Mozambique
Sixth Review Under the Policy Support Instrument, Second Review Under the Arrangement Under the Exogenous Shocks Facility, and Request for a Three-Year Policy Support Instrument: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Mozambique.
Author:
International Monetary Fund
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Publication Date:
23 Jun 2010
eISBN:
9781455204618
Language:
English
Keywords:
ISCR; CR; debt; financing; IMF Executive Board; ESF arrangement; GDP; exchange rate; U.S. dollar; private sector; fiscal policy; investment priority; Public investment spending; Public investment and public-private partnerships (PPP); Monetary base; Global
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Mozambique showed considerable resilience to the global crisis. The government responded to the crisis by promptly easing macroeconomic policies. The Policy Support Instrument (PSI) provided an effective and flexible framework to guide policies during the crisis, and program performance has been strong. Donor support was temporarily halted over governance concerns, but has resumed. Mozambique’s economic performance and track record of macroeconomic stability over the last decade and a half have been impressive, making the country a prime example of a mature stabilizer.

Abstract

Mozambique showed considerable resilience to the global crisis. The government responded to the crisis by promptly easing macroeconomic policies. The Policy Support Instrument (PSI) provided an effective and flexible framework to guide policies during the crisis, and program performance has been strong. Donor support was temporarily halted over governance concerns, but has resumed. Mozambique’s economic performance and track record of macroeconomic stability over the last decade and a half have been impressive, making the country a prime example of a mature stabilizer.

I. Exiting the Global Financial Crisis

1. Mozambique showed considerable resilience to the global crisis. Real GDP grew by 6⅓ percent in 2009, more than expected, owing to stronger performance of the construction, energy, and financial sectors. Large declines occurred in export receipts and private capital inflows, but the impact on external reserves was mitigated by the SDR allocation and ESF resources (Figure 1).

Figure 1.
Figure 1.

Mozambique: Impact of the Global Crisis

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.

MEFP ¶1

2. The government responded to the crisis by promptly easing macroeconomic policies. An accommodating monetary policy facilitated the substitution of foreign borrowing with a domestic credit expansion. Strong revenue performance has kept automatic stabilizers small, resulting in a lower-than-anticipated domestic primary deficit. Inflation has been subdued because of low commodity prices and the introduction of fuel price subsidies in May 2009, but some pick up occurred toward year-end owing to a rebound in international prices and the depreciating currency.

uA01fig01

Macroeconomic Policy Stance, 2006–10

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

MEFP ¶2

3. The PSI provided an effective and flexible framework to guide policies during the crisis, and program performance has been strong. All quantitative targets for end-December 2009 were met, except the one on reserve money. This target was missed because of the continued difficulties to predict the year-end surge in seasonal currency demand and the structural shift from an ‘unbanked’ to a ‘banked’ economy.1 In addition, the authorities deliberately eased monetary conditions more than expected to accommodate the substitution of foreign borrowing with domestic credit in a welcome effort to shore up economic activity. However, the BM is committed to restraining monetary growth in 2010. Structural reforms are on track as well; only the benchmark on the development of a financial sector contingency plan will be delayed by four months because of difficulties in securing World Bank funding for the exercise.

Mozambique: Quantitative Assessment and Performance Criteria and Indicative Targets

article image

MEFP ¶7-8

4. The economic outlook for 2010 has improved. Growth could accelerate to 6½ percent in 2010, led by new megaprojects in the natural resources sector and stepped-up public investment. Inflation should remain in single digits, despite a temporary spike reflecting spillovers from the gradual removal of the fuel subsidy, which was launched in March 2010. Notwithstanding a projected sharp rise in investment-related imports, the recovery in export prices for Mozambique’s key commodities should contain the external current account deficit and keep international reserves at a comfortable level. As outlined below, and in tandem with the improved global recovery, the authorities intend to remove in 2010 last year’s fiscal and monetary stimuli.

5. Donor support was temporarily halted over governance concerns but has resumed. Mozambique relies on extensive external assistance for budget financing and economic development. However, development partners expressed political and economic governance concerns that reached a nadir during the October 2009 elections and led to the temporary suspension of budget support in the first quarter of 2010 (Box 1). The authorities’ recent steps to assuage these concerns through commitments to donors on governance reforms have led to a resumption of aid in April 2010, which is expected to be disbursed according to original plans. Development partners are closely monitoring implementation of the measures. The resumption of donor support, together with stepped-up foreign exchange sales by the central bank, helped remove pressure on the exchange rate and resulted in a narrowing of the temporarily large wedge between the official and the retail market rate.

Agreement on Resumption of Donor Aid

The October 2009 elections confirmed President Guebuza in office and provided the ruling party with a very large majority. Donors were concerned about a lack of inclusiveness in the democratic process, in particular regarding newly emerging opposition parties. In March 2010, donors’ political concerns were addressed through government commitments to reform the electoral law and strengthen the role of opposition parties in parliament. Economic governance concerns centered on the need to improve procurement, strengthen the anti-corruption framework, improve the management of natural resources and concessions, and enhance the business environment. The government committed to measures to address those concerns.

II. A New PSI—Setting Policies for Sustained Growth

A. Overview

6. Mozambique’s economic performance and track record of macroeconomic stability over the last decade and a half have been impressive, making the country a prime example of a mature stabilizer. It has achieved strong economic growth, low inflation, comfortable external reserves, and a sustainable debt position thanks to the HIPC/MDRI debt relief. In addition, the country has been resilient to the recent surge in food and fuel prices and, notably, the global economic crisis. This was made possible by the authorities’ strong commitment to prudent macroeconomic management and by a flexible program design that accommodated the authorities’ policy responses to these exogenous shocks. When faced with the global crisis, Mozambique paired its PSI with a high-access ESF which, together with the subsequent SDR allocation, helped shore up the country’s international reserves at a critical time.

7. As its current PSI reaches its end, the authorities and staff undertook a retrospective on Mozambique’s achievements under the last two Fund-supported programs. This was intended to help draw lessons for the authorities’ economic program going forward, especially since Mozambique’s macroeconomic challenges remain enormous and the authorities intend to accelerate the country’s economic development. Given the authorities’ overall satisfaction with the PSI, they opted to request a seamless transition to a successor three-year PSI, which they hoped would help them strengthen their economic policy making and prepare them well for the challenges as a frontier emerging market economy. In this context, the retrospective served a useful role in identifying areas for improving program design. It also triggered the organization of a high-level conference, organized jointly by the authorities, the Bank, and the Fund to debate Mozambique’s past achievements, identify the key economic challenges going forward, and outline the main policy options that could help the authorities in facing their macroeconomic challenges.

B. Achievements in Past Programs

MEFP ¶3

8. The authorities largely achieved their macroeconomic objectives underlying Mozambique’s fourth PRGF and the current PSI (Figure 2).

  • Real GDP growth averaged almost 8 percent during 2004-09, but has trended down from the post-conflict highs following the end of the civil war in the mid-1990s. Mozambique’s growth performance has been similar to that of some fast-growing Asian economies and compares very favorably with the rest of Sub-Saharan Africa (SSA).

  • The poverty rate fell from 69 percent in 1997 to 54 percent in 2003, the last full assessment; the results of the new household survey are expected in the next few months. Per-capita economic growth was strong over the last few years, but it remains below the 25th percentile of the distribution for SSA countries. Some social indicators (e.g., life expectancy, literacy) have improved markedly, but achieving the MDGs remains a challenge in many areas.

  • Inflation has trended down and has generally remained in single digits, except in those episodes of surging international food and fuel prices.

  • The current account deficit (after grants) strengthened from around 18 percent of GDP during 2000–03 to about 10 percent of GDP in 2004–09, mainly because of megaproject exports, including in particular from the aluminum smelter Mozal.

  • Capital inflows have been high but volatile and averaged 20 percent of GDP during 2004–09. Aid exceeded 13 percent of GDP during the last four years, making donor support a crucial contributor to Mozambique’s economic success.

  • As a result, Mozambique’s international reserves generally surpassed four months of imports and were further boosted in 2009 by access to the ESF and the SDR allocation.

  • Mozambique has a low public debt burden and, following MDRI/HIPC debt relief, a low risk of external debt distress.

uA01fig02

Takeoff Events

(Growth index, 0=100)

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

1/ First year of a prolonged period of macroeconomic stabilization/liberalization policies, post-conflict, normally under IMF programs.
uA01fig03

Real GDP and Per Capita GDP Growth Rates

(Percent)

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

uA01fig04

Real GDP Growth in Non-Fuel Exporting Sub-Saharan Countries

(Averages 1995-2010; percent)

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

uA01fig05

GDP Per Capita at PPP in SSA Countries

(Ranked according to percentiles)

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

Selected Millennium Development Goals, 1990–2008

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Source: World Development Indicators
Figure 2.
Figure 2.

Mozambique: Macroeconomic Developments

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.

9. Program performance was generally very strong (Box 2). The authorities showed commendable ownership in pursuing sound economic policies that were underpinned by a focus on structural reforms aimed at enhancing economic policy-making. A protracted period of political stability was also important in securing these results.

10. The authorities noted that they felt greater ownership under the PSI than under prior programs. They appreciated the self-discipline imposed by a Fund program, while noting that even though conditionality had declined over time, their commitment to the underlying reforms remained strong—because they wanted to implement those reforms. They also valued the Fund’s enhanced flexibility in response to the various exogenous shocks. The authorities saw the program relationship as instrumental in helping them build their capacity in economic policy making. It was mostly felt that a successor PSI would be particularly useful in the current environment when Mozambique is expected to be confronted with more complicated policy issues, such as accessing market financing. In this context, a close engagement with the Fund would provide expertise and act as a counterbalance against overly ambitious and optimistic plans.

A Strong Track Record in Program Implementation Since 2004

A prudent macroeconomic policy mix aimed to preserve macroeconomic stability:

  • Fiscal policy sought to avoid domestic financing to make room for private sector credit. Fiscal deficits were almost exclusively financed on concessional terms, thanks to strong donor engagement. Nonconcessional borrowing was limited to near zero under the Fund-supported programs.

  • Monetary policy successfully managed to contain inflation, relying on reserve money as the operational target.

Program design was flexible:

  • Program targets were loosened to accommodate the authorities’ response to the food and fuel price surge and, more recently, to the global crisis.

  • The performance criterion (PC) on the domestic primary deficit was relaxed at the fourth PRGF review to use the fiscal space created by the MDRI for additional priority spending. It was subsequently replaced by a PC on net credit to the government, which allowed for unexpected aid to be spent.

Program implementation was strong, reflecting strong ownership:

  • The reviews were completed on time.

  • Fiscal policy and NIR targets were generally met. But the reserve money target was regularly overshot because of difficulties in predicting demand for cash in a country transitioning to a banked economy.

  • Observance of structural conditionality improved over time. Some two-thirds of structural measures under the PRGF were implemented on time, compared to four-fifths under the PSI. Compliance was the lowest in reforms outside the Fund’s area of expertise, reflecting a lack of follow-up by development partners, although compliance improved markedly under the PSI.

  • Structural conditionality was streamlined, partly reflecting conditionality reform at the Fund and partly the authorities’ growing program ownership. Prior actions were discontinued after the fourth PRGF review in mid-2006. Structural performance/assessment criteria were halved over time and discontinued altogether after the third PSI review in late 2008.

  • Structural conditionality focused on measures within the Fund’s core area of expertise and was supported by extensive technical assistance (TA) on public financial management (PFM), tax policy and administration, and monetary and financial sector policies. Its selection benefited from close cooperation between the area and functional departments, and the TA coordinator operating from the local Fund office.

C. Mozambique’s Macroeconomic Challenges

11. After enjoying an impressive recovery in the decade and a half following the end of the civil war, economic expansion has gradually been decelerating and become dependent on megaprojects in the natural resources sector. Notwithstanding the contribution of megaprojects to growth,2 their spillovers to the rest of the economy have been limited, owing to shallow vertical and horizontal integration, high physical capital intensity, profit repatriation patterns, and low tax revenue contributions. As a result, sectoral contributions to growth have been uneven, with a still subdued participation of the private sector outside the megaprojects. Private investment has not taken off as much as in most peer countries, little employment has been generated, and development indicators, while improving, are still low. In addition, the traditional export sector has lagged behind, which has led to a concentration of the export base and a heightened external vulnerability. By end-2008, exports of aluminum, electricity, and natural gas accounted for about 60 percent of total exports.

uA01fig06

Mozambique: Actual versus Potential Output Growth

(in percent)

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

uA01fig07

Contributions to Output Growth by Production Sector

(in percent)

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

12. A sustained improvement in living standards would require policies to diversify the country’s productive and export base and increase the role of the private sector. Those policy challenges were discussed during a three-day high-level conference in the midst of the program negotiation mission. The conference, which helped shape the program discussions, was held in Namaacha (southern Mozambique) and organized jointly by the authorities, the Bank, and the Fund. Bank and Fund staff were subsequently invited to present the conference’s conclusions to a special meeting of the Council of Ministers in the capital Maputo (Box 3).

Namaacha Conference on Mozambique’s Economic Challenges and Policy Options

The three-day conference was attended by 140 participants, including current and former members of government, senior managers of line ministries, and representatives of the private sector, academia, civil society, and development partners. It received wide media coverage. The format emphasized a collaborative approach, in which Fund and Bank staff introduced each topic with an analytical presentation, which was followed by the authorities’ analysis and a subsequent panel and open-floor discussion of the issue at stake.

There was broad recognition of Mozambique’s impressive economic growth and macroeconomic stability since the end of the civil war—an achievement that needed to be preserved. At the same time, growth had been trending down, and a large part of the population still lives below the poverty line. There was agreement that in order to sustain higher and more inclusive economic growth going forward, the government would need to encourage economic activity driven by the private sector. Various strategies were discussed, including boosting public investment, creating a more enabling business environment, developing key sectors in the economy, enhancing regional integration with neighboring countries, and better tapping Mozambique’s comparative advantages.

The last day of the seminar was devoted to the need for informed borrowing decisions should Mozambique decide to tap financing at commercial terms. Bank and Fund experts explained the advantages and pitfalls of various financing instruments, including bonds, (syndicated) loans, financing from bilateral development banks, and Public-Private Partnerships (PPP). They also urged the authorities to build institutional capacity for improved debt management and to develop a multi-year strategy to guide them in their external and domestic borrowing.

13. Raising the country’s growth and export potential would thus hinge on creating an environment conducive to private sector activity. The authorities’ thinking is centered on boosting public investment, with a view to expanding the transportation and electricity networks in the vast country to allow private sector activity to emerge. Such investment could partially be financed by nonconcessional external resources if efforts to raise additional concessional funds and strengthen revenue collections proved insufficient.

14. Staff analysis supports the potential merits of boosting investment but urges a cautious approach. Mozambique’s capital abundance and investment rates, especially private investment, are very low indeed (Box 4). However, staffs’ simulations show that a permanent increase in public investment over the next two decades financed exclusively at market terms, would noticeably worsen Mozambique’s debt indicators and impact macroeconomic stability. This suggests that the authorities should adopt a more limited and time-bound scaling up of their investment. Emphasis should also be placed on the quality of projects so as to ensure an adequate growth dividend and the ability to repay the additional borrowing. This in turn hinges on the development of a consistent cross-sectoral investment strategy that would prioritize projects based on feasibility studies and cost-benefit analyses and their potential to promote private investment. This crowding in of private investment appears to be Mozambique’s most promising avenue to create jobs and reduce poverty.

uA01fig08

Total investment

(period averages; in percent of GDP)

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

Empirical Evidence on the Determinants of Economic Growth

Staff conducted an empirical analysis of the determinants of growth in living standards in Mozambique, to assess how investment in infrastructure contributes to it. The results suggest that a 1 percent increase in the rate of public investment could raise output growth by up to 0.5 percent on impact, whereas a 1 percent increase in the rate of private investment could raise output growth by up to 1.3 percent on impact.

These results indicate that public investment in infrastructure, where Mozambique still ranks in the bottom percentile and below SSA averages, could yield higher growth, provided the business environment and economic governance improve as well. But the persistence of the expansionary effect of public investment will depend on the degree to which it promotes future private investment. To achieve this, public investment should be well targeted to raise the benefits and reduce the costs of private investment.

Estimation results for panel error correction model of output per capita growth

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uA01fig09

Capital Stock Depth Indexes

(Percentile rank)

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

15. Various analyses, including by the Bank, also suggest a need to better tap Mozambique’s comparative advantages.3 Those include an abundance of arable land and the country’s geographical location, which suggest enormous possibilities to enhance regional trade (especially with its landlocked neighbors) and develop key industries, such as agro-industries, textile, and tourism. Such sectoral growth strategies would in turn also benefit from the authorities’ plans to develop infrastructure. But all efforts to develop the country would be impaired if the authorities failed to step up their efforts to improve the business climate, since Mozambique ranks well behind its SSA peers in survey-based indicators.

Mozambique’s Ranking in Doing Business, 2010

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Source: The World Bank Group, Doing Business Indicators, 2010.

D. The Design of the New Program

Striking the balance between economic development and macroeconomic stability

MEFP ¶5-10

16. The successor PSI intends to support the authorities’ development objectives while safeguarding macroeconomic stability. The authorities aim to create the conditions for sustainably raising economic growth and reducing poverty. They are adamant that meeting their development needs now requires significantly stepping up public investment in transport and electricity infrastructure, which would necessitate broadening the financing options to also include nonconcessional borrowing and expand reliance on concessions and PPPs. They see such infrastructure investment as a key prerequisite to boost regional trade and private sector activity throughout the country, which they intend to complement with enhanced efforts to improve the business climate. These developmental objectives notwithstanding, the authorities reiterate that safeguarding macroeconomic stability continues to be their overriding priority.

17. A time-bound increase in public investment could be consistent with maintaining macroeconomic stability, as well as debt sustainability, but is not without risks. It would require a changed fiscal policy stance over the next few years that would aim at creating the fiscal space to implement the authorities’ investment priorities. This would mainly be achieved through a sustained revenue effort and an increasing recourse to nonconcessional and domestic borrowing. Staff and the authorities agreed that the virtually zero limit on nonconcessional external borrowing under Mozambique’s last two Fund-supported programs was inconsistent with the country’s vast developmental needs and should be relaxed, allowing Mozambique to reap the benefits from its strong track record of prudent macroeconomic policies and comfortable debt indicators. In addition, the sharp increase in financial intermediation provides some room to increase domestic financing of the budget without the risk of crowding out private sector credit. However, an excessive and permanent—versus a contained and time-bound—expansion of public investment could undermine debt sustainability, create undesirable domestic demand pressures, and strain institutional capacity.

18. The program embeds the expansion of the authorities’ public investment program in transportation and energy infrastructure over the next three years in a prudent macroeconomic policy mix. The authorities committed to a policy stance that would keep the domestic primary balance broadly stable during the program period and tighten monetary policy to ward off inflationary pressures while supporting a continued financial deepening.

19. The envisaged policy stance is not expected to increase domestic demand pressures nor burden the current account and reserve levels. The high import component and external financing of the planned investment and underutilized labor markets should contain inflationary effects and prevent a crowding out of private investment. While the higher imports could potentially worsen the external current account deficit, they are expected to be broadly offset by a recovery in export prices and a larger and more diversified export base arising from the coming online of new megaprojects in the natural resources sector.4 This should also help broadly stabilize Mozambique’s reserve cover over the medium term and prepare the country well for the challenge to service the debt from the envisaged new external borrowing.

uA01fig10

Contributions to Output Growth by Demand Component

(in percent)

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

Selected Indicators, 2008–15

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20. Should contrary to expectations the investment program overextend the capacity of the economy, the authorities stand ready to adjust macroeconomic policies accordingly. They will pay special attention to the emergence of inflationary pressures and signs of a crowding out of the private sector. In this case, they would tighten monetary policy and revisit their budgetary spending plans so as to contain the government’s financing needs.

MEFP ¶16-24, 27-30

21. The structural reform focus under the successor PSI should help shore up the authorities’ policy objectives. The reforms aim to strengthen the authorities’ economic management capacity to help them cope better with the increasingly sophisticated policy environment emanating from, in particular, the possible access to market borrowing and related challenges to the coordination of fiscal and monetary policies. As such, the initial focus of structural conditionality will be on enabling the authorities to make informed decisions with respect to the financing of their investment program, by strengthening debt management, supporting the development of a coherent borrowing strategy, and creating a sound framework for PPPs and concessions. In tandem with the authorities making progress in those areas, it is expected that the focus of structural conditionality will shift back over time to the ongoing reforms to strengthen public financial management, modernize tax policy and administration, support the BM’s move toward an inflation targeting framework, and foster financial sector soundness and deepening. Extensive Fund TA is being provided in those areas, which will facilitate the selection of priority measures for future conditionality during the course of the three-year program. Any reform measures outside of the Fund’s core areas of expertise, such as on improving the business environment, will be taken up by other development partners.

Mozambique: Proposed Structural Benchmarks under the Successor PSI, 2010

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Creating fiscal space to step up public investment

MEFP ¶13-14

22. The adjusted policy mix aiming to support Mozambique’s development objectives hinges on the creation of new fiscal space. During the past two Fund-supported programs, Mozambique successfully created fiscal space primarily through a sustained revenue effort and expanded donor support, which underpinned an expansion of both current and capital spending. Going forward, the program envisages the creation of additional fiscal space through a further increase in revenue collections (1% percent of GDP), a moderate expansion of domestic financing (½ percent of GDP), and nonconcessional external borrowing (2½ percent of GDP); gross aid flows are projected to decline somewhat during the program period. The revenue effort reflects the ongoing improvements in tax administration and tax policy under the program, which are being supported by Fund TA.5 This additional fiscal space will largely be channeled to support the public investment program (Box 5).

Mozambique: Creation of Fiscal Space

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Source: IMF staff calculations

Excludes the Portuguese credit line that will be implemented by the Road Fund.

Corresponds to the reduction of unclassified or unrecorded transactions, which was made possible by the public financial management system reforms.

23. The stepped-up investment program will not compromise Mozambique’s traditionally prudent fiscal policy stance. While the overall fiscal deficit (after grants) will temporarily rise by about 2 percentage points, to a peak of about 7 percent of GDP by 2011, the domestic primary deficit will remain broadly stable at its current level of about 4 to 4½ percent of GDP during the program period. This represents a tightening relative to 2009, as the authorities intend to unwind the fiscal stimulus from the crisis year and contain current expenditure. In addition, consistent with their program commitments, they initiated the removal of the fuel subsidy, which accounted for spending of above 1 percent of GDP in 2009; as a result, since end-March, average retail fuel prices have been adjusted in two steps by a cumulative 30 percent.

uA01fig11

Mozambique: Evolution of the Main Fiscal Balances, 1997–2013

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 174; 10.5089/9781455204618.002.A001

MEFP ¶18

24. The authorities remain committed to expanding priority social expenditure. This is consistent with their poverty reduction strategy (PARPA), which is expected to be updated this year. The PARPA-defined priority expenditure averaged three-fifths of total spending during 2007-09, which the authorities intend to broadly maintain going forward. An indicative floor to this effect was introduced to the program.

The Authorities’ Investment Priorities

The authorities plan to step up their public investment program over the medium term. They expect that several of the key projects will enjoy financing and/or co-financing from development partners and be implemented through either the budget or selected state-owned enterprises (SOEs), such as the Road Fund, the water utility (FIPAG), and the electricity company (EDM).1/ Some projects are planned to be developed under a concession or a PPP, for which the legal framework will be strengthened under the program (a structural benchmark).

The increase in the public investment program aims to remove bottlenecks in transportation and energy infrastructure. The authorities are currently assessing the prioritization and sequencing of infrastructure investment projects and expect to complete this process by the time of the first program review. Current indications point toward a front-loaded expansion of the investment program of 5½ percent of GDP over the next two years, which would abate somewhat thereafter. The MEFP provides an overview of some key projects that at present enjoy the authorities’ priorities.

MEFP ¶14

Mozambique: Total Public Investment Program, 2009–15

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Source: IMF staff calculations.

Portuguese credit line that will be implemented by the Road Fund.

The authorities intend to maximize the return on investment. They plan to focus on projects that they consider could play a pivotal role in improving transportation links between economic centers and to border posts with Mozambique’s neighbors, including landlocked Zimbabwe and Malawi. This is expected to stimulate private sector activity and economic growth. They are assessing the scope of recovering the investment and borrowing costs for some projects through concessions, user fees, and tolls, such as for key road corridors, bridges, and the power transmission line from the Cahorra-Bassa dam to the capital city Maputo; several existing roads and bridges are already toll-based. All such planned projects will be based on feasibility studies, including in some cases also from participating development partners. A continuous structural benchmark will ensure that all projects financed by nonconcessional resources subject to the related assessment criterion under the PSI will be in the transportation and energy sectors.

MEFP ¶14-18

1 The assessment criterion on nonconcessional borrowing is defined to include these three SOEs. It excludes commercially viable companies, namely Portos e Caminhos de Ferro de Mocambique (the company in charge of the rail system and the country’s five ports), LAM (the airline company), and CMH (the company in charge of exploration and processing of natural gas), as well as smaller public entities. In general, the statutes of SOEs require approval by the Minister of Finance on all commercial borrowing. A new Law on Public Enterprises will enhance the reporting of SOEs to the Minister of Finance (see MEFP ¶122).

MEFP ¶19

25. The authorities intend to broaden coverage of the budget. While at present the fiscal stance is measured on a central government basis, the authorities will expeditiously work toward integrating the Road Fund, the water authority (FIPAG), and the electricity company (EDM) into their fiscal analysis. To this end, they will develop a fiscal template that will consolidate the revenue, expenditure, and financing of the central government and those entities, which should allow a regular reporting of quarterly consolidated fiscal accounts later this year. The planned Law on Public Enterprises will further stipulate the reporting requirements of SOEs to the government.

Adapting the borrowing strategy and improving decision making

MEFP ¶15-17

26. The authorities firmly indicated that concessional financing would remain their preferred choice of financing. Nonetheless, they would assess the availability of other financing options—including the possibility of higher domestic borrowing and tapping nonconcessional external resources—to advance their public investment program in transportation and energy infrastructure. The authorities have informed development partners of their intention in this regard, reiterating that the accelerated infrastructure investments are additive to the existing development programs (especially health, education, capacity building) for which donor support will continue to be essential to help meet the country’s development objectives.

27. The fiscal program allows for higher domestic and external borrowing, over a limited time horizon, to implement the high-priority infrastructure projects. Staff’s analysis suggests that limited recourse to domestic financing of up to 1 percent of GDP per year and untied nonconcessional external borrowing averaging 2½ percent of GDP per year (a cumulative US$900 million during the program period), with a commensurate increase in the overall fiscal deficit, could be consistent with macroeconomic stability and debt sustainability, using prudent assumptions on the growth dividend, the revenue response, and financing terms.6 The envisaged larger domestic financing is also expected to help develop domestic financial markets and leave sufficient room for the credit to the private sector.

28. The accompanying debt sustainability analysis confirms Mozambique’s low risk of debt distress but identifies heightened vulnerabilities. While key debt indicators remain under the relevant debt burden thresholds under the Bank-Fund debt sustainability framework (DSF), the thresholds are temporarily exceeded under some stress tests. Consequently, the risk of the new borrowing needs to be carefully managed. To this end, the program includes important commitments to enhance the authorities’ capacity to identify and implement priority projects and step up debt management (Box 6).

Enhancing Investment Planning and Debt Management

Building the capacity to manage risks related to borrowing on nonconcessional terms, the choice of investment projects, and the granting of concessions and PPPs will be a central focus under the program. TA from the Fund and the Bank has been lined up to support the authorities in these endeavors. The following structural reforms were agreed upon:

MEFP ¶16

Debt strategy. By end-November 2010, the government will finalize a multi-year debt strategy (structural benchmark). Key elements of the strategy will include steps to derive an annual borrowing profile and calendar, lengthen the maturity structure to help extend the domestic yield curve, develop the institutional framework of domestic financial markets, and identify possible external financing options.

MEFP ¶11

Debt management. The institutional framework for debt management will be enhanced to help the government make informed decisions about borrowing options and the evaluation of possible risks. To this end, the debt unit in the ministry of finance (MOF) will receive additional staff and be supported in its work by the creation of a debt monitoring committee (DMC) with members of specialized services from other public institutions, such as the central bank. The beefed-up technical expertise will be a strong foundation for the authorities producing their first semiannual debt sustainability analysis (DSA). The first analysis will be completed and published by end-September 2010 (structural benchmark).

MEFP ¶22

Investment planning. A new legal framework for PPPs and concessions will be adopted by the Council of Ministers by end-September 2010 (structural benchmark). The law is expected to follow best practices in terms of financial management, accounting, and risk sharing with the private sector. It will formalize the PPP approval process, introduce ‘gateway’ decision points whereby the consensus of the Ministry of Finance would be required before a PPP can proceed, and create a new PPP unit in the Ministry of Finance to support the gateway process and improve financial oversight of PPPs.

Continuing with fiscal structural reforms to shore up public finance objectives

MEFP ¶20-22

29. The government is determined to press ahead with reforms to shore up public finances. Based on extensive TA from the Fund and other development partners, the government will continue to implement measures to modernize tax policy and administration, strengthen PFM, and improve economic governance. Many of the measures are part of a multi-year effort that is also embedded in performance benchmarks under the harmonized donor support framework (Performance Assessment Framework, PAF).

Containing inflation and strengthening the monetary policy framework

MEFP ¶25-29

30. Monetary policy will continue to aim at maintaining low inflation while making sufficient room for credit to the private sector. The BM aims to contain inflation to below 6 percent over the medium term, with a temporary spike to 9 percent in 2010 arising from spillovers of the removal of the fuel price subsidy. The BM remains committed to maintaining its flexible exchange rate regime, which has enabled it to successfully reduce inflation to single-digit levels and tackle the challenges from the scaling up of aid. This bodes well for the BM facing the new challenges from the increased external borrowing by the government to finance its investment program. In its management of the exchange rate, the BM will pay close attention to the effective exchange rate vis-à-vis a broad basket of currencies, which should prevent a repeat of the temporary overvaluation of the exchange rate in 2008-09 that arose from a focus on the bilateral exchange rate with the U.S. dollar; this overvaluation has in the meantime been reversed.

31. The BM will continue to rely on reserve money as its operational target in the near future. Reserve money growth will be consistent with an assumed further strengthening in money demand and rising financial intermediation. However, the program target is now defined as a monthly average instead of an end-period stock so as to neutralize somewhat the end-month spike in currency demand when wages and salaries are being paid. Staff analysis suggests that this should enhance the ability of the BM to meet the program target.

32. In 2010, the BM will aim to unwind the monetary expansion made necessary by the global crisis, as private operators are expected to revert to their traditional external funding sources. As a result, a marked slowdown in credit to the private sector is projected for this year. As a first step, the BM increased its key policy rate (FPC) from 11½ to 12½ percent in April 2010.

33. The BM will decide whether to move to an inflation targeting framework over the next two years. Based on significant Fund TA, the BM is in the process of tackling some of the prerequisites for a successful transition, as outlined in the relevant action plan. Specifically, the BM needs to: (i) decide which inflation rate will be targeted and what core inflation rate should be used to assess inflationary conditions;7 (ii) enhance its monitoring, understanding, and capacity to project the monetary transmission mechanism; (iii) strengthen its monetary instruments to steer monetary conditions effectively; and (iv) improve its communications strategy with the private sector. The BM is also working on improving its liquidity demand forecasting to better capture the ongoing shift toward a banked economy, as banking services are gradually being rolled out throughout the country.

34. With nonconcessional and domestic borrowing set to substantially increase during the program period, liquidity and foreign exchange management will be particularly challenging. Capital inflows would tend to affect the exchange rate before spending is absorbed in investment-related imports. If the project implementation and related imports are not well timed with borrowing decisions, the lag could lead to temporary appreciation and excess liquidity. If prolonged, this would require selling reserves or issuing t–bills to sterilize the excess liquidity. Large inflows will therefore require greater sterilization and coordination between the BM and the government, and the implementation of a cost-sharing mechanism, which still need to be concluded. The BM will need to carefully balance its sterilization operations: while it has to ensure adequate foreign reserves to meet later debt service payments, the BM will also need to guard against excessive reserve accumulation that would limit the effective external absorption of capital inflows and constrain private sector credit growth.

35. The authorities are currently taking actions to remove the existing exchange restrictions on the making of payments and transfers for current international transactions subject to approval under Article VIII of the Fund’s Articles of Agreement through adoption of foreign exchange regulations. Following the adoption of the foreign exchange law that came into effect on March 11, 2009, they have been working on the implementing regulations that are intended to remove the remaining exchange restrictions. While the drafting process of the implementing regulations has been delayed, as the authorities had reassigned staff to enhance the supervision of the financial sector in the wake of the global crisis, the adoption of the regulations is now near completion, since they are scheduled to be adopted by the Council of Ministers in August 2010, following consultations with the private sector (especially commercial banks) during June/July. The implementation regulations are intended to eliminate the remaining exchange restrictions on the making of payments and transfers for current international transactions, and staff will review the regulations in order to confirm this. The authorities have communicated to staff that they intend to accept their obligations under Article VIII of the Fund’s Articles of Agreement following the issuance of the regulations.

Safeguarding financial sector soundness

MEFP ¶30

36. Several steps will be implemented to strengthen the financial sector. The government and the BM will ensure expeditious follow-up on the recommendations of the 2009 Financial Sector Assessment Program (FSAP) update and recent TA. It will develop a Financial Sector Action Plan to implement the FSAP recommendations by end-July 2010, step-up risk management, and develop deposit insurance. Following rapid credit growth over the last two years, the BM will closely supervise activities in the banking system and encourage banks to develop a stress testing framework. Close attention will be devoted to assessing liquidity conditions and the quality of loan portfolios. Finally, the authorities intend to take important steps to make the AML/CFT framework more effective in the near future.

Improving the business environment, economic governance, and statistics

MEFP ¶23-24, 31-32

37. The government intends to implement a board range of measures to improve the business environment, improve economic governance, and transparency. While they largely fall outside of the core area of expertise of the Fund, they are important to stimulate the hoped-for response of the private sector in boosting economic activity. Among other things, the authorities are working with the Bank on implementing a vast range of fast-track measures to ease red tape, streamline the granting of business-related licenses, improve bankruptcy proceedings, and facilitate trading across borders. They also reiterated their commitment to implement their action plan to enhance transparency and accountability in the natural resources sector to become a full member of EITI within the envisaged timeframe of two years, i.e., by May 2011. Finally, based on Fund TA, the government will improve its statistical system, particularly improving data quality of the quarterly national accounts, consumer prices index, government finance statistics, and megaprojects.

III. Program Monitoring

38. Three changes were made to the quantitative program targets under the successor PSI compared to the expiring PSI/ESF program (MEFP Table 1). First, the ceiling on nonconcessional borrowing is modified to allow untied external borrowing at larger amounts compared to the previous limits that were virtually nil, so as to support the authorities’ development objectives. Second, the reserve money target is to be met henceforth on an average basis, which in light of intra-month volatility should help the BM’s ability to observe the target. And third, an indicative floor on priority spending, as defined in the authorities’ poverty reduction strategy PARPA, has been introduced to ensure that the expansion in the authorities’ public investment program does not impair expenditure on PARPA objectives, such as in the areas of health and education.

IV. Staff Appraisal

39. The Mozambican authorities are to be commended for the successful implementation of their first three-year PSI. Notwithstanding a difficult external environment—first the food and oil price shock and then the global financial crisis—the authorities were able to keep the economy on course through appropriate fiscal and monetary policies. Their traditionally prudent macroeconomic policy mix provided them with the necessary room to flexibly respond to these exogenous shocks. The authorities also made significant headways in implementing their structural reform agenda, including in particular related to PFM, tax policy and administration, the monetary policy framework, and financial sector supervision. Overall, Mozambique fits the characteristics of a mature stabilizer well, with its strong economic growth, low inflation, comfortable external reserves, and sustainable debt.

40. Mozambique has shown remarkable resilience to the global crisis. Its economic performance in 2009 was stronger than expected, notwithstanding the decline in export proceeds and private capital inflows. The domestic economy held up well under the circumstances, as the authorities appropriately loosened fiscal and monetary policies to support economic activity. In particular, an accommodating monetary policy helped substitute foreign borrowing with domestic credit at a crucial time. This, together with the traditional difficulties in predicting cash demand in a country that is transitioning toward a banked economy, contributed to the BM exceeding the reserve money target for end-December 2009. This has resulted in the need for a waiver, which the staff supports, as the BM is committed to restraining monetary growth in 2010. A strong revenue performance—reaping the rewards of past efforts to strengthen tax administration—kept automatic stabilizers small and resulted in a lower-than-anticipated domestic primary deficit. With the improved economic outlook, the authorities’ plans to unwind in 2010 the policy easing from last year is appropriate.

41. The authorities’ intention to raise economic growth to achieve their development objectives while safeguarding macroeconomic stability is welcome, though not without risks. Increasing growth outside the megaprojects in the natural resources sector requires removing identified bottlenecks so that the private sector can develop and play its intended role as an engine for growth. The authorities’ focus is on developing infrastructure in the energy and transport sectors, which is of paramount importance in this vast country. But this is not a panacea, as the infrastructure investment needs to be complemented with targeted measures to improve the business environment, develop sectoral growth strategies, and foster regional trade integration. It also crucially hinges on the authorities’ commitment to preserve one of Mozambique’s strongest assets—its strong track record of macroeconomic stability and low debt vulnerabilities. And it requires putting in place a modern framework for investment planning and PPPs that would be backed by best practices in terms of financial management, accounting, and risk sharing with the private sector. Moving too forcefully with the intended investment push could erode the gains of prior years and risks leaving the country worse off down the road.

42. The successor PSI aims to strike a balance between addressing Mozambique’s daunting development needs and preserving macroeconomic stability. The program accommodates a temporary increase in public investment, partially financed through nonconcessional external borrowing, while keeping domestic demand pressures in check. At the same time, the authorities would need to significantly improve their ability for economic decision making with respect to selecting investment projects and their financing options. The program’s structural reform focus on debt management—including the development of a coherent debt strategy and the finalization of the authorities’ first own DSA—and on investment planning aims to quickly bring the authorities up to speed in this regard. In addition, a continued strong implementation record of fiscal structural reforms in the areas of PFM and tax policy and administration will help shore up the program’s fiscal policy stance. The authorities are also encouraged to continue their efforts to improve liquidity forecasting and management, which should help their preparations for possibly adopting an inflation targeting framework during the program period.

43. Based on program performance to date and the authorities’ commitment to program implementation, staff recommends: (i) completion of the sixth PSI review and the second review under the ESF arrangement; (ii) the waiver for the nonobservance of the end-December 2009 AC/PC on reserve money, as corrective action is being taken; and (iii) approval of the proposed successor three-year PSI covering the period 2010–13.

Table 1.

Mozambique: Selected Economic and Financial Indicators, 2008–15

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

Includes disbursements of IMF resources under the ESF and August 2009 SDR allocation.

Table 2.

Mozambique: Government Finances, 2008–15

(MT Billions)

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

Revenue minus noninterest current expenditure minus locally financed capital expenditure and locally financed net lending.

Residual discrepancy between identified sources and uses of funds. For 2009, reflects expenditure initiated outside the PFM IT regularized later.

Excludes recapitilization bonds issued to the Bank of Mozambique.

A World Bank disbursement of US$80 (US$110) million budget support designated for 2009 (2010) was advanced to 2008 (2009).

Table 3.

Mozambique: Government Finances, 2008–15

(Percent of GDP)

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Sources: Mozambican authorities; and IMF staff estimates and projections. 1/ Includes costs of monetary policy transferred to the Bank

Revenue minus noninterest current expenditure, financed capital expenditure, and locally financed net lending.

Residual discrepancy between identified sources and uses of funds.

Excludes recapitilization bonds issued to the Bank of Mozambique.

A World Bank disbursement of US$80 (US$110) million budget support designated for 2009 (2010) was advanced to 2008 (2009).

Table 4.

Mozambique: Monetary Survey, Quarterly, 2008-101

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Sources: Bank of Mozambique; and IMF staff estimates and projections.

Includes disbursements of Fund resources under the ESF and the August 2009 SDR allocation.

As defined in the TMU, this equals the NCG in the monetary survey excluding Moatize deposits, earmarked donor funds, and bonds issued to capitalize the BM.

3 As defined in the TMU, this equals the NIR in the BM accounts evaluated at the program exchange rates versus the U.S. dollar specified in Table 1 of the TMU.
Table 5.

Mozambique: Balance of Payments, 2008–15

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

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Sources: Data from Government of Mozambique and projections by MF staff.

Accounts for disbursement of an SDR allocation of SDR 108.8 million in 2009Q3 above the line under other investment liabilities of the monetary authorities, and below the line as an increase in reserve assets.

Based on an ESF-HAC arrangement of SDR 113.6 million (100 percent of quota) to be disbursed in three tranches: SDR 85.2 million (75 percent of quota) already disbursed following completion of the fourth PSI review and approval of the ESF arrangement; SDR 14.2 million (12.5 percent of quota) already disbursed following completion of the fifth PSI and first ESF review; and SDR 14.2 million (12.5 percent of quota) to be disbursed upon completion of the sixth PSI and second ESF review.

Table 6.

Mozambique: Indicators of Capacity to Repay the Fund

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Sources: Data from Government of Mozambique and projections by IMF staff.

Based on an ESF-HAC arrangement of SDR 113.6 million (100 percent of quota) to be disbursed in three tranches: SDR 85.2 million (75 percent of quota) already disbursed following completion of the fourth PSI review and approval of the ESF arrangement; SDR 14.2 million (12.5 percent of quota) to be disbursed upon completion of the fifth PSI and first ESF review; and SDR 14.2 million (12.5 percent of quota) to be disbursed upon completion of the sixth PSI and second ESF review.

Accounts for disbursement of an SDR allocation of SDR 108.8 million in 2009Q3. The projected interest obligations do not incorporate the expected temporary interest relief and new structure of interest rates.

Table 7.

Mozambique: Financial Soundness Indicators for Banking Sector, 2001–09

(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: Quantitative Assessment and Performance Criteria and Indicative Targets 1/

(Millions of meticais, unless otherwise specified)

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Sources: Mozambican authorities and IMF staff estimates

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

From June 2010, this is calculated as average of daily values during the third month of the quarter.

Table 9.

Mozambique: Structural Conditionality under the current PSI/ESF, 2010

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Appendix I Republic of Mozambique: Letter of Intent

May 24, 2010

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Mr. Strauss-Kahn:

The Government of Mozambique requests the completion of the sixth review under the Policy Support Instrument (PSI) and the second review under the Exogenous Shocks Facility (ESF). It also requests the approval of a successor PSI for 2010-13. In support of this request, we are transmitting the attached Memorandum of Economic and Financial Policies (MEFP), which reviews implementation of our economic program under the current PSI and sets out the government’s objectives and policies over the short and medium term under the new program.

These policies are consistent with the government’s medium-term Plano de Acção para a Redução da Pobreza Absoluta II (PARPA II) for 2006-09, which was extended to 2010. It aims to maintain macroeconomic stability, promote diversified and strong economic growth, and reduce poverty. A successor Poverty Reduction Strategy is expected to be approved in the second half of 2010, before the first review of the new PSI.

With respect to the current program, all quantitative assessment/performance criteria (A/PC) through end-December 2009 were met, except for the one on reserve money, for which we request a waiver. Reserve money exceeded the program ceiling because of the continued difficulty in predicting the demand for currency in circulation as a result of both the year-end seasonal surge and the structural shift from the expansion of banking services in the economy. We also made strong progress in implementing our structural reform program.

The government believes that the policies outlined in the MEFP are adequate to achieve the objectives of the successor PSI-supported program. Given our dedication to macroeconomic stability, we stand ready to take any additional measures necessary to achieve our policy objectives. The government will consult with the IMF—at its own initiative or whenever the Managing Director requests such a consultation—should revisions be contemplated regarding the policies contained in the attached MEFP. The government will provide the IMF with such information as the IMF may request to be able to assess the progress made in implementing the economic and financial policies and achieving the objectives of the program.

Sincerely yours,

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Attachments: Memorandum of Economic and Financial Policies

Technical Memorandum of Understanding

Attachment I Republic of Mozambique: Memorandum of Economic and Financial Policies

May 24, 2010

I. Performance Under the PSI and ESF Arrangement

1. Mozambique showed considerable resilience to the global economic crisis. Real GDP expanded by 6⅓ percent in 2009, much stronger than expected. Economic activity benefited from dynamic construction, energy, and financial sectors. However, the global crisis triggered large declines in export receipts and private external borrowing. The impact on external reserves was mitigated by the SDR allocation and ESF resources, resulting in an import reserve coverage above 5 months. The government eased macroeconomic policies to contain spillover effects of the crisis to the domestic economy. An accommodating monetary policy facilitated the substitution of foreign borrowing with an exceptionally strong private sector credit expansion. A strong revenue performance kept the size of the automatic stabilizers small and resulted in a lower-than-expected domestic primary fiscal deficit.

2. All the quantitative performance/assessment criteria (P/AC) were met through end-December 2009, except for the one on reserve money, for which we request a waiver. Base money exceeded the program ceiling because of the continued difficulty in predicting the demand for currency in circulation as a result of both the year-end seasonal surge and the structural shift arising from the expansion of banking services in the economy. Structural reforms are on track as well. Specifically, the Extractive Industry Transparency Initiative (EITI) secretariat was created at end-March 2010 and both benchmarks related to the Revenue Authority—the strengthening of its organizational structure and adoption of the e-tax Strategic Planning Document—are being implemented as planned. However, the financial sector contingency plan envisaged for end-May is likely going to be completed by end-September 2010, partly due to delays in the government’s application for, and the World Bank’s approval of, funding for the exercise.

II. Objectives and Policies Going Forward

A. Economic Objectives

3. The government takes pride in Mozambique’s strong economic performance and successful policy implementation under successive IMF-supported programs. This enabled the country to preserve its sound economic fundamentals, with strong economic growth, single-digit inflation, a relatively comfortable international reserves position, and low external and public debt indicators. As a result, the government has gained some flexibility to ease macroeconomic policies to respond to exogenous shocks—such as the recent global crisis—and, going forward, to step up its economic development efforts.

4. Such efforts to sustainably raise and broaden the country’s productive base are necessary, since Mozambique’s economic growth, although high by regional standards, has been trending down over the last decade.

5. Going forward, the government’s focus will be on policies to create an environment conducive to strong private sector activity, which is expected to also help ensure that more and more segments of the population will benefit from economic development. Specifically, the government considers the following avenues to be the most promising to help boost economic development: (i) maintaining macroeconomic stability; (ii) encouraging additional national and foreign direct investment in the natural resources export sector; (iii) significantly stepping up public investment in transport and electricity infrastructure, partly financed through nonconcessional external borrowing and/or Public-Private Partnerships (PPP); (iv) improving the business climate; and (v) reaping benefits from regional integration. In all these efforts, the government will closely cooperate with the domestic private sector and tap expertise from development partners.

6. Consistent with these objectives and policies, the government will update Mozambique’s Five-Year Government Program (PQG) for 2010-14 and adopt it by mid-2010. The development plan will be supplemented by an updated Poverty Reduction Strategy, which will be drafted involving the private sector, civil society, and development partners, and finalized in the second half of 2010, before the first review under the PSI.

B. Macroeconomic Outlook

7. As the global economic crisis wanes, the economic outlook is expected to become more favorable. Real GDP growth should accelerate to 6½ percent in 2010 and 7¾ percent by 2013, largely because of new megaprojects, stepped-up public investment in areas with an expected large growth dividend, and larger private sector participation. Continued prudent macroeconomic policies should keep inflation at around 6 percent on average over the medium term, with a temporary spike in 2010 to above 9 percent following the gradual removal of the fuel subsidy. The government’s investment plans should not fundamentally burden the current account and reserve levels; the current account (after grants) and international reserves are expected to hover around 14 percent of GDP and above five months of imports, respectively, over the next three years.

C. Macroeconomic Policy Mix

8. In 2010, the government intends to gradually unwind the temporary monetary and fiscal stimulus which helped Mozambique weather the impact of the global economic crisis. In particular, the Bank of Mozambique (BM) will begin to reverse, in tandem with the expected recovery of global credit markets, the sharp easing of monetary policy that facilitated substitution of foreign borrowing with domestic credit in the wake of the crisis in 2009. This should also help ward off potential inflationary pressures arising from the recent exchange rate depreciation and from spillovers from the removal of the fuel subsidy, while sustaining credit quality. As to fiscal policy, the strength in revenue collections is expected to continue and should allow a full reversal of the automatic stabilizers and a moderate reduction in the primary domestic deficit relative to 2009.

9. Over the medium term, the government will adjust its macroeconomic policy mix to gradually and prudently increase public investment to close gaps in transport and electricity infrastructure and thus help raise the country’s growth potential. To this end, the fiscal stance will be adjusted to make room for higher domestic and external borrowing, over a limited time horizon, to implement selected high-priority projects with an expected high economic return. Part of the external borrowing is expected to be on nonconcessional terms. Although this will worsen Mozambique’s low debt indicators, the limited time horizon of the planned investment increase and our commitment to concentrate on investment projects with a high growth dividend should ensure that debt sustainability is not at risk.

10. The temporary time horizon of the surge in capital spending will be consistent with macroeconomic stability and debt sustainability. It is not expected to crowd out private investment nor create pressure on domestic demand, as labor markets are underutilized and the investments will have a high import component. In addition, the domestic primary fiscal deficit will remain moderate, and monetary policy will be appropriately tight to ward off inflationary pressures while supporting a continued financial deepening. Should domestic demand pressures materialize, the authorities stand ready to adjust macroeconomic policies accordingly.

D. Fiscal Policy
2010 budget implementation

11. The government aims to reduce the domestic primary deficit by ¼ percentage point, to 4.2 percent of GDP, in 2010. This mainly reflects our intention to further improve tax administration and contain current expenditure. While the 2010 budget law anticipates strong efficiency gains in tax administration that could boost the revenue-to-GDP ratio by 0.7 percentage point, to 18¾ percent of GDP, the government will base its budget execution on more conservative assumptions. As a result, the government will take the following measures to keep domestic current spending broadly unchanged in terms of GDP relative to 2009 until evidence of a stronger revenue performance materializes:

  • In accordance with legal provision of the 2010 Budget Law (Article vii), the Council of Ministers approved the decree on the provisions regarding budget execution (Delegação de Competência sobre a Execução do Orçamento) on April 27, 2010. In addition, on May 18, 2010, the Minister of Finance issued the interministerial regulation (Circular Ministerial) providing the guidance for line ministries for budget execution and contingencies. This legal framework, which is consistent with the general Public Financial Management Law (SISTAFE 2002), limits budget execution to cautionary ceilings as long as revenue collections remain uncertain. According to those provisions, such ceilings are: (i) 90 percent for goods and services and other current expenditures; (ii) 85 percent for civil service wages and transfers; and (iii) 90 percent for domestically financed capital spending. As a result, spending in those categories is currently envisaged to be MT 6.7 billion (2.2 percent of GDP) below appropriations in the 2010 budget law. The decision to spend beyond those ceilings will be taken by mid-November.

12. The government has initiated the phasing out of the fuel subsidy and aims to gradually restore market-based retail prices by the third quarter of 2010. The date of the full pass-through will depend on international price movements but will ultimately entail the unconstrained application of the existing monthly price adjustment formula. To ensure transparency, the government will explicitly show fuel subsidies in its budget documents. With a view to protecting vulnerable segments of the population, the government considers replacing the fuel subsidies with better targeted and more effective alternative measures benefiting those truly in need, in consultation with development partners.

Medium-term fiscal stance

13. The government aims to step up its investment in transport and electricity infrastructure while safeguarding macroeconomic stability. To this end, the medium-term fiscal stance envisages enhanced borrowing from domestic and external sources over a limited time horizon of five years, which would lead to a concomitant temporary rise in the overall fiscal deficit (after grants). During the same period, the government commits to preserve the domestic primary deficit at around 4 percent of GDP. This entails that the expected efficiency gains in revenue administration of 2 percent of GDP will be channeled toward enhancing domestic spending priorities, without any additional recourse to financing.

Stepping up investment

14. The focus of the central government’s investment strategy will be in transport and electricity infrastructure. This is to ensure that the expected growth effect materializes and the scaling up is consistent with the macroeconomic framework. Priority will be given to projects that could have a catalytic effect on private investment. Any new contracting of nonconcessional external borrowing or guarantees by the Central Government and selected state-owned entities (SOEs) subject to the related continuous quantitative AC (see below) will be in those sectors (continuous structural benchmark). The government is currently assessing the prioritization and sequencing of infrastructure investment projects and expects to complete this process by the time of the first program review. It expects that several of the key projects will enjoy financing and/or co-financing from development partners, while others could be developed under a concession or a Public-Private Partnership (PPP). For any projects chosen to be financed with nonconcessional resources, the government will share all project feasibility studies—including those from donors co-financing possible projects—with Bank and Fund staff. Among the projects under evaluation by the government, the following specific projects enjoy the highest priority at present:

  • The international airport of Nacala in Nampula province, which would play a pivotal role in developing the northern part of the country and in servicing a special economic zone;

  • The rehabilitation of the port of Beira, which is strategically located between the northern and southern parts of the country and also serves Malawi and Zimbabwe, the landlocked neighboring countries;

  • An expansion of electricity production at the Cahora-Bassa dam in central Mozambique, which should enhance the reliability of the supply of electricity;

  • The construction of a power line between the Cahora-Bassa dam and Maputo, which would reduce the dependency on electricity re-imports; and

  • An expansion and/or rehabilitation of the road network, as currently only about one-third of Mozambique’s road infrastructure is asphalted. Possible priority projects could include the completion of the transit corridor connecting the port of Beira with Zimbabwe, with the rehabilitation of the remaining section from Beira to Inchope (120 km); and the road between the provinces of Gaza and Maputo (170 km), which would connect areas with high potential for tourism and agriculture.

Borrowing strategy

15. The government aims to implement its stepped-up investment plans by tapping domestic and international financing. As a general principle, the government will aim to rely on the creation of fiscal space through a strengthening of revenue collections, grants, and concessional borrowing first before increasing domestic and external financing:

  • Domestic Financing. The government will limit its annual recourse to domestic financing to less than 1 percent of GDP over the medium term. This is expected to avoid crowding out the private sector. For 2010, the ceiling on net credit to the government is set at MT-1743 million for end-June (indicating a net accumulation in deposits) and MT 933 million for end-December (quantitative AC); these levels largely reflect a drawdown of deposits related to the advance disbursement of World Bank budget support in late 2009. The government and the BM will enhance their coordination on cash flow management, so as to facilitate the BM’s liquidity forecasting and monetary operations.

  • External financing. Concessional donor funds will remain the prime sources of financing in the foreseeable future. Nonetheless, given the size of the planned investment push, the government intends to contract nonconcessional external borrowing of no more than US$900 million during the three-year program period, averaging about 2½ percent of GDP per year. An annual borrowing profile for the program period will be defined by the time of the first program review when the planning of size, purpose and timing of our investment plans will have been firmed up. At this stage, the contracting or guaranteeing of nonconcessional external loans by the central government and key state-owned entities, including the Road Fund, for the investment projects in the infrastructure and energy sectors defined in the previous section will be limited to US$200 million for 2010 (continuous quantitative AC).

16. By end-November 2010, the government will finalize a comprehensive multi-year debt strategy. The preparation of the debt strategy will be supported by FSTAP technical support and closely coordinated with Bank and Fund staff, including during the drafting stage. Key elements of the strategy are expected to include steps to derive an annual borrowing profile and calendar, lengthen the maturity structure to help extend the domestic yield curve, develop the institutional framework of domestic financial markets, and identify possible external financing options (structural benchmark).

17. In the same vein, the government will continue to strengthen its debt management. The debt unit in the Ministry of Finance will benefit from the addition of qualified staff to facilitate the semi-annual production of a debt sustainability analysis (DSA); the first such analysis will be completed and published by end-September 2010 (structural benchmark). The addition of necessary technical expertise aims to help the government make informed decisions about borrowing options (such as choice of instruments, size, currency, and maturity) and the evaluation of possible risks (such as rollover, currency and interest rate risk). The debt unit will also benefit from technical advice from the IMF and World Bank and the creation of a debt management committee (DMC), which will provide technical and analytical support for the development of the macroeconomic framework and DSA; the DMC will comprise staff of the Ministries of Finance, Planning and Development, the BM, and other relevant institutions, as needed.

Priority social spending

18. The government recognizes the importance to protect priority social spending to help sustain progress toward meeting the MDGs, including especially with respect to reducing poverty. Such spending is defined consistently with the PARPA classification. Such spending averaged 17.3 percent of GDP during 2007-09, representing 62 percent of total expenditure. It will be raised to 19.1 percent of GDP in 2010, equivalent to about 62.3 percent of total spending. An indicative floor of such spending is incorporated in the program. The definition of priority spending will be aligned with the any revisions to the concept under the new Five-Year Government Program (PQG) and the successor poverty reduction strategy once they are finalized.

E. Fiscal Structural Reforms
Expanding budget coverage

19. While at present the fiscal stance is measured on a central government basis, the government will expeditiously work toward integrating the Road Fund, the water authority (FIPAG), and the electricity company (EDM) into the fiscal and debt analysis. To this end, by end-June 2010, the government, with technical advice by Fund staff, will develop a fiscal template that will consolidate the revenue, expenditure, and financing of the central government and those entities, in consultation with Fund staff. On this basis, the government will produce by end-August 2010 quarterly consolidated fiscal accounts beginning in 2008. The Law on Public Enterprises, as mentioned above, will further stipulate the reporting requirements of SOEs to the government. This will form a basis for further broadening budget coverage over time, which we will undertake supported by Fund technical advice.

Revenue effort

20. The government will strive to raise its revenue-to-GDP ratio by 1.5 percentage points during the program period. A quantitative indicative target will help monitor progress in this regard. Technical assistance has helped focus the reforms in the areas of tax administration and tax policy on the following key initiatives:

  • Rolling out the electronic tax system e-Tributação (e-tax): Following the approval of the e-Tributação Strategic Planning document on May 15, 2010, the government will approve in 2010 a procedure manual on the collection of the corporate income tax as a pilot for the e-tax roll-out. The revenue authority has also defined a set of concrete actions aimed at strengthening tax collection and improving the business environment. This includes the introduction of online tax filing and the possibility to pay taxes via bank transfer.

  • Reinforcing large taxpayers unit (LTU): The national coordination unit for large tax payers, responsible for planning and monitoring all large taxpayers in the country including megaprojects, will initiate its operations by end-June 2010.

  • Tax policy: To create a level playing field and improve the business environment, the government will assess the recommendations of the recent Fund technical assistance mission by the time of the first program review. As a first step, the government will create the legal basis for the tax treatment of new financial instruments, including mutual funds, leasing, and securitized loans.

Wage policy

21. The government will continue implementing a reform of the civil service pay scale. It approved a new salary policy in September 2008 that it will phase in over the medium term in a very gradual manner, in line with the need to preserve macroeconomic stability and fiscal sustainability. This gradual approach will stabilize the wage bill below 9¼ percent of GDP over the medium term. The new policy aims to simplify and rationalize the salary scales across ministries, decompress the scales consistent with qualification and responsibility, reform the system of housing and other allowances, and harmonize the salary policy with the pension system. Further technical work, supported by development partners, will be undertaken in 2010 to help determine specific elements and the sequencing of reform steps.

Strengthening public financial management (PFM)

22. Based on the PFM vision paper and the 2010-12 SISTAFE Action Plan and Budget, the government envisages the following key measures in the short run:

  • Continued implementation of SISTAFE system: e-SISTAFE will be further rolled out to 15 districts and 35 institutions. Budget execution through e-SISTAFE will gradually increase to 37.5 percent of the executed budget by end-2010. Its program classifiers will be further developed consistent with sectoral accounting, planning and reporting needs.

  • Rolling out e-FOLHA: In order to increase coverage of the e-SISTAFE, by end-September 2010 the salary calculation and processing functionality will be rolled out to 8 sectors at the central level and to the City and Province of Maputo for a gradual introduction of direct salary payments into bank accounts.

  • Improved integration of internal audit in e-SISTAFE system: The General Inspectorate of Finance (IGF) will move toward risk-based audits in light of the gradual roll-out of e-SISTAFE. To this end, IGF will issue a circular to financial departments of line ministries by September 2010 specifying that internal audit will be based on electronic e-SISTAFE reports wherever the system is used. In addition, to reflect emerging fiscal risks from the stepping up of infrastructure investments, IGF will reinforce its work program on state owned enterprises and PPPs.

  • Improving aid management: The MF will actively encourage donors to use the single-and multi-currency treasury accounts at the BM for disbursing project aid.

  • Reinforcing investment planning, limiting fiscal and quasi-fiscal risks, and maximizing economic benefits: By end-September 2010, the Council of Ministers will adopt a PPP Law, which will also be applicable to mega projects and other concessions, including those in the power generation area (structural benchmark). The law will include the creation of the PPP unit within the Ministry of Finance and the mechanisms to formalize the PPP approval process. It will also introduce ‘gateway’ decision points where the consensus of the Ministry of Finance would be required before the PPP can proceed, so as to manage risks. Implementation of the new framework will be facilitated by the creation of the new PPP unit in the Ministry of Finance to support the gateway process and improve financial oversight of PPPs, including through mandated regular reporting from PPPs on their financial statements to the PPP unit. The unit should be operational by end-2010.

  • Improving the framework for public enterprises: A Public Enterprises Law will be adopted by the Council of Ministers by end-July 2010. Among other things, it will ringfence commercial activities of state-owned entities and require quarterly financial reporting to the Ministry of Finance and an annual tabulation of financial and other assets to the General State Accounts. It will also reaffirm the existing provisions that have limited contingent liabilities emanating from state-owned entities, including the need to obtain approval by the Minister of Finance for all borrowing.

  • Enhancing procurement systems: Following up on the Country Procurement Assessment Report (CPAR), the government will adopt terms of reference for carrying out procurement audits in order to assess the integrity and transparency of the system. The ministries that are to be audited in 2011 will be selected by December 2010. By end-June 2010, a strategy for training and capacity development will be defined, and by end-December 2010, the terms of reference for the development of a career in government procurement and certification of experts in this area will be formulated.

Reforming the National Institute for Social Security (INSS)

23. To limit fiscal risks and improve governance and transparency, the government is reassessing its approach to reform the INSS. The adoption of a new investment strategy has been delayed, pending further necessary conceptual work supported by World Bank technical assistance. The new investment strategy will aim solely at protecting the interest of the beneficiaries of the social security system and be approved by end-June 2010. The INSS will also: (i) publish its audited financial statements of 2008 by end-August 2010 and of 2009 by end-2010; (ii) assess its financial viability based on an updated actuarial study that takes into account the financial statements through 2007, and by-end 2010 initiate corrective actions to guarantee the financial equilibrium of the INSS, to be implemented by INSS or to be submitted to the Council of Ministers; (iii) adopt its new organizational structure by end-October 2010; and (iv) introduce an IT system during 2010 to help improve registration of contributors and claimants and strengthen collection of contributions.

Enhancing governance in the natural resources sector

24. The government is committed to becoming a full member of EITI within the envisaged timeframe of two years, i.e., by May 2011. This will enhance the contribution of the natural resource sector to economic development as a result of the improved transparency and accountability in the sector. The newly created EITI secretariat will launch a dedicated EITI website by end July 2010, produce and distribute relevant brochures on EITI by end-July 2010, elaborate the terms of reference for the EITI auditor by end September 2010, and appoint the qualified EITI auditor by end November 2010.

F. Monetary and Exchange Rate Policies

25. The BM is committed to prudent monetary and exchange rate policies aimed at containing inflation at around 6 percent on average over the medium term. The monetary expansion consistent with this objective is expected to leave room for private sector credit expansion.

26. In its monetary policy implementation, the BM will continue to pay close attention to the real effective exchange rate vis-à-vis a broad basket of currencies. This should allow the exchange rate to adjust freely to evolving patterns of trade and financial flows while safeguarding Mozambique’s international reserves. The BM will continue to be cautious in managing the country’s reserves in light of increasing external obligations.

27. The BM will decide whether to move to an inflation targeting framework over the next two years. Supported by IMF technical assistance, the BM is working on establishing the prerequisites for a successful transition, as outlined in the relevant action plan. Specifically, the BM will: (i) assess which inflation rate should be targeted and what core inflation rate should be used to assess inflationary conditions; (ii) enhance its monitoring, understanding, and capacity to project the monetary transmission mechanism; (iii) adopt and implement new monetary instruments to steer monetary conditions effectively; and (iv) improve its communications strategy with the public.

28. During the interim period, the BM will continue its reserve money targeting. A particular challenge will continue to be the structural shifts and seasonal surges in the demand for currency. To this end, the BM will:

  • Improve reserve money targeting. Such targeting will be based on monthly averages, which will neutralize the spike in cash during the last two weeks of each month; and

  • Further enhance liquidity and foreign exchange management. The BM will enhance coordination with the Ministry of Finance on domestic and external borrowing plans, aid management, and cash flow projections, as well as with banks on their liquidity requirements, as the potentially significant increase in foreign exchange inflows from the government’s borrowing plans is likely to accentuate the BM’s liquidity and foreign exchange management challenges.

29. The government intends to accept the obligations under Article VIII sections 2, 3, and 4 of the Fund’s Articles of Agreement in due course. The official communication will be sent as soon as the implementation regulation has been brought in line with the new legislative framework that came into effect on March 11, 2009.

G. Financial Sector Policies

30. The government and the BM will ensure expeditious follow-up to the recommendations of the 2009 Financial Sector Assessment Program (FSAP) update and recent technical assistance:

  • Developing Financial Sector Action Plan. After some delay, the interagency task force will promptly finalize an action plan to implement the FSAP recommendations by end-July 2010. The plan will include measures to enhance access to finance and financial market development, strengthen compliance of the supervisory framework with Basel Core Principles, and complete the modernization of the payments system.

  • Stepping up risk management: In line with FSAP recommendations, the BM will issue regulation (Aviso) on risk management by end-December 2010. The government is working on a draft decree on deposit insurance which it intends to issue by year-end.

  • Enhancing supervision of banking system. Following the rapid credit growth over the last two years, the BM will closely supervise activities in the banking system and encourage banks to develop a stress testing framework. Close attention will be devoted to assessing liquidity conditions and the quality of loan portfolios.

  • Fighting money laundering and financial crime: Following the Inter-Ministerial Civil Service Committee’s approval in April 2010 to hire new staff, the Gabinete de Informação Financeira—GIFIM (Financial Intelligence Unit) will immediately launch the recruitment process and proceed with the necessary capacity building, supported by development partners. The draft amendment to the 2002 AML law, which will remove incompatibilities between the law establishing the GIFIM and the AML law, will be submitted to Parliament by end-August 2010.

H. Other Structural Policies

31. The government is intensifying its reforms to improve the business environment to help raise Mozambique’s growth potential, diversify exports, and stimulate new investment. In coordination with the World Bank, it will work toward implementing a range of fast-track measures by end-2010. This is expected to ease red tape, streamline the granting of business-related licenses, improve bankruptcy proceedings, and facilitate trading across borders.

32. The Government aims to improve its statistical data compilation and dissemination. This should facilitate migration to the Special Data Dissemination System (SDDS) in due course. The Government will focus on improving data quality related to the quarterly national accounts, consumer prices index, government finance statistics, and megaprojects, consistent with IMF technical assistance advice. In particular, the INE will choose a new calculating software before the new rebased Maputo CPI is launched in 2011; this will remove the possible bias of the CPI. INE also intends to increase the geographic coverage of the CPI by including the Greater Maputo area and the populous province of Zambezia.

III. Program Monitoring

33. The quantitative AC for end-June 2010 and end-December 2010 and indicative targets for the second half of 2010 are shown in Table 1. Table 2 lists the structural benchmarks for the new PSI. The first PSI review is expected to be completed by end-December 2010 and the second PSI review by end-June 2011.

Table 1.

Mozambique: Quantitative Assessment and Performance Criteria and Indicative Targets 1/

(Millions of meticais, unless otherwise specified)

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Sources: Mozambican authorities and IMF staff estimates

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

From June 2010, this is average of the daily stock of reserve money and FDP in the third month of the quarter.

Table 2.

Mozambique: Structural Benchmarks for Successor PSI

Mozambique: Structural Benchmarks for Successor PSI

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Attachment II Republic of Mozambique: Technical Memorandum of Understanding

May 24, 2010

1. This Technical Memorandum of Understanding (TMU) defines the quantitative assessment criteria, indicative targets, and structural benchmarks on the basis of which the implementation of the Fund-supported program under the Policy Support Instrument (PSI) will be monitored. In addition, the TMU establishes the terms and timeframe for transmitting the data that will enable Fund staff to monitor program implementation.

I. Definitions

Net credit to the central government

2. Net credit to 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, recapitalization bonds issued to the BM, and proceeds from the signing fee for mineral resource exploration. Credits comprise bank loans, advances to the central government and holdings of central 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 NCG by the banking system will be cumulative from end-December of the previous year.

3. The central 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 in the definition 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 General Directorate of Tax (Direcção Geral dos Impostos, DGI), the General Directorate of Customs (Direcção Geral das Alfândegas, DGA), 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 Património 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 relevant government collecting agencies, in cash or checks, or through transfers into the respective bank account.

Priority social spending

6. Priority social spending is based on the PARPA program categories. Accordingly, it will include total spending in the following sectors: (i) education; (ii) health; (iii) HIV/AIDS; (iv) infrastructure development; (v) agriculture; (vi) rural development; and (vii) governance and judicial system.

Reserve money

7. For the purposes of program monitoring reserve money is defined as the sum of currency issued by the BM and commercial banks’ holdings at the BM. The target is defined in terms of the average of the daily end-of-day stocks in the month of the test date. The reserve money stock will be monitored and reported by the BM.

Net international reserves

8. Net international reserves (NIR) of the BM are defined as reserve assets minus reserve liabilities. The BM’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 central government’s savings accounts related to mineral resource extraction concessions). 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 BM’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.

New nonconcessional external debt contracted or guaranteed by the central government, the BM, and selected state-owned enterprises, with maturity of more than one year

9. The ceiling on nonconcessional external debt applies to external debt contracted or guaranteed by the central government, the BM, the Road Fund, the water authorities (FIPAG), and the electricity company (EDM). It also applies to debt contracted by these three state-owned enterprises from domestic banks or from other state-owned enterprises that is contractually inter-related to external nonconcessional loans.

10. The ceiling applies to external debt with original maturity of one year or more and with a grant element below 35 percent. The grant element is calculated using currency-specific discount rates based on the Organization for Economic Cooperation and Development (OECD) commercial interest reference rates in accordance with the annual Budget Law. The term ‘debt’ will have the meaning set forth in Point 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements adopted on August 3, 1979, as amended August 31, 2009, effective December 1, 2009. The concept of external debt is defined on the basis of the residency of the creditor. The ceiling also applies 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

11. 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 External Debt in Fund Arrangements adopted on August 3, 1979, as amended August 31, 2009, effective December 1, 2009, 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

12. 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. This assessment criterion will be assessed on a continuous basis.

Foreign program assistance

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

Table 1.

TMU Table 1. Mozambique: Net Foreign Assistance, 2009–10

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Source: Mozambican authorities and IMF staff estimates
Actual external debt service payments

14. 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).

II. Adjusters

Net international reserves

15. The quantitative targets (floors) for net international reserves (NIR) will be adjusted:

  • downward by the shortfall in external program aid less debt service payments (up to US$100 million), compared to the program baseline (Table 1);

  • downward/upward for any revision made to the end-year figures corresponding to the previous year; and

  • downward to accommodate higher external outlays because of natural disasters, up to US$20 million.

Net credit to central government

16. The quantitative targets (ceilings) for net credit to the central government (NCG) will be adjusted:

  • upward by the shortfall in the MT value of external program aid receipts less debt service payments (up to the MT equivalent of US$100 million at exchange rates prevailing at the respective test dates), compared to the program baseline (Table 1);

  • downward by privatization proceeds in excess of those envisaged in the program, unless these proceeds are deposited in the government’s savings accounts abroad;

  • downward (upward) for any increase (decrease) in domestic financing from the nonfinancial private sector; and

  • upward to accommodate the higher locally-financed outlays because of natural disasters, up to the MT equivalent of US$20 million at exchange rates prevailing at the respective test dates.

Reserve money

17. The quantitative target (ceiling) for reserve money will be adjusted upward by the excess of the stock of currency in circulation above the level envisaged in the program. The target is defined in terms of the average of the daily end-of-day stocks in the month of the test date. The target will be adjusted up to MT 500 million for end-March, end-June, and end-September and up to MT 750 million for end-December (Table 1).

III. Data and Other Reporting

18. The government will provide Fund staff with:

  • monthly and quarterly data needed to monitor program implementation in relation to the program’s quantitative targets and broader economic developments;

  • weekly updates of the daily data set out in Table 1;

  • weekly data set out in Table 4 of the TMU dated May 26, 2005;

  • monthly updates of the foreign exchange cash flow of the BM;

  • monthly data on government revenues (in detail according to the fiscal table) with a lag not exceeding one month;

  • monthly information on the balance of government savings accounts abroad;

  • monthly data on domestic arrears;

  • monthly budget execution reports (that will also be published) with a time lag not exceeding 45 days; and

  • monthly data on gross international reserves, with the composition by original currencies and converted to US dollars at the actual exchange rates.

19. The monetary survey made available by the BM 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.

20. The government will provide Fund staff with documentation concerning external loan agreements once these have been signed and become effective.
1

More than half of Mozambique’s 128 districts do not have a bank branch, although the country’s four commercial banks have accelerated the expansion of their networks.

2

Megaprojects dominate the economic activity in the secondary sector, and waves of new megaprojects have triggered a rise of the sector’s contribution to GDP growth. During the post-conflict economic expansion, the secondary sector grew by 13 percent on average, while the primary and the tertiary sectors grew by 7 V percent respectively. As a result, the production share of the secondary sector rose from 12 to 23 percent, while that of the primary sector fell from 29 to 26 percent, and that of the tertiary sector from 59 to 52 percent.

3

See Mozambique, Country Economic Memorandum, forthcoming.

4

The Rio Doce coal mine is expected to launch production and exports in 2011, and investment is ongoing to allow an increase in Mozambique’s natural gas and titanium exports by half during 2011-13.

5

A recent assessment of the tax system concluded that Mozambique’s potential tax ratio could exceed 21 percent of GDP in the long run. See International Monetary Fund, 2009, “Evaluation of Reforms in Tax Policy and Administration in Mozambique and Related TA – 1994-2007”.

6

For 2010, the authorities intend to tap nonconcessional financing from bilateral development banks to advance priority projects. Over the medium term, the choice of financing will be determined on the basis of the debt strategy that is being developed (see Box 6 below).

7

The recent multi-topic STA mission concluded that there is a significant downward bias in the CPI, which the authorities need to address urgently, with bilateral technical assistance.

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Cover IMF Staff Country Reports
Mozambique: Sixth Review Under the Policy Support Instrument, Second Review Under the Arrangement Under the Exogenous Shocks Facility, and Request for a Three-Year Policy Support Instrument: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Mozambique.
Author:
International Monetary Fund
Volume/Issue:
Volume 2010: Issue 174
Publisher:
International Monetary Fund
ISBN:
9781455204618
ISSN:
1934-7685
Pages:
94
DOI:
https://doi.org/10.5089/9781455204618.002
Figure 1.

Mozambique: Impact of the Global Crisis

Macroeconomic Policy Stance, 2006–10

Takeoff Events

(Growth index, 0=100)

Real GDP and Per Capita GDP Growth Rates

(Percent)

Real GDP Growth in Non-Fuel Exporting Sub-Saharan Countries

(Averages 1995-2010; percent)

GDP Per Capita at PPP in SSA Countries

(Ranked according to percentiles)
Figure 2.

Mozambique: Macroeconomic Developments

Mozambique: Actual versus Potential Output Growth

(in percent)

Contributions to Output Growth by Production Sector

(in percent)

Total investment

(period averages; in percent of GDP)

Capital Stock Depth Indexes

(Percentile rank)

Contributions to Output Growth by Demand Component

(in percent)

Mozambique: Evolution of the Main Fiscal Balances, 1997–2013

(Percent of GDP)