Republic of Mozambique: Staff Report for the 2005 Article IV Consultation, Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waiver of Performance Criteria, and Modification of Performance Criteria

This paper highlights Mozambique’s 2005 Article IV Consultation, Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF), Request for Waiver of Performance Criteria, and Modification of Performance Criteria. The performance under the program supported by the PRGF was mixed during October 2004–March 2005. All end-December 2004 quantitative performance criteria, except the one pertaining to the fiscal deficit, were met. Prospects for 2005 remain favorable, including for strong growth, a further deceleration in inflation, and maintenance of a sustainable external position.

Abstract

This paper highlights Mozambique’s 2005 Article IV Consultation, Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF), Request for Waiver of Performance Criteria, and Modification of Performance Criteria. The performance under the program supported by the PRGF was mixed during October 2004–March 2005. All end-December 2004 quantitative performance criteria, except the one pertaining to the fiscal deficit, were met. Prospects for 2005 remain favorable, including for strong growth, a further deceleration in inflation, and maintenance of a sustainable external position.

Introduction

1. Mozambique, a post-conflict coastal country, is at a critical juncture in its development process. During the past decade, Mozambique’s strong commitment to sound macroeconomic policies and structural reform has led to a remarkable improvement in its economic performance, supported by substantial donor assistance. Real GDP growth averaged 8 percent a year (one of the highest in Africa), end-period inflation was reduced to single digits, public external debt shrank, the international reserves position strengthened, and the share of the population living in absolute poverty declined substantially. These achievements were facilitated by a stable political situation and the consolidation of the democratic system, as illustrated by the recent general elections that took place peacefully.

Millennium Development Goals: Selected Indicators, 1990–2003

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2. Although the economy responded positively to the reforms implemented in the last decade under successive Fund-supported programs, important weaknesses and vulnerabilities remain. Mozambique now needs to launch a “second wave” of reforms to consolidate its macroeconomic environment, maintain a high rate of export-led growth, reduce poverty, and decrease aid dependency. Against this background, the government is preparing a new Plano de Acção para Redução da Pobreza Absoluta (PRSP or “PARPA” in Portuguese) for 2006–10, which is expected to be finalized during the first half of 2006.

3. Recent economic developments and performance under the program are presented in Section II. The Article IV discussions are presented in Section III with key lessons from the past decade and medium-term challenges in the future in Section III. A; the medium-term framework in Section III.B; and the program for 2005 in Section III.C. Program monitoring, safeguards assessment, and risks are presented in Section IV. The staff appraisal is in Section V.

II. Recent Economic Developments and Performance Under the Program

4. Although the economy continued to perform well in 2004, performance under the program was mixed. Some relaxation occurred in the fiscal stance in the period leading to the elections in December 2004 and the installation of the new government in early 2005. All quantitative performance criteria, except the one pertaining to the government’s domestic primary deficit, were met (memorandum of economic and financial policies (MEFP), Table 1). Using the new GDP series (Box 1), real GDP growth decelerated to an estimated 7.2 percent, reflecting a slowdown in construction related to the completion of a number of private sector megaprojects and a decline in fishing production. Growth in all other sectors continued to be buoyant, including in agriculture (Figure 1). Inflation declined more than expected to 9.1 percent at end-December 2004 and to 4.5 percent at end-April 2005 driven by lower food prices and despite a sharp increase in petroleum prices.1 The easing of inflation expectations also contributed to a reduction in interest rates.

Figure 1.
Figure 1.

Mozambique: Real Growth Rates and Inflation

Citation: IMF Staff Country Reports 2005, 318; 10.5089/9781451931273.002.A001

Sources: Mozambican authorities; and IMF staff estimates.
Table 1.

Mozambique: Selected Economic and Financial Indicators, 2003-08

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Sources: Mozambican authorities; and IMF staff estimates and projections.

The GDP ratios corresponding to the program and the revised projection are calculated with the GDP projected at the time of the publication of the respective documents.

A minus sign indicates depreciation.

The percentage change for net domestic assets in the revised projection for 2004 has been adjusted to take account of the shifting of the external liabilities of the BM to the government.

Includes the issuance of government securities for strenghtening the balance sheet of the BM in years 2005-07, which are not included in the net domestic financing of the government finances table.

TAMs stands for monetary authority bill. TAMs are debt instruments issued by the Bank of Mozambique; this particular instrument was not issued in 2002.

Includes movement in the government account set abroad with the proceeds of the Moatize coal mine concession.

Selected Macroeconomic Indicators 1/

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Annual percentage change unless otherwise indicated.

5. Strong growth in traditional exports, the completion of two megaprojects, and improved terms of trade helped narrow the external current account deficit, excluding grants, by one-third to 13.8 percent of GDP in 2004. This, together with greater-than-anticipated donor support and large private capital inflows, helped to boost net international reserves (NIR), well above the program target, to about six months of imports. As a result, the metical appreciated by 25 percent in real effective terms in 2004, which reversed the depreciation of 8 percent over the previous four years. The exchange rate exhibited significant fluctuations in the aftermath of the introduction of the foreign exchange system in January 2005, which led the monetary authorities to increase significantly their foreign exchange sales to reduce volatility during the first quarter of 2005.

6. The envisaged fiscal consolidation was not achieved. The revenue-to-GDP ratio decreased from 12.9 percent of GDP in 2003 to 12.3 percent in 2004 and fell short by 1.1 percent of GDP of the program indicative floor for end-December 2004 (Table 2). Collection of most taxes turned out lower than envisaged. The authorities attributed the revenue shortfall mainly to higher-than-projected value-added tax (VAT) reimbursements related to megaprojects, delays incurred by corporations in complying with the payments calendar under the new corporate income tax code, and the impact of the appreciation of the metical. Another important factor was the weakening of tax collection during the transition period leading to the nomination of a new government. The revenue shortfall was partially offset by cuts in current expenditures affecting negatively the composition of total expenditure. As a result, the share of priority expenditures to total expenditure (about 63 percent) was slightly lower than programmed. The domestic primary deficit fell short of the program target by 0.7 of GDP, and the overall fiscal deficit, after grants, was slightly higher than envisaged (using the new GDP series).

Table 2.

Mozambique: Government Finances, 2003-08

(In billions of meticais)

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Sources: Mozambican authorities; and IMF staff estimates and projections.

The quasifiscal deficit of the Bank of Mozambique, amounting to Mt 3,455 billion (or 2.5 percent of GDP), is not included.

Revenue minus noninterest current expenditure minus locally financed capital expenditure and locally financed net lending. Unallocated revenue and expenditure are included in the primary balance.

Residual discrepancy between identified sources and uses of funds.

Tracks the movements in the government account set up abroad with the proceeds of the Moatize coal mine concession.

In 2004, it includes the US$123 million concession fee for the Moatize coal mine.

Table 2.

Mozambique: Government Finances, 2003-08 (concluded)

(In billions of meticais)

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Sources: Mozambican authorities; and IMF staff estimates and projections.

The quasifiscal deficit of the Bank of Mozambique, amounting to Mt 3,455 billion (or 2.5 percent of GDP), is not included.

Revenue minus noninterest current expenditure minus locally financed capital expenditure and locally financed net lending. Unallocated revenue and expenditure are included in the primary balance.

Residual discrepancy between identified sources and uses of funds.

Tracks the movements in the government account set up abroad with the proceeds of the Moatize coal mine concession.

In 2004, it includes the US$123 million concession fee for the Moatize coal mine.

Includes government securities issued to strengthen the balance sheet of the Bank of Mozambique.

Selected Fiscal Indicators 2003-04

(In percent of GDP, unless otherwise specified)

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Sources: Mozambican authorities; and IMF staff estimates.

7. Based on preliminary information, revenue collection in the first quarter of 2005 has improved but is slightly below the program target (0.1 percent of GDP). However, identified primary domestic expenditure is higher than programmed (0.4 percent of GDP), mainly on account of a higher-than-expected wage bill (0.6 percent of GDP) that was only partially offset by restraining locally financed capital expenditure by 0.2 percent of GDP. The higher-than-expected wage bill was due to the payment of the 13-month wage and pension bonus corresponding to 2004, which was paid in the first quarter of 2005 (instead of end-2004 as originally programmed).2 In addition the difference between the above-the-line recorded transactions and below-the-line financing shows an excess of unallocated expenditures equivalent to 0.4 percent of GDP. Overall, the indicative target on the domestic primary deficit may have been exceeded by 0.8 percent of GDP at end-March 2005. In addition, the 13-month payment of wage and pension related to 2005 fiscal year will be paid in January 2006 and this will be true respectively for the following years.

8. Broad money growth slowed significantly in 2004, reflecting in part the impact of the appreciation of the metical on the foreign currency deposits (Table 3). While the commercial banks were being restructured, the increase in credit to the private sector remained relatively modest, whereas net credit to the government (NCG) was slightly exceeded. However, the end-December indicative stock of reserve money was exceeded by a small margin, owing mainly to a larger-than-expected demand for domestic currency. Based on preliminary data, the indicative targets for end-March 2005 on net international reserves and net domestic assets of the central bank, as well as on reserve money, appear to have been met. In 2004 and early 2005, the Bank of Mozambique (BM) took several steps to strengthen monetary management, including using a more appropriate mix of its monetary instruments in the context of a managed floating exchange rate system. Since the second half of 2004, it has relied more on foreign exchange sales to control liquidity, following its heavy reliance on domestic monetary instruments. Despite the shift to the government of a large part of the net financial losses cumulated in 2002-03, the BM posted additional financial losses of 2.5 percent of GDP at end-2004 mainly on acccount of the impact of the appreciation of the metical on its net external liabilities.

Table 3.

Mozambique: Monetary Survey, December 2003-December 2008

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Sources: Bank of Mozambique; and IMF staff estimates and projections.

The net international reserves (NIR) program and actual figures for 2004 and the NIR actual for 2003 have been revised downward by deducting from gross reserves some deposits held by the central bank abroad are encumbered for specific imports. The proceeds of the Moatize coal mine concession are not included.

In July 2004, part of the medium- and long-term foreign liabilities of the central bank (11,023.5 billions of meticais or US$489 million) were transferred to the treasury. This account was offset by “other items” in net domestic assets.

uA01fig01

Inflation, Money Growth, and Interest Rates 1998–2004

(In percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2005, 318; 10.5089/9781451931273.002.A001

uA01fig02

Mozambique: Interest Rate, Treasury Bill Issuance, and Foreign Exchange Sales, January 2004 - April 2005

(Annualized yield, billions of Meticais, and US$ millions)

Citation: IMF Staff Country Reports 2005, 318; 10.5089/9781451931273.002.A001

Sources: Banco de Mozambique; and IMF staff estimates.1/ For net treasury bill issuance, the actual data was multiplied by 10 for presentation.

9. The situation of the commercial banking sector has continued to improve notably with a sharp decline in nonperforming loans (Table 7). In particular, the largest bank’s financial statements (Banco Internacional de Moçambique, BIM) through end-2004 show that it remains profitable and in compliance with prudential requirements. Following the external auditors’ approval in early 2005 of the BIM’s financial statements for 2004, the enhanced supervisory regime of the BIM was discontinued.

Table 4.

Mozambique: Balance of Payments, 2003-08

(In millions of U.S. dollars, unless otherwise specified)

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Sources: Mozambican authorities; and IMF staff estimates and projections.

Including IMF.

Private borrowing, not guaranteed by the government or the Bank of Mozambique.

Tracks the movements in the government account set up abroad with the proceeds of the coal mine concession.

Errors and omissions have been adjusted (compared with IMF Country Report No. 05/168) to make the balance of payments consistent with the latest information available on gross international reserves/net international reserves in 2004. Net international reserves accumulation has been kept unchanged in 2005-06.

Figures in net present value terms for 2004 and beyond are derived from the external debt sustainability analysis are not directly comparable to those for the following years as a result of a different methodology.

Table 5.

Mozambique: Balance of Payments of Megaprojects, 2002-08 1/

(In millions of U.S. dollars, unless otherwise specified)

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Sources: Mozambican authorities; and IMF staff estimates and projections.

Megaprojects include Mozal (aluminum production), Sasol (gas production and pipeline), the Cahora-Bassa dam (hydropower), and two titanium ore projects.

This line overestimates the contribution of megaprojects to international reserve accumulation, because most of their financial operations are conducted outside the domestic banking system. Only a small fraction of foreign exchange proceeds are actually repatriated in Mozambique. However, information on the latter is not available.