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 Executive Board of the International Monetary Fund (IMF) today completed the second review of Mozambique’s economic performance under an SDR 11.36 million (about US$16.6 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 04/153).
The completion of the review enables the release of an amount equivalent to SDR 1.62 million (about US$2.4 million), which will bring total disbursements under the PRGF arrangement to an amount equivalent to SDR 4.86 million (about US$7.1 million).
The Executive Board also agreed to waive the nonobservance of the end-December 2004 quantitative performance criterion on the central government’s domestic primary deficit and the end-December 2004 structural performance criterion on the completion of a feasibility study on the divestment of the government’s participation in the Banco Internacional de Moçambique.
Following the Executive Board’s discussion on Mozambique’s economic performance, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:
“Mozambique is at a critical juncture in its development. After its impressive performance of the past decade, a “second wave of reforms” is needed to deepen and accelerate structural changes, in order to sustain high and broad-based growth. In particular, efforts should focus on (i) increasing tax revenues; (ii) strengthening public sector operations; (iii) reducing the costs of doing business; (iv) promoting labor-intensive sectors; and (v) implementing a rural development strategy. Moreover, stepped-up efforts are needed to reduce poverty and, with the help of the international community, to reach the Millennium Development Goals (MDGs). In this context, the forthcoming poverty reduction strategy paper for 2006-10 should be aimed at reinvigorating such a reform process.
“Economic growth remained strong and inflation declined in 2004. However, slippages have occurred under the PRGF-supported program during October 2004-March 2005, primarily reflecting a weakening of tax collections and delays in the implementation of the structural reform agenda in the period leading up to the elections. The authorities have indicated their commitment to implementing a strong set of measures to bring the program back on track and enhancing its monitoring.
“The authorities plan to sustain a higher rate of growth and to continue to reduce gradually the inflation rate by deepening structural reforms, and pursuing prudent fiscal and monetary policies in the context of the flexible exchange rate system. Central to the medium-term strategy will be the consolidation of the fiscal stance, notably by strengthening revenue mobilization and public expenditure management. Priority expenditures will also be protected in order to contribute to the achievement of the MDGs. In this regard, the ongoing measures implemented by the Mozambican authorities to increase tax collections in 2005 include strengthening tax enforcement, progress towards creating the Central Revenue Authority by end-2005, and the enactment of a general tax law. In addition, the timely rollout of the new electronic financial administration system (e-SISTAFE) and the inclusion in the budget of all project-related expenditures, with the help of the donor community, will be crucial to make the budget a more effective instrument of fiscal reporting and management.
“The revival of public sector reforms will also be important to increase the efficiency of government expenditure, combat corruption, and ensure appropriate wages for public employees. The authorities will renew their efforts to improve governance by strengthening the legal system, procurement, and creating a financial investigation unit.
“Monetary policy will continue to be prudent and aimed at reducing inflation in the context of a flexible exchange rate system. Intervention in the foreign exchange market will be limited to maintaining international reserves at comfortable levels, while preventing short-term volatility. Government divestiture from the banking system and further strengthening of banking system supervision and reporting should help deepen the financial sector.
“The authorities will continue to secure a higher share of external grants. In addition, they will make efforts to reach agreement with bilateral and non-Paris Club creditors that have not yet provided debt relief under the enhanced HIPC Initiative to buttress external debt sustainability. Creditors’ readiness and support in this regard are fundamental,” Mr. Kato said.
The PRGF is the IMF’s concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.
