Press Release: IMF Approves Third Annual ESAF Loan for Mozambique
August 25, 1998
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.
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.
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).