Republic of Mozambique: Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Financing Assurances Review

The Fifth Review Under the Three-Year Arrangement under the Poverty Reduction and Growth Facility of the Republic of Mozambique explains macroeconomic performance. Growth has picked up, led by strength in the construction sector and a recovery in agricultural production. The strategy to consolidate macroeconomic stability in the context of scaling-up of foreign aid should sustain strong growth. The Bank of Mozambique (BM) will continue to target base money and facilitate absorption of the additional foreign aid while a strengthening of Public Financial Management (PFM) systems ensure a better monitoring of expenditures.

Abstract

The Fifth Review Under the Three-Year Arrangement under the Poverty Reduction and Growth Facility of the Republic of Mozambique explains macroeconomic performance. Growth has picked up, led by strength in the construction sector and a recovery in agricultural production. The strategy to consolidate macroeconomic stability in the context of scaling-up of foreign aid should sustain strong growth. The Bank of Mozambique (BM) will continue to target base money and facilitate absorption of the additional foreign aid while a strengthening of Public Financial Management (PFM) systems ensure a better monitoring of expenditures.

I. Background

1. Mozambique is a success story in Sub-Saharan Africa, benefiting from sustained large foreign aid inflows, strong and broad-based growth and deep poverty reduction. The main achievements during the PARPA I period (2000-05) were sustaining economic growth of 8 percent per year on average, and reducing the poverty headcount index from 69 percent in 1997 to 54 percent in 2003. Substantial progress was also made in the social sectors including a doubling of the number of children in primary school, reductions in infant and maternal mortality, and beginning the provision of Anti-Retro-Viral (ARV) treatment for HIV infection, partly financed by resources made available by the Highly Indebted Poor County (HIPC) initiative.

Sub-Saharan Africa: Growth and Poverty Reduction Episodes

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Annual average percentage change in real per capita GDP (national currency, constant prices).

Average annual change in incidence of poverty (headcount index).

Source: PARPA II

2. Mozambique’s prospects of achieving the MDGs depend critically on consolidating macroeconomic stability in the context of a scaling-up of aid and the implementation of a second wave of reforms. Now that the post-conflict rebound has largely run its course and first generation reforms are completed—there is a need for a second wave of reforms to sustain rapid pro-poor growth. In addition, the achievement of non-income-related MDGs in areas such as primary school completion, gender equality, and HIV/AIDS call for a scaling-up of basic services without jeopardizing macroeconomic stability. The key macroeconomic challenges are:

  • Managing a continued scaling-up of foreign aid by strengthening fiscal policy to finance and monitor additional priority spending in a sustainable manner;

  • Fine-tuning of monetary and exchange rate policy in coordination with fiscal policy to efficiently “spend and absorb” foreign aid while cushioning against exogenous shocks and maintaining competitiveness;

  • Reducing the cost of doing business to improve the investment climate and promote employment generation; and

  • Buttressing the management of natural resources.

3. Without these reforms and perseverance with the macroeconomic stabilization effort, economic growth and poverty reduction could suffer. Given Mozambique’s track-record of strong macroeconomic performance and relatively high foreign exchange reserves, it would seem well-placed to request a Policy Support Instrument (PSI) as a successor to the current PRGF-supported arrangement expiring in July 2007, as a mechanism to monitor its own ambitious reform and stabilization program and provide a signal for continued strong donor support.

II. An Economic Rebound Supported by a Good Program Performance

4. The economy remains resilient to exogenous shocks in 2006. Real GDP growth is expected to accelerate to about 8 percent in 2006 led by strong growth in the construction sector and a rebound in agricultural production as a result of good rainfall, which ended the localized drought of 2005.1 A prudent monetary policy helped bring down core (non-food) inflation to single-digit levels despite the impact of the spike in domestic petroleum prices. The cumulative headline inflation rate has also slowed down since May to 4.8 percent in September reflecting lower food prices, putting the year-end inflation target, 7 percent, within reach, though continued global oil price volatility poses some inflationary risk (Table 1 and Figure 1).

Table 1.

Mozambique: Selected Economic and Financial Indicators, 2004–09

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Sources: Mozambican authorities; and Fund staff estimates and projections.Note: Takes into account delivery of MDRI in January 2006 and reflects changes in quantitative targets in line with projected program adjustors.

A minus sign indicates depreciation.

The percentage change for net domestic assets in the estimate for 2004 was adjusted to take account of the shifting of the external liabilities of the Bank of Mozambique to the government.

Includes the issuance of government securities for the central bank recapitalization in years 2005-07.

TAMs stands for ‘titulos das autoridades monetarias’. TAMs are debt instruments issued by the Bank of Mozambique. Data for 2006 are at end-June.

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

Figure 1.
Figure 1.

Mozambique: Real Growth Rates and Inflation

Citation: IMF Staff Country Reports 2007, 036; 10.5089/9781451827286.002.A001

Sources: Mozambican authorities; and IMF staff estimates and projections.1/ Twelve-month rate of change.
uA01fig01

Mozambique: Exchange Rate, Consumer Price Index and Oil Prices, January 2004-September 2006

(Annual percentage change)

Citation: IMF Staff Country Reports 2007, 036; 10.5089/9781451827286.002.A001

Sources: Mozambican authorities; IMF staff estimates; and IMF, Information Notice System.

5. The external position strengthened led by a strong export performance. Megaproject exports remained buoyant (29 percent year-on-year growth) in the first semester of 2006 supported by the continued boom in commodity prices, particularly aluminum while traditional exports surged by 66 percent in U.S. dollar terms led by a recovery in cashew, sugar and seafood export volumes. On the other hand, imports grew by less than 12 percent due to the impact of the pass-through of higher oil prices on private consumption and lower than expected donor-financed project imports. This improvement in the trade balance contributed to a relatively stable and liquid foreign exchange market. The net international reserve (NIR) targets for end-June and September 2006 were met while the real effective exchange rate has appreciated by nearly 10 percent since end-2005, partly owing to the rand’s depreciation against the U.S. dollar (Figure 2). Reflecting these trends, the NIR target for end-2006 is within reach.

Figure 2.
Figure 2.

Mozambique: Exchange Rates

Citation: IMF Staff Country Reports 2007, 036; 10.5089/9781451827286.002.A001

Sources: Mozambican authorities; and IMF staff estimates; and IMF, Information Notice System.
uA01fig02

Mozambique: Export and Import Performance and Real Effective Exchange Rate, 2004Q1-2006Q2

Citation: IMF Staff Country Reports 2007, 036; 10.5089/9781451827286.002.A001

Sources: Mozambican authorities; and IMF staff estimates; and IMF, Information Notice System.1/ Imports of gasoline, gasoil, and others subcategory.

6. A revenue over-performance and restraint on current spending underpins a better-than-programmed fiscal consolidation in 2006 (Table 2). Revenue collections are 0.4 percent of GDP above target in the first semester of 2006, led by buoyant corporate and VAT tax collections including 0.1 percent of GDP in tax arrears. Domestic-related expenditures, particularly the wage bill and public investment are in line with the program to end-June, albeit with slightly lower spending on goods and services. This combined with higher than anticipated budget support in the first semester resulted in a higher than programmed decline in Net Credit to the Government (NCG). The domestic primary deficit will be slightly lower than envisaged for end-2006 due to lower spending on goods and services and a partial savings of the revenue overperformance compared to the original indicative target, albeit with domestic revenues remaining at 14.4 percent of GDP. The share of priority expenditures was below the 65 percent PARPA I target for end-June 2006, but is expected to be above target by end-December as the execution of donor-financed projects and priority spending contingent on the MDRI picks up at the end of the year (Table 6). NCG will be slightly higher than originally expected at end-2006 in line with the program adjustors due to lower external financing in meticais for the year as a whole.

Table 2.

Mozambique: Government Finances, 2004–09

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Sources: Mozambican authorities; and IMF staff estimates and projections.Note: Takes into account delivery of MDRI in January 2006 and reflects changes in quantitative targets in line with projected program adjustors.

The quasi-fiscal deficit of the Bank of Mozambique, amounting to MTn 3,455 million (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 use of funds.

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

Includes in 2004 the US$123 million (2.0 percent of GDP) concession fee for the Moatize coal mine concession.

Includes the transfer of both MDRI and HIPC assistance from the central bank to the budget in 2006.

Table 3.

Mozambique: Monetary Survey, 2004–09

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Sources: Bank of Mozambique; and IMF staff estimates and projections.Note: Takes into account delivery of MDRI in January 2006 and reflects changes in quantitative targets in line with projected program adjustors.

Mozambique’s liability to the Fund rests with the Bank of Mozambique. MDRI assistance is immediately transferred to a government blocked deposit account at the Bank of Mozambique.

Balance declines from MDRI assistance by 0.5 percent of GDP corresponding to an agreed increase in government expenditures contingent on MDRI assistance.

Table 4.

Mozambique: Balance of Payments, 2004–09 1/

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

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Sources: Mozambican authorities; and IMF staff estimates and projections.Note: Takes into account delivery of MDRI in January 2006 and reflects changes in quantitative targets in line with projected program adjustors.

The impact of the transfer of ownership of the Cahora Bassa dam has not been included.

Since this presentation still follows the fourth balance of payments manual, MDRI and HIPC grants from the IMF are included in the current account.

The large amortization in 2006 reflects the repayment of IMF debt with MDRI resources.

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.