Statement by the IMF Staff Representative

Mozambique’s strong macroeconomic performance continued in 2005 and early 2006, despite exogenous shocks. Fiscal results were commendable, and all performance criteria through end-March 2006 were met. Although the macroeconomic outlook remains favorable, vigilance will be required, in light of volatile oil prices and unpredictable weather. The main challenges are sustaining broad-based economic growth and making further inroads in alleviating poverty through the implementation of a poverty reduction strategy for 2006–09. The authorities’ commitment to create sufficient fiscal space for priority investments is welcomed.

Abstract

Mozambique’s strong macroeconomic performance continued in 2005 and early 2006, despite exogenous shocks. Fiscal results were commendable, and all performance criteria through end-March 2006 were met. Although the macroeconomic outlook remains favorable, vigilance will be required, in light of volatile oil prices and unpredictable weather. The main challenges are sustaining broad-based economic growth and making further inroads in alleviating poverty through the implementation of a poverty reduction strategy for 2006–09. The authorities’ commitment to create sufficient fiscal space for priority investments is welcomed.

June 19, 2006

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

1. Indicative Targets. Preliminary information indicates that all monetary-related indicative targets for end-March 2006 have been met except for reserve money which was slightly exceeded.

2. Structural Benchmarks. The two structural benchmarks for end-March 2006 were implemented with a slight delay. A revised anti-corruption strategy was approved by the Council of Ministers in April 2006. A decision on the strategic option for the restructuring of PETROMOC, the state-owned petroleum distributor was taken in May 2006.

3. Inflation. With the start of a good harvest season, inflation is receding. Food prices account for more than 50 percent of the CPI basket. As expected, recent information at end-May shows a decline in food prices by almost 3 percent resulting in a monthly inflation rate of minus 1.1 percent and an inflation rate of 4.8 percent from January to May against 6 percent at end-April. The program inflation targets are thus within reach, albeit with some risks related to further rises in fuel prices.

4. Fuel Prices. Domestic fuel prices have increased in June by about 17 percent on average with kerosene and cooking oil prices increasing by 10 percent.

5. Interest rates. All Treasury bill auction rates are now market-determined and have increased by about 6 percentage points since the removal of interest rate caps in March 2006. This has helped reestablish positive real interest rates.

6. Fiscal. The Council of Ministers approved in May the Medium Term Expenditure Framework for 2006-08 (MTEF). The MTEF is a three years rolling expenditure plan that translates the PARPA II into a concrete action plan with identified sources of funding. The preparation of the MTEF was improved. The fiscal targets are consistent with the PRGF-supported program.

Republic of Mozambique: Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Financing Assurances Review, and Request for Modification of Performance Criteria
Author: International Monetary Fund