Republic of Mozambique
2007 Article IV Consultation, Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waiver of Performance Criterion, Financing Assurance Review, and Request for a Three-Year Policy Support Instrument: Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Mozambique
Author:
International Monetary Fund
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Publication Date:
31 Jul 2007
eISBN:
9781451827316
Language:
English
Keywords:
ISCR; CR; debt; NPV; Mozambique; real GDP; central bank; trade balance; banking system; IMF staff estimate; current account; Exports; Global
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This paper discusses the Republic of Mozambique’s 2007 Article IV Consultation and Sixth Review Under the Poverty Reduction and Growth Facility (PRGF). The post-conflict rebound has largely run its course, and first-generation reforms are completed; a second wave of reforms is needed to sustain broad-based growth and further reduce poverty. Achieving the non-income-related Millennium Development Goals also requires scaling up basic services without undermining macroeconomic stability. The PRGF program helped maintain macroeconomic stability in the face of exogenous shocks and addressed the structural weaknesses identified in the Ex Post Assessment.

Abstract

This paper discusses the Republic of Mozambique’s 2007 Article IV Consultation and Sixth Review Under the Poverty Reduction and Growth Facility (PRGF). The post-conflict rebound has largely run its course, and first-generation reforms are completed; a second wave of reforms is needed to sustain broad-based growth and further reduce poverty. Achieving the non-income-related Millennium Development Goals also requires scaling up basic services without undermining macroeconomic stability. The PRGF program helped maintain macroeconomic stability in the face of exogenous shocks and addressed the structural weaknesses identified in the Ex Post Assessment.

I. Economic Resilience Supported by Prudent Macroeconomic Policies

1. Mozambique’s macroeconomic performance has been strong since the 2005 Article IV consultation. After some slippages, notably fiscal overruns as the December 2004 elections approached, President Guebuza’s new government has shown firm commitment to prudent macroeconomic policies in an uninterrupted PRGF-supported program. The stronger policy framework and reinvigorated structural reform agenda have helped make the economy more resilient to exogenous shocks; robust growth; moderate inflation; and a sustainable fiscal and external position have prevailed:

  • Real GDP growth accelerated to about 8 ½ percent in 2006, led by a rebound in agricultural production after the localized drought of 2005 and by continued activity in the construction sector (related to megaprojects and donor-financed projects).1

  • Prudent monetary policy helped lower core (nonfood) inflation to single digits in the second half of 2006, reversing a temporary rise after a spike in petroleum prices. Headline inflation declined to 4.9 percent in March 2007 after being above target at the end of year 2006 because of an unexpectedly large seasonal increase in food prices.

Mozambique: Selected Economic Indicators 2004-07

article image
Source: Mozambican authorities; and IMF staff estimates and projections.
Figure 1.
Figure 1.

Recent Economic Developments

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Sources: Mozambican authorities; and Fund staff estimates and projections.

  • The 2006 currency reform went smoothly. The BM introduced new meticais (MT) on July 1, 2006 (1,000 old MTs equal one new one); about 95 percent of MT in circulation by the end of March 2007 were new. Because of volatility in currency demand around the deadline for exchanging old currency for new, base money was above the end-year 2006 target (a performance criterion), though it fell below by January 2007 and was within the indicative target for March 2007.

  • The trade balance has gradually improved despite the oil price shock. With prices for commodities (particularly aluminum) booming, megaproject exports have surged over the past two years; nonmegaproject exports (cashews, sugar, and seafood) also rebounded after the 2005 drought and the MT appreciation of 2004 began reversing. Strong exports, along with sustained foreign aid inflows, helped keep net international reserves (NIR) at a comfortable level (about US$ 165 million higher than programmed at the end of 2006).

uA01fig01

Currency reform was successful

(Percent change)

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Sources: Mozambican authorities; and IMF staff estimates.
uA01fig02

Trade balance is improving

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

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

  • The foreign exchange market has stabilized. Mozambique experienced bouts of rapid exchange rate depreciation after January 2005, when it moved to a more flexible exchange rate regime by introducing foreign exchange auctions. The volatility appears to have stemmed in part from correction of a somewhat overvalued exchange rate at the end of 2004, lumpy oil import transactions, and portfolio shifts in the shallow foreign exchange market. In response the BM introduced a temporary band in both the foreign exchange auctions and interbank market (MCI) in November 2005. Initially, the band in the auction market led to widening of the premium between the auction rate and the rate banks charged customers and foreign exchange bureaus. The band in the MCI market also discouraged transactions between banks at quoted rates, although such transactions continued outside the MCI market. However, as the BM gradually widened the bands in both the auction and MCI markets, the spread between the auction rate and rates for bank customers and bureaus fell to pre-band levels. Transactions in the MCI market also increased as onscreen quotations by banks were able to move closer to the rate outside the MCI market. The deepening of the MCI market was supported by a code of conduct among banks and measures to facilitate firm quotations.

uA01fig03

Exchange rate spreads are narrowing Premium on Auction Rate

(Percent; on a weekly basis)

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: Mozambican authorities.
uA01fig04

The widening of the band in the MCI market has activated transactions and reduced the spread between the MCI rate and transaction rate outside the MCI

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

  • The financial system has deepened since the banking system was restructured. Sound financial policies and cleaned-up balance sheets, especially at the largest bank, have restored confidence in the banking sector, prompting broad money growth to outpace nominal GDP growth (Table 3) and credit to the private sector to almost double in just two years. These developments reflect structural factors associated with banks again taking on consumer credit (e.g., credit cards and loans to purchase durable goods) and lending for industrial activities, as well as borrowing by domestic petroleum distributors related to the syndication of larger oil import transactions. Lending to the agriculture and rural sector, however, remains minimal. According to a prudential measure introduced in July 2005, banks must provision 50 percent of foreign currency-denominated loans to nonexporters. This has led to a substitution from foreign currency to domestic currency lending partly because of an increase in interest rates on foreign-currency borrowing relative to domestic currency lending. Importantly, this measure has reduced banks’ exposure to unhedged borrowers and does not seem to have hampered financial intermediation as indicated by a steadily rising credit-to-deposit ratio.

uA01fig05

Financial intermediation is growing

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Sources: Mozambican authorities; and IMF staff estimates.

Credit to the Economy has nearly doubled in two years

Sectoral Contribution to Credit Growth 1/, 2005-6

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Source: Bank of Mozambique - Monthly Credit survey.

Total and sectoral growth on a 12-month basis and derived from BM’s Monthly Credit Survey. This survey covers only a sample of the universe of financial institutions covered in BM’s monetary survey.

Includes all loans to finance domestic and foreign trade activities such as oil and food imports.

Includes credit cards and consumer credit lines for vehicle and durable goods

Non-classified activities

  • The soundness of Mozambique financial system has continued to improve. Bank profitability was particularly good in 2006. Nonperforming loans (NPL) have also fallen to less than 5 percent of all loans according to Mozambican accounting standards (Table 6). Banks have also become more efficient. In particular, noninterest expenses to gross income, and to a lesser extent personal expenses to noninterest expenses, have been declining since 2004. Greater confidence in the banking system has also led to a significant decrease in liability dollarization and thus less financial vulnerability. On the other hand, while capital adequacy ratios are still above the minimum, they have continued to decline as a result of increased lending—the credit boom needs close monitoring. Recapitalization of the Bank of Mozambique is on schedule; the first and second tranche of government securities, each amounting to MT 1.5 million, were issued in June 2005 and June 2006. The last is expected to be issued in June 2007.

uA01fig06

Bank Soundness Evolution has improved

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: Bank of Mozambique.1/ Non- performing loans are defined according to Mozambican accounting standards (they include only part of the past due loans).
uA01fig07

Microfinance activities have blossomed

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: Mozambique Microfinance Facility, Survey of Microfinance Operators.

  • Microfinance institutions (MFI) have grown significantly in the last decade. Between 2000 and 2005 there was about a five-fold increase in the number of clients and a seven-fold increase in outstanding loans. Consolidation also seems to be underway: 3 institutions out of about 35 control more than 68 percent of the active loan portfolio. However, MFI outreach is very limited. Rural areas account for less than 12 percent of total borrowers. However, growth has been accompanied by a substantial improvement in performance. The percentage of MFI with recovery rates considered acceptable (90 percent or above) increased from 16 percent in 1997 to about 30 percent in 2005.

  • The fiscal position is more sustainable because of higher revenues and current spending restraint (Table 2). Revenue collections in 2006—which were nearly 1½ percent of GDP higher than in 2004—were led by buoyant corporate tax collections (including arrears) and nontax revenues related to the boom in commodity prices. Domestic-related expenditures, which in 2005 were far lower than expected because of late budget approval after the December 2004 elections, also picked up in 2006. At the same time, the composition of spending improved, supported by donor-financed projects. The share of priority expenditures consistently exceeded the 65 percent PARPA target (Table 5). Thanks to these trends, and restraint on current spending, the domestic current primary balance has improved. The unexpectedly high external program aid in 2006 also meant that net credit to the government from the banking system (NCG) declined more than expected.

uA01fig08

Consolidation of the fiscal position continues

(Percent of GDP)

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Sources: Mozambican authorities; and IMF staff estimates and projections.

  • MDRI aid delivery has decreased external vulnerabilities, though megaproject- related transactions will require vigilance. As a result of MDRI, the net present value of public external debt was halved (from about 22 percent to about 12 percent of GDP), slightly more than previously estimated. An agreement signed in October 2006 will transfer majority ownership of the Cahora Bassa hydropower plant from Portugal to Mozambique. The authorities are committed to financing large infrastructure projects in the pipeline, including Cahora Bassa, through nonrecourse financing and private participation to unlock Mozambique’s growth potential while keeping debt sustainable (MEFP ¶35).

uA01fig09

External vulnerability has decreased

(Percent of GDP)

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: Mozambican authorities, and IMF staff projection.

II. Policy Challenges and Lessons from the PRGF-Supported Program

2. Sustaining Mozambique’s impressive growth takeoff is crucial to further reducing poverty. Since the end of its civil war in 1992, Mozambique has grown 8 percent a year, on average; it reduced its poverty headcount index from 69 percent in 1997 to 54 percent in 2003. Poverty levels declined more in rural areas than in urban ones, making Mozambique the second country in the world (other than Vietnam) to see such reductions. However, now that the post-stabilization rebound has largely run its course and first- generation reforms are completed, a lot more also needs to be done to address the large human capital and infrastructure gaps. The aim of achieving nonincome-related MDGs in areas like primary school completion, gender equality, and HIV/AIDS require a scaling up of basic services without undermining macroeconomic stability.

uA01fig10

Mozambique’s growth takeoff continues

(Growth Index, 0=100)

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: World Economic Outlook.

Selected Human Capital and Infrastructure Indicators

article image
Source: Human Development Report 2006, UNDP; and World Development Indicators, World Bank.

2006 data.

2004 data.

2000 data except Mozambique (2002)

2005 data.

3. The current PRGF program helped maintain macroeconomic stability in the face of exogenous shocks and addressed structural weaknesses identified in the Ex Post Assessment (EPA). The request for the program targeted fiscal consolidation in the face of an expected decline in aid inflows after the aid surge and high inflation (2000-03) related to the flooding in 2000. Fiscal consolidation limited recourse to monetary financing and helped reduce inflation to single-digit levels, relieving pressure on domestic interest rates. The improved structural program performance since March 2005 has also helped the authorities complete outstanding first-generation reforms identified in the EPA—particularly in strengthening revenue mobilization by creating a central revenue authority (ATM), improving expenditure efficiency through the rollout of a government financial management information system (e-SISTAFE), and addressing vulnerabilities in the financial system.

4. Performance under the PRGF program was satisfactory in 2006. All quantitative and structural performance criteria from September 2006 through March 2007 were met except one: base money was above target at end-year 2006 (MEFP Table 1 and 2). A waiver for the missed performance criterion is justified as it was temporary and related to the currency reform. The indicative target on utilization of the Moatize coal mine deposit was also missed due to higher spending on the construction of a bridge over the Zambezi. Three out of four structural benchmarks were met for the final review; the benchmark related to the treasury single account (CUT) has been delayed to the end of September 2007 due to capacity constraints.

Table 1.

Mozambique: Selected Economic and Financial Indicators, 2004–10 1/

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

Projections exclude the Moatize coal mine project, Cahora Bassa transfer, and Petroleum exploration.

Minus sign indicates depreciation.

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

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

Table 2.

Mozambique: Government Finances, 2004-10

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Sources: Mozambican authorities; and IMF staff estimates and projections.

The quasi-fiscal deficit of the Bank of Mozambique, amounting to MT 3,455 billion (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 below the line.

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 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.

5. While reiterating the commitment to improving the quality of and access to public services, the government’s PARPA II (2006-09) recognizes that to sustain growth, more emphasis must be placed on productivity growth and a greater role for the private sector. This is to be achieved by:

  • consolidating macroeconomic stability and maintaining competitiveness through prudent monetary and fiscal policies in the context of a flexible exchange rate regime;

  • improving the investment climate and promoting employment generation by reducing the cost of doing business; and

  • improving governance and the management of natural resources.

6. These near- and medium-term challenges are addressed in a three-year PSI designed to consolidate macroeconomic stability and sustain rapid economic growth. Given its economic stability, comfortable level of international reserves, policy performance, and lack of need for balance of payments support, Mozambique is well-placed to graduate to a PSI when its current PRGF arrangement expires in July 2007. The government favors such an arrangement to monitor its ambitious reform program and send a signal to donors of its commitments. The authorities have asked that the PSI proposal be presented to the Executive Board before the current arrangement expires to avoid a vacuum between the two programs. This approach has been closely coordinated with the World Bank’s new Country Partnership Strategy (2007-11) and the joint Performance Assessment Framework (PAF) of the government and donor community.

7. Recent refinements to the design of the PRGF program should allow for a smooth transition to a PSI. The streamlining of quantitative performance criteria and adjusters at the completion of the fourth review seems to have helped focus the quantitative program, particularly in accommodating both spending and absorption of foreign aid as needed.2 The replacement of the domestic primary deficit by an asymmetric ceiling on NCG with regard to external financing and the removal of the indicative target on the wage bill were particularly useful in reinforcing the management of foreign aid once it became clear that the decline in aid in 2004-05 would be reversed. Further streamlining of structural conditionality and strengthening of the interministerial committee monitoring the program have helped build ownership and allow for regular updating of reform priorities. The likelihood of a further scaling up of foreign aid and strong program performance over the last three reviews points to a continuation of the present program design under the proposed PSI.

8. Close collaboration between the partners and targeted capacity building will need to continue to facilitate the realization of the reform agenda. The World Bank and the Fund have worked together very closely on, among other projects, the Poverty Reduction Support Credit and PRGF program content, the Cahora Bassa hydropower project, and reform of the fiscal code governing mineral resources. The practice of holding joint Bank-Fund missions has had synergistic benefits and has also reduced the burden on the government of preparing for multiple missions. The authorities have welcomed the close coordination between the Bank, the Fund, and the donor community in Maputo. Continuous Fund technical assistance, provided in close coordination with donors (for example, in the area of tax reform), has helped build administrative capacity to take the reform process forward. More recently, PFM reforms, an area where past performance was poor, are progressing well. These reforms were initiated with substantial Fund technical assistance on the ground; this has evolved to a more advisory role, and the medium-term PFM reform plan is being financed by a multidonor common fund. This highlights how intensive and well-coordinated technical assistance can catalyze progress in the early stages of a major reform that through time can help build ownership and sustain the reform momentum.

III. Article IV Policy Challenges

9. The main theme of the Article IV discussions was consolidating macroeconomic stability and accelerating the second wave of reforms in PARPA II to sustain broad-based growth and further reduce poverty. The mission discussed the results of a benchmarking exercise comparing the characteristics of fast-growing Asian and sub-Saharan African (SSA) countries with that of Mozambique to identify potential constraints on rapid growth. As the exercise shows, Mozambique is well placed to sustain its growth takeoff given its sound political institutions, geography (coastal and close to South Africa), and relative equality. On the other hand, regulatory quality and enforcement of the law are institutional weaknesses that may be detrimental to sustaining Mozambique’s growth takeoff.

uA01fig11

Political institutions are relatively sound

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: Kaufmann, Kraay, and Mastruzzi (2006).Note: Percentile rank indicates the percentage of countries worldwide that rate below selected country subject to a margin of error. The statistically likely range of the indicator is shown as a thin black line.
uA01fig12

Although a number of institutional weaknesses remain

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: Kaufmann, Kraay, and Mastruzzi (2006).Note: Percentile rank indicates the percentage of countries worldwide that rate below selected country subject to a margin of error. The statistically likely range of the indicator is shown as a thin black line.

10. The major challenges now are to:

  • Consolidate macroeconomic stability. Inflation is still higher in Mozambique than in ASEAN-4 countries and in South Africa, its main trading partner. To avoid stymieing growth it must also guard again real exchange rate misalignments. The authorities described the PARPA II three-pronged approach to macroeconomic stability:

    • Priority spending. Continue to monitor the additional priority spending, including MDRI resources, by strengthening PFM systems while embarking on a public sector reform program to improve efficiency and public service delivery.

    • Increased revenues. Given the low tax-to-GDP ratio and the need to guard against aid volatility and gradually reduce dependence on donors, target (through the medium-term fiscal framework CFMP), an annual average revenue increase of 0.5 percent of GDP, to be achieved by broadening the tax base and improving revenue administration.3

    • Monetary and exchange rate policy framework. Keep inflation in the single digits through monetary control and pursue greater exchange rate flexibility to cushion against exogenous shocks and maintain adequate reserves.

uA01fig13

Inflation needs to fall further

(Average period, percent)

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: World Bank Development Indicators.
uA01fig14

Revenue mobilization is the key to fiscal sustainability

(% of GDP)

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

1/ Data for China includes grants.Source: World Bank Development Indicators.

  • Reduce the costs of doing business. Export levels for Mozambique, as elsewhere in SSA, are comparable to the ASEAN-4 during their initial growth takeoff. Its share of world trade has been expanding but is attributable to only a few sectors (Box 1). Mozambique’s exports are dominated by capital-intensive megaprojects; 4 sustained growth tends to be associated with considerable manufacturing exports. The authorities agreed that the lack of manufacturing exports may partly reflect the wide gap in competitiveness between Mozambique and the ASEAN-4 and regional competitors, as measured by the World Bank’s Doing Business indicators. Therefore, lowering the costs of doing business must be at the core of the authorities’ strategy to promote export diversification. Priorities are to improve access to finance, build a manufacturing base, and generate jobs by fostering small- and medium-sized enterprises (SMEs).

    • Business surveys in 2002 and 2006 found the high cost of credit to be the most binding constraint to business; more than 70 percent of firms surveyed said they lacked access to bank loan or overdraft facilities. Access to credit is a particular problem in the agriculture sector, which is dominated by poor farmers who lack collateral.

    • Improving competitiveness is key to uncapping Mozambique’s export potential (Box 1). The limited number of skilled workers and labor market rigidities explain both relatively high labor costs and low productivity in manufacturing. High indirect costs and loss of output because of inadequate infrastructure and burdensome regulation also impede manufacturer and SME growth. Further trade reform would also reduce the cost of imported inputs because Mozambique’s export-tax equivalents of tariff barriers may still be relatively high.5

  • Better manage natural resources. Mozambique has proven resources of coal, hydropower potential, gas, titanium, and oil, but countries with abundant natural resources have seldom attained sustained growth.6 To avoid the “resource curse” that has plagued much of SSA, Mozambique needs (i) an efficient tax and regulatory regime to attract investment while maximizing benefits to the economy; and (ii) more transparent management of resource revenue.

uA01fig15

Export growth needs to be sustained…

(Percent of GDP)

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: World Bank Development Indicators.
uA01fig16

…Through greater diversification of non-megaprojects exports.

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: IMF staff estimates and projections.

Mozambique’s Competitiveness

Although Mozambique’s share of world exports has increased in the past decade, this is due to the increase in megaproject exports. Excluding megaprojects, its export-to-GDP ratio and its share of world trade have been relatively stable for the past decade and the contribution of non-megaproject exports to economic growth has been subdued. Because of the limited linkages between megaprojects and the economy as a whole, and their susceptibility to swings in commodity prices, there is a need to raise the contribution of non-megaproject exports. This is particularly true for manufacturing exports, which are often thought to be the engine of export-led productivity growth.

The real effective exchange rate (REER) has been relatively stable for a decade, although there are signs that it may currently be somewhat overvalued. Estimates of the fundamental equilibrium exchange rate (FEER) model for Mozambique suggest that the REER has appreciated in response to improved terms of trade and productivity and to increases in government consumption, investment, and foreign direct investment, and it has depreciated in response to increasing openness. Thus, although the evolution of the REER does not indicate that Mozambique is becoming less competitive, econometric results suggest that the REER may be overvalued by about 10 percent, though with some statistical uncertainty about the precise magnitude. As a result, export performance may be weaker than it could have been if the REER had been aligned with its underlying equilibrium rate.

Diversifying exports into products that are dynamic in the global market place should be part of Mozambique’s strategy to raise the contribution of the nonmegaproject export sector. Nonmegaproject exports tend to be concentrated in products that have had below average growth in world markets. This, together with relatively low price increases, suggests declining demand for these products. Megaproject exports are concentrated in products for which world demand is increasing, though commodity prices are volatile. Overall, to help sustain economic growth, there is a need to rebalance export growth toward non-megaproject exports by diversifying into labor-intensive sectors, in particular manufacturing exports.

uA01fig17

Mozambique: Export Performance by Product (2000-2005)

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: IMF staff estimates and projections.
uA01fig18

Mozambique: Equilibrium Real Exchange Rate (1998-2006)

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: IMF staff estimates and projections.

Developments in Perceived Constraints

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Souces: Ministry of Planning and Development, Government of Mozambique (MPD), National Directorate of Studies and Policy Analysis Note: Average across firms of judgements on how constraining listed factors are for the operation and growth of their business. Where 0 = no obstacle, 1 = slight, 2 = moderate, 3 = major and 4 = serious obstacle).
uA01fig19

Labor and indirect costs are high in Mozambique

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Sources: Eifert, Benn, Alan Gelb, and Vijaya Ramachandran, 2005

IV. The PSI: Addressing Medium-Term Challenges 2007–10

A. Medium-Term Outlook

11. The baseline medium-term macroeconomic framework, which assumes that macroeconomic stability will be consolidated and the second-wave reforms in PARPA II accelerated, envisages real GDP growth of about 7-8 percent a year (Table 1).7 This means persevering with stabilization efforts with the CFMP largely unchanged, particularly a 0.5 percent of GDP annual increase in revenues and moderating current expenditures related to efficiency gains from the public sector reform program (MEFP ¶¶ 16 and 17). This would allow private sector credit to expand further while maintaining competitiveness through a flexible exchange rate regime. Monetary control will target inflation of 5-6 percent. The impact of recent floods and cyclone has been localized, and should not unduly affect the near-to-medium term outlook. The external current account deficit will continue to be largely financed by scaled-up concessional foreign aid; a comfortable level of international reserves will help cushion against exogenous shocks.

12. Managing scaled-up aid will be a challenge. Donors have indicated foreign aid may be scaled up by about US$200 million (2 percent of Mozambique’s 2008 GDP) over the medium term. The mission therefore discussed an alternative scenario to identify challenges in spending and absorbing additional external borrowing. The authorities agreed that unless all spending is on imports (as has not previously been the case), the higher demand for domestic goods will tend to appreciate the real exchange rate and thus discourage the expansion of exports to widen the trade deficit and absorb aid. Thus harm may be done to long-term growth. The mission emphasized that the additional spending must effectively reach the most economically and socially productive priority sectors (e.g., infrastructure, education, and health) to elicit a supply response and mitigate any Dutch disease effects.8 The fiscal framework will also need to rely more on revenue mobilization as an exit strategy from aid dependence in the long-run and to ensure that at least recurrent spending can be financed from own resources.

uA01fig20

Debt remains below the DSA threshold under the alternative scaling-up borrowing scenario, although the absorption of the additional foreign aid may require a real exchange rate appreciation

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

13. Megaprojects are expected to make a growing contribution to poverty reduction and fiscal sustainability. Natural resource-based megaprojects can help reduce poverty indirectly by bringing in more revenue and linking to the economy.9 Beyond the PARPA II period, strong growth and increased fiscal revenues from megaprojects—such as the multibillion-dollar Moatize coal mine and the Pande-Temane gas project (still in its cost recovery phase)—would help Mozambique gradually decrease its dependence on donors.10

14. The medium-term structural reform agenda is designed to (i) reinforce fiscal policy to manage scaled-up foreign aid; (ii) refine monetary and exchange rate policy; (iii) enhance the business environment; and (iv) improve natural resource management (MEFP ¶17). The proposed PSI, drawn up in close collaboration with the World Bank and other donors, will support these priorities. The main risks to the medium-term program are inclement weather, too hasty decentralization, and poor fiscal performance in the run-up to elections.

B. Strengthening Fiscal Policy and Institutions

15. Total domestic revenue is envisaged to rise 0.5 percent of GDP by (i) increasing the number of taxpayers and audits to broaden the tax base; (ii) strengthening border control and limiting unwarranted customs exemptions; (iii) collecting tax arrears amounting to about 0.3 percent of GDP; (iv) again updating the specific fuel tax rate quarterly and recovering the real reduction resulting from not indexing in 2005;11 (iv) bringing in more nontax revenues based on buoyant commodity prices; and (v) continuing to improve tax administration in line with recent TA from the Fund (MEFP ¶22). Priority public investments will increase significantly (Table 6). Most of these expenditures will be financed by foreign grants and accompanied by sufficient counterpart funds and current spending for maintenance. The wage bill is unchanged relative to the CFMP; about 10,000 teachers and 3,000 health workers are to be hired. Transfer payments in 2007 are higher as spending is gradually decentralized, particularly through an increase in the investment budgets to each districts that began in 2006. If revenue falls short, the authorities have agreed to cut nonpriority expenditures to meet the NCG target. Overall, scaled up program aid will permit a higher domestic primary deficit with no recourse to domestic financing, which should bring a healthy increase in credit to the economy.

16. The emergency response to the floods along the Zambezi river and Cyclone Favio is expected to be accommodated within the 2007 budget ceilings, with the assistance of the international community.12 The government drew up a reconstruction plan estimated at US$71 million and the UN Office for the Coordination of Humanitarian Affairs launched an emergency appeal for a further US$29 million to meet short- to medium-term needs of those affected. The government has asked the donor community to cover most of the cost of the reconstruction plan. However, if donor financing is inadequate, the government may consider using the program adjustor to accommodate emergency outlays (TMU, paragraph 18).

17. Tax reforms are designed to improve tax system efficiency and achieve the medium-term revenue targets. A comprehensive review undertaken by Fund TA found the tax system to be generally sound and appropriate for a low-income country like Mozambique, but it also identified a few tax policy measures that might compensate for the further reduction in external tariffs scheduled for 2008 and thus help meet the authorities’ medium-term revenue targets. The government is thinking about including some of these measures in the 2008 budget (MEFP ¶21). An external audit of VAT refunds outstanding, including any arrears in payments to large infrastructure contractors, will also be completed in 2007 to address concerns of stakeholders about delayed payments while maintaining the integrity of the VAT system.13 The next phase of revenue administration reforms (2007-10) are designed to establish the ATM as a sustainable, semi-autonomous institution and improve its operations. The phased integration of the core functions of both tax and customs administration in 2007 will be supported by putting into operation the strategic plan of the ATM, drawing up an IT plan to support the ATM, and setting up the tax tribunals (MEFP ¶22).

Projected e-SISTAFE Outputs, 2006-2009

  1. Financial and budget execution in operation in all ministries at the central, provincial and district levels, and in the municipalities and public enterprises.

  2. The module of payment of salaries and pensions implemented.

  3. The budget formulation module implemented (Phase II).

  4. The asset management module and procurement interface implemented.

  5. The ATM revenue management module implemented.

  6. Program budgets under preparation by ministries.

  7. The debt management module implemented.

  8. The internal audit module implemented.

  9. The Data Processing Centre (CPD) operating as an effective and sustainable unit.

  10. Project Implementation Unit for SISTAFE operating as an effective and sustainable unit.

Source: Authorities’ PFM APB (2006)

18. The implementation of the medium-term PFM plan (2007-09) will help maintain macroeconomic stability by supporting the monitoring of priority expenditures. A cornerstone of the PFM plan is the timely implementation of the e-SISTAFE Action Plan and Budget (APB) agreed with the donors and financed through a multi-donor common fund. Its main elements are rollout of the budget execution module to all central and provincial entities, and its customization for districts and municipalities; introduction of Phase II of the budget formulation module; and the design of new modules and functions. For 2007 (MEFP ¶23), the milestones are:

  • Development of an integrated and e-SISTAFE-compatible payroll database—registry of state employees (CAF)—so that the Ministry of Finance can pay salaries via e-SISTAFE by the end of June 2007 (structural benchmark).

  • Rollout of e-SISTAFE to all remaining ministries at the central and provincial levels listed in the TMU by end-December 2007 (structural benchmark).

  • Increase the level of effective direct budget execution (according to the sequence of commitment, verification, and payment) for goods and services to 30 percent by the end of September 2007 and 50 percent by the end of December 2007 (structural assessment criterion); and

  • Pilot test the multicurrency single treasury account (CUT) by the end of September 2007 (structural benchmark) with a goal of full production by January 2008 to facilitate inclusion of all donor-financed projects.14

19. Reinvigoration of Phase II of the public sector reform program under the auspices of the new public service authority (ANFP) must be carefully sequenced to retain accountability and fiscal control. The pillars of the program are (MEFP ¶40):

  • Civil service census. Completion of the census of all civil servants in the second quarter of 2007 will produce a unique number of total civil servants as the basis for an integrated payroll database. It should identify “ghost” workers and help control the wage bill as more frontline sectors recruit teachers, nurses, etc.

  • Wage reform. The government will identify reform options and set a timetable for improving incentive structures and performance by the end of June 2007; approval of a new wage policy is expected by the end of 2007, to be implemented in the 2009 budget (MEFP ¶40).

  • Decentralization. The government should be very cautious about devolving resources to subnational levels through June 2008 until e-SISTAFE is rolled out at the local level and a decentralization strategy is approved (MEFP ¶40). The strategy should include, among other things, a clear legal, regulatory, and institutional framework for the revenue and spending responsibilities of subnational units (provinces, districts, and municipalities) and monitoring of subnational fiscal operations. This would help address concerns about the accountability and transparency of district spending.15 The World Bank will take the lead on capacity-building assistance for local procurement reform and internal and external audit.

  • Anti-corruption strategy. In 2006 five ministries drew up operational plans; their implementation will be closely monitored by the National Anti-Corruption Forum with broad stakeholder participation and leadership from the highest levels (MEFP ¶41). The Central Office for the Fight Against Corruption is also expected to improve on its performance of 2006 where of 271 cases, 9 were shelved, 4 sent to other institutions, and only 18 were prosecuted.

C. Monetary and Exchange Rate Policy

20. The monetary program will continue to target base money aimed at keeping inflation at 5–6 percent (Table 3). Recent trends in monetary aggregates have helped anchor inflation expectations, keeping the monetary program largely unchanged for 2007. The impact of the recent flooding on food prices will need to be closely analyzed; no change in monetary targets is envisaged if core inflation remains subdued.16 The mission supported the reduction in required bank reserves from 11.5 percent to 10.15 percent of deposits beginning in April 2007 because it may help reduce the spread between deposit and lending rates, which is high by regional standards. The BM will need to keep a close watch on the liquidity impact, however, and mop up any excess liquidity to meet the base money targets. In general, the BM though it would continue to rely mostly on foreign exchange sales to mop up structural excess liquidity and absorb foreign aid-financed expenditures, and issue treasury bills to smooth seasonal liquidity fluctuations.

Table 3.

Mozambique: Monetary Survey, 2004–10

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Sources: Bank of Mozambique; and IMF staff estimates and projections. Note While the new family of meticais (MT) was introduced in July 2006, values in this tables have been converted to MT to reflect this change for ease of comparison.

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.

On an annual average basis from December 2006 to December 2007, reserve money growth is 15.5 percent.

21. The BM also recognized that more exchange rate flexibility will support monetary targeting. The mission noted that the emergence of a possible overvaluation at the end of 2005 (Box 1) coincided with the introduction of regulations limiting daily exchange rate movements and is consistent with evidence of depreciation pressure in the MCI market, where transactions are taking place at the upper end of the band. That suggests that removing these restrictions may help bring the REER back to equilibrium and improve competitiveness. The BM noted its intention to eliminate the temporary band in both the auction and MCI market, conditions permitting. Finally, to enhance the credibility of the BM and address its financial weaknesses, the BM and MF are to agree in a memorandum of understanding to shift the costs of sterilization to the budget.

uA01fig21

Exchange rate depreciation pressures remain

(nominal value)

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Source: IMF staff estimates and projections.

22. To avoid undue movements in both interest rates and the exchange rate, monetary and exchange rate policy operations must be fine-tuned. Staff encouraged the BM to improve liquidity forecasts, introduce repurchase operations, and with the help of Fund TA stimulate secondary government securities markets. The mission also discussed the recent reforms to the MCI market, including the widening of the band in December 2006, that seem to have activated interbank transactions based on firm quotations by narrowing the spread between the transaction rate among banks outside the market and the MCI mid-rate. The authorities also agreed to continue the present auction system until all price restrictions are lifted and the MCI is sufficiently liquid; the BM could then undertake foreign exchange sales for sterilization directly through the MCI market.

D. Strengthening the Business Environment

23. To make Mozambique the most competitive economy in the South African Development Community (SADC) by 2015 and the region’s location of choice for FDI, the authorities, with the assistance of the World Bank, have drawn up a strategic action plan to build the business environment MEFP ¶32).

  • Financial sector strategy. The mission, in close collaboration with the Financial Sector Technical Assistance Program (FSTAP), which is based on the FSAP recommendations, agreed with the BM on a three-year financial sector strategy to increase access to credit and lower financing costs.17 The key elements are to (i) reinforce the BM’s supervisory functions and make all banks compliant with international accounting, loan classification, and provisioning standards (MEFP ¶27); (ii) address structural impediments to lending, such as the cost of enforcing contracts, lack of collateral, and inadequate information on creditors (Figure 2); and (iii) support sound expansion of the nonbank sector, including microfinance, pension, and insurance institutions (MEFP ¶28).

  • Trade liberalization. The mission welcomed the reduction in customs duties on consumer goods from 25 percent to 20 percent for all trading partners in January 2007; this extends the preferential access granted to SADC countries in 2006.18 By observing the most favored nation (MFN) principle, Mozambique should minimize the possibility of welfare-reducing trade diversion as a result of its membership in a regional trade arrangement (RTA). The authorities were concerned by delays in moving forward with the SADC trade protocol among all members but reiterated its commitment to being a member of only one RTA. The mission encouraged the authorities to move towards further broad-based MFN trade liberalization while at the same time striving to make SADC less discriminatory to non-RTA members and to promote liberal rules of origin. However, as discussed in the Diagnostic Trade Integration Study, realizing Mozambique’s full export potential and promoting export diversification will depend on reducing the cost of doing business.

Figure 2.
Figure 2.

Financial Sector Challenges

Citation: IMF Staff Country Reports 2007, 262; 10.5089/9781451827316.002.A001

Sources: Mozambican authorities; and Fund staff estimates and projections.1/ Real lending rate, in percent; per annum.2/ Index of measures affecting scope, access and quality of credit information.3/ Index was zero for those countries.

  • Reducing the costs of doing business. The government action plan would accelerate business registration, reduce employment costs, simplify trade regulations, and reduce the time it takes to register property. Staff recognized recent progress in authorizing firms to publish their bylaws electronically and approval of a new labor law that significantly decreases the costs of hiring and firing workers but expressed concern about the substantial rise in fees charged for scanning freight in the Maputo harbor. Moreover, infrastructure services, which are partly in the hands of state-owned or public-participating institutions, are inadequate.19 This calls for a clear diagnostic of who provides infrastructure and a coherent multisector strategy to address gaps, through such means as transparent sales of remaining public-participating enterprises and public-private partnerships PPPs).20

Action plan to to reduce the costs of doing business.

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Source: World Bank staff estimates

E. Management of Natural Resources

24. The government is committed to following international best practices in the tax and transparency regime related to mining and petroleum resources (MEFP ¶¶ 37 and 38).21 Now that investors have more confidence in Mozambique, the authorities recognize that generous tax exemptions that limit the contribution of new projects in these sectors are not needed to attract quality investment. The Council of Ministers therefore approved a new mining fiscal law (structural PC for the end of December 2006) and a new petroleum fiscal law that reduces such exemptions, which were approved by the Assembly in May 2007.22 Implementing regulations will be approved within 90 days. The Government will also adopt the new model contracts for mining concessions (structural assessment criterion for the end of June 2007), and exploration and production concession (EPC) contracts in the petroleum sector by the end of September 2007 (structural assessment criterion) to complement the new laws. In the interim, the government will ensure that any sizeable new mineral resource project or EPC contracts in the petroleum sector will adhere to the new fiscal regime. The government is also thinking about following the Extractive Industries Transparency Initiative (EITI) principles to improve transparency, revenue management, and governance in the mining and petroleum sectors, as well as to govern expansion of related megaprojects.

25. The transfer of ownership of the Cahora Bassa dam to Mozambique will adhere to the principles agreed to in the PRGF-supported program (MEFP ¶35). An immediate priority is to secure nonrecourse financing for the transfer of majority ownership of the hydropower plant through the dam operating company, Hidroeléetrica de Cahora Bassa (HCB), so as not to increase the government’s liabilities to commercial creditors. The government also reiterated its commitment to

  • Sustain transparency and accountability. Besides transparency of both the process and the final financing package, authorities must ensure that HCB is (i) managed in a commercially efficient way; (ii) audited by external auditors; and (iii) subject to the regular concession and tax regimes.

  • Report on risk. Authorities must identify and incorporate into the fiscal accounts and budget documents fiscal risks and any quasi-fiscal transactions.

F. Other Issues

26. The risk of debt distress for Mozambique is low (Appendix II). The joint Bank-Fund DSA shows that debt dynamics are sustainable under the baseline and stress tests, though susceptible to a ratcheting up of nonconcessional and concessional external borrowing. The authorities should therefore continue to rely as much as possible on concessional borrowing and grants; the scope for undertaking large infrastructure projects on commercial terms without jeopardizing debt sustainability is limited. Mozambique reached bilateral agreements in the context of the Heavily Indebted Poor Country Initiative with all Paris Club creditors except Portugal and Japan.23 Despite Mozambique’s best efforts, it has been less successful in negotiating debt relief agreements with most of its non-Paris Club bilateral creditors. Of those that have not delivered debt relief, negotiations with Algeria, Libya, and Iraq are proving difficult. In this respect, the authorities look forward to continuing support from the Fund to reach an orderly and rapid rescheduling with these creditors. Mozambique is expected to benefit from a commercial debt buy-back operation in 2007 covering virtually all outstanding commercial debt in arrears (about US$175 million or 5 percent of total debt). A commitment to finance most of the operation has been secured from the Government of Norway and the World Bank. The Fund concludes that the authorities are making best efforts to conclude bilateral agreements with Japan, Portugal, and its non Paris Club creditors with whom they have not yet reached bilateral agreements. Further, the authorities are making good faith efforts to reach a collaborative agreement with their commercial creditors.

27. Mozambique has built a consensus to move toward current account convertibility. Although Mozambique has eliminated all Article XIV restrictions, it maintains restrictions on the making of payments and transfers for current international transactions subject to Fund approval under Article VIII.24 The authorities intend to address these restrictions at the time of approval of the new foreign exchange law, which was submitted to the Assembly in May 2007 with a slight delay, and the issuance of related regulations. Following the approval of the new law and issuance of related regulations, the authorities intend to accept their obligations under Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement. The recent regulation pertaining to the import and export transactions (Aviso 2) remains suspended and will be replaced by the issuance of a new one.

28. The statistical agency is revising its historical national accounts series. It intends to launch a new national accounts framework, including revision of annual GDP data rebased to 2000 and dissemination of quarterly estimates, by the end of June 2007. TA in this area could seek to support the efforts of the statistical agencies to accelerate dissemination of final GDP estimates and improve the accuracy of national account aggregates, particularly in trade and agricultural production. With regard to monetary statistics the BM, which is committed to aligning its chart of accounts with the Monetary and Financial Statistics Manual, has requested TA from the Fund.

V. Program Monitoring and Risks

29. The first year of the new three-year PSI will be monitored through quantitative assessment criteria, quantitative indicative targets, and structural assessment criteria and benchmarks set in the MEFP, Tables 1 and 3. Program conditionality is flexible, accommodating as needed both spending and absorption of foreign aid, as in the last two reviews of the PRGF-supported program. The performance criterion on the zero ceiling on nonconcessional external debt is relaxed slightly, to be consistent with the budget law that allows for accumulating a very small amount (US$2-3 million, less than 0.1 percent of total debt) of nonconcessional debt. This aligns the program with the authorities’ own procedures and supports independent oversight of government borrowing. Any future non-concessional financing of large projects will need to be considered on a case-by-case basis based on their economic return, availability of concessional finance, debt management capacity, and impact on debt sustainability. Progress in finalizing the draft debt management strategy and building capacity at the MF debt management unit will be closely monitored. The government intends to continue using its current multidisciplinary committee to monitor the program, and the research department of the MF will gather information on megaprojects and state-owned and public-participating enterprises initiated early in 2007 (MEFP ¶39).

30. With regard to risks, the staff notes that external shocks, fiscal slippages related to upcoming elections, large nonconcessional external borrowing, and a hasty implementation of fiscal decentralization, could undermine the government’s macroeconomic targets.

31. While the BM is making progress in implementing recommendations of the safeguards assessment, weaknesses remain in financial reporting practices and the internal audit function. The authorities are considering whether to request a voluntary safeguards assessment with respect to the proposed Policy Support Instrument. The new Anti-Money Laundering law was also approved by the Assembly in its current session, paving the way for the creation of a financial intelligence unit (MEFP ¶42).

VI. Staff Appraisal

32. The economy has been resilient to numerous exogenous shocks. Real GDP growth has picked up in 2006 led by a recovery in agricultural production and constructions activities while the trade balance improved due to a surge in exports. The core and headline inflation rates have fallen to single digit levels anchored by a prudent monetary stance, although they were temporarily higher due to the evolution of food and domestic fuel prices. The outlook for 2007 is for continued strong growth, 5–7 percent inflation, and a sustainable fiscal and external position, though with some risks related to recent calamities and a further rise in oil prices.

33. There are policy challenges related to sustaining Mozambique’s growth takeoff and achieve the MDGs. Impressive growth and foreign aid, including debt relief, helped reduce poverty and improve social indicators. This was supported by the PRGF program, which helped stabilize the economy in the face of exogenous shocks and monitored completion of a first wave of reforms. The experience of countries that have kept growth accelerating over the long run suggests a need to consolidate macroeconomic stability and implement second-generation reforms, including a scaling-up of basic services to address human capital and infrastructure gaps.

34. The PSI is focused on consolidating macroeconomic stability as foreign aid is scaled up. A major challenge is to firm up fiscal policy to finance additional priority spending sustainably and ensure that aid-financed spending reaches the most productive and propoor sectors. Emphasis should be given to collecting taxes and dividends from state shareholding, particularly of natural resources, and managing the fiscal risks of PPPs.

35. Institutional and capacity building need to keep pace with the rapid structural transformation of the economy and facilitate the implementation of second-generation reforms. The structural program aims at improving the business environment by deepening the financial system and reducing the cost of doing business. Adoption of new model contracts in the mining and petroleum sectors, and adherence to the principles of the new fiscal regime and EITI will be important to ensure a virtuous cycle of natural resource use. A better monitoring of megaprojects, and public and public-participating enterprises as well as concessions to the private sector is also essential.

36. The 2007 fiscal framework includes scaled-up foreign aid to pursue the MDGs. To maintain macroeconomic stability, a continued 0.5 percent of GDP rise in domestic revenue is targeted while the share of priority expenditures will exceed 65 percent of total spending. The rollout of e-SISTAFE to all public entities at the central and provincial level, and direct execution of a greater share of current spending should improve monitoring of expenditures. The finalization of guidelines to include donor-funded projects in the CUT and e-SISTAFE as well as the opening of a multicurrency CUT should be expedited to encourage the donors to transfer projects on CUT. Performance budgeting could also be piloted alongside a strengthening of sector strategies.

37. The public sector reform program is at a critical juncture The installation of a clean integrated payroll database based on a civil service census should help rightsizing the civil service and improving service delivery. The implementation of the anti-corruption strategy and judicial sector reform needs to be reinvigorated and results publicized, in order for public perceptions of lack of progress to be reversed.

38. The government’s fiscal decentralization strategy should be well sequenced. Lack of clarity on the division of revenue raising and spending responsibilities of subnational units, and concerns regarding the capacity of some districts and municipalities to effectively absorb and account for resources need to be addressed first. Budgetary resources should not be increased to subnational units that do not provide spending plans and report on their use.

39. Greater exchange rate flexibility should help improve competitiveness. The exchange rate level appears to be somewhat overvalued at present and thus staff calls on the BM to eliminate the temporary exchange rate band as soon as possible. A flexible exchange rate regime has served Mozambique well, helping to cushion against exogenous shocks and maintain a comfortable level of international reserves. A fine-tuning of liquidity management and deepening of interbank markets should also lead to a smoother transmission of monetary policy actions.

40. Large infrastructure projects should be carefully managed. The staff welcomes the renewed commitment to seek non-recourse financing for the transfer of majority ownership of the Cahora Bassa hydropower plant from Portugal so not to increase the central government’s liabilities to commercial creditors, and ensure transparency and accountability. These principles should be applied to all future infrastructure projects whilst encouraging greater private participation to reduce risks to debt sustainability.

41. The implementation of the strategic action plan to reduce the cost of doing business will be key to promote export diversification and generate employment. In this regard, a good start has been made with regard to business registration but recent proposals related to the labor market (both the draft labor and minimum wage legislation) need to be implemented in a manner that reduces labor costs to firms. The high fees charged for scanning freight should also be reviewed to help lower export/import transaction costs and make Maputo a transshipment hub in Southern Africa.

42. Mozambique’s banking system is making a growing contribution to private sector development. Introduction of risk-based supervision and international reporting standards should facilitate monitoring of capital adequacy during a period of strong credit growth. The sustainability of the national pension fund (INSS) needs to be secured through a restructuring based on an actuarial study. A strengthening of the supervisory framework for the growing non-bank financial sector is becoming more important. However, the high cost of and limited access to credit to SMEs and the agriculture sector indicates the need to step up reform efforts to improve the institutional lending environment, as well as measures to improve banks and MFI outreach in rural areas.

43. The staff welcomes progress in liberalizing trade, debt rescheduling, and exchange system reforms. The staff encouraged further broad-based MFN trade liberalization and early adoption of a new foreign exchange regime to realize the authorities’ stated intentions to accept the obligations of Article VIII, Sections 2, 3 and 4 in the near future. The authorities are encouraged to continue to negotiate in good faith with all of their external creditors to reach an agreement consistent with that provided by the Paris Club.

44. The authorities are encouraged to undertake a voluntary safeguards assessment in the context of the proposed PSI.

45. Given Mozambique’s track-record of strong macroeconomic performance and program implementation, the staff welcomes the authorities’ request for a PSI.

46. The staff recommends completion of the sixth review and financing assurances review under the PRGF arrangement. Staff recommends a waiver for the missed performance criterion on base money at end-year 2006 as it was temporary and related to the currency reform. The staff also recommends the approval of foreign exchange restrictions under Article VIII given the authorities stated intention to remove exchange restrictions within one year.

47. The staff welcomes the intention of the authorities to make public the staff report, the letter of intent, and the MEFP.

48. It is recommended that the next Article IV consultation with Mozambique take place within 24-months subject to the provisions of the decision on consultation cycles in program countries.

Table 4.

Mozambique: Balance of Payments, 2004–10

(Millions of U.S. dollars, unless otherwise specified)

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Sources: Mozambican authorities; and IMF staff estimates and projections.

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.

Table 5.

Mozambique: Balance of Payments of Megaprojects, 2002–10 1/

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Sources: Mozambican authorities; and IMF staff estimates and projections.

Megaprojects include Mozal (aluminum production); Sasol (gas production and pipeline); the Cahora-Bassa dam (hydro-power); and two titanium ore projects.

This line significantly overestimates the contribution of megaprojects to international reserve accumulation, because most of their financial operations are conducted outside the domestic banking system. Only a small fraction of foreign exchange proceeds are actually repatriated in Mozambique. However, information on the latter is not available.

Table 6.

Mozambique: Expenditure in PARPA Priority Sectors, 2004-2007 1/

(In millions of meticais, unless otherwise indicated)

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Source: Mozambican authorities (Ministry of Finance); and staff estimates and projections.

PARPA stands for National Action Plan for the Reduction of Absolute Poverty, which is the Portuguese acronym.

Table 7.

Mozambique: Financial Soundness Indicators for Banking Sector, 2000–06

(Percent unless otherwise indicated)

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Source: Bank of Mozambique (BM).

Includes credit cards and consumer credit lines for vehicle and durable goods.

Includes credit to all other sectors not discriminated above or yet to be identified.

Nonperforming loans are defined according to Mozambican accounting standards (they include only part of the past-due loans).

Includes deposits at parent banks.

Table 8.

Mozambique: Indicators of External Vulnerability, 2004-07

(percent of GDP, unless otherwise indicated)

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Sources: Mozambican authorities; and IMF staff estimates and projections.

Domestic public debt and private sector external debt are valued at par in the net present value calculation.

Historical NPV estimates are based on previous debt sustainability analyses.

Cash interest and amortization payments, after HIPC assistance.

Official exchange rate.

Minus sign indicates depreciation.

Table 9.

Mozambique: Millennium Development Goals, 1990-2004

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Source: World Development Indicators database, April 2006; and Mozambican authorities.

Figures in italics refer to periods other than those specified.

A household survey was conducted between 1996-97 and 2002-03 to determine poverty incidence. The methodology included a basket of goods that satisfies basic calorie needs. The cost of this basket represents the food poverty line in each domain; a nonfood poverty line was also obtained. Households are defined as poor if their daily per capita expenditure is less than the total poverty line (sum of food and nonfood poverty lines).

Appendix I

Maputo, Mozambique

March 28, 2007

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Mr. de Rato:

1. The Government of Mozambique requests a three-year arrangement under the Policy Support Instrument (PSI) before the expiration on July 5, 2007 of the current arrangement under the Poverty Reduction and Growth Facility (PRGF). This request is made at this stage to avoid a vacuum between the two arrangements. The main elements of the new program are consistent with our Plano de Acçãopara a Redução da Pobreza Absoluta II (or PARPA II) and are described in the attached memorandum of economic and financial policies (MEFP) covering the period 2007-2010. The MEFP also sets forth the objectives and policies that the Government intends to pursue during 2007. The attached technical memorandum of understanding (TMU) defines the terms and conditions of the program.

2. The Government of Mozambique continues to make progress in implementing its PRGF-supported program despite the severe floods that affected parts of the country during the first months of 2007. All end-December quantitative performance criteria (PCs) were met, except for the PC on base money, due to the temporary surge in currency in circulation at the end of 2006 which was related to the currency reform. The structural PC and benchmarks through end-March 2007 were also achieved, except for the benchmark related to the treasury single account (CUT) which has been delayed to end-September 2007. In light of the progress achieved in the implementation of our program, the Government of Mozambique requests a waiver for the non-observance of the quantitative PC on base money.

3. The resources released as part of the MDRI have been incorporated in the execution of the 2007 budget and included in the medium-term fiscal framework (CFMP) to be spent on poverty-reducing priority expenditures identified in the PARPA II.

4. Looking ahead, the policies set out in the MEFP continue to aim to consolidate macroeconomic stability and sustain strong broad-based growth through a second wave of reforms in order to achieve the Millennium Development Goals (MDGs). Our PSI supported program proposes assessment criteria for the performance target dates of end-June and end- December 2007 for the first and second reviews as set out in Tables 1 and 3 of the MEFP, which are expected to be completed by end-December 2007 and end-June 2008, respectively.

5. The Government of Mozambique intends to accept its obligations under Article VIII, Sections 2, 3, and 4, of the Fund’s Articles of Agreement following the approval of the new foreign exchange law which will be submitted to the Assembly by end-April 2007. The government remains committed to a flexible exchange rate regime.

6. The Government of Mozambique will provide the Fund with such information as the Fund may request in connection with the progress made in implementing the economic and financial policies and achieving the objectives of the program.

7. The Government of Mozambique believes that the policies set forth in the MEFP are adequate to achieve the objectives of our PSI program; it will take additional measures to that end if deemed necessary. During the implementation of the arrangement, the Government of Mozambique will consult with the Managing Director on the adoption of these measures and in advance of revisions to the policies contained in the PSI, at the initiative of the Government or whenever the Managing Director requests such a consultation.

Sincerely yours,

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Attachments: Memorandum of Economic and Financial Policies

Technical Memorandum of Understanding

Attachment I: Memorandum of Economic and Financial Policies of the Government of Mozambique for the Sixth Review Under the PRGF Arrangement and for the PSI Supported-Program (June 2007-June 2010)

March 28, 2007

1. The Government of Mozambique is committed to continuing to consolidate macroeconomic stability and to achieve sustained economic growth and poverty reduction through the pursuit of prudent macroeconomic policies and a second wave of structural reforms. The strategy to achieve these goals is set out in the Plano de Acção Para a Redução da Pobreza Absoluta II (PARPA II) for which a Joint Staff Advisory Note was approved by the Boards of the International Monetary Fund (IMF) and World Bank (WB) in December 2006. The current Government’s economic program is supported by the IMF with a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), which expires on July 5, 2007. The new program for 2007-2010 would be supported by the IMF with a three-year arrangement under the Policy Support Instrument (PSI). This Memorandum of Economic and Financial Policies (MEFP) reviews the performance under the PRGF-supported program (October 2006-March 2007) and describes the policies and targets for the remainder of 2007.

I. Recent Performance Under the PRGF-Supported Program

2. In 2006, economic performance has been strong. Economic growth accelerated to 8.5 percent, led by a rebound in agricultural production after the localized drought of 2005 ended, as well as continued strength in the construction sector (related to megaproject activity and a pick-up in donor-financed project execution). Prudent fiscal and monetary policies helped lower the 12-month headline inflation rate down from its peak in April of 17.7 percent to 9.4 percent in December 2006, and further to 5.4 percent in February 2007. Strong exports, along with sustained foreign aid inflows, helped keep net international reserves at a comfortable level (over 4 months of imports).

3. The foreign exchange market has remained stable following the introduction of a temporary exchange rate band in the interbank foreign exchange market (MCI) in November 2005. The spread between the MCI rate and the rates charged by banks fell below pre-band levels thanks to the measures taken by the Bank of Mozambique (BM) to deepen the MCI through the introduction of a code of conduct among banks and facilitating firm quotation.

4. The 2006 currency reform went smoothly. The BM introduced a new family of Meticais on July 1, 2006—1,000 Meticais equals to one of the new family of Metical (MT). By end of February 2007, 94 percent of currency in circulation corresponded to the new family of Metical. Because of the volatility in currency demand around the deadline to exchange the old currency for the new, the PC on base money was missed at end-2006, though it declined below the end-year target in January 2007.

5. The fiscal position at end-2006 was better than programmed. Revenue collection in 2006 is slightly above target led by continued buoyancy in corporate and personal tax collection (including collection of tax arrears) and non-tax revenue. Current spending, including the wage bill and locally financed investment was slightly lower than programmed, resulting in a greater than expected consolidation of the domestic primary deficit. Higher than anticipated program aid in 2006 also meant that net credit to the Government from the banking system declined more than programmed (performance criteria). The composition of spending improved, supported by donor-financed project, with the share of priority expenditures in line with the 65 percent PARPA target.

6. Progress has been made in reforming revenue administration and in widening the tax base. The new Central Revenue Authority (ATM) is now fully operational with all the senior and lower management appointed. The current reforms focus on establishing the ATM as a sustainable, semi-autonomous agency with the aim of improving operational performance and tax compliance. Three new collegial bodies were created as part of the new ATM: (i) the High Tax Council; (ii) the “Directive” Council; and (iii) the Fiscal Council, a consultative council. Progress has been made in incorporating the former customs and tax directorates into the ATM and to create the General Directorate for Common Services, an Office of Planning, Research and International Cooperation, and Office of Internal Control. Legal, human resource and systems integration work have also been prepared. A draft IT-strategy is ready for internal discussion and approval. In addition, the following measures were implemented in 2006: (i) tax arrears continued to be identified and collected; (ii) the number of taxpayers was increased by about 100,000 to 391,719; and (iii) about 500 tax audits were conducted. An ATM seminar held on February 2007 concluded that there was a need to: (i) immediately prepare studies and formulate recommendations in response to the revenue losses related to the Southern African Development Community (SADC) tariff reductions in 2008; (ii) to continue the process of simplification, decentralization, and broadening of the tax base; (iii) to prepare a study (to be finalized by end 2007), operationalizing an “electronic one-stop-window” through an integrated IT system in which both customs and tax IT systems are incorporated; and (iv) to elaborate a plan to create a technical tax training institute by end-December 2007.

7. In the area of tax policy, the Council of Ministers approved and submitted to the Assembly three laws on specific taxes and fiscal incentives in the mineral resource and the petroleum sectors in December 2006 (structural performance criteria). A new fiscal code for succession and donations, and a draft municipal finance and asset law was also submitted to the Assembly. The latter aligns the finance and asset management of the municipalities with the new financial and fiscal systems implemented over the last six years.

8. Public Financial Management (PFM) reforms have made good progress. The medium-term fiscal framework (CFMP) is closely aligned with the objectives of PARPA II, and was, for the first time, approved by the Council of Ministers in May 2006. The 2006 budget also included an investment budget for each district supported by strengthened planning capacity in some districts, though the reporting of utilization of funds needs to be further strengthened. Specific measures in the medium-term PFM Action Plan and Budget (APB) for 2006-2009 under implementation include:

  • a. After an initial 6 ministries, all budgetary operations for goods and services of Financial Management Departments (DAFs) of 22 additional ministries and organs, at the central and provincial levels, are since January 2007 executed through the e-SISTAFE (structural benchmark). This enables an effective direct budget execution according to the sequence of commitment, verification, and payment. However, the level of direct budget execution has increased slowly to about five percent of payments for goods and services made through e-SISTAFE, while 95 percent of payments continue to be made on the basis of advance payments.

  • b. The Inhassoro functionality allowing for the closure of the 2006 budget and the production of the financial accounts of the State within e-SISTAFE is operational since end-2006.

  • c. The census of the civil service is ongoing and is expected to be completed as scheduled by end-April 2007 (structural benchmark).

  • d. The e-SISTAFE reporting functionality has been developed and is being implemented.

  • e. Most G-18 donor-financed projects have been integrated into the 2007 budget ceilings. However, the opening of a limited number of separate foreign currency accounts in the Single Treasury account (CUT)—a benchmark for end-March 2007—is delayed until end-September 2007 (structural benchmark). In addition, the guidelines to facilitate the inclusion of donor-financed projects on the CUT have not yet been issued and are now envisaged by mid-May 2007.

9. Monetary policy has remained prudent. Interest rates on government securities continued to be determined by market forces following the removal of interest rate caps in March 2006. Money velocity continued to decrease pointing to a deepening of the financial sector. Credit growth to the economy has remained strong especially due to the financing of petroleum imports and consumer loans. Net credit to the government (NCG) was lower than programmed (performance criteria) while net international reserves exceeded the floor by US$166 million (performance criteria). The indicative target on the balance of the Government’s saving account set up abroad with the proceeds from the coal mine exploration contract was lower than the floor programmed at end-December 2006 and end-March 2007. The funds were used for priority investment projects. In December 2006, the BM widened the band in the MCI from 0.25 percent to 1 percent. In addition, in order to strengthen the balance sheet of the BM, securities in an amount of MT 1.5 billion were issued to BM in June 2006 as envisaged in the program.

10. Prudential ratios of the banking system have remained sound. The ratio of non-performing loans to total loans has remained below 5 percent while the requirement to provision 50 percent of their foreign currency-denominated loans to nonexporters since July 2005 has led to a deceleration in foreign currency credit growth. The commercial banks are highly profitable but their level of capital adequacy is being closely monitored in light of the overall strong growth in credit to the economy.

11. To strengthen Bank supervision, a proposal on the new organizational structure of the banking supervision department consistent with the Integral Strengthening Plan for Banking Supervision was approved by end-December 2006. In addition the new regulation on the assessment, classification and provisioning of credit and the regulation on integral risk management for credit institutions and finance companies were approved by end-March 2007. The Chart of Accounts of the commercial banking system was made consistent with IFRS with some delay in March 2007.

12. The remaining measures needed to address weaknesses identified in the context of the Fund’s safeguard assessment mission conducted in June 2004, have now been implemented. In the area of accounting, the BM has issued its 2006 financial statements in compliance with IFRS in parallel to the financial statement prepared under the current accounting standard. The reconciliation of monetary data with audited financial statements and its review by the internal audit department was completed by end-December 2006.

13. Progress was also made to increase access to finance, in particular for rural financing. The BM has reduced the legal reserves requirement from 11.51 to 10.15 percent, a level that is in line with the practice in the region. This should help bring down the spread between deposit and lending rates along with other measures to reduce overhead costs and improve competition among banks including by encouraging greater transparency of fees and charges. Progress was also made improving the institutional lending environment. In order to accelerate dispute settlement and debt recovery of unsecured lending, the government has implemented a new Commercial Code, and established commercial sections of the judicial tribunals in the cities of Maputo, Beira, and Nampula. It has also set a strategy to promote rural financing through fiscal incentives and measures to reduce operating costs, including the opening of five BM agencies (with due regard to its cost) to facilitate the payment system and transfer of cash to commercial bank branches.

14. Progress on structural reforms also accelerated, particularly in the areas of the public sector, cost of doing business, and governance reforms. The Council of Ministers in October 2006 approved the second phase of the public sector reform strategic action plan (2006-11). The Ministry of Industry and Trade has finalized a draft strategy for reducing the cost of doing business climate in March 2007 as envisaged under the program. In the area of trade reforms, in January 2007, the maximum import tariff rate for consumer goods applicable to all trading partners was lowered from 25 to 20 percent. With regard to the Justice sector, the Supreme Court concluded 66 percent more cases in 2006 than in the previous year while activities in provincial courts increased by 48 percent thus reducing the backlog of cases by 34,019 cases to 68,433 outstanding cases. To accelerate the enactment of approved laws, the production of the Gazette of the Republic has been assigned to the Ministry of Justice. However, the Penal Procedure Code was not approved by Council of Ministers in December 2006 as envisaged under the program.

15. Some progress has been made in collecting the necessary information to monitor adequately the megaprojects and public enterprises. While a unit to monitor the megaprojects has not been created as envisaged under the program, the government has decided to assign that responsibility to the research department within the Ministry of Finance, whose functions include gathering information on megaprojects and public enterprises.

II. Objectives and Policies for the Three-Year PSI

16. Our overriding objective is to sustain a high rate of growth and to further reduce poverty in line with the PARPA II. Consolidating macroeconomic stability in the context of scaled-up foreign aid is a necessary condition to meet this challenge by maintaining a single digit inflation rate and preserving a comfortable level of foreign reserves. This is to be achieved by implementing sound fiscal and monetary policies in the context of a flexible exchange rate regime, as well as prudent public debt management and public finance reforms. In this regard, the CFMP will be revised taking into account the latest external financing envelope while continuing to target an average revenue increase of 0.5 percent of GDP a year and no recourse to financing from the domestic financial system. The gradual strengthening of sector strategies and costing of programs in PARPA II will help inform the revision of the CFMP, though addressing the variable quality of work on the costing of policies and programs at the sector and district level remains a priority to improve the overall planning and budgeting framework.

17. At the same time, we need to persevere with the timely implementation of our second wave of reforms to continue to improve public service delivery and create an enabling environment for private sector activity. Particular emphasis will be on implementing the second phase of the public reform program (2006-10) which consist of three pillars; (i) human resource management including payroll systems; (ii) performance evaluation and wage policy; and (iii) decentralization policy. Improving governance will remain a priority through the firm implementation of our anti-corruption strategy at all levels of the public service. We are also determined to make Mozambique’s business environment one of the most competitive in Africa so as to achieve broad based growth, and to benefit from Foreign Direct Investment (FDI) and technology spillovers. We will also ensure that our natural resources are managed transparently following the principles of the Extractive Industries Transparency Initiative (EITI) so that future generations reap the maximum benefit of Mozambique’s rich endowment. The fight against pandemics, and the improvement of human and physical capital, particularly infrastructure would continue with the help of the international community. The Government intends to continue to monitor its program with the existing multi-disciplinary committee, especially through reinforced coordination between the BM and the Ministry of Finance (MF).

III. The Policy Agenda for 2007

18. Economic prospects for 2007 remain favorable with continued strong economic growth and deceleration in inflation, albeit with risks related to the recent floods and cyclone. Central to achieving these objectives will be a strengthening of fiscal policy backed by a revenue increase of 0.5 percent of GDP and a prudent monetary policy. To maintain competitiveness and a comfortable level of international reserves, the BM will bestow greater exchange rate flexibility in the foreign exchange market. The structural reform agenda is in line with the PARPA II strategic matrix.

19. The 2007 budget envisages a scaling-up of aid and an associated increase in priority spending focused towards achieving the PARPA II targets including sufficient counterpart funds to ensure a smooth execution of donor-financed projects. There will be no recourse to domestic financing. Despite a nearly 0.2 percent of GDP revenue loss related to tariff reform, total domestic revenue is envisaged to rise by 0.5 percent of GDP by broadening the tax base through a continued increase of the number of taxpayers (by about 100,000), strengthening border control and limiting unwarranted customs exemptions (revenues amounting to about 0.2 percent of GDP), collection of new tax arrears amounting to about 0.3 percent of GDP, and quarterly updating of the specific fuel tax rate. In line with our 2007 budget, the expenditure side will reflect a hiring of about 10,000 teachers and 3,000 health workers while counterpart funds have been increased to cover scaled-up project financing. The share of spending on priority sectors (above 65 percent), particularly education, health, and infrastructure, has been agreed with the donors and will be closely monitored.

20. Following the immediate emergency response by the Disaster Management National Institute (INGC) to the victims of the floods along the Zambezi river and Cyclone Favio, the government developed a reconstruction plan estimated at US$71 million and the UN Office for the Coordination of Humanitarian Affairs launched an emergency appeal for a further US$29 million to meet the short-to-medium term needs of those hit by the flooding and by the Cyclone. The government, with the financial assistance of the donor community, will assist the affected population and enterprises with their basic needs and reconstruction of damaged infrastructure. However, in the event that donor-financing is inadequate to cover the reconstruction plan, the government may consider using the program adjustor to accommodate emergency fiscal outlays (up to a maximum of about US$20 million).

21. The government will continue to improve the efficiency of the tax system by sequentially implementing its medium-term tax policy reform program benefiting from Fund technical assistance. Progress on tax reform will be closely monitored within the MF. By end-June 2007, the government will study options on how to compensate for the further reduction in external tariffs that take place in 2008. In this regard, tax policy measures will be defined to equalize the treatment of interest income on different assets, streamline and simplify the tax system for small and medium-sized enterprises, update excise tax rates, rationalize income tax benefits, and reduce VAT exemptions. An external quantitative audit which sets the amount of arrears on VAT reform due to contractors of large infrastructure projects, particularly in the road and water sectors, will be conducted with financial support from donors by end-September 2007, to be approved and decided upon by the Government by end-December 2007. On the basis of this audit a payment schedule will be defined to clear the arrears. Going forward, the government will ensure that VAT charged on supplies of projects be included in the final price of a contract.

22. The next phase of the revenue administration reforms (2007-10), to be supported by a multi-donor common fund, will focus on implementing the ATM strategic plan, and improving operational performance to help achieve the medium-term revenue targets. The ATM will be established through three stages: a transition period to end-2007, a gradual integration of the tax and customs agencies that will take place during 2008, and further strengthening and consolidation in 2009 and 2010. Revenues administration measures envisaged in 2007 include: (i) initiating procedures to recover tax arrears generated during 2006; (ii) providing a better service to taxpayers by reducing the average time to resolve VAT refund claims; (iii) implementing an audit plan for 2007 encompassing at least 675 audits at the DGI aimed at broadening audit coverage for domestic taxes; (iv) facilitating trade through the reduction of the average time to release imported goods at the border; and (v) implementing the IT Plan (PDTI). The ATM will initially use a basic information scoreboard and a basic set of operational performance indicators to monitor progress in reforms. In the course of 2008, ATM will put in place a modern management information system to measure performance of the tax administration’s core functions at both strategic and operational level to evaluate the tax administration’s efficiency and effectiveness, to guide management decisions, and to measure progress in the implementation of ATM’s strategy.

23. A number of specific measures in the medium-term PFM APB will be implemented in 2007.

  • Following the completion of the census of the civil service, an integrated and e-SISTAFE compatible payroll database will be developed—register of the state employees (CAF)—enabling the MF to carry out salary payments via e-SISTAFE by end-June 2007 (structural benchmark). The pensioners census will be executed in a slightly different timeframe and the pension functionality in e-SISTAFE will be completed by end-September 2007. In addition, by end-September 2007, the government will decide on the institutional responsibilities for keeping the payroll and pension database updated.

  • Even with the introduction of the CAF, the calculation of salaries and pensions (value of payment, value of tax to be retained, and classifications) will continue to be made outside e-SISTAFE, and global salary payments to civil servants who do not have a banking account will continue to be paid into the line ministries salary accounts. As such, a business case (BC) will be developed by end-September 2007 for a second phase allowing for the automatic calculation of payroll and pension payments, as well as execution of salaries and pension payments directly to recipients’ bank accounts, through e-SISTAFE on a transactional basis.

  • UTRAFE will elaborate a BC presenting the various options with relation to e-SISTAFE rollout to the districts. Conditioned on the approval of the BC, it is foreseen that by the end of October 2007 a total of 27 districts will be operating e-SISTAFE. By end September 2007, UTRAFE will present a plan for further district and autarquia rollout in 2008.

  • The e-SISTAFE will be rolled out to all the remaining ministries at the central and provincial levels listed in the TMU by end-December 2007 (structural benchmark).

  • A business case will be finalized by end-September 2007, defining a list of State organs at the central level for which the e-SISTAFE will be progressively rolled out.

  • The Phase II of the budget formulation module will be tested and ready for use and training by end-June 2007, to fit in with the 2008 budget calendar and pilot cases of program budgeting. The latter uses a conceptual model agreed between the MF and the Ministry of Plan and Development.

  • In close coordination with the ATM, a fully articulated BC will be prepared by end-June 2007 to implement a revenue collection network (RCN) with which all government revenues collection will be automated and classified before being transferred to the CUT. UTRAFE is aiming at testing a functional prototype by April 2008.

  • To facilitate the inclusion of all donor-financed projects within the CUT, UTRAFE will put in production a pilot test of the multi-currency CUT by end-September 2007 aiming at full production by January 2008.

  • For the implementation of the asset management system and procurement interface to e-SISTAFE, the development of requirement specifications will be finalized and a tender launched by end-June 2007.

  • Through the development of a reliable and updated supplier data base and the implementation of findings by the Government task force, the level of effective direct budget execution (according to the sequence of commitment, verification, and payment) for goods and services will be increased to 30 percent by end-September 2007, 50 percent by end-December 2007 (structural assessment criterion), and 75 percent by end-March 2008, and 90 percent by end-June 2008.

24. On monetary policy, the BM will continue to target base money with a view to achieving its inflation target. A long-term monetary policy strategy document was approved by the executive board of the BM in October 2006 that defines an intermediate target compatible with the base money operational target, a new format for the monetary policy committee, and its communication policy. To achieve the inflation objective of 6 percent by end-2007, broad money growth will be limited to about 16 percent—or slightly higher than nominal GDP growth—to take into account the ongoing financial deepening. In addition, the monetary authority remains committed to a flexible exchange rate regime and to that effect will continue to gradually widen the temporary exchange rate band in the foreign exchange market when conditions permit.

25. The BM will continue to improve liquidity management, and deepen financial markets as part of the Financial Sector Technical Assistance Program (FSTAP). In this context, the MF, in turn, will improve the preparation of cash-flow projections and communicate it to the BM in a timely manner with Fund technical assistance. Moreover, with Fund technical assistance, the BM will finalize a master repurchase agreement by end-May 2007. The BM and the MF will agree, through a memorandum of understanding (structural benchmark for end-September), to shift the costs of managing monetary policy to the budget.

26. In the area of public debt management, FSTAP supported reforms at the MF and BM has gained momentum and is expected to intensify after the second quarter of 2007. Following recommendations made in a debt management assessment report prepared by an FSTAP consultant, the government intends to realign its debt management institutional framework along international best practices. The MF intends to strengthen its staffing complement, launch a multi-year training program, consolidate the debt database for all public debt, start to publish debt reports regularly and design an integrated debt strategy by end-2007.

27. The BM will also continue to strengthen and modernize its supervisory functions and implement the recently approved organizational changes in view of strengthening on-site and off-site monitoring. In this regard, training to adopt a risk-based supervision approach will start in 2007, at which time the new inspection manuals will also be used. The BM is implementing a timetable to adopt IFRS in the banking system in 2007. Based on the results of the FSTAP study, to be completed by mid-2008, the application of IFRS will also be extended to the corporate sector in January 2009 for large companies. This will improve the ability of the financial system to evaluate the quality of their loan portfolios. Further, new regulation on the assessment, classification and provisioning of credits as well as a regulation on integral risk management for credit institutions and finance companies have been approved and will become effective during the first semester of 2007. The BM will issue its own 2006 financial statements in line with IFRS in 2007.

28. The Government is committed to supporting a sound expansion of the non-bank financial sector. The BM will continue to license and supervise microfinance deposit-taking institutions to facilitate enhanced access to finance by rural households and small-and-medium sized enterprises. Both the FSTAP and the IFAD supported Fundo de Apoio à Reabilitação Económica (FARE) and the Rural Finance Support Program (RFSP) will support the government’s efforts to improve access to finance, especially in rural areas. The strengthening of the social security and supplementary pension system is also being undertaken as part of a new law on social protection, which has been approved by the Assembly. As part of the restructuring of the National Social Security Institute (INSS), an actuarial study will be completed before the end of 2007. In the meantime, guarantees of minimum benefits will be limited until the full study is carried out. Efforts to strengthen the regulatory and supervisory framework of the insurance sector as well as the institutional capacity of the Inspeçãgao Geral de Seguros (IGS) are under way. The Insurance Law is being reviewed to bring it in line with international best practices, revised prudential and solvency requirements for Mozambican insurers are being developed, while new IFRS-compliant Chart of Accounts for insurers would also be designed. New supplementary pension funds regulations are to be presented to the Council of Ministers for approval by September 2007.

29. Regarding the foreign exchange system, a new foreign exchange law taking into account comments from all stakeholders and the Fund, will be submitted to the Assembly by end-April 2007. Following approval of the new law, the authorities intend to accept their obligations under Article VIII sections 2, 3, and 4 of the Fund’s Articles of Agreement. The recent regulation (Aviso 2/06) pertaining to the current import and export transactions remains suspended and will be replaced by the issuance of a new one.

30. In order to improve the trade regime, the government will continue in 2007 ongoing Economic Partnership Agreement (EPA) negotiations, with technical advice under the Integrated Framework. The government is also pursuing bilateral free trade arrangements as recommended in the Diagnostic Trade Integration Study (DTIS). The government is continuing its negotiations with Angola, Tanzania and Zambia in order to reach trade agreements similar to the ones concluded with Zimbabwe and Malawi in 2005.

31. The Government looks forward to completing the buyback operation for its commercial debt in September 2007 with the financial assistance of the World Bank and the Government of Norway. The Government recognizes the importance of reaching rescheduling agreements with all bilateral creditors in the context of the enhanced HIPC Initiative. It has intensified efforts to negotiate with all Paris Club and non-Paris Club creditors that have not yet delivered debt relief, and hopes that progress would be made in reaching agreements with its remaining creditors, including commercial creditors, as soon as possible. In this regard the Government of Mozambique looks forward to the continuing support of the Bretton Woods institutions.

32. The Government of Mozambique is conscious that despite its efforts to improve its investment climate during the year 2006, its ranking in the ease of doing business, as assessed in the Doing Business report 2007, has worsened to 140th place. The recent authorization to publish the bylaws of firms electronically would help to improve the ranking. However, it is not sufficient to make Mozambique’s business environment the most competitive in SADC by 2015. To address this challenge and significantly improve the investment climate in Mozambique, the Ministry of Industry and Commerce has developed a draft strategic action plan for 2007-12 covering business start-up and registration, licensing, business inspections, labor costs, access to credit, cost of energy, and property registration. The World Bank has provided comments on the strategy and will provide further assistance in the development of the strategic action plan. An interministerial committee has been setup to monitor the implementation of this plan. In 2007, the two key actions envisaged will include:

  • (i) Reducing the cost of inspections and fines while improving compliance. The authorities intend to adopt a system of inspections that will be simplified, business friendly and harmonized across the several ministries that undertake inspections; and

  • (ii) Simplifying the procedures of closing businesses. Through a new insolvency law that will be submitted to the Council of Ministers by end-September 2007, the Government intends to simplify the business closing process and increase the recovery rate with the objective of helping viable businesses to overcome a short-term cash flow crisis, and insolvent businesses to be rapidly liquidated.

33. In 2008, the three key actions envisaged are:

  • (i) Reducing the licensing burden. To speed up the licensing process, the Ministry of Industry and Trade is in the process of setting up “One-Stop-Shops” for licenses at the provincial level. Additionally, through the Inter-Ministerial Commission mechanism, the licensing process will be streamlined, and the number of licenses required will be reduced;

  • (ii) Facilitating trading across borders. The Government will carry out a review of the import and export procedures, with financial assistance from the international community and will implement the recommendations of that study with the specific aim of reducing documents, signatures and the amount of time required for both importing and exporting; and

  • (iii) Improving the system for VAT reimbursement. The Directorate of Taxes and Audits will implement a system to improve collection, including through the prosecution of non-compliant institutions and expediently channeling these funds back to those firms that are in compliance with the VAT system.

34. In 2009, the four key actions envisaged are:

  • (i) Consolidate the progress in streamlining and reducing licenses for all sectors;

  • (ii) Consolidate the progress in facilitating trading across the borders. By end 2009, Mozambique should be as efficient at its borders as South Africa in the clearance of goods for both imports and exports. This will require reducing the number of documents filled out by at least half.;

  • (iii) Simplification of Tax Filing. Electronic filing of taxes should be provided and forms should be simplified to reduce the time required for tax preparation; and

  • (iv) Property Registration. Amendment of the relevant legislation to speed up the registration process by improving communication among different government agencies and developing an electronic database for the real estate registry. All registrable acts will be exempted from the requirement of prior execution of public deeds.

35. The Government will continue to restructure and encourage public-private partnerships, particularly in infrastructure services. Public-private partnerships and sale of state assets (and concessions) will be undertaken transparently in line with international best practices. A decision was made by the Council of Ministers in May 2006 to develop a new restructuring plan for PETROMOC that would improve efficiency. The new restructuring plan will be completed by end-June 2007 for its adoption by the Council of Ministers by end-September 2007. For the purchase of shares in Cahora Bassa, the Government remains committed to a non-recourse financing of the outstanding payment of US$700 million to Portugal and ensuring transparency of the financing package and operations. While strengthening the investment planning capacity of the Ministry of Energy, the Government, with the assistance of its financial advisors, is now in the process of selecting strategic investors for: (i) Temane gas-fired generation project (about 750MW); (ii) Moatize coal power project (about 1,500MW); and (iii) Mphanda Nkuwa hydropower plant (about 1,300MW). To support these new generation projects, there would be a need to build a major transmission line to distribute the power to the Mozambican market and for export. For all these projects, the Government will ensure, with the help of the World Bank and other partners, that: (i) financing is non-recourse and does not increase central government liabilities; and (ii) maximizes private sector investments through the use of public-private partnerships with any equity stake by the state-owned electricity company (Electricidade de Moçambique, EDM) raised through concessional borrowing or without government guarantees. The Government with the help of the World Bank and other partners will also continue to put in place measures to assist EDM to improve its performance, including through a performance contract and the operationalization of the regulator (CNELEC) by end-June 2007. In general, the government will, across all sectors seek to buttress regulatory bodies, including monitoring of concessions.

36. Aeroportos de Moçambique (ADM) commissioned a project-financed report on options for airport infrastructure financing which was completed in August 2006. While the proposed Maputo Airport Concession (ACSA) has been cancelled, ADM is now seeking to mobilize funds for its Investment Plan, estimated at US$94 million, including the Modernization of Maputo Airport Infrastructure (about US$46 million) through only concessional borrowing.

37. To strengthen the management of natural resources, the government will issue regulations to the new Mining and Petroleum Fiscal Regime laws within 90 days once they have been approved by the Assembly. The Government will adopt the new model contract for mining concessions to complement the new law submitted to the Assembly (structural assessment criterion at end-June 2007). The model contract for the petroleum sector will be adopted by end-September 2007 (structural assessment criterion). The Government also remains committed to ensuring that any new mineral resource project agreements will adhere to the principles of the new law and its proposed regulations, and is using a model mining contract in its current round of negotiations, as well as new fiscal model to develop the capacity to undertake timely feasibility studies and financial modeling. The Government has also requested TA from the Fund to make the model petroleum contract more specific, and narrow the range of items for bidding or negotiation. In the interim, the Government is committed to avoiding signing any new Exploitation and Production Concession Contracts (EPCs) in the petroleum sector until a new comprehensive petroleum fiscal regime is in place that would be embodied in the general tax law so as to avoid case by case negotiation of petroleum tax terms.

38. Improving transparency remains a priority for the Government. The Government intends to follow the EITI principles with regard to management of natural resources. The Government has already participated in a seminar in Oslo in 2006 on the EITI principles and will participate in a seminar in Maputo in 2007. The Government will consider becoming a member of the EITI in the future. In this regard, an EITI scoping study is planned under the Ministry of Planning and Development to assess the barriers to implementation and the net financial benefits and improvement in investment climate likely to accrue to Mozambique from the adoption of the EITI principles. Thereafter all new related agreements, in particular the future exploitation of coal, oil, titanium and natural gas as well as any new megaprojects (or expansion of existing megaprojects) will follow the EITI principles.

39. The monitoring of megaprojects and public enterprises in the research department of the MF will be further strengthened including through the compilation of a comprehensive database of financial information.

40. The Council of Ministers approved the Phase II of the public sector reform program (2006-11) building on the lessons from the implementation of the Phase I of this program (2001-05). The Phase II document sets four priorities for the public sector reform program: (i) the improvement of the delivery of public services to citizens and the private sector; (ii) the strengthening of the capacity of the local organs of the state which includes the implementation of a decentralization policy and strategy; (iii) the professionalization of public servants including introduction of performance evaluation systems and wage policy; and (iv) the strengthening of governance and anti-corruption systems. A special role is provided to districts as the focus of development which will be supported by improved planning, financial control, and operation of the new procurement system up to the district level. Public sector accountability through external and internal audits will be improved by reinforcement of the capacity of the Tribunal Administrativo, the supreme audit institution in Mozambique, and capacity building of the Inspector General of Finances. Importantly, a decentralization policy will be appraised by the Council of Ministers by end-June 2007 and submitted to the Assembly. Subsequently, a decentralization strategy will be approved by the Council of Ministers by June 2008. The strategy will propose, among other things, a clear legal, regulatory, and institutional framework for revenue raising and spending responsibilities and functions of subnational units (provinces, districts, and municipalities) and monitoring of subnational fiscal operations. The sequencing of the strategy will pay due regard to the administrative capacity of subnational units and need to maintain fiscal control. The results of the census will be incorporated in a preliminary wage policy to be discussed by the Council of Minister by end-November 2007 and implemented in the context of the 2009 budget. The next steps include the collection of baseline data for monitoring and evaluation of the results of the activities to be undertaken within the aforementioned priorities.

41. With regard to government’s anti-corruption strategy, operational plans were developed in five sectors (Judicial, Interior, Finance, Education and Culture, and Health) in 2006 and completed in January 2007. Such plans form the National Action Plan to Fight Corruption and were submitted to the first session of the Anti-Corruption Forum in March 2007. The dissemination of the actions and outcomes to be undertaken by these sectors was initiated in a national workshop for the launching of the oversight and monitoring organs of the anti-corruption strategy that took place in March 2007 and was opened by the President of the Republic. The main organ that was set is the National Anti-corruption Forum chaired by the Prime Minister and having the Attorney-General as vice-chair. The Forum has 78 members and its other members include parliamentarians, religious leaders, representatives of business associations, trade unions, NGOs, and of the 11 provincial anti-corruption forums. Expected to meet once a year its routine work will be undertaken by small technical supervisory unit, headed by the director of the Central Office for the Fight Against Corruption (which operates from the Attorney-General’s Office). The next step will be the setting of the baseline data for the monitoring of the various indicators included in the National Action Plan to Fight Corruption.

42. In the context of the implementation of the Anti-Money Laundering Law, the Government is also committed to creating a financial intelligence unit as soon as the law is adopted by the Assembly, hopefully during its current session.

43. The urban land use Regulation was approved by the Council of Ministers in October 2006, which will facilitate the reduction of costs and time involved in transactions. The Lei do Ordenamento do Território has been submitted to the Assembly for approval. The Government remains committed to conducting an economic analysis of urban land markets with a view to understanding how these function in practice, as well as assessing the associated poverty reduction impact analysis of urban tenure regulations and monitoring the implementation of the Land Law and its regulations. The survey of land holding in some selected districts in the southern part of the country will end in June 2007 and the titling after digitization is expected to be completed by the end of 2007. Finally, the Government is also preparing a draft strategy for slum upgrading.

44. The Government is committed to reinvigorate the reform of the judicial reform with the help of the international community. The main priority for the coming year is the redrafting of an integrated strategic plan for the justice system by June 2007, to set up a joint monitoring system for the entire legal sector, to strengthen mechanisms of sector coordination, and to draw up a vision of justice. The organic law of judicial tribunals is expected to be approved by the Assembly in the current session of the Assembly. Commercial and labor sections of the judicial tribunals will be expanded with the help of the international community. A new bankruptcy law and the Code of Penal Procedures will also be approved by the Council of Ministers and submitted to the Assembly by end- September 2007.

45. The Government is continuing its efforts to improve the quality of macroeconomic statistics in order to improve policy formulation and the monitoring of economic developments. To that end, the INE is aiming to launch a new national accounts framework, including revision of annual GDP data and quarterly estimates by end-June 2007. With regards to monetary statistics, the BM is committed to aligning the chart of accounts with the Monetary and Financial Statistics Manual, including a breakdown between local and foreign-currency denominated accounts. The BM is also aiming to improve the quality of its external sector statistics, including by improving the coverage of megaprojects. With regards to government finance statistics, significant improvements have been made as a result of the launch of e-SISTAFE. However, the Government understands that further work is needed to expand the institutional and transactional coverage sufficient for compilation of the Funds in accordance with Government Finance Statistics (GFS) manual of 2001.

IV. Program Monitoring

46. The semiannual quantitative assessment criteria for end-June 2007 and end-December 2007 and indicative targets for end-September 2007 which will be used to evaluate the implementation of the program for the remainder of 2007 are shown in Table 1 of this memorandum, with further definitions and explanations contained in the annexed Technical Memorandum of Understanding. In addition, the Government has specified in Table 3 a list of structural assessment criteria and benchmarks for 2007.

47. The Government understands that the completion of the first review is contingent upon the observance of the assessment criteria for end-June 2007 set out in Table 1 and 3; which is expected to take place before end-December 2007. In reviewing developments under the program during the first review, particular attention will be paid to the implementation of measures aimed at broadening the tax base and further developing e-SISTAFE, the 2008 budget, monetary and financial sector reform, reducing the cost of doing business, infrastructure financing with due regard to debt sustainability, and improving the fiscal regime and transparency of natural resource exploitation and megaprojects as well as their net contribution.

Table 1.

Mozambique: Quantitative Performance/Assessment Criteria and Indicative Targets, 2006-2007 1/

(In millions of MT, unless otherwise specified)

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For definition and adjustors see the attached Program Monitoring Section of Memorandum of Economic and Financial Polices and the Technical Memorandum of Understanding.

Note: While the new family of meticais (MT) was introduced in July 2006, values in this tables have been converted to MT to reflect this change for ease of comparison.
Table 2.

Mozambique: Structural Performance Criterion and Benchmarks Under the 2006 and 2007 PRGF-Supported Program

(October 2006–April 2007)

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Table 3.

Mozambique: Structural Assessment Criteria and Benchmarks Under the 2007 Policy Supported Instrument

(June 2007–December 2007)

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Attachment II: Technical Memorandum of Understanding on Selected Concepts, Definitions, and Data Reporting Under Mozambique’s Policy Support Instrument Program

March 28, 2007

1. This technical memorandum of understanding (TMU) purpose is to describe the concepts and definitions that will be used in monitoring the Policy Support Instrument (PSI) program, including the following:

  • net claims on the central government by the banking system;

  • government revenue;

  • net international reserves, and reserve money of the Bank of Mozambique;

  • new nonconcessional external debt contracted or guaranteed by the central government or the Bank of Mozambique with a maturity of more than one year;

  • short-term external public debt outstanding;

  • external payments arrears; and

  • foreign program assistance and external debt service.

This memorandum also describes the adjusters that will be applied to certain quantitative assessment criteria of the program.

Net Claims on the Central Government by the Banking System

2. Net claims on the central government (NCG) by the banking system is defined as the difference between the outstanding amount of bank credits to the central government and the central government’s deposits with the banking system, excluding deposits in project accounts with the banking system and proceeds from the signing fee for coal exploration. Credits comprise bank loans and advances to the government and holdings of government securities and promissory notes. NCG will be calculated based on data from balance sheets of the monetary authority and commercial banks as per the monetary survey. The limits on the change in net claims on the central government by the banking system will be cumulative beginning end-December 2006 for the 2007 program.

3. The government encompasses all institutions whose revenue and expenditure are included in the state budget (orçamento do Estado): central government ministries, agencies, and the administration of 11 provinces. Although local governments (33 municipalities or autarquias) are not included because they are independent, the bulk of their revenue is registered in the state budget as transfers to local governments.

Government revenue and financing

4. Revenue is defined to include all receipts of the Domestic Tax Administration (Administração Tributaria de Impostos or DGI), the National Directorate of Customs (Direcção Nacional de Alfândegas, DNA), and nontax revenue, including certain own-generated revenues of districts and some line ministries as defined in the budget. Net receipts from privatization received by the National Directorate of State Assets (Direcção Nacional do Patrimônio do Estado) and unrealized profits transferred by the central bank to the treasury will not be considered as revenue (above the line) and will be accounted for as other domestic financing (below the line).

5. For the purpose of program monitoring, revenue is considered as collected at the time when it is received by the DGI from private agents or other government collecting agencies, in cash or checks, or through transfers into a DGI bank account.

6. An indicative target consisting of semiannual floors on the resources in the government’s savings fund abroad has been added to monitor the use of the proceeds from the signing fee for coal exploration.

Money supply

7. Base money is defined as the sum of currency issued by Bank of Mozambique (BM) and the commercial banks’ deposits in the BM. The commercial bank deposits include the statutory required reserves and excess reserves held at the BM. The base money ceilings for 2007 will be the total stock of base money outstanding at end-June 2007, end-September 2007 and end-December 2007, and will be monitored by the monetary authority and provided to the IMF by the BM.

Net international reserves

8. Net international reserves of the Bank of Mozambique are defined as reserve assets minus reserve liabilities. The Bank of Mozambique’s reserve assets include (a) monetary gold; (b) holdings of SDRs; (c) reserve position at the IMF; (d) holdings of foreign exchange; and (e) claims on nonresidents, such as deposits abroad (excluding the government’s savings account related to the Moatize coal mine concession). Reserve assets exclude assets pledged or otherwise encumbered, including but not limited to assets used as collateral or guarantee for a third-party external liability (assets not readily available.) The Bank of Mozambique’s reserve liabilities include (a) all short-term foreign exchange liabilities to nonresidents with original maturity of up to and including one year; and (b) all liabilities to the IMF.

9. The Bank of Mozambique will publish the exchange rates quoted by commercial banks on average as the market rates.

New nonconcessional external debt contracted or guaranteed by the central government or the Bank of Mozambique with maturity of more than one year

10. The term “debt” will have the meaning set forth in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000. Government debt is outstanding debt owed or guaranteed by the central government or the Bank of Mozambique (but does not include debt of any political subdivision or government-owned entity with a separate legal personality that is not otherwise owed or guaranteed by the central government).

11. The central government will limit contracting or guaranteeing external debt up to US$3 million with original maturity of one year or more with a grant element of less than 35 percent, calculated using currency-specific discount rates based on the Organization for Economic Cooperation and Development (OECD) commercial interest reference rates in accordance with the Budget Law. This assessment criterion applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. This assessment criterion will be assessed on a continuous basis.

Stock of short-term external public debt outstanding

12. The central government will not contract or guarantee external debt with original maturity of less than one year. This assessment criterion applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this assessment criterion are short-term, import-related trade credits. This assessment criterion will be assessed on a continuous basis.

External payments arrears

13. The government undertakes not to incur payments arrears on external debt owed or guaranteed by the central government, with the exception of external payments arrears arising from government debt that is being renegotiated with creditors, including Paris Club creditors. This assessment criterion will be assessed on a continuous basis.

Foreign program assistance

14. Foreign program assistance is defined as grants and loans received by the Ministry of Finance through Bank of Mozambique accounts excluding those related to projects (Table 1).

Table 1.

Mozambique: Foreign Program Assistance and External Debt Service for 2007

(In millions of MTn; unless otherwise indicated)

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Source: Mozambican authorities; and Fund staff estimates.
Actual external debt-service payments

15. Actual external debt-service payments are defined as cash payments on external debt-service obligations of the government and central bank, including obligations to Paris Club and other bilateral creditors rescheduled under enhanced HIPC Initiative completion point terms, multilateral creditors, and private creditors, but excluding obligations to the IMF (Table 1).

Adjusters

16. The quantitative targets (floors) for the central bank’s net international reserves will not be adjusted for any excess in disbursements of foreign program assistance (and any shortfall in external debt service), compared to the program baseline. These targets will be adjusted downward by 100 percent of any shortfall in external program aid (up to a maximum of US$50 million) and any excess in external debt service payments, compared to the program baseline (Table 1). The quantitative targets (floors) for the central bank’s net international reserves will be adjusted downward/upward for any revision made to the end-year figures corresponding to the previous year. They will also be adjusted upward for the full amount of any external privatization proceeds in excess of those envisaged in the program, unless these proceeds are deposited in the government’s savings account abroad. If they are deposited abroad, the indicative targets on the balance in this account will be adjusted upward for the full amount of the higher than envisaged proceeds, net of any costs related to the privatizations, including severance payments. The quantitative targets (floors) for the central bank’s net international reserves will be adjusted equivalently downward up to a maximum of US$50 million per annum by the amount that the projected fuel import bill is higher due to a rise in the average global oil price (average petroleum spot price of West Texas Intermediate, U.K. Brent, and Dubai Fateh crude). This adjustment will be equal to the difference between the realized and the projected average global oil price, multiplied by the volume of total fuel imports projected for each quarter (Table 2). In addition, the quantitative targets (floors) for the central bank’s net international reserves will be adjusted upward (downward) by the amount of donor-financed projects deposited in the MT single treasury account (CUT) if they are higher (lower) than projected for each quarter (Table 1)

Table 2.

Projected Fuel Import Bill, 2006-07

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

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Sources: Mozambican authorities and Fund staff projections.

17. The quantitative targets (ceilings) for net claims on the central government (NCG) will not be adjusted for any excess in disbursements of foreign program assistance (and any shortfall in external debt service), compared to the program baseline. These targets will be adjusted upward by 100 percent of any shortfall in external program aid (up to a maximum of US$50 million) and any excess in external debt service payments, compared to the program baseline (Table 1). These targets will also be adjusted downward for the full amount of any privatization proceeds in excess of those envisaged in the program, unless these proceeds are deposited in the government’s savings account abroad. The quantitative targets (ceilings) for NCG will be adjusted downward (upward) for any increase (decrease) in domestic financing from the non-financial private sector. The government expenditures contingent on higher disbursements of foreign program assistance (and lower external debt service) will be used to finance greater “priority” spending identified in the budget.

18. The quantitative target (ceiling) for net claims on the central government (NCG) for end-June 2007, end-September 2007 and end-December 2007 will be adjusted upward (and the floors on net international reserves adjusted downward) to accommodate the possible need for higher locally financed government outlays to deal with natural disasters, up to a total limit of MT 500 million.

19. The base money ceiling will be adjusted equivalently upward up to a maximum of MT 300 million at end-June 2007, end-September 2007, and end-December 2007 to the extent that the outstanding stock of currency issued by the BM exceeds those projected in Table 3.

Table 3.

Currency Issued by the BM

(In millions of MTn, stock)

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Source: Mozambican authorities; and Fund staff projections.
Data reporting

20. In addition to providing the monthly and quarterly data needed to monitor program implementation in relation to the programs’ quantitative targets and broader economic developments, the authorities will provide weekly updates of the daily data set out in Table 3 as well as the weekly data set out in Table 4 of the TMU dated May 26, 2005. Monthly updates will also be provided of the foreign exchange cash flow of the Bank of Mozambique.

21. The government will continue to provide Fund staff with the data corresponding to monthly government revenues (in detail according to the fiscal table), with a lag not exceeding one month. In addition, the government will continue to publish and provide Fund staff with the quarterly budget execution reports with a time lag not exceeding 45 days.

22. In addition, the government will provide monthly information on the balance of its savings account abroad and will start developing and providing information on domestic arrears on a quarterly basis.

23. From December 2005 onwards, the monetary survey made available by the Bank of Mozambique will clearly identify donor-financed project deposits (with a breakdown between foreign and domestic currency) included in net credit to the government in both the central bank’s and commercial banks’ balance sheets.

SISTAFE Implementation Plan

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1

Historical national accounts data will be revised and rebased to 2000 in the coming months.

2

Aid absorption is defined as the extent to which a country’s nonaid current account deficit (in foreign currency terms) widens in response to an increase in aid inflows.

3

The CFMP does not envisage significant revenues from megaprojects and natural resources more generally.

4

Total employment by Megaprojects in 2010, excluding the construction phase work, will be about 9,000 full-time positions or under 2 percent of urban private sector employment.

5

Trade liberalization could also promote competition in the domestic economy and improve institutional quality.

6

In this regard, Botswana and Chile’s experience is more encouraging, although their initial economic institutions were probably stronger than Mozambique’s.

7

The Joint Staff Advisory Note (IMF Country Report No. 07/38) summarizes the pillars of the PARPA II (IMF Country Report No. 07/37) and staff advice on priorities for strengthening PARPA II and ensuring that it is effectively implemented.

8

Although the MDGs have not been fully costed in Mozambique, an accompanying Selected Issues paper discusses illustrative scaling-up scenarios to identify possible medium- to long-term macroeconomic outcomes, and measures and policies that would not only help absorb more aid but also ensure that it is used efficiently.

9

Forward and backward input and output linkages can have an impact from related infrastructure developments and user fees from their use.

10

Fiscal revenues from natural resource-based megaprojects could range between 2-3 percent of GDP.

11

The updating of the fuel tax started in October 2006.

12

It is also expected that compensation to victims of the recent explosion of an ammunition store facility near Maputo can be accommodated within the 2007 budget ceilings.

13

The government will set an arrears payment schedule, if needed, and ensure that the final contract price includes VAT on project supplies.

14

While a single currency CUT has technical and transparency benefits, this measure can be seen as a transition measure for donors that are constrained by their own rules. All donors should be encouraged to put their funds into the CUT as soon as possible, preferably in domestic currency.

15

This is particularly important to avoid politically motivated spending at times of elections.

16

Core inflation is not the official indicator that the BM follows, which remains to be headline inflation.

17

An accompanying Selected Issues paper summarizes the forward-looking strategy, which benefited from an overlapping World Bank FSTAP mission. An FSAP update planned in FY 2008 will take stock of reforms and update the reform strategy.

18

A Selected Issues paper addresses trade policy and market access issues facing Mozambique.

19

Public-participating institutions are enterprises with some private equity participation.

20

The restructuring of public-participating enterprises is not expected to result in the budget absorbing liabilities, although PPPs should be carefully managed to minimize fiscal risks by transparently reporting contingent liabilities or quasi-fiscal operations in budget documents. The authorities have requested TA from the Fund to improve the PPP regime.

21

To date, the only major petroleum project operating in Mozambique is the Pande-Temane natural gas extraction project including a pipeline to South Africa. More recently, four international oil companies have been granted the right to start drilling for oil in the Rovuma Basin, and a multinational mining company announced that mining and heavy mineral concentrate production has started at its Moma Titanium Minerals Mine in the northern Mozambican province of Nampula.

22

The Fund and the World Bank have collaborated closely to assist the authorities strengthen the mining and petroleum fiscal regime.

23

The authorities are making best efforts to reach agreements with Portugal and Japan in 2007.

24

The restrictions pertain to: (i) the discretionary prior approval for remittances of family living expenses, (ii) the authorization for the purchase of foreign exchange in excess of US$5,000 for certain transactions, (iii) the prohibition for the conversion of balances of nonresidents’ domestic currency accounts into foreign currency or transfer abroad, (iv) the prohibition on advance payments for a service, and (v) the prohibition on advance payments for the import of goods.

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Cover IMF Staff Country Reports
Republic of Mozambique: 2007 Article IV Consultation, Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waiver of Performance Criterion, Financing Assurance Review, and Request for a Three-Year Policy Support Instrument: Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Mozambique
Author:
International Monetary Fund
Volume/Issue:
Volume 2007: Issue 262
Publisher:
International Monetary Fund
ISBN:
9781451827316
ISSN:
1934-7685
Pages:
120
DOI:
https://doi.org/10.5089/9781451827316.002
Figure 1.

Recent Economic Developments

Currency reform was successful

(Percent change)

Trade balance is improving

Exchange rate spreads are narrowing Premium on Auction Rate

(Percent; on a weekly basis)

The widening of the band in the MCI market has activated transactions and reduced the spread between the MCI rate and transaction rate outside the MCI

Financial intermediation is growing

Bank Soundness Evolution has improved

Microfinance activities have blossomed

Consolidation of the fiscal position continues

(Percent of GDP)

External vulnerability has decreased

(Percent of GDP)

Mozambique’s growth takeoff continues

(Growth Index, 0=100)

Political institutions are relatively sound

Although a number of institutional weaknesses remain

Inflation needs to fall further

(Average period, percent)

Revenue mobilization is the key to fiscal sustainability

(% of GDP)

Export growth needs to be sustained…

(Percent of GDP)

…Through greater diversification of non-megaprojects exports.

Mozambique: Export Performance by Product (2000-2005)

Mozambique: Equilibrium Real Exchange Rate (1998-2006)

Labor and indirect costs are high in Mozambique

Debt remains below the DSA threshold under the alternative scaling-up borrowing scenario, although the absorption of the additional foreign aid may require a real exchange rate appreciation

Exchange rate depreciation pressures remain

(nominal value)
Figure 2.

Financial Sector Challenges