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Press Release No. 98/35
August 25, 1998
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Third Annual ESAF Loan for Mozambique

The International Monetary Fund (IMF) has approved the third annual loan for Mozambique under the Enhanced Structural Adjustment Facility (ESAF)1 in an amount equivalent to SDR 25.2 million (about US$33 million), to support the government’s economic program for 1998/99. The loan will be disbursed in two equal semiannual installments, the first of which is available on September 1, 1998.

Background

Mozambique’s economic performance has improved significantly in recent years. GDP grew by 12.4 percent in 1997, inflation came down dramatically to 5.8 percent in 1997 and continued to decline during the first seven months of 1998, the external current account deficit narrowed by about 9 percentage points of GDP during 1996-97, the nominal exchange rate has been stable, and the net international reserve position was comfortable at four months of imports by end-1997. Confidence in the economy is improving steadily, and private investment is rising in what can be seen as a validation of the economic policies put in place over the past two years and supported by the first two loans under the ESAF (see Press Releases 96/33 and 97/28).

Against this background, the IMF Executive Board determined last April that Mozambique qualified for assistance under the Initiative for Heavily Indebted Poor Countries (HIPC)2 (see Press Release 98/12). Delivery of assistance under the HIPC Initiative for Mozambique at the completion point in June 1999 is conditional upon the successful conclusion of the midterm review of the program supported by the current third annual arrangement, the approval at a new three-year ESAF loan, and adequate progress in implementing social policies.

The 1998/99 Program

Mozambique’s medium- and long-term goals are to create the conditions for poverty-reducing sustainable economic growth while lowering the country’s dependence on external aid. The government’s medium-term strategy is to capitalize on gains achieved in both macroeconomic stabilization and economic liberalization to encourage rapid private sector expansion.

The program for 1998/99 aims at a real GDP growth (excluding large projects) of about 7 percent in 1998 and 1999, an end-period inflation of 6-8 percent in 1998 and 1999, and the maintenance of net international reserves at about three to four months of projected imports. Theslowdown in economic growth relative to 1997 mainly reflects expectations of slower growth in the industrial, energy, construction, and services sectors, which led the growth spurt in 1997.

To these ends, the program projects a decline of the overall fiscal deficit, before grants, by one half of a percentage point in 1998 because of higher revenues resulting from improvements in customs and internal tax administration. In 1999, the budget is expected to be adversely affected by fiscal reforms, including tax cuts and a wage decompression in the civil service, that will widen the overall deficit before grants, but this will be accommodated by higher concessional external financing.

Structural Reforms

The authorities’ program of structural reforms seeks to remove impediments to economic growth and stabilization that remain, despite progress achieved in economic reform and liberalization in the past decade. The program focuses on increasing private investment through the privatization of state enterprises and elimination of administrative barriers to trade and investment, improving public sector saving by strengthening tax administration and widening the tax base, and stimulating private sector saving through the development of financial instruments and markets and maintaining low tax rates.

The program also contains actions aimed at strengthening the capacity for national economic management through civil service reform, ensuring a competitive and sound banking system by strengthening bank supervision and revising financial legislation, and increasing the efficiency of public sector investment through a greater coordination of external aid.

Addressing Social Needs

The government’s medium-term social objective is to improve poverty indicators to levels that at least match the average of sub-Saharan Africa through the implementation of medium-term expenditure programs on education and health, backed by an increase in the share of budgetary resources going to these areas.

Education’s share of total current expenditure is budgeted to increase to 18.2 percent in 1998 from an average of 13.5 percent during the period 1987-97, while that of health is projected to rise to 8.8 percent from an average of 6.3 percent. The education and health budgets will be expanded through debt-service savings accruing from the HIPC Initiative, as well as through direct contributions to a debt alleviation fund created in 1996. Furthermore, government spending on the social sectors will be supplemented by programs financed by nongovernmental organizations.

The Challenge Ahead

Mozambique’s economic objectives under the 1998/99 program are consistent with its medium-term economic strategy. Monetary and fiscal policies are restrained and are judged to be adequate to achieve the objectives, while the program of structural reforms is comprehensive andtackles several key concerns. However, continuing progress will depend on the authorities’ determination to advance the momentum of reforms already started, to adapt them to changing circumstances, and to maintain the prudent stance of financial policies that has served Mozambique so well in the recent past.

Mozambique joined the IMF on September 24, 1984; its quota3 is SDR 84.0 million (about US$111 million); and its outstanding use of IMF credit currently totals SDR 144 million (about US$190 million).


Mozambique: Selected Economic and Financial Indicators, 1994-20001


1994

1995

1996

1997

1998

1999

2000






Prog.

Proj.

Proj.


(Annual percentage change, unless otherwise specified)

National income and prices








Real GDP

7.5

4.3

7.1

12.4

9.1

9.6

6.9

Real GDP (excluding large projects)

7.5

4.3

7.1

12.4

7.2

7.3

7.0

Real GDP per capita

0.9

-0.5

3.5

9.4

6.2

6.8

4.1

GDP deflator

59.4

52.0

40.9

8.8

7.0

5.8

7.7

Consumer price index (annual average)

63.1

54.4

44.6

6.4

3.3

7.7

6.0

Consumer price index (end of period)

70.2

54.1

16.6

5.8

6.5

6.0

6.0

External sector








Merchandise exports (total)

24.4

6.3

29.8

-2.3

32.0

17.7

8.0

Merchandise exports (excluding large projects)

24.4

6.3

29.8

-2.3

8.2

9.2

8.7

Merchandise imports (excluding large projects)

6.2

-22.1

6.4

-1.7

16.1

7.5

6.7

Merchandise export volume (excluding large projects)

23.8

-2.9

31.0

-1.8

5.9

5.3

6.9

Merchandise import volume (excluding large projects)

2.8

-29.5

6.9

8.4

21.1

6.0

5.4

Terms of trade (excluding large projects)

-2.7

-1.0

-0.4

9.8

6.6

2.2

0.3

Nominal exchange rate (average, US$/Mt)

-37.1

-33.1

-20.1

-2.2

...

...

Real effective exchange rate (dep. = -)

28.3

-4.4

14.9

14.7

Government budget








Total revenue

39.6

58.1

44.2

31.8

18.5

12.4

21.7

Total expenditure and net lending

77.7

25.9

31.3

34.7

14.7

17.5

13.5

Current expenditure

69.4

10.6

40.6

38.8

20.5

22.1

13.0

Capital expenditure and net lending

93.1

40.1

24.5

31.3

9.5

13.0

14.0

Money and credit (in percent of opening M2)




Net domestic assets, of which:

33.8

15.2

-27.2

2.3

9.7

9.8

Net credit to the government

-3.7

-4.3

-8.8

-10.8

0.5

0.0

Credit to the rest of the economy

30.5

25.9

22.4

31.8

17.9

17.5

Broad money (M2)2

57.6

54.7

21.1

24.4

17.0

16.0

Velocity (GDP/M2)

3.4

3.5

4.4

4.3

4.3

4.3

Rediscount rate (end of period, in percent)

69.7

57.8

32.0

13.0

...

...


(In percent of GDP)

Saving-investment balance








Gross domestic investment

31.3

36.1

30.1

29.5

35.2

41.0

40.6

Public

12.9

11.0

9.3

10.0

9.1

9.2

9.1

Private

18.4

25.1

20.8

19.5

26.0

31.8

31.5

Gross national savings

15.0

18.6

14.5

20.0

20.2

19.7

21.2

Public

12.1

13.2

8.7

11.1

9.5

7.6

8.0

Private

2.9

5.4

5.8

8.9

10.7

12.1

13.2

External current account (after grants)

-16.3

-17.4

-15.6

-9.6

-15.0

-21.3

-19.4

Government budget3








Total revenue

14.0

14.0

13.4

14.4

14.9

14.5

15.3

Total expenditure and net lending

37.7

29.9

26.1

28.7

28.7

29.2

28.7

Overall balance before grants

-23.7

-15.9

-12.7

-14.3

-13.8

-14.7

-13.4

Total grants

17.1

12.1

8.8

10.1

9.1

9.1

8.4

Overall balance after grants

-6.6

-3.8

-3.9

-4.2

-4.7

-5.5

-5.0

Domestic primary balance

-22.3

-13.3

-10.8

-12.5

-11.7

-13.3

-12.0

Domestic bank financing

-0.2

-0.8

-1.7

-1.9

0.0

0.0

0.0


(In percent of exports of goods and nonfactor services)

Net present value of total external debt outstanding4

4,308.3

1,887.3

691.4

644.3

443.2

402.3

Total external debt service5








Scheduled, including IMF debt6

131.7

103.7

74.4

71.6

80.0

74.5

86.5

Actual, including IMF debt

33.0

27.5

28.1

24.9

33.5

36.9

39.9

Actual, excluding IMF debt

29.9

23.7

21.3

22.5

29.0

32.2

35.6


(In percent of government revenue)

External nonfinancial public debt service7




Scheduled6

176.7

132.9

91.9

72.6

74.0

66.6

77.1

Actual

19.1

25.8

31.4

21.0

22.9

24.6

24.6


(In months of imports of goods and nonfactor services)

Gross international reserves (end of period)

2.2

2.7

4.4

6.2

5.3

4.4

4.0


(In millions of U.S. dollars)

External current account (after grants)

-300

-338

-337

-263

-464

-727

-706

Overall balance of payments

-377

-280

-49

-67

-256

-270

-430

Total external debt (end of period)

8,671

8,911

9,279

7,432

7,150

7051

7,297

External arrears (public sector, end of period)8

2,508

2,895

2,830

619

0

0

0

Gross international reserves (end of period)

209

225

383

532

571

590

534


(In millions of SDRs)

Use of Fund resources








Enhanced Structural Adjustment Facility disbursements

14.7

0.0

12.6

25.2

25.2

12.6

...

Enhanced Structural Adjustment Facility repayments

7.3

9.5

22.3

11.0

18.1

22.8

22.2

Outstanding amount

145.2

135.8

126.1

140.1

147.2

137.0

114.9

Quota

84.0

84.0

84.0

84.0

84.0

84.0

84.0


(In units specified)

Nominal GDP (Mt billions)

10,860

17,220

25,982

31,780

37,095

43,027

49,521

Market exchange rate (12-month average, Mt/US$)

5,918

8,890

11,294

11,546

...

...

...









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

1For price, exchange rate, and trade data, percentage changes are over the preceding 12 months; for fiscal data, they are over the same period a year earlier. Fiscal and monetary data are cumulative for the year.

2Includes foreign currency deposits.

3In percent of nonenergy GDP.

4Refers to public and publicly guaranteed debt after rescheduling, in percent of three-year export average.

5Including nonguaranteed private sector debt.

6Before debt relief.

7Excludes IMF debt.

8In view of the best efforts being undertaken by Mozambique to conclude debt-rescheduling agreements, the country is deemed to have no arrears outstanding for programming purposes.


1The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with 5-year grace period.

2The HIPC Initiative entails coordinated action by the international financial community, including multilateral institutions, to reduce to sustainable levels the external debt burden of heavily indebted poor countries that pursue IMF- and World Bank-supported adjustment and reform programs, but for whom traditional debt relief mechanisms are insufficient.

3A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.


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