## _cr0815

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---

### I. Economic resilience, performance, and risks
- Real GDP grew an estimated 7.6 percent in the first semester of 2007, down from 8.0 percent in 2006.
- Core (nonfood and energy) inflation contained in the 5–7 percent range; headline inflation accelerated temporarily after a more than 20 percent rise in domestic fuel prices.
- Net international reserves (NIR): end-June and September 2007 NIR targets were met; end-year 2007 NIR target likely to be exceeded comfortably.
- Base money developments:
  - Base money exceeded the end-June assessment criterion due to an unanticipated, likely permanent, increase in money demand.
  - Base money now expected to grow by 14.7 at end-year 2007, moderating from 19 percent at end-September 2007.
- Exchange rate and central bank operations:
  - Bank of Mozambique removed the temporary band on the interbank foreign exchange market (MCI) in June 2007; spread between MCI and bank rates narrowed to less than 1 percent; REER stable.
  - One September structural benchmark (agreement to shift the cost of monetary policy to the budget) delayed to November 2007.
- Financial intermediation:
  - Credit to the private sector grew around 20 percent year-on-year but moderated in 2007.
  - Nonperforming loans below 5 percent; profitability high but moderating; capital adequacy ratios comfortably above minimum requirements.
  - Prudential measure since July 2005 (50 percent provisioning of foreign currency-denominated loans to nonexporters) has encouraged shift to domestic-currency borrowing.
- Fiscal performance through September 2007 broadly in line with program:
  - Revenues 0.1 percent of GDP above target; expenditures roughly as programmed despite emergency flood spending.
  - Net credit to the government remained within adjusted targets and was far below target in September due to higher-than-expected donor-financed project disbursements.
  - Priority expenditures as share of total spending in June slightly below the 65 percent PARPA target but expected to exceed the 2007 target as donor-financed project execution picks up.
- Main risks:
  - Inflationary pressures from higher food and fuel prices;
  - Volatility in net capital flows (especially foreign aid);
  - Need to manage sterilization of aid-related liquidity without excessive reliance on treasury bill issuance;
  - Natural calamities and spending pressure during election times.

### II. 2008 program objectives and policy framework
- Program aims: consolidate macroeconomic stability, support MDGs while managing scaled-up aid, fine-tune monetary/exchange rate policy, and accelerate second-wave reforms.
- Fiscal package and priorities:
  - 2008 budget includes a domestic revenue effort of 0.5 percent of GDP.
  - Contingent spending allowance of 0.5 percent (as permitted under the PSI) to accommodate outperformance in revenues or program aid.
  - Scaled-up aid expected to be about US$350 million (about 5.5 percent of GDP) more than originally programmed.
  - Priority public investments to fund municipal election costs, hiring of 12,000 teachers and 5,000 health workers, reinforcement of security forces, and counterpart funds for donor-financed projects.
- Revenue measures and PFM strengthening:
  - Simplification of tax system for SMEs; revision of the 2002 code of fiscal benefits to rationalize tax incentives; audits of VAT refunds and related arrears to large infrastructure contractors; initiation of a strategic plan for the AT supported by a common donor fund to computerize revenue collection.
- e-SISTAFE and payroll reforms:
  - Salary payments via e-SISTAFE to start in early 2008 (end-March benchmark / end-April in MEFP/TMU references) using integrated payroll database; rollout to 27 districts initiated January 2008; business case for additional districts/municipalities to be defined by June 2008 (structural benchmark).
- Monetary policy and liquidity management:
  - BM will limit base money growth to 14.4 percent in 2008 to achieve an inflation target of 5-6 percent (MEFP, ¶26).
  - Excess liquidity to be mopped up mostly through foreign exchange sales (up to a maximum of the NIR floor); treasury bill issuances to smooth seasonal liquidity.
  - Plan for net redemption of treasury bills in 2008 and increased reliance on foreign exchange sales to avoid excessive domestic debt buildup.
  - Intensify repurchase operations, strengthen research and forecasting, and deepen debt markets (allow outright operations in secondary treasury bill market — structural benchmark for June 2008).
  - BM may consider gradual move toward an inflation-targeting framework as conditions permit.
- Second-wave structural reforms and transparency:
  - Emphasis on private sector development, natural resource and megaproject management, adoption of IFRS, risk-based supervision, and deeper nonbank financial sector.
  - Adoption of regulations to implement new mining and petroleum fiscal laws (structural benchmark for end-February 2008); government commitment to adhere to Extractive Industries Transparency Initiative (EITI) principles.
  - Strengthen Council of Ministers’ approval process for new projects, PPPs, and concessions to maximize fiscal revenue and minimize fiscal risks (MEFP, ¶15).

### III. Debt operations, bilateral negotiations, and external convertibility
- Commercial debt buyback:
  - Completed buyback of commercial debt of US$153 million in October 2007 at a buyback price of 9 cents per dollar (assisted by international community; World Bank and Government of Norway assistance referenced).
- Bilateral creditor progress:
  - Negotiations concluded with Hungary and Romania; ongoing with Bulgaria and Libya; scheduled discussions with Iraq and Portugal; ongoing discussions with Russia on mechanisms to cancel debt.
  - Libya did not agree on restructuring terms comparable to Paris Club and considered litigation.
- Exchange system reform and Article VIII intentions:
  - New foreign exchange law submitted to the Assembly in September 2007.
  - After approval and issuance of related regulations, authorities intend to accept obligations under Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement (MEFP, ¶30).
- Staff appraisal encourages continuation of creditor negotiations consistent with Paris Club terms.

### IV. Program monitoring, conditionality, and adjusters
- Implementation through September 2007:
  - All but one of the quantitative assessment criteria for end-June 2007 and all structural assessment criteria through September 2007 were observed; base money narrowly missed end-June target.
  - Staff supports authorities’ request for a waiver and modification to the assessment criterion on base money at end-year given structural increase in money demand and core inflation within target.
- PSI review timetable:
  - Second review of the PSI expected to be completed by end-June 2008, conditional on meeting end-December 2007 quantitative and structural assessment criteria (MEFP, Tables 1 and 3).
- Key adjusters and contingency provisions (TMU):
  - NIR floors adjustments include: downward adjustments for shortfalls in external program aid (up to US$50 million) and excess external debt service; upward adjustment for excess privatization proceeds (unless deposited abroad); downward adjustment up to US$50 million per annum for higher-than-projected fuel import bill due to global oil price increases.
  - NCG ceilings adjustments include: upward by 100 percent of any shortfall in external program aid (up to US$50 million) and any excess in external debt service; downward for privatization proceeds in excess of program envisagement unless deposited abroad; disaster contingency: NCG ceilings may be adjusted upward (and NIR floors downward) to accommodate locally financed disaster outlays up to MT 500 million in total.
  - Base money ceiling may be adjusted upward up to MT 500 million at specific quarter-ends to account for higher-than-projected currency issued.
- Data reporting requirements:
  - Weekly, monthly, and quarterly data and timely reporting obligations specified (e.g., monthly government revenue with lag not exceeding one month; quarterly budget execution reports with lag not exceeding 45 days).

### V. Fiscal framework and public spending details (selected exact figures)
- 2008 fiscal package highlights:
  - Scaled-up aid by about 1 percent of GDP mainly due to appreciation of the euro.
  - Revenue losses related to trade liberalization: 0.4 percent of GDP.
  - Increase in domestic revenue by 0.5 percent of GDP expected from:
    - revisions to personal and corporate income tax codes (0.2 percent of GDP),
    - reduction in VAT exemptions (0.1 percent of GDP),
    - collection of tax arrears (0.1 percent of GDP),
    - adjustment of fuel taxes and revision of excise taxes on alcoholic drinks, beer and tobacco (0.1 percent of GDP).
  - Wage bill to reach 7.7 percent of GDP due mainly to hiring of 12,000 teachers and 5,000 health workers.
  - 2008 budget identifies 0.5 percent of GDP contingent priority expenditures for execution if revenues or program aid outperform expectations.
- PARPA priority spending (2005–08, selected levels):
  - Total expenditure in PARPA priority sectors (Millions of MT): 21,756; 29,575; 43,730; 53,219.
  - PARPA sector spending examples (Millions of MT): Education: 6,542; 9,109; 13,111; 14,110. Health: 4,159; 6,628; 8,397; 9,892.
  - PARPA expenditures as percent of GDP (selected): Education: 4.3; 5.2; 6.5; 6.2. Health: 2.7; 3.8; 4.2; 4.4.
- Budget execution and PFM measures:
  - Direct budget execution via e-SISTAFE improved from 5 percent in 2006 to more than 80 percent in 2007 (structural assessment criterion for end-December 2007).
  - Integrated and e-SISTAFE compatible payroll database developed in June 2007 (structural benchmark); validation and salary payments via e-SISTAFE scheduled in early 2008.

### VI. Financial sector, supervision, and accounting reforms
- IMF and TA-supported reforms:
  - BM issued March 2007 regulations related to IFRS implementation, risk management, consolidated supervision, capital ratios, and related areas; banks with nonbank holdings required to publish consolidated accounts using IFRS by October 31, 2007, and all banks by January 2008.
  - BSD reviewing Inspection Manual with IMF TA; creation of "Chief Inspector" positions; financial intelligence unit created in June 2007.
  - By end-December 2007 BM to complete assessment of IFRS impact on banks’ NPL and prudential regulations.
- Access to finance and rural banking:
  - Initiatives to reduce operational costs of rural banking, relax reserve requirements in rural branches to include cash in vault; opening of five BM branches in selected provinces.
  - New bankruptcy and insolvency law for banks approved by Parliament in October 2007.
  - BM launched a survey on banking sector fees and charges.
- Nonbank financial sector and INSS:
  - Restructuring of INSS: actuarial study finalized by early 2008; investment strategy considering fiscal sustainability approved by June 2008.
  - FSTAP study completion by mid-2008; IFRS application to corporate sector extended to January 2009 for large companies.

### VII. Infrastructure projects, PPPs, and natural resources management
- Major projects and financing principles:
  - Agreement reached in October 2007 with consortium of international banks for Cahora Bassa purchase includes non-recourse financing clause.
  - Strategic investors being selected for Temane gas-fired generation (~1100 MW), Moatize coal power (~1,500 MW), and Mphanda Nkuwa hydropower (~1,500 MW).
  - Government commitments: financing non-recourse; maximize private sector investments via PPPs; any EDM equity stake to be raised through concessional borrowing or without government guarantees.
  - Aeroportos de Moçambique (ADM) Investment Plan estimated at US$94 million; Maputo Airport modernization about US$46 million to be financed only through concessional borrowing.
- PPPs, concessions, and transparency:
  - Government intends to strengthen selection and monitoring of major investment projects, PPPs and concessions with World Bank assistance; mandatory cost-benefit analysis and publication of megaproject lists and related fiscal regimes starting March 2008.
  - Model contracts for mining and petroleum approved in June and September 2007 respectively and to be used in negotiations.
- Debt operations (reiterated):
  - Buyback of US$153 million commercial debt completed in October 2007 at 9 cents per dollar.

### VIII. Selected macroeconomic and fiscal statistics (exact figures as presented)
- National income and prices (selected series, nominal GDP in millions of MT and growth rates):
  - Nominal GDP (millions of MT): 151,707; 173,566; 220,150; 200,419; 249,051; 226,786; 255,723; 287,815.
  - Nominal GDP growth: 17.9; 14.4; 13.9; 15.5; 13.1; 13.2; 12.8; 12.5.
  - Real GDP growth: 8.4; 8.0; 7.0; 7.0; 7.0; 7.0; 7.0; 7.0.
  - GDP per capita (US$): 336; 347; 397; 378; 421; 410; 441; 476.
  - Consumer price index (annual average): 6.4; 13.2; 6.4; 7.9; 5.7; 5.7; 5.4; 5.1.
- External sector (selected):
  - Trade balance (Millions of US$): -721; -533; -539; -602; -732; -1,017; -1,105; -1,130.
  - Exports, f.o.b. (Millions of US$): 1,745; 2,381; 2,580; 2,483; 2,542; 2,494; 2,553; 2,714.
    - Megaprojects (of exports, Millions of US$): 1,263; 1,699; 1,719; 1,793; 1,563; 1,669; 1,564; 1,514.
    - Other exports (Millions of US$): 483; 682; 861; 690; 979; 825; 989; 1,200.
  - Net international reserves (end of period, Millions of US$): 943; 1,229; 1,300; 1,450; 1,354; 1,566; 1,641; 1,700.
  - Gross international reserves (end of period, Millions of US$): 1,103; 1,241; 1,315; 1,464; 1,369; 1,581; 1,656; 1,715.
  - Reserves in months of imports: 4.6; 4.4; 4.2; 4.7; 4.2; 4.5; 4.5; 4.5.
  - Memorandum: Current account deficit (percent of GDP) Before grants: 16.8; 16.2; 17.9; 20.7; 17.0; 22.8; 21.3; 19.4.
- Money and credit (selected):
  - Credit to the economy (annual change, percent): 22.5; 14.3; 15.9; 10.8; 17.0; 10.3; 14.6; 16.5.
  - M2 (12-month percent change): 22.1; 25.8; 16.2; 20.1; 15.4; 18.1; 17.9; 17.9.
  - Reserve money (Millions of MT): 12,185; 14,736; 16,020; 16,904; 17,742; 19,334; 21,849; 24,650.
  - Broad money (M3) (Millions of MT): 43,441; 53,586; 62,253; 64,786; 71,862; 76,516; 89,551; 105,589.
  - Foreign currency deposits (Millions of MT): 15,793; 18,809; 21,851; 23,032; 25,224; 27,214; 31,432; 37,061.
  - Foreign currency deposits (Millions of US$): 653; 724; 777; 876; 876; 1,011; 1,142; 1,321.
- Government finances (levels):
  - Total revenue (Millions of MT): 21,418; 26,997; 31,941; 32,274; 37,256; 37,773; 44,061; 51,437.
  - Tax revenue (Millions of MT): 18,534; 23,313; 27,852; 28,102; 32,163; 32,695; 37,831; 45,588.
  - Total expenditure and net lending (Millions of MT): 34,734; 48,546; 67,052; 68,896; 72,171; 83,220; 90,409; 98,461.
  - Overall balance, after grants (Millions of MT): -3,482; -2,932; -9,797; -11,005; -8,254; -14,113; -14,281; -14,304.
  - Total revenue (percent of GDP): 14.1; 15.6; 14.5; 16.1; 15.0; 16.7; 17.2; 17.9.
  - Total expenditure and net lending (percent of GDP): 22.9; 28.0; 30.5; 34.4; 29.0; 36.7; 35.4; 34.2.
  - Overall balance, after grants (percent of GDP): -2.3; -1.7; -4.5; -5.5; -3.3; -6.2; -5.6; -5.0.
- Financial soundness indicators (selected, data as of September 2007):
  - Nonperforming loans to gross loans (percent): 23.43; 21.98; 14.43; 6.42; 23.8; 23.3; 23.26; 4.64.
  - Return on assets (percent): 0.14; 1.59; 1.24; 1.43; 1.81; 3.51; 1; 2.82.
  - Return on equity (percent): 3.51; 22.10; 16.29; 18.73; 27.42; 55.39; 36.36.

### IX. Staff appraisal, recommendations, and Fund actions
- Staff appraisal:
  - Medium-term framework focuses on consolidating macroeconomic stability to sustain growth; priority reforms include reducing costs of doing business and strengthening natural resource management.
  - Staff supports authorities’ measures to mobilize domestic revenue, strengthen PFM and AT, and fine-tune monetary and exchange rate operations to anchor inflationary expectations in single digits.
  - Staff welcomes advances in debt rescheduling and exchange system reforms and encourages continued creditor negotiations consistent with Paris Club terms.
- Staff recommendations and actions:
  - Support completion of the first review of the PSI.
  - Recommend granting a waiver for non-observance of the quantitative assessment criterion on base money for end-June 2007 and modification of the assessment criterion on base money for end-year 2007.
  - Encourage BM to rely more on foreign exchange sales to mop up excess liquidity and consider gradual shift toward an inflation-targeting framework as conditions permit.
  - Emphasize issuance of regulations for new Mining and Petroleum Fiscal Regime by end-February 2008 and adherence to EITI principles.
  - Urge strengthening of project selection, monitoring, and fiscal transparency for megaprojects, PPPs, and concessions.

*Source: _cr0815 (Executive Summary, selected sections, tables, and appendices).*

### Executive Summary ......................................................................................................

### _cr0815 - Executive Summary

### I. Economic Resilience is Increasing
- Real GDP grew an estimated 7.6 percent in the first semester of 2007, down from 8.0 percent in 2006; buoyant agricultural activities kept GDP growth above the 2007 target despite floods and an expected return to trend in construction.
- Core (nonfood and energy) inflation has been contained in the 5–7 percent range as programmed; headline inflation accelerated temporarily reflecting a more than 20 percent rise in domestic fuel prices, and higher food prices and further fuel price rises pose inflationary risks.
- The external position strengthened as strong capital inflows and foreign aid offset the effects of oil price and climatic shocks; net international reserve (NIR) targets for end-June and September 2007 were met and the NIR target for end-year 2007 is likely to be exceeded by a comfortable margin.
- Base money exceeded the end-June assessment criterion because of an unanticipated, likely permanent, increase in money demand driven by: stronger-than-expected economic activity; increased foreign currency deposits as donor-financed project disbursements through commercial banks picked up; unexpectedly good cash crops (cotton and sugar); and additional provincial central bank branches boosting demand for currency in circulation. Base money is now expected to grow by 14.7 at end-year 2007, moderating from 19 percent at end-September 2007.
- The Bank of Mozambique (BM) removed the temporary band on the interbank foreign exchange market (MCI) in June 2007, restoring exchange rate flexibility; markets have remained calm, the spread between MCI rates and those quoted by banks has narrowed to less than 1 percent, and the real effective exchange rate (REER) is stable. One September structural benchmark (agreement to shift the cost of monetary policy to the budget to enhance BM operational independence) was delayed to November 2007.
- Financial intermediation continued to deepen: credit to the private sector grew around 20 percent year-on-year but moderated in 2007; the banking system is sound with nonperforming loans below 5 percent; profitability is high but moderating; capital adequacy ratios remain comfortably above minimum requirements. Since July 2005 a prudential measure (50 percent provisioning of foreign currency-denominated loans to nonexporters) has encouraged a shift from foreign currency borrowing to domestic currency bank borrowing.
- Fiscal performance through September 2007 was broadly in line with the program: revenues were 0.1 percent of GDP above target (buoyed by personal and corporate income tax collections); expenditures were roughly as programmed despite emergency flood spending; net credit to the government remained within adjusted targets and was far below target in September because donor-financed project disbursements exceeded expectations. Priority expenditures as a share of total spending in June were slightly below the 65 percent PARPA target but are expected to exceed the 2007 target as donor-financed project execution picks up.

### II. Policy Framework

- The 2008 program aims to consolidate macroeconomic stability and support achievement of the Millennium Development Goals (MDGs) while managing scaled-up aid, fine-tuning monetary and exchange rate policy, and accelerating second-wave reforms.

A. Strengthening Fiscal Policy and Institutions to Manage Scaled-up Aid
- 2008 budget includes:
  - a domestic revenue effort of 0.5 percent of GDP;
  - allocation of most of the increase in foreign aid toward achieving the MDGs;
  - measures to buttress the central revenue authority (AT) and public financial management (PFM), including a prudent wage policy and a strategy to decentralize public finance;
  - a contingent spending allowance of 0.5 percent (as permitted under the PSI) to accommodate outperformance in revenues or program aid.
- Scaled-up aid is expected to be about US$350 million (about 5.5 percent of GDP) more than originally programmed (partly due to the euro’s appreciation against the U.S. dollar); priority public investments will increase significantly, funding municipal election costs, hiring of 12,000 teachers and 5,000 health workers, reinforcement of security forces, and sufficient counterpart funds for donor-financed project execution.
- Revenue measures and PFM strengthening:
  - simplification of the tax system for small and medium-sized enterprises;
  - revision of the 2002 code of fiscal benefits to rationalize tax incentives across key sectors including agriculture and special economic zones;
  - audits of VAT refunds and related arrears to large infrastructure contractors, with development of an arrears payment schedule if needed and aim to include VAT charged on supplies of projects in final contract prices;
  - initiation of a strategic plan for the AT supported by a common donor fund to computerize the entire revenue collection chain.
- e-SISTAFE and payroll reforms:
  - salary payments via e-SISTAFE to start in early 2008 (end-March benchmark) using an integrated payroll database verified by all sectors; validation by the Administrative Tribunal will continue;
  - rollout of e-SISTAFE to 27 districts initiated in January 2008, and a business case for additional districts and municipalities to receive e-SISTAFE to be defined by June 2008 (structural benchmark).
- A strategy to decentralize revenue and expenditure responsibilities across all government tiers will be defined by end-2007; a new wage policy to improve incentives and accountability is being designed with World Bank assistance; action plans address governance concerns following the anticorruption strategy.

B. Fine-Tuning Monetary and Exchange Rate Policy
- Monetary objectives and instruments:
  - BM will limit base money growth to 14.4 percent in 2008 to achieve an inflation target of 5-6 percent and anchor expectations (MEFP, ¶26).
  - Excess liquidity will be mopped up mostly through foreign exchange sales (up to a maximum of the NIR floor); treasury bill issuances will smooth seasonal liquidity fluctuations.
  - Authorities recognize potential excessive reliance on treasury bill issuance for sterilization in 2007 and plan net redemption of treasury bills in 2008; they will increase foreign exchange sales.
- Monetary policy mix and operational steps:
  - intensify reliance on repurchase operations for short-term liquidity management;
  - strengthen research and forecasting capacity;
  - deepen debt markets, including allowing for outright operations in the secondary treasury bill market (structural benchmark for June 2008).
- The volatility of net capital flows (particularly foreign aid) and government spending patterns requires close monitoring of liquidity and external conditions and flexible responses. BM may consider a gradual move toward an inflation targeting framework as conditions permit.

C. Acceleration of the Second Wave of Reforms
- Second-generation reforms supported by the World Bank and other partners will emphasize private sector development and stronger management of natural resources and megaprojects.
- Improving the business environment:
  - timely implementation of the action plan to reduce costs of doing business (MEFP, ¶33–¶34);
  - financial sector reforms to introduce International Financial Reporting Standards (IFRS), risk-based supervision in the banking system, and to deepen the nonbank financial sector (MEFP, ¶27–¶29).
- Fiscal and transparency regime:
  - adoption of regulations to implement the new mining and petroleum fiscal laws (structural benchmark for end-February 2008);
  - government commitment to adhere to Extractive Industries Transparency Initiative (EITI) principles (MEFP, ¶21);
  - strengthening the process by which the Council of Ministers approves new projects, public-private partnerships (PPPs), and concessions to maximize fiscal revenue and minimize fiscal risks (MEFP, ¶15).

D. Other Issues
- The new mining and petroleum fiscal regimes are being implemented: the model contract for mining concessions and the petroleum sector were adopted on time (assessment criteria for end-June and end-September).
- For the transfer of ownership of Cahora Bassa dam from Portugal to Mozambique, an agreement with a consortium of international banks was reached in October 2007 and includes a nonrecourse financing clause (financing will not increase the government’s liabilities to commercial creditors).
- The fiscal structural program is ahead of schedule: all but one of the tax policy measures for the 2008 budget have been submitted to the assembly; multicurrency treasury single account (CUT) has been operational since September; other structural measures have advanced (MEFP ¶11–¶14).

### III. Program Monitoring and Risks
- The 2007 program was implemented satisfactorily through September 2007:
  - All but one of the quantitative assessment criteria for end-June 2007 and all structural assessment criteria through September 2007 were observed.
  - Base money narrowly missed the end-June target due to increased money demand; staff supports the authorities’ request for a waiver and modification to the assessment criterion on base money at end-year given the permanent-seeming increase in money demand and core inflation within target.
  - All but one of the structural benchmarks through September 2007 were met.
- Risks highlighted include inflationary pressures from higher food and fuel prices, volatility in net capital flows (especially foreign aid), and the need to manage sterilization of aid-related liquidity without excessive reliance on treasury bill issuance.

### IV. Staff Appraisal
- The medium-term framework focuses on consolidating macroeconomic stability to sustain Mozambique’s growth takeoff; priority reforms include reducing the costs of doing business and strengthening natural resource management.
- Staff supports the authorities’ program measures to mobilize domestic revenue, strengthen PFM and the AT, fine-tune monetary and exchange rate operations to anchor inflationary expectations in single digits, and accelerate the second wave of structural reforms under PARPA II.

*Source: _cr0815 - Executive Summary*

### 13. Progress was made in reaching debt rescheduling agreements in the context of

### _cr0815 - 13. Progress was made in reaching debt rescheduling agreements in the context of

### Debt rescheduling, external vulnerability, and HIPC progress
- Enhanced Heavily Indebted Poor Country (HIPC) Initiative context: progress in reaching debt rescheduling agreements (Table 8 and MEFP, ¶18).
- Commercial debt buyback:
  - Completed buyback of commercial debt of US$153 million in October 2007.
  - Buyback price: 9 cents per dollar.
  - Assistance provided by the international community.
- Bilateral debt negotiations and status:
  - Concluded negotiations with Hungary and Romania (in the context of enhanced HIPC).
  - Ongoing negotiations with Bulgaria and Libya.
  - Discussions scheduled with Iraq and Portugal.
  - Ongoing discussions with Russia on mechanisms to cancel debt.
- Footnotes and program context:
  - The program for 2008 allows US$5 million of nonconcessional borrowing consistent with the 2008 budget.
  - Libya did not agree on the debt restructuring terms comparable to the Paris Club and considered litigation.

### Exchange system reform and convertibility
- Commitments and legislative steps:
  - Mozambique has committed to introduce current account convertibility.
  - A new foreign exchange law was submitted to the Assembly in September 2007.
  - After approval and issuance of related regulations, authorities intend to accept obligations under Article VIII sections 2, 3, and 4 of the Fund’s Articles of Agreement (MEFP, ¶30).
- Staff appraisal note:
  - Staff looks forward to the approval of the new foreign exchange law and regulations consistent with Article VIII, Sections 2, 3, and 4 of the Fund Articles of Agreement.

### Statistics and institutional improvements
- Statistical updates:
  - The statistical agency has revised its historical national accounts series.
  - The agency is seeking further assistance to improve statistics through a sector-wide financing approach.
- Institutional measures:
  - Government intends to continue to monitor its program through the multidisciplinary committee.
  - A centralized unit will be created to collect and disseminate information on megaprojects and state-owned and public-participating enterprises by end-March 2008 (MEFP, ¶35).

### Program monitoring, timelines, and risks
- PSI review timing:
  - The second review of the PSI is expected to be completed by end-June 2008, conditional on the authorities meeting the end-December 2007 quantitative and structural assessment criteria (MEFP, Tables 1 and 3).
- Monitoring arrangements:
  - Government will continue monitoring via the multidisciplinary committee.
  - A centralized unit for megaprojects and SOEs/public-participating enterprises to be created by end-March 2008 (MEFP, ¶35).
- Main risks to the program:
  - Natural calamities.
  - A surge in international oil prices.
  - Spending pressure during election times.
- Coordination with the World Bank:
  - Mission held a retreat with the Mozambique World Bank team in Maputo to update joint work programs for 2008.
  - Staffs discussed macrocritical sectoral issues; shared recent analytic and diagnostic work; coordinated work programs, including TA missions and the timing of the next Debt Sustainability Analysis.
  - Staffs agreed the retreat was useful and should be repeated.

### Staff appraisal — performance, outlook, and policy recommendations
- Program implementation and criteria observance:
  - The 2007 program has been implemented satisfactorily through September 2007.
  - All but one of the quantitative assessment criteria for end-June 2007 and all structural assessment criteria through end-September 2007 were observed.
  - Base money narrowly missed the end-June target because of increased money demand.
  - All but one of the structural benchmarks through September 2007 were met.
- 2007 performance and near-term outlook:
  - Economic growth slowed to 7.6 percent in the first semester.
  - Inflation expected to stay in the single digits, albeit somewhat higher than programmed in line with higher international oil prices.
  - Despite a marked decrease in traditional exports and higher oil imports, NIR should remain at a comfortable level.
- 2008 and medium-term prospects:
  - Economic prospects for 2008 and the medium term are good.
  - Growth should continue to be robust and inflation should decelerate.
  - Risks: natural calamities, an increase in international oil prices, and spending pressures during election times.
  - External current account is expected to widen as aid is scaled up.
- Fiscal strategy and public spending:
  - To sustain growth as aid is scaled up, authorities’ strategy is to consolidate macroeconomic stability while accelerating the second-generation of reforms.
  - Fiscal policy will be strengthened so additional priority spending is sustainable and to ensure aid-financed expenditures reach the most productive sectors.
  - Reforms to reduce the cost of doing business and buttress the management of natural resources feature prominently.
- 2008 fiscal framework specifics:
  - Targets a 0.5 percent of GDP rise in domestic revenue.
  - Priority expenditures will make up more than 65 percent of total spending, significantly above the 2007 level.
  - The budget identifies 0.5 percent of contingent priority spending that could be executed if revenue or program aid outperforms expectations.
  - Rollout of e-SISTAFE to all public entities (central and provincial) and a number of districts in early 2008 should improve expenditures monitoring.
  - The multicurrency CUT is operational; staff supports the authorities’ call on the international community to bring their projects, including common funds on CUT and e-SISTAFE (MEFP ¶8).
- Public sector, governance, and decentralization recommendations:
  - Define a decentralization strategy that ensures macroeconomic stability and accounts for the capacity of districts and municipalities to absorb and account for resources.
  - Borrowing by the provinces should be ruled-out and reporting mechanisms should be established to facilitate fiscal coordination with the center.
  - A new wage policy is needed to retain and recruit frontline workers including economic and financial managers but must be fiscally sustainable.
  - Authorities’ commitment to decisively carry out their anticorruption strategy would ease governance concerns.
- Monetary policy recommendations:
  - With fine-tuning, the monetary policy framework should help consolidate price stability.
  - Staff encourages the BM to rely more on foreign exchange sales to mop up excess liquidity.
  - Given success with first-generation reforms, the BM could consider gradually moving to a monetary policy framework that targets inflation as conditions permit.
- Financial sector and transparency:
  - Mozambique’s expanding financial system is sound.
  - Risk-based supervision and the IFRS should foster bank stability.
  - Steps to restructure the national pension fund (INSS) and better supervise the growing nonbank financial sector are important.
  - More fiscal transparency in megaprojects, public-private partnerships, and concessions would enhance their economic returns.
  - Regulations to the new Mining and Petroleum Fiscal Regime laws must be issued on time to ensure all new projects are subject to the new fiscal regime.
  - Staff welcomes the authorities’ commitment to adhere to the EITI principles.
  - Megaprojects, PPPs, and concessions must be selected and monitored more systematically to safeguard fiscal sustainability.
- Debt and exchange system reform appraisal:
  - Staff welcomes advances in debt rescheduling and exchange system reforms.
  - Authorities are encouraged to continue to negotiate with external creditors and agree on terms consistent with those of the Paris Club.
- Staff recommendation:
  - Based on performance to date and the strength of the program, the staff recommends completion of the first review of the PSI, a waiver for the non-observance of the quantitative assessment criterion on base money, and modification of the assessment criterion on base money for end-year 2007.

*Source: _cr0815 - 13. Progress was made in reaching debt rescheduling agreements in the context of (IMF staff report excerpt).*

### 31. The staff welcomes the authorities’ intent to make public the staff report, the

### _cr0815 - 31. The staff welcomes the authorities’ intent to make public the staff report, the

### National income and prices
- Nominal GDP (millions of MT): 151,707; 173,566; 220,150; 200,419; 249,051; 226,786; 255,723; 287,815
- Nominal GDP growth: 17.9; 14.4; 13.9; 15.5; 13.1; 13.2; 12.8; 12.5
- Real GDP growth: 8.4; 8.0; 7.0; 7.0; 7.0; 7.0; 7.0; 7.0
- GDP per capita (US$): 336; 347; 397; 378; 421; 410; 441; 476
- Consumer price index (annual average): 6.4; 13.2; 6.4; 7.9; 5.7; 5.7; 5.4; 5.1
- Consumer price index (end of period): 11.2; 9.4; 6.0; 8.0; 5.5; 5.5; 5.3; 5.0

### External sector and balance of payments
- Merchandise exports: 16.1; 36.4; 7.9; 4.3; -1.5; 0.4; 2.4; 6.3 (annual percent change)
- Merchandise exports, excluding megaprojects: 6.0; 41.3; 22.6; 1.2; 13.7; 19.6; 19.9; 21.3
- Merchandise imports: 21.2; 18.1; 8.4; 5.9; 5.0; 13.8; 4.2; 5.1
- Terms of trade: 11.1; 34.8; 1.9; 7.0; -20.5; -11.7; -13.3; -13.6
- Trade balance (Millions of US$): -721; -533; -539; -602; -732; -1,017; -1,105; -1,130
- Exports, f.o.b. (Millions of US$): 1,745; 2,381; 2,580; 2,483; 2,542; 2,494; 2,553; 2,714
  - Megaprojects (of exports, Millions of US$): 1,263; 1,699; 1,719; 1,793; 1,563; 1,669; 1,564; 1,514
  - Other exports (Millions of US$): 483; 682; 861; 690; 979; 825; 989; 1,200
- Current account, before grants (Millions of US$): -1,103; -1,125; -1,456; -1,607; -1,504; -1,957; -2,014; -2,026
- Current account, after grants (Millions of US$): -642; 1,445; -506; -584; -538; -733; -789; -814
- Net international reserves (end of period, Millions of US$): 943; 1,229; 1,300; 1,450; 1,354; 1,566; 1,641; 1,700
- Gross international reserves (end of period, Millions of US$): 1,103; 1,241; 1,315; 1,464; 1,369; 1,581; 1,656; 1,715
- Reserves in months of imports of goods and nonfactor services: 4.6; 4.4; 4.2; 4.7; 4.2; 4.5; 4.5; 4.5
- Memorandum: Current account deficit (percent of GDP) Before grants: 16.8; 16.2; 17.9; 20.7; 17.0; 22.8; 21.3; 19.4

### Money, credit, and monetary survey
- Net foreign assets (annual change, percent of beginning-of-period stock of money): 23.1; 31.3; 10.4; 18.5; 3.0; 10.5; 4.6; 3.4
- Net domestic assets (annual change, percent): 4.0; -7.9; 5.7; 2.4; 12.5; 7.6; 12.4; 14.5
- Net credit to the government (annual change, percent) 3/: -2.2; -9.6; 1.0; 0.6; -2.4; -0.4; -0.2; -0.5
- Credit to the economy (annual change, percent): 22.5; 14.3; 15.9; 10.8; 17.0; 10.3; 14.6; 16.5
- M2 (12-month percent change): 22.1; 25.8; 16.2; 20.1; 15.4; 18.1; 17.9; 17.9
- Velocity (GDP/M2): 5.5; 5.0; 5.4; 4.8; 5.3; 4.6; 4.4; 4.2
- Interest rate for 90-day treasury bills (percent; end of period): 10.0; 16.3
- Reserve money (Millions of MT): 12,185; 14,736; 16,020; 16,904; 17,742; 19,334; 21,849; 24,650
- Broad money (M3) (Millions of MT): 43,441; 53,586; 62,253; 64,786; 71,862; 76,516; 89,551; 105,589
- Foreign currency deposits (Millions of MT and US$ memorandum): 15,793; 18,809; 21,851; 23,032; 25,224; 27,214; 31,432; 37,061 (Millions of MT); (Millions of US$): 653; 724; 777; 876; 876; 1,011; 1,142; 1,321
- M2-to-GDP ratio (percent): 18.2; 20.0; 18.4; 20.8; 18.7; 21.7; 22.7; 23.8
- Broad money (M3) 12-month percent change: 27.1; 23.4; 16.2; 20.9; 15.4; 18.1; 17.0; 17.9

### Government finances (levels and percent of GDP)
- Total revenue (Millions of MT): 21,418; 26,997; 31,941; 32,274; 37,256; 37,773; 44,061; 51,437
- Tax revenue (Millions of MT): 18,534; 23,313; 27,852; 28,102; 32,163; 32,695; 37,831; 45,588
  - Taxes on income and profits: 4,469; 6,367; 7,241; 7,627; 9,165; 10,004; 12,799; 17,730
  - Taxes on goods and services: 10,873; 13,031; 15,974; 15,874; 18,012; 18,892; 21,063; 23,827
  - Taxes on international trade: 2,816; 3,284; 3,936; 3,957; 4,203; 3,124; 3,202; 3,163
- Nontax revenue (Millions of MT): 2,884; 3,683; 4,089; 4,171; 5,093; 5,078; 6,230; 5,849
- Total expenditure and net lending (Millions of MT): 34,734; 48,546; 67,052; 68,896; 72,171; 83,220; 90,409; 98,461
  - Current expenditure: 21,092; 25,518; 31,841; 32,175; 35,489; 37,886; 41,960; 47,315
  - Capital expenditure: 12,971; 21,292; 31,667; 33,374; 33,526; 40,450; 43,317; 45,775
- Interest on public debt (Millions of MT): 1,248; 1,380; 2,238; 1,326; 1,877; 1,651; 2,187; 2,014
  - Domestic interest: 789; 916; 1,818; 889; 1,271; 1,122; 1,481; 1,285
  - External interest: 459; 464; 420; 437; 606; 529; 707; 729
- Overall balance, before grants (Millions of MT): -13,457; -22,056; -35,111; -36,623; -34,915; -45,447; -46,348; -47,024
- Grants received (Millions of MT): 9,975; 19,124; 25,313; 25,618; 26,661; 31,334; 32,067; 32,720
- Overall balance, after grants (Millions of MT): -3,482; -2,932; -9,797; -11,005; -8,254; -14,113; -14,281; -14,304
- Net external financing (Millions of MT): 5,035; 8,767; 11,521; 13,012; 10,628; 15,193; 14,438; 14,715
- Net domestic financing (Millions of MT): -2,335; -5,835; -1,828; -2,111; -2,493; -1,202; -157; -411
- Domestic primary balance, before grants, below the line (Percent of GDP): -1.9; -2.1; -2.7; -3.3; -2.6; -3.5; -3.2; -2.8
- Total revenue (percent of GDP): 14.1; 15.6; 14.5; 16.1; 15.0; 16.7; 17.2; 17.9
- Total expenditure and net lending (percent of GDP): 22.9; 28.0; 30.5; 34.4; 29.0; 36.7; 35.4; 34.2
- Overall balance, before grants (percent of GDP): -8.9; -12.7; -15.9; -18.3; -14.0; -20.0; -18.1; -16.3
- Grants received (percent of GDP): 6.6; 11.0; 11.5; 12.8; 10.7; 13.8; 12.5; 11.4
- Overall balance, after grants (percent of GDP): -2.3; -1.7; -4.5; -5.5; -3.3; -6.2; -5.6; -5.0

### Expenditure in PARPA priority sectors (2005–08)
- Total revenues (Millions of MT): 21,418; 26,997; 32,274; 37,773
- Total expenditure in PARPA priority sectors (Millions of MT): 21,756; 29,575; 43,730; 53,219
  - Percent of GDP: 14.3; 17.0; 21.8; 23.5
  - Percent of total expenditure (excl. bank restruct. costs, net lending, and interest payments): 66.3; 65.1; 68.1; 69.4
- PARPA sector spending (Millions of MT):
  - Education: 6,542; 9,109; 13,111; 14,110
  - Health: 4,159; 6,628; 8,397; 9,892
  - Infrastructure development: 6,131; 7,435; 11,991; 13,420
  - Agriculture and rural development: 1,290; 1,522; 3,956; 5,751
  - Governance and judicial system: 2,913; 5,671; 4,214; 6,595
  - Other priority areas: 727; 510; 1,016; 3,451
- PARPA expenditures as percent of GDP by sector:
  - Education: 4.3; 5.2; 6.5; 6.2
  - Health: 2.7; 3.8; 4.2; 4.4
  - Infrastructure development: 4.0; 4.3; 6.0; 5.9
  - Agriculture and rural development: 0.9; 0.9; 2.0; 2.5
  - Governance and judicial system: 1.9; 3.3; 2.1; 2.9
  - Other priority areas: 0.5; 0.3; 0.5; 1.5

### Financial soundness indicators for the banking sector (selected, 2001–07; data as of September 2007)
- Regulatory capital to risk-weighted assets (percent): 5.49; 14.01; 17.03; 18.65; 16.00; 12.5; 3; 17.1
- Regulatory Tier I capital to risk-weighted assets (percent): 6.03; 11.97; 14.67; 15.97; 13.57; 10.7; 2; 14.14
- Capital (net worth) to assets (percent): 8.22; 9.42; 9.01; 9.51; 8.04; 6.06; 7.06
- Sectoral distribution of loans to total loans (percent, selected): Agriculture 18.00; 15.00; 12.73; Industry 25.00; 22.00; 16.94; Commerce 20.00; 17.00; 18.13
- Foreign exchange loans to total loans (percent): 64.69; 69.87; 70.77; 67.33; 63.9; 145.04; 30.49
- Nonperforming loans to gross loans (percent): 23.43; 21.98; 14.43; 6.42; 23.8; 23.3; 23.26; 4.64
- Return on assets (percent): 0.14; 1.59; 1.24; 1.43; 1.81; 3.51; 1; 2.82
- Return on equity (percent): 3.51; 22.10; 16.29; 18.73; 27.42; 55.39; 36.36

### Indicators of external vulnerability and other macro indicators
- Net present value of public sector debt: 19.0; 19.7; 19.8; 22.6
- Exports of goods (percent change, 12-month basis in US$): 16.1; 36.4; 4.3; 0.4
- Imports of goods c.i.f. (percent change, 12-month basis in US$): 21.2; 18.1; 5.9; 13.8
- Terms of trade (percent change, 12-month basis): 11.1; 34.8; 7.0; -11.7
- Current account balance (after grants): -9.8; 20.8; -7.5; -8.5
- Capital and financial account balance: 5.3; -20.5; 10.4; 9.9
  - Foreign direct investment (net): 1.6; 2.2; 4.1; 4.0
- Gross international reserves (Millions of US$): 1,103; 1,241; 1,464; 1,581
  - In months of imports of goods and services: 4.6; 4.4; 4.7; 4.5
- Net international reserves (Millions of US$): 943; 1,229; 1,450; 1,566
- Net international reserves (percent of foreign currency deposits): 144; 170; 165; 155
- Net present value of total external debt: 30.7; 30.4; 30.5; 31.3
- Net present value of public external debt-to-exports of goods and services (percent): 31.1; 24.6; 33.3; 45.2
- Public external debt-service payments to exports of goods and services (percent): 4.3; 2.5; 1.2; 1.2
- Exchange rate (MT per US$; end of period): 24.2; 26.0
- Real effective exchange rate (end of period): -6.3; 1.8

### Millennium Development Goals and social indicators (selected)
- National household survey poverty incidence: 69.4; 54.1
- Malnutrition prevalence, weight for age (children under 5, percent): 26.0; 26.0; 24.0; 24.0
- Primary completion rate, total (percent): 24.9; 24.5; 25.4; 16.2; 22.1; 29.0
- Immunization, measles (children ages 12–23 months, percent): 59.0; 65.0; 61.0; 71.0; 77.0; 77.0
- Mortality rate, infant (per 1,000 live births): 158.0; 122.0; 104.0
- Mortality rate, under-5 (per 1,000): 235.0; 178.0; 152.0
- Contraceptive prevalence (women ages 15-49, percent): 6.0; 17.0; 17.0
- Prevalence of HIV, total (percent of population ages 15-49): 12.0; 12.0
- GNI per capita, Atlas method (current US$): 170; 140; 170; 210; 230; 270
- Population, total (millions): 13.4; 15.3; 16.7; 17.9; 19.1; 19.4
- Life expectancy at birth, total (years): 43.2; 43.8; 42.6; 41.9; 41.8

*Sources: Mozambican authorities; and Fund staff estimates and projections.*

### Appendix I

### Appendix I

### Context and purpose
- Letter dated November 12, 2007, from the Government of Mozambique transmitting the Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU) to the IMF for the first review of the Policy Support Instrument (PSI) program (PSI approved June 18, 2007).
- Requests: waiver for non-observance of the end-June 2007 quantitative assessment criterion (AC) on base money and completion of the first review under the PSI.
- Government intention to accept obligations under Article VIII, Sections 2, 3, and 4, of the Fund’s Articles of Agreement following approval of a new foreign exchange law submitted to the Assembly in September 2007, and issuance of related regulations.
- Government commitment to provide requested information to the Fund and to consult the Managing Director on policy revisions or additional measures.

### Recent macroeconomic performance (2007) — summary findings
- Real GDP growth:
  - Expected to reach the program target of 7 percent for 2007.
- Inflation:
  - Expected to remain in the single digits, "albeit somewhat higher than programmed," due to food and international oil prices.
- Net international reserves (NIR):
  - Expected to remain at a comfortable level and exceed the program target at end-2007 mainly on account of an increase in net capital inflows.
  - At end-June, NIR exceeded the floor by US$69 million (assessment criterion).
- Base money:
  - End-June AC for base money missed by a narrow margin due to a permanent increase in money demand.
  - Base money at end-June (assessment criteria) and end-September was higher than programmed because of a structural increase in money demand.
  - Government requests modification of the related AC for end-December 2007.
- Net credit to the government (NCG):
  - At end-June (assessment criteria) remained negative and within the upward adjusted target.
- Credit growth:
  - Credit growth to the economy has remained strong and has almost doubled in the last three years (starting from a low base).
- Banking sector soundness:
  - Nonperforming loans (NPL) have fallen to less than 5 percent of all loans.
  - Bank profitability remains high.
  - Liability dollarization has decreased significantly following May 2005 regulatory measures.

### Shocks and contingency
- Natural disasters and food insecurity:
  - Floods along the Zambezi River and cyclone Favio affected Mozambique in early 2007.
  - Vulnerability assessment: 520,000 people are highly food insecure and need humanitarian assistance until March 2008; an additional 140,000 people are at risk and will need assistance from October 2007 to March 2008.
  - Government and donor community assisting affected populations; if donor financing is inadequate, Government may consider using the program adjustor for emergency fiscal outlays up to a maximum of about MT500 million.

### Fiscal performance and public spending
- Fiscal position:
  - At end-June and end-September 2007 better than programmed; fiscal targets for end-2007 are well within reach despite election-related administrative costs included in a supplementary budget approved in October 2007.
- Revenue developments:
  - Tax collections slightly higher than targeted through end-September 2007, led by buoyancy in corporate and income taxes (including collection of tax arrears).
- Priority expenditures:
  - Share of priority expenditures slightly below the PARPA target of 65 percent due to delays in disbursement of donor-financed projects; expected to pick up toward year-end.
- Donor resources:
  - Resources released as part of the MDRI incorporated in the 2007 budget and included in the medium-term fiscal framework (CFMP) to be spent on poverty-reducing priority expenditures identified in PARPA II.

### Revenue administration and tax policy measures
- Administrative actions to increase tax collection and widen the tax base (through end-September 2007 unless stated):
  - Increase of registered taxpayers by 138,472 at end-September (exceeding the objective of 100,000 by end-December 2007).
  - Increase of tax audits of large taxpayers, including mega projects, in line with the 2007 target of 675 audits.
  - Simplification of tax declaration forms.
  - Intensification of fiscal education and communication campaigns at central and provincial levels.
  - Reduction in average time to release imported goods at the border to a maximum of two hours.
  - Approval in June of the Information Technology Master Plan (PDTI) for 2007-2010.
  - Development of a business case (BC) for a revenue collection network (RCN) electronically consolidating classified revenues and linking to e-SISTAFE (e-Tributação); awaits financing approval by end-January 2008.
  - Finalization of a study on operationalizing an "electronic one-stop-window" integrating customs and tax IT systems by end-2007.

- Tax policy measures submitted and planned:
  - Draft laws submitted to Parliament on: Municipal Finances and Property; Inheritance and Donations; amendments to personal and corporate tax income laws (IRPS and IRPC); and amendments to the VAT law.
  - VAT changes grant a limited exemption on public works as a transitory solution; government committed to full taxation of services related to public works and will seek to reduce deductions and eliminate the limited exemption over time.
  - Draft law updating excise taxes on alcoholic beverages, beer and tobacco to be submitted to the Council of Ministers by end-December 2007 and to Parliament by end-February 2008 (structural assessment criterion).

### Public Financial Management (PFM) reforms — progress and benchmarks
- Payroll and payroll database:
  - Integrated and e-SISTAFE compatible payroll database developed in June (structural benchmark).
  - Validation by the Administrative Tribunal (TA) expected in early 2008; salary payments via e-SISTAFE to start in early 2008 (end-April benchmark).
  - Institutional responsibilities for payroll updates to be decided before end-December 2007.
- e-SISTAFE rollout and functionality:
  - e-SISTAFE rolled out in September 2007 to all remaining ministries at central and provincial levels (structural benchmark for end-December).
  - Roll-out to 27 districts to be initiated January 1, 2008.
  - Progressive roll-out to State organs at central level to start in 2008.
  - Phase II of the budget formulation module developed and implemented for 2008 budget preparation.
- Revenue collection network (RCN) and Treasury Single Account (CUT):
  - Fully articulated BC approved in July 2007 to implement RCN automating and classifying government revenue before transfer to CUT.
  - Module for a multi-currency CUT finalized (structural benchmark for September 2007); pilot with UTRAFE external funds initiated for salary payments and allowances.
  - Government encourages donors to put projects on-CUT to maximize e-SISTAFE benefits.
- Asset management and procurement interface:
  - Tender for implementation to be launched by December 2007 pending international financing.
- Direct budget execution via e-SISTAFE:
  - Improved from 5 percent in 2006 to more than 80 percent in 2007 (structural assessment criterion for end-December 2007).

### Monetary and exchange rate policy and operations
- Exchange rate regime:
  - In June 2007, Bank of Mozambique (BM) lifted temporary bands on the interbank foreign exchange market introduced in November 2005; exchange rate showed greater flexibility and remained relatively stable.
  - Spread between different FX markets narrowed to about one percent; real effective exchange rate remained stable.
- Market-determined interest rates and instruments:
  - Since June 2007, interest rates on government securities and the exchange rate are market determined.
  - BM issued new regulations for repo operations in June; added a new facility to the main money market instrument system (Metical net) to perform reverse repo auctions.
  - Initial stock of treasury bills for repo operations of about 1.75 billion meticais issued in July.
  - BM started using reverse repo auctions in July 2007 to mop up liquidity excess.
- Monetary policy governance and transparency:
  - Approval and electronic dissemination of a long-term monetary policy strategy document.
  - Creation in June 2007 of a new Monetary Policy Committee with published meeting communiqués.
- BM balance sheet strengthening:
  - Securities in an amount of MT 1.5 billion were issued to BM in June 2007 as envisaged in the program.
  - Agreement between BM and the treasury to shift the cost of monetary policy to the budget (to enhance BM independence) to be finalized before end-November 2007 (end-September 2007 structural benchmark).

### Banking sector regulation, supervision, and access to finance
- Regulatory and supervisory framework:
  - BM issued in March 2007 regulations related to IFRS implementation in the financial sector, covering risk management, maximum limit exposures, consolidated supervision, capital ratios, and connected lending.
  - Banks with non-bank holdings required to publish consolidated accounts using IFRS by October 31, 2007, and all banks by January 2008.
  - Banking supervision department reviewing the Inspection Manual with IMF technical assistance.
  - Creation of "Chief Inspector" positions in the banking supervision department (BSD).
  - Financial intelligence unit created in June 2007 in the context of the Anti-Money Laundering Law.
  - By end-December 2007, BM to complete assessment of IFRS impact on banks’ NPL and prudential regulations.
- Access to finance and rural banking:
  - Initiatives launched to reduce operational costs of providing banking services in rural areas (infrastructure improvements, relaxing reserve requirements in rural branches to include cash in vault).
  - Opening of five BM branches in selected provinces to minimize transport costs related to legal reserves and cash in vault.
  - New bankruptcy and insolvency law for banks approved by Parliament in October 2007 to accelerate dispute settlement and improve contract enforcement.
  - New national payment system law approved consistent with the SADC payment system initiative.
  - BM launched a survey on banking sector fees and charges rationale.

### Structural reforms, investment climate, and natural resources management
- Doing business and cost of doing business improvements:
  - Mozambique improved by 6 positions to 134th place in the Doing Business report 2008.
  - Time to start a business reduced from 113 to 29 days; cost of business registration decreased by two-thirds; number of procedures declined from 13 to 10.
  - Decree on Simplified Licenses for Micro and Small Business to be submitted to the Council of Ministers by end-2007.
- State-owned enterprises and privatization/ restructuring:
  - New restructuring plan of PETROMOC to be submitted to the Council of Ministers by end-December 2007 to improve operational and financial performance.
- Justice sector reforms:
  - Laws approved: Law on Judiciary Organization; Organic Law of the Public Ministry and the Statute of the Magistrate.
  - Draft Integrated Strategic Plan to be submitted to the Council of Ministers before end-December 2007.
  - Law revising principles and regulation of the Institute for the Provision of Judicial Assistance (IPAJ) to be submitted to the Council of Ministers before end-December 2007.
- Project selection, PPPs, concessions, and natural resources transparency:
  - Government intends to strengthen selection and monitoring of major investment projects, PPPs, and concessions with World Bank assistance, ensuring non-recourse financing clauses to the Government.
  - Approval process by the Council of Ministers for new projects and concessions to be strengthened to ensure fiscal regime, maximization of fiscal revenue, and minimization of fiscal risks are considered before end-December 2007.
  - MPD to develop standards and guidelines, including mandatory cost-benefit analysis for public investment projects and concessions in key sectors.
  - Regulations to the new Mining and Petroleum Fiscal Regime laws to be issued by end-December 2007 (structural benchmark for end-February 2008) and start publishing transactions relating to natural resource concessions.
  - A list of megaprojects and concessions together with their related fiscal regime will be published in budget execution documents starting in March 2008.
  - Government committed that any new mineral resource project agreements and Exploitation and Production Concession Contracts (EPCs) in the petroleum sector will adhere to principles of the new fiscal laws and proposed regulations.
  - Moatize coal mine contract has been signed and is broadly in line with the new mining fiscal regime.
  - Model contracts for mining and petroleum approved in June and September 2007 respectively and will be used in current negotiations.

### Program monitoring and conditionality
- Assessment criteria and structural benchmarks:
  - Implementation was satisfactory through September 2007: all but one quantitative AC for end-June 2007 observed and all structural ACs through end-September 2007 observed (exception: memorandum of understanding between the Ministry of Finance and the Bank of Mozambique on shifting the cost of managing monetary policy; to be agreed before end-November 2007).
  - ACs for end-December 2007 for the second review remain unchanged except for the one on base money (as set out in Tables 1 and 3 of the MEFP).
  - PSI-supported program also proposes ACs for end-June 2008 for the third review (expected completed by December 2008).
- Program assurances:
  - Government believes the policies in the MEFP are adequate to achieve PSI objectives and will take additional measures if necessary, consulting the Managing Director in advance of revisions or when requested.

*Source: Memorandum of Economic and Financial Policies and accompanying material transmitted by the Government of Mozambique to the Managing Director, November 12, 2007.*

### 16.      A number of large infrastructure projects in the pipeline will be carefully managed

### 16.      A number of large infrastructure projects in the pipeline will be carefully managed

### Major infrastructure projects and financing principles
- Agreement reached in October 2007 with a consortium of international banks for the purchase of shares in Cahora Bassa, which includes a non-recourse financing clause (i.e., the financing package does not increase liabilities of the Government to commercial creditors).
- Government, with financial advisors, selecting strategic investors for:
  - Temane gas-fired generation project (about 1100 MW)
  - Moatize coal power project (about 1,500 MW)
  - Mphanda Nkuwa hydropower plant (about 1,500 MW)
- Need to build a major transmission line to distribute power domestically and for export to support new generation projects.
- Government commitments for all these projects:
  - Financing is non-recourse and does not increase central government liabilities.
  - Maximize private sector investments through public-private partnerships; any equity stake by Electricidade de Moçambique (EDM) to be raised through concessional borrowing or without government guarantees.
- Aeroportos de Moçambique (ADM) Investment Plan estimated at US$94 million, including Modernization of Maputo Airport Infrastructure (about US$46 million), to be financed through only concessional borrowing.

### Trade agreements and negotiations
- Government to continue 2007 Economic Partnership Agreement (EPA) negotiations with technical advice under the Integrated Framework.
- Pursuing bilateral free trade arrangements as recommended in the Diagnostic Trade Integration Study (DTIS).
- Continuing negotiations with Angola, Tanzania, and Zambia to reach trade agreements similar to ones concluded with Zimbabwe and Malawi in 2005.

### Debt operations and bilateral creditor negotiations
- Buyback operation for commercial debt of US$153 million completed in October 2007 at the price of 9 cents per dollar (with World Bank and Government of Norway assistance).
- Discussions ongoing with Russia on mechanisms of 100 percent debt cancellation.
- Progress in bilateral debt rescheduling with non-Paris club creditors: concluded bilateral negotiations with Hungary and Romania; negotiations ongoing with Bulgaria and Libya; scheduled with Iraq and Portugal; invitations extended to Angola, Poland and Algeria.
- Government seeks continuing support of Bretton Woods institutions in these efforts.

### Improvements in macroeconomic statistics and institutions
- INE launched in June 2007 a new national accounts framework, including revision of annual GDP data and quarterly estimates in real term.
- BM committed to aligning chart of accounts with the Monetary and Financial Statistics Manual, including breakdown between local and foreign-currency denominated accounts.
- BM aims to improve external sector statistics coverage of megaprojects with help of MF research department and to provide timely information via monthly bulletins.
- Government finance statistics improvements from launch of e-SISTAFE; further work needed to expand institutional and transactional coverage to compile according to Government Finance Statistics (GFS) manual of 2001.

### Objectives and macroeconomic stance for 2008
- Economic prospects for 2008 and the medium term: continued strong economic growth and inflation in single digits, with risks from natural calamities, resurge in international oil prices, and election-time spending pressure.
- Central policy: continuation of prudent fiscal and monetary policy within a flexible exchange rate regime.
- External current account targeted to widen due to scaling up of aid; international reserves to remain at comfortable levels.
- Commitment to implement second phase of public sector reform program (2006–11) with four pillars:
  - improving service delivery to citizens and private sector;
  - strengthening capacity of local governments, emphasis on Districts and decentralization;
  - professionalization of public sector (payroll systems, performance evaluation, wage policy);
  - strengthening good governance systems and fight against corruption.
- Commitment to transparent management of natural resources following Extractive Industries Transparency Initiative (EITI) principles and considering fiscal risk.

### 2008 budget and fiscal measures (exact figures)
- Scaling-up of aid by about 1 percent of GDP mainly due to appreciation of the euro and associated increase in priority spending toward PARPA II targets and MDGs.
- No recourse to domestic bank financing.
- Revenue losses related to trade liberalization: 0.4 percent of GDP, mitigated by bringing off-budget line items on budget.
- Increase in domestic revenue by 0.5 percent of GDP expected to come from:
  - revisions to personal and corporate income tax codes (0.2 percent of GDP),
  - reduction in VAT exemptions (0.1 percent of GDP),
  - collection of tax arrears (0.1 percent of GDP),
  - continued adjustment of fuel taxes, and revision of excise taxes on alcoholic drinks, beer and tobacco (0.1 percent of GDP).
- Share of spending on priority sectors: above 65 percent (particularly education, health, and infrastructure).
- Wage bill to reach 7.7 percent of GDP, mainly due to hiring of 12,000 teachers, 5,000 health workers, and reinforcement of security forces.
- 2008 budget identifies 0.5 percent of GDP contingent priority expenditures to be executed if revenues or program aid are higher than expected.

### Tax administration and policy reforms (timelines and actions)
- By end-June 2008: submit to Council of Ministers tax policy measures to streamline and simplify tax system for SMEs and rationalize code of income tax benefits (including agriculture, biofuels, industrial free trade zones, rapid development zones).
- AT to implement approved IT Master Plan (PDTI), including e-Tributação and single electronic window; subject to Partnership Committee approval:
  - pilot with one key tax by September 2008; extension to all other taxes for the 2009 budget.
- AT actions in 2008:
  - design and implement detailed performance indicator framework using a modern management information system;
  - fully develop and implement a tax collection system through banks;
  - fully develop and implement an electronic filing and payment system starting with large taxpayers;
  - bring more informal taxpayers into the tax net;
  - create new fiscal areas to bring AT closer to taxpayers;
  - continue to strengthen the audit function.

### VAT arrears and contractor refunds
- External audit findings on VAT refund arrears to contractors of large infrastructure projects (road and water sectors) to be approved by Government before end-April 2008.
- Payment schedule to clear arrears to be defined based on audit.
- Going forward:
  - ensure VAT charged on project supplies included in final contract price;
  - establish coordination mechanisms between Budget Directorate, Planning Directorate, line ministries and ATM to avoid contradictory approaches.
- Donors encouraged to waive VAT exemptions for externally financed projects to facilitate Government liquidity management and reduce administrative burden.

### Public finance management measures (2008 structural benchmarks and actions)
- Define business case (BC) list of additional districts and municipalities for rollout of e-SISTAFE by June 2008 (structural benchmark).
- Census of pensioners in April 2008; new pension database finalized by end-September 2008; pension payments via e-SISTAFE starting January 2009.
- Further develop program budgeting based on pilot projects (road program, Proagri Common Fund, primary education) and roll out to public works, agriculture, education and culture; improve reports from e-SISTAFE by March 2008.
- UTRAFE to facilitate IGF and TA use of e-SISTAFE by June 2008 for consulting purposes.

### Monetary policy and financial sector reforms (targets and timelines)
- BM to target base money to achieve inflation goal of 5-6 percent at end-2008.
- Base money growth limited to 14.5 percent—or higher than nominal GDP growth—to account for ongoing financial deepening.
- BM to publish its regulations before end-December 2007 to enhance Monetary Policy Committee transparency.
- BM to consider moving to a monetary framework reflecting determinants of price stability with Fund technical assistance.
- Liquidity management and market operations:
  - MF to improve cash-flow projections and communicate to BM timely.
  - Monetary policy operations to use repo operations; deposit auctions replaced by reverse repo operations in early 2008.
  - Meticalnet adapted to allow outright operations for secondary market by June 2008 (structural benchmark for June 2008).
  - BM to increasingly use foreign exchange sales to sterilize liquidity to avoid large domestic debt buildup and crowding-out private sector.

### Accounting, supervision, and non-bank financial sector actions
- FSTAP study completion by mid-2008; application of IFRS extended to corporate sector in January 2009 for large companies; a firm to be selected in early 2008 to assist.
- BM Banking Supervision Department (BSD) capacity strengthening to update regulatory framework, inspection tools, training, research, monitor FSIs, and review supervision manuals.
- BSD to review role of external auditors by June 2008 and issue regulations granting BM access to audit reports, working papers, contracts and related documents.
- By December 2008 BSD intends to:
  - develop framework for assessing market and operational risks;
  - review banks’ rating system (CAMEL) as function of banks’ risks;
  - create information system within BM intranet for managerial information on banks and financial system;
  - design plan for on-site inspections based on banks’ risk profile.
- BM to license and supervise microfinance deposit-taking institutions to enhance rural and SME access to finance.
- Support from FSTAP, IFAD-supported FARE, and RFSP to improve rural access to finance.
- Restructuring of INSS: actuarial study finalized by early 2008; investment strategy considering fiscal sustainability approved by June 2008; guarantees of minimum benefits limited until full study carried out.
- Insurance sector reforms: review of Insurance Law to align with international best practices; development of revised prudential and solvency requirements; design IFRS-compliant Chart of Accounts for insurers.

### Foreign exchange system and Article VIII obligations
- New foreign exchange law submitted to Assembly in September 2007 (taking into account stakeholder and Fund comments).
- Following approval of law and implementing regulations, authorities intend to accept obligations under Article VIII sections 2, 3, and 4 of the Fund’s Articles of Agreement.
- Recent regulation (Aviso 2/06) pertaining to current import and export transactions remains suspended and will be replaced by a new regulation in consultation with stakeholders including the Fund.

### Public debt management reforms (2008 actions)
- MF to, in 2008:
  - restructure the Public Debt Unit (PDU) and strengthen procedures and controls with resident public debt advisor under FSTAP;
  - consolidate and reconcile debt database for all public debt with assistance of COMSEC;
  - strengthen information analysis and reporting with help of IT consultant under FSTAP;
  - prepare debt sustainability analysis and design integrated debt strategy with support of ASDI;
  - improve Treasury cash management policies and procedures.
- MF intends also to start publishing debt reports regularly.

### Improving the business environment (goal and 2008 actions)
- Government aim: make Mozambique’s business environment the most competitive in SADC by 2015 through reforms coordinated by Ministry of Industry and Commerce and monitored by an inter-ministerial committee; World Bank to provide comments and technical assistance.
- Envisaged 2008 actions:
  - Adopt decree on unified inspections for business activities by Council of Ministers by March 2008 to reduce cost of inspections and fines while improving compliance.
  - Transfer authority to issue licenses to “One-Stop-Shops” at provincial level in first trimester of 2008 to reduce licensing burden.
  - Submit new insolvency law for corporate sector to Council of Ministers by end-March 2008 to simplify business closing process and increase recovery rate.
  - Review import and export procedures (with international financial assistance) and implement recommendations to reduce documents, signatures and required time for importing and exporting.
  - Improve VAT refund system by: (1) identifying regular exporters and auditing their refund requests; (2) auditing providers of public work services to government; (3) improving coordination with customs regarding information on actual exports.

*Source: _cr0815 - 16.      A number of large infrastructure projects in the pipeline will be carefully managed*

### 34.      In 2009, the four key actions envisaged are:

### _cr0815 - 34.      In 2009, the four key actions envisaged are:

### 2009: Four key actions envisaged
- Consolidate the progress in streamlining and reducing licenses for all sectors.
- Consolidate the progress in facilitating trading across the borders. By end-2009, Mozambique should be one of the most efficient within SADC in the clearance of goods for both imports and exports. This will require reducing the number of documents filled out by at least half.
- Simplification of Tax Filing. Electronic filing of taxes should be provided and forms should be simplified to reduce the time required for tax filing.
- Property Registration. Amend the relevant legislation to speed up the registration process by improving communication among different government agencies and developing an electronic database for the real estate registry.

### Fiscal risk management, transparency, and reporting
- The Ministry of Finance (MF) intends to implement recommendations from recent Fund technical assistance to improve fiscal risk management and accountability, transparency and revenue forecasting.
- With international community support the MF will:
  - buttress compilation and consolidation of financial data from partial or full state shareholdings in private or public enterprises, State’s autonomous institutions, Public-Private Partnerships (PPPs) and other concessions, and mega-projects;
  - systematically compile and publish an annex to budget execution documents covering quasi-fiscal activities, contingent assets and liabilities, and sensitivity analysis of fiscal risks.

### Natural resources, EITI, and megaprojects
- Government intends to follow EITI principles for management of natural resources and other megaprojects.
- Based on the EITI scoping study the government will decide whether to formally solicit stakeholder views, will convene and participate in a seminar in Maputo in 2008 to discuss findings and build a national consensus around joining the initiative.
- Possible next steps if pursuing membership:
  - public declaration of intent;
  - formation of a national multi stakeholder EITI working group;
  - adoption of an implementation work program to collect, verify and publish all significant payments between the government and the natural resource sector.

### Judicial and legislative timetable
- Revision of Law of the Community Tribunals to be submitted to the Council of Ministers before end-September 2008.
- Penal Procedures Code expected to be submitted to the Council of Ministers before end-June 2008 pending authorization by Parliament (with some delay).

### Public sector reform priorities and measures
- Decentralization strategy (with World Bank and partners) to be approved by the Council of Ministers by end-2008, including:
  - clear legal, regulatory, and institutional framework for revenue raising and spending responsibilities and functions of subnational units (provinces, districts, and municipalities) and monitoring of subnational fiscal operations;
  - sequencing that accounts for administrative capacity of subnational units and need to maintain fiscal control and fiscal sustainability.
- Preliminary wage policy being elaborated by a reference group of ministries (Civil Service, Finance, Planning and Development, Education and Culture, Health and Agriculture) with World Bank consultants, based on recent census of civil servants; study to be presented to the Council of Ministers and include costing of alternative scenarios taking into account fiscal sustainability.
- Public sector accountability improvements:
  - reinforce capacity of the Tribunal Administrativo and the Inspectorate General of Finances;
  - conduct more internal and external audits.
- Government intends to forcefully implement public sector reform program and anti-corruption strategy; a committee, with World Bank help, to define by March 2008 a number of measures to improve governance indicators.

### Program monitoring framework (2007–2008)
- Semiannual quantitative assessment criteria for end-December 2007 and end-June 2008 and indicative targets for end-March 2008 are used to evaluate program implementation for 2007-08 (Table 1; definitions in annexed TMU).
- Completion of the second review is contingent upon observance of assessment criteria for end-December 2007 set out in Tables 1 and 3; review expected before end-June 2008.
- Particular attention in second review to:
  - implementation of measures to broaden tax base;
  - further development of e-SISTAFE;
  - improved overall fiscal risk assessment;
  - 2008 budget execution;
  - monetary and financial sector reform;
  - reducing cost of doing business;
  - infrastructure financing with due regard to debt sustainability;
  - improving fiscal regime and transparency of natural resource exploitation and megaprojects as well as their net contribution.

### Selected quantitative targets and indicators (explicit figures as presented)
- Net credit to the government (cumulative ceiling) — sample values from Table 1 include: -1,948; -960; -1,332; -1,713; -1,228; -2,831; -1,828; -1,828; -2,000; -1,600; -700; -1,200.
- Stock of reserve money (ceiling) — sample values from Table 1 include: 14,235; 14,535; 14,647; 14,990; 15,174; 15,467; 16,020; 16,904; 15,859; 17,394; 17,747; 19,334.
- Stock of net international reserves of the BM (floor, millions of US$) — sample values from Table 1 include: 1,283; 1,228; 1,309; 1,341; 1,285; 1,465; 1,300; 1,300; 1,532; 1,552; 1,566; 1,566.
- New nonconcessional external debt contracted or guaranteed by the central government or the BM with maturity of one year or more (ceiling) — referenced in Table 1.
- Stock of short-term external public debt outstanding (ceiling) — referenced in Table 1.
- External payments arrears (ceiling) — referenced in Table 1.
- Indicative target: Balance of the government's savings account set up abroad with proceeds from the coal exploration contract (floor, in millions of U.S. dollars) — sample values include: 55; 55; 55; 35; 55; 55; 35; 35; 35; 0; 0; 0.
- Government revenue (floor) — sample partial values shown: 14,594; ...; 15,557; 22,711; ...; 23,058; 31,942; 32,274; 8,367; 17,271; 26,590; 37,773.

### Structural assessment criteria and benchmarks (selected)
- Table 2 (June 2007–December 2007) — structural assessment criteria met:
  - Adoption of the new model contract for mining concessions. Expected: End-June 2007 — met.
  - Adoption of the new model contract for the petroleum sector. Expected: End-September 2007 — met.
  - Level of effective direct budget execution via e-SISTAFE for goods and services increased to 50 percent. Expected: End-December 2007 — met.
- Structural benchmarks met or scheduled:
  - Integrated and e-SISTAFE compatible payroll database (CAF) developed — End-June 2007 — met.
  - Limited number of separate foreign currency accounts opened within the CUT — End-September 2007 — met.
  - Memorandum of understanding between Ministry of Finance and Bank of Mozambique to shift costs of managing monetary policy to the budget — End-September 2007 / End-November 2007.
  - All budgetary operations for goods and services of Financial Management Departments (DAFs) of all remaining ministries at central and provincial levels executed through e-SISTAFE — End-December 2007 — met.
- Table 3 (December 2007—June 2008) — selected actions and benchmarks:
  - Submission to Parliament of a draft law on the excise tax on alcoholic beverages, beer, and tobacco — End-February 2008.
  - Level of effective direct budget execution via e-SISTAFE increased to 50 percent — End-December 2007 — met.
  - Adoption by the Council of Ministers of regulations for the new mining and petroleum fiscal regime laws — End-February 2008.
  - Integrated and e-SISTAFE compatible payroll database start to be used by Ministry of Finance to carry out salary payments via e-SISTAFE — End-April 2008.
  - A list of additional district and municipalities for rollout of e-SISTAFE to be defined — End-June 2008.
  - Meticalnet adapted to allow for outright operations of treasury bills for the secondary market — End-June 2008.

### Technical Memorandum of Understanding (TMU) — definitions and adjusters (selected)
- TMU date: November 12, 2007.
- TMU monitoring concepts include:
  - net claims on the central government by the banking system;
  - government revenue;
  - net international reserves, and reserve money of the Bank of Mozambique;
  - new nonconcessional external debt contracted or guaranteed by the central government or the Bank of Mozambique with a maturity of more than one year;
  - short-term external public debt outstanding;
  - external payments arrears;
  - foreign program assistance and external debt service.
- Net claims on the central government (NCG) definition: difference between outstanding bank credits to central government and central government's deposits with the banking system, excluding deposits in project accounts with the banking system, recapitalization bonds issued to the Bank of Mozambique and commercial banks, and proceeds from the signing fee for coal exploration. Credits include bank loans and advances to the government and holdings of government securities and promissory notes. NCG calculated from balance sheets of monetary authority and commercial banks as per monetary survey. Limits on change in NCG cumulative beginning end-December 2006 for 2007 program and end-December 2007 for 2008 program.
- Government scope: central government ministries, agencies, and administration of 11 provinces; local governments (33 municipalities or autarquias) not included though bulk of their revenue is registered in state budget as transfers.
- Revenue definition: includes receipts of DGI, DNA, and nontax revenue, including certain own-generated revenues of districts and some line ministries as defined in the budget. Net receipts from privatization received by the National Directorate of State Assets and unrealized profits transferred by the central bank are not considered revenue and will be accounted for as other domestic financing.
- Revenue considered collected when received by DGI in cash, checks, or transfers into a DGI bank account.
- Indicative target added to monitor use of proceeds from signing fee for coal exploration: semiannual floors on resources in government’s savings fund abroad.
- Base money definition: sum of currency issued by BM and commercial banks’ deposits in BM (including statutory required reserves and excess reserves). Base money ceilings for 2007-08 will be total stock outstanding at end-December 2007, end-March 2008, end-June 2008, end-September 2008 and end-December 2008.
- Net international reserves (NIR) definition: reserve assets minus reserve liabilities. Reserve assets include (a) monetary gold; (b) holdings of SDRs; (c) reserve position at the IMF; (d) holdings of foreign exchange; and (e) claims on nonresidents, such as deposits abroad (excluding the government’s savings account related to the Moatize coal mine concession). Reserve assets exclude assets pledged or encumbered. Reserve liabilities include (a) all short-term foreign exchange liabilities to nonresidents with original maturity up to and including one year; and (b) all liabilities to the IMF.
- Bank of Mozambique will publish exchange rates quoted by commercial banks on average as the market rates.
- Debt limits and definitions:
  - “Debt” as per Point 9 of Guidelines on Performance Criteria with Respect to Foreign Debt adopted August 24, 2000.
  - Government will limit contracting or guaranteeing external debt up to US$3 million in 2007 and US$5 million in 2008 with original maturity of one year or more with a grant element of less than 35 percent, calculated using OECD commercial interest reference rates.
  - Criterion applies also to commitments contracted or guaranteed for which value has not been received; assessed continuously.
  - Central government will not contract or guarantee external debt with original maturity of less than one year (short-term import-related trade credits excluded); assessed continuously.
  - Government undertakes not to incur external payments arrears except those arising from government debt being renegotiated with creditors.
- Foreign program assistance defined as grants and loans received by Ministry of Finance through Bank of Mozambique accounts excluding project-related funds.
- Actual external debt-service payments defined as cash payments on external debt-service obligations of government and central bank, excluding obligations to the IMF.
- Adjusters to NIR floors:
  - NIR floors will not be adjusted for excess in foreign program assistance disbursements (and any shortfall in external debt service) compared to baseline.
  - NIR floors will be adjusted downward by 100 percent of any shortfall in external program aid (up to a maximum of US$50 million) and any excess in external debt service payments compared to baseline.
  - NIR floors will be adjusted downward/upward for any revision to end-year figures corresponding to previous year.
  - NIR floors adjusted upward for full amount of any external privatization proceeds in excess of program envisagement, unless deposited in government’s savings account abroad. If deposited abroad, indicative targets on that account will be adjusted upward for full amount of higher than envisaged proceeds, net of privatization costs.
  - NIR floors adjusted downward equivalently up to a maximum of US$50 million per annum by the amount that projected fuel import bill is higher due to rise in average global oil price (average petroleum spot price of West Texas Intermediate, U.K. Brent, and Dubai Fateh crude); adjustment equals difference between realized and projected average global oil price multiplied by volume of total fuel imports projected for each quarter.

*Source: _cr0815 - 34.      In 2009, the four key actions envisaged are:*

### 17.      The quantitative targets (ceilings) for net claims on the central government (NCG)

### 17.      The quantitative targets (ceilings) for net claims on the central government (NCG)

### Adjustments to NCG ceilings and related rules
- NCG ceilings will not be adjusted for any excess in disbursements of foreign program assistance (and any shortfall in external debt service), compared to the program baseline.
- NCG ceilings will be adjusted upward by 100 percent of:
  - any shortfall in external program aid (up to a maximum of US$50 million), and
  - any excess in external debt service payments,
  - compared to the program baseline (Table 1).
- NCG ceilings will be adjusted downward for the full amount of any privatization proceeds in excess of those envisaged in the program, unless these proceeds are deposited in the government’s savings account abroad.
- NCG ceilings will be adjusted:
  - downward for any increase in domestic financing from the non-financial private sector, and
  - upward for any decrease in domestic financing from the non-financial private sector.
- Government expenditures contingent on higher disbursements of foreign program assistance (and lower external debt service) will finance greater “priority” spending identified in the budget.

### Disaster contingency and related ceilings
- The NCG ceiling for:
  - end-December 2007,
  - end-March 2008,
  - end-June 2008,
  - end-September 2008, and
  - end-December 2008
  will be adjusted upward (and the floors on net international reserves adjusted downward) to accommodate the possible need for higher locally financed government outlays to deal with natural disasters, up to a total limit of MT 500 million.

### Base money ceiling
- The base money ceiling will be adjusted equivalently upward up to a maximum of MT 500 million at:
  - end-December 2007,
  - end-March 2008,
  - end-June 2008,
  - end-September 2008, and
  - end-December 2008
  to the extent that the outstanding stock of currency issued by the BM exceeds those projected in Table 3.

### Data reporting requirements
- Authorities will provide the monthly and quarterly data needed to monitor program implementation relative to the program’s quantitative targets and broader economic developments.
- Authorities will provide:
  - weekly updates of the daily data set in Table 3 and the weekly data set in Table 4 of the TMU dated May 26, 2005,
  - monthly updates of the foreign exchange cash flow of the Bank of Mozambique,
  - monthly government revenue data (in detail according to the fiscal table) with a lag not exceeding one month,
  - quarterly budget execution reports with a time lag not exceeding 45 days,
  - monthly information on the balance of the government’s savings account abroad,
  - quarterly information on domestic arrears (to be developed and provided).
- From December 2005 onwards, the monetary survey made available by the Bank of Mozambique will clearly identify donor-financed project deposits (with a breakdown between foreign and domestic currency) included in net credit to the government in both the central bank’s and commercial banks’ balance sheets.

### Key figures and program tables (as presented)
- Table 1: Mozambique: Foreign Program Assistance and External Debt Service for 2007 and 2008 (In millions of MTn; unless otherwise indicated)
  - 2007 Prog. (Q1 Q2 Q3 Q4 Year)
    - Foreign program assistance: 10179.5 4877.7 2672.5 1530.9 2550.1 1631.3
    - Program grants: 7518.6 3926.8 2672.5 1513.8 872.1 8985.2
    - Program loans: 2660.9 950.9 0.0 17.1 1678.0 2646.0
    - External debt service: -50 2.4 -126.8 -136.9 -129.7 -135.6 -529.0
  - Source line in table: Mozambican authorities; and Fund staff estimates.
- Table 2: Projected fuel import bill 2007-08
  - Fuel Import Bill (End-Dec. End-Mar. End-Jun. End-Sept. End-Dec.): 81.3 94.5 123.9 146.0 89.5
  - Forecast Oil price (US$ per barrel): 63.5 76.5 75.3 74.5 73.8
  - Volume of fuel imports (in metric tons): 122,416 123,673 163,757 199,386 120,686
  - Sources: Mozambican authorities and Fund staff projections
- Table 3: Currency issued by the BM
  - Currency issued by BM (End-December End-March End-June End-End-Rev. Prog. Prog. Prog. Prog. Prog.): 10,133 8,924 10,310 10,358 11,486
  - Source: Mozambican authorities; and Fund staff projections.

*Source: 17.      The quantitative targets (ceilings) for net claims on the central government (NCG)*

### 2.      The Fund will continue to lead the policy dialogue on macroeconomic policy,

### 2.      The Fund will continue to lead the policy dialogue on macroeconomic policy,

### Fund–Bank division of labor and collaboration
- The Fund will lead policy dialogue on macroeconomic policy (including fiscal, monetary, and exchange rate policies), the integrated financial management information system (SISTAFE), and tax and customs reforms.
- The Bank will lead policy dialogue on public expenditure management, sectoral structural reforms, the reform of the civil service, and the Poverty and Social Impact Analysis (PSIA).
- Areas of close collaboration: banking supervision and financial sector issues, trade issues, natural resource management, the PARPA and accompanying annual updates and joint staff advisory notes, and external debt sustainability.

### Bank group country assistance strategy (CPS FY08-11)
- CPS FY08-11 was discussed by the Board on May 22, 2007.
- The new strategy is the second results-based strategy, prepared jointly with IFC and MIGA.
- CPS preparation was coordinated with 14 development partners through a review process mechanism launched by Government in 2006 in support of the Paris Declaration on harmonization.
- CPS pillars (corresponding to PARPA II pillars):
  - (i) increased accountability and public voice;
  - (ii) equitable access to key services;
  - (iii) equitable and broad-based growth.
- Five major result areas defined, encompassing 18 development outcomes in support of key outcomes in PARPA II.
- Under the new CPS, IDA, IFC and MIGA will work more closely and at an early stage on large infrastructure projects to optimize developmental impacts.
- IDA actions and financing channels noted:
  - review accessing carbon financing funds;
  - access Output-Based Aid for additional financing;
  - collaborate with GEF to update irrigation infrastructure and improve efficient water resources management in rural areas and Maputo.

### World Bank approvals, portfolio, and financing plans
- To date, the World Bank Group has approved 7 adjustment operations, 3 development policy operations, one investment guarantee and 51 investment operations totaling approximately US$3.3 billion in grants and credits.
- Current portfolio includes 18 operations for total commitments of US$778.2, of which US$95.5 in grants (including through the Global Environment Facility as well as IDA).
- The CPS financing plan for FY08–11 includes credit financing and grant resources for over US$650 million through budget support operations and investment operations and introduces a strong focus on regional integration.
- World Bank disbursements under investment projects are expected to reach around US$184 million on average a year in 2007 and 2008.

### Sectoral composition and major projects (highlights)
- World Bank Lending in Mozambique (as of November 2007) sector shares graphic labels shown: Infrastructure, Public Sector and Decentralization, Private Sector and Mining, Human Development, Agriculture, Tourism and Rural Development (percentages visible in source graphic: 58%, 14%, 0%, 21%, 7%).
- Major past and active operations (selected with original amounts and fiscal years as stated):
  - Economic Management and Private Sector Operation (EMPSO): US$120 million (approved August 2002).
  - PRSC series: PRSC1 US$60 million (July 2004), PRSC2 US$120 million (September 2005), PRSC3 US70 million (January 2007); a Fourth credit under preparation for presentation at end of 2007.
  - Education Sector Strategic Program: US$71 million—FY99, closed December 31, 2007.
  - Higher Education Project: US$60 million—FY02; additional financing US$15 million approved in FY08.
  - Technical and Vocational Education and Training project: US$30 million—FY06.
  - Health Sector Recovery Project: US$98.7 million—FY96, closed 2003.
  - HIV/AIDS Project: US$55 million grant—FY03.
  - HIV/AIDS Treatment Acceleration Project: US$21 million―FY04.
  - Railways and Ports Restructuring Project: US$100 million—FY00.
  - Roads and Bridges Project: US$162 million—FY02; second phase US$100 million approved by Board on May 22, 2007.
  - Beira Railway Project: US$110 million―FY05.
  - NWDP I: US$36 million—FY98, closed October 31, 2006.
  - NWDP II: US$75 million plus US$15 supplemental—FY99, FY04.
  - Africa Growth Catalytic Fund follow-on operation: US$15 million (catalyzed external resources); approved in FY08.
  - Enterprise Development Project: US$26 million—FY00 (closed).
  - Mineral Resource Management Capacity Building Project: US$18 million—FY01 (closed in FY07).
  - Communications Sector Reform Project: US$14.9 million—FY02.
  - Public Sector Project: US$25.6 million―FY03.
  - Municipal Development Project: US$33.6 million―FY01 (closed February 2007).
  - Maputo Municipal Development Program: US$30 million, FY07.
  - Decentralized Planning Financing Project: US$42 million―FY04.
  - Financial Sector Technical Assistance project: US$10.5 million—FY06.
  - Agricultural Sector Public Expenditure Program: US$30 million—FY99, closed December 2006.
  - Gas Engineering Project: US$26 million—FY94 (closed 2003).
  - Energy Reform and Access Project: US$40.2 million—FY04.
  - Coastal and Marine Biodiversity Management Project: US$9.7 million—FY00.
  - TFCA and Tourism (second credit): US$20 million plus US$10 million in a Global Environment Facility grant—FY06.
  - Market-Led Smallholder Development project: US$30 million approved in FY06.
  - New irrigation operation under preparation.

### Analytical and advisory program (Bank)
- Planned analytical and advisory activities include:
  - Analytical work to examine mechanisms for local government financing and accountability.
  - Fiduciary analytical and advisory work in procurement and financial management, and assessing municipal development; a second Public Expenditure Financial Accountability Assessment (jointly with some G18 partners) to update key public financial management reforms.
  - Work aimed at strengthening the governance framework, including anti-corruption and support to civil society.
  - Beneficiary Assessment Surveys and benefit incidence analysis to help fine-tune public sector reforms and ensure public funds reach intended targets.
  - IDA to undertake specific poverty and social impact analyses of major reforms planned by Government, including continued work on the Poverty Social Impact Analysis.
  - Monitoring and Evaluation: Bank provided technical assistance to finalize and monitor PARPAII Strategic Matrix; Bank supporting preparation of a monitoring plan to implement the Strategic Matrix.

### IMF–World Bank collaboration in specific areas (detailed)
- The Fund and Bank staffs maintain a close working relationship with lead roles taken by one or both institutions across:
  - (i) analyses and reforms in public financial management;
  - (ii) the PARPA and accompanying annual updates and joint staff advisory notes;
  - (iii) the financial sector and banking supervision;
  - (iv) natural resource management;
  - (v) PSIA;
  - (vi) tax issues;
  - (vii) trade issues;
  - (viii) external debt sustainability analysis.
- Public financial management:
  - Joint emphasis on urgent need to improve public expenditure management, accountability, and transparency.
  - IMF assists authorities in introducing SISTAFE; several donors, including the World Bank, provide financial support and policy advice.
  - Under the Fund’s leadership, a group of 10 donors set up a common fund for SISTAFE.
  - Bank’s PRSC emphasizes budget comprehensiveness, adoption of the e-SISTAFE, internal and external audit, budget execution reporting, and implementation of procurement reforms.
- Poverty reduction strategy paper (PARPA/PARPA II):
  - Joint staff review presented to Boards in September 2001 for PARPA.
  - Government issued annual progress reports in 2003, 2004 and 2005; Joint Staff Advisory Note (JSAN) on PARPA II elaborated in late 2006.
  - PARPAII incorporates a Strategic Matrix, basis for M&E system.
- Financial sector:
  - Following the FSAP conducted in the first semester of 2003, Fund and Bank continue advising authorities on strengthening financial supervision and accounting standards.
  - Financial Sector Technical Assistance Project approved in FY06.
- Natural resources management:
  - Collaboration to improve transparency of resource revenues and revise fiscal regimes for mining and petroleum to maximize benefits.
- PSIA:
  - Pilot PSIA on increase in specific fuel taxes undertaken in 2002.
  - Second PSIA on impact of reducing primary schooling fees completed in October 2004.
  - Third PSIA in FY07 analyzed likely impact of proposed new Labor Law.
  - PSIA following up on elimination of primary schooling fees expected to be finalized in FY08.
- Taxes:
  - Fund has taken the lead; government issued a new income tax law in 2002 and a revised code of fiscal incentives for investors.
  - Bank supportive; further reforms to strengthen tax revenues and improve tax administration efficiency are part of regular Fund dialogue.
- Trade:
  - Joint work since early 1990s on general tariff reductions, the variable tariff on sugar (introduced 1999), and reduction in export tariff on raw cashews.
  - Involvement in reforming customs administration and cooperating with donors (particularly USAID) on Integrated Framework trade policy studies.
- Debt sustainability analysis (DSA):
  - Bank and Fund prepare an annual DSA jointly in consultation with the authorities; latest DSA finalized in May 2007.

### Historical and tabulated disbursement figures (1999–2006) — selected numeric entries preserved exactly as in source
- Aggregate project credit disbursements by year (I. Project Credit Disbursements): 97.5 51.6 85.2 89.4 140.6 187.1 158.7
- Selected project disbursements line items and years are presented in the source tables with exact yearly numeric entries (see table extract in source).
- II. Adjustment operations (Million U.S. dollars) by year: 0.00 0.0 63.5 70.7 60.0 60.0 60.0
- Specific adjustment operations:
  - Economic Management and Private Sector Operation: 0.00 0.0 63.5 70.7 0.00 0.0
  - PRSC 1 (6/04): 60.0
  - PRSC 2 (9/05): 60.0 60.0
  - PRSC3 (1/07): 70.0

*Source: _cr0815 - 2.      The Fund will continue to lead the policy dialogue on macroeconomic policy,*

### Appendix III

### Appendix III — Mozambique: Statistical Issues

### Overview
- Data provision to the Fund for surveillance purposes is adequate, but the overall quality of macroeconomic statistics still hinders policy formulation and monitoring of economic development.
- Despite an increase in budget resources for official statistics, continued high reliance on external funding raises concerns about the sustainability of National Institute of Statistics (INE) programs.
- An STA mission in May 2005 updated the ROSC prepared in June 2002 and noted significant efforts to address 2002 ROSC shortcomings; methodological soundness, accuracy, and reliability of macroeconomic statistics are starting to show improvements.
- The authorities participate in the IMF’s General Data Dissemination System (GDDS) since November 2003; GDDS metadata are posted on the IMF’s DSBB website and on INE’s website. In August 2004 the INE webpage was replaced by a portal with search capabilities.

### National accounts
- National accounts are prepared by INE in accordance with the 1993 System of National Accounts (1993 SNA).
- In August 2007, INE released quarterly GDP estimates for the first time along with a revised annual GDP series.
- INE compiles and disseminates:
  - annual GDP at current and constant (1996) prices by activity;
  - annual GDP by expenditure items at current and constant prices;
  - annual value added components at current prices by activity.
- INE has launched a new household income and expenditure survey and new economic censuses leading to a new business registry.
- INE is compiling more comprehensive and timely foreign trade data based on improved classification systems.

### Prices and labor market
- A new consumer price index for Maputo, based on weights from the 2002–03 household survey, was released in February 2006.
- A national index integrating Maputo, Beira, and Nampula indices was released in April 2006.
- IMF technical assistance in price statistics was provided under the GDDS Regional Project for Lusophone African Countries; the last TA mission (June 11–July 21, 2006) noted advances in the use of the COICOP classification and strengthened human resources.
- Outstanding issues in CPI compilation include price collection procedures not fully consolidated at the provincial level, imputation methods, and possible inconsistencies in the overlapping period between the new and old series.
- There are insufficient sectoral labor market and employment data with limited coverage. A one-year labor market survey of the entire country, undertaken by INE in collaboration with the Labor Ministry, was launched in October 2004.

### Monetary statistics
- An STA mission in September 2004 prepared a work plan for implementation of the Monetary and Financial Statistics Manual (MFSM) and development of an integrated monetary database (IMD) to meet Bank of Mozambique (BM), AFR, and STA needs.
- The mission noted progress in the information system and in the periodicity and timeliness of compiled data, but found BM’s chart of accounts not fully aligned with the MFSM in sectorization and breakdown between local and foreign-currency-denominated accounts.
- Mission recommendations included improving classification and valuation of some financial instruments, estimating full instrument and sectoral breakdowns based on available information, and expanding coverage of the survey on other depository corporations to include credit cooperatives in the medium term.
- Mozambique now reports monetary data to STA using the standardized forms (SRFs); five-year historical enhanced data were published in the IFS Supplement first issued in September 2006.
- The IMD consistent with the SRFs is in the process of becoming fully operational to derive accurate and timely monthly monetary statistics and reduce BM’s reporting burden. STA provided follow-up TA via a monetary and financial statistics mission to Maputo in November 2007.

### External sector statistics
- With STA assistance under the GDDS regional project, BM has made significant progress toward compiling and disseminating balance-of-payments (BOP) and international investment position (IIP) statistics aligned with the Balance of Payments Manual, fifth edition (BPM5).
- BM has an adequate institutional framework for BOP and IIP compilation and has implemented many recommendations from four TA missions since mid-2003.
- Consolidation of institution building requires:
  - approval of the Foreign Exchange Law (incorporating the definition of residency aligned with BPM5),
  - sustained training on BOP statistics,
  - completion of the project to computerize the BOP compilation system.
- Major improvements in basic data sources include:
  - distribution of new BOP surveys to more than 35 enterprises, including megaprojects;
  - program improvements by Customs to ensure external trade data quality;
  - improvements in reports on transportation services, foreign investment, and private loans prepared by BM;
  - improvements in reports on external public debt from the Ministry of Finance;
  - improvements in banks’ reports on foreign currency transactions.
- A panel on foreign trade statistics was established comprising representatives from the Directorate General of Customs, National Statistics Institute, and BM.
- Other important concerns:
  - coverage and quality of data from enterprise surveys;
  - quality of external trade data, especially price and volume indices;
  - coverage, time of recording, and classification of data on foreign investment and private loans;
  - completeness of data for the Reserves Template and reconciliation with the reserve component of the balance of payments;
  - compiling the IIP using the sources used for BOP compilation.
- In 2007, BM started to compile and report to STA comprehensive IIP data; previously only partial IIP data had been reported and published in the 2005 Balance of Payments Statistics Yearbook.

### Government finance statistics
- Technical assistance under the GDDS Project for Lusophone countries has been provided in recent years; the July 2005 mission found that despite significant efforts to improve fiscal data, serious weaknesses remain.
- Creation of a statistical unit in the Ministry of Finance (MOF) and launching of the Integrated Management and Financial Information System (SISTAFE) will enhance analytical usefulness of government finance statistics in the near future.
- The budget system, while broadly aligned to the GFSM 1986 analytical framework, is inadequate to compile GFS; further work is needed to improve institutional and transactional coverage.
- Mozambique does not report fiscal data for publication in the IFS or the Government Finance Statistic Yearbook (GFSY).

### Mozambique: Table of Common Indicators Required for Surveillance (As of November 19, 2007)
- Exchange Rates
  - Date of latest observation: Oct. 2007
  - Date received: Nov. 2007
  - Frequency of Data: D
  - Frequency of Reporting: W
  - Frequency of publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Reserve/Base Money
    - Date of latest observation: Sept. 2007
    - Date received: Oct. 2007
    - Frequency of Data: M
    - Frequency of Reporting: M
    - Frequency of publication: M
  - Broad Money
    - Date of latest observation: Sept. 2007
    - Date received: Oct. 2007
    - Frequency of Data: M
    - Frequency of Reporting: M
    - Frequency of publication: M
  - Central Bank Balance Sheet
    - Date of latest observation: Sept. 2007
    - Date received: Oct. 2007
    - Frequency of Data: M
    - Frequency of Reporting: M
    - Frequency of publication: M
  - Consolidated Balance Sheet of the Banking System
    - Date of latest observation: Sept. 2007
    - Date received: Oct. 2007
    - Frequency of Data: M
    - Frequency of Reporting: M
    - Frequency of publication: M
  - Interest Rates
    - Date of latest observation: Sept. 2007
    - Date received: Oct. 2007
    - Frequency of Data: M
    - Frequency of Reporting: M
    - Frequency of publication: M
- Consumer Price Index
  - Date of latest observation: Oct. 2007
  - Date received: Nov. 2007
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of publication: M
  - Data Quality – Methodological soundness: O, LO, LNO, O
  - Data Quality – Accuracy and reliability: LNO, LO, LO, O, O
- Revenue, Expenditure, Balance and Composition of Financing – General Government
  - Data Quality – Methodological soundness: LO, LNO, LO, O
  - Data Quality – Accuracy and reliability: LO, O, LO, O, LNO
- External Current Account Balance
  - Date of latest observation: Sept. 2007
  - Date received: Nov. 2007
  - Frequency of Data: Q
  - Frequency of Reporting: I
  - Frequency of publication: I
  - Data Quality – Methodological soundness: LO, LNO, LO, O
  - Data Quality – Accuracy and reliability: LO, LNO, LO, LO, LNO
- Exports and Imports of Goods and Services
  - Date of latest observation: Sept. 2007
  - Date received: Nov. 2007
  - Frequency of Data: Q
  - Frequency of Reporting: I
  - Frequency of publication: I
- GDP/GNP
  - Date of latest observation: Dec. 2005
  - Date received: Mar. 2007
  - Frequency of Data: A
  - Frequency of Reporting: I
  - Frequency of publication: I
  - Data Quality – Methodological soundness: O, LO, O, LO
  - Data Quality – Accuracy and reliability: LNO, LO, LO, O, LO
- Gross External Debt
  - Date of latest observation: Dec. 2005
  - Date received: Mar. 2006
  - Frequency of Data: A
  - Frequency of Reporting: I
  - Frequency of publication: I
- Footnotes (selected)
  - 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
  - 2 Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
  - 3 Foreign, domestic bank, and domestic nonbank financing.
  - 4 The general government consists of the central government (budgetary funds, extrabudgetary funds, and social security funds) and state and local governments.
  - 5 Including currency and maturity composition.
  - 6 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), and Not Available (NA).
  - 7 Reflects assessment provided in the data ROSC published in March 2003 based on findings of the June 2002 mission. Assessment categories: fully observed (O), largely observed (LO), largely not observed (LNO), not observed (NO). No changes were proposed by the update mission of May 2005.
  - 8 Same as footnote 7, except referring to source data, statistical techniques, validation, and revision studies. No changes were proposed by the update mission of May 2005.

### Press Release: IMF Completes First Review under the Policy Support Instrument for Mozambique (Press Release No. 07/292, December 17, 2007)
- The Executive Board completed the first review under Mozambique’s three-year Policy Support Instrument (PSI) and granted a waiver of nonobservance for the quantitative assessment criterion on reserve money.
- The PSI for Mozambique was approved on June 18, 2007, to support economic reform efforts aimed at consolidating macroeconomic stability as foreign aid is scaled up, promoting structural reforms, and implementing the authorities’ national poverty reduction strategy, Plano de Acção para Redução da Pobreza Absoluta (PARPA II).
- The PSI framework is designed for low-income countries that may not need IMF financial assistance but seek close cooperation with the IMF; PSI-supported programs are based on country-owned poverty reduction strategies and are reviewed semi-annually.
- Statement by Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair:
  - Commended Mozambican authorities for strong macroeconomic performance attributable to prudent fiscal and monetary policies in the context of a flexible exchange rate regime.
  - The 2008 budget will continue to target a 0.5 percent of GDP rise in domestic revenue, with priority expenditures exceeding 65 percent of total spending.
  - Expenditures related to the elections will be monitored closely to avoid fiscal slippages.
  - Rollout of the public financial administration system (e-SISTAFE) to all public entities at central and provincial levels and to some districts should improve expenditure monitoring and allow donors to incorporate projects into the multicurrency single treasury account and e-SISTAFE.
  - Fiscal transparency needs strengthening given the number of large investment projects and concessions in the pipeline; authorities are committed to adopting regulations to give force to the new Mining and Petroleum Fiscal Regime laws and intend to adhere to the Extractive Industries Transparency Initiative principles.
  - Bank of Mozambique intends to consider gradually moving to an inflation-targeting framework, as conditions permit.
  - The authorities have embarked on the second wave of structural reforms, including designing a comprehensive decentralization strategy for fiscal responsibilities to districts and municipalities that preserves macroeconomic stability and local capacity.
  - A new public service wage policy will aim at recruiting and retaining key workers while maintaining fiscal sustainability.
  - Progress is being made in reducing the cost of doing business and ensuring a level playing field for investors.
  - Public sector and governance reforms will continue, and authorities are committed to decisively carrying out their anticorruption strategy.
  - Hope expressed that debt cancellation negotiations with Mozambique’s few remaining official bilateral creditors would soon be concluded successfully so the country can receive full benefits of the Multilateral Debt Reduction Initiative.

*Source: Appendix III — Mozambique: Statistical Issues (as contained in _cr0815 - Appendix III)._

### Introduction

### _cr0815 - Introduction

### Authorities' assessment and program stance
- Mozambican authorities appreciate Fund support and value the constructive policy dialogue and advice given by staff.
- Authorities welcome the balanced staff report and are in broad agreement with the thrust of the analyses, conclusions, and recommendations.
- Authorities reaffirm their commitment to pursuing prudent policies under the PSI and request the completion of the first review.
- All but one of the quantitative assessment criteria (AC) for end-June 2007 and all structural assessment criteria through end-September 2007 were observed.
- The end-June AC for base money was missed by a narrow margin because of an unanticipated increase in money demand; the government requested modification of the related AC for end-December 2007 because of the permanent nature of this increase.
- All structural benchmarks through September 2007 were met except the memorandum of understanding between the Ministry of Finance and the Bank of Mozambique for shifting the cost of managing monetary policy, which was agreed at the end of November 2007.

### Macroeconomic developments and outlook
- Real GDP growth averaged about 8 percent over the past decade.
- Poverty reduced from 69 percent in 1996-97 to 54 percent in 2002-03.
- Economic growth remains robust and is expected to reach the program target of 7 percent for the year as a whole.
- Inflation has been kept in the single digits, albeit somewhat higher than programmed, due to high food and international oil prices.
- Despite a marked deceleration in traditional exports, net international reserves are expected to remain at a comfortable level and exceed the program target at end-2007, mainly because of an increase in net capital inflows.
- Agriculture benefits from growth in the food-crop sub-sector and expansion of export crops; output remains dependent on climatic conditions.
- Key cash crops include tobacco, sugar and cotton; these should continue to benefit from heavy investment in recent years.
- Services account for a large percentage of GDP and should be boosted by higher domestic demand and growth in local service providers.
- Transport and communications continue to attract private investment in ports, railways, roads and mobile telephone.
- Economic prospects for 2008 and the medium term remain favorable with continued strong growth and inflation in single digits, albeit with risks related to natural calamities, high oil prices, and spending pressure during the period of the elections.
- The external current account is targeted to widen on account of inflows and the impact of the Euro appreciation, but international reserves will be comfortable.
- Government will implement policies aimed at employment generation and improvement of income distribution, with emphasis on SMEs and rural areas.
- Policy anchor: continuation of a prudent fiscal and monetary policy in the context of a flexible exchange rate regime.
- Economy expected to benefit from a second generation of large projects.

### Fiscal policy
- Fiscal stance was better than programmed at end-September 2007: revenue collection was above target, while current and capital expenditures were as programmed.
- Fiscal targets for end 2007 are well within reach.
- Government postponed provincial elections from January 2008 to 2009 to harmonize them with parliamentary and presidential elections, intending to ensure efficient use of resources and financing.
- Progress on implementing the integrated public financial management system (SISTAFE): expanded to all ministries at central and provincial levels.
- Continued improvements in public expenditure management, including installation of an integrated payroll database for the civil service; additional features to be enhanced in ensuing months for full operation.
- Tax policy: several draft laws submitted to Parliament; proposed VAT changes grant a limited exemption on public works that is transitory, with commitment to full taxation of services related to public works and gradual reduction and elimination of the limited exemption in due course.
- Authorities increased fiscal spending for 2008, with around two-thirds allocated to priority sectors, including sufficient counterpart funds for donor-financed projects.
- 2008 Budget reflects increased donor support and the appreciation of the Euro.
- Mid-year review with the "G-19" (Program Aid Partners) completed in September; intended to streamline government reporting and enable donors to buy into the government's overall performance.
- Major policy goal in 2008: increase tax revenue by the equivalent of 0.5 percent of GDP.
- Expected revenue increases to come from improvements in revenue administration and tax policy measures, including revisions to personal income and corporate income tax codes.
- Legislation passed establishing new tax regimes for the mining and petroleum sectors applicable to new investments, expected to increase natural resource-based contributions to fiscal revenues in the near future.

### Monetary and exchange rate policy
- Bank of Mozambique (BM) stepped up efforts to strengthen monetary and exchange rate policy and operations and redoubled efforts in the fight against inflation during 2007.
- The spread between the different foreign exchange markets has narrowed to about one percent.
- The real effective exchange rate has remained stable.
- Spreads between deposit and lending interest rates have been narrowing.
- BM will continue to target base money to achieve its inflation goal of 5-6 percent at end-2008.
- BM will continue interventions in the foreign exchange markets as a major mechanism to sterilize liquidity.
- With first-generation reforms implemented, BM will consider moving to a monetary framework that better reflects determinants of price stability with Fund technical assistance.
- BM will support expansion of the non-bank financial sector and continue to license and supervise microfinance deposit-taking institutions to facilitate access to finance by SMEs and rural households.
- A new foreign exchange law was submitted to Parliament in September 2007; upon approval and related regulations, authorities intend to accept obligations under Article VIII, Sections 2, 3, and 4 of the Fund's Articles of Agreement.

### Structural reforms and governance
- Progress accelerated on structural reforms, particularly in reducing the cost of doing business and on the judiciary.
- Measures to improve the investment climate: authorization to publish company bylaws electronically (approved in early 2007) helped reduce time to start a business from 113 to 29 days.
- Cost of business registration decreased by two-thirds.
- Number of procedures to start a business declined from 13 to 10.
- Authorities aim to make Mozambique's business environment the most competitive in the region by 2015.
- Ministry of Industry and Commerce coordinated development of a strategic action plan to improve the business environment through an inter-ministerial committee; World Bank to provide support on the strategy and technical assistance in coordination with other donors.
- Decree on Simplified Licenses for Micro and Small Business to be submitted to the Council of Ministers by end of 2007.
- Justice sector reforms: recent approvals include the Law on Judiciary Organization (increases district tribunal competencies), the Organic Law of the Public Ministry, and the Statute of the Magistrate.
- Draft Integrated Strategic Plan and Law revising principles and regulation of Instituto de Patrocínio e Assistência Jurídica (IPAJ) to be submitted to the Council of Ministers before end-December 2007.
- Government intends to faithfully implement public sector reform program and anti-corruption strategy; a committee working with World Bank to define by March 2008 a number of measures to help improve governance indicators.
- Authorities recognize challenges in managing aid and financial inflows, including from potential mega-projects, for fiscal and monetary authorities.
- Authorities believe conditions are ripe to demand more from foreign investors in natural resources and concessions; recent legislation in this area is a step in that direction.
- Government announced conclusion of process to take over ownership of the company that operates the Cahora Bassa dam (HCB) on November 26th, after a long process of negotiations of a non-recourse financing.

### Conclusion and commitments
- Authorities remain committed to implementing prudent policies and advancing the reform agenda.
- Strategy: effective implementation of the PSI arrangement within the framework of PARPA II to attain macroeconomic stability, enhance revenue mobilization, and ensure efficient use of public resources through PFM reforms.
- Timely implementation of the second wave of reforms is central, in particular improving service delivery in the public sector and creating an enabling environment for private sector development and related financing.
- Authorities are grateful for Fund and international community support and will continue to count on such future support for their reform effort.

*Source: _cr0815 - Introduction*

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