Mozambique
First Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria-Staff Report; and Press Release

Mozambique continues to show a strong economic performance. The inflation expectations require a tightening of the macroeconomic policy mix. Executive Directors commended the role of government in sustaining economic growth by accelerating the public investment program. Engaging development partners and civil society to make the growth strategy more inclusive and allowing Mozambicans to participate in economic growth and the determination in fighting inflation is welcome. The fuel price policy has contributed to substantial costs to Mozambique’s fiscal and external accounts, and poses future risks.

Abstract

Mozambique continues to show a strong economic performance. The inflation expectations require a tightening of the macroeconomic policy mix. Executive Directors commended the role of government in sustaining economic growth by accelerating the public investment program. Engaging development partners and civil society to make the growth strategy more inclusive and allowing Mozambicans to participate in economic growth and the determination in fighting inflation is welcome. The fuel price policy has contributed to substantial costs to Mozambique’s fiscal and external accounts, and poses future risks.

I. Introduction

1. The program is off to a good start overall. The authorities have shown the same strong ownership of, and commitment to, the program that have marked their past implementation of Fund-supported programs. They stayed a prudent policy course in responding to recent adverse developments triggered by street riots by the urban poor over the rising costs of living and have begun addressing a surge in inflation. Although the program’s medium-term objectives and overall strategy remain valid, some adjustments are required in the short run to reflect the authorities’ response to these adversities.

II. Recent Economic Developments

2. Mozambique’s growth performance remains robust (Figures 1 and 2). Easing macroeconomic policies in response to the global crisis helped sustain economic growth, allowing Mozambique to fare better during the global downturn than its peers in sub-Saharan Africa (SSA) (Figure 3). Real GDP growth is projected to accelerate to 7¼ percent in 2010, well above growth rates in peer countries, driven by a recovery in external demand. Economic activity was broad based and particularly strong in the primary and tertiary sectors.

Mozambique: Comparison with Sub-Saharan Africa, Selected Indicators, 2004-10 1

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Source: REO database, latest available data. Data for 2010 are preliminary projections.

Figure 1.
Figure 1.

Mozambique: Macroeconomic Developments

Citation: IMF Staff Country Reports 2010, 375; 10.5089/9781455212941.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.
Figure 2.
Figure 2.

Mozambique: Recovery from the Global Crisis

Citation: IMF Staff Country Reports 2010, 375; 10.5089/9781455212941.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.
Figure 3.
Figure 3.

Mozambique: Regional Comparison

Citation: IMF Staff Country Reports 2010, 375; 10.5089/9781455212941.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.

3. Nonetheless, the external environment has been less supportive than expected. While the recovery in commodity prices has boosted megaproject exports, the balance of payments has come under pressure from rising fuel and food import prices and lower-than-expected private capital inflows, which continues to force large corporations to tap domestic bank financing. The accommodating monetary policy stance, accentuated by balance-of-payments pressures and thin market trading, has triggered a depreciation of the exchange rate; the meticais has lost about one-third against the US dollar and two-fifths against the South African rand since end-2009. The real effective exchange rate has nevertheless remained broadly stable since mid-2009.

4. Rising food and fuel prices triggered a surge in inflation, exacerbated by the depreciating exchange rate and the adjustment of administered prices. Headline inflation reached 17 percent in the twelve months to September. Food prices, accounting for half of the CPI basket, surged by one-fourth during the period, while domestic fuel prices rose by more than half—which was aggravated by the gradual removal of the fuel subsidy, in line with program commitments (Box 1). Although global food and fuel price increases are projected to taper off, second-round effects on inflation are likely. Indeed, core inflation, while remaining subdued, has edged up from its trough earlier in the year.

uA01fig01

CPI and Components

(Annual change, percent)

Citation: IMF Staff Country Reports 2010, 375; 10.5089/9781455212941.002.A001

The Removal of the Fuel Subsidy

Mozambique has traditionally adjusted fuel prices once per month based on a market-based formula. At the peak of the food and fuel price shock in February 2008, the government introduced an adjustment factor that kept fuel prices below market prices for social reasons. In April 2009, it locked pump prices and asked fuel importers to continue to provide fuel below market prices.

In March 2010, the government began gradually raising fuel prices to market levels, which was completed for petroleum products other than diesel in August 2010, with a cumulative price increase of 73 percent. Diesel prices were raised by 38 percent until May 2010 but remain below equilibrium levels, entailing continued losses to the industry.

An agreement between the government and fuel importers to settle outstanding claims for 2008-09 became effective in February 2010. The government also paid compensation for below-market fuel prices in 2010 until end-May. In November 2010, it clarified that it intends to compensate importers under the market-based formula through a cross-subsidization of diesel from other petroleum products that are less socially sensitive, but agreement with importers on this mechanism and run-up losses is still outstanding. It also plans to put in place a different price structure for wholesale customers which to date also benefited from the below-market price levels.

The fuel subsidy has resulted in higher budgetary costs in 2010 than budgeted (1.3 vs. 0.6 percent of GDP). It also burdened the balance of payments through a sharp rise in fuel imports, as consumers from neighboring countries sought to benefit from lower fuel prices in Mozambique. The planned measures should help reverse the surge in the import bill going forward.

uA01fig02

Fuel Imports and Real GDP Growth

(percent)

Citation: IMF Staff Country Reports 2010, 375; 10.5089/9781455212941.002.A001

5. Once the rise in core inflation became evident, monetary policy responded to the emerging risks to macroeconomic stability. The BM tightened monetary policy in June and again in September by cumulatively raising its key policy rate and reserve requirements by 4 and ¾ percentage points, respectively. It also stepped up sales of foreign exchange to mop up liquidity and help stabilize the exchange rate, given its direct pass-through to inflation. In light of the strong expansion in private sector credit, the BM has closely supervised the banking sector, although so far there have been no signs of deterioration in banks’ credit portfolio quality or profitability.

6. The conduct of fiscal policy until mid-year was broadly as programmed, with two exceptions. First, the fuel subsidy proved more expensive than programmed, as outlined above. And second, capital expenditures fell substantially short, as the formation of the new government delayed the execution of new projects well into the second quarter. This, along with an overperformance of tax collections and cuts in non-priority spending, kept net credit to the government (NCG) within the program limit.

7. The increase in the administered prices on bread, water, and electricity on September 1 led to two days of violent street riots in major cities, with 13 casualties. Mozambique saw similar unrest some two years ago at the peak of the food and fuel price shock. This resurgence prompted the authorities to adopt a series of measures that are slated to be phased out by year-end, conditions permitting, and estimated to cost ¼ percent of GDP in 2010. Among other things, they introduced a bread subsidy, rescinded the tariff increases for electricity and water for low-usage households, and maintained subsidies for urban transportation. The measures are better targeted than the blanket fuel subsidy and believed to benefit the most vulnerable segments of the population.

III. Program Performance

8. All the quantitative program targets for end-June 2010 were met, except the one for reserve money which was exceeded by a small margin. Preliminary data for end-September suggest that the foreign exchange interventions have resulted in the BM missing the indicative NIR target, while reserve money was pushed well above the programmed path as a result of the higher nominal GDP growth, the increase in reserve requirements, and the sharp depreciation of the local currency which boosted the meticais counterpart of deposits in foreign currency.

9. Compliance with structural conditionality was strong. The authorities met the end-September structural benchmarks on the adoption of the PPP law and the drafting of their first debt sustainability analysis (DSA), which produced results broadly similar to those under the DSA prepared by Bank and Fund staff (EBS/10/98, Supp. 1). They also made good progress in implementing their other structural reforms, particularly in the areas of PFM and tax administration.

A. Overview

10. The program is off to a good start, but needs to be adjusted in the short run because of two main developments. First, concerns about rising inflation expectations signal a need for a stepped-up concerted policy response. And second, the authorities are eager to intensify their efforts to reduce poverty in light of the discontent among the more vulnerable segments of the population that came to the fore during the September street riots.

11. The program’s medium-term focus on sustaining economic growth remains valid. The authorities aim to promote economic development embedded in an environment of macroeconomic stability. A key pillar of the strategy is to increase public investment in growth-enhancing sectors (transportation and energy), in part financed by nonconcessional external borrowing (NCB). This is expected to trigger a crowding in of private investment, create employment opportunities, and thereby help make a more meaningful dent in poverty.

12. The medium-term outlook remains favorable. Megaprojects activity is projected to expand at a rapid pace, with the start of operations of several projects over the next few years. As a result, economic activity should accelerate to 7½ percent in 2011 and 8 percent over time. The strong expansion of megaproject exports should offset the still meager growth of traditional exports and the strong import demand related to public and private investment, thereby stabilizing the external current account (after grants) at around 12 percent of GDP and keeping the import cover of reserves at about 5 months over the medium term. Mirroring the concerted policy tightening, inflation is projected to return to single digits in 2011 and approximate the authorities’ objective of 6 percent over the medium-term.

Selected Indicators, 2008-15

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B. Exiting the Policy Stimulus and Curbing Inflation

13. The authorities have started tightening macroeconomic policies, reverting from the expansionary stance adopted during the global economic crisis (Figure 4). With economic growth on a sound footing, they recognized the need to accelerate their tightening of monetary and fiscal policies in 2011 to fight emerging inflation expectations.

Figure 4.
Figure 4.

Mozambique: Macroeconomic Policy Stance

Citation: IMF Staff Country Reports 2010, 375; 10.5089/9781455212941.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.

14. The BM will use its full set of monetary policy instruments to withdraw the monetary stimulus and stabilize the exchange rate (Figure 5). In doing so, it will aim to strike the proper balance between speed and the need to safeguard the soundness of the banking system, as banks need to orderly unwind the large rise in private sector credit made possible by the previous stimulus.

Figure 5.
Figure 5.

Mozambique: Monetary and Financial Sector Developments

Citation: IMF Staff Country Reports 2010, 375; 10.5089/9781455212941.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.

15. The envisaged mopping up of liquidity should lead to a slowdown in monetary expansion relative to GDP during the remainder of 2010 and, in particular, in 2011. Quarterly reserve money growth will decelerate to 5 percent in the fourth quarter of 2010, after 12½ percent in the previous quarter, while annual growth will drop from 25 percent this year to 13 percent next year. This is expected to lead to a concomitant slowdown in private sector credit. The BM will also continue signaling its policy intentions by raising its key policy rates, as needed. The envisaged policy stance, together with the temporary impact of the global crisis and the surge in fuel imports on the balance of payments this year, necessitates a lower target on net international reserves (NIR) for 2010, resulting in a small dent in the import coverage of reserves, although it will quickly revert to about 5 months over the medium term.

16. Fiscal policy is set to contribute its share to the tightening, but with limited scope in 2010 (Figure 5). The primary domestic fiscal deficit is projected to narrow to 4.1 percent of GDP, marginally lower than under the program. Notwithstanding buoyant revenues and a careful budget execution during the first half of 2010, room for a more decisive fiscal tightening during the remainder of this year has been reduced by emerging additional expenditure needs, such as the measures to restore social peace and the larger-than-expected costs for the fuel subsidy. In addition, the wage bill will reach the budgeted amount, as the revenue contingency under the organic budget law was removed in light of buoyant tax collections. The authorities’ cuts in nonpriority domestic spending should nonetheless contain NCG such that it supports the BM’s monetary tightening and avoids a crowding out of the private sector.

17. In 2011, while the overall fiscal deficit will rise, reflecting the planned boost in infrastructure investment, domestic spending will be curtailed. This, together with the strong revenue performance, will result in a decline of the domestic primary fiscal deficit by 0.8 percentage points, to 3 ⅓ percent of GDP.1 This will sharply reduce the government’s recourse to domestic financing to virtually nil, supporting the monetary tightening while preserving room for credit to the private sector.

Figure 6.
Figure 6.

Mozambique: Fiscal Developments

Citation: IMF Staff Country Reports 2010, 375; 10.5089/9781455212941.002.A001

Sources: Mozambican authorities and IMF staff estimates and projections.

18. Like in 2010, consistent with the organic budget law, the authorities agreed to put budget execution under a revenue contingency. It would slow budget execution until evidence of an increase in revenue collections beyond ½ percent of GDP materializes; the draft 2011 budget assumes a rise in revenue of about 1 percent of GDP, similar to the projected revenue effort in 2010. While important reforms in tax policy and administration, closely accompanied by Fund technical assistance, have helped raise revenue collections by 5 percent of GDP since 2004, staff and the authorities agreed to initially base their economic program on the revenue contingency and revisit the pace of budget execution at the time of the next review.

19. In light of the projected sharp rise in the wage bill for 2011, the government committed to revisit the implementation strategy of its wage policy. To date, it has pursued a rapid implementation pace of this multi-year plan in order to, among other things, simplify and decompress the salary scales and reform allowances. The government plans to adjust the implementation pace in line with macroeconomic constraints. In addition, under a structural benchmark for end-July 2011, it will take decisive steps to create an automated real-time civil service database on the number of civil servants and wage payments.

C. Responding to the Riots and Supporting the Most Vulnerable

20. The September riots illustrated the need to accelerate efforts to fight poverty. As highlighted in EBS/10/98, Mozambique’s strong growth performance has been skewed in the capital-intensive natural resource sector, which has had limited spillovers to the domestic economy and created few jobs. While the authorities’ growth strategy underlying their PSI aims at crowding in private sector activity through stepped-up well-targeted public investment in the transportation and energy sectors, this will take time, and there is a need to adopt timely measures to more decisively fight poverty and help preserve social peace. The authorities plan to complete their new Poverty Reduction Strategy (PARP) next spring, in consultation with civil society, the private sector, and development partners (Box 2).

21. The authorities emphasized the transitional nature of the emergency measures adopted in the wake of the September riots. While they created budgetary room for the various subsidies and tax suspensions in 2010 and 2011, they plan to review their effectiveness and possibly replace them with alternative measures in due course.

22. They also expressed interest in studying, jointly with their partners, better targeted social safety nets that could more permanently support those truly in need. This could be achieved within existing programs—current social transfer programs benefit only about one-twentieth of the population—or through the introduction of new initiatives, which, however, are likely to require extensive technical and financial assistance. The authorities indicated they would strive to reserve fiscal space for such measures in their medium-term fiscal program.

Addressing Poverty

Mozambique’s impressive growth performance has helped reduce poverty, but challenges remain. After a sizable 15 percentage point drop between 1997 and 2003, the just released 2008/09 household survey data indicate a broadly stable poverty headcount, at around 54 percent. The data point to a slight rise in urban, and drop in rural, poverty, and substantial regional changes. One-fifth of all households consume less than 800 calories per day. Overall, notwithstanding strong per-capita growth, Mozambique remains below the 25th percentile of the distribution for SSA countries.

The current PARPA will expire this year, and the authorities have launched the drafting of their successor strategy for 2011-14. Following the September riots, they opted to lengthen the drafting process to allow for a more thorough analysis and discussion with stakeholders.

uA01fig12

GDP Per Capita at PPP in SSA Countries

(Ranked according to percentiles)

Citation: IMF Staff Country Reports 2010, 375; 10.5089/9781455212941.002.A001

The new PARP offers an opportunity to make Mozambique’s growth strategy more inclusive and provide better protection to the poor. The authorities have reached out to development partners to discuss possible avenues to generate employment, increase household incomes, and improve food security. This could also include developing sectoral strategies, such as for agriculture and tourism. In addition, the mission urged the authorities to step up efforts to improve the business environment where Mozambique lags many of its African peers. A follow-up event to the March 2010 Namaacha conference on Mozambique’s economic challenges, organized jointly by the authorities, the Bank, and the Fund (see Box 3 in EBS/10/98), is slated to take place in December.

23. There are several possible pro-poor policy options advocated by various development partners. Those include labor-intensive public works programs, a conditional cash transfer system, an agricultural sector reform strategy, school feeding programs, abolition of the remaining health care fees, and targeted urban transport subsidies. Work by Bank and Fund staff in the wake of the 2008 food and fuel price crisis had advocated several of these options.

D. Sustaining Economic Growth

24. The planned acceleration of public investment will be embedded in a prudent policy mix to maintain macroeconomic stability and debt sustainability. The authorities intend to limit the domestic primary fiscal deficit at the previously envisaged level of about 4 percent of GDP from 2012 onwards, coupled with a tight monetary policy stance to achieve their inflation objective, ward off demand pressures, and support financial deepening. They also reiterated their intention to boost the business environment, which will be supported under the Bank’s PRSC.

25. Updated projections for the pipeline of public investment projects and their financing indicate little change relative to prior staff analysis. Implementation of projects financed by NCB and the partially nonconcessional Portuguese credit line should peak over the next three years. This seems compatible with the capacity of the economy, given the high import component and external financing of the planned investment and underutilized labor markets. The current account impact will be more than offset by the expected recovery in external demand and the coming online of new megaprojects with a substantial export potential (e.g., the Rio Doce coal mine). The authorities reaffirmed their commitment to remain vigilant as to any signs of overextending the economy’s capacity that would indicate a need to adjust policies.

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. 2010 data are preliminary projections.

26. The authorities’ envisaged investment and borrowing plans remain consistent with debt sustainability. A DSA update prepared by staff suggests that Mozambique continues to face a low risk of external debt distress. External debt levels should remain below their indicative thresholds under the baseline scenario. The PV of external PPG debt peaks at about 33 percent of GDP in 2015, gradually falling to 23 percent of GDP over time. However, the government’s plans would noticeably increase debt vulnerabilities. The PV of debt-to-GDP ratio under stress tests would temporarily and marginally exceed the relevant threshold. In addition, a high-investment/low-growth scenario indicates the potential risks to debt sustainability of scaling up public investment, if expected growth dividends do not materialize.

uA01fig14

PV of debt-to GDP ratio

Citation: IMF Staff Country Reports 2010, 375; 10.5089/9781455212941.002.A001

27. The authorities reiterated their determination to pursue a cautious approach to NCB. They saw NCB as complementary to their primary reliance on concessional donor funds. They clarified that any NCB would be considered case-by-case, based on economic return and impact on debt sustainability, which should be conducive to containing debt vulnerabilities.

28. The authorities requested greater flexibility under the program to benefit from the program’s overall NCB ceiling of US$900 million. At the inception of the program, this ceiling was determined to be compatible with macroeconomic stability and debt sustainability. In light of the progress made in negotiating two Brazilian loans for Nacala airport (US$80 million) and the port of Beira (US$220 million), the start-up limit of US$200 million set for 2010 is proposed to be raised to US$300 million.2 Considering the authorities’ progress in implementing reforms in debt management and investment planning, further commitments in the current MEFP in this area, and the maintenance of program safeguards—the continuous structural benchmark on channeling NCB to transportation and energy infrastructure and the sharing of feasibility studies—granting the authorities full access to the remaining US$600 million out of the overall NCB program ceiling of US$900 million from 2011 onwards can be justified. This is also warranted in light of Mozambique’s recent progress in public financial management (PFM),3 and the new program commitments that would allow the authorities to slow implementation of NCB-financed projects should this be warranted by macroeconomic circumstances.

E. Building Capacity

29. The program’s emphasis on building institutional capacity to shore up the authorities’ policy objectives and improve economic decision-making will continue. In addition to the afore-mentioned structural benchmark on enhancing real-time wage bill monitoring, conditionality was set in the areas of debt management and investment planning, tax policy, and financial sector supervision. As such, they would underpin achievement of the program’s objectives of safeguarding macroeconomic stability and supporting economic development.

30. Beyond structural conditionality, the authorities committed to important other reforms. Among other things, they agreed to additional reforms in PFM, debt management (including to make the new PPP unit in the Ministry of Finance operational), tax administration, pension reform, and financial sector development and supervision. With respect to natural resources management, the authorities are well on track to become a full EITI member within the envisaged two-year candidacy period.

Structural Conditionality, 2011

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IV. Risks to the Program

31. Although Mozambique’s track record in implementing Fund-supported programs is strong, some risks remain. First, the macroeconomic outlook could worsen, should the recovery of the global economy take longer than expected. This could adversely affect the projected strengthening in export prices for Mozambique’s key commodities, especially aluminum, and burden the current account. It could also delay the anticipated recovery of private capital inflows. Second, disappointments related to the authorities’ plans to make economic growth more inclusive and expand social safety nets could lead to the reemergence of social tensions. Third, the tightening of the macroeconomic policy mix to curb inflation expectations hinges on sustained efforts to raise government revenues and reign in non-priority spending, as well as the BM’s determination to decisively remove the excess liquidity in the economy. Shortfalls in any of these areas, but also sustained international price increases for food and fuel products, could lengthen the period to bring headline inflation back into single digits. And fourth, with a more medium-term perspective, the authorities may encounter difficulties in preserving the focus of government spending on priority infrastructure investment and social sectors, if efforts to contain the wage bill and address the fiscal risks emanating from the continued subsidization of diesel fuel are unsuccessful.

V. Program Monitoring

32. Modifications are proposed for several ACs and indicative targets for end-December 2010. This affects the ACs on NCG, reserve money, and NIR, and the indicative floor on government revenues; these changes largely reflect the changed economic environment and the authorities’ policy response to it. In addition, with respect to the AC on NCB, it is proposed that the ceiling be raised from US$200 million to US$300 million to allow the authorities to contract two loans related to the construction of Nacala airport and the rehabilitation of the port of Beira.

33. From 2011 onwards, it is proposed that the remainder of the full NCB amount of US$900 million that was envisaged for the entire three-year program period be made available. Should the Brazilian loans of US$300 million be signed as expected by year-end, the available NCB amount in 2011 would thus be US$600 million. This should facilitate the authorities’ contracting of NCB loans. The ringfencing of such borrowing should ensure the compatibility of the NCB with macroeconomic stability and debt sustainability.

VI. Staff Appraisal

34. Mozambique has weathered the global crisis well. While the country’s external accounts have shown some strains in 2010, its growth performance has remained impressive, partially helped by the authorities’ appropriate adoption of accommodating macroeconomic policies. Although this has partially contributed to the emergence of inflationary pressures, the authorities’ swift response bodes well for preventing inflation expectations from taking a foothold in the economy. Nonetheless, the rising costs of living have taken a toll on the poor, and the recent unrest highlighted that economic growth over the last two decades has not generated a sufficient number of jobs and raised people’s livelihoods.

35. The authorities are appropriately rethinking their growth strategy in the context of the forthcoming drafting of the new four-year PARP. Their eagerness to engage development partners and civil society on making their growth strategy more inclusive and allowing more Mozambicans to participate in the country’s economic growth is welcome. In this context, the authorities are urged to also consider expanding the existing social safety nets in a well-targeted way, which may be beneficial in enhancing the country’s long-term growth factors; development partners indicated their readiness to assist them in this undertaking. If well done, the new PARP could represent a milestone in building a basis for durable and sustainable growth shared by many. The next PSI review will provide an opportunity to embed any such efforts in the program design, complementing the program’s current focus on macroeconomic stability and economic development through infrastructure investment.

36. The authorities’ determination in fighting inflation is welcome. When core inflation was ratcheting up in mid-2010, the BM quickly signaled its policy intentions through increases in its key policy rate and reserve requirements. It also appropriately chose to focus on foreign exchange sales in its efforts to mop up excess liquidity, which, while helping smooth the exchange rate with its direct pass-through to inflation, necessitated tapping into the country’s international reserves. For 2011, the BM needs to adhere to a strict course of monetary tightening to achieve its declared objective to return inflation to single digits. Over the medium term, achieving the authorities’ inflation objective of 6 percent appears feasible, while continuing to provide the necessary space for financial deepening.

37. The government has shown strong resolve to support the monetary tightening. It was able to reallocate spending within an envelope that was strained by higher-than-expected outlays for the fuel subsidy and the emergency measures to restore social calm. Mozambique’s revenue performance is remarkable, both over time and compared to other SSA countries; the strong gains reaped from the reforms in tax policy and administration in recent years are helping the authorities at a crucial time keep their fiscal program on course. Similarly, following two years of strong expansion of the wage bill, the planned review of the government wage policy, together with improvements to the civil service data base and the wage payment system, should allow the government to make prudent decisions on the way forward, consistent with macroeconomic circumstances. Finally, given the authorities’ strong implementation track record, the PSI’s continued emphasis on fiscal structural reforms will provide a strong footing for the envisaged medium-term fiscal framework.

38. The authorities’ fuel price policy has contributed to substantial costs to Mozambique’s fiscal and external accounts and poses future risks. Although the motivation is understandable, keeping retail prices below market prices over an extended period of time is unsustainable. The recent policy declaration to charge market prices to wholesale customers was overdue, and while the planned cross-subsidization between the various fuel categories could help contain fiscal risks, the authorities are encouraged to swiftly reach an agreement with fuel importers on settling accumulated losses. They also need to assess how the impact of the necessary price adjustments can be cushioned for the poor.

39. Based on program performance to date and the authorities’ traditionally strong ownership of their Fund-supported programs, staff recommends: (i) completion of the first review under the PSI; (ii) the waiver for the nonobservance of the end-June AC on reserve money, as corrective action is being taken; and (iii) modification of ACs.

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, 2009-11

(MT Billions)

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

In line with the organic budget law (SISTAFE 2002) budget execution w ill be limited to cautionary ceilings untill evidence of stronger revenue performance materializes.

Revenue minus noninterest current expenditure minus locally 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.

Table 3.

Mozambique: Government Finances, 2009-15

(Percent of GDP)

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

In line with the organic budget law (SISTAFE 2002) budget execution will be limited to cautionary ceilings untill evidence of stronger performance materializes.

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

Excludes recapitilization bonds issued to the Bank of Mozambique.

Table 4.

Mozambique: Monetary Survey, Quarterly, 2009-101

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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.