Introduction

My authorities are grateful to Fund management for their continuous support and to staff for constructive policy dialogue and guidance against the backdrop of a very challenging global economic environment. The authorities share the thrust of the staff report as it provides a forthright assessment of recent economic developments and program performance.

Recent Economic Developments

Despite the uncertain external environment, economic developments in 2010 were characterized by strong growth, strengthened balance of payments and better-than-expected fiscal performance. The Mozambican economy proved resilient boosted by significant exports in mineral mega-projects and infrastructure investment. Real GDP grew at 6.6 percent in 2010, higher than that of its regional peers. However, despite robust efforts by the authorities to tighten monetary and fiscal policies, inflation reached double digits for the first time in a decade, fueled by global food and fuel price increases.

Program Performance

Program performance has been strong. All end-December 2010 quantitative assessment criteria (AC) were observed, with the exception of the target on reserve money for which the authorities have since taken corrective action to rein in its growth. On the structural front, all benchmarks were implemented. In this context, my authorities request Directors’ support for the completion of the second review under the Policy Support Instrument, and for modification of assessment criteria as outlined in the staff report. My authorities remain committed to prudent macroeconomic policies and maintaining strong program implementation going forward.

Economic outlook

Reducing the current level of poverty, improving social safety nets, expanding infrastructure investment, and boosting key sectors such as agriculture, fishing, minerals, tourism and transport are key priorities for the Mozambican authorities. However, they are caught between supporting sustainable economic growth and arresting inflation expectations in the context of a challenging internal and external environment. For 2011, my authorities foresee a positive macroeconomic outlook as real GDP is projected to grow by 7¼ percent. They are committed to tightening fiscal and monetary policies in order to control liquidity and monitor reserve money developments aimed at reducing headline inflation to single digits from 2011 onwards. The external current account deficit is projected to stabilize during the next few years, while reserves coverage should approach 5 months of projected imports, fully supported by exports from new mega projects in the mining sector, and continued external support from development partners.

Poverty Reduction and Growth Strategy

In May 2011, my authorities adopted a new four-year Poverty Reduction Strategy aimed at reducing poverty from about 55 percent to 42 percent by 2014. The program is focused on three pillars: i) increasing production and productivity in sectors such as agriculture and fisheries; ii) creating employment through improvements in the business climate; and iii) pursuing human and social developments. The Government is committed to promoting long-term economic growth, and in this regard, intends to create the necessary fiscal space, including from improving collection of revenues from the natural resource sector in order to finance infrastructure investment and expand social safety nets. In this regard, they plan to build on the existing National Basic Social Security Strategy (ENSSB), Strategic Program for the Reduction of Urban Poverty (PERPU) and the ongoing national policy dialogue to refine their strategy for social protection.

Fiscal Policy

The 2011 fiscal objective is to limit the primary domestic fiscal deficit to 3 percent of GDP, ¼ percent lower than initially projected. The government will continue to target a lower fiscal deficit through prudent expenditure execution and continued buoyancy in revenue collection. However, in line with changing social spending priorities, the government has submitted to Parliament a revised budget incorporating adjustments in the budgetary ceiling for transfers and subsidies to accommodate an existing fuel subsidy and planned outlays to cushion the effects of increases in food and fuel prices on the vulnerable groups. My authorities would like to affirm that the previous measures will be gradually phased out as better targeted and sustainable interventions are implemented. In addition, government will continue to reflect the costs of any government outlays for fuel products in the budget, in line with the best fiscal transparency practices.

Mozambique has a low risk of debt distress as shown in the latest Debt Sustainability Analysis (DSA). My authorities reiterate that fiscal policy will continue to be geared toward safeguarding macroeconomic stability and debt sustainability. In this regard, they will move carefully in making use of the ceiling on nonconcessional borrowing under the program. They will continue to improve their debt management and investment planning, in line with commitments under the program.

Monetary and Financial Sector prospects

Bringing inflation to single digits is a key priority for the authorities. With average inflation surging to around 12.7 percent in 2010, the Central Bank of Mozambique intends to take measures to contain it at 9½ percent in 2011 and to reduce it further in the years ahead by continuing to decelerate the pace of monetary expansion. The authorities are committed to maintaining the flexible exchange rate regime and the exchange rate looks broadly in line with macroeconomic fundamentals. On May 20, 2011, my authorities accepted the obligations under Article VIII of the Fund’s Articles of Agreement and are on track to remove all identified exchange restrictions shortly.

Financial sector reform will be guided by the prospective 2011-20 Financial Sector Development Strategy that will be finalized no later than end-September 2011. The BM will continue to monitor the banking system closely to safeguard its soundness, enhance financial competition, and protect consumers. In particular, work will continue to fully develop a financial sector contingency plan, migrate to Basel II, introduce deposit insurance, broaden electronic banking and strengthen defenses against money laundering.

Structural Reforms

My authorities are committed to continue with the reforms in public financial management (PFM) as well as improving their reporting, monitoring, and control of budget execution. They will continue to improve the e-SISTAFE budget execution system and will roll it out nationally with the aim of completion by 2015. My Mozambican authorities are aware that enhanced debt management and investment planning are critical to ensure prudent borrowing decisions. Thus, they will continue reforming debt management and investment planning through the strengthening of the new Debt Management Committee (DMC) and Project Coordination Committee (PCC) that will oversee project cycle management and borrowing options.

In addition, the authorities intend to pursue a more business-friendly environment through tax policy and administration reforms. They will step up efforts to improve automated revenue collection and better monitoring of large taxpayers through strengthening the existing large taxpayers unit, and lowering transactions costs for taxpayers. Furthermore, an Anti-Corruption Strategy was approved in January 2011, and the authorities intend to submit to Parliament by end-July 2011, the legislation required to implement the strategy.