The Executive Board of the International Monetary Fund (IMF) has completed the first review under the three-year Policy Support Instrument (PSI) for the Republic of Mozambique.4 The Board’s decision was taken on a lapse of time basis.5
Mozambique’s macroeconomic performance has been strong overall, and its economic program supported under the PSI remains on track. Real GDP growth is projected to accelerate to 7.2 percent in 2010, driven by a recovery in external demand. However, the external environment has been less supportive than expected, as the balance of payments has been burdened by rising fuel and food import prices and lower private capital inflows. Rising food and fuel prices also triggered a surge in headline inflation. In response, the central bank has initiated a tightening of monetary policy. Fiscal policy has been marked by a remarkably strong revenue performance and an overall prudent execution of the budget, which helped offset unexpected outlays, such as for the fuel subsidy. Most of the program’s quantitative targets for end-June 2010 were met—though reserve money growth was higher than envisaged—and there has been good progress in implementing structural reforms.
The authorities’ economic program under the PSI will continue to emphasize preserving macroeconomic stability and debt sustainability while promoting economic development. This includes an acceleration of public investment in infrastructure, partially financed by nonconcessional external borrowing. In the short run, the authorities will pursue a tightening of fiscal and monetary policies to curb inflation expectations. They will also draft, in consultation with civil society and development partners, a new four-year poverty reduction strategy, with a particular focus on making economic growth more inclusive and protecting the population’s more vulnerable segments. The program’s structural reforms will focus on improving public financial management, debt management, tax policy, and financial sector supervision.
The Executive Board approved Mozambique’s second three-year PSI on June 14, 2010 (see Press Release No. 10/242), upon expiration of the previous PSI and completion of the final review under a 12-month high-access arrangement (SDR 113.6 million) under the Exogenous Shocks Facility, aimed at providing temporary balance of payments support in dealing with the global crisis (see Press Release No. 09/247).
The IMF’s framework for PSIs is designed for low-income countries that may not need IMF financial assistance, but still seek close cooperation with the IMF in preparation and endorsement of their policy frameworks. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners. A country’s performance under a PSI is reviewed bi-annually.
The Executive Board takes decisions under its lapse of time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.