IMF Executive Board Completes Fourth Review Under the Three-Year PRGF Arrangement for MozambiquePress Release No. 06/134
June 19, 2006
The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Mozambique's economic performance under an SDR11.36 million (about US$16.7 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 04/153).
The completion of the review enables the release of an amount equivalent to SDR 1.62 million (about US$2.4 million), which will bring total disbursements under the PRGF arrangement to an amount equivalent to SDR 8.1 million (about US$11.9 million).
The Executive Board also accepted that as part of the financing assurances review that adequate safeguards remain in place for further use of Fund resources, as well a request for modification of performance criteria.
Following the Executive Board's discussion on Mozambique's economic performance, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:
"Mozambique's strong macroeconomic performance continued in 2005 and early 2006, despite exogenous shocks. Fiscal results have been commendable and all performance criteria through end-March 2006 have been met. While the macroeconomic outlook remains favorable, vigilance will be required, in light of volatile oil prices and unpredictable weather.
"Over the medium term, the main challenges are sustaining broad-based economic growth and making further inroads in alleviating poverty through the implementation of a poverty reduction strategy for 2006-09. This will entail persevering with stabilization efforts, reducing the cost of doing business, and continuing to address governance issues directly, including by further enhancements to the legal framework and strengthening the transparency of natural resource management, in line with the principles of the Extractive Industries Transparency Initiative.
"To help achieve the Millennium Development Goals (MDGs), the government should ensure that additional external financing, including Multilateral Debt Relief Initiative (MDRI) resources, are allocated to the most economically and socially productive areas in a manner that does not compromise macroeconomic stability. A costing of the programs that are targeted towards the MDGs should facilitate this allocation.
"The authorities' commitment to create sufficient fiscal space for priority investments is welcome. This will require enhanced revenue mobilization as well as reinvigorated public sector reform program and governance strategy aimed at improving public service delivery and using additional donor assistance effectively. The decentralization strategy should also be clarified and well sequenced, with appropriate checks and balances.
"The 2006 fiscal framework includes higher priority spending financed by MDRI resources from the Fund and should be accompanied by the rollout of e-SISTAFE (Financial Administration System) to ministries and other entities at the central and provincial levels to ensure a better monitoring of expenditures. Moreover, off-budget donor-funded projects should progressively be brought on budget and included in e-SISTAFE with the continued help of the donor community.
"The Bank of Mozambique's pursuit of base money targeting, in conjunction with a flexible exchange rate regime has served the country well. In this regard, the removal of the interest rate caps in the treasury bill auctions and the authorities' renewed commitment to a flexible exchange rate system are noteworthy. Supported by a public information campaign covering the entire country, the introduction of the new family of metical banknotes should protect price stability and secure the savings of the poor. Enhanced bank supervision and accounting standards should ensure financial stability and a prudent financial deepening.
"Mozambique's external debt levels will remain well below its indicative thresholds for debt distress in the foreseeable future. In that context, the authorities' commitment to financing the transfer of majority ownership of the Cahora Bassa dam operating company through non-recourse financing that does not increase the government's liabilities to commercial creditors is welcome. The authorities' are commended for their good faith negotiations to facilitate collaborative agreements with all external creditors," Mr. Kato said.
The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.