The following information has become available since the issuance of the staff report for the third review of the three-year arrangement under the Poverty Reduction and Growth Facility. The thrust of the staff appraisal remains unchanged.

1. Prior action. The information system of the Bank of Mozambique (STF) was upgraded on November 17, 2005 to allow the system to record all transactions to and from the government accounts in the commercial banks to beneficiaries on a real time basis.

2. Other measures under the program. Based on preliminary information, the following measures have been implemented: (i) the e-SISTAFE was rolled-out to the Ministry of Education along with the abolishment of disbursement of funds (Structural Benchmark for end-December); (ii) the parliament passed on December 7th the final reading of a bill to create a new national Tax Authority and the law to create the Central Revenue Authority; and (iii) the Bank of Mozambique (BM) implemented the link of the monetary data to the balance sheet.

3. Inflation. Reflecting an increase in domestic petroleum prices of about 20 percent in October and 8 percent in November as well as the prices of some imported food items, inflation between December 2004 and November 2005 reached 8 percent (and an annual average of 6.5 percent).

4. Fiscal. Based on preliminary information, the fiscal stance continued to be broadly in line with the program at end-September 2005. Revenues were slightly below program while current expenditure was lower resulting in a smaller domestic primary deficit.

5. Foreign exchange system. While the exchange rate has been relatively stable during April-October 2005, the metical depreciated by nearly 15 percent in November on account of a sharp increase in foreign exchange demand related to a few large oil import transactions. To avoid such erratic fluctuations, and given the thinness of the foreign exchange market, the Bank of Mozambique (BM) in November modified the foreign exchange system, including the implementation of a temporary exchange rate band which is centered on the previous day’s average exchange rate. This temporary band will be gradually widened until it becomes non-binding. The authorities have reiterated their commitment to a flexible exchange rate regime.

6. Currency reform. The National Assembly approved on November 24, 2005 the Government’s proposed law to reform the currency by introducing new metical bank notes that would be equivalent to 1,000 of the current metical.

7. Cahora Bassa dam. The Government of Portugal and Mozambique signed a memorandum of understanding on November 2, 2005, on the transfer of the Cahora Bassa dam operating company’s, Hidroelétrica de Cahora Bassa (HCB), ownership from majority Portuguese to majority Mozambican ownership. The main element of the memorandum is an agreement that a repayment of US$950 million will clear all HCB’s outstanding debt to Portugal (approximately US$2.3 billion), and increase Mozambique’s ownership in HCB from 18 percent to 85 percent. The memorandum indicates that, of the US$950 million, US$250 million will need to be paid in two installments in 2006 and the remaining US$700 million 12-18 months after the signing of the final Minutes of Negotiation. The World Bank, on the basis of the preliminary information, is of the view that a viable financing plan for the HCB debt repayment appears to be feasible, one which, through non-recourse financing, does not increase the Government’s liabilities to commercial creditors. The government of Mozambique is committed to ensure (i) the transparency of the process and the final financing package, (ii) that HCB is managed in a commercially efficient manner and will be audited by external auditors, and (iii) that HCB would be subject to the regular concession and tax regimes.