Press Release: IMF Approves Three-Year Loan for Mozambique Under the ESAF
June 21, 1996
The International Monetary Fund (IMF) today approved a new three-year loan for Mozambique under the enhanced structural adjustment facility (ESAF)1 equivalent to SDR 75.6 million (about $110 million) to support the Government's economic reform program for 1996-98. The first annual loan, equivalent to SDR 25.2 million (about $37 million), will be disbursed in two equal semiannual installments, the first of which will be available on June 28, 1996.
Since 1987, Mozambique has made good progress toward reversing economic decline, reducing macroeconomic imbalances, and liberalizing its economy. Despite civil war, a decline in the terms of trade, and natural disasters, the economy grew at an annual average rate of 6.7 percent in the period 1987-1995. Liberalization of the exchange rate, prices, interest rates, and trade policies is now almost complete; progress toward enterprise and financial sector reforms has also been significant, although more still remains to be done in these areas. However, the remaining macroeconomic imbalances are substantial, and the objective of economic stabilization in this decade has not yet been fully achieved. Moreover, Mozambique's external position remains fragile, inasmuch as the high levels of foreign aid inflows of recent years may not be forthcoming in the future, and foreign direct investment has been modest thus far. Although there has been a significant alleviation of the debt burden since 1987, Mozambique's external debt level remains unsustainable.
Medium-Term Strategy for 1996-98 and the Program for 1996
The Government's medium-term economic strategy is designed to raise gross domestic savings and improve the allocation of resources in order to create the conditions for sustained economic growth and poverty reduction. The basic macroeconomic objectives for the 1996-98 program to be supported by the ESAF loans are to: (a) achieve an average annual growth of nonenergy GDP of 5 percent; (b) reduce the rate of annual inflation to 10 percent by 1998; and (c) increase international reserves to the equivalent of four months of imports of goods and nonfactor services by 1998.
Within this medium-term strategy, the program for 1996 supported by the first annual ESAF loan, aims at achieving a real GDP growth rate of 4 percent, reducing the end-of-period inflation rate to 22 percent, and increasing gross official reserves to 3.5 months of imports by end-1996. To achieve these objectives, the authorities plan to reduce the overall fiscal deficit (before grants) to 16.5 percent of GDP in 1996 from 20.3 percent in 1995 through revenue and expenditure measures. The program seeks to increase revenue by 1.9 percentage points of GDP in 1996, primarily as a result of an acceleration of customs reform and an increase in petroleum product taxes, and provides for a reduction in overall expenditure, as well as a continuing consolidation of the public investment program. Monetary policy will be geared to achieving the inflation and balance of payments objectives.
Structural reforms will be accelerated under the program. In particular, the Government will focus on privatization and financial sector reforms, export promotion, strengthening the revenue base, public administration reforms--including decentralization and civil service reform--and promoting greater transparency and accountability in the public finances and in the economic regulatory system. The judicial system will also be strengthened.
Addressing Social Costs
Development of the agricultural sector through market incentives will be the cornerstone of government policies to reduce poverty. A review of the existing safety nets is being carried out by the authorities and should be completed in 1996, and a Poverty Assessment and Action plan will be completed in 1997. The Government will also focus on the expansion of primary and secondary education by rehabilitating facilities, and hiring and training more teachers. To address health concerns, the Government's priorities will be on increased primary care, mother and child needs, and training of mid-level health professionals.
The Challenge Ahead
A key element in the period ahead is the acceleration of privatization of public enterprises, which is critical to increase investment efficiency and the stability of the banking system. Also, the external position remains vulnerable, which could indicate that Mozambique will require exceptional treatment in order to achieve a sustainable external debt position.
Mozambique joined the IMF on September 24, 1984. Its quota2 is SDR 84.0 million (about $122 million). Its outstanding use of IMF credit currently totals SDR 131 million (about $189 million).
Sources: The Mozambique authorities; and IMF staff estimates.
1. The ESAF is a concessional IMF facility for assisting eligible members that are undertaking reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years, with a 5-1/2-year grace period.
2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.