Public Information Notice: IMF Concludes Article IV Consultation with Mozambique
July 14, 1999
|Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.|
On June 28, 1999, the Executive Board concluded the Article IV consultation with Mozambique.1
Mozambique's sustained adjustment effort was supported by the IMF under successive programs since 1987, first under the Structural Adjustment Facility (SAF) until 1990, and then by two arrangements under the Enhanced Structural Adjustment Facility (ESAF). A third ESAF arrangement was approved on June 28, 1999. The IMF and the World Bank's International Development Association (IDA) agreed last June 29 that Mozambique has met the requirements for reaching the completion point under the Heavily Indebted Poor Countries (HIPC) Initiative, allowing the country to receive substantial debt relief from its external creditors.
Economic growth rose from an average of 6.7 percent a year during 1987-95 to 10 percent a year during 1996-98, while inflation declined from about 50 percent in 1995 to less than one percent in 1998. These developments were fostered by prudent fiscal and monetary policies and by continued implementation of structural reforms. Increased confidence in the economy was reflected in higher long-term capital inflows and a stable exchange rate.
Further progress was also made on structural reforms during the last three years. Key reforms in the fiscal area comprised the development of a medium-term expenditure framework, a revision of the civil service career and compensation systems, a reduction and rationalization of direct tax rates, and the introduction of a value-added tax. In the financial sector, interbank foreign exchange and money markets were established, steps were taken to improve the payments system, a new law of financial institutions was drafted, and banking supervision was strengthened. Other important reforms included the completion of a large privatization and restructuring program, the simplification of the trade regime, and the reduction in import and export taxes.
As a result of the increased emphasis on health and education, social indicators are also improving. Between 1996 and 1998, the primary school enrollment rate increased from 62 percent to 71 percent, and coverage for key vaccinations increased from 58 percent to 77 percent. During the last five years, the number of primary classrooms increased by more than 60 percent. In support of these improvements, the share of health and education in total current government expenditure increased from 7 percent and 16 percent, respectively, in 1995 to 9 percent and 18 percent in 1998.
Despite these achievements, pressing economic problems remain, namely widespread poverty, a small export base, low revenue collections, insufficient human capital, and inadequate infrastructure. The government's new three-year program, extending through early 2002, seeks to further address these problems while consolidating the macroeconomic gains achieved. The program aims to strengthen the foundations for real economic growth of about 7-10 percent per year, limit inflation to near 5 percent a year, and maintain a prudent level of international reserves. Social development goals will continue to be pursued through the implementation of medium-term programs in health and education and a poverty action plan.
During the first year of the program, the budget deficit is projected to rise temporarily as a result of a number of tax and expenditure reforms intended to encourage private sector development and improve public administration. In 2000-2001, higher revenue and reduced spending pressures are expected to lead to a declining deficit. The value-added tax and a series of measures to broaden the tax base and improve tax administration constitute the core of the government's revenue mobilization effort. Meanwhile, the monetary program is designed to maintain price stability and ensure a healthy supply of credit to the private sector.
In addition, the structural reform agenda for the next three years focuses on reforming the civil service, increasing human capital, improving the delivery of social services, ensuring the transparency of government operations, and facilitating private sector development. The latter is to be achieved through continued privatization, further trade liberalization, and simplification of the legal and regulatory frameworks.
Executive Board Assessment
Executive Directors were pleased that Mozambique's economic performance had remained strong in 1998, as evidenced by double-digit economic growth, the stability of prices and of the exchange rate, and a comfortable level of foreign exchange reserves. Noting that the authorities' sustained commitment had been a key determinant of that performance, Directors commended their adherence to stability-oriented macroeconomic policies and to their program of structural reforms.
Directors noted that the reforms adopted-including in the key areas of privatization, the civil service, the tax system, and the financial sector-had stimulated capital inflows, and set the stage for sustained economic growth. They considered that the continuation of these reform policies-supported by external financial and technical assistance-was indispensable if Mozambique was to meet the major economic challenges that remained. In this connection, Directors referred, in particular, to the widespread incidence of poverty that affected about 70 percent of the population, and looked forward to forceful implementation of the recently adopted Poverty Action Plan, and to other remedial measures.
Directors endorsed the authorities' economic program and the medium-term policy framework that will be supported by a new three-year ESAF arrangement. Directors noted the low level of domestic savings and Mozambique's resultant heavy reliance on external assistance. They were encouraged by the authorities' intention to reduce this reliance over time, in part through a strengthening of the fiscal position.
Regarding fiscal developments in 1998-99, Directors viewed the increase in the domestic primary budget deficit as the result of desirable policies to improve the tax system, stimulate the private sector, and strengthen public administration. At the same time, they emphasized that care would be needed not to jeopardize fiscal discipline in the medium term. Directors therefore stressed the need to raise revenue collection by continuing efforts to strengthen tax administration and reduce exemptions. They saw the recent introduction of the value-added tax as a positive step in this direction. Directors also emphasized the importance of civil service reform. They noted that these measures, together with resources freed-up by the assistance under the HIPC Initiative, would help the authorities in meeting their goals for further increases in spending on health, education, and other social services.
Directors welcomed the emphasis in the Government's program on the efficiency and transparency of government operations, and the improvement of the legal and judicial system. They also welcomed the authorities' intention to complete the privatization and public enterprise restructuring program, to simplify the regulatory framework, and to encourage private sector participation in the provision of public services.
Directors noted with approval the shift toward indirect instruments of monetary control. They viewed the continuation of the flexible exchange rate policy as appropriate and welcomed the authorities' plan to maintain gross reserves at a reasonable level of import cover over the medium term, particularly in view of the economy's vulnerability to external shocks.
Directors commended the authorities for their commitment to maintaining a liberal trade environment. They welcomed the recent reduction in the maximum import tariff rate from 35 percent to 30 percent, and looked forward to further reductions over time. A few Directors noted that the resultant impact on revenues could be limited by eliminating tariff exemptions more quickly. Directors welcomed Mozambique's intention to accept the obligations of Article VIII, Sections 2, 3, and 4 of the Fund's Articles of Agreement in the near future.
Directors looked forward to Mozambique's reaching the completion point under the HIPC initiative on the conclusion of the World Bank's discussion the following day. They emphasized that its external debt and debt service burden would be significantly reduced with the delivery of assistance under the HIPC Initiative. Directors considered that the substantial additional resources made available by this assistance could make a significant contribution to attaining Mozambique's social objectives, notably in improving health and education. They stressed, however, that continued determined implementation of sound macroeconomic and structural reforms was essential.
Some Directors considered that, following revisions to the framework of the HIPC Initiative, Mozambique's eligibility for additional assistance could be considered.