Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Mozambique

July 24, 2007

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.

Public Information Notice (PIN) No. 07/84
July 24, 2007

On June 18, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mozambique.1


The Mozambican economy has continued to perform well in recent years and is increasingly resilient to exogenous shocks. Real GDP growth has picked up in 2006 led by a recovery in agricultural production and construction activities while the trade balance improved due to a surge in exports. Headline inflation has fallen to single digit levels anchored by a prudent monetary stance. The outlook for 2007 is for continued strong growth, inflation in the range of 5-7 percent, and a sustainable fiscal and external position, with some risks related to a further rise in oil prices.

Policy challenges remain, however, in sustaining Mozambique's growth takeoff and achieving the Millennium Development Goals (MDGs). The stabilization effort and a first-wave of reforms helped sustain a growth of 8 percent a year, on average, since the early 1990s. Broad-based growth and foreign aid, including debt relief, helped reduce poverty and improve social indicators. The experience of countries that have kept growth accelerating over the long run suggests a need to consolidate macroeconomic stability and implement second-generation reforms, including a scaling-up of basic services to address human capital and infrastructure gaps.

The arrangement under the Poverty Reduction and Growth Facility (PRGF) helped maintain macroeconomic stability in the face of exogenous shocks and addressed the structural weaknesses identified in the Ex Post Assessment (EPA, IMF/04/53). Overall performance under the program has been good, which has helped the authorities maintain inflation control and a comfortable level of international reserves in the face of exogenous shocks. The authorities also completed reforms identified in the EPA-particularly in strengthening revenue mobilization by creating a central revenue authority (ATM), improving expenditure efficiency through the rollout of a government financial management information system (e-SISTAFE), and addressing vulnerabilities in the financial system.

The three-year Policy Support Instrument (2007-10) is focused on consolidating macroeconomic stability to sustain Mozambique's growth takeoff in the context of scaled-up foreign aid. Fiscal policy will be reinforced to finance additional priority spending in a sustainable manner and ensure that a scaling-up of aid-financed expenditures reaches the most productive and pro-poor sectors. Monetary control will anchor inflationary expectations while a flexible exchange rate regime will help maintain competitiveness and a comfortable level of international reserves to cushion against exogenous shocks. The structural program aims at improving the business environment by deepening the financial system and reducing the cost of doing business, as well as strengthening the fiscal and transparency regime of the natural resource sector. Institutional and capacity building need to keep pace with the rapid structural transformation of the economy and facilitate the implementation of second-generation reforms.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. Directors commended the Mozambican authorities on the impressive macroeconomic performance and overall satisfactory program performance since the last Article IV consultation. They noted that the economy has been resilient to numerous exogenous shocks, and the outlook is for continued strong growth, moderate inflation, and a sustainable fiscal and external position. Progress has also been made in reducing poverty.

Directors agreed that there are policy challenges related to sustaining Mozambique's growth takeoff and to achieving the MDGs. The strategy to consolidate macroeconomic stability in the context of a continued scaling-up of foreign aid and the acceleration of a second wave of reforms outlined in the authorities' poverty reduction plan (PARPA II) for 2006-09, to be monitored under the new Policy Support Instrument arrangement, should help sustain strong broad-based growth.

Directors noted that consolidating macroeconomic stability would require persevering with sound fiscal and monetary policies, as well as prudent public debt management and public finance reforms. In this regard, the medium-term fiscal framework will need to continue to target an annual 0.5 percent GDP revenue increase and no recourse to financing from the domestic financial system. This should help contain inflation and allow private sector credit to expand further and decrease its cost, while maintaining competitiveness and debt sustainability and reducing aid dependency.

Directors agreed that the 2007 budget was appropriate as it targeted a 0.5 percent of GDP rise in domestic revenue with the share of priority expenditures exceeding 65 percent of total spending. The rollout of the public financial administration system (e-SISTAFE) to all public entities at the central and provincial level, and direct execution of a greater share of current spending should improve monitoring of expenditures. The finalization of guidelines to include donor-funded projects in the single treasury account (CUT) and e-SISTAFE as well as the opening of a multicurrency CUT should be expedited to encourage the donors to transfer projects on CUT.

Directors noted that the public sector reform program is at a critical juncture. They looked forward to the installation of a clean integrated payroll database based on a civil service census and the piloting of program budgeting. The government's decentralization strategy should be clarified and well sequenced with sufficient capacity building and reporting systems to ensure accountability of budgetary resources. This would help address concerns about the accountability and transparency of district spending. Directors looked forward to visible results of the anti-corruption strategy and judicial sector reform.

Directors supported the Bank of Mozambique's policy framework of base money targeting, in conjunction with a flexible exchange rate regime. They welcomed the abolition of the exchange rate band, which demonstrates the commitment of the authorities to a flexible exchange rate regime, and which should help cushion against exogenous shocks and improve competitiveness.

Directors emphasized that second-generation institutional reforms are critical to sustain economic growth. A private sector led growth strategy calls for a strengthening of the business environment, particularly a deepening of the financial sector while strengthening the supervisory framework. Directors welcomed the approval of the new mining and petroleum fiscal laws, and looked forward to the timely adoption of their implementing regulations. They also encouraged the adoption of new model contracts in the mining and petroleum sectors while ensuring that all new sizable projects abide by the principles of the new fiscal regime and the core principles of the Extractive Industries Transparency Initiative.

Directors welcomed the good progress made in seeking financing for the transfer of majority ownership of the Cahora Bassa hydropower plant from Portugal to Mozambique. They noted the authorities renewed commitment to non-recourse financing so as not to increase the government's liabilities to commercial creditors, and ensure transparency and accountability. These principles could be applied to all future infrastructure projects, while encouraging greater private participation to reduce risks to debt sustainability.

Directors emphasized that the timely implementation of the strategic action plan to reduce the cost of doing business will be key to promote export diversification and generate employment. In this regard, high fees charged for scanning freight is a concern, as they increase export/import transaction costs.

It is expected that the next Article IV consultation with Mozambique will be held within 24 months, subject to the provisions of the Executive Board decision on consultation cycles in program countries.

Mozambique: Selected Economic Indicators, 2005-07
Rev. Proj.2
  (Annual percentage change, unless otherwise indicated)

National income and prices


Nominal GDP (millions of MT)

157,345 193,322 220,150

Nominal GDP growth

18.0 22.9 13.9

Real GDP growth

6.2 8.5 7.0

GDP per capita (in U.S. dollars)

348 386 397

Consumer price index (annual average)

6.4 13.2 6.4

Consumer price index (end of period)

11.2 9.4 6.0

External sector


Merchandise exports

16.1 37.0 7.9

Merchandise imports

21.2 16.7 8.4

Terms of trade

22.5 59.0 1.9

Real effective exchange rate (end of period)3

-6.3 1.8 ...
  (Annual changes in percent of beginning-of-period
stock of money, unless otherwise indicated)

Money and credit


Net foreign assets

23.1 31.3 10.4

Net domestic assets

4.0 -7.9 5.7

M2 (12-month percent change)

22.1 25.8 16.2

Interest rate for 90-day treasury bills (percent; of period)

10.0 16.0 ...
  (Percent of GDP)

Investment and saving


Gross domestic investment

21.5 24.9 28.8

Gross domestic savings (excl. grants)

5.6 11.3 10.9

Current account, before grants

-15.8 -13.6 -17.9

Government budget


Total revenue

13.6 14.0 14.5

Total expenditure and net lending

22.1 25.1 30.5

Overall balance, before grants

-8.6 -11.4 -15.9

Total grants

6.3 9.9 11.5

Overall balance, after grants

-2.2 -1.5 -4.5

Domestic primary balance

-1.8 -1.9 -2.7

External financing (incl. debt relief)4

3.4 4.5 5.2

Net domestic financing

-1.5 -3.0 -0.7
  (Percent of exports of goods and nonfactor services)

External debt service (nonfinancial public sector)


Scheduled, after additional bilateral assistance and MDRI

2.0 0.8 0.7
  (Millions of U.S. dollars, unless otherwise indicated)

Overall balance of payments

-57 139 74

Gross international reserves (end of period)

1,103 1,241 1,315

In months of imports of goods and nonfactor services

4.6 4.4 4.2

Sources: Mozambican authorities; and Fund staff estimates and projections.
1 Takes into account IMF delivery of MDRI in January 2006.
2 Projections exclude the Moatize coal mine project, Cahora Bassa transfer, and Petroleum exploration.
3 Minus sign indicates depreciation.
4 Includes movement in the government account set abroad with the proceed of the Moatize coal mine concession.

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.


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