Press Release No. 00/73

The Executive Board of the International Monetary Fund (IMF) completed the second review of Mozambique's program under the Poverty Reduction and Growth Facility (PRGF)¹ and approved a second annual loan to support the government's economic program. The completion of this review enables Mozambique to draw an amount equivalent to SDR 8.4 million (about US$11 million) from the IMF.

Mozambique's three-year program, originally supported under the Enhanced Structural Adjustment Facility (ESAF), was approved on June 28, 1999 (see Press Release No 99/25), in an amount equivalent to SDR58.8 million (about US$76 million). In March 2000, the access under the program was augmented to the equivalent amount of SDR87.2 million (about US$113 million), of which an amount equivalent to SDR 45.2 million (about US$58 million) has been disbursed. On April 12, 2000, the IMF and the World Bank agreed that Mozambique had met the requirements to receive debt relief from its external creditors under the HIPC Initiative (see Press Release No 00/28).

In commenting on today's Executive Board discussion on Mozambique, Shigemitsu Sugisaki, Deputy Managing Director of the IMF and Acting Chairman of the session said:

"Mozambique has broadly maintained its good record of program implementation, despite the devastating floods at the beginning of 2000. The authorities recognize the risks to macroeconomic stability from the rapid monetary expansion during the current year and the consequent pickup in inflation, and have taken action to reassert monetary control. However, continued monetary restraint will be required in the period ahead to bring inflation down to single digits.

"The authorities' objective of raising significantly the revenue effort over the coming years is a crucial complement to external aid in supporting poverty reduction spending while consolidating the fiscal position. Close attention will be needed to ensure that spending in other areas, including wages, remains prudent, and that the efficiency of all spending continues to be enhanced.

"In their effort to improve transparency in government operations, the authorities have started the publication of a quarterly budget execution report and completed a review of fiscal transparency in the context of the code of good practices on fiscal transparency. In this regard, the authorities' commitment to including information on poverty-related expenditures in the quarterly budget execution report is particularly welcome.

"The government, as minority owner, and the private shareholders, have made progress in addressing the liquidity and solvency problems of two troubled banks in Mozambique. Concluding the recapitalization in the timeframe envisaged under the program is critical in the interest of a sound banking system. In the meantime, the safeguard measures put in place by the central bank should be strictly enforced.

"The authorities have taken steps to improve the functioning of the judiciary including the opening of a new center for judicial studies and training and the completion of a draft new commercial code. Looking ahead, the authorities should speed up their work on judicial reform," Mr. Sugisaki said.

ANNEX

Program Summary

Since the inception of the present PRGF arrangement in June 1999, economic developments in Mozambique have been marked by a slowdown of economic growth, a rekindling of inflation, and a weakening external current account linked in large part to the serious flooding that afflicted the country in February-March 2000.

The medium-term Government Program contains four primary objectives: the reduction of absolute poverty through programs in health, education, and rural development; the attainment of rapid and sustainable growth through the creation of a favorable environment for the private sector, together with the improvement of the country's fiscal position; the economic development of rural areas in order to reduce regional inequality; and the consolidation of peace, national unity, justice, and democracy. The medium-term macroeconomic outlook projects GDP growth of about 10 percent in 2001; in subsequent years, GDP growth is expected to average 6 percent a year.

Bringing down inflation through a slowdown of monetary expansion, and restoring health to the banking system are the most important immediate objectives of monetary and financial sector policy.

Following a review of the system of tax and customs exemptions, the government has recently adopted measures to improve the administration of exemptions and will proceed under the program with a comprehensive fiscal reform, including of the legal basis of tax incentives. These changes in fiscal tax policy and tax administration are expected to yield significant revenue gains by 2002.

A significant increase in government expenditure in 2001 reflects outlays for flood reconstruction, higher social spending, a boost in the government wage bill, and onetime outlays for bank recapitalization.

The government will continue to implement a strong structural reform agenda. The program aims at strengthening the financial sector, rationalizing tax policy and tax administration, and improving fiscal accountability. A new commercial code will also be submitted to the National Assembly by July 2001. Comprehensive reform in these and other areas will be key to improving the environment for private sector development.

The government remains committed to preparing the full PRSP and meeting the other conditions for reaching the completion point under the enhanced HIPC Initiative by end-March 2001. This will be an important step in implementing its poverty reduction program. In this regard, a draft health sector strategic plan is expected to be ready in the near future and activities to implement the HIV/AIDS strategic plan are being organized. Also, the share of recurrent health and education expenditures in total recurrent expenditure increased in the 2000 budget and is expected to increase further in the 2001 budget.

Mozambique joined the IMF on September 24, 1984, and its quota is SDR 113.6 million (about US$147 million). Its outstanding use of IMF financing currently totals SDR 166.1 million (about US$215 million).

Table 1. Mozambique: Selected Economic and Financial Indicators, 1998-2001     1998   1999 2000   2001           Prog.   Proj.                     (Annual percentage change, unless otherwise specified)                 National income and prices               Nominal GDP (in billions of meticais) 46,427   50,827 58,887   68,939 Nominal GDP (in millions of U.S. dollars) 3,918   4,005 3,922   4,197 Real GDP   11.9   7.3 3.8   10.4 GDP per capita (in U.S. dollars)   231.6   231.5 221.7   232.0 GDP deflator   2.4   2.0 11.6   6.0 Consumer price index (annual average) 0.6   3.1 12.3   5.7 Consumer price index (end of period) -1.3   6.2 11.0   7.0                 External sector               Merchandise exports   6.3   10.8 15.4   119.0 Merchandise imports   7.5   46.8 -3.2   1.4 Terms of trade   5.3   -0.1 -1.5   1.5 Nominal effective exchange rate (end of period) 1/ 2/ -5.7   0.0 -8.2   ... Real effective exchange rate (end of period) 1/ 2/ -9.7   1.7 3.4   ...                     (Annual change in percent of beginning-period broad     money, unless otherwise specified)                 Money and credit               Net domestic assets   9.3   23.9 25.0   13.3 Of which: net credit to the government -16.0   0.0 12.5   9.8 credit to the rest of the economy 17.8   22.9 26.3   16.5 Broad money (M2)   17.6   35.1 34.0   16.0 Velocity (GDP/ average M2)   5.7   5.2 4.3   4.0 Prime rate (in percent; end of period) 3/ 19.6   19.6 18.4   ...                     (In percent of GDP)                 Investment and saving               Gross domestic investment   23.5   32.6 29.7   27.3 Government   ...   ... 12.8   13.1 Other sectors   ...   ... 16.9   14.2 Gross national savings   11.5   15.1 15.1   16.0 Government   ...   ... 9.3   7.8 Other sectors   ...   ... 5.8   8.2                 Government budget               Total revenue   11.5   12.2 12.7   12.3 Total expenditure and net lending 21.8   25.2 29.1   30.0 Overall balance before grants   -10.6   -13.4 -16.7   -17.7 Total grants   8.2   11.9 10.5   11.5 Overall balance after grants   -2.4   -1.6 -6.1   -6.3 Domestic primary balance   -0.6   -3.5 -7.5   -7.4 Domestic bank financing   -2.3   -0.3 2.5   2.2                 External sector               Current account balance before grants -21.3   -30.1 -28.5   -18.8 Current account balance after grants -12.4   -19.2 -17.6   -8.8                     (In percent of exports of goods and nonfactor services)                 Net present value of total external debt outstanding 4/ 538.2   202.0 163.0   150.0 External debt service (nonfinancial public sector)             Scheduled, before HIPC Initiative assistance (Naples terms) 20.0   26.1 31.3   20.2 Scheduled, after original HIPC Initiative assistance ...   15.3 12.2   8.2 Scheduled, after enhanced HIPC Initiative assistance ...   ... 4.4   5.8                     (In millions of U.S. dollars, unless otherwise specified)                 External current account after grants -436   -770 -690   -403 Overall balance of payments   -204   -243 -478   -488 Gross international reserves (end of period) 625   669 700   634 In months of imports of goods and nonfactor services 7.0   5.2 5.7   5.0 In percent of broad money   82.7   76.0 70.5   56.8 Exchange rate (meticais per U.S. dollar; end of period) 3/ 12,366   13,300 16,244   ...                 Use of Fund resources (in millions of SDRs)             Purchases/disbursements   25.2   21.0 45.2   16.8 Repurchases/repayments, before HIPC Initiative assistance 18.1   22.8 22.2   21.0 Credit outstanding   147.2   145.4 168.5   164.3                 Quota   84.0   113.6 113.6   113.6                 Sources: Mozambican authorities; and staff estimates and projections. 1/ A minus sign indicates depreciation.             2/ The figure for 2000 is the actual rate at the end of September. 3/ The figure for 2000 is the actual rate at the end of November. 4/ Public and publicly guaranteed, in percent of the three-year average of exports. Data for 1998 reflect the impact of applying traditional debt-relief mechanisms (Naples terms). The data for 1999-2000 include the impact of total debt relief granted under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) and new borrowing. 1On November 22, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was renamed the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for Mozambique, pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP, and a participatory process is underway. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and the World Bank, the PRSP will provide the policy framework for future reviews under the PRGF arrangement. PRGF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years with a 5 ½ year grace period on principal payments.