IMF Executive Board Completes Fifth Review Under the Three-Year PRGF Arrangement for Mozambique and Approves US$2.4 million Disbursement

Press Release No. 06/289
December 18, 2006

The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Mozambique's economic performance under the Poverty Reduction and Growth Facility (PRGF) arrangement for Mozambique in an amount equivalent to SDR11.36 million (about US$17.0 million), 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 9.7 million (about US$14.6 million).

The Executive Board also accepted, as part of the financing assurances review, that adequate safeguards remain in place for further use of Fund resources.

Following the Executive Board's discussion on Mozambique's economic performance, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

"Mozambique's prudent macroeconomic policies, together with a first wave of structural reforms under its PRGF-supported program, have yielded strong economic growth, moderating inflation, and solid progress towards the objectives set out in its poverty reduction strategy. Continued solid policy implementation will play a pivotal role in consolidating macroeconomic stability, sustaining economic growth, reducing inflation, and enabling the efficient absorption of scaled-up foreign assistance, under the second wave of reforms envisaged in the Plano de Acção para Redução da Pobreza Absoluta II (PARPA II) for 2006-09. Donor-financed projects should be integrated into the Treasury Single Account and e-SISTAFE with the help of the donors while clear guidelines on the use of national systems for the disbursement of aid could be disseminated. Over the medium term, the links between PARPA II targets and the budget should be strengthened to reflect comprehensive fiscal planning and costing of programs and policies.

"The achievement of these objectives will require strengthened fiscal policy and an investment climate enhanced by lowering the cost of doing business and continuing to squarely address governance issues. While the new draft labor law represents an improvement on the current law, the authorities are encouraged to take steps to address the remaining rigidities to labor market flexibility. The authorities are also encouraged to adopt a new laws on the mining and petroleum fiscal regimes. Adherence to the core principles of the Extractive Industries Transparency Initiative should strengthen the transparency of natural resource management and megaprojects.

"In the context of scaled-up aid and acceleration of reforms, the 2007 budget envisages a 0.5 percent of GDP rise in domestic revenue with the share of priority expenditures exceeding 65 percent of total spending. The impending rollout of the new e-SISTAFE (public financial administration system) should also ensure a better monitoring of priority expenditures. A cautious approach is warranted in devolving resources to subnational levels, with proper sequencing, supported by sufficient administrative capacity—particularly at the district level.

"The reinvigoration of the public sector reform program under a new public service authority is welcome. In particular, the installation of a clean, integrated payroll database based on a civil service census should help rightsize the civil service in line with more comprehensive sectoral strategies. The anti-corruption and judicial sector reform should be accelerated, in order to improve public perceptions and strengthen the constituency for reform.

"The authorities' commitment to seek non-recourse financing for the transfer of majority ownership of the Cahora Bassa hydropower plant from Portugal to Mozambique will avoid an increase in the government's liabilities to commercial creditors, and to ensure transparency and accountability.

"The Bank of Mozambique's stated policy of pursuing base money targeting in conjunction with a flexible exchange rate regime is welcome. This framework will help keep inflation under control, and cushion against exogenous shocks. In this regard, a more consistent monetary policy stance will be supported by greater exchange rate flexibility, when conditions permit. Parliamentary approval of the new foreign exchange law will allow Mozambique to establish full current account convertibility.

"The Fund stands ready to remain engaged with Mozambique as it builds on its track record of strong macroeconomic performance and program implementation," Mr. Portugal said.



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