies and reforms will the real potential of the Mozambican economy be able to be unleashed for the benefit of its people. In this effort, they hope to be able to count on the support of their development partners and the BWIs.

We are pleased to advise that my authorities, as has been the case in the past, have acceded to the publication of the staff report.