The following information has become available since the issuance of the documents relating to the first review under the three year arrangement under the Poverty Reduction and Growth Facility. The thrust of the staff appraisal remains unchanged.

1. On February 2, 2005, Mr. Guebuza of FRELIMO (the ruling party) was inaugurated as President of the Republic. During his speech, the President highlighted that his government would honor commitments with multilateral and bilateral partners, including those with the Fund. President Guebuza appointed Ms. Luisa Dias Diogo, who served as Prime Minister and Minister of Planning and Finance under the previous FRELIMO administration, as Prime Minister, and Mr. Manuel Chang, previously Deputy Finance Minister, as the new Minister of Finance. Minister Chang reiterated the government’s commitment to the PRGF-supported program and the current orientation of economic policies in a meeting with the Fund Resident Representative in Maputo.

2. The 12-month rate of inflation declined to 7.6 percent in January 2005, from 9.1 percent in December 2004. The metical has continued to strengthen against the U.S. dollar; the cumulative appreciation from end-2003 to end-January 2005 exceeded 20 percent.

3. The information on the government’s fiscal performance for the whole year 2004 is still incomplete, as the authorities provide quarterly data on budgetary execution with a lag of 45 days. Partial information on the financing of the budget suggests that the domestic primary deficit was lower than in the revised fiscal projection reflected in the staff report. Preliminary revenue data, however, indicate that revenue performance remained weak during the last quarter of 2004; total revenue for the year was 0.6 percentage point of GDP lower than envisaged in the staff report owing to further shortfalls in the personal and corporate income taxes and customs receipts. These developments suggest that expenditure was restrained significantly below program projections, which may have affected adversely the priority sectors. No information is yet available on expenditure and its composition.

4. Preliminary monetary information indicates that the end-December 2004 performance criteria on the net international reserves (NIR) and net domestic assets of the Bank of Mozambique (BM) were observed with large margins. Reserve accumulation was much larger than programmed during the last quarter of 2004, owing to continued strong inflows of private capital. As a result, NIR rose by US$225 million during 2004, to US$963 million by year’s end, or about US$200 million more than the adjusted program target. Notwithstanding the much larger reserve accumulation, the indicative target for base money was exceeded by a relatively small margin, owing mainly to a larger-than-expected reduction in the net indebtedness of the government with the Bank of Mozambique. In light of the decline in inflation and the continued pressures toward an appreciation of the metical, in mid-January 2005 the Bank of Mozambique lowered its lending and absorption interest rates further by 200 basis points, to 11 ½ percent and 4½ percent, respectively.

5. As regards developments on the structural front, the supervisory regime for the Banco Internacional de Moçambique (BIM) has been kept in place, with the monthly information on the bank’s financial statements through end-December 2004 showing that BIM remains profitable and in compliance with prudential requirements. The authorities have also informed the staff that the audits of the other large banks based on International Financial Reporting Standards (IFRS) have been completed, and that the final reports will be made available to them shortly. A Fund expert is currently in Maputo to help prepare a timetable for the transition to IFRS by the BM.

6. In January, with technical assistance from a Fund expert, the BM initiated its auctions of foreign exchange, in line with program understandings. The auctions are held once a week, and in between auctions the BM intervenes in the interbank market as required.