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.

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

1. The 12-month rate of inflation declined further to 3.8 percent in May 2005, from 9.1 percent in December 2004, mainly on account of food prices. The metical has further depreciated against the U.S. dollar and, to a lesser extent, against the rand in the past few weeks. The cumulative depreciation against the U.S. dollar between end-December 2004 and June 3 reached 28 percent. Thus, part of the real effective appreciation of 2004 is likely to have been reversed.

2. The prices of petroleum products were increased on average by 20 percent on June 1, 2005, to reflect the increase in import prices. At the same time, the government granted a 50 percent reduction in the fuel tax on diesel to mitigate the impact on production costs.

3. The wages of public sector employees were increased—to be applied retroactively starting in April 1, 2005—by 14 percent for the lowest wage categories (including education and health services) and 7 percent for higher wage categories. This increase is consistent with the authorities’ commitment in the MEFP to keep the ratio of the wage bill to GDP constant in 2005.

4. Very preliminary information indicates that fiscal and monetary developments during January-April 2005 were in line with the program.

5. As envisaged in the Letter of Intent, the authorities began to implement a series of measures aimed at improving revenue collection, in particular (i) the VAT and customs IT systems were interfaced to facilitate cross checking and auditing; and (ii) a monthly system for monitoring the tax returns by large taxpayers and megaprojects in Maputo began.

6. In addition, the following measures have been implemented: (i) a decision has been made on the issuance of securities by the government to cover the central bank’s financial losses in 2004; (ii) four “one stop shops” for business registration were opened; and (iii) the government has formalized the anticorruption unit in Maputo and established new units in two other main cities.