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.

December 18, 2006

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

1. Inflation. Reflecting an increase in domestic fuel oil and gas of about 20 percent in November, headline inflation between December 2005 and November 2006 reached 7.1 percent or slightly above the end-year 7 percent target.

2. Fiscal. Based on preliminary information, the fiscal stance continued to be broadly in line with the program at end-September 2006. Revenues were slightly below programmed at end-September (albeit in line at end-November) while current and locally financed investment expenditure were on target. Importantly, the latter has helped raise the share of priority expenditure in total spending above the 65 percent target at end-September 2006.

3. Cahora Bassa dam. The Assembly unanimously ratified the protocol agreement between the Mozambican and Portuguese governments, under which Mozambique’s shareholding in the company that runs the Cahora Bassa dam, Hidroeletrica de Cahora Bassa (HCB) increases from the current 18 percent to 85 percent. In addition, the authorities have publicly reiterated their commitment to seek nonrecourse financing so not to increase the government’s liabilities to commercial creditors. However, the government requested more time to prepare for the full joint IMF-World Bank group mission that is now scheduled for the last week of January 2007, to help them in exploring the financial options for an amount of US$700 million. The first payment of US$250 million was paid directly from an off-shore account of HCB as originally envisaged. 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.

4. Mining and petroleum fiscal regime. The new mining and petroleum fiscal laws envisaged in the program have been submitted to the Council of Ministers taking into account comments by IMF and World Bank staffs, and are expected to be approved and sent to the Assembly in the next few weeks. The authorities intend to request technical assistance from the World Bank and IMF to help in the design of related regulations and a model contract for the mining and petroleum sectors, respectively. Finally, the feasibility study of the multi-billion dollar Moatize coal mine project has been recently submitted to the government by a Brazilian foreign direct investor.