Republic of Mozambique and the IMF

Country's Policy Intentions Documents

See also:
Poverty Reduction Strategy Papers (PRSPs)

Republic of Mozambique
Enhanced Structural Adjustment Facility
Policy Framework Paper for April 1999–March 2002

Prepared by the Mozambican authorities in collaboration
with the staffs of the IMF and the World Bank
June 10, 1999


  1. Introduction

  2. Economic Developments During 1996-98

  3. Medium-Term Framework: Objectives, Strategies, and Targets

  4. Financial Policies
    1. Public Finance
    2. Financial Sector

  5. Public Administration and Governance

  6. Social and Sectoral Policies for Growth and Poverty Reduction
    1. Legal and Regulatory Reforms
    2. Agriculture and the Environment
    3. Transport and Telecommunications
    4. Energy and Water
    5. Education
    6. Health

  7. External Viability and Financing Requirements

  8. Statistical Issues and Technical Assistance


  1. Mozambique: Summary and Time Frame for Implementation of Macroeconomic and Structural Adjustment Policies, April 1999-March 2002
  2. Mozambique: Selected Economic and Financial Indicators, 1997-2001
  3. Mozambique: Social Indicators
  4. Mozambique: External Financing Requirements and Sources, 1997-2005

I.  Introduction

1.  Mozambique launched a structural adjustment program in 1987. The program was supported by a Structural Adjustment Facility (SAF) arrangement until 1990, by an Enhanced Structural Adjustment Facility (ESAF) arrangement until 1995, and by a second ESAF-supported arrangement until mid-1999. In support of the structural reforms, the World Bank approved six adjustment lending operations. The last adjustment operation-the Economic Management Reform Operation-was approved on December 10, 1998. This policy framework paper (PFP) sets out the government's objectives and policies for the April 1999-March 2002 period.

2.  Mozambique emerged in 1992 from a protracted civil war with over one-fourth of its population displaced and some of the poorest social indicators in sub-Saharan Africa. Over the subsequent three years, with generous assistance from the international community, the government successfully steered the resettlement and economic reintegration of the displaced population, the demobilization of 80,000 troops, and the return to democracy. Presidential and parliamentary elections were held in November 1994, and the next general elections are scheduled for late 1999. While the economic recovery has been strong in recent years, income per capita is still low by international standards, making further strong growth and poverty reduction the overarching goals of economic policy.


II.  Economic Developments During 1996-98

3.  During 1996-98, the economy grew at an annual average rate of 10 percent. Growth was fostered by political and economic stability; structural reforms, including the privatization of state enterprises and banks; substantial foreign aid inflows; and favorable weather. The increase in output was broad based, though particularly vigorous in manufacturing, construction, and services, all of which experienced double-digit growth rates. Agriculture grew at an average rate of almost 9 percent a year, owing to improving yields, expansion of planted areas, and favorable weather.

4.  Successful stabilization policies resulted in a reduction in average inflation from 47 percent in 1996 to less than 1 percent in 1998. Lower commodity prices and the depreciation of the South African rand in 1998 also contributed to low inflation in that year. The metical remained relatively stable during 1996-98, supported by a stable macroeconomic environment and high levels of foreign aid. In real effective terms, the metical appreciated by almost 26 percent between 1995 and 1997. The appreciation was partially reversed in 1998, when the real effective exchange rate index fell by 9 percent.

5.  During 1996-98, merchandise exports increased by 42 percent, owing to increases in export volumes and prices of key commodities, such as prawns, cashews, and cotton. Export growth in 1998 was propelled by the resumption of electricity exports from the Cahora Bassa hydropower project to Zimbabwe. Nevertheless, merchandise exports have remained below the levels attained in the early 1980s. Imports grew slowly during 1996-97, on account of lower import prices and increased import substitution activity. Nonetheless, in 1997, the value of imports amounted to more than three times the value of exports. After narrowing in 1995-97, the current account deficit (before grants) widened by 2.7 percentage points of GDP to 20.4 percent in 1998. The increase in the deficit was the result of increased imports associated with the construction of the Mozal aluminum smelter, and it was entirely financed by higher direct foreign investment.

6.  Reflecting a significant revenue turnaround in 1997, the domestic primary budget balance improved, reaching a surplus of 0.7 percent of GDP. This surplus was achieved mainly through improvements in tax and customs administration, a reduction in import tax exemptions, and the broadening of the turnover tax base at the end of 1996. Recorded current expenditure also increased in 1997, owing to the inclusion in the budget of previously off-budget operations, the costs of the customs reform, and the increase in pension payments to demobilized soldiers. In 1998, the domestic primary balance worsened by 1 percentage point of GDP as the personal income tax rate was lowered and the civil service salary scale was decompressed.

7.  During 1996-98, monetary policy was aimed at ensuring price stability, modernizing the financial system, and increasing financial intermediation. Monetary growth was reduced from 55 percent in 1995 to 18 percent in 1998. In addition to the considerable help provided by the accumulation of government deposits in the banking system, the main instruments to achieve these objectives were quarterly direct controls on the net domestic assets of individual banks, legal and regulatory reforms in the financial sector, and the privatization of the two state-owned banks, which, at the end of 1995, represented 71 percent of total commercial bank assets. Legal and regulatory reforms in the financial sector included improved management of the reserve requirement regime and the central bank rediscount rate, a law on the use of checks, and a new law of financial institutions. The reliance on direct instruments of monetary control was reduced by replacing the quarterly bank-by-bank credit ceilings with annual ceilings and by introducing an interbank foreign exchange market in mid-1996 and a money market in late 1997. Privatization, deregulation, and the entry of two additional commercial banks increased competition within the financial sector.

8.  An ambitious program of structural reforms was undertaken during the 1996-98 period. The program of privatization and restructuring large enterprises was completed in 1998, and that for small- and medium-scale enterprises will be completed in June 1999. Administrative prices have been adjusted regularly to ensure the commercial viability of the regulated companies. In addition, steps have also been taken to increase private sector participation and competition in the transport, energy, and water sectors. As part of the government's efforts to improve public sector management, a civil service reform that included salary decompression and a new career stream was initiated in 1997. The simplification of procedures for industrial and commercial licensing and for imports has improved the regulatory environment. The trade regime was also liberalized through a reduction in tariff dispersion and a reduction in the average import tariff rate from 18 percent to 10 percent. Agricultural marketing was further liberalized with the removal of all minimum prices (except for cotton), and an important step toward improved land tenure security, including among smallholders, was taken with the passage of the Land Law in 1997.

9.  Government programs on health and education, with the support of donors, have started to bring about improvements in social indicators as well. The government increased the share of current expenditure on health and education in total current expenditures from 7 percent and 16 percent, respectively, in 1995 to 9 percent and 18 percent in 1998. Access to health care and gross admission rates to schools was also increased (see Section VI). However, social indicators remain less favorable than the corresponding average for sub-Saharan Africa, and the provision of social and health services needs to be substantially improved.


III.  Medium-Term Framework: Objectives, Strategies, and Targets

10.  The government's economic objectives through the beginning of 2002 are to strengthen the foundations for real GDP growth of about 7-10 percent a year, limit inflation to 5-7 percent a year, and maintain gross international reserves at about five months of imports of goods and nonfactor services. Sustained, broad-based real GDP growth and low inflation, together with improved delivery of social services, are central to the government's efforts to reduce poverty in the medium term. To attain these objectives, the government is committed to maintaining financial discipline, improving the environment for the expansion of private sector activities, and fostering the development of a strong export base through liberal trade and investment policies, while reducing the dependence on foreign aid. Key elements of the medium-term economic strategy include (i) an increase in public savings, to be achieved through revenue mobilization and rationalization of expenditure; (ii) an improvement in the efficiency of public sector operations; (iii) the further development of the financial system; (iv) the implementation of legislative reforms aimed at increasing economic security and reducing the cost of conducting business; and (v) the development and implementation of social and sectoral programs.

11.  On the assumption of no adverse exogenous shocks and the continued satisfactory implementation of the economic program, the medium-term economic outlook remains favorable. Private investment is projected to increase from 11 percent of GDP in 1998 to almost 25 percent of GDP in 1999, reflecting for the most part the implementation of large projects. At the same time, the government intends to continue to promote the development of small and medium-scale enterprises. Growth and investment rates over the period 1999-2001 are expected to fluctuate considerably from year to year because of the large projects, such as the aluminum smelter and the Cahora Bassa project.


IV.  Financial Policies

A.  Public Finance

12.  The key public finance objectives in the next three years will be to strengthen the underlying fiscal balance, reduce tax distortions, increase the coverage and transparency of the budget, and improve the efficiency of resource allocation in the public sector. High priority will be given to laying the foundations of a sustainable fiscal position, and the primary means of achieving this goal will be revenue mobilization.

13.  Considerable progress has already been made in rationalizing the tax system. Corporate and personal income tax rates were restructured and lowered in 1998, and a value-added tax (VAT) and more limited excise taxes were introduced to replace the turnover and consumption taxes in June 1999. The import tariff structure was simplified in November 1996 when the average rate, as well as the number and dispersion of rates, were reduced, and the top import tariff rate was further reduced from 35 percent to 30 percent in April 1999. Another reduction of this rate is scheduled to take effect in January 2002. The government will commission shortly a review of the tax and tariff system aimed at assessing the fiscal incentives regime and identifying and removing remaining distortions.

14.  To maximize revenue and increase the efficiency and equity of the tax system, the government will step up its efforts to widen the tax base. The recently introduced VAT is broadly based, with a single rate and few exemptions. A documentation of the legal basis, terms, and duration of all customs exemptions has been completed and will be used to further reduce exemptions. The use of customs exemptions is already being carefully monitored by customs, and a recording system for monitoring exemptions on domestic taxes will be created shortly.

15.  In May 1997, a private management company took over customs administration and began implementing a comprehensive program of modernization, restructuring, and training. The management contract comes to an end in December 1999, at which time control of customs will be passed back to Mozambican hands. The government will continue to provide the necessary financial and other support to customs to ensure that the management company completes its scheduled work by end-1999. If necessary, to consolidate the gains and ensure sustainability of the customs reforms program, the government will consider retaining the management company on a limited basis for a period of time after 1999. In particular, the government will see to it that the computerization of at least ten customs clearance points is completed by end-September 1999, and that 500 redundant workers are redeployed by the end of 1999. The government also intends to submit revised customs legislation to the National Assembly by end-December 1999. In view of these efforts to improve customs administration, the government will continue to reduce the share of imports subject to preshipment inspection operations.

16.  Efforts to strengthen internal tax administration have been made as part of the preparations for introducing the VAT. These efforts will soon be broadened to cover direct taxes. The taxpayer identification number, newly introduced for the VAT and excises, will be applied to corporate and personal income taxes and to customs duties, and work will begin on extending the VAT and customs computerized databases to include direct taxes. The auditing capacity of the internal tax office will be boosted through recruitment and training of additional tax audit officers. Finally, consideration will be given to the creation of a national revenue authority.

17.  Since 1997 the government has been implementing a strategy to increase the efficiency, transparency, and accountability of public expenditure management, to create effective tools for the prioritization of expenditures, and to guarantee the sustainability of public expenditure programs. Starting in 1999, the government will -in December each year- formally close the budget accounts for the previous year and submit the accounts to parliament and to the auditing office. The government will also progressively remove any institutional and legal impediments to the inclusion in the budget of previously off-budget revenue and expenditure flows, such as fees collected by government institutions without a legal basis and their associated expenditures. A medium-term expenditure framework will be prepared and linked to the annual budget, so as to match sectoral expenditure priorities with resource availability. A draft for a new system of public accounting and its implementation schedule will be prepared by end-September 1999. To complement these efforts, the government is taking steps to improve cash management at the treasury. A key element of this initiative will be the development of a system for forecasting the short-term borrowing needs of the government, which will also contribute to an improvement in monetary management by the Bank of Mozambique.

18.  Because of pension payments to demobilized soldiers under the terms of the 1992 peace agreement, government pension payments substantially exceed contributions by workers. The government has therefore decided to assess the long-term viability of the public sector pension system, as well as the pension system administered by the National Social Security Institute. It will commission actuarial studies of both schemes in 1999.

19.  As noted above, the program of privatization of selected large enterprises was completed in September 1998, with the exception of the national airline. In the absence of acceptable bids, the airline was converted into a limited liability company, with the intention of selling the government's shares in the future stock exchange. The program of privatizing and restructuring small- and medium-sized enterprises will be completed in June 1999. By that time, over 1,200 enterprises will have been privatized or restructured, and only 11 wholly owned public enterprises and 22 companies with majority government share will remain. By end-March 2000, the government will prepare a policy statement regarding the future of these enterprises. At a minimum, the performance of these enterprises will be strengthened through several mechanisms, such as performance-based management contracts, restructuring and joint ventures, and the granting of concessions to the private sector. Furthermore, the government will develop a strategy on its holding of shares in privatized enterprises, including the formulation of criteria for divestment and the development of a plan to distribute shares held on behalf of labor.

B.  Financial Sector

20.  The development of the money market has allowed the government to move toward indirect instruments of monetary control as of mid-1999 and away from bank-by-bank credit ceilings. The current system of sporadic central bank money market operations will be converted to a regular system of treasury bill auctions, in preparation for which the Bank of Mozambique will be explicitly authorized by the end of 1999 to issue treasury bills as needed for monetary control purposes. This process will be supported by the development of the Treasury's cash and debt management capability including liquidity management and forecasting.

21.  Reserve requirements were extended to time deposits in May 1999 to facilitate indirect monetary control and encourage better liquidity management by commercial banks. The government will continue to encourage financial intermediation, strengthen banking supervision, and seek to reduce the cost of financial intermediation.

22.  The supervisory authorities are aware of the importance of effective banking supervision for the stability and the healthy development of the financial sector. The Basle Committee's Core Principles for effective banking supervision will be observed. The authorities are also committed to at least enforcing the Basle Committee's minimum capital adequacy ratios in all banks by March 2000, when the restructuring of the privatized banks will be finalized. The enforcement of prudential ratios with regard to foreign exchange exposure will be tightened. The supervisory authorities will also endeavor to improve the timeliness and rigor with which commercial bank accounts are being compiled and raise the minimum standards for internal control of commercial banks. A new chart of accounts for commercial banks will be adopted by end-1999. In this context, the Bank of Mozambique's capacity for on- and off-site supervision has been strengthened with technical assistance from the IMF.

23.  The removal of credit ceilings is expected to intensify competition among banks and contribute to a reduction of interest rate spreads. Other measures that are expected to reduce bank operating costs are the use of the bad check register and the credit bureau established at the central bank in 1997. The standard format and technology for electronic check clearing have been adopted, and the system will be ready by April 2000.


V.  Public Administration and Governance

24.  The government has begun to address the problems of Mozambique's public administration, which include weak incentives, lack of skills, and a heavily centralized structure. Key initiatives include civil service reform, capacity building, and decentralization. Regarding civil service reform, salaries have been decompressed since 1998, and a revised career stream and remuneration system was adopted in April 1999. The government's intention is to continue to improve incentives within the new career stream, with the objective of retaining qualified staff. Attention will now turn to preparing by December 1999 new civil service regulations that include performance standards and incentive mechanisms, and, by December 2000, a code of administrative procedures. A system of merit-based pay increases and promotions will be instituted, and special incentives will be given to civil servants assigned to provinces and districts. Under the capacity-building component, a public administration training system has been designed, and an operational plan for its implementation will be completed by March 2000.

25.  To broaden the scope of the reform program and develop a more results-oriented public service, the government will prepare by June 2000 a comprehensive plan for the development of the public service. This plan will define the role of the public sector, consider the appropriate restructuring of public institutions, outline a human resource strategy, and improve the process of developing and implementing policy. A Committee of the Council of Ministers, supported by a technical group, has been established to oversee the reform.

26.  To achieve greater accountability, the government will implement action plans to strengthen the auditing functions of the government departments, namely the Administrative Tribunal and the Inspectorate General of Finance. A law to govern the management of public assets will be submitted to the National Assembly in 2000. Mozambique is also one of the eleven countries which drafted and approved in February 1999, under the auspices of the Global Coalition for Africa, the 25 Principles to Combat Corruption in African Countries.


VI.  Social and Sectoral Policies for Growth and Poverty Reduction

27.  The government's first national poverty assessment, completed at end-1998, reveals that about 70 percent of the national population is below the poverty line and that about 80 percent of the poor live in rural areas. The poverty action plan adopted by the Council of Ministers in April 1999 is based on (i) generating rapid and sustainable growth, particularly in rural areas; (ii) investing in human capital through improved delivery and quality of social services; and (iii) developing a program, including safety nets, that enables the social and economic integration of the most vulnerable social groups. The strategy calls for continued prioritization of public expenditure in the social sectors and rural infrastructure, especially roads. It also aims at establishing a policy, institutional, and regulatory framework that improves access to services and resources while reducing their costs.

28. The government plans to translate the priorities established in its poverty action plan into a public expenditure profile, as well as into policy reforms aimed at reducing poverty. The medium-term expenditure framework will be used to allocate resources to programs, including sector expenditure programs that support the objectives of the government's poverty action plan. An intersectoral committee is being established to oversee and guide implementation of the action plan. The targeting of government expenditure programs to the poor will be improved with the completion in 1999 of provincial poverty profiles. In addition, to improve the poverty-reducing focus of policy, the government will establish a systematic technical review process, reporting to the Council of Ministers, that will consider the impact of major policy decisions on poverty.

A.  Legal and Regulatory Reforms

29.  The government regards legislative and regulatory reform, together with enhanced institutional capacity in these areas, as critical for improving economic security and protecting individual rights. A strategic plan for the justice system is being developed and will be adopted by October 2000. A Center for Judicial Studies will begin training magistrates by March 2000. On-the-job training is being provided to public defenders at the Institute for Legal Assistance.

30.  The government is prioritizing the adoption of legislation that will foster private sector activity. The time and costs involved in enforcing legal contracts undermine investor and lender confidence in the protection of their property rights. Therefore, a draft Commercial Code, covering company and contract law, will be completed by August 2000. After a review process, the Commercial Code and accompanying Commercial Register and Incorporation Act are to be submitted to the National Assembly by July 2001. Equally important for the development of the private sector are regulations, to be adopted by end-1999, that will permit the implementation of the Land Law in urban areas. To expedite the effective resolution of commercial disputes, arbitration courts will be established following the passage of enabling legislation in May 1999.

31.  The government is also committed to intensifying its efforts to simplify regulations and reduce red tape. The accountability of the Interministerial Commission for Removal of Administrative Barriers, which oversees the implementation of priority measures to reduce red tape, will be strengthened with the publication of its annual implementation report.

B.  Agriculture and the Environment

32.  For most of the population that lives in rural areas, agriculture and natural resource exploitation are the main sources of income. Smallholder incomes and agricultural growth are constrained by the poor access that many farmers have to input and output markets, especially where transport costs are high, and by resource degradation and limited access to land where population density is high. The government's strategy for promoting growth and reducing poverty through agriculture is based on policies aimed at improving market incentives, road infrastructure and the delivery of agricultural services, and on the adoption and enforcement of land tenure regulations.

33.  In 1999, the government commenced implementation of a five-year agricultural sector expenditure program (PROAGRI). The program rationalizes public expenditure in the sector and the role of the Ministry of Agriculture, so as to improve the effectiveness of government services delivery and regulatory functions. Under the program, the government will complete in 1999 a diagnostic study on the impediments to agricultural input markets, with a view to removing them thereafter. The government has also prioritized the proper implementation and enforcement of regulations, approved in December 1998, that apply to rural land under the Land Law of 1997. An interministerial committee has been established, chaired by the Prime Minister and supported by a technical secretariat, to improve the implementation and enforcement of the law and its regulations, primarily by building institutional capacity at the provincial level. To reduce the backlog in unprocessed land title applications, the government is identifying outstanding valid title applications and will adopt, by January 2000, an indicative timetable for their reduction.

34.  The government recognizes that careful environmental management is critical to current and future national welfare and to sustained economic growth. Environmental legislation and regulations relating to environmental assessment under the law have been approved. Additional regulations for the implementation of the legislation (including those that apply to waste management, environmental management, and marine pollution) will be adopted by December 2000. A formal environmental assessment review system will be established by mid-2000, setting criteria and procedures for review across ministries and enforcing the proper implementation of environmental management plans. A program for capacity building will also be implemented to strengthen Mozambique's capacity for environmental assessment review.

C.  Transport and Telecommunications

35.  Improved transportation and telecommunication linkages will reduce transaction costs and increase economic integration within Mozambique. These improvements are essential for fostering rural marketing and private sector activity, foreign exchange generation, and regional growth.

36.  Under the government's road sector program, which has focused to date on the emergency rehabilitation and opening of roads, some 12,000 kilometers (40 percent) of the classified network are now transitable. The government's objective is to increase further the percentage of the transitable road network, by upgrading the condition of the tertiary network in rural areas while ensuring the sustainable maintenance of the whole network. This will require an improved financial and institutional framework for road management. The domestically financed share of periodic and routine maintenance expenditure, currently at less than 25 percent, is to be increased annually. The government is also putting into place an organizational framework conducive to the commercial management of the road network. A new road administration system will aim to improve accountability and transparency in the management of road sector funding, involve road users in the management and allocation of funds, and separate the custody of funds and the management of their use. To reduce eventually the role of the state in the execution of civil works, state construction units are being converted into limited liability companies. Excess equipment will be placed into plant pools and privatized commencing in October 1999. The government will also reclassify the road network by December 2000, including rural roads previously unclassified, in order to improve their management.

37.  The government is in the process of concessioning of ports and railways to private sector operators. CFM, the state-owned port and railway company, is to be restructured into a holding company, with a view to unbundling its shareholding in concession companies and other residual asset ownership and management functions. Concessions have been granted for most port terminal facilities at Maputo and Beira and are under private operation. Memoranda of understanding have also been signed with private consortia for the management of the Maputo and Nacala ports and the Maputo and Nacala rail systems (excluding the Ressano Garcia line). Private operators are being sought for the Ressano Garcia line, the CFM Center lines, and the Beira maritime services. The government and CFM are committed to completing the concessioning of the main port and railway systems associated with CFM South, CFM Center, and CFM North, and to having all three transport corridors under private sector operation by mid-2000. The government has also granted concessions for three tertiary ports to private management and plans to enter into concession contracts for the remaining tertiary ports by 2000. A new performance contract between the government and CFM, to be signed by December 1999, would restructure outstanding debt and rationalize the flow of funds between the two, including a specification of the stream of debt service, concession fees, dividends, and taxes to be paid by CFM to the government. The corporate restructuring and downsizing of CFM, including staff retrenchment, is under way and will be completed by mid-2000.

38.  Coastal shipping and air transport are to be liberalized gradually, so as to reduce the costs of domestic and international trade. Regulations for the Maritime Law (Lei do Mar) of 1997 are to be completed and adopted in 1999 to facilitate entry into, and increase the capacity of coastal shipping. A decree promulgated in 1998 lays the framework for competition in, and entry into, domestic air routes. While all other routes are now open to entry, LAM, the national airline, has exclusive rights through 2003 to serve the national trunk route, after which the route will be open to competition. A strategic private partner is being sought for LAM, which was converted to a limited liability company in December 1998.

39.  To lower costs and improve service in the area of telecommunications, the government will be taking important steps to eliminate the monopoly status of the public telecommunications enterprise (TDM) and to permit entry into, and competition in, the sector. To this end, the government has undertaken a review of current telecommunications legislation and is preparing revised legislation, including revised regulations, for submission to the National Assembly by June 2000.

D.  Energy and Water

40. Mozambique has substantial energy resources in the form of natural gas, coal, and hydropower, and the sector has the potential to be a major source of economic growth through its generation of foreign exchange earnings and tax revenues. Several large new private large gas and electricity export projects and projects for the manufacture of energy-intensive products have been developed or are under consideration. The government is committed to facilitating the access of businesses and households to energy and water through increased reliance on the private sector in providing services. Currently, only 5 percent of all households have electricity, and only 13 percent have piped or well water at home.

41.  The government has developed a comprehensive strategy for the development of the energy sector, to be considered by the Council of Ministers in June 1999, which aims at increasing exports; promoting competition in the generation and distribution of electricity; increasing access to electricity through the creation of decentralized power markets; increasing utilization of commercial forms of energy more in relation to wood fuels; increasing the efficient utilization of biomass fuels; and strengthening the institutional capacity of the sector entities.

42.  By December 1999, the government will adopt regulations to implement the Electricity Law promulgated in 1997. The law sets a framework for the expanding and improving the provision of electricity services through competition in the generation and distribution of electricity. The law and its regulations will establish, inter alia, a tariff framework, with (i) separate tariffs for the generation, transmission, and distribution of electricity; (ii) an autonomous regulatory body responsible for setting these tariff rates; (iii) procedures for application for private producer and distribution concessions; and (iv) guidelines for the sale of electricity from the national grid to the private sector. The government is taking steps to improve the financial management of the state-owned electricity company (EDM) with the approval in 1999 of a performance contract that focuses on increasing revenue collection and reducing line losses. The generation, transmission, and distribution accounts of the EDM are being divided, with a view to separating these functions.

43.  Under its National Water Policy approved in 1995, the Government is undertaking a broad reform of water supply provision aimed at moving toward delegated management, and improving its regulation and financial planning. In December 1998, the legal framework for private sector participation, a regulatory board for water, and a water tariff policy were all approved. With respect to urban water provision, the government will complete the contracting out to full private sector management the water supply services in five major cities (Maputo, Beira, Quelimane, Nampula, and Pemba) in 1999. The government has commenced tariff adjustments to ensure the improvement and sustainability of water provision. An integrated water sanitation and hygiene strategy is under preparation and will be completed by mid-2001. With regard to rural water supply, the government has begun implementation of a Rural Water Transition Plan. The plan, which will be extended to all provinces by 2002, aims at transforming the planning and delivery of rural water and sanitation services from a supply-driven model to a sustained demand responsive approach, characterized by community management, cost recovery, and the involvement of the private sector. The government will also develop a national water resource management strategy and a strategy for internationally-shared river basins, and it will develop and implement riparian cooperative legal and institutional frameworks at the regional level.

E.  Education

44.  In the education sector, there has been a substantial increase in access to primary education. Between 1992 and 1998, the number of primary classrooms, particularly in rural areas, increased by more than 60 percent, and the total number of primary schools in the country has now surpassed prewar levels. The gross admission ratio increased from 58 percent in 1994 to 79 percent in 1998. During this period, owing to capacity constraints, quality indicators-such as the percentage of teachers with preservice training and the completion rates-have not kept pace with the rapid expansion of coverage.

45.  To address the challenges of education and training in Mozambique, the government prepared and assessed with donors its five-year policy framework and strategic plan, the Plano Estratégico de Educação. In support of this plan, the government initiated implementation of an integrated Education Sector Strategic Program (ESSP) for primary and secondary education for 1999-2003. Under the ESSP, current expenditure in education is programmed to increase annually both in real terms and as a share of total current expenditure. The program is designed to raise education levels of the Mozambican population by increasing the access to, and improving the quality of, education. Specifically, the program targets improvements of 1-2 percentage points a year in the gross enrollment rate and in the proportion of students passing key examinations, as well as a 1-2 percentage points annual reduction in the average repetition rate in primary and lower secondary schools. The program will also support a further expansion of the school network. The program will particularly emphasize the promotion of higher enrollment rates for girls and for those living in underserved regions. To achieve the dual objectives of greater access and higher quality, the program will raise the number of qualified teachers through increased preservice and in-service training. Lower and upper primary education will be merged in 1999 to make better use of the existing teaching staff. The curriculum and evaluation processes for grades 1-7 are being revised to better reflect local needs and will be completed by 2001. These measures, by improving quality and efficiency, are expected to lower the currently high repetition rates and increase completion rates. Implementation of the ESSP will be supported by strengthening the institutional capacity of the Ministry of Education, especially to manage resources at the provincial, district, and school levels. The government will also complete in 2000 strategies for technical and vocational education, as well as for tertiary education, aimed at satisfying to Mozambique's increased demand for skilled workers.

F.  Health

46.  The government's Health Sector Recovery Program (HSRP), adopted in 1995, aims at improving the access to and quality of, health services, with a particular focus on rural areas. Under the sector program, current expenditure in health is programmed to increase annually both in real terms and as a share of total current expenditure. Access to health services has improved. Service units per inhabitant increased by 38 percent between 1996 and 1998, while DPT vaccination coverage increased from 55 percent in 1995 to 70 percent in 1998, and coverage of antenatal care increased from 63 percent to 85 percent over the period. Quality improvements are also evident, as both the proportion of health posts staffed with trained personnel and the proportion of first-level health facilities stocked with essential drug kits have increased. Despite these improvements, other outcome indicators underscore the extent of the remaining problems in this area: for example, while the infant mortality rate declined from 162 per 1,000 in 1995 to 135 per 1,000 in 1997, it is still high relative to the sub-Saharan African average of 91.

47.  The government's strategy for the health sector focuses on increasing access to health care and improving the quality of services through the rehabilitation and construction of first-level care facilities and rural hospitals, and the provision of adequate medical supplies. The strategy also emphasizes improving institutional and management capacity at the Ministry of Health (at both the central and provincial levels), while developing human resources in the health sector through the training of health workers and enhancement of university medical training. The government will be using key outcome indicators to monitor progress. DPT coverage is targeted to increase to 80 percent in 2001 (from 70 percent in 1998), the index of geographical inequality in the provision of health services will be reduced to below 2.8 in 2001 (from 3.1 in 1998), the proportion of health posts/centers stocked with drug kits will be increased to, and maintained at, 90 percent (relative to 86 percent in 1997), and the proportion of health posts/centers staffed with trained personnel will be increased to 90 percent in 2001 (from 88 percent in 1998). The government is also committed to combating HIV/AIDS, and to that end in mid-2000 it intends to adopt and commence implementing a National Multisectoral Strategic Plan.

48.  By December 2000, the government will complete and begin implementing a new Health Sector Strategic Plan that will establish sectoral policies, programs, and targets for the new decade. The plan will provide the policy framework for the development of a sector-wide approach in which the government will work with donors to develop joint procedures for budgetary support in the health sector.


VII.  External Viability and Financing Requirements

49.  In April 1998, the Executive Boards of the Fund and the Bank declared Mozambique eligible for assistance under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) and scheduled the completion point under the Initiative for June 1999. At that time, the Boards also agreed that Mozambique's ratio of the net present value (NPV) of debt to exports should be brought down to 200 percent to achieve debt sustainability. The assistance committed to Mozambique under the Initiative is to be delivered at the completion point, conditional on continued satisfactory policy implementation. To ensure that debt sustainability is maintained after the completion point, the government intends to strengthen its debt-recording and debt-management capabilities and to limit its new external borrowing to concessional loans.

50.  External financing requirements for 1999 will amount to about US$2.6 billion, including a reduction in arrears to official bilateral and commercial creditors. For 2000-01, the required yearly amounts are expected to decline toward US$1 billion. Total identified financing will amount to US$1.5 billion in 1999, US$960 million in 2000, and about US$690 million in 2001. The total figure for 1999 includes US$100 million from existing IDA commitments and US$150 million corresponding to IDA interim assistance under the HIPC Initiative (in the form of a grant). Disbursements from expected new commitments would reach about US$690 million in 1999, and somewhat less in 2000-01. Direct foreign investment is expected to be exceptionally high in 1999 (about US$350 million), on account of the start-up of the Mozal aluminum project. This level is expected to be reduced to an average of about US$100 million in the following two years. A financing gap of about US$930 million is projected for 1999, to be followed by gaps of about US$400 million in 2000 and 2001, respectively. These gaps could be filled by the application of traditional rescheduling mechanisms by non-Paris Club creditors and with assistance under the HIPC Initiative.


VIII.  Statistical Issues and Technical Assistance

51.  The government attaches considerable importance to improving the quality and timeliness of statistical information. In view of its resource constraints, the National Institute of Statistics (INE) will adopt a plan for prioritizing data collection efforts in line with capacity. The INE will also adopt a policy for public access to, and dissemination of, statistical information by December 1999.

52.  Steps are being taken to improve the national accounts data. The data for 1996 and 1997 have been revised to incorporate the results of the 1996 household survey, and they will be further revised by October 1999 to incorporate the census results. Historical national accounts series will be reconstructed back to 1991. Preliminary annual data are to be produced within six months of the end of each year. The publication of a national price index integrating the price indices for Maputo, Beira, and Nampula started in May 1999, and the INE intends to publish the index monthly within 30 days of the end of each month. Preliminary monetary surveys are now regularly compiled within 45 days of the end of each month; the Bank of Mozambique will reduce this compilation time to 30 days starting in April 2000.

53.  Mozambique will continue to require further technical assistance to ensure the successful implementation of the strategy laid out in this policy framework paper. The priority areas are legal and judiciary reform, treasury operations, customs and tax administration, budget execution and accounting, banking supervision, and statistics.