## _cr09327

## Source details

**Canonical URL:** [_cr09327](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09327.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09327.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09327.pdf.json)

---

### Executive Summary
- Impact of the global economic crisis on Mozambique contained mainly to real sector channels through the external sector; the financial sector largely insulated.
- Export receipts declined sharply in H1 2009 in tandem with commodity prices; export volumes only modestly affected.
  - Mozal provides about half of Mozambique’s export receipts and 70 percent of the manufacturing sector’s output in 2008.
- Private capital inflows, including trade credit, stalled with onset of global financial crisis in late 2008; firms substituted foreign financing with domestic bank credit.
- Project aid disbursements experienced shortfalls in H1 2009; 2009 outlook for project aid revised below budgeted levels.
- Spillovers from South Africa’s contraction lowered tourism receipts and FDI.
- External reserves deterioration milder than expected because of the SDR allocation, Fund resources under the ESF, and acceleration of a large World Bank disbursement.
- Staff supports waivers for nonobservance of end-June 2009 A/PCs and completion of the fifth PSI review and the first ESF review.

### Impact of the Global Turmoil — Macroeconomic Developments and Outlook
- Policy response: temporary easing of macroeconomic policies in 2009; gradual reversal expected as global recovery proceeds.
- Growth projections:
  - Real GDP growth in 2009 projected to soften to about 4½ percent.
  - Real GDP growth in 2010 projected to pick up to 5½ percent; return to trend not expected until 2011.
- Inflation and exchange rate:
  - Twelve-month inflation fell to about 1 percent in September 2009.
  - Inflation could rise to about 8 percent by end-2010 if the fuel subsidy is removed and international prices increase.
  - Medium-term inflation expected to hover between 5 and 6 percent.
  - Exchange rate: currency depreciated 10 percent against the US dollar (year to September) and depreciated 16 percent in real effective terms.
- External position and reserves:
  - Gross reserve coverage expected to approach 5½ months at end-2009.
  - Reserve coverage expected to dip to five months by end-2010.
  - Government does not plan to use the SDR allocation but notes it would strengthen external reserves if needed.
- Credit and banking sector:
  - Credit to the private sector increased by half over the past year.
  - Expansion in foreign currency credit large and partly financed by banks’ foreign borrowing and drawdown of foreign assets.
  - Liquidity ratios declined; BM stepped up monitoring.

### Fiscal Policy Stance and Budget Outcomes (2008–2009) and 2010 Draft Budget
- 2009 fiscal stance:
  - Government temporarily loosened fiscal policy in 2009 compared to 2008, increasing both structural and cyclical components of the domestic primary deficit.
  - Revenues in H1 2009, though lower than budgeted, surpassed expectations due to more resilient activity and strong administrative effort (including a simplified tax for small taxpayers).
  - Discretionary expenditures accelerated: faster implementation of new civil service pay scale and fuel subsidy.
  - Fiscal program on track at end-September 2009; end-June fiscal target very narrowly missed with virtually zero recourse to banking system.
  - Acceleration of a large World Bank disbursement to end-2009 reduced recourse to domestic borrowing for the year.
- 2010 draft budget and medium-term outlook:
  - Discretionary policy unchanged in 2010; deficit expected to improve largely through unwinding of automatic cyclical stabilizers.
  - Draft 2010 budget envisages:
    - a moderate increase in revenues due to efficiency gains and stronger growth,
    - broadly unchanged domestic spending relative to GDP.
  - Within expenditure envelope, priority outlays to increase to:
    - further implement new civil service pay scale,
    - hire additional civil servants mainly in priority sectors,
    - clear tax refund arrears.
  - Government intends to gradually phase out the fuel subsidy in early 2010 and explicitly show its cost in the budget.
  - Temporary widening of domestic primary deficit in 2009 to be gradually reversed from 2010.

### Fiscal Targets and Selected Macro-Fiscal Numbers (preserved exactly)
- Nominal GDP (MT billion): 240 261 260 288 300 337 378 425 479
- Nominal GDP growth: 15.5 9.1 8.2 10.2 15.5 12.4 12.2 12.5 12.6
- Real GDP growth: 6.7 4.3 4.5 5.0 5.4 6.0 6.2 6.5 6.5
- GDP per capita (US$): 465 440 445 445 471 496 521 551 587
- Consumer price index (annual average): 10.3 6.1 3.5 5.6 9.5 5.8 5.6 5.6 5.6
- External current account, after grants (percent of GDP): -12.2 -10.9 -11.0 -9.1 -11.5 -9.5 -10.1 -10.1 -9.9
- Total revenue (percent of GDP): 16.0 15.7 16.4 16.0 16.7 17.1 17.6 18.0 18.3
- Total expenditure and net lending (percent of GDP): 27.9 33.1 30.1 34.4 31.4 30.8 31.0 31.5 31.8
- Overall balance, after grants (percent of GDP): -2.3 -5.6 -4.3 -4.3 -3.9 -2.7 -2.5 -2.5 -2.5
- Domestic primary balance, before grants (percent of GDP): -3.2 -5.6 -5.3 -5.2 -5.1 -3.6 -3.6 -3.6 -3.5
- Gross international reserves (end period, US$ millions): 1,660 1,440 1,929 1,294 1,904 2,065 2,176 2,288 2,436
- Months of projected imports of goods and nonfactor services: 4.7 3.9 5.4 3.6 5.0 5.0 4.9 4.8 4.9

### Monetary Policy, Reserves, and Exchange Rate Developments
- BM eased monetary conditions in 2009 via:
  - reduced interest rates on BM’s standing lending and deposit facilities,
  - lowered banks’ reserve requirements,
  - leaving unanticipated foreign exchange inflows unsterilized.
- Reserve money exceeded end-June and end-September targets.
- BM intervened heavily in late 2008 and early 2009 to meet FX demand, then shifted sterilization operations away from FX sales and broadened exchange rate policy to a broader basket of currencies.
- Reserve money (12-month percent change): 7.8 15.0 18.0 13.7 16.0 13.4 12.1 12.7 12.9
- Broad money, M3 (12-month percent change): 20.3 15.0 25.6 13.7 18.3 18.4 15.7 16.1 16.3
- Monetary policy stance in 2010: slightly less accommodating than 2009 to allow room for government borrowing and moderate private credit deepening.

### Financial Sector Developments, Risks, and Safeguards
- Large expansion in private sector credit tightened liquidity; banks’ overall and FX liquidity ratios declined sharply.
- Private sector credit expected to ease as share of deposits as monetary policy tightens and government borrowing rises, but will still rise relative to GDP.
- Introduction of fuel subsidy held inflation low in 2009; its removal will add about 3 percentage points to inflation in 2010.
- Inflation over 2009 and 2010 expected to average about 6½ percent.
- FSAP follow-up: implement recommendations; adopt financial sector contingency plan by May 31, 2010.
- Safeguards: update safeguards assessment in progress for ESF; BM implemented some 2008 recommendations; remaining weaknesses in oversight of audits and internal audit function.

### Structural Reform Agenda and Conditionality (2010)
- Main reform areas: fiscal (revenue administration and PFM), financial sector (monetary policy instruments, supervision, FSAP recommendations, contingency plan), business environment (fast-track measures), EITI implementation.
- Structural benchmarks (selected, exact dates preserved):
  - Creation of an EITI Secretariat — March 31, 2010.
  - Approval by the Minister of Finance of the e-Tributação (e-tax) Strategic Planning Document — May 15, 2010.
  - Strengthening the Revenue Authority (AT), including enhancing management IT system and approving new organic structure — May 31, 2010.
  - Adoption of a financial sector contingency plan — May 31, 2010.
- All structural benchmarks under the program met except the tax administration pilot project (modified to finalize strategic framework).

### Development Financing, Borrowing Strategy, and Public Investment
- Authorities prioritize infrastructure, especially road upgrading, to raise growth and export potential; concessional resources considered insufficient.
- Four-partite framework agreement signed for a €300 million credit line to finance infrastructure; terms nonconcessional with estimated grant element of less than 20 percent.
  - Government refrained from providing external guarantee but guaranteed loan repayment to domestic bank.
  - Framework agreement does not implicate nonconcessional external debt A/PC under the program but raises questions on financing public infrastructure.
- Government to identify possible projects under the framework and consult Fund and Bank staff to ensure macroeconomic and debt sustainability compatibility.
- Urgent need for a well-defined borrowing strategy to be discussed in next program review based on updated joint DSA.

### Program Monitoring, TMU, and Reporting Requirements
- Technical Memorandum of Understanding (TMU) date: November 18, 2009.
- Key definitions preserved exactly (examples):
  - Net credit to the central government (NCG): difference between outstanding 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 BM, and proceeds from the signing fee for mineral resource exploration.
  - Reserve money: sum of currency issued by BM and commercial banks’ holdings at the BM.
  - Net international reserves (NIR): reserve assets minus reserve liabilities; includes monetary gold, holdings of SDRs, reserve position at the IMF, holdings of foreign exchange, and claims on nonresidents (excluding government savings accounts related to mineral resource extraction concessions).
- Specific debt limit:
  - Central government will limit contracting or guaranteeing external debt up to US$5 million each year with original maturity of one year or more with grant element less than 35 percent.
- Data and reporting requirements include weekly and monthly reporting of fiscal, monetary, and reserves data; monetary survey must identify donor-financed project deposits.

### Staff Appraisal and Policy Recommendations
- Staff view: Mozambique showed resilience to external challenges in 2009; authorities responded timely and appropriately.
- Staff supports:
  - Waivers for nonobservance of end-June 2009 A/PCs on net credit to government and reserve money.
  - Modifications to end-December 2009 A/PCs to reflect recent developments.
  - Completion of the fifth PSI review and first ESF review.
- Staff recommendations:
  - Gradually unwind policy easing in tandem with global recovery, while remaining ready to maintain accommodation if external environment recovers more slowly.
  - Carefully monitor prospective donor support and adjust policy mix if shortfalls materialize.
  - Closely monitor rapid private credit expansion risks; welcome BM’s enhanced monitoring, FSAP implementation, and contingency planning.

### Statistical and Surveillance Notes
- Article IV consultation: completed by Executive Board on June 30, 2009 (Country Report No. 09/227); Mozambique on a 24-month Article IV cycle.
- Data provision broadly adequate for surveillance but with shortcomings; continued high reliance on external funding raises concerns about sustainability of INE programs.
- Selected data quality and reporting periodicity entries maintained (dates and frequencies preserved as in source).

*Source: IMF staff report and attachments; Mozambique: Letter of Intent and Memorandum of Economic and Financial Policies (November 18, 2009) — excerpt from the Executive Summary and MEFP through September 2009.*

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

### Executive Summary

### I. The Impact of the Global Turmoil — Transmission Channels and Effects
- The impact of the global economic crisis on Mozambique has been contained mainly to real sector channels through the external sector; the financial sector is largely insulated and has so far weathered the crisis.
- Export receipts declined sharply in the first half of 2009 in tandem with commodity prices, while export volumes appear to have been only modestly affected (see Box 1).
  - Mozal (the aluminum smelter) provides about half of Mozambique’s export receipts and 70 percent of the manufacturing sector’s output in 2008.
  - Falling aluminum prices reduced Mozal’s profit margins, tax payments and dividend payments; production and sales volumes remained largely unchanged.
- Private capital inflows, including trade credit, stalled with the onset of the global financial crisis in late 2008 and remained well below recent highs. Firms have substituted foreign financing with domestic bank credit, and large investment project plans have been broadly sustained.
- Project aid disbursements experienced shortfalls in the first half of 2009 owing to donors’ budget constraints and implementation delays; the 2009 outlook for project aid was revised below budgeted levels to be more in line with actual donor commitments.
- Mozambique experienced spillovers from South Africa’s contraction, lowering tourism receipts and FDI.
- External reserves deterioration was milder than expected because of the SDR allocation, Fund resources under the ESF, and an acceleration of a large World Bank disbursement.

### I. The Impact of the Global Turmoil — Macroeconomic Developments and Outlook
- Policy response: The government eased macroeconomic policies to mitigate the impact; the easing is viewed as temporary and will be gradually reversed as the global recovery proceeds.
- Growth projections:
  - Real GDP growth in 2009 is cautiously projected to soften to about 4½ percent, pushing growth and the level of economic activity below trend.
  - Real GDP growth in 2010 is cautiously projected to pick up to 5½ percent, with return to trend not expected until 2011.
- Inflation and exchange rate:
  - Twelve-month inflation fell to about 1 percent in September 2009, restrained by weak domestic pressures, falling international food prices, and fuel price subsidies introduced in May 2009.
  - Inflation could rise to about 8 percent by end-2010 if the fuel subsidy is removed and international prices increase.
  - Over the medium term, inflation is expected to hover between 5 and 6 percent.
  - The exchange rate depreciated in real effective terms during 2009.
- External position and reserves:
  - Gross reserve coverage is expected to approach 5½ months at end-2009.
  - Reserve coverage is expected to dip to five months by end-2010 as the external environment strengthens but private capital inflows recover more slowly.
  - The government does not plan to use the SDR allocation; the allocation would strengthen external reserves and provide flexibility if the crisis deepens or is prolonged.
- Credit and banking sector:
  - Credit to the private sector increased by half over the past year, reflecting easier monetary conditions, some large loans, and substitution of foreign financing with domestic bank credit.
  - The expansion in foreign currency credit has been large and partly financed by banks’ foreign borrowing and drawdown of foreign assets.
  - Rapid credit growth has led to increased competition for deposits and liquidity squeezes for some banks, causing a decline in liquidity ratios; no deterioration in credit quality has been observed so far, but the Banco de Moçambique (BM) has stepped up monitoring.

### I. The Impact of the Global Turmoil — Comparison to Other Countries
- Mozambique has weathered the global economic crisis better than other countries in the region but is expected to benefit less from the global recovery, reflecting differences in transmission channels and scope for policy easing.
- Strong performance in economic management and structural reforms, and in good governance, remain essential to maintain high donor support; the final assessment of external observers of the October elections will be important for several donors.

### II. Responding to the Crisis — Macroeconomic Policy Temporarily Eased
- Rationale and scope:
  - A track record of prudent policies (low inflation and public debt) and earlier indications of an overvalued currency provided scope for policy easing in 2009.
  - The PSI and ESF program was adjusted to support an accommodating policy stance.
- Fiscal policy:
  - Revenues surpassed expectations in the first semester of 2009 and the fiscal program was on track at end-September 2009.
  - The government missed its end-June 2009 assessment/performance criterion (A/PC) on net domestic credit very marginally.
  - The draft 2010 budget reflects the start of a gradual unwinding of the expansionary fiscal stance, mainly via the unwinding of automatic cyclical stabilizers.
  - The government remains committed to its medium-term strategy of prudent macroeconomic policies and plans to gradually tighten policies in 2010 as activity rebounds.
- Monetary policy:
  - The BM eased monetary policy further than anticipated to accommodate higher private sector credit, including substitution of foreign with domestic credit.
  - Monetary operations faced unusually high currency demand; the BM met its end-June 2009 A/PC on net international reserves but exceeded its target on reserve money (the gap narrowed by end-September).
  - Monetary policy will remain eased compared to 2008 but will be cautiously tightened to ward off inflationary pressures while preserving room for private sector credit.
- Financial support and reserves:
  - External reserves were sustained by the SDR allocation and by Fund resources under the ESF, and benefited from an acceleration of a large World Bank disbursement.
- Policy medium-term intent:
  - The policy easing is considered temporary; the government plans gradual tightening in 2010 to preserve low debt indicators and low risk of debt distress.
- Governance and donor support:
  - Continued strong economic management, structural reforms, and good governance are essential to preserve donor support.

### II. Responding to the Crisis — Structural Measures and Developmental Needs
- Structural reforms:
  - The government is committed to a structural reform agenda to enhance medium-term growth prospects, focusing on:
    - Improving the effectiveness of macroeconomic policy formulation and implementation;
    - Strengthening the financial sector;
    - Making the business environment more conducive to private sector development.
  - All structural benchmarks under the program were met except the one on the tax administration pilot project.
- Developmental priorities:
  - The government emphasizes addressing Mozambique’s developmental needs while maintaining macroeconomic stability; structural reforms are central to sustaining growth.

### III. Staff Appraisal and Program Reviews
- Staff supports the government’s requests for:
  - Waivers for the nonobservance of end-June 2009 A/PCs;
  - Modification of end-December 2009 A/PCs;
  - Completion of the fifth PSI review and the first review under the ESF arrangement.

*Source: Executive Summary (IMF staff report).*

### 12.      The government temporarily loosened fiscal policy in 2009 compared to 2008

### 12.      The government temporarily loosened fiscal policy in 2009 compared to 2008

### Fiscal policy stance and budget outcomes (2008–2009)
- The government temporarily loosened fiscal policy in 2009 compared to 2008, increasing both the structural and the cyclical components of the domestic primary deficit.
- The automatic cyclical stabilizers operated largely through reduced revenues, mainly because of the weak export sector.
- Revenues in the first semester of 2009, though lower than budgeted, surpassed expectations because of:
  - more resilient economic activity, and
  - a strong administrative effort, including the introduction of a simplified tax of small taxpayers.
- Discretionary expenditures were accelerated, including faster implementation of the new civil service pay scale and the newly-introduced fuel subsidy; these were only partially offset by cuts in non-priority areas.
- The fiscal program was on track at end-September 2009, but the end-June fiscal target was very narrowly missed, with virtually zero recourse to the banking system.
- The acceleration of a large World Bank disbursement to end-2009 will allow a lower recourse to domestic borrowing for the year.

### 2010 draft budget and medium-term fiscal outlook
- Discretionary policy will remain unchanged in 2010, but the deficit is expected to improve along with the economy, largely through the unwinding of automatic cyclical stabilizers and leaving the structural domestic balance broadly unchanged.
- Relative to GDP, the draft 2010 budget envisages:
  - a moderate increase in revenues due to efficiency gains and stronger economic growth, and
  - broadly unchanged domestic spending.
- Within the expenditure envelope, priority outlays will be further increased to:
  - further implement the new civil service pay scale,
  - hire additional civil servants mainly in priority sectors, and
  - clear tax refund arrears.
- The government intends to gradually phase out the fuel subsidy in early 2010 and will explicitly and transparently show its cost in the budget.
- The accelerated disbursement of World Bank budget support from 2010 in 2009 will result in a larger domestic financing requirement in 2010.
- The temporary widening of the domestic primary deficit in 2009 will be gradually reversed from 2010 to allow for a return to a prudent medium-term fiscal policy stance.

### Monetary policy, reserves, and exchange rate developments
- The BM eased monetary conditions significantly in 2009 compared to 2008 to accommodate planned increases in fiscal borrowing needs and a large expansion in private sector credit, and partly to compensate for lower foreign private capital inflows.
- Policy measures included:
  - reduced interest rates on the BM’s standing lending and deposit facilities,
  - lowered banks’ reserve requirements, and
  - leaving unanticipated foreign exchange inflows unsterilized.
- Reserve money exceeded the end-June target comfortably and also surpassed the end-September target (though by a smaller margin).
- The BM intervened heavily in late 2008 and early 2009 to meet high market demand for foreign exchange for import payments, but then shifted sterilization operations away from FX sales and broadened exchange rate policy away from a sole focus on the US dollar towards a broader basket of currencies.
- Exchange rate movements (year to September):
  - the currency depreciated 10 percent against the US dollar, and
  - depreciated 16 percent in real effective terms, largely reversing the 2008 appreciation.

### Financial sector developments and risks
- Money aggregates rose faster than expected, and reserve money exceeded end-June and end-September targets.
- The large expansion in private sector credit tightened liquidity conditions; banks’ overall and FX liquidity ratios declined sharply.
- Private sector credit is expected to ease as a share of deposits as monetary policy tightens and government borrowing rises, but will still rise relative to GDP.
- Inflation risks and the real effective depreciation of the currency have reduced the scope for further easing in 2010.
- The introduction of the fuel subsidy held inflation low in 2009, while its removal will add about 3 percentage points to inflation in 2010.
- Inflation over 2009 and 2010 will average about 6½ percent, broadly consistent with the medium-term inflation objectives.
- Considering risks to credit quality and banks’ liquidity ratios from continued large expansion of private credit, the BM intends a slightly less accommodating policy stance in 2010 than in 2009—allowing room for government borrowing and a modest deepening of private sector credit relative to GDP.

### Structural reform agenda and conditionality (2010)
- All structural benchmarks were met except the one on the tax administration pilot project because of a shift in strategy; the delay reflects additional conceptual work required to redesign the e-Tax strategy.
- Main reform areas:
  - Fiscal: reforms in revenue administration and public financial management (PFM), including simplifying tax collections and improving management information systems to raise spending quality and efficiency.
  - Financial sector: strengthen monetary policy instruments and operations, deepen financial intermediation, strengthen banking supervision, finalize an action plan to implement 2009 FSAP Update recommendations, and develop a financial sector contingency plan.
  - Business environment: fast-track specific measures (in consultation with the World Bank) to improve the business environment by end-2010.
  - EITI: following acceptance as an EITI candidate in May 2009, create an EITI Secretariat to help comply with EITI requirements during the two-year candidacy.
- Structural conditionality actions and expected dates:
  - Approval by the Minister of Finance of the e-Tributação (e-tax) Strategic Planning Document — May 15, 2010.
  - Strengthening the Revenue Authority (Administração Tributária, AT): enhancing the management IT system and approving the new organic structure — May 31, 2010.
  - Creation of an EITI Secretariat — March 31, 2010.
  - Adoption of a financial sector contingency plan — May 31, 2010.

### Development financing and borrowing strategy
- The authorities are prioritizing infrastructure, especially road upgrading, to raise growth and export potential and consider concessional resources insufficient.
- A four-partite framework agreement was signed for a €300 million credit line to help finance infrastructure investment; contractual partners are the governments of Mozambique and Portugal, the Portuguese savings bank (CGD), and a local bank (BCI).
  - The terms are nonconcessional, with an estimated grant element of the loan package of less than 20 percent.
  - The government refrained from providing an external guarantee but guaranteed loan repayment to the domestic bank.
  - The framework agreement itself does not implicate the nonconcessional external debt A/PC under the program, but raises questions about financing of public infrastructure projects.
- The government has initiated identification and assessment of possible projects for the framework agreement and intends to consult Fund and Bank staff to ensure compatibility with the macroeconomic framework and debt sustainability.
- A well-defined borrowing strategy is urgently needed and will be discussed in the next program review mission, based on an updated joint DSA.

### Staff appraisal and policy recommendations
- Mozambique’s overall macroeconomic performance in 2009 showed resilience to external challenges; spillovers to the domestic economy were limited.
- The authorities responded commendably with timely and appropriate policies and consulted closely with IMF staff.
- A track record of prudent policies provided scope for easing macroeconomic policies in 2009.
- Despite a strong revenue effort, the authorities missed the end-June fiscal target marginally but returned to on-track budget implementation by end-September.
- The BM expanded monetary policy more than programmed to accommodate strong private sector credit growth and high currency demand; this led to the need for waivers for non-observance of end-June A/PCs on net credit to government and on reserve money, which staff support.
- The currency’s real effective depreciation is considered timely and appropriate and largely reverses the 2008 appreciation; staff commends the BM for focusing on a broader range of currencies.
- Staff recommends unwinding policy easing in tandem with global recovery and international credit market loosening; welcomes authorities’ intention to gradually tighten in 2010 but urges readiness to maintain accommodation if the external environment recovers more slowly than envisaged.
- Staff emphasizes careful monitoring of prospective donor support and readiness to adjust the policy mix if shortfalls materialize.
- Staff expresses concern that the large expansion in private sector credit could undermine credit quality and welcomes the BM’s enhanced monitoring, FSAP implementation, and preparation of a contingency plan to deal with banks in distress.

*Source: IMF staff report excerpt.*

### 26.      The authorities have continued to make noticeable progress in implementing

### 26.      The authorities have continued to make noticeable progress in implementing

### Structural reforms and macroeconomic stability
- The authorities have continued to make noticeable progress in implementing structural reforms.
- This is essential to shoring up Mozambique’s medium-term growth prospects.
- Strengthening policy formulation and implementation will help cement macroeconomic stability.

### Business environment and EITI
- Rapid and tangible improvements in the business environment will be essential to support private sector development.
- Mozambique needs a concerted effort to move ahead on implementing the EITI to meet its commitments under the Initiative.

### Borrowing strategy and debt sustainability (paragraph 27)
- The authorities should urgently develop a borrowing strategy to help address Mozambique’s significant development needs.
- Any future domestic and external nonconcessional borrowing must be used effectively and be consistent with fiscal and debt sustainability.
- Staff urges the authorities to ensure that the implementation of the recently signed framework agreement, which provides nonconcessional financing for infrastructure development, does not threaten the stability of Mozambique’s overall macroeconomic framework.

*Source: _cr09327 - 26.      The authorities have continued to make noticeable progress in implementing*

### 28.      Based on performance to date and Mozambique’s continued commitment to

### _cr09327 - 28.      Based on performance to date and Mozambique’s continued commitment to

### Staff recommendations and authorities' requests
- Staff recommends completion of the fifth PSI review and the first review under the ESF arrangement.
- Staff supports the authorities’ request for waivers for the non-observance of the end-June A/PCs on:
  - net credit to government (deviation described as minor and marginally exceeded relevant program ceiling), and
  - reserve money (deviation described as minor and temporary and due to unexpected shifts in currency demand).
- Staff supports the authorities’ request for modifications to the end-December A/PCs to reflect recent developments.

### Macroeconomic performance and projections: national income and prices
- Nominal GDP (MT billion): 240 261 260 288 300 337 378 425 479
- Nominal GDP growth: 15.5 9.1 8.2 10.2 15.5 12.4 12.2 12.5 12.6
- Real GDP growth: 6.7 4.3 4.5 5.0 5.4 6.0 6.2 6.5 6.5
- GDP per capita (US$): 465 440 445 445 471 496 521 551 587
- Consumer price index (annual average): 10.3 6.1 3.5 5.6 9.5 5.8 5.6 5.6 5.6
- Consumer price index (end of period): 6.2 5.8 5.4 5.7 8.0 6.0 5.7 5.6 5.6

### External sector (annual percent changes / dollar levels)
- Merchandise exports: 10.0 -29.3 -26.5 25.7 9.8 14.7 8.8 6.6 7.2
- Merchandise exports, excluding megaprojects: 41.1 -14.7 -22.3 6.2 4.3 6.2 8.3 9.2 10.3
- Merchandise imports: 29.6 -3.5 -10.0 -1.8 0.8 4.5 9.6 7.6 7.6
- Merchandise imports, excluding megaprojects: 34.7 -11.6 -6.4 14.1 -1.7 0.7 9.7 8.2 8.2
- Terms of trade: 4.6 -21.2 -12.7 6.4 4.3 12.5 2.1 1.9 2.5
- External current account, before grants (percent of GDP): -20.3 -22.9 -17.8 -23.2 -19.3 -17.3 -17.9 -17.9 -17.7
- External current account, after grants (percent of GDP): -12.2 -10.9 -11.0 -9.1 -11.5 -9.5 -10.1 -10.1 -9.9
- External current account, before grants (US$ millions): -1,958 -2,135 -1,677 -2,229 -1,959 -1,891 -2,090 -2,261 -2,430
- External current account, after grants (US$ millions): -1,179 -1,019 -1,034 -877 -1,167 -1,040 -1,177 -1,276 -1,360

### Monetary and credit aggregates
- Net foreign assets (percent change): 4.0 -0.1 5.2 0.2 4.7 6.2 4.5 7.3 6.6
- Net domestic assets: 16.3 15.1 20.4 13.5 13.6 12.2 11.2 8.8 9.7
- Of which: net credit to the government: -2.0 5.8 3.0 2.5 5.4 0.6 0.3 0.3 0.4
- Of which: credit to the economy: 21.1 15.6 24.9 11.7 11.4 10.6 10.2 9.9 10.2
- Reserve money (12-month per cent change): 7.8 15.0 18.0 13.7 16.0 13.4 12.1 12.7 12.9
- Broad money, M3 (12-month percent change): 20.3 15.0 25.6 13.7 18.3 18.4 15.7 16.1 16.3
- M2 (12-month percent change): 26.0 15.8 28.6 14.3 20.4 17.3 16.3 16.7 16.9
- Velocity (GDP/M2): 4.4 4.2 3.7 4.0 3.6 3.4 3.3 3.2 3.1

### Investment, saving, and fiscal accounts (percent of GDP)
- Gross domestic investment: 15.7 21.9 15.9 22.7 19.7 19.9 20.6 21.3 21.7
- Government investment (percent of GDP): 11.6 15.6 11.7 16.8 13.6 13.5 13.6 14.4 14.7
- Gross domestic savings (excluding grants): -4.6 -1.1 -1.9 -0.5 0.4 2.5 2.7 3.4 4.0
- Total revenue (percent of GDP): 16.0 15.7 16.4 16.0 16.7 17.1 17.6 18.0 18.3
- Total expenditure and net lending (percent of GDP): 27.9 33.1 30.1 34.4 31.4 30.8 31.0 31.5 31.8
- Overall balance, before grants (percent of GDP): -11.8 -17.4 -13.7 -18.4 -14.7 -13.6 -13.5 -13.5 -13.5
- Total grants (percent of GDP): 9.4 11.8 9.3 14.0 10.8 10.9 10.9 10.9 10.9
- Overall balance, after grants (percent of GDP): -2.3 -5.6 -4.3 -4.3 -3.9 -2.7 -2.5 -2.5 -2.5
- Domestic primary balance, before grants (percent of GDP): -3.2 -5.6 -5.3 -5.2 -5.1 -3.6 -3.6 -3.6 -3.5

### Balance of payments and reserves
- Overall balance of payments (US$ millions): 120 -223 114 -146 -481 641 131 151 151
- Net international reserves (end of period, US$ millions): 1,643 1,421 1,758 1,275 1,711 1,874 1,987 2,102 2,253
- Gross international reserves (end of period, US$ millions): 1,660 1,440 1,929 1,294 1,904 2,065 2,176 2,288 2,436
- Months of projected imports of goods and nonfactor services: 4.7 3.9 5.4 3.6 5.0 5.0 4.9 4.8 4.9

### Monetary survey highlights (quarterly and flow metrics)
- Reserve money (12-month percent change, quarterly series): 19.2 17.9 20.8 20.5 22.7 21.0 23.8 23.9 26.3 (levels across Qs)
- M3 (levels / percent change across series): Money and quasi money (M3): 80.7 82.3 89.2 92.0 101.4 100.7 107.8 111.2 119.9
- Net credit to government (NCG stock, program definition): -14.8 -14.8 -14.6 -12.5 -12.6 -12.7 -13.1 -11.4 -7.1

### Financial sector indicators and banking soundness (2001–Mar-09)
- Regulatory capital to risk-weighted assets: 5.5 14.0 17.0 18.7 16.0 12.5 14.2 13.9 17.0 18.1
- Nonperforming loans to gross loans: 23.4 22.0 14.4 6.4 3.8 3.3 0.9 2.0 2.0 2.2
- Foreign exchange loans to total loans: 64.7 69.9 70.8 67.3 63.9 45.0 31.5 40.1 36.1 33.1
- Return on assets (selected years): 0.1 1.6 1.2 1.4 1.8 3.5 1.9 3.5 0.9 1.6
- Liquid assets to total assets: 34.6 53.9 57.7 58.1 55.5 51.9 53.3 49.3 34.8 32.2

### Structural conditionality (selected actions and status)
- Approval of a PFM vision paper for 2009-2011: End-March 2009 — Met (approved by Ministry mid-July with recommendations).
- Government formal submission to start EITI membership process: End-June 2009 — Met.
- Decree streamlining business inspection process (creation of INAE): End-July — Met.
- Preparation of estimate of new pay policy for fiscal years 2010-2012: End-August 2009 — Met (Budget Directorate preparing alternative scenarios and fiscal impact over 2010-24).
- Submission of draft public enterprises law to Council of Ministers: End-September 2009 — Met (draft submitted August 7, 2009; Council recommended revision; revised draft to be submitted by end-May 2010).
- Pilot project on corporate income tax e-Tributação implementation (central revenue authority and UTRAFE): End-September 2009 — Not met (measure modified to finalize strategic framework to be implemented in early 2010).
- BM issuance of new loan classification regulations consistent with international best practices: End-September 2009 — Met.
- BM plan to strengthen Monetary Policy framework (including core inflation indicator), with Fund technical assistance: End-December 2009 — Met.

*Source: IMF staff report and attachments, Mozambique: Letter of Intent and Memorandum of Economic and Financial Policies (November 18, 2009).*

### 1.      This updated MEFP (i) describes performance under the Government of

### This updated MEFP (i) describes performance under the Government of Mozambique’s economic program under the three-year Policy Support Instrument (PSI) and the one-year arrangement under the Exogenous Shocks Facility (ESF) through September 2009; (ii) summarizes the Government’s policy intentions over the short- and medium-term; and (iii) elaborates on the specific policies and targets for 2009/10.

### I. PERFORMANCE UNDER THE PSI AND ESF ARRANGEMENT
- Most program targets have been met through end-June 2009; exceptions were base money and net credit to the Government (NCG).
- Base money exceeded the program ceiling due to:
  - unusually high demand for currency from buoyant agricultural activity, notably commercialization of tobacco where metical (instead of the Malawian currency) is used for payment;
  - increase in credit to the economy to compensate for shortfall in foreign financing.
- The floor on net international reserves was met comfortably.
- Fiscal performance in H1 2009 broadly in line with program projections; virtually zero NCG though the program ceiling was slightly missed.
- Structural reforms: all structural benchmarks through end-September 2009 met except the tax administration pilot project (delayed due to re-definition consistent with IMF technical assistance).

### II. OBJECTIVES AND POLICIES LOOKING FORWARD
- Medium-term commitment: prudent macroeconomic policies and second-generation structural reforms to safeguard macroeconomic stability, sustain high growth, and reduce poverty; consistent with PARPA II (2006-09) extended to 2010 and preparation of a new strategy for 2011-14.
- Temporary easing of macroeconomic policies to mitigate global crisis effects; easing is limited in time and will be unwound when recovery becomes evident.
- Growth and external sector projections:
  - 2009: temporary softening of economic growth.
  - 2010: economic activity expected to strengthen to 5½ percent.
  - Medium term: growth expected at 6 percent.
  - External current account deficit (after grants) expected to stabilize at around 10 percent of GDP over 2010-12.
  - International reserves projected to average five months of imports during the period (benefiting from IMF SDR allocation).
  - Average inflation expected at about 6 percent over the medium term.
  - Peak in average inflation of 9½ percent in 2010 due to full pass-through of international oil prices.

### A. Fiscal Policy
- Medium-term fiscal strategy priorities: preserve debt sustainability, contain inflationary pressures, limit recourse to domestic financing to allow private sector credit growth.
- 2009 fiscal outlook:
  - Overall fiscal deficit (after grants) expected to widen by two percentage points, to 4½ percent of GDP.
  - Domestic financing need of 0.8 percent of GDP.
  - Lower recourse to domestic financing than earlier envisaged due to advance World Bank disbursement.
  - Higher spending pressures: wages and pensions (0.2 percent of GDP) from early decompression of new civil service pay scale; fuel subsidies (0.6 percent of GDP).
  - Priority spending projected to rise to 66.9 percent of total domestic spending in 2009, from 66.7 percent in 2008.
  - Government intends to adhere to overall budget envelope and accommodate pressures by cutting other expenditures, possibly temporary cuts in some priority expenditures.
- 2010 fiscal outlook:
  - Reduce overall fiscal deficit (after grants) to about 4 percent of GDP.
  - Net domestic financing requirement of 1.8 percent of GDP (reflects a deposit drawdown related to World Bank disbursement from late 2009).
  - Draft 2010 budget envisages revenue increase by 0.3 percent of GDP and domestic current and capital spending broadly unchanged at about 22 percent of GDP.
  - Priority spending aimed at 67.1 percent of total domestic spending.
  - Draft budget allocations include:
    - further implement new civil service pay scale: 0.4 percent of GDP;
    - hire 16,000 additional civil servants (two-thirds for education and health): 0.5 percent of GDP;
    - expected costs of fuel subsidies: 0.6 percent of GDP;
    - continue clearing post-2003 commercial VAT arrears: 0.1 percent of GDP (based on 2008 audit), with commitment to eliminate all remaining arrears by end-2012.
- Fuel subsidy policy:
  - Intend to gradually phase out current system of fuel subsidies by end-March 2010 to allow full pass-through of international prices.
  - Consider replacing subsidies with better targeted measures using overall ceiling of MT 1.7 billion for such measures in the 2010 draft budget.
  - Fuel subsidies to be transparently shown in budget documents.
- Social protection objective: protect vulnerable segments while balancing macro stability, temporary relief, and targeting.

### B. Fiscal Structural Reform
- Revenue administration and public financial management (PFM) to be strengthened, with IMF, World Bank, and development partner cooperation.
- Tax administration short-term measures:
  - Roll out e-Tributação (e-tax):
    - MF to approve by May 15, 2010 the e-Tributação Strategic Planning Document (structural benchmark).
    - e-Tributação pilot focusing on corporate income tax in Large Tax Payer Unit (Maputo) and Revenue Directorate of Maputo City (Primeiro Bairro Fiscal) to be completed by end-2010.
  - Strengthen Revenue Authority (Administração Tributária, AT):
    - Enhance management information system; define core management performance indicators; effective use in decision-making.
    - Submit to the Council of Ministers two decrees approving new organic structure and remuneration status of staff.
    - Approval by Interministerial Committee of Civil Service of a resolution approving AT’s new career structure.
    - These three steps to be completed by end-May 2010 (structural benchmark).
  - Improve monitoring of own revenues:
    - Diagnostic study on sources of own revenues by end-2009.
    - Minister of Finance to issue regulation (circular) by end-March 2010 specifying which own revenues are included in e-SISTAFE.
  - Reinforce Large Taxpayers Unit (LTU): consolidate three regional LTUs under one national coordination unit by end-June 2010 to plan and monitor all large taxpayers including mega projects.
  - Implement new taxes and special regimes:
    - Introduce new code for excise taxes on alcoholic beverages and tobacco as of January 1, 2010.
    - Strictly apply new fiscal benefits code.
    - Broaden application of simplified tax for small contributors.
  - Adhere strictly to mega project framework: implement mining and petroleum fiscal regime, related regulations, and model contracts for all new projects; adopt non-recourse financing clauses in future mega projects.
- PFM improvements and SISTAFE:
  - PFM vision paper approved July 20, 2009.
  - Promote implementation of SISTAFE:
    - Minister of Finance adopted Phase III of SISTAFE action plan and budget end-September 2009.
    - e-SISTAFE to be rolled out to districts and state institutions; target to increase direct budget execution through e-SISTAFE to 37.5 percent of total executed budget by end-2010 (as agreed with development partners).
  - Ensure compatibility of other IT systems with SISTAFE:
    - MF to issue a decree (diploma ministerial) by end-2009 requiring prior authorization for procurement of new accounting or financial management systems complementary to e-SISTAFE.
  - Improve aid and debt management:
    - Encourage donors to use single- and multi-currency treasury accounts at BM for project aid disbursements.
    - Continue improving external debt management and seek concessional resources.
    - Framework loan agreement with Portugal allows extension of external loans to a domestic bank and on-lending to a domestic public entity up to 300 million euros; government did not guarantee external loans but committed to guarantee future borrowings by public entity from domestic bank regarding implementation of framework agreement.
    - Government to identify potential projects under the framework and consult IMF and World Bank to ensure compatibility with macro framework, debt sustainability, and financial viability; ensure road fund (Fundo de Estradas) generates sufficient resources to repay the loan.
  - Reinforce investment planning, limit fiscal/quasi-fiscal risks, maximize economic benefits:
    - MF to submit draft Public Private Partnership Law to Council of Ministers by end-May 2010 (applicable to mega projects and concessions including power generation).
  - Improve framework for public enterprises:
    - Draft Public Enterprises Law to be submitted to Council of Ministers by end-May 2010; to include quarterly financial reporting to MF and ring-fencing of commercial activities.
  - Enhance procurement systems:
    - Aim to make reliable procurement information publicly available in 2011.
    - Initiate study by end-March 2010 to develop web-based monitoring and evaluation system.
- Civil service pay reform:
  - New salary policy approved September 2008 to be phased in gradually over the medium term to preserve macro stability and fiscal sustainability.
  - Objectives: simplify and rationalize salary scales, decompress scales by qualification/responsibility, reform housing and other allowances, harmonize salary policy with pension system.
  - Further technical work in 2010 with development partner support to determine specifics and sequencing.
- INSS (National Institute for Social Security) strengthening:
  - INSS Board to approve investment strategy by end-December 2009 aimed at protecting pensioners’ interests (based on external consultant work).
  - INSS to finalize and publish audited financial statements up to 2007 by end-December 2009 to serve as basis for updated actuarial study to assess contribution rates and benefits.
  - INSS to introduce an IT system during 2010 to improve registration of contributors and claimants and strengthen contribution collection.
- EITI membership commitment:
  - Government committed to full EITI membership within envisaged timeframe of two years.
  - Actions include drafting first EITI progress report per EITI standards, hiring an independent auditor, creating a public information website.
  - EITI Secretariat to be created in early 2010, but not later than end-March 2010 (structural benchmark).

### C. Monetary and Exchange Rate Policies
- Bank of Mozambique (BM) to pursue prudent monetary policy aimed at price stability within a flexible exchange rate regime; scope to maintain an eased monetary policy stance given inflation developments and need to finance Government and private sector.
- Risks to watch: bottoming out of international food prices, higher domestic retail fuel prices from phasing out subsidies, and a more depreciated currency could create short-run inflationary pressures.
- BM monetary policy implementation measures:
  - Pay closer attention to the level of the effective real exchange rate vis-à-vis a broad basket of currencies to allow freer exchange rate adjustment while safeguarding international reserves.
  - Reinforce monitoring, analysis and forecasting of macroeconomic and monetary indicators.
  - Continue strengthening liquidity management with improved coordination with Ministry of Finance on cash flow projections and increased aid management through single- and multi-currency treasury accounts at BM, and coordination with banks on liquidity requirements.
  - Broaden use of repos and reverse repos to strengthen the interbank market and liquidity management, safeguard international reserves, and build a flexible and realistic intervention corridor that reflects market conditions.
- Government intends to accept obligations under Article VIII sections 2, 3, and 4 of the Fund’s Articles of Agreement once implementation regulation aligns with new legislative framework effective March 11, 2009.

### D. Financial Sector Policies
- Follow-up to 2009 Financial Sector Assessment Program (FSAP) update: implement recommendations expeditiously.
  - FSAP findings: overall soundness of banking system and improvements in supervision/regulation, with remaining obstacles to financial intermediation and access to credit.
- Initiatives:
  - Develop Financial Sector Action Plan by end-March 2010 (supported by technical assistance); create interagency task force to enhance access to finance, financial market development, strengthen supervisory framework compliance with Basel Core Principles, and complete payments system modernization. BM will preserve confidentiality of banking information in cooperation.
  - Continuous monitoring of banking system: BM to closely monitor activities given challenging international environment and rapid credit growth over last two years; focus on liquidity conditions and loan portfolio quality.
  - Adopt Financial Sector Contingency Plan: develop tools to (i) enhance response to banks in distress; (ii) strengthen interagency coordination between BM and Government (information sharing, analysis, decision-making, communication); (iii) develop a bank resolution framework. Plan to be developed with development partners and completed by end-May 2010 (structural benchmark).

*Source: Updated Memorandum of Economic and Financial Policies (MEFP) for Mozambique through September 2009.*

### 22.      The Government is intensifying its reforms to improve the business environment to

### _cr09327 - 22.      The Government is intensifying its reforms to improve the business environment to

### Reforms to improve the business environment (fast track measures to be implemented by end-2010)
- Objective: help raise Mozambique’s growth potential, diversify exports, and stimulate new investment.
- Key measures identified in coordination with the World Bank (intended to be fast-tracked and implemented by end-2010):
  - Ease red tape to start and run a business by:
    - combining the three procedures related to tax registration of businesses;
    - evenhandedly applying the labor code and reducing paperwork to hire workers;
    - making the new unified inspection agency (for all inspections except those on taxes and labor) operational.
  - Submit legislation to streamline business-related licenses.
  - Implement the new bankruptcy law once it has been adopted by parliament.
  - Accelerate the registration of property by streamlining legislation and consolidating procedures.
  - Facilitate trading across borders by easing pre-arrival clearance.

### Strengthening analysis of mega projects
- The Government will strengthen the compilation and analysis of data on mega projects to better assess their budgetary, macroeconomic and social implications.
- Coordination improvements to be made among:
  - Ministry of Finance (MF), Ministry of Planning and Development (MPD), the BM, the Institute for National Statistics (INE), and line ministries.
- Capacity enhancements:
  - enhance the analytical and forecasting capabilities at the MF and MPD.

### Program monitoring: quantitative assessment, targets, and indicative targets (summary)
- The revised quantitative P/AC for end-December 2009 and the new indicative targets for the first half of 2010 are presented in Table 1; Table 2 lists structural benchmarks for 2010.
- Selected quantitative program figures and targets shown (values preserved exactly as in source):
  - Net credit to the government (cumulative ceiling): 133; 133; 0; 85; 85; 171; 2,148; 4,716; 2,148; -124; -446; 1,182; 5,515
  - Stock of reserve money (ceiling): 17,622; 17,622; 17,896; 19,301; 20,051; 20,814; 19,762; 21,632; 22,685; 21,031; 23,841; 23,920; 26,321
  - Stock of net international reserves of the BM (floor, US$ millions): 1,632; 1,632; 1,666; 1,554; 1,537; 1,717; 1,487; 1,421; 1,758; 1,711; 1,839; 1,940; 1,711
  - New nonconcessional external debt contracted or guaranteed by the central government or the BM with maturity of one year or more (ceiling, US$ millions): 553    553; 5; 5; 5; 5555
  - Indicative target — Government revenue (floor): 9,075; 9,075; 9,152; 19,861; 19,861; 20,995; 30,624; 41,095; 42,553; 10,810; 23,773; 36,560; 49,983
  - Memorandum items — Stock of net crediit to the government (cumulative change): 367; 249; 2,443; -4; -662; 966; 5,515
  - Memorandum items — Stock of net international reserves at the BM: 1,539; 1,670; 1,758; 1,711; 1,839; 1,940; 1,711
- Net foreign program assistance and related flows (quarterly and annual figures as presented):
  - Net foreign program assistance (US$ mn) — sample quarterly/yearly numbers: 105; 104; 105; 128; 78; 85; 68; 127; 356; 446; 163; 95; 86; 26; 370
  - Gross foreign program assistance — sample figures: 116; 116; 117; 138; 98; 103; 82; 144; 413; 501; 182; 113; 104; 44; 444
  - External debt service — sample figures: 11; 12; 11; 10; 21; 17; 14; 17; 57; 56; 18; 18; 18; 18; 73
  - World Bank PRSC 6 Disbursement — sample entry: 110; 110   00000
  - Net foreign program assistance (MT mn) — sample figures: 2,735    2,715; 2,643    3,400; 2,434; 2,331; 1,740    2,885; 9,552   11,331; 4,843    2,539    2,549; 600   10,531
  - Stock of outstanding currency (MT bm) — sample figures: 10,587   10,587; 11,677   13,085; 11,857   13,462; 12,763   15,004; 12,763   15,004; 13,278   15,634   15,473   17,298   17,298

### Structural benchmarks and actions (Table 2, 2010)
- Actions and expected dates of implementation:
  - Approval by the Minister of Finance of the e-Tributação (e-tax) Strategic Planning Document — May 15, 2010
  - Strengthening the Revenue Authority (Administração Tributária, AT): enhancing the management IT system and approving the new organic structure — May 31, 2010
    - (i) enhancement of the management information system;
    - (ii) submission to the Council of Ministers of two decrees to approve the new organic structure and remuneration status AT's staff; and
    - (iii) approval of a resolution by the Interministerial Committee of Civil Service of a resolution that approves the AT ́s new career structure.
  - Creation of an EITI Secretariat — March 31, 2010
  - Adoption of a financial sector contingency plan — May 31, 2010

### Technical Memorandum of Understanding (TMU) — key definitions and rules (selected)
- TMU date: November 18, 2009.
- Purpose: defines the quantitative assessment (performance) criteria, indicative targets, and structural benchmarks for monitoring implementation of the Fund-supported program under the Policy Support Instrument (PSI) and the twelve-month arrangement under the Exogenous Shock Facility (ESF).
- Definitions (selected):
  - Net credit to the central government (NCG): difference between outstanding 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 BM, and proceeds from the signing fee for mineral resource exploration. NCG calculated from balance sheets as per the monetary survey. Limits on change in NCG are cumulative from end-December of the previous year.
  - Government scope: central government ministries, agencies, and the administration of 11 provinces; local governments (33 municipalities or autarquias) are independent and not included.
  - Revenue: includes receipts of the General Directorate of Tax (Direcção Geral dos Impostos, DGI), the General Directorate of Customs (Direcção Geral das Alfândegas, DGA), and nontax revenue as defined in the budget. Net receipts from privatization received by the National Directorate of State Assets and unrealized profits transferred by the central bank to the treasury will not be considered as revenue and will be accounted for as other domestic financing.
  - Reserve money: sum of currency issued by BM and commercial banks’ holdings at the BM.
  - Net international reserves (NIR) of the BM: reserve assets minus reserve liabilities; reserve assets include monetary gold, holdings of SDRs, reserve position at the IMF, holdings of foreign exchange, and claims on nonresidents (excluding government savings accounts related to mineral resource extraction concessions); reserve liabilities include all short-term foreign exchange liabilities to nonresidents with original maturity up to and including one year and all liabilities to the IMF.
  - New nonconcessional external debt contracted or guaranteed by the central government or the BM with maturity of more than one year: debt definition per Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000.
- Specific debt limit:
  - The central government will limit contracting or guaranteeing external debt up to US$5 million each year with original maturity of one year or more with a grant element of less than 35 percent (calculated using OECD commercial interest reference rates). This assessment (performance) criterion applies also to commitments contracted or guaranteed for which value has not been received and will be assessed continuously.
- Other continuous assessment criteria:
  - Stock of short-term external public debt outstanding — central government will not contract or guarantee external debt with original maturity of less than one year (excluding short-term, import-related trade credits).
  - External payments arrears — government undertakes not to incur payments arrears on external debt owed or guaranteed by the central government, except arrears arising from government debt being renegotiated with creditors.
- Adjusters (selected):
  - NIR floors will be adjusted downward/upward by the shortfall/excess in World Bank PRSC 6 program disbursements; downward by shortfall in external program aid less debt service payments (up to US$100 million); downward/upward for revisions to prior year end figures; downward to accommodate higher external outlays because of natural disasters, up to US$20 million.
  - NCG ceilings will be adjusted upward/downward by shortfall/excess in MT equivalent of World Bank PRSC 6 disbursements; upward by shortfall in MT value of external program aid receipts less debt service payments (up to MT equivalent of US$100 million); downward by privatization proceeds in excess of program unless deposited in government’s savings accounts abroad; downward (upward) for any increase (decrease) in domestic financing from the nonfinancial private sector; upward to accommodate higher locally financed government outlays because of natural disasters, up to the MT equivalent of US$20 million.
  - Reserve money ceiling will be adjusted upward by excess of stock of currency issued by the BM above program level, up to MT 750 million; maximum adjustment MT 1000 million at end-December for seasonal currency demand.

### Data and reporting requirements (selected)
- Government will provide Fund staff with:
  - monthly and quarterly data needed to monitor program implementation and broader developments;
  - weekly updates of the daily data set out in Table 1;
  - weekly data set out in Table 4 of the TMU dated May 26, 2005;
  - monthly updates of the foreign exchange cash flow of the BM;
  - monthly data on government revenues (in detail according to the fiscal table) with a lag not exceeding one month;
  - monthly information on the balance of government savings accounts abroad;
  - monthly data on domestic arrears;
  - monthly budget execution reports (to be published) with a time lag not exceeding 45 days;
  - monthly data on gross international reserves, with composition by original currencies and converted to US dollars at the actual exchange rates.
- Monetary survey requirement:
  - The monetary survey made available by the BM will clearly identify donor-financed project deposits (broken down between foreign and domestic currency) included in net credit to the government in both the central bank’s and commercial banks’ balance sheets.
- Loan documentation:
  - Government will provide Fund staff with documentation concerning external loan agreements once signed and effective.

*Source: Mozambican authorities and IMF staff estimates; excerpts from the TMU dated November 18, 2009, and Informational Annex prepared November 23, 2009.*

### 2004. An update safeguards assessment is currently in progress with respect to the

### _cr09327 - 2004. An update safeguards assessment is currently in progress with respect to the

### Safeguards and internal audit
- An update safeguards assessment is currently in progress with respect to the Exogenous Shocks Facility.
- The Bank of Mozambique (BM) has implemented some recommendations of the 2008 assessment.
- Remaining weaknesses:
  - Effectiveness of oversight over external and internal audits needs to be enhanced.
  - The internal audit function needs to be strengthened.

### Exchange arrangements
- Exchange system: Mozambique has a floating exchange system.
- Commercial banks: may buy and sell foreign exchange to individual customers on a fully negotiable basis.
- Foreign exchange auction system: introduced in January 2005 by the Bank of Mozambique.
  - Foreign exchange transactions are conducted mainly bilaterally.
  - There is no pre-established frequency for auctions.
- Article XIV and Article VIII status:
  - Mozambique still avails itself of the transitional arrangements under Article XIV of the Fund Articles of Agreement, but has eliminated all Article XIV restrictions.
  - Maintains restrictions on payments and transfers for current international transactions subject to Fund approval under Article VIII, evidenced by:
    - (i) discretionary prior approval for remittances of family living expenses;
    - (ii) authorization for the purchase of foreign exchange in excess of US$5,000 for certain transactions;
    - (iii) prohibition for the conversion of balances of nonresidents’ domestic currency accounts into foreign currency or transfer abroad;
    - (iv) prohibition on advance payments for a service; and
    - (v) prohibition on advance payments for the import of goods.
  - On June 18, 2007, the Fund granted approval for the retention of these five exchange restrictions until May 31, 2008.
  - An Article VIII mission was conducted by LEG and PDR in March 2004 at the authorities’ request.
  - A new foreign exchange law was submitted to the Assembly in May 2007 and came into effect on March 11, 2009.
  - Following issuance of implementation regulations, the authorities intend to accept their obligations under Article VIII sections 2, 3, and 4 of the Fund’s Articles of Agreement.

### Article IV consultation (2009)
- Cycle: Mozambique is on a 24-month Article IV cycle due to the approval of a PSI in June 2007 (Decision No 12794–(02/76), as amended by Decision No 12854–(02/96)).
- 2009 Article IV consultation: completed by the Executive Board on June 30, 2009 (Country Report No. 09/227).
- Executive Directors’ conclusions and advice:
  - Welcomed Mozambique’s continued strong macroeconomic performance in 2008 despite a challenging external environment.
  - Commended authorities’ flexible policy response to higher fuel and food import prices.
  - Noted vulnerability to the global economic slowdown; agreed country’s track record provided room to ease fiscal and monetary policy in the near-term.
  - Medium-term priorities: further strengthening macroeconomic stability, enhance domestic revenue mobilization, improve public financial management.
  - Welcomed authorities’ intention to limit recourse to domestic financing of the budget to preserve room for private sector credit growth.
  - On exchange rate: Directors suggested paying closer attention to a basket of currencies to support competitiveness and diversification.
  - Further progress needed in structural reforms and safeguarding banking system soundness to support the business environment.

### Ex-post assessment of Fund-supported programs
- An ex post assessment (EPA) of Mozambique’s performance under Fund-Supported Programs since 1987 was undertaken in December 2003; circulated to the Executive Board on November 21, 2003 (Country Report No. 04/53).
- Directors’ assessment:
  - Commended pursuit of sound macroeconomic policies and wide ranging structural reforms over the past fifteen years.
  - Noted these contributed to strong growth and a steady decline in poverty rates.
  - Urged continued efforts to consolidate macroeconomic stability and accelerate structural reforms to sustain growth, encourage employment creation, and reduce poverty.
  - Noted Mozambique remains a very poor and vulnerable country despite progress.

### FSAP participation and ROSCs
- FSAP: Undertaken in Q1 2003; Financial Sector Stability Assessment circulated on November 19, 2003 (Country Report No. 04/52). An update to the FSAP took place in February 2009.
- ROSC on fiscal transparency:
  - Issued on February 22, 2001.
  - Updated in the context of the 2002 Article IV consultation (Country Report No. 02/140) and the 2003 Article IV Consultation (Country Report No. 04/50).
  - ROSC on fiscal transparency updated in May 2008.
- ROSC data module:
  - Prepared in June 2002 and issued on March 5, 2003.
  - Updated in August 2005.

### Management visits and resident representative
- Management visits:
  - Mr. Kato, Deputy Managing Director, visited Maputo in July 2005.
  - The Managing Director visited Mozambique in August 2007 for a meeting with the African Consultative Group on Quotas, Voice, and Representation.
- Resident representative:
  - Mr. Felix Fischer has been the IMF’s resident representative to Mozambique since March 14, 2006.

### IMF Technical Assistance Provided to Mozambique (2006–09)
- Finance Department:
  - February 2008: Mission — Update of safeguard assessment — Bank of Mozambique.
- Fiscal Affairs Department (selected missions):
  - May 2009: Mission — Tax Administration Reform — Ministry of Finance.
  - August 2008: Mission — Public Financial Management Reforms — Ministry of Finance.
  - April–May 2008: Mission — Revenue Administration reform — Ministry of Finance.
  - Oct–Nov 2007: Mission — Tax Administration inspection — Ministry of Finance.
  - September 2007: Mission — Public Private Partnerships and Fiscal Risks — Ministry of Finance.
  - August 2007: Peripatetic expert — Tax Policy and Administration — Ministry of Finance.
  - August 2007: Mission — Fiscal ROSC update and Public Financial Management inspection — Ministry of Finance.
  - April–May 2007: Mission — Tax Administration inspection — Ministry of Finance.
  - April–May 2007: Mission — Petroleum Fiscal Regime — Ministry of Finance; Ministry of Mineral Resources.
  - December 2006: Mission — Tax Administration — Ministry of Finance.
  - March 2006: Mission — Tax Policy review — Ministry of Finance.
- Monetary and Capital Markets Department (selected missions):
  - May 2009: Mission — 2009 FSAP follow-up mission — Bank of Mozambique.
  - February 2009: Mission — TA on Central Banking and Monetary Policy Formulation — Bank of Mozambique.
  - May 2008: Mission — Strengthening Monetary Policy Formulation and Implementation — Bank of Mozambique.
  - December 2007: Mission — Implementation of IFRS for Central Bank accounts — Bank of Mozambique.
  - August 2007: Mission — Post-FSAP TA assessment banking supervision, monetary Policy and operations — Bank of Mozambique.
  - April 2007: Short-term consultant — Banking supervision — Bank of Mozambique.
  - October 2006: Mission — Post-FSAP TA assessment banking supervision, monetary Policy and operations — Bank of Mozambique.
  - Feb–March 2006: Mission — AML/CFT legislation — Bank of Mozambique.
  - Jan–Feb 2006: Short-term consultant — Monetary policy framework — Bank of Mozambique.
  - Jan–Feb 2006: Short-term consultant — Monetary operations — Bank of Mozambique.
  - January 2006: Short-term consultant — Exchange rate management — Bank of Mozambique.
- Statistics Department (selected missions):
  - March–April 2008: Mission — National accounts statistics — National Institute of Statistics.
  - February 2008: Mission — Balance of payments statistics — Bank of Mozambique.
  - December 2007: Mission — Balance of payments statistics — Bank of Mozambique.
  - November 2007: Mission — Monetary and financial statistics — Bank of Mozambique.
  - June–July 2006: Mission — Consumer price statistics — National Institute of Statistics (INE).
  - August 2005–July 2006: Long-term consultant — National accounts statistics — National Institute of Statistics.
  - July 2005: Mission — Government finance statistics — National Institute of Statistics.

### Joint work program and planned products (selected)
- Bank work program:
  - CEM on export competitiveness and regional integration: Feb-May 2008, expected delivery June 2009.
  - PRSC6 supporting government reforms program in PFM, PSR and economic development reforms: November 2009.
  - Updated poverty analysis using the 2008/09 household survey: February 2010.
- Fund work program:
  - Fifth PSI and First ESF Review: Sep-09, expected Dec-09.
  - Sixth PSI and Second ESF Review: Mar-10, expected Jun-10.
- Joint products and missions:
  - DSA: End-2009, Early 2010.
  - FSAP: February 2009, May 2009 (delivered).
  - PFM: update work plan for 2009-11 in light of findings from PEFA and ROSC: October 2010.
  - PFM: continue to monitor consolidation and expansion of e-SISTAFE: ongoing.
  - Policy advice on Public Sector Salary Reforms (incl. pensions): ongoing.
  - Review of tax policy: tbd.

### Statistical issues — overview and sectoral details
- Overall assessment:
  - Data provision has some shortcomings, but is broadly adequate for surveillance.
  - Continued high reliance on external funding raises concerns about sustainability of INE programs.
  - Authorities participate in the Fund’s GDDS and GDDS Project for Anglophone African Countries (funded by the U.K. Department for International Development (DFID)).
  - GDDS metadata posted on the Fund’s DSBB since November 2003.
- ROSC updates and STA missions:
  - May 2005 STA mission updated the data module of the ROSC prepared in June 2002; noted significant effort to address shortcomings.
  - Improvements in institutional environment and increased resources for national accounts, balance of payments, and government finance statistics expected to improve quality and timeliness.
- National accounts:
  - Prepared by INE in accordance with the 1993 System of National Accounts (1993 SNA).
  - August 2007: INE released quarterly GDP estimates at constant prices covering 2000–07 and revised annual GDP series for 1991–2006, base year 2003.
  - March–April 2008 STA mission advised on improvements to compile quarterly national accounts at current prices for possible release starting in mid-2009.
  - INE launched a new household income and expenditure survey and new economic censuses leading to a new business registry; compiling more comprehensive foreign trade data.
- Prices and labor market:
  - Revamped consumer price index for Maputo based on 2002–03 household survey released February 2006.
  - National CPI integrating Maputo, Beira, and Nampula released April 2006.
  - June 2006 STA mission noted advances (COICOP classification use, strengthened human resources) but outstanding issues remain (provincial price collection consolidation, imputation methods, overlapping-series inconsistencies).
  - Insufficient sectoral labor market and employment data; a one-year labor market survey launched October 2004.
- Monetary statistics:
  - September 2004 STA mission prepared a work plan for MFSM implementation and integrated monetary database (IMD).
  - Recommended improvements in classification, valuation of instruments, estimating full instrument and sectoral breakdowns, and expanding depositary survey coverage.
  - November 2007 follow-up assisted in finalizing IMD; Mozambique now reports monthly monetary data to STA using SRFs.
  - Five-year historical enhanced data published in the IFS Supplement.
- External sector statistics:
  - With STA assistance, BM made significant progress toward compiling and disseminating BOP and IIP statistics aligned with BPM5.
  - Remaining needs: Foreign Exchange Law approval (to incorporate residency definition consistent with BPM5), sustained training, completion of the balance of payments compilation system computerization.
  - Ongoing concerns: (i) coverage and quality of enterprise survey data; (ii) quality of external trade data (price and volume indices); (iii) coverage, timing, and classification of foreign investment and private loans data; (iv) completeness of International Reserves Template data and reconciliation with the reserve component of the BOP; (v) compiling the IIP using sources used for BOP.
  - To improve merchandise trade data collection, a foreign trade statistics panel was established with Customs, INE, and BM.
  - 2007: BM started to compile and report comprehensive IIP data (previously only partial IIP data reported).
- Government finance statistics:
  - July 2005 STA mission found serious weaknesses in fiscal statistics.
  - Issues: budget accounting system broadly aligned to GFSM 1986 but shortcomings in definitions and coverage of general government, budgetary classifications not fully meeting GFS needs, omission of certain revenues and expenditures.
  - Data on arrears are not collected and compiled systematically.
  - 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 October 15, 2009) — selected entries
- Exchange Rates: Date of latest observation Aug. 2009; Date received Sep. 2009; Frequency D; Frequency of Reporting W; Frequency of publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: Date of latest observation Aug. 2009; Date received Sep. 2009; Frequency D; Frequency of Reporting W; Frequency of publication D.
- Reserve/Base Money: Date of latest observation Aug. 2009; Date received Sep. 2009; Frequency M; Frequency of Reporting M; Frequency of publication M; Data Quality – Methodological soundness: LO, O, LO, O; Data Quality Accuracy and reliability: LO, LO, O, O, LO.
- Broad Money: Date of latest observation Aug. 2009; Date received Sep. 2009; Frequency M; Frequency of Reporting M; Frequency of publication M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation July 2009; Date received Aug. 2009.
- Interest Rates2: Date of latest observation Aug. 2009; Date received Sep. 2009; Frequency M; Frequency of Reporting M; Frequency of publication M.
- Consumer Price Index: Date of latest observation Aug. 2009; Date received Sep. 2009; Frequency M; Frequency of Reporting M; Frequency of publication M; Data Quality – Methodological soundness: O, LO, LNO, O; Data Quality Accuracy and reliability: LNO, LO, LO, O, O.
- Revenue, Expenditure, Balance and Composition of Financing3 – General Government4: Date of latest observation July 2009; Date received Aug. 2009; Frequency of Data M; Frequency of Reporting Q; Frequency of publication Q; Data Quality – Methodological soundness: LO, LNO, LO, O; Data Quality Accuracy and reliability: LO, O, LO, O, LNO.
- Stocks of Central Government and Central Government-Guaranteed Debt5: Date of latest observation Dec.2008; Date received May. 2009; Frequency Q; Frequency of Reporting Q; Frequency of publication Q.
- External Current Account Balance: Date of latest observation June. 2009; Date received Sep. 2009; Frequency Q; Frequency of Reporting I; Frequency of publication I; Data Quality – Methodological soundness: LO, LNO, LO, O; Data Quality Accuracy and reliability: LO, LNO, LO, LO, LNO.
- Exports and Imports of Goods and Services: Date of latest observation June. 2009; Date received Sep. 2009.
- GDP/GNP: Date of latest observation 2009 Q2; Date received Sep. 2009; Frequency Q; Frequency of Reporting Q; Frequency of publication I; Data Quality – Methodological soundness: O, LO, O, LO; Data Quality Accuracy and reliability: LNO, LO, LO, O, LO.
- Gross External Debt: Date of latest observation Dec. 2008; Date received Mar. 2009; Frequency A; Frequency of Reporting I; Frequency of publication I.
- International Investment Position6: Date of latest observation 2007; Date received May 2009; Frequency A; Frequency of Reporting A; Frequency of publication A.

### Press Release — IMF completes Fifth PSI review and First ESF review for Mozambique (Press Release No. 09/450; December 8, 2009)
- The Executive Board completed the fifth review under the three-year Policy Support Instrument (PSI) and the first review under the one-year Exogenous Shocks Facility (ESF).
- Completion of the first ESF review made available a disbursement of SDR 14.2 million (about 22.6 US million dollars). The Board's decision was taken on a lapse of time basis.
- Recent macroeconomic context and outlook:
  - After a prolonged period of robust macroeconomic performance, Mozambique was adversely affected by the global economic crisis.
  - The economy showed unexpected resilience, partly because authorities temporarily eased macroeconomic policies.
  - Growth averaged 7½ percent over the past three years; expected to weaken to 4½ percent in 2009.
  - Policy implementation remained strong and broadly in line with the program.
  - Most key quantitative targets for end-June 2009 were met — though net credit to the government and reserve money growth were higher than envisaged.
  - Good progress in implementing structural reforms.
  - Economic performance expected to improve in 2010 with projected growth rate of 5½ percent.
  - Authorities intend to start unwinding temporary fiscal and monetary stimulus as activity strengthens.
  - Authorities reiterated commitment to medium-term strategy of prudent macroeconomic policies and structural reforms to support private sector development.
- PSI approval:
  - PSI for Mozambique approved on June 18, 2007 to support economic reform efforts; aimed at consolidating macroeconomic stability and achieving sustained growth and poverty reduction.
  - Strategy set in national poverty reduction strategy, Plano de Acção para Redução da Pobreza Absoluta (PARPA II).
- ESF details:
  - ESF amount: SDR 113.6 million approved on May 29, 2009; SDR 85.2 million disbursed on approval.
  - Purpose: provide policy support and concessional financial assistance to eligible low-income countries facing temporary exogenous shocks to help offset deterioration of balance of payments.

*Source: _cr09327 - 2004. An update safeguards assessment is currently in progress with respect to the (IMF country report / PDF content provided).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09327.pdf_