Public Information Notice: IMF Concludes Article IV Consultation with Mozambique

January 17, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On December 18, 2000, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mozambique.1


Since the conclusion of the last Article IV consultation in June 1999, economic developments in Mozambique have been marked by a slowdown in economic growth, a rekindling of inflation, and a weakening of the external current account, all linked in large part to the devastating floods that affected the country in February-March 2000. Flood reconstruction and production at the recently opened Mozal aluminum smelter helped contain the economic slowdown, and real GDP growth for 2000 is now expected at 3.8 percent. The exchange rate in real effective terms appreciated moderately during the year.

Inflation rose in the immediate aftermath of the floods, and continued to increase thereafter, to a 12-month rate of 16.8 percent in October 2000, reflecting in part a larger-than-expected monetary growth. The 12-month rate of expansion of broad money increased from 35 percent at end-1999 to 44 percent in September 2000. A recent monetary tightening, however, promises a slowdown of inflation—which declined to 15.7 percent in November—although further oil price increases might pose an upward risk.

Two important commercial banks have been experiencing liquidity and solvency problems, constraining the ability of the central bank to follow a tight monetary policy during the past year. The government, as a minority shareholder, and the private shareholders have agreed to recapitalize the banks. The completion of this task and the strengthening of bank supervision are important government objectives for the next few months.

Government revenue was in line with expectations during the first three quarters of 2000. The first year of operation of the value-added tax, which was introduced in June 1999, produced encouraging results. As part of its medium-term objective of broadening the revenue base, the government has recently tightened the administration of tax and customs exemptions and initiated a more fundamental reform of tax policy and tax administration. Preparation for this included a review of the system of tax and customs exemptions.

Government expenditure in 2000 is expected to increase significantly with respect to 1999, as a result of outlays for flood reconstruction, higher social expenditure, a higher government wage bill, and onetime outlays for bank recapitalization.

In the governance, transparency, and legal reform areas, a review of fiscal transparency in the context of the code of good practices on fiscal transparency was completed; the publication of quarterly budget execution reports was started; and a new commercial code was drafted. However, the adoption of a strategic plan for the justice system expected for October 2000 will be delayed as the government envisages a reform that encompasses all levels of the judicial system. To prepare for close monitoring of the poverty-reduction strategy, the National Statistical Institute published in mid-2000 a comprehensive set of social and development indicators.

Executive Board Assessment

Executive Directors commended the Mozambican authorities for their generally good record of policy implementation despite the devastating floods at the beginning of the year. They welcomed the progress made on structural reforms under the PRGF-supported program, and noted the authorities' commitment to, and strong ownership of the reforms. Looking ahead, Directors considered that, in order to establish the conditions for economic recovery and equitable growth, special emphasis will need to be placed on budget management, prudent monetary and credit policy, and structural reforms.

Directors welcomed the authorities' objective of increasing the revenue-to-GDP ratio, as well as Fund technical assistance in this area. They stressed the importance of proceeding with the rationalization of tax and customs exemptions, improvements in tax administration, and the planned comprehensive reform of the tax system. These measures to increase revenues would help sustain the increasing expenditure needs, especially in the social sector. Directors underscored the importance of further improving expenditure management, accountability, and the transparency of government operations. They welcomed the publication of a quarterly budget execution report and the review of fiscal transparency undertaken in the context of the code of good practices on fiscal transparency. Directors underscored the importance of improving the tracking of poverty-related expenditures, particularly with regard to the use of resources that are freed up as a result of HIPC debt relief. They welcomed the authorities' intention to include information on poverty-related expenditures in the quarterly budget execution reports, beginning in the first quarter of 2001.

Directors noted that the rapid monetary expansion in 2000 poses a risk to macroeconomic stability, and stressed the importance of bringing inflation down to single digits. They therefore welcomed the recent actions by the central bank to reassert monetary control. They also welcomed the authorities' initiative of publishing a more representative exchange rate and considered it an important step to improve the functioning of the foreign exchange market.

On structural reforms, Directors commended the authorities for the progress made in addressing the liquidity and solvency problems of two commercial banks, and stressed the importance of restoring health in the banking sector. They urged the authorities to strictly enforce the safeguard measures put in place, and generally to strengthen prudential regulations and supervision of the banking sector. Directors also called for early adoption of the strategic plan for the justice system. Directors welcomed the authorities' commitment to trade liberalization. They urged them to stay the course of trade liberalization, and to resolve the problems of the cashew processing industry. A few Directors also stressed the need to avoid increasing protection of the sugar sector.

Directors urged the authorities to continue to improve the accuracy, coverage, and timeliness of statistical data.

Directors encouraged the authorities to accept the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement.

Table 1. Mozambique: Selected Economic and Financial Indicators, 1998-2001

    1997   1999 2000   2001
          Prog.   Proj.

    (Annual percentage change, unless otherwise specified)
National income and prices              
Nominal GDP (in billions of meticais) 46,427   50,827 58,887   68,939
Nominal GDP (in millions of U.S. dollars) 3,918   4,005 3,922   4,197
Real GDP   11.9   7.3 3.8   10.4
GDP per capita (in U.S. dollars)   231.6   231.5 221.7   232.0
GDP deflator   2.4   2.0 11.6   6.0
Consumer price index (annual average) 0.6   3.1 12.3   5.7
Consumer price index (end of period) -1.3   6.2 11.0   7.0
External sector              
Merchandise exports   6.3   10.8 15.4   119.0
Merchandise imports   7.5   46.8 -3.2   1.4
Terms of trade   5.3   -0.1 -1.5   1.5
Nominal effective exchange rate (end of period) 1/ 2/ -5.7   0.0 -8.2   ...
Real effective exchange rate (end of period) 1/ 2/ -9.7   1.7 3.4   ...
    (Annual change in percent of beginning-period broad money, unless otherwise specified)
Money and credit              
Net domestic assets   9.3   23.9 25.0   13.3
Of which: net credit to the government -16.0   0.0 12.5   9.8
credit to the rest of the economy 17.8   22.9 26.3   16.5
Broad money (M2)   17.6   35.1 34.0   16.0
Velocity (GDP/ average M2)   5.7   5.2 4.3   4.0
Prime rate (in percent; end of period) 3/ 19.6   19.6 18.4   ...
    (In percent of GDP)
Investment and saving              
Gross domestic investment   23.5   32.6 29.7   27.3
Government   ...   ... 12.8   13.1
Other sectors   ...   ... 16.9   14.2
Gross national savings   11.5   15.1 15.1   16.0
Government   ...   ... 9.3   7.8
Other sectors   ...   ... 5.8   8.2
Government budget              
Total revenue   11.5   12.2 12.7   12.3
Total expenditure and net lending 21.8   25.2 29.1   30.0
Overall balance before grants   -10.6   -13.4 -16.7   -17.7
Total grants   8.2   11.9 10.5   11.5
Overall balance after grants   -2.4   -1.6 -6.1   -6.3
Domestic primary balance   -0.6   -3.5 -7.5   -7.4
Domestic bank financing   -2.3   -0.3 2.5   2.2
External sector              
Current account balance before grants -21.3   -30.1 -28.5   -18.8
Current account balance after grants -12.4   -19.2 -17.6   -8.8
    (In percent of exports of goods and nonfactor services)
Net present value of total external debt outstanding 4/ 538.2   202.0 163.0   150.0
External debt service (nonfinancial public sector)            
Scheduled, before HIPC Initiative assistance (Naples terms) 20.0   26.1 31.3   20.2
Scheduled, after original HIPC Initiative assistance ...   15.3 12.2   8.2
Scheduled, after enhanced HIPC Initiative assistance ...   ... 4.4   5.8
    (In millions of U.S. dollars, unless otherwise specified)
External current account after grants -436   -770 -690   -403
Overall balance of payments   -204   -243 -478   -488
Gross international reserves (end of period) 625   669 700   634
In months of imports of goods and nonfactor services 7.0   5.2 5.7   5.0
In percent of broad money   82.7   76.0 70.5   56.8
Exchange rate (meticais per U.S. dollar; end of period) 3/ 12,366   13,300 16,244   ...
Use of Fund resources (in millions of SDRs)            
Purchases/disbursements   25.2   21.0 45.2   16.8
Repurchases/repayments, before HIPC Initiative assistance 18.1   22.8 22.2   21.0
Credit outstanding   147.2   145.4 168.5   164.3
Quota   84.0   113.6 113.6   113.6

Sources: Mozambican authorities; and staff estimates and projections.

1/ A minus sign indicates depreciation.            
2/ The figure for 2000 is the actual rate at the end of September.
3/ The figure for 2000 is the actual rate at the end of November.
4/ Public and publicly guaranteed, in percent of the three-year average of exports. Data for 1998 reflect the impact of applying traditional debt-relief mechanisms (Naples terms). The data for 1999-2000 include the impact of total debt relief granted under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) and new borrowing

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the December 18, 2000 Executive Board discussion based on the staff report.


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