Republic of Mozambique and the IMF

Press Release: IMF Executive Board Approves PRGF for the Republic of Mozambique
July 20, 2004


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Republic of MozambiqueLetter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Maputo, June 4, 2004

Use the free Adobe Acrobat Reader to view the MEFP Table 1 (10k PDF file)

The following item is a Letter of Intent of the government of the Republic of Mozambique, which describes the policies that the Republic of Mozambique intends to implement in the context of its request for financial support from the IMF. The document, which is the property of the Republic of Mozambique, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 

Ms. Anne Krueger
Acting Managing Director
International Monetary Fund
Washington, D.C., 20431
U.S.A.

Dear Ms. Krueger:

1. The Government of Mozambique has prepared a new program of economic and structural adjustment that it intends to implement during the next three years. The main elements of the program are described in the attached Memorandum of Economic and Financial Policies (MEFP) covering the period 2004-06. The memorandum also sets forth in detail the objectives and policies that the Government intends to pursue during 2004. A Technical Memorandum of Understanding on Selected Concepts, Definitions, and Data Reporting Requirements under the program is also attached.

2. In support of its program, the Government of Mozambique hereby requests a new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in a total amount of SDR 11.36 million (10 percent of the quota). The Government also requests that the first disbursement under the arrangement, in an amount equivalent to SDR 1.62 million, be made available following approval of the new PRGF arrangement by the Fund's Executive Board.

3. The Government of Mozambique believes that the policies and measures set forth in the attached MEFP are adequate to achieve the objectives of the program to be supported by the new PRGF arrangement, but it will take any further measures that may become necessary for this purpose. Moreover, the Government will continue to consult with the Fund on its economic and financial policies, in accordance with the Fund's policies on such consultations, and to provide the Fund with such information as the Fund needs to assess the government's progress in implementing the economic and financial policies described in the MEFP.

4. The Government will conduct with the Fund the first review under the new PRGF arrangement no later than end-November 2004, based on the semi-annual quantitative performance criteria and indicative targets for end-June 2004, and the relevant structural performance criteria and benchmarks through November 15, 2004. The second review under the program will be completed no later than end-May 2005. In the context of the first review, the Government will specify its policies for the second-year program.

Sincerely yours,

/s/

Luisa Dias Diogo
Prime Minister and
Minister of Planning and Finance

/s/

Adriano Afonso Maleiane
Governor
Bank of Mozambique


Memorandum of Economic and Financial Policies
of the Government of Mozambique for the Period 2004-06

I. Introduction

1. The Government of Mozambique has implemented four Fund-supported programs over the last seventeen years. These programs were instrumental in moving from a centrally planned to a market-based economy, achieving macroeconomic stability, and substantially reducing the country's external debt burden in the context of the HIPC Initiative. Real GDP growth averaged close to 7 percent a year over this period, the international reserves position was strengthened, and important reforms were implemented. Moreover, substantial advances were made toward achieving the objectives specified in the Plano de Acção Para a Reduçao da Pobreza Absoluta (PARPA), with the proportion of the population living in absolute poverty declining from almost 70 percent in 1997 to 54 percent in 2002, which is already below the PARPA target of 60 percent for 2005.

2. Although economic performance improved markedly in response to these reforms, important challenges remain. In recent years, growth has been stimulated in part by foreign investment flows in several large-scale projects (megaprojects) and a strong recovery of agricultural output following the floods in 2000. However, the linkages of these megaprojects with the domestic economy need to be enhanced and the performance of the agriculture-based family sector strengthened in order to further reduce poverty. Broadening and sustaining growth requires the implementation of deeper structural reforms to increase productivity and encourage private investment and employment creation in sectors with high growth potential, such as agriculture, light manufacturing, tourism, transport, and mining.

3. The government is also conscious of the need to consolidate macroeconomic stability while ensuring adequate budgetary resources for the priority sectors. To that end, efforts need to be continued to further strengthen revenue mobilization, improve expenditure efficiency, and enhance fiscal transparency. Moreover, the Banco de Moçambique (BM) is committed to strengthening monetary and exchange rate management in order to lower inflation and reduce its volatility.

4. Progress has been made in recent years in strengthening the financial system, including the major banks. However, some important weaknesses still need to be addressed, and further improvements are required in bank supervision, prudential regulation, and accounting standards to move toward best international practices. In addition, reforms are needed to reduce bank spreads and improve the lending environment to facilitate access to bank credit.

5. In the rest of this document we describe recent economic developments, outline the main elements of the government's economic program for 2004-06, and detail our policies for the remainder of 2004.

II. Recent Developments and Program Implementation

6. Mozambique's last Poverty Reduction and Growth Facility (PRGF) arrangement with the International Monetary Fund expired on June 28, 2003. In the context of the fifth review under the arrangement, the government reached understandings with Fund staff on indicative targets and benchmarks to monitor macroeconomic performance during the second half of the year.

7. Following a good performance during 2002, macroeconomic developments under the government's program in 2003 and early 2004 continued to be broadly satisfactory. Preliminary information suggests that manufacturing output, transportation, and services performed strongly in 2003, and that the government's target of real GDP growth of 7 percent is likely to have been met. Inflation, however, increased to 13.8 percent during 2003, compared with a target of 10.8 percent in the program. The higher-than-envisaged inflation in 2003 is mainly explained by the sharp appreciation of the South African rand against the U.S. dollar (and the metical) and the impact on food prices of the regional drought early in the year. Inflation rose further to over 17 percent in January 2004, owing largely to a significant monetary expansion toward the end of 2003. This expansion was associated with a concentration of government spending that was financed with delayed disbursements of external aid that were not sterilized by the central bank through sales of foreign exchange. The 12-month rate of inflation declined to 13 ½ percent in March 2004.

8. Most of the indicative quantitative targets under the government's program for end-September 2003 and end-December 2003 were observed. However, the indicative target for the government's domestic primary deficit for end-December 2003 was exceeded by 0.3 percent of GDP, owing mainly to higher-than-envisaged locally financed capital outlays, and the end-year indicative target for base money was also missed (Table 1).

9. The government's domestic primary deficit (excluding bank restructuring costs) increased slightly relative to 2002, to 4.0 percent of GDP in 2003; this compares with a deficit of 3.7 percent of GDP envisaged in the program. Tax revenue rose markedly as a result of the implementation of a new code for personal and corporate income taxes, the full-year effect of a new, more transparent fiscal incentives code approved in 2002, and the introduction of withholding of income tax on the salaries of government employees. In addition, in May 2003, the government raised the specific tax on domestic petroleum products by 62 ½ percent to offset a large part of the erosion experienced by these taxes in recent years because of inflation. The increase in tax receipts was offset, to a large extent, by a decline in nontax revenue associated in part with the decision to suspend the distribution of central bank dividends to the government in order to strengthen the BM's balance sheet.

10. Noninterest current expenditure rose in 2003 owing to higher outlays related to the local elections, and to an increase in the wage bill following an average wage adjustment for government employees of 17 percent and an expansion in employment in the health, education, and security sectors. Interest payments turned out higher than programmed as delays in disbursements of external assistance during the second and third quarters forced the government to finance its operations by resorting to domestic borrowing and delaying payments to domestic suppliers. External disbursements were fully normalized toward the end of the year, which permitted the government to repay these obligations. Spending on PARPA priorities is estimated to have declined to 64.1 percent of total primary expenditure in 2003, from 65.3 percent in 2002. However, in constant prices, priority spending rose by 5.5 percent in 2003.

11. Monetary growth slowed during 2003 but ended up being higher than programmed. Broad money rose by 18.7 percent during 2003, compared with a revised program target of 13 ½ percent, reflecting the monetary expansion that took place toward the end of the year. The net international reserves of the central bank rose by US$172 million during 2003, to a level of US$797 million by year's end (seven months of imports), compared with an adjusted program target of US$669 million. Average commercial bank lending rates fell from 37 percent in late 2002 to 26 percent in February 2004, but interest spreads remained high at 15-16 percent. In an effort to improve monetary management, in January 2004, the BM began weekly price auctions of preannounced amounts of open market paper with maturities of 91 and 182 days, and introduced daily operations with instruments of very short maturities (one to six days) to improve liquidity control.

12. The external current account deficit (after grants) is estimated to have declined from 12.7 percent of GDP in 2002 to 6.2 percent in 2003. Total exports are estimated to have grown by 30 percent, reflecting a substantial increase in production by MOZAL (the aluminum smelter) and a strong performance of some traditional exports, such as cotton and timber. At the same time, imports rose by 7 percent in 2003, with megaproject imports recording a robust increase.

13. Significant advances were made during the first half of 2003 in implementing structural reforms, but progress slowed subsequently in part because of capacity constraints and factors beyond the government's control. In the first half of the year, three structural benchmarks under the last PRGF were completed (Table 2). These included the submission to the assembly of amendments to the Financial Institutions Law and the Organic Law for Tax Tribunals (the latter was passed by the assembly in December 2003), and the approval of a plan to establish the Autoridade Tributaria de Moçambique (ATM), which would integrate the Direcção Nacional de Impostos e Auditoria (DNIA) with the Direcção Geral das Alfândegas (DGA). Following some delays, in December 2003, the government established a consolidated treasury account as a first step toward improving the transparency and efficiency of treasury operations. Moreover, starting in January 2004, some elements of a new budget execution system (SISTAFE) began to be implemented, with the old accounting system functioning in parallel. The implementation of the system in the Ministries of Planning and Finance and Education, however, has been delayed until end-2004. In addition, a partial computerized information system for the new income taxes was put in place in January 2004, and a new statute providing the DNIA with a certain degree of financial autonomy was approved in March 2004 (a few months later than originally anticipated) (Table 3). Also, the government has appointed a project manager, and the Fund has placed a new advisor, both with a view to bolstering the capacity of the unit in charge of the SISTAFE during the implementation phase of this crucial reform.

14. As noted in paragraph 1 above, a National Household Survey conducted in 2002/03 shows that the proportion of the population living in absolute poverty dropped by over 15 percentage points since 1997, to 54 percent in 2002. The results indicate that the decline was relatively more pronounced in the rural areas, where the incidence of poverty is higher. Moreover, there was a significant improvement in housing and sanitary conditions and in school enrollment, as well as an important increase in agricultural production in per capita terms.

III. The Macroeconomic Framework for 2004-06

15. The economic program for 2004-06 aims at consolidating macroeconomic stability and addressing remaining structural weaknesses to sustain and broaden growth, promote employment creation, and further reduce poverty.

16. The policies envisaged by the government for 2004-06 are consistent with the poverty reduction strategy presented in the PARPA and the second progress report on its implementation (Balanço do Plano Economico e Social) issued in March 2004. In particular, the government will ensure that the budgetary allocations and other policy interventions are compatible with the PARPA targets and priorities for 2004-06. Following the current PARPA, a new PARPA covering the period 2006-10 will be produced in 2005.

17. The government's medium-term macroeconomic framework envisages an increase in real GDP growth to over 8 percent in 2004, owing mainly to the coming on stream of MOZAL II and SASOL (a gas pipeline project connecting Mozambique to South Africa), followed by slower growth of 6 ½ -7 percent a year in 2005-06. End-year inflation is targeted to decline to 11 percent in 2004 in response to the maintenance of a prudent fiscal stance and tighter monetary conditions, and to fall further to 8 ½ percent in 2005 and 7 percent in 2006. Aid flows (grants and concessional loans) are expected to increase to US$735 million in 2004 (14 percent of GDP), and to decline to about US$700 million a year in 2005-06.

18. The fiscal program will seek to continue with the process of fiscal consolidation to provide adequate room for credit to the private sector while allowing for appropriate spending in the priority areas. After declining to 3.3 percent of GDP in 2004, the domestic primary deficit is projected to narrow further to 3.0 percent of GDP in 2005-06. Revenue is expected to strengthen in response to further improvements in tax administration and higher receipts of royalties from the megaprojects. At the same time, the program envisages a decline in the wage bill relative to GDP through the implementation of a prudent wage policy, following large increases in government wages in recent years. The resulting strengthening of government savings, together with improvements in expenditure efficiency, will provide room for a gradual increase in locally financed capital expenditure in the priority sectors, which will offset in part a projected decline in capital outlays financed with external resources. The fiscal program for 2005-06 incorporates the impact on the interest bill of the implementation of a three-year program to strengthen the balance sheet of the central bank through the issuance of government securities.

19. The external current account deficit (after grants) is projected to decline to about 2 percent of GDP in 2004, with exports increasing by more than 40 percent, owing to the coming onstream of Mozal II and SASOL, and imports declining because of the completion of the construction phase of these megaprojects. The deficit is expected to widen to 7 percent of GDP in 2005-06, reflecting the initiation of other large-scale investment projects, including a titanium ore project. The country's medium-term financing needs will continue to be covered through a mix of grants, concessional loans, and private capital flows in the form of foreign direct investment and private borrowing. Following the large accumulation registered in 2003, net international reserves are targeted to remain unchanged over the program's three-year period (gross reserves would be equivalent to 5 ½ months of imports by end-2006).

IV. The Economic Program for 2004

20. The sections below describe the policies the government intends to implement in the fiscal, monetary, financial, and structural areas in order to achieve its economic objectives for 2004.

A. Fiscal Policy

21. As noted above, the fiscal program for 2004 calls for a reduction in the domestic primary deficit to 3.3 percent of GDP. At the same time, the overall deficit after grants is projected to decline to 3.8 percent of GDP, from 4.9 percent in 2003. This deficit is expected to be more than covered by net external financing.

22. Total revenue is projected to rise by 0.3 percentage points of GDP in 2004, to 14.6 percent of GDP. This reflects further increases in the collection of income and indirect taxes in response to continued improvements in tax administration, as well as the full-year effect of the adjustment in specific fuel taxes implemented in May 2003. In addition, effective January 2004, the specific fuel taxes were increased by a further 2 percent and an automatic quarterly mechanism of adjustment to prevent their erosion in real terms was adopted (a cap of 5 percent was placed on the quarterly adjustments).

23. Several reforms are being implemented to strengthen the tax system with technical assistance from the Fund and several donors. A draft general tax law setting out the principles of taxation, the guarantees and obligations of taxpayers, and the treatment to be accorded to tax crimes will be submitted to the assembly in June 2004. Also, a decree modifying the stamp tax was approved in April 2004, another decree dealing with the tax on transfers of real estate will be issued before end-June 2004, and a new computerized information system supporting collection of all taxes will be put in place before the end of the year. A single taxpayer identification number (TIN) has been introduced and the DNIA will assign new TINs to all corporate and individual taxpayers by end-2004. Moreover, steps are being taken to strengthen the institutional capacity of the DNIA with a view to establishing the ATM in the last quarter of 2005. In this regard, in July 2004, the government will submit to the assembly the draft law creating the ATM, the approval of which will open the way for the integration of the DNIA and the DGA. Looking beyond 2004, the government intends to develop modern procedures and regulations for tax audits (by mid-2005), and to put in place a comprehensive integrated informational system to control the new direct taxes (by end-2005). The government will also make every effort to avoid delays in reimbursing the value-added tax (VAT) when reimbursements are warranted.

24. Total current expenditure is programmed to decline to 15.6 percent of GDP in 2004, with the government's wage bill falling from 7.5 percent of GDP in 2003 to 7.3 percent in 2004. To this end, the average wage increase for government employees that became effective on April 1st, 2004 was limited to projected inflation (11 percent), and the government will exercise stricter control over the payroll, including by reversing a large part of an expansion in contractual employment that took place last year. The wage bill projected for 2004 already includes the impact of an increase of close to 7,200 in the number of permanent government employees in priority sectors. Moreover, the expenditure projections incorporate the equivalent of US$20 million to cover the cost of the general elections scheduled for November 2004. Based on preliminary information, spending on PARPA priorities is projected to increase to 65 percent of total primary expenditure in 2004, from 64.1 percent in 2003.

25. The program for 2004 includes specific measures to strengthen public sector management and improve fiscal transparency. Following the delays experienced during 2003, the implementation of the SISTAFE in the Ministry of Planning and Finance, including the provincial directorates, will be fully completed by end-2004. This will be followed by a rollout of the system across all ministries by end-2005. Moreover, the budget execution report for the third quarter of 2004 will be based on the accounting generated by the e-SISTAFE using a new budgetary classifier. In addition, steps will be taken to expand as much as possible the coverage of the budget. In particular, the own-generated revenues of the ministries of Health and Public Works have already been incorporated in budget reporting, and those of the Ministries of Education and the Immigration Service will be fully included in the 2005 budget reporting system. Efforts will also be made with a view to incorporating in the budget extrabudgetary expenditures financed with donor support. The government is committed to taking further steps during 2005 with the objective of including the own-generated revenue of all ministries in the 2006 budget execution and reporting. The program for 2005-06 will include additional measures to address other recommendations made in the context of a fiscal transparency Report on Observance of Standards and Codes(ROSC) issued in February 2001, including removing or severely limiting the legal power of municipalities to borrow. The government is also conducting a process of verification of pension beneficiaries to rationalize pension payments.

B. Monetary and Exchange Rate Policies

26. The monetary program for 2004 aims at achieving a reduction in inflation to 11 percent during the year. In line with anticipated money demand, broad money growth is projected to decline to 15 percent in 2004. Based on the fiscal program described above and no change in net international reserves, the monetary program provides room for an increase in credit to the private sector in line with nominal GDP. The BM will monitor price developments closely and will stand ready to tighten monetary conditions as needed, through placements of open market paper and sales of foreign exchange to achieve the program's inflation objective. In addition to using base money as an intermediate target, the BM will continue to monitor other monetary indicators, including currency in circulation, which appears to have a more stable relationship with inflation.

27. Several steps are being taken to improve monetary and foreign exchange rate management with Fund technical assistance. First, the BM plans to improve liquidity sterilization by using sales of foreign exchange to reduce the reliance placed in recent years on sterilization operations with domestic instruments, which has contributed to a larger-than-programmed reserve accumulation. This will be accompanied by steps to allow for greater exchange rate flexibility. To that end, the BM intends to change gradually its intervention procedures by discontinuing the current practice of quoting rates to the market and starting to deal at rates quoted by commercial banks. As an intermediate step in this direction, the BM plans to introduce price auctions of foreign exchange with technical assistance from the Fund later this year. Second, in an effort to strengthen monetary control, effective June 22, the BM will broaden the scope of commercial bank liabilities subject to legal reserve requirements, so as to include deposits held by nonresidents and escrow deposits. Third, as a first step toward the introduction of repos and reverse repos, the BM will work on developing a master repurchase agreement for this type of operations.

28. Measures will be adopted during the remainder of 2004 in order to strengthen the balance sheet of the BM. Specifically, before end-July 2004, the government will assume a large part of the external debt liabilities in the balance sheet of the BM, as specified in the Technical Memorandum of Understanding. This step would be followed by the implementation of a three-year program to further strengthen the financial position of the BM through the issuance of government securities, with the initial issuance of securities taking place in the context of the 2005 budget. In the meantime, the BM will only distribute realized profits as measured under International Financial Reporting Standards (IFRS) and will intensify efforts to reduce its administrative expenditures.

C. Financial Sector Policies

29. An evaluation of the financial system in the context of the Financial Sector Assessment Program (FSAP) was conducted by Fund and World Bank staff during the first half of 2003. In addition to the monetary and exchange rate issues referred to above, this exercise identified the need for improvements in a number of areas. In particular, several recommendations were made on bank supervision and financial regulation, public debt management, microfinance, the payments system, and the lending environment. The government has begun to address some of these recommendations with technical support from the Fund and the World Bank.

30. To dispel uncertainties about the overall condition of the banking system, in April 2003, the government agreed with Fund and World Bank staff on the need to conduct comprehensive reviews of major banks by international firms according to IFRS. Following some administrative delays, the results of the diagnostic review of the Banco Internacional de Moçambique (BIM), which was conducted by PricewaterhouseCoopers and funded by the World Bank, became available in late February 2004. The diagnostic review confirmed that BIM's condition has improved as a result of the implementation of an operational restructuring program launched early in 2003. The results show that BIM is solvent, profitable, and in compliance with all prudential regulations, and that its loan portfolio is adequately provisioned. Moreover, even after adjusting for some deferred charges that would be considered as losses under IFRS, the bank's capital adequacy ratio, at around 9 percent, is above the regulatory minimum.

31. Although these results are encouraging, the central bank will keep in place the current supervisory regime for BIM, including the present policy of retaining profits. Efforts to resolve a difference in BIM's accounts at the central bank will continue. In addition, a feasibility study on the divestment of the government's participation in BIM will be completed by end-2004.

32. Following administrative delays, the diagnostic reviews of three other large banks based on IAS are expected to begin shortly. Taking into account the results of these reviews, by end-2004, the BM will develop a timetable to move gradually toward IFRS in the banking system. The appropriateness of raising further the minimum capital for banks after 2005 will also be reviewed.

33. As a parallel process to the convergence to IFRS, the government is also committed to improving compliance with the Basel Core Principles for Effective Supervision (BCP). In this regard, based on the information provided by the diagnostic reviews referred to above, by end-December 2004, the BM will develop a timetable to introduce new rules on loan classification and provisioning, in line with best international practices.

34. A new Financial Institutions Law was approved by the assembly in May 2004. The new law gives the BM sole responsibility for issuing and revoking licenses for financial institutions; provides for automatic application of most penalties for noncompliance with prudential regulations; and makes managers of financial institutions personally liable for gross violations of banking regulations. Based on the framework provided by the new law, a new regulatory framework for microfinance activities will be approved by end-September 2004.

35. During the remainder of the year, the government intends to repurchase part of the bonds indexed to the Maputo Interbank Offered Rate (MAIBOR). Moreover, a computerized information system is expected to be in place in the public pension agency (INSS) by July 2005, which would permit completing an actuarial evaluation of the INSS during 2006. In addition, steps are being taken by the BM to increase the staff and capabilities of the Department of Banking Supervision (DBS). During the remainder of 2004, the DBS will work on developing an inspection manual and preparing models for the presentation of consolidated financial statements as part of the Regulation on Consolidated Supervision.

36. The banking system has continued to feature wide spreads, which discourages access to credit. The main reasons behind these wide spreads are structural in nature and include insufficient competition in the system, the relatively large share of nonperforming loans, high operating costs of banking institutions, absence of efficient judicial procedures to facilitate loan recovery, and difficulties in obtaining and using collateral. Recent efforts to restructure the largest bank and foster increased competition in the system should help in this regard. Other reforms in the area of the judicial system and land tenure procedures are discussed in more detail in paragraphs 43 and 45 below.

D. External Sector Issues

37. Substantial progress has been made in recent years in the area of trade liberalization. Import tariff rates have been lowered and there are no quantitative trade restrictions in place. In the context of the Southern African Development Community (SADC) agreement, the government plans to lower the top tariff rate applied to all trading partners from the current level of 25 percent to 20 percent in 2006.

38. Regarding the exchange system, Mozambique still avails itself of the transitional arrangements under Article XIV. All the restrictions on the making of payments and transfers have been eliminated, with the exception of discretionary prior approval required for remittances of family living expenses. The central bank is preparing a new foreign exchange law to clarify and improve the existing legislation, and it intends to eliminate the existing restriction on family remittances. The new law will be submitted to the assembly during 2005. Following its approval, the government intends to accept the obligations under Article VIII of the Fund's Articles of Agreement.

39. The government recognizes the crucial importance of timely debt-service payments in view of Mozambique having reached its enhanced HIPC Initiative completion point in September 2001, and the agreement reached with the Paris Club creditors in November 2001. Mozambique has already signed bilateral agreements with 9 out of 12 Paris Club creditors and has completed negotiations with one of the three remaining creditors. Progress with non-Paris Club creditors, however, has been limited. The government is committed to continuing with efforts to complete the negotiations with remaining Paris Club creditors, and to reach agreements with non-Paris Club official creditors and commercial creditors on comparable terms. Regarding the sovereign commercial debt, the World Bank has made a commitment to finance a debt-reduction operation through the IDA Debt Reduction Facility, and the government is in the process of hiring a financial and a legal advisor for the operation.

40. During the period of the PRGF-supported program, the government will not impose or intensify restrictions on payments and transfers for current international transactions; will not introduce multiple currency practices; and will not impose or intensify import restrictions for balance of payments reasons. Furthermore, the government will not incur any external payments arrears (continuous performance criterion). In this connection, delays in payments related to cases where debt-restructuring agreements are still pending, notwithstanding good faith efforts by the government, will not be considered arrears.

E. Other Structural Reforms, Governance, and Statistical Issues

41. The new program will aim at removing a number of obstacles to private sector development. Specific measures will be taken to (i) simplify the still complex regulations and procedures that affect the cost of doing business; (ii) address labor rigidities in the formal sector that hinder competitiveness and export diversification; (iii) modify current regulations and practices to allow for the development of a tradable leasehold system facilitating the use of land as collateral; (iv) develop basic infrastructure, which is still inadequate; (v) improve the functioning of the judicial system; and (vi) reform the public sector to increase efficiency in the delivery of public services.

42. The government is currently working on reducing the amount of red tape for the registration of new companies in Mozambique. To that end, the authorities issued recently new regulations to simplify the licensing and inspection of commercial and industrial activities. In addition, before end-September 2004, the government will authorize the Mahotas railroad customs terminal to handle road cargo, which will speed up customs clearance and permit a more fluid transit of goods to and from South Africa.

43. Labor rigidities, including time-consuming procedures for hiring expatriates and high retrenchment costs, have had an adverse effect on employment creation. Recently, the government approved a decree to facilitate the process of hiring skilled expatriates. Among other things, the decree (i) extended the effective period of the temporary work visa from 30 to 90 days, with the possibility of renewal for another 90 days; (ii) simplified authorization procedures, including by removing the requirements for approval by line ministries and the presentation of a plan for on-site training of local staff; and (iii) limited the period for obtaining the work authorization to 15 days. The government is aware of the need for further simplification of the procedures for hiring expatriates but believes that any additional modifications in this area would require changes in the existing labor legislation. Last year, a tripartite commission was established to start work on a revised labor law aimed at increasing flexibility in the labor market by reducing retrenchment costs, facilitating temporary employment, and addressing remaining issues concerning the hiring of expatriates. The tripartite commission will present a draft of the revised law to the government by end-September 2004; the draft law is expected to be submitted to the assembly during 2005.

44. The government is conscious of the need to revise land tenure regulations to facilitate the use of land as collateral to access bank credit. To that end, a Poverty and Social Impact Analysis (PSIA) study on land tenure issues will be conducted during 2005. Moreover, before end-July 2004, the government will adjust the regulations (through a ministerial decree or other appropriate instrument) to regularize property rights in urban areas. The government has also taken steps to reduce substantially the time required for issuing new land use titles in rural areas to 90 days.

45. The government is making efforts to enhance Mozambique's infrastructure in the context of several project loans from the World Bank. The projects envisage private sector participation in electricity distribution; divestment of the government's participation in the telecommunications company and the national airline (the tender for sale of these companies is expected to be issued by June 2005); management contracts for water systems in several cities (contracts for the five largest cities have largely been completed); and private concessions to operate some ports (the Maputo port has already been concessioned). In addition, the government is considering strategic options for divesting PETROMOC, the state-owned petroleum distributor.

46. To improve governance and the efficiency of public institutions, the government has embarked on programs of judicial and public sector reform. As regards the judicial system, the government is working on measures to increase efficiency and speed up the administration of justice with donor support. In this regard, an Organic Law for Tribunal Courts has been approved by the assembly, and consideration is being given to either establishing intermediate courts or reducing the grounds for appeal to the Supreme Court to accelerate the resolution of a large backlog of unsolved cases. Efforts are also being made to increase the number of judges and judicial officers and improve their skills through training. Moreover, a new penal code has been submitted to the assembly, an anticorruption law is being revised to avoid a possible breaching of civil constitutional liberties, and a new code of civil procedure that will facilitate the process of loan recovery is being prepared. In addition, before end-2004, the government will issue the regulations for an anti-money laundering law approved in 2002 and will establish a financial investigations unit.

47. In the area of public sector reform, with support from the World Bank, the government has embarked on a long-term program aimed at restructuring the civil service and decentralizing service delivery. The first phase of this program, which involves the functional analysis of five major ministries (Planning and Finance, State Administration, Education, Health and Agriculture) is well advanced and will be completed by end-2004, while the second phase, which includes the restructuring of these ministries is expected to be finalized within a three-year period. The government is also studying a reform of the wage system to link pay more closely with performance, and is taking steps to identify and eliminate "ghost employees" by intensifying inspections and reconciling the payroll data with the personnel information system. In addition, a decree establishing procurement regulations in line with international standards is expected to be approved before end-December 2004. The government has also launched a National Survey on Governance and Corruption, to obtain the opinion of citizens (private sector, households, and government employees) regarding the functioning of the public sector.

48. In November 2003, Mozambique began to participate in the General Data Dissemination System (GDDS), which represents an important step forward in the process of improving the production and distribution of economic data. Moreover, since May 2003, the government has published and provided to the Fund staff budget execution reports corresponding to the preceding quarter, with a lag not exceeding 45 days, as well as data corresponding to monthly government revenues with a lag not exceeding one month. This practice will continue during the whole program period. Looking ahead, steps will be taken with Fund technical assistance to strengthen the national accounts and the balance of payments data (including information on the megaprojects), and to widen the coverage of the government finance statistics.

49. A full safeguards assessment of the BM will be completed by the time of the first review under the PRGF arrangement. The government is committed to addressing the issues that could be identified in the context of such an assessment.

V. Program Monitoring

50. The semiannual quantitative performance criteria and the indicative targets that will be used to evaluate the implementation of the program are shown in Table 1 of this memorandum, with further definitions and explanations contained in a technical memorandum of understanding annexed to this memorandum. As in the past, the ceilings on the net domestic assets of the central bank will be adjusted upward/downward for any shortfall/excess in disbursements of external program grants and loans, and downward/upward to the extent that actual payments of external debt service exceed/fall short of programmed amounts. Symmetrical adjustments will apply to net international reserves. Moreover, the ceilings on the domestic primary deficit will be adjusted upward (and the floors on net international reserves downward) to accommodate the possible need for higher-than-budgeted locally financed government outlays to deal with drought, with the adjustment being limited to Mt 400 billion. Taking into account that the budget already includes a contingency of Mt 200 billion, the adjustment would allow for an increase in locally financed drought-related expenditure of up to Mt 600 billion (0.5 percent of GDP). The end-December ceiling for the domestic primary deficit will also be adjusted upward for up to Mt 600 billion (0.5 percent of GDP) to accommodate additional capital outlays covered by higher-than-envisaged external budgetary grants. A list of structural performance criteria and benchmarks has been specified in Table 4. The government understands that its ability to request the disbursement of the second loan under the PRGF arrangement will be contingent upon the observance of the semiannual quantitative performance criteria for end-June 2004 set out in Table 3; the structural performance criteria set out in Table 4; and the completion of the first review of the program, which is expected to take place, at the latest, by end-November 2004. The second program review is expected to be completed no later than end-May 2005.

Table 2. Mozambique: Prior Actions and Structural Benchmarks for
the First Half of 2003 Under the Last PRGF arrangement

Actions Expected Date of Implementation, According to the Program Outcome

Prior actions
 
Terms of reference prepared, in consultation with Fund and Bank staff will be agreed, and donor funding identified for the diagnostic review of the four major banks in Mozambique, in order to assess the impact of moving toward international accounting standards.   Done
 
In May, the government will resume publication and will provide Fund staff with the quarterly budget execution reports, with a time lag not exceeding 45 days.   Done
 
The government will provide the Fund staff with the data corresponding to monthly government revenues (in detail according to the fiscal table), with a lag not exceeding one month, starting in April 2003.   Done
 
In May, the government increased by a weighted average of 62½ percent the specific taxes on petroleum products.   Done
 
Structural benchmarks
 
Amendments to the Financial Institutions Law will be submitted to parliament giving the Bank of Mozambique sole responsibility for issuing and revoking licenses for financial institutions; providing for the automatic application of most penalties for noncompliance with prudential regulations; and making managers of financial institutions personally liable for gross violations of banking regulations. April 2003 Done
 
The implementation plan for the Central Revenue Authority (CRA) will be approved by the Ministry of Planning and Finance May 2003 Done
 
The Organic Law for Tax Tribunals will be submitted to the National Assembly May 2003 Done

Table 3. Mozambique: Structural Measures Envisaged Under the Authorities' Program
for the Second Half of 2003

Actions   Expected Date of Implementation, According to the Program   Outcome

Initiate the tender process for the pilot integrated financial management system (SISTAFE) to be implemented in the Ministry of Planning and Finance and the Ministry of Education.   End-June 2003   Done
 
Install a computerized system for the registration of personal and corporate income tax payments.   August 2003    Partially implemented in January 2004
 
Develop a timetable for implementing loan-loss provisioning standards consistent with accepted international practices.   Within two months of completion of the banks' reviews   Bank reviews not yet completed
 
Ensure approval by the Council of Ministers of a new statute transforming the National Directorate of Taxes and Auditing (DNIA) into a general directorate, as part of the integration of current reforms and the transition to the Central Revenue Authority (CRA).    October 2003   New statute approved in March 2004
 
Issue instructions to financial institutions detailing the practical steps for consolidated supervision.   October 2003   Done
 
Implement the pilot SISTAFE in the Ministry of Planning and Finance and Ministry of Education.   December 2003   Implementation in the Ministry of Planning and Finance has been delayed until December 2004. Implementation in the Ministry of Education has been postponed to 2005

Table 4. Mozambique: Structural Performance Criteria and Benchmarks
Under the 2004 PRGF Program

     Expected time of implementation

Structural performance criteria
Submit to the National Assembly the draft general tax law (paragraph 23 of the Memorandum of Economic and Financial Policies).   End-June 2004
Strengthen the balance sheet of the Bank of Mozambique (BM) by shifting to the government a large part of its external debt liabilities, as set forth in paragraph 28 of this Memorandum and the Technical Memorandum of Understanding.   End-July 2004
Keep in place the current supervisory regime for BIM until approval of the financial statements for 2004 by the external auditors   Continuous
Complete a feasibility study on the divestment of the government's participation in BIM.   End-2004
Structural benchmarks
Submit to the assembly the draft law creating the Autoridade Tributária de Moçambique.   End-July 2004
Complete the revision of the regulatory framework for microfinance activities.   End-September 2004
In the context of the 2005 budget, initiate the implementation of the three-year program to strengthen the balance sheet of the central bank. Include the corresponding allocation in the 2005 budget proposal.   End-October 2004
Prepare the budget execution report corresponding to the third quarter of 2004 on the basis of the accounting generated by the e-SISTAFE, using the new budget classifier.   November 15, 2004
Develop timetables to move gradually to IFRS and to comply with loan classification and provisioning, based on best international practices.   End-2004
Issue regulations of the anti-money laundering law and establish financial investigations unit   End-2004
Implement the SISTAFE in the Ministry of Planning and Finance, including the provincial directorates   End-2004



Technical Memorandum of Understanding
On Selected Concepts, Definitions, and Data Reporting
Under Mozambique's PRGF-Supported Program

The purpose of this technical memorandum of understanding (TMU) is to describe the concepts and definitions that will be used in monitoring the Poverty Reduction and Growth Facility (PRGF)-supported program, including the following:

  • central government domestic primary balance;
  • central government revenue;
  • net domestic assets, net international reserves, and reserve money of the Bank of Mozambique;
  • new nonconcessional external debt contracted or guaranteed by the central government or the Bank of Mozambique with a maturity of more than one year;
  • short-term external public debt outstanding;
  • external payments arrears; and
  • foreign program assistance.

This memorandum also describes the adjusters that will be applied to certain quantitative performance criteria of the program.

Central government domestic primary balance

The central government domestic primary balance is defined as central government revenue, less noninterest current expenditure, less locally financed capital expenditure, less locally financed net lending. It excludes bank restructuring costs and the cost of recapitalizing the central bank. Net lending is derived as gross lending to enterprises through acordos de retrocessão (excluding acordos de retrocessão that were required by donors), plus food aid disbursed but not collected in the period, minus repayments by enterprises of loans obtained through acordos de retrocessão and through refinancing agreements with the Bank of Mozambique, minus food aid collected but not disbursed in the period. Unallocated revenue or expenditure arising from discrepancies between the central government balance measured from above the line and the balance measured from below the line will be part of the central government domestic primary balance.

The central government encompasses all institutions whose revenue and expenditure are included in the state budget (orçamento do Estado): central government ministries, agencies, and the administration of 11 provinces. Although local governments (33 municipalities or autarquias) are not included because they are independent, the bulk of their revenue is registered in the state budget as transfers to local governments.

Central government revenue, expenditure, and financing

Revenue is defined to include all receipts of the Domestic Tax Administration (Administração Tributaria de Impostos or DGI), the National Directorate of Customs (Direcção Nacional de Alfândegas, DNA), and nontax revenue. Net receipts from privatization received by the National Directorate of State Assets (Direcção Nacional do Património do Estado) and unrealized profits transferred by the central bank to the treasury will not be considered as revenue (above the line) and will be accounted for as other domestic financing (below the line).

For the purpose of program monitoring, revenue is considered as collected at the time when it is received by the DGI from private agents or other government collecting agencies, in cash or checks, or through transfers into a DGI bank account.

Expenditure is defined as government outlays transferred from treasury accounts to other government accounts or private sector accounts, and includes spending reported to the National Directorate of Public Accounting (despesas liquidadas) and any further treasury advances (operações de Tesouraria) that have been transferred out of treasury accounts but whose use has not yet been reported to the National Directorate of Public Accounting.

External financing of the central government includes foreign grants, external loan disbursements minus amortization, changes in external arrears, and privatization proceeds. Domestic financing of the central government is defined as including net financing provided by the banking system, net placements of government securities with nonbanks, and privatization proceeds.

Net domestic assets

The net domestic assets of the Bank of Mozambique are defined as reserve money minus the net foreign assets of the Bank of Mozambique. Net foreign assets will be valued at program exchange rates; net foreign assets are defined to exclude the effect of any stock adjustments in medium- and long-term external liabilities.

The central bank's foreign currency-denominated assets and liabilities are converted in its balance sheet to meticais at actual exchange rates. However, for purposes of program monitoring, these amounts will be converted into U.S. dollars at the average program exchange rate for the end of each quarter.

Stock adjustments in the central bank's medium- and long-term liabilities are understood to mean any changes that are not the result of foreign exchange flows, such as write-offs, interest capitalization, transfer of liabilities to the government, etc.

Net international reserves

The net international reserves of the Bank of Mozambique are defined as reserve assets minus reserve liabilities. The Bank of Mozambique's reserve assets include (a) monetary gold; (b) holdings of SDRs; (c) reserve position at the IMF; (d) holdings of foreign exchange; and (e) claims on nonresidents, such as deposits abroad. Reserve assets exclude assets pledged or otherwise encumbered, including but not limited to assets used as collateral or guarantee for a third-party external liability (assets not readily available.) The Bank of Mozambique's reserve liabilities include (a) all short-term foreign exchange liabilities to nonresidents with original maturity of up to and including one year; and (b) all liabilities to the IMF.

New nonconcessional external debt contracted or guaranteed by the central government or the Bank of Mozambique with maturity of more than one year

The term "debt" will have the meaning set forth in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000. Government debt is outstanding debt owed or guaranteed by the Republic of Mozambique or the Bank of Mozambique (but does not include debt of any political subdivision or government-owned entity with a separate legal personality that is not otherwise owed or guaranteed by the Republic of Mozambique).

The government will not contract or guarantee external debt with original maturity of one year or more with a grant element of less than 35 percent, calculated using currency-specific discount rates based on the Organization for Economic Cooperation and Development (OECD) commercial interest reference rates. This performance criterion applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. This performance criterion will be assessed on a continuous basis.

Stock of short-term external public debt outstanding

The government will not contract or guarantee external debt with original maturity of less than one year. This performance criterion applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are short-term, import-related trade credits. This performance criterion will be assessed on a continuous basis.

External payments arrears

The government undertakes not to incur payments arrears on external debt owed or guaranteed by the government, with the exception of external payments arrears arising from government debt that is being renegotiated with creditors, including Paris Club creditors. This performance criterion will be assessed on a continuous basis.

Foreign program assistance

Foreign program assistance is defined as grants and loans received by the Ministry of Planning and Finance through Bank of Mozambique accounts (Table 1).

Actual external debt-service payments

Actual external debt-service payments are defined as cash payments on external debt-service obligations of the government and central bank, including obligations to Paris Club and other bilateral creditors rescheduled under enhanced HIPC Initiative completion point terms, multilateral creditors, and private creditors (Table 1).

Adjusters

The quantitative targets (floors) for the central bank's net international reserves will be adjusted upward (downward) for any excess (shortfall) in disbursement of external program grants and loans, compared to the program baseline; and downward (upward) to the extent that actual payments of external debt service exceed (fall short of) programmed amounts (Table 1). The upward adjustment for higher-than-programmed external grants for end-December 2004 will not take place to the extent that the additional budgetary grants are used to accommodate higher capital outlays by the government, up to US$ 25 million. The quantitative targets (floors) for the central bank's net international reserves will be adjusted downward/upward for any revision made to the end-2003 figures.

The quantitative targets (ceilings) for the central bank's net domestic assets will be adjusted upward (downward) for any shortfall (excess) in disbursement of external program grants and loans, compared to the program baseline; and downward (upward) to the extent that actual payments of external debt service fall short of (exceed) programmed amounts (Table 1). The downward adjustment for higher than programmed external grants for end-December 2004 will not take place to the extent that additional budgetary grants are used to accommodate higher capital outlays by the government, up to US$ 25 million.

The quantitative targets (ceilings) for the central bank's net domestic assets and reserve money will be adjusted downward to the extent that eligible bank reserves fall short of 11.51 percent of resident deposits in commercial banks at the end of each quarter.

The quantitative target (ceiling) for the domestic primary balance (excluding bank restructuring costs) for end-June 2004 and end-December 2004 will be adjusted upward (and the floors on net international reserves and ceilings on net domestic assets downward/upward) to accommodate the possible need for higher locally financed government outlays to deal with drought, up to a total limit of Mt 400 billion (US$16 million). The ceilings for the domestic primary balance for end-December 2004 will also be adjusted upward for up to Mt 600 billion to accommodate additional capital outlays covered by higher than envisaged external budgetary grants in U.S. dollars valued at the average program exchange rate for the year. The amount of external budgetary grants envisaged in the program for 2004 is of US$178 million (Table 2).

Data reporting

In addition to providing the monthly and quarterly data needed to monitor program implementation in relation to the programs' quantitative targets and broader economic developments, the authorities will provide weekly updates of the daily data set out in Table 3 of this attachment, as well as the weekly data set out in Table 4. Monthly updates will also be provided of the foreign exchange cash flow of the Bank of Mozambique, as set out in Table 5.

The government will continue to provide Fund staff with the data corresponding to monthly government revenues (in detail according to the fiscal table), with a lag not exceeding one month. In addition, the government will continue to publish and provide Fund staff with the quarterly budget execution reports with a time lag not exceeding 45 days.

In addition, the government will start developing and providing information on domestic arrears on a quarterly basis.

External Liabilities of the BM to be Transferred to the Government

The external liabilities of the BM to be transferred to the government include the BM's debt to the European Investment Bank, Brazil, Portugal, Bulgaria, Hungary, India, Poland, Romania, South Africa, and the former Yugoslav Republic.

Table 1. Mozambique: Foreign Program Assistance and External Debt Service for 2004
(In millions of U.S. dollars)

 
2004

Q1
Q2
Q3
Q4
Year
Prog.
Prog.
Prog.
Prog.
Prog.

Foreign program assistance
55.4
26.9
97.2
84.5
264.0
   Program grants
55.4
26.9
71.2
24.5
178.0
   Program loans
0.0
0.0
26.0
60.0
86.0
   
External debt service
6.4
18.8
13.1
24.0
62.3

Sources: Mozambican authorities; and staff estimates.

Table 2. Mozambique: External Grants and Loans in Support of the Fiscal Program
(In millions of U.S. dollars, unless otherwise specified)

 
2004

Prog.
Prog.
Prog.
Prog.
Prog.
Q1
Q2
Q3
Q4
Year Total

I. Grants
99.9
90.4
172.1
124.8
487.1
I.1 Projects and special programs grants
41.2
59.9
93.1
98.8
292.9
      Project grants
41.2
59.9
79.5
98.8
279.3
      Special program grants
0.0
0.0
13.6
0.0
13.6
I.2. Direct financing grants
0.0
3.5
5.0
1.5
10.0
I.3. Budget support grants
55.4
26.9
71.2
24.5
178.0
I.4. Food aid in kind
3.3
0.0
2.8
0.0
6.1
   
II. Loans
26.5
25.7
68.4
112.2
232.8
II.1. Project loans
21.8
23.9
36.7
48.2
130.6
II.2. Loans in support of the budget
4.7
1.8
31.7
64.0
102.2
      Budget support loans
0.0
0.0
29.0
60.0
89.0
      Loans for public enterprises
4.7
1.8
2.7
4.0
13.2
   
Memorandum items:
   Grants (cumulative, in billions of meticais)
      Project and special program grants
979.7
2,419.1
4,676.9
7,091.3
7,091.3
      Budget support grants
1,318.0
1,965.5
3,692.9
4,291.6
4,291.6
      Direct financing grants
0.0
84.1
205.4
242.1
242.1
      Food aid in kind
78.5
78.5
146.4
146.4
146.4
   
   Loans (cumulative, in billions of meticais)
      Project loans
518.6
1,092.9
1,983.3
3,161.2
3,161.2
      Budget support grants
0.0
0.0
703.6
2,169.8
2,169.8
      Loans for public enterprises
111.8
155.1
220.6
318.3
318.3

Sources: Mozambican authorities.

Table 3. Mozambique: Daily Foreign Exchange Rates and Foreign Exchange Transactions, Week of month/day-month/day

 
Exchange Rates

Transactions with BoM

Commercial banks

Foreign exchange

Bank of Mozambique

bureaus
Buy
Sell
Buy Sell Buy Sell BoM sales BoM purchases Requests outstanding for BoM foreign exchange

Monday          
Tuesday          
Wednesday          
Thursday          
Friday            

Source: Bank of Mozambique.

Table 4. Mozambique: Weekly Financial Data

Exchange rates (in meticais per U.S. dollar; weekly average)    
   Bank of Mozambique    
      Buy    
      Sell    
   Secondary market    
      Buy    
      Sell    
   Foreign exchange bureaus    
      Buy    
      Sell    
Interest rates (in percent per annum)    
   Permanent Access Facility (FPC)    
   Excess liquidity rate (FPA)    
   Treasury bills    
      28 days    
      63 days    
      1 day    
      162 days    
      364 days    
   Monetary authority bills (TAMs) (if any)    
Open market operations (in billions of meticais)    
   Securities issues during week    
      Treasury bills    
      TAMs    
   Securities matured/called during week    
      Treasury bills    
      TAMs    
   Securities outstanding    
     By type    
      Treasury bills    
      TAMs    
     By holder    
      Financial institutions    
      Public    
   Amount used by the government - (Ministry of Planning and Finance)    
Reserve money in (billions of meticais)    
   Currency in circulation    
   Bank reserves    
Bank of Mozambique net foreign assets    
   In billions of meticais    
   In millions of U.S. dollars    
Bank of Mozambique net international reserves (in millions of U.S. dollars)    
External assistance disbursed (in millions U.S. dollars)    
Net credit to the government (in billions of meticais)    
Net credit to the government; flow (in billions of meticais)    

Source: Bank of Mozambique

Table 5. Mozambique: Central Bank Monthly Foreign Exchange Cash Flow
(In millions of U.S. dollars)

Beginning stock of net international reserves (NIR)    
   
   Inflows    
      Program loans and grants    
      Miners' remittances    
      Interbank exchange market purchases    
      Foreign assets income    
      Provisioning of commercial banks    
      Other    
   
   Outflows    
      External debt service    
      Interbank exchange market purchases    
      Transfers to commercial banks    
      Government    
      Traditional circuit    

Source: Bank of Mozambique

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