Republic of Mozambique: Staff Report for the 2013 Article IV Consultation, Sixth Review Under the Policy Support Instrument, Request for a Three-Year Policy Support Instrument and Cancellation of Current Policy Support Instrument—Informational Annex

The staff report for the 2013 Article IV Consultation for the Republic of Mozambique focuses on the development agenda and appropriate policy priorities to successfully transition to a resource-rich era. These priorities include skillful medium-term management of the impact of developing coal and gas resources, high public investment spending on growth, external competitiveness, and through increased commercial borrowing, on debt sustainability and investment planning. Mozambique has a high rate of public investment of which more than half is financed domestically. The authorities are working to strengthen their project selection and economic profitability analysis capacity, and to assess the impact of related borrowing on public debt.

Abstract

The staff report for the 2013 Article IV Consultation for the Republic of Mozambique focuses on the development agenda and appropriate policy priorities to successfully transition to a resource-rich era. These priorities include skillful medium-term management of the impact of developing coal and gas resources, high public investment spending on growth, external competitiveness, and through increased commercial borrowing, on debt sustainability and investment planning. Mozambique has a high rate of public investment of which more than half is financed domestically. The authorities are working to strengthen their project selection and economic profitability analysis capacity, and to assess the impact of related borrowing on public debt.

Relations with the Fund

(As of March 31, 2013)

Membership Status: Joined: September 24, 1984; Article VIII

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans:

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Latest Financial Arrangements:

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Projected Payments to Fund2

(SDR Million; based on existing use of resources and present holdings of SDRs):

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Implementation of HIPC Initiative:

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Implementation of Multilateral Debt Relief Initiative (MDRI):

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II. Debt Relief by Facility (SDR Million)

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Implementation of Post-Catastrophe Debt Relief (PCDR): Not Applicable

Safeguards assessment

An update safeguards assessment of the Bank of Mozambique (BM) was completed on January 11, 2010 for the ESF. The assessment found improvements in financial reporting practices following the implementation of IFRS. It noted vulnerabilities in the oversight mechanism for external and internal auditing, controls, financial reporting, and in the BM’s legal structure. It recommended that the BM commission an external quality assurance review of the internal audit function.

Exchange Rate Arrangement

Mozambique has a de jure and de facto floating exchange rate arrangement. The exchange rate is largely determined in the interbank foreign exchange market (MCI). The BM regularly intervenes in the market to smooth seasonal fluctuations, provide foreign exchange liquidity received by the government in the form of aid, and sterilize domestic liquidity as part of its monetary policy operations.

On May 20, 2011, Mozambique accepted its obligations under Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement (www.imf.org). A new foreign exchange law—“Foreign Exchange Law” Law No. 11/2009—came into effect on March 11, 2009. A new foreign exchange regulation to implement the foreign exchange law—the “Regulation for the Foreign Exchange Law” (the “Regulation”) (Decreto No. 83/2010)—was issued on December 31, 2010. The Regulation, in conjunction with the implementing norms subsequently issued by the BM, fully removed the existing exchange restrictions subject to Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement as of July 11, 2011. The two existing multiple currency practices (MCP) were also removed. The MCP arising from the foreign exchange auction system was removed on April 27, 2011 through the adoption of a new regulation on the interbank exchange market and that discontinued the previous multiple price foreign exchange auction system, which in any case had not been used since 2009. The MCP arising from the absence of a mechanism to prevent potential deviations between the rate used by the BM in its foreign exchange transactions in the interbank foreign exchange market and in its transactions with the government, public entities and the World Bank was removed on July 1, 2011 through the adoption of a new mechanism for the determination of the exchange rate for such transactions of which the relevant parties have been notified on August 11, 2011.

AML/CFT framework

Mozambique’s first AML/CFT Mutual Evaluation Report by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) has been formally adopted by ESAAMLG and published on its website. Based on the deficiencies identified in the report, the Financial Action Task Force’s (FATF) International Co-operation Review Group (ICRG) maintains Mozambique in a pool of jurisdictions which may be taken up for review. This process is designed to publicly identify high-risk jurisdictions, and could ultimately result in a public statement by the FATF to apply counter-measures. In order to improve compliance with the FATF Recommendations, the Financial Intelligence Unit (GIFIM) has begun its operations and is working towards membership of the Egmont Group of Financial Intelligence Units. However, the number of suspicious transaction reports (STRs) still appears to be low. Once the AML/CFT law is approved by Parliament, the BM intends to issue implementing guidelines. In order to ensure a consistent application of the AML/CFT framework across various regulators, the Government has established and appointed the members of the National AML/CFT Task Force in December 2011. The AML/CFT strategic plan has been approved by the Council of Ministers and will be submitted to ESAAMLG.

Article IV Consultation

In accordance with Decision No 12794–(02/76), as amended by Decision No 12854–(02/96), Mozambique is on a 24-month Article IV cycle due to the approval of the successor PSI in June 2010. The 2011 Article IV consultation was completed by the Executive Board on June 17, 2011 (Country Report No. 11/149).

In concluding the 2011 Article IV consultation, Executive Directors commended the authorities for their prudent policies that have resulted in a strong economic performance. They noted that, although Mozambique’s medium-term prospects continue to be favorable, significant challenges remain in managing macroeconomic risks and ensuring that the benefits from growth are shared fairly across the population. In this regard, Directors underscored that safeguarding price stability and containing inflation expectations remain key policy priorities for the period ahead. They welcomed the authorities’ new Poverty Reduction Strategy (PARP), including its focus on continued structural reforms to improve productivity and production in labor-intensive sectors such as agriculture, create jobs through improvements in the business environment, and pursue social and human development. These focus areas will be important to achieve sustained growth and poverty reduction. Directors supported the authorities’ prudent fiscal stance aimed at preserving macroeconomic stability and debt sustainability, and encouraged the authorities to adopt a prudent approach to generating additional budgetary revenue from the natural resource sector while protecting Mozambique as a destination for foreign investment. Directors emphasized the importance of adhering to a prudent borrowing strategy, further strengthening debt management, and improving investment planning. They noted the resilience of the banking system during the global crisis, and recommended continued vigilance in light of remaining vulnerabilities.

Ex post assessment of performance under Fund-supported programs

An ex post assessment (EPA) of Mozambique’s performance under Fund-Supported Programs since 1987 was undertaken in December 2003 under the guidelines on assessments of countries with a longer-term program engagement. The EPA was circulated to the Executive Board on November 21, 2003 (Country Report No. 04/53).

Directors commended the authorities for their pursuit of sound macroeconomic policies and wide ranging structural reforms over the past fifteen years which contributed to strong growth of the economy, and a steady decline in poverty rates. Noting that despite considerable progress Mozambique remains a very poor and vulnerable country, Directors urged the authorities to persevere in their efforts to consolidate macroeconomic stability and accelerate and deepen structural reforms with a view to sustaining economic growth, encouraging employment creation, and further reducing poverty.

FSAP participation and ROSCs

A Financial Sector Assessment Program (FSAP) for Mozambique was undertaken during the first quarter of 2003. The related Financial Sector Stability Assessment was circulated to the Executive Board on November 19, 2003 (Country Report No. 04/52). An update to the FSAP took place in February 2009 and the related Financial Sector Stability Assessment circulated to the Board on June 19, 2009 (Country Report No. 10/12). A ROSC on fiscal transparency was issued on February 22, 2001. This ROSC was updated in the context of the 2002 Article IV consultation (Country Report No. 02/140) and the 2003 Article IV Consultation (Country Report No. 04/50). The ROSC on fiscal transparency was updated in May 2008. A Report on the Observance of Standards and Codes (ROSC) data module was prepared in June 2002 and issued on March 5, 2003. This data module was updated in August 2005.

Management’s visit

At the invitation of the authorities, Mr. Kato, Deputy Managing Director, visited Maputo, Mozambique in July 2005. Mr. de Rato, Managing Director, visited Mozambique on August 2007 for a meeting with the African Consultative Group on Quotas, Voice, and Representation. Mr. Lipton, Deputy Managing Director, visited Maputo, in May 2013.

Resident representative

Mr. Victor Lledo has been the IMF’s resident representative to Mozambique since June 21, 2010.

Technical Assistance (2005–2013)

IMF Technical Assistance Provided to Mozambique (2005–13)

(As of May 8, 2013)

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World Bank-IMF Collaboration

(As of May 8, 2013)

59. The Fund Mozambique team met with the World Bank Mozambique team in Maputo during the sixth PSI review mission in April 2013. The objective was to identify macro-critical structural reforms and to coordinate the two teams’ work for the period May 2013 to April 2014.

2. The teams agreed that Mozambique’s main macroeconomic challenge is to sustain higher and more inclusive economic growth going forward. To meet this challenge, Mozambique needs to enable broader-based economic activity led by the private sector, in particular in areas where it has competitive advantages, such as agriculture, trade-related services in support of booming commodity export sectors, labor-intensive manufacturing, and tourism. Given the low level of infrastructure, this will entail policies and reforms to boost public investment, coupled with enhancements in the business environment. As traditional aid is on a gradual declining trend, increasing public investment may require resorting to nonconcessional financing and stepping up capacity in the investment selection and debt management areas.

3. Based on this shared assessment, the teams identified seven structural reform areas as macro-critical, in view of their central role in achieving higher and more inclusive growth:

Debt management and investment planning. The authorities’ ambitious investment program will need to be backed by a strong reform agenda to enhance capacity to manage fiscal risks and ensure value for money. In the field of investment selection, several measures are being implemented to establish an investment pipeline and define project selection standards and protocols. A new legal framework supporting private-public partnership and concessions is being implemented. Debt management will be strengthened to ensure that borrowing and investment decisions entail value for money. This is underpinned by a new medium-term debt strategy.

Public financial management. The focus will be on enhancing the capacity to manage risks outside the central government, including in the area of state-owned enterprises (SOEs) and decentralized administrative units. To achieve this objective, the authorities will step up risk-based controls and audits, continue rolling out their new PFM system, and enhance budget execution and monitoring reports. Other critical measures aim at enhancing control of the wage bill, both in budget preparation and execution. These reforms are macro-critical since they will create fiscal space needed to reduce poverty and increase priority spending, while managing risks related to SOE’s large-scale investment plans and enhancing the government’s oversight.

Tax administration. Despite the strong increase in revenue collections, the tax system is still complex to administer and comply with. It is marked by numerous tax benefits and an overall low contribution from the mega-project sectors. Going forward, the government plans to facilitate tax compliance through electronic tax payment and continue to expand the tax base to cover the large informal sector. The revenue management system will be enhanced, in line with a set of agreed performance indicators. The large tax-payers unit will be made fully operational.

Social safety nets. Two decades of high GDP growth have not yet resulted in significant poverty reduction. This, in turn, undermines the country’s long-term growth potential. To address this, the authorities have started to strengthen their safety nets. Measures include: (i) rationalizing and expanding health insurance coverage; (ii) strengthening higher education and vocational training; (iii) strengthening the financial sustainability and administration of the National Social Security Fund, and creating a new pension system for private sector workers; and (iv) improving the targeting of social protection systems to the most needy. These measures are macro-critical, as better health and education services, stronger pensions systems, and a more effective social safety net can enhance the productivity of the workforce and support social cohesion.

Natural resource wealth. Mozambique is endowed with rich natural resource reserves which are largely not exploited so far. With the recently started coal projects in Tete and a series of other projects in the coming years, the extractive sector is slated for a boom which could make significant contributions to the country’s economic growth and government revenues. This poses challenges for economic management, the sector’s legal and regulatory frameworks and the government’s capacity in managing contracts and revenues. In addition, Mozambique has attained full membership of the Extractive Industries Transparency Initiative (EITI).

Investment climate. Mozambique’s private sector is held back by the high costs of doing business. These arise mainly from weaknesses in governance, access to finance, power supply, tax and regulatory systems, and contract enforcement. Wide-ranging reforms are needed to address these issues. They are macro-critical because a better investment climate is conducive to supporting private sector activities, thereby broadening the country’s productive and export base, creating jobs, and thus helping reduce poverty.

Financial sector stability and development. Strong past growth of credit to the private sector, the expansion of the banking system and its potential exposure to cross-border risks call for strengthening the continuous supervision of the financial sector, as well as the capacity to identity and address potential sources of vulnerabilities. Meanwhile, improving financial intermediation and access to credit remains a top priority. To this end, the authorities have prepared the 2013-22 Financial Sector Development Strategy which includes a wide-ranging and clearly sequenced action plan, covering ways to, among other things, enhance financial inclusion, competition, consumer protection, and financial literacy.

4. The teams agreed on the following division of labor:

Debt management and investment planning reforms. The Fund will continue to play a key role in building government capacity to assess debt sustainability and define a coherent debt strategy through TA and continued support from HQ. Both institutions will assist the authorities in strengthening their debt management capacity, with TA support from the Fund and on-site assistance from the Bank. The Fund will continue to play a key role in helping the authorities plan investments, in line with recent TA and program commitments. The Bank will continue providing technical assistance for enhancing project investment management. The Fund review missions will provide further opportunities to assess progress in this field and discuss possible actions with the Bank.

Public financial management reform. The Bank and the Fund will cooperate in the field of rolling out the new PFM system to cover local administrations and SOEs engaging in large-scale infrastructure investments. The Fund will secure its support through regular TA missions from its AFRITAC South office. The Bank will provide ongoing consultation from its local office and supervision missions of projects under implementation in this area. The Fund program review missions will provide further opportunities to assess progress in this field.

Tax administration reforms. The Fund will provide support through ongoing advice based on regular TA. The Bank will advance reforms in this area in the context of its business environment policies and portfolio.

Social safety net reform. The Bank will take the lead in this field through continued TA in the design of more comprehensive and performing safety nets, in cooperation with other development partners and international organizations (including UNICEF and ILO). The Fund will play its role in identifying the fiscal space for the safety nets. The results will be discussed among the collaborators on a regular basis, so as to inform policy discussions with the authorities. The Bank is also taking the lead in public pension reforms.

Natural resource wealth. The Fund will provide TA under the newly established Topical Trust Fund for Managing Natural Resource Wealth (TTF-MNRW), relating to the fiscal regime of the extractive sector, revenue forecasting, and natural resource statistics, all being crucial to increase the sector’s contribution to the budget and support the country’s development agenda. The Bank is supporting Mozambique’s implementation of EITI through its Multi-donor Trust Fund (MDTF). The Bank also funds the update of the mining law and regulations and the model mining contract, and the development of a concessions database for gas and mining projects to support the government’s forecasting and contract monitoring functions. The Bank is also implementing a program of analytical support for enhanced fiscal policy in a resource rich setting, including a public expenditure review.

Investment climate reform. The Bank will take the lead in working with government to enhance the investment climate, by deepening its agenda to help the authorities cut red tape and simplify the legal and regulatory framework. The results will be shared on an ongoing basis and discussed during the Fund program review missions.

Financial sector stability and development. The Fund will continue to help the Bank of Mozambique to build its capacity to assess risks to financial stability of the banking sector, while the Bank will take the lead in supporting financial sector development and reforms, including through enhanced financial inclusion, competition, consumer protection, and financial literacy. The results of their respective work will be shared and discussed regularly.

5. The teams have the following requests for information from their counterparts:

  • The Fund team requests to be kept informed of progress in the above macro-critical structural reform areas. Timing: when milestones are reached; and at least semiannually during Fund program review missions.

  • The Bank team requests to be kept informed of the Fund’s assessments of macroeconomic policies and prospects, and analytical work on areas under the Fund’s lead, as well as on recommendations of Fund TA missions. Timing: in the context of Fund program review and other missions, and at least semi-annually.

6. The table below lists the teams’ separate and joint work programs during May 2013-April 2014.

Mozambique: Bank and Fund planned activities in macro-critical structural reform areas, May 2013-April 2014

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Statistical Issues

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Mozambique: Table of Common Indicators Required for Surveillance

(As of May 8, 2013)

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Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

Reflects the assessment provided in the data ROSC published in August, 2008, and based on the findings of the mission that took place during November 29–December 7, 2007 for the dataset corresponding to the variables in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 8, except referring to international standards concerning source data, assessment and validation of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

1

Former PRGF.

2

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

3

Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts cannot be added.

4

Under the enhanced framework, an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

5

The MDRI provides 100 percent debt relief to eligible member countries qualified for the assistance. Grant assistance from the MDRI Trust and HIPC resources provide debt relief to cover the full stock of debt owed to the Fund as of end-2004 outstanding at the time the member qualifies for debt relief.

Republic of Mozambique: Staff Report for the 2013 Article IV Consultation, Sixth Review Under the Policy Support Instrument, Request for a Three-Year Policy Support Instrument and Cancellation of Current Policy Support Instrument
Author: International Monetary Fund. African Dept.