## _cr08220 ## Source details **Canonical URL:** [_cr08220](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08220.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08220.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08220.pdf.json) --- ### Executive Summary — 2007 performance and shocks - Real GDP growth: "Real GDP rose more than envisaged"; Real GDP, percent change series excerpt: "8.5 7.3 7.0 7.0 7.0 7.0". - Inflation: - "Average inflation nevertheless declined and core inflation (excluding food and energy) was contained around 5 percent." - CPI, per avg., percent change series excerpt: "13.2 8.2 7.3 5.5 5.3 5.1". - CPI, eop., percent change series excerpt: "9.4 10.3 6.0 5.2 5.1". - External indicators: - Current account balance (before grants), percent of GDP series excerpt: "-15.9 -16.4 -20.8 -20.2 -18.5 -17.3". - External reserves coverage, months of imports: "4.4 5.0 4.6 4.6 4.6 4.6". - Price and external shocks: - "In the 12 months to March 2008, gasolene and food prices rose 27 and 15 percent respectively." - Large domestic fuel price increases in February 2008 triggered riots and led to a temporary transportation subsidy. - Fiscal and aid developments: - "Domestic tax revenues exceeded expectations by 0.4 percent of GDP." - Capital under-spending: "capital under-spending (4.6 percent of GDP)." - Priority expenditures’ share fell below the 65 percent target (about 62 percent achieved). - End-December 2007 AC on net credit to government (NCG) missed by "0.8 percent of GDP"; BM technical revisions adjusted the miss to "0.2 percent of GDP." - Monetary operations and pressures: - Reserve money target breached at end-2007 due to seasonal currency demand; reversed in January 2008. - Monetary Policy Mix table excerpts: - "Total sterilization 8.6 11.9 7.8 11.5 15.0" - "Net foreign exchange sales 8.9 12.4 5.5 7.7 10.2" - "Net T-bill issuance -0.3 -0.5 2.3 3.8 4.7" ### Macroeconomic outlook and policy stance for 2008 - Outlook statements: - "Prospects for 2008 remain positive. Output growth is projected to remain robust. Inflation will decelerate, though less than previously envisaged. External reserves will remain at a comfortable level." - Target: BM aims for "achieving an average headline inflation of 7–8 percent in 2008." - Fiscal stance: "There will be no recourse to monetary financing to make room for credit to the private sector." - Fiscal measures and adjusters: - Government aims to raise domestic revenues by "0.5 percent of GDP." - Temporary transportation subsidy accommodated: "(0.15 percent of GDP)." - Contingency adjuster for natural disasters: "MT 500 million". - Donors’ commitments imply scaling-up of project aid "by over 5 percent of GDP." - e-Sistafe and cash management targets: - Use e-Sistafe to pay civil service salaries by end-April 2008 (structural benchmark). - Define additional districts/municipalities for e-Sistafe rollout by end-June 2008 (structural benchmark). - Expand e-Sistafe for program budgeting for the 2009 budget and selected pension payments starting in early 2009. - Study on cash-flow management and public enterprise reporting: "will be undertaken by December 2008 (structural benchmark)." ### Fiscal position — levels, shares, and priorities (selected figures) - Nominal GDP (millions of MT): "176,804; 200,419; 201,437; 226,786; 226,786; 255,325; 287,456; 323,630." - Total revenue (percent of GDP): "15.3; 16.1; 16.4; 16.7; 16.9; 17.4; 18.1; 18.6." - Total expenditure and net lending (percent of GDP): "27.5; 34.4; 29.0; 36.7; 35.1; 34.5; 33.4; 32.6." - Overall balance, after grants (percent of GDP): "-1.7; -5.5; -3.9; -6.2; -5.5; -5.1; -4.5; -4.1." - Domestic primary balance (percent of GDP): "-2.1; -3.3; -3.5; -3.5; -3.2; -3.1; -2.7; -2.6." - Tax revenue (millions of MT): "23,313; 28,102; 29,081; 32,695; 32,695; 37,831; 45,588; 52,746." - Capital expenditure (millions of MT): "21,292; 33,374; 24,314; 40,450; 37,536; 41,439; 43,907; 46,872." - Net domestic financing (millions of MT): "-5,835; -2,111; 382; -1,202; -1,202; -179; -422; -168." ### External sector, reserves, and megaprojects (selected figures) - Net international reserves (end period, millions of U.S. dollars): "1,231; 1,450; 1,508; 1,566; 1,589; 1,642; 1,713; 1,790." - Gross international reserves (end period, millions of U.S. dollars): "1,241; 1,464; 1,524; 1,581; 1,605; 1,658; 1,729; 1,806." - Current account, before grants (percent of GDP): "-15.9; -20.7; -16.4; -22.8; -20.8; -20.2; -18.5; -17.3." - Exports, f.o.b. (millions of U.S. dollars): "2,381; 2,483; 2,412; 2,494; 2,488; 2,515; 2,676; 2,768." - Megaprojects exports (millions of U.S. dollars): "1,699; 1,793; 1,841; 1,669; 1,889; 1,867; 1,931; 1,942." - Trade balance (millions of U.S. dollars): "-533; -602; -681; -1,017; -1,052; -1,149; -1,136; -1,184." - Overall balance (millions of U.S. dollars): "139; 223; 283; 116; 81; 53; 71; 77." ### Monetary policy and banking sector reforms - Monetary policy stance: - BM reduced lending facility rate from "15.5 to 14.5 percent" and deposit facility from "10.5 to 10.25 percent" in January 2008. - Legal reserve requirement reduced from "10.15 to 9.0 percent", effective April 2008. - BM began reverse repo auctions in July 2007 and expanded reverse repo operations in February 2008. - BM will introduce repo operations in June 2008 and adapt Meticalnet for secondary market T-bill outright operations by end-June 2008 (structural benchmark). - Monetary aggregates and credit (selected): - Credit to the economy (percent change of beginning-period M3): "14.3; 10.8; 7.8; 10.3; 12.1; 13.0; 13.5; 13.4." - Broad money-M3 (12-month percent change): "23.4; 20.1; 25.3; 18.1; 17.0; 14.5; 15.1; 15.2." - Reserve money (levels, millions of MT): "14,736; 16,904; 17,822; 17,822; 19,334; 18,934; 21,211; 23,887; 26,928." - Currency in circulation (millions of MT): "8,789; 10,133; 10,942; 10,942; 11,486; 11,659; 12,971; 14,450; 16,164." - Banking sector soundness indicators (selected): - Regulatory capital to risk-weighted assets: "5.49; 14.01; 17.03; 18.65; 16.00; 12.53; 14.21." - Nonperforming loans to gross loans: "23.43; 21.98; 14.43; 6.42; 3.82; 3.26; 2.62." - Return on assets: "0.14; 1.59; 1.24; 1.43; 1.81; 3.51; 3.46." - Foreign exchange loans to total loans (percent): "64.69; 69.87; 70.77; 67.33; 63.91; 45.04; 29.68." - Capital adequacy ratio increased to "14.2 percent" in December 2007 from "12.5 percent" in 2006. - Non-performing loans decreased to "2.6 percent" in 2007 from "3.3 percent" in 2006. ### Structural reforms, governance, and natural resource management - Public financial management and tax reform: - "Good progress has been made in implementing the first two phases of the e-Sistafe project." - Parliament approved new income and value added tax codes in December 2007. - Submission of draft excise tax law to Parliament delayed from end-February to May 2008. - Tax administration achievements: number of taxpayers increased by "190,019—to a total number of 587,205." - Expected revenue measures contributing to 0.5 percent of GDP: revisions to income tax codes "0.2 percent of GDP"; reduction in VAT exemptions "0.1 percent of GDP"; collection of arrears "0.1 percent of GDP"; adjustment of fuel taxes "0.1 percent of GDP." - Business environment and trade: - Government approved medium-term strategy to strengthen business environment (February 2008); simplification of licensing and cross-border trade facilitation actions underway. - Mozambique joined an interim-Economic Partnership Agreement with the EU in November 2007; reciprocal free access from July 2008. - Megaprojects and transparency: - MF short-term actions: strengthen monitoring, ensure MF agreement with fiscal regime before Council of Ministers, adopt legal instrument before end-May 2008, strictly implement mining and petroleum fiscal regime, and pursue EITI adherence during 2008. - Draft Public-Private Partnership law planned for 2009. - Governance and public sector reforms: - Public wage policy reform outline approved December 2007. - Decentralization strategy to be approved by end-2008. - A strategy to improve governance to be completed in early April 2008; implementation targeted 2008–2009. - Civil service disciplinary actions in 2007: "2415 disciplinary measures" including "813 expelled", "380 fined", "247 demoted." ### Program monitoring, assessment criteria, and IMF actions - Missed criteria and waivers: - Two end-December 2007 quantitative ACs (net credit to government and reserve money) and one structural AC (excise tax law) were missed; staff supports waivers and recommends completion of the second review under the PSI. - Modifications and adjusters: - NIR and base money ACs for end-June 2008 modified to reflect technical revisions, reduced legal reserve requirement, and revised schedule of foreign program assistance. - Base money adjuster modified to account for seasonal increase in currency demand in Q4 (festive season). - Disaster-related flexibility: NCG ceiling may be adjusted upward to accommodate up to "MT 500 million" for natural disasters. - Limit on new nonconcessional external debt contracting or guaranteeing: up to "US$5 million" in 2008 with grant element < 35 percent. - Data reporting commitments: - Weekly and monthly reporting obligations on specified tables and series; monetary survey to identify donor-financed project deposits. - IMF Board action: - IMF Press Release No. 08/123 (May 29, 2008): Executive Board completed the second review and granted waivers for the nonobservance of the two end-December 2007 quantitative ACs and one structural AC. ### Social mitigation, risks, and priorities - Social mitigation: - Government considering measures to mitigate oil and food price impacts; IMF/World Bank seminar scheduled in May to identify best practices. - Temporary fuel subsidy for minibus operators cost: "0.15 percent of GDP." - Risks: - Natural calamities, adverse international price movements (oil and food), and pressures for unsustainable spending approaching elections. - Only "3 percent" of cultivated land affected by floods; economic impact likely limited. - Priority spending and PARPA: - PARPA expenditures in percent of GDP: "16.7; 16.7; 22.5; 22.4." - PARPA share of total expenditure (excl. bank restructuring, net lending, interest): "65.1; 61.5; 69.4; 70.4." - Wage bill will reach "8.3 percent of GDP" in 2008 and includes hiring "12,000 teachers" and "5,000 health workers." ### Statistical issues and data development - National accounts and statistics: - INE released quarterly GDP estimates covering 2000-2007 and revised annual GDP series for 1991-2006 with 2003 as new base year (August 2007). - New household income and expenditure survey and new economic censuses underway. - Monetary and external statistics: - IMD fully operational after November 2007 mission; monetary data reported to STA using SRFs. - BM started compiling comprehensive IIP data in 2007. - Data dissemination: - Mozambique participates in GDDS since November 2003; metadata and plans need updating. - Table of Common Indicators — selected latest observations: Exchange Rates (Mar. 2008); Reserve/Base Money (Jan. 2008); CPI (Mar. 2008); External Current Account Balance (Dec. 2007). *Source: _cr08220 (IMF staff report).* ### Executive Summary....................................................................................................... ### Executive Summary ### I. The Economy in 2007 Remains Resilient - Real GDP growth and inflation - "Real GDP rose more than envisaged" (broad-based growth). - "Average inflation nevertheless declined and core inflation (excluding food and energy) was contained around 5 percent." - Selected indicators excerpt (as presented): - "Real GDP, percent change8.57.37.07.07.07.0" - "CPI, per avg., percent change13.28.27.35.55.35.1" - "CPI, eop., percent change9.410.36.05.25.15.1" - "REER, percent change1.86.5............" - "Current account balance (before grants), percent of GDP-15.9-16.4-20.8-20.2-18.5-17.3" - "External reserves coverage, months of imports4.45.04.64.64.64.6" - External and price shocks - Economy remained resilient to climatic shocks (extensive flooding late in the year) and large international import price increases. - "In the 12 months to March 2008, gasolene and food prices rose 27 and 15 percent respectively." - "Large domestic fuel price increases in February 2008 triggered riots and led to the introduction of a temporary and well-targeted transportation subsidy." - Fiscal performance and aid shortfalls - "Domestic tax revenues exceeded expectations by 0.4 percent of GDP." - Capital under-spending due to project aid shortfalls: "capital under-spending (4.6 percent of GDP)." - Priority expenditures’ share of total spending fell below the 65 percent target. - End-December 2007 assessment criterion (AC) on net credit to government (NCG) was missed: - "The end-year AC on NCG was missed by 0.8 percent of GDP, mainly because of aid shortfalls for on-lending to public enterprises ... and deficiencies in cash-flow management." - Technical revision: "The BM made technical revisions in January 2008 ... according to which the adjusted end-December 2007 target on net credit to the government was missed by only 0.2 percent of GDP." - Monetary developments - Monetary policy remained prudent but faced seasonal demand pressures: - Reserve money target breached at end-2007 due to "an unusually strong seasonal demand for currency during the end-year festive season" that "was reversed in January 2008." - Central bank operations (figures as presented): - Monetary Policy Mix table excerpts: - "Total sterilization8.611.97.811.515.0" - "Net foreign exchange sales8.912.45.57.710.2" - "Net T-bill issuance-0.3-0.52.33.84.7" - Memo lines (Millions of US$ and other entries) appear in source. ### II. Structural Reform Momentum Maintained - Public financial management and tax reform - "Good progress has been made in implementing the first two phases of the e-Sistafe project." - Parliament approved new codes for income and value added taxes in December. - Submission of a draft excise tax law to Parliament has been temporarily delayed to May 2008 (end-February structural AC). - Central bank reforms and supervision - The Bank of Mozambique (BM) expanded instruments to control liquidity and agreed in November to shift the costs of monetary policy to the Ministry of Finance (MF), with those costs to be included in the 2009 budget. - The BM continued to strengthen banking sector supervision to comply with Basel I principles. - Planned measures for 2008 include: - Introduction of repo operations in June 2008. - Adapting the interbank money market system (Meticalnet) to allow outright Treasury bill operations in the secondary market (end-June 2008 structural benchmark). - Publication of audited financial statements prepared in accordance with IFRS (starting with the financial year 2008). - External quality assurance review of the internal audit function, adoption of an internal audit charter, and periodic reporting to the BM’s Executive Board on audit recommendations (end-July 2008 structural benchmark). - Interim measure: the Audit Board will assume the role of the audit committee with a focused mandate (end-June 2008 structural AC). - The government will conclude a medium-term IFRS Strategic Implementation Plan by end-April 2008. - Business environment and natural resource management - Government approved a medium-term strategy to strengthen the business environment (February 2008), simplified licensing, completed a cross-border trade facilitation study, and issued regulations for the mining and petroleum fiscal regime laws approved in June 2007. - The government has initiated steps to declare its adherence to the Extractive Industries Transparency Initiative (EITI) during 2008. - Several SADC countries, including Mozambique, concluded an interim-Economic Partnership Agreement with the EU in November, providing continued free access to EU markets, in exchange for reciprocal free access from July 2008. ### III. Macroeconomic Policies in 2008 - Outlook and policy stance - "Prospects for 2008 remain positive. Output growth is projected to remain robust. Inflation will decelerate, though less than previously envisaged. External reserves will remain at a comfortable level." - "The BM will maintain a prudent monetary policy stance in the context of a flexible exchange rate." Target: "achieving an average headline inflation of 7–8 percent in 2008." - Fiscal stance: "There will be no recourse to monetary financing to make room for credit to the private sector." - Fiscal strategy and revenue measures - The government aims to raise domestic revenues by "0.5 percent of GDP" and mitigate revenue losses from trade liberalization through improved administration, tax measures, and higher Cahora Bassa concession fees. - The fiscal framework accommodates a temporary transportation subsidy "(0.15 percent of GDP)" and costs related to flooding and cyclone via the contingency line; an adjuster of "MT 500 million" for natural disasters is noted. - Donors’ firm commitments imply scaling-up of project aid "by over 5 percent of GDP." - Strengthening fiscal operations and cash management - e-Sistafe rollout and milestones: - Use e-Sistafe to pay civil service salaries by end-April 2008 (structural benchmark). - Define list of additional districts and municipalities for e-Sistafe rollout by end-June 2008 (structural benchmark). - Expand e-Sistafe for program budgeting for the 2009 budget and for selected pension payments starting in early 2009. - Facilitate routing externally financed projects through the single treasury account (CUT); pilot underway. - Study on cash-flow management and public enterprise reporting: - "A study, with the support of technical assistance, will be undertaken by December 2008 (structural benchmark)." This will serve as a basis for drafting a public enterprise law requiring monthly financial reports to the MF. - Social mitigation and risks - Government considering measures to mitigate social impact of oil and food price increases; a seminar organized by the IMF and World Bank is scheduled in May to identify best practices. - Risks include natural calamities, adverse movements in international prices, and pressures for unsustainable additional spending approaching elections. ### IV. Program Monitoring and Staff Appraisal (high-level points) - Program performance - "Overall performance under the program was satisfactory but encountered unexpected challenges." - Key misses: end-December AC on NCG (missed by 0.8 percent of GDP; adjusted to 0.2 percent after BM revisions) and end-year AC on reserve money (breached due to seasonal currency demand, reversed in January 2008). - Implementation commitments - Continued commitment to the reform agenda, including PFM strengthening, tax administration improvements, BM operational deepening (repos and secondary market T-bill operations), and BM internal audit strengthening. *Source: Executive Summary (IMF staff–prepared content).* ### 23. Mozambique has committed to introducing current account convertibility. A ### Mozambique has committed to introducing current account convertibility. A ### Implementing Second-Wave Reforms - With the help of the World Bank and other development partners, the government is implementing second-wave reforms to support private sector development, management of the country’s natural resources, and public sector governance. - Government objectives and timelines (MEFP ¶37-38): - Reduce the cost of doing business to make Mozambique’s business environment the most competitive in SADC by 2015. - Facilitate cross-border trade during 2008. - Consolidate business inspections by April 2008. - Submit an insolvency law to the CM by June 2008 for implementation during 2008. ### Improving the Management and Boosting the Economic Benefits of Megaprojects (Box 1) - Improving management and boosting domestic economic benefits of megaprojects is a central government objective. - Ministry of Finance (MF) short-term (2008–09) intended actions to manage budgetary and macroeconomic implications of megaprojects: - Strengthen the monitoring of megaprojects by developing data gathering and analytical and forecasting capabilities at the MF in close coordination with other interested ministries and the Bank of Mozambique. - Enhance the oversight and control mechanism of the MF by ensuring that it formally agrees with the fiscal regime of new projects at the appropriate stages of the negotiations, and before its submission to the Council of Ministers. An appropriate legal instrument will be adopted before end-May 2008. - Strictly implement the mining and petroleum fiscal regime and related regulations and model contracts to all new projects. - Start to develop actions aimed to meet the steps necessary for the official declaration of Government to adhere to the Extractive Industry Transparency Initiative (EITI) in the course of 2008. - Continue to adopt nonrecourse financing clauses in future megaprojects. - Draft a Public-Private Partnership law in 2009 which will also be applicable to megaprojects. ### Natural Resources Management and Transparency - Measures are being implemented to improve management and transparency of the country’s natural resources and increase benefits to the country (MEFP ¶39). - Government initiated steps in March to declare its adherence to the EITI during 2008. - A joint World Bank and IMF mission in April discussed ways to improve management and boost economic benefits of megaprojects, PPPs and concessions. ### Public Governance and Institutional Reforms - Strengthening public governance remains a key focus (MEFP ¶40–41): - Reform of civil service compensation is underway, with attention to fiscal sustainability. - A decentralization strategy is being prepared, with the support of the World Bank and other development partners, for the CM’s approval by end-2008. - A restructuring plan of PETROMOC will be submitted to the CM by May 2008. - Progress on judicial reforms is slower than envisaged. - As part of anti-corruption efforts, the government will complete in April a strategy, with specific objectives and actions, to improve Mozambique’s governance indicators in 2008 and 2009. ### Program Monitoring - The revised program incorporates modifications to the ACs for NCG, net international reserves (NIR), and reserve money for end-June 2008 for the third review (expected to be completed by end-December 2008). - Specific AC modifications for end-June 2008: - NIR AC modified to take into account technical revisions to the monetary survey. - AC on base money modified to take into account the reduced legal reserve requirement for banks. - AC on NCG modified to take into account the revised schedule of disbursements of foreign program assistance (MEFP Table 1). - ACs for end-December 2008 are proposed for the fourth review, expected to be completed by end-June 2009. - TMU updates: - The adjuster on reserve money related to currency issued by the BM has been modified to take into account the seasonal increase in currency demand during the festive season in the fourth quarter of the year (TMU ¶19). ### Staff Appraisal — Macroeconomic Performance and Policy Priorities - Macroeconomic performance: - Mozambique’s overall macroeconomic performance during the second half of 2007 was satisfactory. - Economic growth was resilient to shocks and inflation continued to decline. - The two end-December 2007 quantitative ACs on net credit to government and reserve money were missed mostly because of unforeseen challenges. - The submission of the draft excise tax law to Parliament, a structural AC for end-February, has been temporarily delayed to May 2008. - Policy advice and assessments: - Staff welcomes the authorities’ commitment to prudent fiscal and monetary policies in the context of a flexible exchange rate system and to avoid monetary financing of the budget. - Staff urges the authorities to ensure that the civil service wage and pension reform does not compromise fiscal sustainability. - Fiscal operations: - Staff commends progress made in tax administration and on PFM. - Implementation of the e-Sistafe project has progressed well, but timely donor financial support will be important for its completion. - Authorities and donors should promptly address the causes of the 2007 shortfalls in aid disbursement of projects and special programs and related spending to allow a scaling-up of aid in 2008. - Monetary operations: - The BM has made good progress in introducing new instruments. - Staff welcomes BM’s efforts to move towards a monetary framework that better reflects determinants of price stability and to buttress its internal audit. - Staff welcomes the Treasury’s commitment to communicate its cash-flow projections to the BM on a weekly basis. - Reforms for private sector and natural resource management: - Reforms to strengthen private sector development and management of natural resources are a high priority. - Implementation of the medium-term strategic plan to improve the business environment is important. - Staff welcomes implementation of the regulations on the mining and petroleum fiscal regime laws and stresses the importance of the MF having oversight of the fiscal terms for new megaproject agreements. - Adherence to the EITI is highlighted as an important step forward for transparency and spreading benefits of natural resources. - Governance: - Staff welcomes continued focus on improving governance and urges the completion and timely implementation of the strategy to improve Mozambique’s overall governance performance. - Exchange regime and IMF obligations: - A new foreign exchange law was submitted to the Assembly in September 2007. - Following approval of the new law and implementing regulations, the authorities intend to accept their obligations under Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement. - The staff recommends the approval of five exchange restrictions under Article VIII, Section 2(a) given the authorities' stated intention to remove these exchange restrictions within one year. *IMF staff report content.* ### 35. Based on performance to date and their continued commitment to program ### _cr08220 - 35. Based on performance to date and their continued commitment to program ### Program assessment and IMF staff recommendation - Staff supports the authorities’ request for waivers for the non-observance of the two end-December 2007 quantitative assessment criteria on net credit to government and reserve money, and for the end-February 2008 structural assessment criterion on the excise tax law. - Staff recommends the completion of the second review under the PSI. ### Macroeconomic outlook and growth - Nominal GDP (millions of MT): 176,804; 200,419; 201,437; 226,786; 226,786; 255,325; 287,456; 323,630. - Nominal GDP growth: 16.5; 15.5; 13.9; 13.2; 12.6; 12.6; 12.6; 12.6. - Real GDP growth: 8.5; 7.0; 7.3; 7.0; 7.0; 7.0; 7.0; 6.4. - GDP per capita (in U.S. dollars): 355; 378; 386; 410; 453; 474; 512; 553. - Consumer price index (annual average): 13.2; 7.9; 8.2; 5.7; 7.3; 5.5; 5.3; 5.1. - Consumer price index (end of period): 9.4; 8.0; 10.3; 5.5; 6.0; 5.2; 5.1; 5.1. ### External sector and reserves - Merchandise exports (annual percent change): 36.4; 4.3; 1.3; 0.4; 3.1; 1.1; 6.4; 3.4. - Merchandise exports, excluding megaprojects: 41.3; 1.2; -16.3; 19.6; 4.8; 8.1; 15.1; 13.2. - Merchandise imports: 18.1; 5.9; 6.1; 13.8; 14.5; 3.5; 4.0; 3.7. - Current account, before grants (percent of GDP): -15.9; -20.7; -16.4; -22.8; -20.8; -20.2; -18.5; -17.3. - Net international reserves (end of period, millions of U.S. dollars): 1,231; 1,450; 1,508; 1,566; 1,589; 1,642; 1,713; 1,790. - Gross international reserves (end of period, millions of U.S. dollars): 1,241; 1,464; 1,524; 1,581; 1,605; 1,658; 1,729; 1,806. - In months of imports of goods and nonfactor services: 4.4; 4.7; 5.0; 4.5; 4.6; 4.6; 4.6; 4.6. - In months of imports of goods and nonfactor services, excl. megaprojects: 6.8; 6.0; 6.5; 5.5; 5.7; 5.8; 5.9; 5.9. - Exchange rate (MT per U.S. dollar; end of period): 26.0; 23.8. ### Money and credit - Net foreign assets (percent change of beginning-period M3): 31.3; 18.5; 14.3; 10.5; 14.8; 3.5; 3.6; 3.4. - Net domestic assets (percent change of beginning-period M3): -7.9; 2.4; 11.0; 7.6; 2.2; 11.0; 11.5; 11.8. - Net credit to the government (percent change of beginning-period M3): -9.6; 0.6; 6.1; -0.4; -3.1; -0.3; -0.5; -0.2. - Credit to the economy (percent change of beginning-period M3): 14.3; 10.8; 7.8; 10.3; 12.1; 13.0; 13.5; 13.4. - Broad money-M3 (12-month percent change): 23.4; 20.1; 25.3; 18.1; 17.0; 14.5; 15.1; 15.2. - M2 (12-month percent change): 25.8; 20.1; 22.9; 18.1; 15.8; 14.5; 15.1; 15.2. - Reserve money (levels, millions of MT): 14,736; 16,904; 17,822; 17,822; 19,334; 18,934; 21,211; 23,887; 26,928. - Currency in circulation (millions of MT): 8,789; 10,133; 10,942; 10,942; 11,486; 11,659; 12,971; 14,450; 16,164. - Deposit money banks: Deposits (millions of MT): 46,434; 56,352; 58,177; 57,548; 66,902; 68,818; 78,472; 90,562; 104,181. - Money and quasi money (M3, millions of MT): 53,586; 64,786; 67,127; 67,099; 76,516; 78,477; 89,888; 103,499; 119,234. ### Fiscal position and public finances - Total revenue (percent of GDP): 15.3; 16.1; 16.4; 16.7; 16.9; 17.4; 18.1; 18.6. - Total expenditure and net lending (percent of GDP): 27.5; 34.4; 29.0; 36.7; 35.1; 34.5; 33.4; 32.6. - Overall balance, before grants (percent of GDP): -12.5; -18.3; -13.5; -20.0; -18.3; -17.0; -15.4; -14.1. - Total grants (percent of GDP): 10.8; 12.8; 9.6; 13.8; 12.8; 11.9; 10.8; 10.0. - Overall balance, after grants (percent of GDP): -1.7; -5.5; -3.9; -6.2; -5.5; -5.1; -4.5; -4.1. - Domestic primary balance (percent of GDP): -2.1; -3.3; -3.5; -3.5; -3.2; -3.1; -2.7; -2.6. - Total revenue (millions of MT): 26,997; 32,274; 33,058; 37,773; 38,239; 44,527; 51,903; 60,053. - Total expenditure and net lending (millions of MT): 48,546; 68,896; 58,448; 83,220; 79,713; 88,041; 96,129; 105,566. - Tax revenue (millions of MT): 23,313; 28,102; 29,081; 32,695; 32,695; 37,831; 45,588; 52,746. - Taxes on income and profits (millions of MT): 6,367; 7,627; 9,279; 10,004; 10,004; 12,799; 17,730; 20,513. - Compensation to employees (millions of MT): 12,994; 15,920; 16,091; 18,815; 18,815; 20,588; 23,161; 26,076. - Capital expenditure (millions of MT): 21,292; 33,374; 24,314; 40,450; 37,536; 41,439; 43,907; 46,872. - Grants received (millions of MT): 19,124; 25,618; 19,268; 31,334; 28,969; 30,487; 31,166; 32,269. - Net domestic financing (millions of MT): -5,835; -2,111; 382; -1,202; -1,202; -179; -422; -168. ### Balance of payments and megaprojects - Trade balance (millions of U.S. dollars): -533; -602; -681; -1,017; -1,052; -1,149; -1,136; -1,184. - Exports, f.o.b. (millions of U.S. dollars): 2,381; 2,483; 2,412; 2,494; 2,488; 2,515; 2,676; 2,768. - Megaprojects exports (millions of U.S. dollars): 1,699; 1,793; 1,841; 1,669; 1,889; 1,867; 1,931; 1,942. - Imports, c.i.f. (millions of U.S. dollars): -2,914; -3,085; -3,093; -3,511; -3,540; -3,664; -3,811; -3,951. - Current account, before grants (millions of U.S. dollars): -1,125; -1,607; -1,286; -1,957; -1,954; -2,025; -2,043; -2,107. - Current account, after grants (millions of U.S. dollars): 1,445; -584; -496; -733; -710; -775; -804; -526. - Overall balance (millions of U.S. dollars): 139; 223; 283; 116; 81; 53; 71; 77. ### Public spending on poverty-reduction priorities (PARPA) - Total expenditure in PARPA priority sectors (millions of MT): 29,575; 33,734; 51,116; 57,070. - Total PARPA expenditures in percent of GDP: 16.7; 16.7; 22.5; 22.4. - PARPA share of total expenditure (excl. bank restructuring, net lending, and interest payments): 65.1; 61.5; 69.4; 70.4. - Education (millions of MT): 9,109; 12,145; 13,552; 17,186. - Health (millions of MT): 6,628; 7,351; 9,501; 9,728. - Infrastructure development (millions of MT): 7,435; 7,538; 12,890; 11,187. - PARPA expenditures in percent of GDP — Education: 5.2; 6.0; 6.0; 6.7. - PARPA expenditures in percent of GDP — Health: 3.7; 3.6; 4.2; 3.8. ### Banking sector soundness and financial indicators - Regulatory capital to risk-weighted assets: 5.49; 14.01; 17.03; 18.65; 16.00; 12.53; 14.21. - Regulatory Tier I capital to risk-weighted assets: 6.03; 11.97; 14.67; 15.97; 13.57; 10.72; 12.32. - Capital (net worth) to assets: 8.22; 9.42; 9.02; 9.51; 8.04; 6.06; 6.35. - Nonperforming loans to gross loans: 23.43; 21.98; 14.43; 6.42; 3.82; 3.26; 2.62. - Return on assets: 0.14; 1.59; 1.24; 1.43; 1.81; 3.51; 3.46. - Liquid assets to total assets: 34.64; 53.93; 57.74; 58.12; 55.52; 51.87; 55.9. - Foreign exchange loans to total loans (percent): 64.69; 69.87; 70.77; 67.33; 63.91; 45.04; 29.68. ### External vulnerability and development indicators - Gross international reserves (millions of U.S. dollars): 825; 988; 1,160; 1,103; 1,241; 1,524. - Net international reserves (millions of U.S. dollars): 625; 779; 961; 943; 1,231; 1,508. - Current account balance (after grants, percent of GDP): -9.7; -9.4; -5.4; -9.8; 18.7; -6.3. - Exports of goods (percent change, 12-month basis in U.S. dollars): 15.2; 28.9; 44.1; 16.1; 36.4; 1.3. - Millennium Development Goals and social indicators (selected): - National household survey poverty incidence: 69.4; 54.1. - Malnutrition prevalence, weight for age (percentage of children under 5): 26.0; 26.0; 24.0; 24.0. - Primary completion rate, total (percentage of relevant age group): 24.9; 24.5; 25.4; 16.2; 22.1; 29.0. - Immunization, measles (percentage of children ages 12–23 months): 59.0; 65.0; 61.0; 71.0; 77.0; 77.0. - GNI per capita, Atlas method (current U.S dollars): 170; 140; 170; 210; 230; 270. *Source: Mozambican authorities; and Fund staff estimates and projections.* ### APPENDIX I ### APPENDIX I ### Program status and requests - The Government of Mozambique is implementing a financial and economic program supported by the Fund through its Policy Support Instrument (PSI). - The Government transmits a Memorandum of Economic and Financial Policies (MEFP) and an updated Technical Memorandum of Understanding (TMU) covering the period 2008–2010. - Implementation of the 2007 program has been satisfactory through December 2007, but: - Two quantitative assessment criteria (ACs) for end-December 2007 and one structural AC through end-February 2008 were missed. - The end-December 2007 AC for base money was missed by a narrow margin due to an unanticipated and temporary increase in money demand over the festivity season. - Adjusted Net credit to the Government (NCG) at end-December was higher by 0.8 percent of GDP mainly due to a shortfall in net foreign financing. - Net lending to public enterprises exceeded available external financing. - The structural AC related to submission to Parliament of the excise tax on alcoholic beverages, beer, and tobacco was delayed from February to May 2008 to draft a more comprehensive law. - The Government requests waivers for the non-observance of the two quantitative ACs and the structural AC and requests completion of the second review under the PSI. - The ACs for Net International Reserves (NIR) and reserve money for end-June 2008 (third review) were modified to reflect technical revisions to the monetary survey, the reduced legal reserve requirement for banks, and the revised schedule of disbursements of foreign program assistance. - An adjuster on base money related to currency issued by Bank of Mozambique was modified to account for the seasonal increase in demand for currency during the festive season in the fourth quarter. ### Macroeconomic performance (2007 and early 2008) - Real GDP growth in 2007: 7.3 percent (higher than targeted). - Core (nonfood and energy) inflation in 2007: 5.1 percent. - Average headline inflation declined from 13.2 percent in 2006 to 8.2 percent in 2007. - Bank of Mozambique (BM) reduced interest rates on its lending and deposit standing facilities in January 2008: - Lending facility: from 15.5 to 14.5 percent. - Deposit facility: from 10.5 to 10.25 percent. - End-December net international reserves (NIR) exceeded the program target despite a deceleration in traditional exports. - Real effective exchange rate appreciation: about 6.5 percent. - Spread between interbank and bank-quoted exchange rates: around 1 percent. ### Fiscal performance and priorities - Revenues were higher than targeted due to buoyant direct domestic taxes (0.4 percent of GDP). - Investment expenditures were substantially lower than envisaged: 4.6 percent of GDP. - Share of priority spending: about 62 percent (target: 65 percent) — shortfall due to low execution of donor-financed projects. - Government measures and intentions: - Strengthen monitoring of transfers of public enterprises. - Revise the public enterprise law to prevent recurrence of slippages. - May consider using the program adjustor to accommodate emergency fiscal outlays up to a maximum of about MT500 million if donor financing is inadequate. - Temporarily subsidized fuel for minibus operators at a cost of 0.15 percent of GDP following fare-related unrest. ### Tax administration and tax policy reforms - Administrative measures to improve tax collection: - Approval of regulating decrees on hiring and payment of AT staff. - Intensified staff training program. - Implementation of a performance measurement system since January 2008. - Revised Business Case (BC) for a revenue collection network (e-Tributação) elaborated in February and submitted for approval. - Study on operationalizing an “electronic one-stop-window” integrating customs and tax IT systems completed in December 2007; implementation in 2008 subject to donor funding. - Construction of the first one-stop border scheduled to start in June 2008. - At secondary borders, Customs Directorate reduced average release time from two to one hour for 70 percent of imports. - Number of taxpayers increased by 190,019—to a total number of 587,205 (nearly double the target for 2007). - New fiscal collection sites (postos de cobrança) and simplified tax declaration forms. - Audit function: 958 audits realized in 2007—over 40 percent more than targeted. - A multi-donor Tax Reform Common Fund established in December 2007 to support AT’s medium-term development 2007–2010. - Tax policy changes: - Parliament approved new income (personal and corporate) and value added tax (VAT) codes in December 2007. - New VAT code: eliminates VAT exemptions on industrial and commercial rents for industrial purposes; introduces partial exemptions for public works as a transitory solution; maintains exemptions for the sugar, vegetable oil and soap industries until 2010. ### Public Financial Management (PFM) and public sector reforms - e-Sistafe rollout and related developments: - By March 2008 e-Sistafe rolled out to 31 districts (4 more than initially envisaged) and to 10 State organs at the central level. - Ministry of Public Works (Road Program), Ministry of Agriculture (ProAgri) and Ministry of Education (Primary Education) initiated program budgeting pilots and are relating the Five Year Plan and PARPA directly to their budgets. - General Finance Inspection and the Administrative Tribunal have technical provisions to access e-Sistafe for consulting purposes. - Validation of the civil service staff database completed at a sector level and validated by the Administrative Tribunal for salaries to be paid via e-Sistafe—initially for civil servants of the Ministry of Finance—by end-April 2008 (structural benchmark). - Council of Ministers approved a decree in November 2007 assigning institutional responsibilities and updates of the civil servants database to the Ministry of Civil Service. - Revised BC on e-Tributação finalized in February 2008. - By end-2007, three donors started pilots to bring externally financed projects into the domestic and foreign currency single treasury accounts; first results expected by September 2008. - A BC on Asset Management was approved internally by Government at end-2007; due to lack of financing the tender for implementation and procurement interface to e-SISTAFE envisaged for December 2007 has not been launched. ### Monetary policy, banking sector, and financial markets - Monetary operations and policy tools: - BM started using reverse repo auctions in July 2007 to mop up excess liquidity. - In February 2008 BM began replacing deposit auctions and allowed reverse repo operations on a daily basis using 1 to 7 days, 14 days and 21 days treasury bills. - Monetary policy transparency enhanced by regular publishing of Monetary Policy Committee meeting communiqués. - Agreement between BM and treasury to shift the cost of monetary policy to the budget was finalized in November 2007. - BM reduced the legal reserve requirement (LRR) to the SADC average (excluding South Africa) from 10.15 to 9.0 percent, effective April 2008. - Monetary aggregates and credit: - On account of a temporary strong increase in money demand over the festivity season, base money exceeded its end-December AC but declined sharply early January to levels consistent with the program. - Credit to the economy grew by 17 percent and has more than doubled in the last three years. - End-December NIR exceeded the floor by US$208 million (assessment criteria). - Banking sector soundness and performance: - Capital adequacy ratio for the banking sector increased to 14.2 percent in December 2007 from 12.5 percent in 2006. - Non-performing loans decreased to 2.6 percent in 2007 from 3.3 percent in 2006. - Liquidity ratio: 56 percent (2006: 52 percent). - Return on equity in 2007: 47.7 percent. - Interest rate spreads declined from 10.9 percent in 2006 to 9.5 percent in 2007. - Banks are becoming more efficient: non-interest expenses to gross income and, to a lesser extent, personal expenses to non-interest expenses have continued to decline since 2004. - BM completed an assessment in December 2007 of IFRS impact on banks’ nonperforming loans and prudential regulations indicating negligible impact. - Regulatory compliance and reforms: - 11 out of 12 banks and 4 of 5 cooperatives are compliant with improved prudential regulations (representing 88 percent of all deposit taking financial institutions). - New regulations on assessment, classification and provisioning of credits in line with IFRS were approved in 2007. - A new chart of accounts has been prepared; BM is working with commercial banks to facilitate publication of IFRS compliant accounts in 2008. - Efforts to reduce cost of financing and deepen markets: - BM presented conclusions of a banking survey in late January on causes of higher than SADC average intermediation costs. - A working group of commercial banks mandated to identify measures to make finance more affordable and the banking sector more competitive; BM to monitor progress. ### Structural reforms and business environment - Government commitment to reduce cost of doing business and improve competitiveness: - Council of Ministers approved in February 2008 a strategic action plan (Ministry of Industry and Commerce, in consultation with World Bank) with responsibilities and timetable to streamline the business environment. - A high level Inter-Ministerial Committee on Business Reforms will monitor implementation. - Action plan is being costed and a donor mapping exercise was undertaken to improve donor coordination. - Achievements and planned actions: - Simplification of the licensing process approved in February 2008: decree transfers authority to issue licenses to “One-Stop-Shops” at provincial or district level to simplify licensing for micro and small businesses. - Study completed proposing operationalization of an “electronic one-stop-window” integrating customs and tax IT systems; ready for implementation contingent on financial support. - Strengthening of VAT refund unit: refunds granted faster and more efficiently; staff trained and guided by performance targets. - First draft of an external audit on VAT refund arrears to contractors of large infrastructure projects produced in January 2008. - Judicial reform: - Submission to Council of Ministers of the draft Integrated Strategic Plan of the Justice Sector and draft law revising principles and regulation of IPAJ—envisaged for December 2007—still pending. - Preparations underway for the first of three planned appeal courts to relieve the Supreme Court’s workload. - For the first time in 2007 the Government is employing judicial administrators to bring the judiciary closer to the public. - Courts’ backlog: 24 percent more cases closed in 2007 compared to 2006 (targeted improvement: 15 percent). ### External relations, transparency, and commitments - The Government decided to start developing actions necessary for official declaration of Government adherence to the Extractive Industry Transparency Initiative (EITI) in the course of 2008. - Mozambique’s credit rating by Standards and Poor was upgraded from BB to B+ (with stable outlook). - The Government intends to accept obligations under Article VIII, Sections 2, 3, and 4, of the Fund’s Articles of Agreement following approval of the new foreign exchange law submitted to the Assembly in September 2007 and issuance of related regulations. - The Government remains committed to a flexible exchange rate regime and will provide the Fund with information requested on progress in implementing policies and achieving program objectives. - The Government will consult the Managing Director on additional measures if necessary and in advance of revisions to PSI-contained policies. *Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding transmitted by the Government of Mozambique, March 31, 2008.* ### 15. The public sector reform program is being reinvigorated, particularly: ### 15. The public sector reform program is being reinvigorated, particularly: ### Key public sector reform actions and accountability - In December 2007, the Council of Ministers approved the main outline for the public wage policy reform recognizing the need for fiscal sustainability. - The TA and the IGF improved public sector accountability in 2007, compared with 2006, by increasing the number of internal and external audits at provincial and district levels by 92 and 67 percent respectively. - A comparison of the external audit opinions of the TA shows a significant improvement in the comprehensiveness and quality of the analysis. - Under the National Decentralized Planning and Finance Program (NDPFP) funds and planning and procurement responsibilities were transferred to province and district administrations; human resource and management capabilities need further strengthening and the overall decentralization strategy has still to be developed. ### Civil service discipline, governance planning, and anti-corruption oversight - In 2007, the Government took 2415 disciplinary measures against civil servants. - 813 civil servants were expelled from the administration. - 380 were fined. - 247 were demoted. - The law obliges that all the admissions and dismissals in public sector to be published in the Official Gazette. - In collaboration with the World Bank, a committee has defined a number of measures for implementation during 2008 and 2009 to help improve several governance indicators. - A preliminary action plan was prepared in December 2007; the final strategy including objectives and specific actions is to be completed in early April 2008. - After the abolition of the Anti-Corruption Forum in January 2008, implementation of the Anti-Corruption Strategy continues to be monitored as part of the public sector reform program by the Public Sector Interministerial Committee (Comite Interministerial da Reforma do Sector Publico—CIRESP), chaired by the Prime Minister and comprising the Ministries of Justice, Finance, Interior, Heath, Education, Planning and Development, State Administration, Trade and Industry, Science and Technology, Labor, and Civil Service. - Several fora are monitoring progress in good governance, including the Development Observatory with strong representation of civil society, and district consultative councils. ### Natural resources transparency and EITI adherence - To strengthen the management and transparency of natural resources, the Government issued regulations to the new Mining and Petroleum Fiscal Regime laws in 2008. - In March 2008, the Government decided to start developing actions aimed to meet the steps necessary for the official declaration of Government to adhere to the Extractive Industry Transparency Initiative (EITI) in the course of 2008. - For the implementation of the EITI, the Government will use already existing systems, procedures and fora. - Public consultations will be made through the Development Observatories, which include the Government and civil society, and which is to include in the future representatives of extractive industry through CTA. - Fiscal data would be published in the budget execution reports, and audited by the internal finance inspection and the comptroller general. ### Trade agreements and regional integration - In November 2007, Mozambique—together with a sub-group of SADC countries (SADC EPA) including Botswana, Lesotho and Swaziland—reached an interim Economic Partnership Agreement (EPA) with the European Union (EU). - As a result, Mozambique will continue to benefit from a contractually binding quota- and duty free access to the EU market. - From July 1, 2008, SADC EPA will open their markets on a reciprocal basis to EU exports, with the consequence of binding quota and duty free access to such exports. - Negotiations with the EU on a final EPA agreement will continue together with other SADC countries. - The Government is pursuing bilateral free trade arrangements as recommended in the Diagnostic Trade Integration Study (DTIS) and is continuing negotiations with Angola, Tanzania, and Zambia to reach trade agreements similar to the ones concluded with Zimbabwe and Malawi in 2005. ### External debt rescheduling and HIPC context - The Government recognizes the importance of reaching rescheduling agreements with all bilateral creditors in the context of the enhanced HIPC Initiative. - Negotiations are still ongoing with Bulgaria and Libya and are scheduled with Iraq and Portugal. - The Government has invited Angola, Poland and Algeria to negotiate and awaits confirmation of dates. ### Macroeconomic outlook and risks for 2008 - Only three percent of cultivated land has been affected by floods so the overall economic impact is likely to be limited. - The medium-term outlook is characterized by continued strong economic growth, single-digit inflation, and sustainable fiscal and external positions. - Prices for the main export item aluminum are expected to decline slightly while international prices for petroleum products (12 percent of total imports) are expected to remain high, which will impact the trade balance. - The external current account is targeted to widen as a result of an acceleration of aid disbursements while international reserves will remain at comfortable levels. - Risks include natural calamities, a continued surge in international oil and food prices, and spending pressure during election times. - Central to consolidating macroeconomic objectives will be the continuation of a prudent fiscal policy with strengthened management of public enterprises, and prudent monetary policy in the context of a flexible exchange rate regime. ### Objectives and policy priorities for the remainder of 2008 - Continue timely implementation of the second wave of reforms, with emphasis on the second phase of public sector reform program (2006–11) consisting of four pillars: - (i) improving service delivery to the citizen and the private sector; - (ii) strengthening the capacity of local governments, with special emphasis on the Districts (including the decentralization strategy); - (iii) professionalization of the public sector (including payroll systems, performance evaluation and wage policy); - (iv) strengthening good governance systems and the fight against corruption. - Make Mozambique’s business environment one of the most competitive in Africa to benefit from Foreign Direct Investment (FDI) and technology spillovers. - Ensure natural resources are managed transparently following the principles of the EITI and with due regard to fiscal risk. - Continue the fight against pandemics and the improvement of human and physical capital, particularly infrastructure, with help of the international community. - Continue to monitor the program with the existing multi-disciplinary committee, especially through reinforced coordination between the BM and the MF. ### 2008 budget and fiscal measures - The 2008 budget includes an acceleration of disbursements of foreign aid by about 1 percent of GDP and an associated increase in priority spending focused towards achieving the PARPA II targets and the Millennium Development Goals (MDGs) including sufficient counterpart funds to ensure smooth execution of donor-financed projects. - Authorities will analyze causes of relatively low disbursement in 2007 of committed project financing and special programs to accelerate aid disbursements in 2008. - Authorities will encourage donors to shift foreign financed projects and special programs onto the single Treasury account (CUT). - The budget envisages no recourse to domestic bank financing. - The Government continues its efforts to increase revenues by 0.5 percent of GDP while losses related to trade liberalization (0.4 percent of GDP) will be mitigated by bringing a number of off-budget line items on budget. - Expected revenue measures and sources (exact contributions to revenue increase): - revisions to the personal income and corporate income tax codes approved by the Parliament (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 (0.1 percent of GDP); - increase in the number of tax payers by 100,000. - Non tax revenues are expected to increase on account of higher concession fees from Hidroeléctrica de Cahora Bassa (HCB). - The MF will continue to improve its weekly and monthly cash-flow projections and communicate them to the BM on a weekly basis. - In line with the memorandum of November 2007 between the MF and the BM the cost of monetary policy will be included in the budget starting in 2009. ### Expenditure priorities and fiscal safeguards - The wage bill will reach 8.3 percent of GDP and includes hiring of 12,000 teachers, 5,000 health workers, and reinforcement of security forces. - Subsidies and flood and cyclone related costs will be accommodated through the budget’s contingency line. - An adjuster of 500 million Meticais for natural disasters could help accommodate additional spending. - The share of spending on priority sectors (above 65 percent), particularly education, health, and infrastructure will be closely monitored. - A study, with technical assistance support, will be undertaken to strengthen monitoring of net lending to public enterprises and to serve as basis for drafting the relevant law by December 2008 (structural benchmark), which will include the requirement for monthly financial reporting to the MF. - The 2008 budget identifies 0.5 percent of GDP contingent priority expenditures that will be executed if revenues or program aid is higher than expected. - Government intends to finalize an evaluation of its national procurement system using the OECD/DAC methodology by May 2008 and define measures in the second half of 2008 based on this evaluation. ### Tax administration, arrears, and reform actions - The Government will continue to improve the efficiency of the tax system by implementing its medium-term tax policy reform program. - Preparations for two new laws with tax policy measures to streamline and simplify the tax system for small and medium sized enterprises, and rationalize the code of tax benefits. - The AT will: - start the implementation of the approved IT Master Plan (PDTI) in collaboration with UTRAFE; - implement a detailed performance indicator framework using a modern management information system to measure performance of the tax administration’s core functions by September 2008; - develop and implement a tax collection system through banks; - develop and implement an electronic filing and payment system starting with the large tax payers; - conduct 700 tax audits. - The final report on the amount of arrears on VAT refund due to contractors of large infrastructure projects is scheduled for approval by the MF in May 2008. - Based on this audit, the Government will define a repayment schedule by August 2008 to be included in the 2009 budget, and if necessary the budgets thereafter. - Government will seek support to ensure that VAT charged on supplies of projects is included in the final price of a contract and will strengthen coordination mechanisms between relevant departments. ### e-SISTAFE implementation and related benchmarks - Authorities committed to fully implementing the first phase of the e-SISTAFE reform (budget execution and accounting functionality) and seek timely donor financing of the third phase. - Specific measures and deadlines: - Complete the sectional classification by May 2008. - Issue a ministerial decree for the multi-currency CUT by April 2008 to allow transactions through e-SISTAFE to accounts abroad by January 2009. - Clean and update the list of e-SISTAFE operators by September 2008 and use the new list by January, 2009. - Finalize the system for program budgeting using e-SISTAFE by end-June 2008. - Salaries of civil servants of four line ministries and three central government institutions will be paid via e-SISTAFE by end-June 2008. - Salaries of a total of twelve line ministries and four central government institutions by end-September 2008. - Remaining ministries and central institutions by June 2009. - Based on roll-out experience in the first 31 districts, a list of additional district and municipalities will be defined by June 2008 (structural benchmark). - The census of pensioners will be made by June 2008 and database finalized by end-September 2008 so pension payments via e-SISTAFE start in January 2009 for pensioners with a bank account; remainder to be paid through e-SISTAFE starting in July 2009. - By September 2008, concept of program budgeting will be rolled out to cover ministries of public works, agriculture and education and culture, health and transport and communications to be ready for the 2009 budget. - Government intends to integrate all ministries, State organs and central government institutions in multi-year program budgets for the 2010 budget. - UTRAFE will facilitate that the General Finance Inspection and the Administrative Tribunal can use e-SISTAFE for consulting purposes—and if necessary with additional reporting facilities—by June 2008. - Consistent with the approved revenue collection network BC (e-Tributação), implementation of a pilot project for the personal income tax (IRPS) will start in January 2009, hopefully with donor financing, and will subsequently be expanded to all other taxes in the course of 2009. ### Monetary policy, central bank governance, and financial sector reforms - The BM will continue to target base money with a view to achieving an average inflation of 7-8 percent in 2008. - The BM will continue to use foreign exchange sales to sterilize liquidity to avoid a build-up in domestic debt and crowding-out of the private sector. - With Fund technical assistance the BM will move towards a monetary framework that better reflects determinants of price stability, fine-tune monetary operations, improve liquidity management, and deepen financial markets. - The BM will gradually increase the use of reverse repo operations and starting in June 2008 introduce repo operations, and study the possibility of introducing repurchase agreements. - By June 2008, the Meticalnet will be adapted to allow for outright operations for the secondary market (structural benchmark for June 2008). - Measures to buttress BM internal audit with Fund technical assistance: - BM will conduct an external quality assurance review of its internal audit function in accordance with international standards. - By July 2008, the BM will adopt an internal audit charter and commence periodic reporting to the Executive Board on the implementation of audit recommendations (structural benchmark). - A proposal of a new central bank law will be submitted to the Council of Ministers as soon as a SADC central bank model law has been approved; draft law will reflect international best practice of the audit committee, including composition. - Pending approval of the new central bank law, the Audit Board will assume the role of an audit committee. By end-June 2008 (structural AC), the terms of reference of the existing audit board will be simplified to focus on accountability, transparency, internal control oversight, financial reporting, external and internal audits, and systems of internal control. - Control over reserve management will be enhanced by September 2008 through installation of physical access controls in SWIFT operations, recording of dealer communications regarding trading activities, and introduction of tiered financial limits for authorization of SWIFT transactions. - The BM is committed to publishing its audited financial statements prepared in accordance with IFRS for the year ending December 31, 2008, by June 30, 2009. - The MF and the BM will discuss issues arising from the BM’s holding of government securities issued at non-market terms. ### Accounting standards, supervision capacity, and prudential frameworks - Government aims at extending IFRS to the corporate sector and for large enterprises in January 2010 and by 2011 for medium size companies. - A firm has been selected to prepare the draft IFRS Strategic Implementation Plan by the end-April 2008. - The final study, including the pertinent legislation will be approved in 2009. - The BM will strengthen human resource capacity of its Banking Supervision Department (BSD) to update the regulatory framework, update internal tools for inspectors, provide training, research banking supervision issues, prepare and monitor Financial Soundness Indicators, and review supervision manuals. - The BSD will review by June 2008 the role assigned to external auditors of banks and issue regulations that give the BM access to audit reports, working papers, contracts and other documents produced by external auditors related to audited institutions. - The BSD intends by December 2008 to: - develop a framework for assessing market and operational risks; - review banks’ rating system (CAMEL) as a function of the banks’ risks; - create an information system within the BM intranet for managerial information of banks and financial system in the interest of supervision; - design a plan for on-site inspections on the basis of banks’ risk profile. *Source: _cr08220 - 15. The public sector reform program is being reinvigorated, particularly:* ### 34. The Government is committed to supporting a sound expansion of the non-bank ### The Government is committed to supporting a sound expansion of the non-bank financial sector ### Financial sector reform and microfinance - The BM will continue to license and supervise microfinance deposit-taking institutions to facilitate enhanced access to finance by rural households and SMEs. - Examiners of the BSD received training and are preparing two pilot onsite inspections in June 2008; results will be used to fine-tune the draft prudential regulation to be issued by end 2008 and for designing a Microfinance Supervision Manual. - The World Bank Financial Sector Technical Assistance Project (FSTAP), IFAD-supported Fundo de Apoio à Reabilitação Económica (FARE), and the Rural Finance Support Program (RFSP) will support efforts to improve access to finance, especially in rural areas. - Following adoption of a new law on social protection, authorities intend to strengthen social security and the supplementary pension system: - Draft reports on an actuarial study and on a new investment management policy were finalized in early March 2008. - The INSS is preparing an action plan that will pay due regard to fiscal sustainability and will be ready by June 2008. - Insurance sector reforms: - Review of the Insurance Law will be finalized to bring it in line with international best practices. - Revised prudential and solvency requirements for Mozambican insurers are being developed. - New IFRS-compliant Chart of Accounts for insurers will be designed. ### Foreign exchange system and Article VIII obligations - A new foreign exchange law, taking into account stakeholder and Fund comments, was submitted to the Assembly in September 2007. - Following approval of the new law and implementing regulations, the authorities intend to accept their obligations under Article VIII sections 2, 3, and 4 of the Fund’s Articles of Agreement. - The 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. ### Ministry of Finance technical capacity and public debt management (remainder of 2008) The MF will: - (i) continue restructuring the Public Debt Unit and strengthen procedures and controls with the help of a resident public debt advisor, under the FSTAP project; - (ii) finalize consolidation and reconciliation of the debt database for all public debt in accordance with Commonwealth standards; - (iii) strengthen information analysis and reporting with the help of an IT consultant under the FSTAP project; - (iv) prepare regular debt sustainability analysis; and - (v) improve Treasury cash management policies and procedures with technical support of the World Bank. ### Reducing cost of doing business — strategy and near-term actions - Objective: make Mozambique’s business environment the most competitive in SADC by 2015 (strategy approved February 2008; supervised by a high-level Inter-Ministerial Committee). - Actions envisaged for remainder of 2008: - Submit a decree to the Council of Ministers in April 2008 to consolidate business inspections. - Submit a draft insolvency law for the corporate sector to the Council of Ministers by end June 2008 to simplify business closing and increase recovery rates. - Ensure sufficient provincial capacity to administer licenses; expand sectors covered under “One-Stop-Shops” and review municipal licensing competencies. - Revoke requirement for bank deposits when opening a company, and reduce required minimum capital to start up the business. - Implement the new insolvency law for the corporate sector once approved by Parliament with reduced legal intervention and simplified business recovery procedures. - Implement the electronic one-stop window to facilitate trading across borders. - Improve and simplify the system of VAT refunds through increased compliance and reduced VAT-refund processing times. - Initiate implementation of the SME strategy. - Key actions envisaged for 2009: - Consolidate progress in streamlining and reducing licenses across sectors and implement an inspection approach focused on prevention and education. - Consolidate progress in facilitating trading across borders so that by end-2009 Mozambique should be one of the most efficient within SADC in clearance of goods for imports and exports; this will require reducing the number of documents filled out by at least half, implementing the one-stop border post with South Africa, and revitalizing the Development Corridors concept. - Simplify tax filing: provide electronic filing of taxes and simplify forms to reduce time required for tax filing. - Property Registration: amend relevant legislation to speed up registration by improving communication among government agencies and developing an electronic database for the real estate registry. ### Megaprojects: fiscal risk management, accountability, and transparency (short-term 2008–2009) The Government intends to: - Strengthen monitoring of megaprojects by developing data gathering and analytical and forecasting capabilities at the Ministry of Finance in close coordination with other interested ministries and the BM. - Enhance MF oversight and control by ensuring formal MF agreement with the fiscal regime of new projects at appropriate negotiation stages and before submission to the Council of Ministers; adopt an appropriate legal instrument before end-May 2008. - Strictly implement the mining and petroleum fiscal regime and related regulations and model contracts for all new projects. - Continue to adopt nonrecourse financing clauses in future megaprojects. - Draft a Public-Private Partnership law in 2009 applicable to megaprojects. ### Public sector reform and governance - Decentralization: - A decentralization strategy is being prepared with World Bank and other partners and will be approved by the Council of Ministers by end-2008. - The strategy will define legal, regulatory, and institutional frameworks for revenue raising and spending responsibilities of subnational units and monitoring of subnational fiscal operations; sequencing will consider administrative capacity and need to maintain fiscal control and fiscal sustainability, and should align with the NDFPF. - Wage policy: - In coordination with development partners and based on a recent census of civil servants, the Government is preparing a reform of the wage policy that will pay due regard to fiscal sustainability. - PETROMOC: - A new restructuring plan of PETROMOC will be submitted to the Council of Ministers by May 2008 to improve operational and financial performance and ring-fence commercial activities. ### Justice sector reforms and judiciary strengthening - Approve the Integrated Strategic Plan of the Justice Sector by May 2008 and mobilize donor funding for implementation. - Submit the law revising principles and regulation of the Institute for the Provision of Judicial Assistance (IPAJ) by September 2008. - Submit revision of the Law of the Community Tribunals to the Council of Ministers by 2009. - Submit the Penal Procedures Code to the Council of Ministers before end-June 2008; once approved, submit a new Penal Code by end-December 2008. - Following intensified training in 2008, the number of magistrates is to quadruple to 100, starting in 2009. - Gradually open the Appeal Courts, out of a total of three, starting August 2008 to relieve the Supreme Court’s work program. ### Program monitoring and performance criteria - Semiannual quantitative assessment criteria for end-June 2008 and end-December 2008 and indicative targets for end-September 2008 will be used to evaluate program implementation for 2008; these are shown in Table 1 of the memorandum, with definitions and explanations in the annexed Technical Memorandum of Understanding (TMU). - The Government understands that the completion of the third review is contingent upon observance of the assessment criteria for end-June 2008 set out in Tables 1 and 3; the third review is expected to take place before end-December 2008. - In the third review, particular attention will be paid to: implementation of measures to broaden the tax base, implementation of e-SISTAFE, improvement of overall fiscal risk assessment and reporting, 2008 budget execution, the 2009 budget, monetary and financial sector reform, reduction in the cost of doing business, and management of natural resources. ### Selected monitoring definitions and reporting (TMU, March 28, 2008) - Purpose: describe concepts and definitions used in monitoring the Policy Support Instrument (PSI) program, including: - 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 maturity of more than one year; - short-term external public debt outstanding; - external payments arrears; and - foreign program assistance and external debt service. - Net claims on the central government (NCG) by the banking system: - Defined as difference between outstanding amount of bank credits to the central government and the 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 comprise bank loans and advances to the government and holdings of government securities and promissory notes. - NCG calculated based on balance sheets of the monetary authority and commercial banks as per the monetary survey. - Limits on change in NCG for the 2008 program will be cumulative from end-December 2007. - Government scope: - Encompasses all institutions whose revenue and expenditure are included in the state budget (Orçamento do Estado): central government ministries, agencies, and the administration of 11 provinces. - Local governments (33 municipalities or autarquias) are not included because they are independent, though bulk of their revenue is registered in the state budget as transfers to local governments. - Government revenue: - Includes all receipts of the Domestic Tax Administration (Administração Tributária de Impostos or DGI), the National Directorate of Customs (Direcção Nacional de Alfândegas, 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 (Direcção Nacional do Património do Estado) and unrealized profits transferred by the central bank to the treasury will not be considered as revenue and will be accounted for as other domestic financing. - For program monitoring, revenue is considered collected when received by the DGI from private agents or other government collecting agencies, in cash or checks, or through transfers into a DGI bank account. - An indicative target consisting of semiannual floors on the resources in the government’s savings fund abroad has been added to monitor use of proceeds from the signing fee for coal exploration. - Money supply: - Base money is defined as sum of currency issued by the Bank of Mozambique (BM) and commercial banks’ deposits in the BM (including statutory required reserves and excess reserves). - Base money ceilings for 2008 will be the total stock of base money outstanding at end-March 2008, end-June 2008, end-September 2008 and end-December 2008, and will be monitored by the monetary authority and provided to the IMF by the BM. - Net international reserves (NIR): - Defined as 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 otherwise encumbered (assets not readily available). - Reserve liabilities include: (a) all short-term foreign exchange liabilities to nonresidents with original maturity of up to and including one year; and (b) all liabilities to the IMF. - Publication and market rates: - The Bank of Mozambique will publish the exchange rates quoted by commercial banks on average as the market rates. - New nonconcessional external debt contracted or guaranteed by the central government or the Bank of Mozambique with maturity of more than one year: - The term “debt” has the meaning set forth in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000. - Government debt is outstanding debt owed or guaranteed by the central government or the Bank of Mozambique (does not include debt of any political subdivision or government-owned entity with separate legal personality that is not otherwise owed or guaranteed by the central government). *Source: _cr08220 - 34. The Government is committed to supporting a sound expansion of the non-bank* ### 11. The central government will limit contracting or guaranteeing external debt up to ### _cr08220 - 11. The central government will limit contracting or guaranteeing external debt up to ### External debt limit and maturities - The central government will limit contracting or guaranteeing external debt up to US$5 million in 2008 with original maturity of one year or more with a grant element of less than 35 percent, calculated using currency-specific discount rates based on the Organization for Economic Cooperation and Development (OECD) commercial interest reference rates in accordance with the 2008 Budget Law. - The central government will not contract or guarantee external debt with original maturity of less than one year. - Excluded from the prohibition on short-term debt are short-term, import-related trade credits. ### Assessment criteria and scope - The assessment criterion applies not only to debt as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. - These assessment criteria will be assessed on a continuous basis. - The government undertakes not to incur payments arrears on external debt owed or guaranteed by the central government, with the exception of external payments arrears arising from government debt that is being renegotiated with creditors, including Paris Club creditors. This assessment criterion will be assessed on a continuous basis. ### Definitions relevant to program monitoring - Foreign program assistance: defined as grants and loans received by the Ministry of Finance through Bank of Mozambique accounts excluding those related to projects (Table 1). - Actual external debt-service payments: defined as cash payments on external debt-service obligations of the government and central bank, including obligations to Paris Club and other bilateral creditors rescheduled under enhanced HIPC Initiative completion point terms, multilateral creditors, and private creditors, but excluding obligations to the IMF (Table 1). ### Adjusters to quantitative targets - Net international reserves (NIR) floors: - 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. - 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 the program baseline (Table 1). - Will be adjusted downward/upward for any revision made to the end-year figures corresponding to the previous year. - Will be adjusted upward for the full amount of any external privatization proceeds in excess of those envisaged in the program, unless these proceeds are deposited in the government’s savings account abroad. If deposited abroad, the indicative targets on the balance in this account will be adjusted upward for the full amount of the higher than envisaged proceeds, net of any costs related to the privatizations, including severance payments. - Will be adjusted equivalently downward up to a maximum of US$50 million per annum by the amount that the projected fuel import bill is higher due to a rise in the average global oil price (average petroleum spot price of West Texas Intermediate, U.K. Brent, and Dubai Fateh crude). This adjustment will be equal to the difference between the realized and the projected average global oil price, multiplied by the volume of total fuel imports projected for each quarter (Table 2). - Net claims on the central government (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. - 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). - Will be adjusted downward for the full amount of any privatization proceeds in excess of those envisaged in the program, unless deposited in the government’s savings account abroad. - Will be adjusted downward (upward) for any increase (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 be used to finance greater “priority” spending identified in the budget. - Disaster-related flexibility: - The NCG ceiling for 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 adjustments: - The base money ceiling will be adjusted equivalently upward up to a maximum of MT 500 million at end-March 2008, end-June 2008, end-September 2008, and to a maximum of MT 1000 million at end-December 2008 to the extent that the outstanding stock of currency issued by the BM exceeds those projected in Table 3. - The maximum at end-December 2008 is higher by MT 500 million because of the seasonal increase in the demand for currency during the festive season in the fourth quarter of the year. ### Data reporting and transparency requirements - Authorities will provide weekly updates of the daily data set out in Table 3 as well as the weekly data set out in Table 4 of the TMU dated May 26, 2005. - Monthly updates will be provided of the foreign exchange cash flow of the Bank of Mozambique. - The government will continue to provide Fund staff with monthly government revenues (in detail according to the fiscal table), with a lag not exceeding one month. - The government will continue to publish and provide Fund staff with the quarterly budget execution reports with a time lag not exceeding 45 days. - The government will provide monthly information on the balance of its savings account abroad and will start developing and providing information on domestic arrears on a quarterly basis. - 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. ### Selected table figures (as presented in source tables) - Net foreign program assistance per period (Prog, Act, Prog, Rev. Prog. entries across periods): 9,677; 9,340; 4,751; 6,466; 2,536; 1,856; 1,401; 38; 2,415; 1,106; 11,102; 9,465. - Foreign program assistance (Prog, Act, ...): 10,179; 10,591; 4,878; 6,756; 2,673; 2,419; 1,531; 335; 2,550; 1,359; 11,631; 10,870. - Program grants (selected entries): 7,519; 8,013; 3,927; 5,241; 2,673; 2,419; 1,514; 320; 872; 425; 8,985; 8,405. - Program loans (selected entries): 2,661; 2,577; 951; 1,515; 0; 0; 17; 16; 1,678; 934; 2,646; 2,465. - External debt service (selected entries): 502; 1,250; 127; 290; 137; 563; 130; 298; 136; 253; 529; 1,404. - Fuel import bill per period (millions of US dollars): 81; 100; 95; 109; 124; 164; 146; 150; 90; 103; 90; 103. - Forecast oil price (US$ per barrel) (table entries): 648; 87; 78; 77; 58; 77; 58; 67; 48; 57; 48; 5. - Volume of fuel imports per period (metric tons) (selected entries): 122,376; 126,119; 123,673; 125,467; 163,757; 194,512; 199,386; 183,274; 120,686; 133,759; 120,686; 133,759. - Outstanding stock of currency, end of period (selected entries, Millions of MT): 10,133; 10,942; 8,924; 9,055; 10,310; 10,772; 10,358; 10,854; 11,486; 11,659; 11,486; 11,659. *Prepared by the African Department (In consultation with other Departments) May 9, 2008* ### Appendix II ### Appendix II — Mozambique: World Bank- IMF Joint Management Action Plan (As of April 22, 2008) ### A. Mutual information on relevant work program in next 12 months - Bank work program: - CEM on export competitiveness and regional integration — February-May 2008; Expected delivery: Nov-08 - PRSC5 supporting government reforms program in PFM, governance and economic development reforms — Expected delivery: Nov-08 - FSTAP project support to financial sector reforms — Timing: Nov-08; Expected delivery: ongoing - ESW on inter-governmental fiscal architecture (for decentralization) — Expected delivery: Sep-08 - Fund work program: - Third Review of the PSI — Timing: Oct-08; Expected delivery: Dec-08 - Follow up mission on Tax Administration — Timing: Apr-08; Expected delivery: May-08 - Inspection mission on PFM — Timing: Aug-08; Expected delivery: Sep-08 - Follow up mission on Monetary Policy and Operations, Banking Supervision and Accounting — Timing: Sep-08; Expected delivery: Nov-08 ### B. Requests for work program inputs with summary justification - Bank request to the Fund: - Updated Macro Framework data, and PSI reviews Staff Report on macro developments — PSI reviews: April and October 20 - Board Chairman Summing up from PSI review discussion (or Assessment letter) not older than six-months — Expected delivery: Sep-08 - Fund request to the Bank: - Updates on advancing structural reforms: procurement, decentralization, business environment, financial sector — Timing: March and Septembe 2008 ### C. Agreements on joint products and missions - Joint products and timing: - Policy advice on subsidies (food and energy) — May - September 2008; Expected delivery: Dec-08 - Policy advice on improving the domestic impact of large investment projects — February - April - May 2008; Expected delivery: May-08 - Policy advice on Public Sector Salary Reforms (incl. pensions) — ongoing; Expected delivery: Oct-08 - FSAP — Fall 2008 (exact time to be determined) - PFM: update work plan for 2009-11 in light of findings from PEFA and ROSC — Meeting in May 2008; Expected delivery: Aug-08 - PFM: continue to monitor consolidation and expansion of e-SISTAFE — ongoing; Expected delivery: ongoing - DSA — Oct-08; Expected delivery: Dec-08 - Support to EITI membership, and scoping report on EITI++ — ongoing; Expected delivery: Aug-08 *Mozambique: World Bank-IMF Joint Management Action Plan (As of April 22, 2008)* ### Appendix III — Mozambique: Statistical Issues ### Overall assessment and data dissemination - Data provision to the Fund for surveillance purposes is adequate, but shortcomings hinder policy formulation and monitoring of economic development. - Continued high reliance on external funding raises concerns about the sustainability of the National Institute of Statistics (INE) programs. - Mozambique participates in the IMF’s General Data Dissemination System since November 2003; metadata and plans posted on the Dissemination Standards Bulletin Board need updating. - A successor project (GDDS2) launched in 2006; Mozambique is among six countries participating in the external sector module with a three-year work plan to improve BOP and IIP statistics, focusing on private sector cross border financial flows and stocks. ### 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 at constant prices covering the 2000-2007 period and a revised annual GDP series for 1991-2006, with 2003 as the new base year. - A March-April 2008 STA mission advised on improvements to advance quarterly national accounts compilation at current prices, possibly starting in mid-2009. - 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; compiling more comprehensive and timely foreign trade data based on improved classification systems. ### Prices and labor market - CPI developments: - A 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 provided under the GDDS Regional Project for Lusophone African Countries; last mission (June 11–July 21, 2006) noted advances in COICOP classification and strengthened human resources. - Outstanding issues: price collection procedures at the provincial level, imputation methods, and possible inconsistencies in the overlap between new and old series. - Labor market data: - Insufficient sectoral labor market and employment data with limited coverage. - A one-year labor market survey launched in October 2004 by INE in collaboration with the Labor Ministry. ### Monetary statistics - September 2004 STA mission prepared a work plan for implementing the Monetary and Financial Statistics Manual (MFSM) and developing an integrated monetary database (IMD) to meet BM, AFR, and STA needs. - The BM’s chart of accounts was not fully aligned with the MFSM regarding sectorization and the breakdown between local and foreign-currency-denominated accounts. - Recommendations included improving classification and valuation of some financial instruments, estimating full instrument and sectoral breakdowns, 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 are published in the IFS Supplement. - A follow-up monetary and financial statistics mission in November 2007 assisted in completing the IMD development; the IMD is now fully operational, allowing accurate and timely monthly monetary statistics and reducing BM’s reporting burden. ### External sector statistics - With STA assistance (GDDS regional project), BM has made significant progress toward compiling and disseminating BOP and IIP statistics aligned with BPM5. - BM has an adequate institutional framework and has implemented many recommendations from four technical assistance missions since mid-2003. - Consolidation requirements include: approval of the Foreign Exchange Law (aligning residency definition with BPM5), sustained BOP training, and completion of computerization of the BOP compilation system. - Major improvements in basic data sources: - distribution of new BOP surveys to more than 35 enterprises, including mega-projects; - Customs program improvements for external trade data quality; - improved reports on transportation services, foreign investment, and private loans by BM; - improved reports on external public debt by the Ministry of Finance; - improved banks’ reports on foreign currency transactions. - A foreign trade statistics panel was established with representatives from Customs, INE, and BM to improve goods data collection, timeliness, and quality. - Remaining concerns: - coverage and quality of enterprise survey data; - quality of external trade data, especially price and volume indices; - coverage, timing of recording, and classification of foreign investment and private loans; - completeness of Reserves Template data and reconciliation with reserve component of the balance of payments; - compiling IIP using the same sources as BOP. - In 2007, BM started to compile and report comprehensive IIP data to STA; previously only partial IIP data were reported and published in the 2005 Balance of Payments Statistics Yearbook. ### Government finance statistics - Technical assistance under the GDDS Project for Lusophone countries provided in recent years. - July 2005 mission found significant efforts to improve fiscal data but serious weaknesses remain. - Creation of a statistical unit in the 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 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). ### Table of Common Indicators Required for Surveillance (As of April 22, 2008) — Selected items and frequency notes - Exchange Rates — Date of latest observation: Mar. 2008; Date received: Mar. 2008; Frequency of Data: D; Frequency of Reporting: W; Frequency of publication: D - Reserve/Base Money — Date of latest observation: Jan. 2008; Date received: Mar. 2008; Frequency: M; Reporting: M; Publication: M - Broad Money — Date of latest observation: Jan. 2008; Date received: Mar. 2008; Frequency: M; Reporting: M; Publication: M - Central Bank Balance Sheet — Date of latest observation: Jan. 2008; Date received: Mar. 2008; Frequency: M; Reporting: M; Publication: M - Consumer Price Index — Date of latest observation: Mar. 2008; Date received: Apr. 2008; Frequency: M; Reporting: M; Publication: M - External Current Account Balance — Date of latest observation: Dec. 2007; Date received: Mar. 2008; Frequency: Q; Frequency of Reporting: I; Frequency of publication: I - GDP/GNP — Date of latest observation: 2006; Date received: Feb. 2007; Frequency: A; Frequency of Reporting: I; Frequency of publication: I - Gross External Debt — Date of latest observation: Dec. 2007; Date received: Mar. 2008; Frequency: A; Frequency of Reporting: I; Frequency of publication: I - Notes on data quality assessments reflect the ROSC assessment published in March 2003 based on the June 2002 mission; no changes were proposed by the May 2005 update mission. ### Statement by the IMF Staff Representative (May 28, 2008) — Key updates and observations - Measures implemented since the staff report: - The draft law on excise taxes for alcoholic beverages and tobacco was submitted to Parliament in mid-May (end-February 2008 structural assessment criterion). - Civil service salaries in the Ministry of Finance were paid through e-Sistafe in April (April 2008 structural benchmark). - The ministerial decree for the multi-currency single treasury account (CUT) was issued in early May. - The draft strategic plan of the justice sector has been finalized and will be presented to the Council of Ministers by end-May. - Preliminary data, subject to revision, suggest authorities met indicative program targets for end-March on reserve money and net international reserves by comfortable margins. - Monthly inflation has decelerated in the last three months, mainly because of weakening food price inflation in line with seasonality and the program. - Government and development partners met on May 19, 2008 to discuss policy responses to high world oil and food prices; broad agreement: - avoid extensive interventions, including sweeping price subsidies and tariff reductions; - favor well-targeted support efforts, including well-targeted subsidies and higher safety-net cash-transfers; - pursue measures to raise agricultural production. ### IMF Press Release No. 08/123 (May 29, 2008) — Completion of Second Review under PSI - The Executive Board completed the second review of Mozambique's performance under a three-year PSI and granted waivers of nonobservance of: - two end-December 2007 quantitative assessment criteria pertaining to base money and net credit to the Government; - one structural assessment criterion on a draft law on excise tax on alcoholic beverages. - The PSI was approved on June 18, 2007 to support economic reform efforts, consolidate macroeconomic stability, and achieve sustained economic growth and poverty reduction through prudent macroeconomic policies and structural reforms, aligned with PARPA II. - Board statement highlights: - Overall macroeconomic performance under the PSI has been satisfactory. - Prudent fiscal and monetary policies in a flexible exchange rate regime; commitment to avoid monetary financing of the budget. - Economic growth remains resilient; average annual inflation has decelerated despite high oil and food import prices. - Commendation for progress in tax administration and public financial management; e-SISTAFE implementation progressed well but timely donor support is important. - Need to address causes of 2007 shortfalls in aid disbursements to allow scaling-up of aid in 2008. - Importance of well-targeted and fiscally sustainable measures to mitigate social impact of further increases in oil and food prices, and resisting pressures for unsustainable additional spending related to the elections. - Civil service wage and pension reforms must not compromise fiscal sustainability. - Bank of Mozambique continued strengthening monetary policy framework and internal audit; Treasury’s weekly cash-flow projections to the central bank improve liquidity management. - Priority reforms: stimulate private sector development, improve management of natural resources, implement medium-term strategic plan to improve business environment, enhance Ministry of Finance oversight of fiscal terms of new megaproject agreements, adherence to EITI to improve transparency, and complete government governance strategy in a timely manner. *Source: _cr08220 - Appendix II and Appendix III (Mozambique), As of April 22, 2008; IMF staff statement and Press Release No. 08/123 (May 29, 2008).* ### 1. The Mozambican authorities appreciate the continued support by the Fund and the ### The Mozambican authorities appreciate the continued support by the Fund and the valuable and constructive policy dialogue and advice given by staff ### Performance under the Program - Authorities reaffirm commitment to pursuing prudent policies under the PSI and request completion of the second review. - 2007 program implementation described as satisfactory overall, but: - Two quantitative assessment criteria (ACs) for end-December 2007 and one structural AC through end-February 2008 were missed. - End-December 2007 AC for base money missed narrowly because of an unanticipated and temporary increase in money demand over the end-year festive season. - Adjusted Net Credit to the Government (NCG) at end-December 2007 was higher by 0.8 percent of GDP mainly due to shortfall on foreign financing for on-lending to public enterprises and deficiencies in cash-flow management. - Government responses and requests: - Strengthen monitoring of transfers of public enterprises and revise public enterprise law to avoid recurrences. - Authorities request modifications to the quantitative assessment criteria and the adjuster on base money (reflected in the Technical Memorandum of Understanding attached to the MEFP). - Structural AC on excise tax on alcoholic beverages, beer, and tobacco postponed from February to May 2008 to allow drafting of more comprehensive legislation; draft law submitted to Parliament. ### Recent Economic Developments - Growth and inflation: - Real GDP growth in 2007 was higher than targeted. - Core (nonfood and energy) inflation was 5.1 percent. - Average headline inflation declined from 13.2 percent in 2006 to 8.2 percent in 2007, somewhat higher than programmed due to rises in international food and oil prices. - Fiscal performance: - Revenues were higher than targeted due to buoyant direct domestic taxes (0.4 percent of GDP). - Current expenditures in line with program; investment expenditures substantially lower than envisaged because of significant shortfall in disbursement of external financing. - Share of priority spending below the 65 percent target due to low execution rate of donor-financed projects. - Adjusted NCG at end-December higher by 0.8 percent of GDP mainly due to shortfall in net foreign financing. - Monetary and reserves: - At end-December 2007, net international reserves exceeded the program target despite deceleration in traditional exports and higher sales of foreign exchange. - Base money exceeded end-December AC due to festive season money demand spike but declined sharply in early January 2008 to program-consistent levels. - In January 2008, Banco de Moçambique (BM) reduced interest rates on its lending and deposit standing facilities and reduced the legal reserve requirement to the SADC average (excluding South Africa) effective April 2008. - BM began using reverse repo auctions in July 2007 to mop up excess liquidity. - Monetary Policy Committee communiqués and regulations published on BM’s website to enhance transparency and credibility. - Structural reform progress: - Council of Ministers approved a strategic action plan in February 2008 (prepared in consultation with the World Bank) to streamline the business environment; financial implications under preparation and donor coordination being improved. - Judicial reform progress slower than envisaged; submission to Council of Ministers of draft Integrated Strategic Plan of the Justice Sector and draft law revising principles and regulation of the Institute for the Provision of Judicial Assistance (IPAJ) is pending. - Significant progress in reducing courts’ backlog of cases in 2007. - Steps initiated for official declaration of adherence to the Extractive Industry Transparency Initiative (EITI) in 2008. - Cabinet met in April to discuss adoption of legal instrument (coordinated by Minister of Finance) to ensure megaprojects follow the fiscal regime before Cabinet approval. ### Outlook and Policies for the Remainder of 2008 and the Medium Term - Policy priorities: - Consolidate macroeconomic stability and sustain strong broad-based growth via a second generation of reforms focused on public sector reform, improving the business environment, and transparent management of natural resources. - Develop human capital and address pandemics such as HIV/AIDS and other diseases. - 2008 outlook and risks: - Floods had severe humanitarian impact but only 3 percent of cultivated land affected; overall economic impact likely limited. - Economic expansion in 2008 expected to remain robust across most sectors, aided by macroeconomic stability and continued donor support. - Anticipated benefits from a second wave of megaprojects in coal and gas. - Policies aimed at avoiding a dual economy by prioritizing the business environment to strengthen small and medium-sized enterprises for employment generation and improved living standards. - External current account deficit targeted to widen because of an acceleration of aid disbursements; international reserves expected to remain at comfortable levels. - Risks include natural calamities, continued surge in international oil and food prices, and spending pressure during the election period. - Social concerns: - Poverty declining but social inequalities remain a concern; authorities prioritize protection of vulnerable groups and strengthening monitoring of poverty. - Continued development of mechanisms for public resource allocation in accordance with PARPA II priorities. ### Fiscal Policy - Fiscal stance and revenue measures: - Budget envisages no recourse to domestic bank financing. - Government efforts to increase revenues by 0.5 percent of GDP in 2008 via improvements in revenue administration and new tax policy measures: revisions to personal income and corporate income tax codes, reduction in VAT exemptions, collection of tax arrears, continued adjustment of fuel taxes, and increase in number of taxpayers by 100,000. - Non-tax revenues expected to increase due to higher concession fees from Hidroeléctrica de Cahora Bassa (HCB). - Losses from trade liberalization to be mitigated by bringing a number of off-budget revenue items onto the budget. - Expenditures and priorities: - Expenditures account for election-related costs and subsidies for minibus fares. - Wage bill will reach 8.3 percent of GDP and includes hiring of additional teachers, health workers, and reinforcement of security forces. - To strengthen monitoring of net lending to public enterprises, a study with technical assistance will be undertaken to serve as basis for drafting by December 2008 the relevant law requiring monthly financial reporting to the Ministry of Finance (MF). - Government committed to continue strengthening national procurement system; evaluation of procurement system using OECD/DAC methodology concluded in May (final report to be available in June 2008). - Disaster response and fiscal pressures: - In response to floods and a cyclone in early 2008, government and development partners assisted affected population; over 100,000 people moved to resettlement centers. - Large increase in negotiated transportation fares for private minibuses in early February led to riots; government revoked the increase and temporarily subsidized fuel for minibuses operators at a cost of 0.15 percent of GDP, resulting in reallocation of resources in Budget 2008. - Authorities analyzing impact of oil and food prices; program allows some safeguards and authorities request greater understanding from Board and Management for fiscal space and greater access to Exogenous Shock Facilities. - Anticipated return of migrant workers from South Africa will require actions from authorities. - Aid disbursements and PFM: - Due to relatively low disbursement in 2007 of committed project financing and special programs, authorities and international community will explore options to accelerate aid disbursements in 2008. - To enhance public financial management (PFM), authorities will continue to encourage donors to shift foreign financial project and special programs to the Single Treasury Account (CUT). ### Monetary and Exchange Rate Policy - Monetary strategy: - Central bank will control money supply and keep exchange rate stable to contain imported inflation. - BM will continue to target base money to achieve an average inflation of 7-8 percent in 2008. - BM will use foreign exchange sales to sterilize liquidity to avoid build-up in domestic debt and crowding-out of the private sector. - BM will fine-tune monetary operations, improve liquidity management, and deepen financial markets. - MF will improve its cash-flow projections and communicate them to the BM on a weekly basis. - BM keen to reduce lending rates but recognizes structural issues; reviewing and updating regulatory framework, improving ability to evaluate portfolio quality, and supporting expansion of non-bank financial sector and microfinance deposit-taking institutions to enhance rural access to finance. - Exchange system: - New foreign exchange law submitted to Parliament in September 2007. - Following approval of new law and implementing regulations, authorities intend to accept obligations under Article VIII sections 2, 3, and 4 of the Fund’s Articles of Agreement. ### Structural Reforms - Business environment and public sector reforms: - Acceleration of reforms to reduce costs of doing business, including actions on business inspections, insolvency legislation, licensing at provincial level, simplification of VAT refunds, cross-border trading, and property registration. - Reinvigoration of public sector reform program focusing on decentralization, wage policy reform, and implementation of the Integrated Plan of the Justice Sector. - Megaprojects and fiscal risk management: - Ministry of Finance intends to implement measures to improve fiscal risk management, fiscal regimes, accountability and transparency for megaprojects. - External trade arrangements: - Mozambique reached agreement on an interim Economic Partnership Agreement (EPA) with the European Union (EU) and will continue to benefit from quota and duty free access to the EU market. - Negotiations with the EU on a final EPA agreement will continue together with other SADC countries. - Government pursuing bilateral free trade arrangements recommended in the Diagnostic Trade Integration Study (DTIS) to promote economic growth. ### Conclusion - Authorities remain committed to prudent policies and advancing the reform agenda but acknowledge remaining governance challenges that must be tackled to sustain reforms. - Implementation of the PSI arrangement within PARPA II framework aims to attain macroeconomic stability, enhance revenue mobilization, and ensure efficient use of public resources through PFM reforms. - Recognized challenges from food and oil price increases and reduced demand in major export markets require boosting the agricultural sector, where most labor is employed. - Authorities emphasize inclusive growth to address inequalities and income distribution while maintaining environmental sustainability. - Implementing the second generation of reforms requires increased capacity within domestic public administration institutions; authorities count on the Fund to provide a wide range of TA support and call on the Fund to safeguard development objectives in its TA policy. - On April 30, 2008, authorities and Program Aid Partners (PAPs), known as the “G-19”, completed the annual Joint Review of general budget support; the JR concluded there is a satisfactory basis to continue budget support to Mozambique. - Authorities express gratitude for support from the Fund and international community and will continue efforts to transform the economy for the well-being of the Mozambican population. *Source: Mozambican authorities’ response to IMF staff report (content unit)._cr08220* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08220.pdf_