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Public Information Notice (PIN) No. 02/70
July 9, 2002
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2002 Article IV Consultation with Mozambique

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2002 Article IV consultation with Mozambique is also available.

On June 17, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mozambique.1

Background

Economic activity has recovered strongly from the devastating floods that reduced growth in 2000 to less than 2 percent. Aided by a rebound in agricultural output, post flood reconstruction activity, and the first full year of production by the MOZAL aluminum smelter, growth reached almost 14 percent in 2001, bringing average growth for the last two years close to the annual average of 8½ percent recorded in the second half of the 1990s. Near-term prospects point to a continuation of this pace of growth in 2002, fueled by further large-scale private foreign investment.

However, inflation, which had subsided in early 2001 to less than 1 percent, rose to 22 percent at year's end, reflecting an overly expansionary monetary stance that went hand in hand with a depreciation of the metical. The central bank responded by tightening monetary policy from mid-2001 through higher reserve requirements, interest rates, and sales of foreign exchange and government bonds. This tightening of liquidity enabled the 12-month rate of broad money growth to decline from 45 percent in September 2001 to 30 percent in March 2002 and the metical to remain stable since October 2001. As a result, cumulative inflation in the first five months of 2002 was less than 1 percent.

The fiscal outturn for 2001 was stronger than programmed. Revenues were ½ of one percent GDP higher than programmed and the primary fiscal deficit was correspondingly lower than programmed. The government incurred significant outlays (2.3 percent of GDP) on bank restructuring, which were financed mostly by issuing bonds to the banks concerned.

External developments in 2001 were more favorable than envisaged under the program. The current account deficit (including grants) narrowed in 2001 to under 11 percent of GDP as MOZAL's aluminum exports contributed to a further narrowing of the trade deficit, which has been more than halved since 1999. Aided by this strong performance, net international reserves were increased by US$7 million despite a shortfall of US$120 million in external assistance.

Problems with two of Mozambique's largest banks were the focus of policy discussions. Accordingly, one of the banks (Banco Austral) was sold to a reputable international bank; the other (Banco Internacional de Moçambique) was recapitalized by the current shareholders. Steps have been taken to strengthen banking supervision and establish accountability for losses in the banking sector.

Important progress was made in key fiscal reforms with the passage of a new public financial management law and parliamentary consideration of a new income tax law. Despite further delays in developing a strategic plan for the justice system, a draft was circulated in February 2002, and detailed plans for the four branches of the system are expected to be finalized during the year.

Executive Board Assessment

Directors welcomed the strong recovery of economic activity in 2001 from the devastating effects of the floods in the previous year, and the good prospects for continued rapid growth in the period ahead. Directors commended the authorities for continuing their impressive record of broad-based reform, which formed an essential backdrop for the recent inflows of foreign direct investment and Mozambique's strong growth performance. They observed that the Mozambican economy is now reaping the rewards of sustained implementation of sound policies, in terms of macroeconomic performance and a strengthened institutional framework. They expressed concern about the impact of drought, and welcomed the authorities' action to address emerging localized food shortages.

Directors noted that inflation had abated in recent months, following its acceleration in 2001. They urged the authorities to persevere with the recent tighter stance of monetary policies to ensure that the inflation rate returns to single digits in 2002. Improved monetary control would require closer coordination of fiscal and monetary policies, Directors noted, and in this regard they recommended that the pace of foreign exchange sales by the central bank be consistent with externally financed budgetary spending and the international reserves target.

Directors agreed with the emphasis placed on fiscal adjustment over the medium term to support external and fiscal sustainability while safeguarding priority spending. They welcomed the authorities' efforts to strengthen tax collection and improve public expenditure management. They noted that further progress in both of these areas will be fundamental to safeguard expenditures in support of Mozambique's poverty reduction strategy (PARPA) and to reduce the current high levels of aid dependence. Directors stressed the importance of ensuring that the new income tax law enters fully into force at the beginning of 2003, and that it would be prudent to delay any reduction in tax rates under the new law until the desired increase in collections had been firmly established. Directors welcomed the passage of the new financial management law, which establishes the basis for greater transparency, efficiency and accountability in the budgetary process in line with key recommendations of the fiscal transparency ROSC completed last year. The challenge now is to follow through on these legislative changes and put in place improvements in public expenditure management. In this regard, Directors urged the authorities to implement the action plan developed by a recent technical assistance mission from the Fund's Fiscal Affairs Department. At the same time, Directors pointed out the importance of an appropriate sequencing of key reforms—including the need to define more clearly the role of government and hence the size of the civil service before embarking on a salary reform.

Directors expressed disappointment about the delay in finalizing the integrated reform plan for the judicial system. While recognizing the complexity of such a project, they considered it indispensable to the government's long-term growth strategy and strongly urged the authorities to complete the plan without further delay.

Directors commended the authorities for the successful sale of Banco Austral, despite some delays relative to the authorities' own tight timetable. Nevertheless, the emergence of a capital shortfall in the largest bank, BIM, underscored the need for further actions to strengthen the financial system. They therefore urged the authorities to send a strong signal of the need for greater discipline in the financial system by pushing ahead with rigorous and transparent loan recovery and strengthening accountability for the problems in the banking sector. Directors also stressed the importance of enhancing banking supervision and strongly supported the government's stated objective of ending all government participation in commercial banks. Directors supported the government's request to participate at an early date in the Financial Sector Assessment Program. They also commended the recent approval of anti-money laundering legislation.

Directors were encouraged that Mozambique remained well placed to maintain external debt sustainability despite adverse developments in the world economy since reaching its completion point under the enhanced HIPC Initiative. They noted, though, that there remained significant risks over the medium term, and suggested that the projections embodied in the authorities' poverty reduction strategy be updated to incorporate more fully the macroeconomic implications of HIV/AIDS. Directors observed that a key challenge is to muster domestic resources and to achieve broad-based economic growth, thus maximizing the impact on employment and poverty impact. In this regard, they encouraged the authorities to give priority to creating an environment favorable for the development of medium and small-size business enterprises, and to include more detailed plans in this area in the next revision of the PARPA.

Directors agreed that the current flexible exchange rate regime has served Mozambique well and that high levels of external assistance had not so far resulted in a sustained real appreciation of the metical or other symptoms of aid-induced Dutch disease, as underscored by strong export growth. While competitiveness had not been compromised, Directors stressed the need to closely monitor aid inflows. They commended the authorities for maintaining a liberal trade regime, and welcomed their intention to reduce the top tariff rate in 2003, and to accept the obligations of Article VIII, Sections 2, 3 and 4.

Directors noted that Mozambique had made progress in completing bilateral agreements with Paris Club creditors. They also stressed the importance of strengthening debt management capacity, to ensure that obligations remaining after HIPC and other debt relief are serviced in a timely manner and that new borrowing remains within the country's payments capacity. Directors were concerned about the difficulty in reaching agreement with official non-Paris Club and commercial creditors, and urged these creditors to play their full part in debt relief for Mozambique. Some Directors also endorsed the suggestion that an escrow account could be established, into which estimated payments for these creditors would be set aside.

Directors noted that Mozambique's data are adequate for surveillance purposes, but weaknesses were still evident, especially in national accounts and balance of payments statistics. Thus, Directors welcomed Mozambique's participation in a data ROSC during 2002.



Table 1. Mozambique: Selected Economic and Financial Indicators, 1999-2002


 

1999

2000

2001

2002

       

Prog.


         
 

(Annual percentage change, unless otherwise specified)

National income and prices

       

Nominal GDP (in billions of meticais)

51,915

58,905

74,675

95,151

Nominal GDP (in billions of U.S. dollars)

4.09

3.75

3.61

3.88

Real GDP

7.5

1.6

13.9

9.0

GDP deflator

2.9

11.7

11.3

16.9

Consumer price index (annual average)

2.9

12.7

9.0

16.6

Consumer price index (end of period)

6.2

11.4

21.9

8.0

         

External sector

       

Merchandise exports (in U.S. dollars)

16.0

28.3

93.3

1.1

Merchandise imports (in U.S. dollars)

46.8

-3.1

-3.9

58.3

Terms of trade (in U.S. dollars)

-14.3

-2.8

5.8

3.5

Nominal effective exchange rate (end of period) 1/

-0.7

-10.9

-23.5

...

Real effective exchange rate (end of period) 1/

2.0

-3.6

-9.3

...

         
 

(Annual change in percent of beginning-period broad money, unless otherwise specified)

Money and credit

       

Net domestic assets

23.9

11.6

9.1

12.0

Of which: net credit to the government

0.0

4.1

5.3

7.0

credit to the economy (in percent)

22.9

22.3

22.9

14.1

Broad money (M2)

35.1

42.4

29.7

19.2

Velocity (GDP/ average M2)

5.2

4.1

3.9

4.0

Prime rate (in percent; end of period)

19.6

19.6

25.3

...

         
 

(In percent of GDP)

Investment and saving

       

Gross domestic investment

36.9

39.6

41.6

57.7

Government

11.6

13.3

14.0

12.6

Other sectors

25.3

26.3

27.7

45.1

Gross national savings

19.3

26.9

31.1

28.8

Government

11.5

11.0

11.7

8.9

Other sectors

7.8

15.9

19.4

19.8

Current account, after grants

-17.5

-12.7

-10.5

-28.9

         

Government budget

       

Total revenue

12.0

12.7

12.9

13.0

Total expenditure and net lending (incl. residual)

25.1

28.8

30.7

29.9

Overall balance, before grants

-13.2

-16.1

-17.8

-16.9

Total grants

11.7

11.6

12.9

10.1

Overall balance, after grants

-1.5

-4.5

-4.9

-6.7

Domestic primary balance

-3.4

-6.7

-7.7

-6.1

Excluding bank restructuring

-0.8

-5.0

-5.6

-3.4

External financing (incl. debt relief)

1.8

3.7

3.0

4.6

Domestic financing

-0.3

0.8

1.8

2.1

         
         
 

(In percent of exports of goods and nonfactor services)

         

Net present value of total external debt outstanding 2/

212.0

194.4

113.2

100.3

External debt service (nonfinancial public sector)

 

Scheduled, after original HIPC Initiative assistance

15.3

5.5

5.8

8.1

Scheduled, after enhanced HIPC Initiative assistance

...

2.5

3.6

5.2

Scheduled, after additional bilateral assistance

...

...

3.5

4.1

 

(In millions of U.S. dollars, unless otherwise specified)

         

External current account, after grants

-718

-478

-380

-1,120

Overall balance of payments

-236

-351

-419

26

Gross international reserves (end of period)

669

746

727

733

In months of imports of goods and nonfactor services

5.5

5.8

6.4

4.4

In percent of broad money

75.5

76.2

77.9

73.5

Exchange rate (meticais per U.S. dollar; end of period)

13,300

17,140

23,320

...

         

Use of Fund resources (in millions of SDRs)

   

Purchases/disbursements

21.0

45.2

8.4

16.8

Repurchases/repayments, before HIPC Initiative assistance

22.8

23.0

21.0

17.7

Credit outstanding

145.4

167.6

155.0

154.1

         

Sources: Mozambican authorities; and IMF staff estimates and projections.

1/ A minus sign indicates depreciation.

2/ Public and publicly guaranteed, in percent of the three-year average of exports. The data for 1999-2000 include the impact of total debt relief granted under the original HIPC Initiative. Data for 2001-02 include the impact of total debt relief under the enhanced HIPC initiative, additional bilateral assistance, and new borrowing.


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



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