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.
June 14, 2010
Introduction
1. My Mozambican authorities value the continued support by the Fund and the constructive policy dialogue with staff. They are committed to implementing reforms and to macroeconomic stability, as is evidenced by the overall satisfactory performance under the current PSI arrangement since its inception, and plan to further strengthen their engagement with the Fund under the successor PSI arrangement, for which they request approval by the Executive Directors.
2. With respect to the current program, all quantitative assessment/performance criteria through end-December 2009 were met, except for the one on reserve money, for which the authorities 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. In addition, there was progress in implementing structural reforms. In this regard, the authorities request Directors’ support for the completion of the sixth review under the PSI and the second review under the ESF.
Performance in 2009
3. Mozambique has showed considerable resilience to the global economic crisis. Real GDP growth was much stronger than expected in 2009, which has been supported by construction, energy, and financial sectors. The global economic downturn triggered a large decline in export receipts and private external borrowing. The impact on external reserves was, however, mitigated by the SDR allocation and ESF resources, resulting in reserve coverage above 5 months of imports. The Government eased macroeconomic policies to contain spillover effects of the global crisis to the domestic economy. An accommodating monetary policy facilitated the substitution of foreign borrowing with a strong domestic private sector credit expansion. On the fiscal side, revenue performance kept the size of the automatic stabilizers small and resulted in a lower-than-expected domestic primary fiscal deficit.
Objectives and policies under the new successor PSI arrangement and outlook
Objectives and outlook
4. Economic performance has been strong and policy implementation has been successful under successive IMF-supported programs. Despite the relative strong GDP growth of the past decade, there are concerns that even though capital-intensive export sectors are growing, activity in the rest of the economy is below potential and labor-intensive growth is yet to be meaningfully exploited. In addition, although economic growth in Mozambique is high by regional standards, it has been trending down over the last few years. This slowed down progress in reducing poverty and improving development indicators. In this context, the authorities recognize the necessity of enhancing their efforts to sustainably raise and broaden the country’s productive base.
5. Going forward, the authorities’ focus will be on implementing policies to facilitate private sector development and sustainable economic growth. To that end, steps will be to enhance economic growth and rural development, in particular, with impact on the poor and disadvantaged through the creation and expansion of jobs; and acceleration of measures to improve the business environment and support to small and medium-sized enterprises. They will also seek to improve the selection process and prioritization of public investment in order to maximize the benefits associated with employment creation and poverty reduction and crowd-in private sector investment and production; and, further strengthen institutions to enable them reap the benefits from regional integration.
6. Consistent with these objectives and policies, and taking into account the political cycle in Mozambique, the Parliament has recently approved the Government’s Five-Year Government Program for 2010-14. This program will be supplemented by an updated Poverty Reduction Strategy, which will be drafted, in a consultative process with all stakeholders, and finalized in the second half of 2010, taking into account the publication of the results of the Household Survey.
7. The economic outlook is expected to improve, as the global economic crisis wanes. Real GDP growth should accelerate to 6½ percent in 2010 and above 7 percent by 2013, facilitated largely by 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 low over the medium-term, with a temporary spike in 2010 following the gradual removal of the fuel subsidy. Since the publication of the staff report, another fuel price increase has taken place, in line with program commitments. The authorities’ investment plans are not anticipated to fundamentally burden the current account and, as a result, international reserve levels are expected to remain above 5 months of imports over the next three years.
8. The authorities are very thankful for the staff’s collaboration at a Seminar held in Namaacha—south of Mozambique—to discuss Mozambique’s medium-term economic policy priorities, as well as on the identification of options for financing the country’s public investment program. This was a unique setting in terms of a wide participation of relevant decision-making individuals from the public sector and other stakeholders in the country. The authorities appreciate the fact that staff took time to participate in this retreat and to engage openly on policy options and exchange ideas, outside the normal review mission meetings.
Fiscal policy
9. The authorities aim to reduce the domestic primary deficit to 4.2 percent of GDP, in 2010. This will be attained through further improvements in the tax administration and current expenditure restraint. The 2010 budget law anticipates strong efficiency gains in tax administration that could boost the revenue-to-GDP ratio to 18¾ percent of GDP. Furthermore, the authorities will base the budget execution on more conservative assumptions.
10. The authorities plan to step-up implementation of public investments in transport and electricity infrastructure by tapping domestic and international financing. They also plan to limit their annual recourse to domestic financing to less than 1 percent of GDP over the medium term. This would avoid crowding out the private sector. Concessional donor funding will remain the prime sources of financing in the foreseeable future. Nonetheless, given the size of the planned investment plans, the authorities are considering external non-concessional borrowing averaging about 2½ percent of GDP per year during the next three years. To support the growing level of external financing, they will finalize by end-2010 a comprehensive multi-year debt strategy, and will continue to strengthen their debt management, and in particular train 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.
Monetary and exchange rate policies
11. The Bank of Mozambique (BM) is committed to implement prudent monetary and exchange rate policies aimed at containing inflation at single-digit on average over the medium term. These policies should help contain inflationary pressures emanating from the recent depreciation of the metical and the spillovers from higher domestic fuel prices due to the removal of fuel subsidy. 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 international reserves.
12. The monetary policy transmission mechanism remains complex. In this regard, the BM will during the new PSI program (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) select and implement new monetary instruments to steer monetary conditions effectively; and (iv) improve its communications strategy with the public.
Structure reforms
13. The authorities will continue with their reforms to improve the business environment to help raise Mozambique’s growth potential, diversify exports, and stimulate new investment. In coordination with their development partners, they will work toward implementing a range of fast-track measures. This is expected to ease red tape, streamline the granting of business-related licenses, improve bankruptcy proceedings, and facilitate trading across borders.
14. In order to improve their statistical data compilation and dissemination, the authorities will focus on improving data quality related to the quarterly national accounts, consumer prices index, government finance statistics, and megaprojects. In the process, the authorities will request Fund’s TA and advice. In particular, the National Statistics Institute (INE) will improve the calculation and the rebase of the CPI, and increase its geographical coverage. Furthermore, the authorities will ensure that INE’s Strategic Plan is aligned with government’s planning and budgeting cycle in order to influence policy development.
15. On PFM reforms, the authorities envisage a series of key measures in the short run comprising: (i) the implementation of SISTAFE system (e-SISTAFE) to more districts and other institutions, as well as on coverage of budget execution; (ii) the salary calculation in e-SISTAFE; (iii) the integration of internal audit in e-SISTAFE system; (iv) improvement in aid management; (v) the strengthening of investment planning, limiting fiscal and quasi-fiscal risks, and maximizing economic benefits; (v) the improvements of the framework for public enterprises; and, (vi) the enhancement of the procurement systems.
16. Other reforms include: (i) reforming the National Institute for Social Security (INSS) to limit fiscal risks and improve governance and transparency; and, (ii) enhancing governance in the natural resources sector, and in this context the Government is committed to becoming a full member of EITI within the envisaged timeframe of two years.
17. Finally, the authorities and the Program Aid Partners (PAPs) have recently agreed on several economic and political governance issues during the last Annual Review concluded in May 2010. The authorities are committed to accelerate reforms in this area, which is also very important to sustain strategies to support growth and poverty reduction without increasing inequalities in the society.
Conclusion
18. Mozambique has an enormous potential for rapid economic growth, and the authorities’ policy reforms are intended to unleash such potential. In this context, the authorities’ desire to identify additional resources to finance an ambitious investment program is a major objective, but the success of this development drive will depend on an approach that combines prudent macroeconomic management with the identification of the right public investments. In addition, it is also clear to the authorities that securing additional financing for infrastructure investments is only part of the problem. This needs to be complemented with efforts to improve the business environment, allowing for greater flexibility in land and labor markets, and improving the logistics for trade. All of these ingredients are needed to unleash private sector initiative, and thereby ensure that the existing infrastructure, as well as the newly planned investments, can be fully utilized to generate economic activity and create wealth.
19. The authorities remain committed to accelerate the broader reform agenda, and mobilize the requisite financing without compromising the debt sustainability of the country. They are also aware that facing these challenges will require additional capacity and good governance. To that end, the authorities count on the support of both the Fund and other development partners to provide TA and enhance policy discussions in the implementation of their development programs. In this context, they request the completion of the sixth review under the PSI, the second review under the ESF, and the approval of the successor three-year PSI for the period 2010-2013.