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IMF Country Report No. 23/17

REPUBLIC OF MOZAMBIQUE

TECHNICAL ASSISTANCE REPORT — FUEL SUBSIDY AND PRICING REFORM

January 2023

This technical assistance report on Republic of Mozambique was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in December 2015.

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Fuel Subsidy and Pricing Reform

Laura Jaramillo, Samah Mazraani, Esther Palacio, Wei Sh

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INTERNATIONAL MONETARY FUND

Fiscal Affairs Department

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MOZAMBIQUE

FUEL SUBSIDY AND PRICING REFORM

Laura Jaramillo, Samah Mazraani, Esther Palacio, Wei Shi

December 2015

The contents of this report constitute technical advice provided by the staff of the IMF to the authorities of Mozambique (the “TA recipient”) in response to their request for technical assistance (TA). This report (in whole or in part) or summaries thereof may be disclosed by the IMF to IMF Executive Directors and members of their staff, as well as to other agencies or instrumentalities of the TA recipient, and upon their request, to World Bank staff and other technical assistance providers and donors with legitimate interest, unless the TA recipient specifically objects to such disclosure (see Operational Guidelines for the Dissemination of Technical Assistance Information—http://www.imf.org/external/np/pp/eng/2013/061013.pdf). Disclosure of this report (in whole or in part) or summaries thereof to parties outside the IMF other than agencies or instrumentalities of the TA recipient, World Bank staff, other technical assistance providers and donors with legitimate interest shall require the explicit consent of the TA recipient and the IMF’s Fiscal Affairs Department.

Contents

• Abbreviations and Acronyms

• Preface

• Executive Summary

• I. Introduction

• II. Fuel Subsidies are Costly

• III. Reform will Impact Household Welfare If Prices Increase

• IV. Strategy for Reform

  • A. Reform the Fuel Price Structure an Increase Transparency

  • B. Depoliticize Fuel Pricing and Adopt an Automatic Fuel Pricing Mechanism

  • C. Implement Measures to Mitigate the Impact of Reform on the Most Vulnerable

  • D. Ensure Transparency and Launch a Public Communication Strategy

• V. Timing and Sequencing of Reform

• Tables

• 1. Proposed Action Plan for Implementation of Fuel Subsidy Reform

• Figures

• 1. Total Subsidy, 2014 Estimate and 2015–16 Projections

• 2. Total Subsidy Share

• 3. Distribution of Welfare Impact

• Boxes

• 1. The Level and Structure of Fuel Taxes

• 2. Choice of Pricing Mechanism

• 3. Social Programs – Country Experience

• Annexes

• I. Annex on Fuel Price Structure

  • A. Current Fuel Import System and Price Formula

  • B. Fiscal Cost of Subsidies

  • C. Recommendations

• II. Annex on Automatic Fuel Pricing Mechanism

  • A. Objectives, Main Principles, and Policy Options

  • B. Recommendations

• III. Annex on Social Impact and Mitigating Measures of Fuel Subsidy Reform

  • A. Distributional Impact of Fuel Subsidy Reform

  • B. Social Assistance Programs in Mozambique

  • C. Recommendations

• Annex Tables

• 1. Current Price Formula Structure

• 2. Margins and Costs, June 2015

• 3. Total Subsidy, 2014 Estimate and 2015–2016 Projections

• 4. Proposed Formula Structure

• 5. Total Subsidy Share

• 6. Cost of Providing MT$1 through Fuel Subsidy to Households in the Lower 80 percent of the Income Distribution

• Annex Figures

• 1. Volumes of Fuel Imports

• 2. Gap between Formula CIF and International FOB, April 2014–February 2015

• 3. Exchange Rate, Formula vs. Central Bank (LC/$US)

• 4. Retail Price Components and Net Tax Components by Type of Fuel

• 5. Retail Fuel Prices, 2014

• 6. Share of per Capita

• 7. Share of Urban and Rural Households

• 8. Share of Household Income Spent on Fuel Products

• 9. Budget Share of Food and Transport

• 10. Distribution of Welfare Impact

• References

Abbreviations and Acronyms

Preface

In response to a request from the Minister of Economy and Finance, Mr. Adriano Afonso Maleiane, a mission from the Fiscal Affairs Department (FAD) of the International Monetary Fund (IMF) visited Maputo during October 7 to 20, 2015 to advise on fuel subsidy reform and implementation of an automatic pricing mechanism, and discuss supporting measures including strengthening of the social safety net. The mission comprised Ms. Laura Jaramillo (head), Ms. Samah Mazraani and Ms. Wei Shi (all FAD), and Ms. Esther Palacio (economist from the Resident Representative’s office).

The mission received excellent support from the authorities of the Ministry of Economy and Finance, the Ministry of Mineral Resources and Energy, and other areas of the Government of Mozambique. The mission met with Minister of Economy and Finance Mr. Adriano Afonso Maleiane and Minister of Mineral Resources and Energy Mr. Pedro Couto. Within the Ministry of Mineral Resources and Energy, the mission held discussions with National Director of Planning and Cooperation Mr. Eugénio Simbine; National Director of Energy Mr. Pascoal Alberto Bacelo; National Director of Hydrocarbons and Fuel Mr. Moisés Paulino; Deputy Director of Hydrocarbons and Fuel Mr. Almirante Dima. Within the Ministry of Economy and Finance, the mission met with Director of Economic Studies Mr. Vasco Correia Nhabinde; National Director of Planning and Budget Mr. Momad Piaraly Jutha; Deputy of Planning and Budget Ms. Chamila Ali; and Treasury Deputy Director Mr. Mastalino Mastala. The mission also met with Director of Tax Policy of the Revenue Authority Mr. Zefanias Tamele; Director of Research and Statistics of the Central Bank Mr. Felisberto Navalha; Director of National Accounts of the National Statistics Institute Mr. Firmino Guiliche. In addition, the mission met with representatives of the liquid fuels procurement operator IMOPETRO; the state oil distribution company PETROMOC; and private oil distribution companies. Furthermore, it met with representatives from ILO, UNICEF and the World Bank.

The mission wishes to thank the authorities for their excellent cooperation and for providing the information and data needed to prepare this report, and especially to Mr. Eugénio Simbine and Ms. Marla Matos for their assistance throughout the mission. The mission would like to express its appreciation to the IMF resident representative, Mr. Alex Segura-Ubiergo, and his staff for their logistical and technical support. In addition, it would like to thank Adam Boyd, Ana Popovich, and Mileva Radisavljević for their administrative support and Ms. Marina Costa, Mr. Jorge Leao, and Ms. Corinne Capela for their excellent interpretation service.