## _cr10174 — Executive Summary

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### I. Exiting the Global Financial Crisis — performance and near-term outlook
- Real GDP grew by 6⅓ percent in 2009; growth driven by construction, energy, and financial sectors.
- Policy response:
  - Authorities eased fiscal and monetary policies; substitution of foreign borrowing with domestic credit expansion occurred.
  - Inflation remained subdued due to low commodity prices and a fuel price subsidy introduced in May 2009, with some pick up toward year-end.
  - All quantitative targets for end-December 2009 were met except the reserve money target; authorities request a waiver for nonobservance.
  - Reserve money target missed because of an unpredictable year-end surge in seasonal currency demand and a structural shift from ‘unbanked’ to ‘banked’ economy.
  - The central bank (BM) committed to restraining monetary growth in 2010.
- Outlook and sequencing:
  - Growth forecast: 6½ percent in 2010, led by new megaprojects and stepped-up public investment.
  - Inflation: expected to remain in single digits with a temporary spike related to gradual removal of the fuel subsidy (temporary spike to above 9 percent in 2010 is noted elsewhere).
  - External sector: projected sharp rise in investment-related imports, but recovery in export prices should contain the current account deficit and keep international reserves comfortable.
- Donor relations:
  - Donor budget support was temporarily suspended after October 2009 elections and resumed in April 2010.
  - Resumption of aid and stepped-up foreign exchange sales by the central bank narrowed the wedge between official and retail market exchange rates.

### II. Rationale and design of the successor PSI (2010–13)
- Strategic objectives:
  - Diversify the productive base and increase private sector role to create employment and reduce poverty.
  - Step up transportation and electricity infrastructure investment; consider tapping nonconcessional external resources on a limited, time-bound basis.
- Key program features:
  - Financing and fiscal stance:
    - Limited and time-bound expansion of untied nonconcessional external borrowing and domestic financing to boost infrastructure investment.
    - Maintain a prudent fiscal policy stance to keep the primary domestic deficit broadly unchanged.
  - Monetary policy:
    - Sufficiently tight to contain domestic demand pressures while providing room for private sector credit expansion.
    - Reserve money remains the operational target in the near future; program target defined as a monthly average rather than an end-period stock.
  - Structural reform priorities:
    - Promote debt management and a multi-year borrowing strategy.
    - Improve investment planning.
    - Continue public financial management, tax policy and administration, monetary policy framework, and financial sector supervision reforms.
  - Implementation support:
    - Staff supports waiver for nonobservance of end-December 2009 reserve money criterion and completion of final PSI/ESF program reviews and successor PSI approval.

### III. Program performance, ownership, and lessons from past programs
- Program performance and ownership:
  - Program performance was generally very strong; authorities showed commendable ownership and discipline under Fund programs.
  - PSI proved flexible to accommodate shocks (food/fuel price surge; global crisis).
  - Reviews were completed on time; fiscal policy and NIR targets were generally met; reserve money target was regularly overshot due to cash demand prediction difficulties.
  - Structural conditionality observance improved over time: two-thirds of structural measures under the PRGF implemented on time versus four-fifths under the PSI.
- Major macro achievements 2004–09:
  - Real GDP growth averaged almost 8 percent during 2004–09.
  - Poverty rate fell from 69 percent in 1997 to 54 percent in 2003 (last full assessment).
  - Current account deficit (after grants) improved from around 18 percent of GDP during 2000–03 to about 10 percent of GDP in 2004–09.
  - Capital inflows averaged 20 percent of GDP during 2004–09; aid exceeded 13 percent of GDP in the last four years.
  - International reserves generally exceeded four months of imports, further boosted in 2009 by ESF access and SDR allocation.
  - Low public debt burden after MDRI/HIPC debt relief; low risk of external debt distress at end-2009.

### IV. Fiscal strategy, public investment, and financing
- Creation and sources of fiscal space:
  - Revenue collections increase of 1½ percent of GDP.
  - Moderate expansion of domestic financing of ½ percent of GDP.
  - Nonconcessional external borrowing of 2½ percent of GDP (staff guidance: cautious, time-bound).
- Allocation and fiscal balances:
  - Additional fiscal space largely channeled to public investment.
  - Overall fiscal deficit (after grants) temporarily rises by about 2 percentage points to a peak of about 7 percent of GDP by 2011.
  - Primary domestic deficit to remain broadly stable at about 4 to 4½ percent of GDP during the program period.
  - Fuel subsidy accounted for spending of above 1 percent of GDP in 2009; retail fuel prices adjusted by a cumulative 30 percent since end-March (two steps).
- Public investment program magnitude (Total public investment, percent of GDP):
  - Total: 13.1 (2009), 15.4 (2010), 18.6 (2011), 18.4 (2012), 18.0 (2013), 17.4 (2014), 17.3 (2015)
  - On budget: 13.1 (2009), 13.9 (2010), 17.1 (2011), 17.0 (2012), 16.8 (2013), 16.3 (2014), 16.5 (2015)
  - Domestically financed: 4.5 (2009), 6.1 (2010), 6.5 (2011), 6.8 (2012), 6.9 (2013), 7.0 (2014), 7.3 (2015)
  - Donor financed, concessional: 8.6 (2009), 7.8 (2010–2015 each year at 7.8)
  - Nonconcessional: 0.0 (2009), 0.0 (2010), 2.8 (2011), 2.5 (2012), 2.2 (2013), 1.6 (2014), 1.4 (2015)
- Implementation modalities:
  - Projects financed/co-financed by development partners and implemented through budget or selected SOEs (Road Fund, FIPAG, EDM).
  - Some projects via concessions or PPPs; emphasis on feasibility studies and cost recovery via concessions, user fees, and tolls where appropriate.

### V. Borrowing strategy, debt sustainability, and DSA findings
- Borrowing limits suggested by staff analysis:
  - Domestic financing up to 1 percent of GDP per year.
  - Untied nonconcessional external borrowing averaging 2½ percent of GDP per year (a cumulative US$900 million during the program period).
- DSA key findings:
  - Joint IMF-World Bank LIC DSA (end-2009 stocks) indicates Mozambique’s risk of debt distress remains low.
  - External PPG debt stock at end-2009: US$3.45 billion nominal; US$1.59 billion PV.
  - Creditor composition: 67 percent multilateral; 33 percent bilateral.
  - PV of PPG external debt: 17 percent of GDP in 2009; about 31 percent of GDP in 2015 (threshold: 40 percent); below 25 percent by 2030.
  - Debt service on PPG external debt: nearly 2 percent of exports in 2009; rise to 7½ percent in 2016; decrease towards 4 percent by 2030 (threshold: 20 percent).
- Stress tests and vulnerabilities:
  - A 30 percent depreciation and combination shocks would temporarily and marginally breach PV of debt-to-GDP threshold.
  - Standard export shock (B2) would raise PV of debt-to-exports ratio to 190 percent by 2015, exceeding threshold; modified export shock (aluminum volatility) does not exceed threshold.
  - Public debt projected to rise from 29 percent of GDP at end-2009 to 48 percent of GDP in 2015, then decline toward 42 percent by 2030.
- Staff recommendations:
  - Cautious use of nonconcessional borrowing; assess new financing case-by-case based on economic return and debt sustainability.
  - Strengthen debt management capacity; finalize a comprehensive debt strategy by end-November 2010; complete first semiannual DSA by end-September 2010.

### VI. Monetary policy, liquidity management, and exchange regime
- Monetary policy objectives:
  - BM aims to contain inflation to below 6 percent over the medium term, with a temporary spike to 9 percent in 2010 from fuel subsidy removal (alternate passages indicate above 9 percent spike in 2010).
  - BM raised its key policy rate (FPC) from 11½ to 12½ percent in April 2010.
  - Reserve money will remain the operational target; program target defined as monthly average of daily stocks to accommodate intramonth volatility.
- Operational work and transition:
  - BM deciding whether to move to an inflation targeting framework over the next two years with significant Fund TA; prerequisites: select inflation target, improve projection and transmission analysis, strengthen monetary instruments, improve communications.
  - BM working on liquidity demand forecasting to capture shift toward a banked economy.
- Challenges from increased borrowing:
  - Nonconcessional and domestic borrowing increases raise liquidity and foreign exchange management challenges, potential for temporary appreciation and excess liquidity if borrowing timing misaligned with imports.
  - Large inflows may require greater sterilization and coordination between BM and government and a cost-sharing mechanism.

### VII. Financial sector, governance, and structural reforms
- Financial sector measures:
  - Follow-up on 2009 FSAP update and recent TA; develop Financial Sector Action Plan by end-July 2010.
  - Step-up risk management and develop deposit insurance; issue Aviso on risk management by end-December 2010; draft decree on deposit insurance by year-end.
  - Close supervision following rapid credit growth; encourage bank stress testing and monitor liquidity and loan portfolio quality.
  - Strengthen AML/CFT framework; GIFIM recruitment and draft AML law amendment to be submitted to Parliament by end-August 2010.
- Public financial management and governance reforms:
  - Roll out e-SISTAFE and e-FOLHA, integrate internal audit, and improve aid management.
  - PPP, Concessions and Megaprojects Law adoption by end-September 2010; PPP unit operational by end-2010.
  - Public Enterprises Law by end-July 2010 to improve SOE reporting and borrowing approval requirements.
  - Procurement reforms, procurement audits terms of reference, and procurement career development milestones through end-2010/2011.
- Business environment and statistics:
  - Fast-track measures to ease red tape, streamline licensing, improve bankruptcy proceedings, and facilitate trading across borders by end-2010.
  - Statistical improvements: rebasing CPI, improving quarterly national accounts, and enhancing GFS and megaproject data; CPI rebasing and software selection before 2011.

### VIII. Program monitoring, performance criteria, and structural benchmarks
- Program monitoring changes relative to expiring PSI/ESF:
  - Ceiling on nonconcessional borrowing modified to allow larger untied external borrowing.
  - Reserve money target to be met on an average basis (monthly average) to accommodate intra-month volatility.
  - Indicative floor on priority spending (PARPA-defined) introduced to protect social spending.
- Selected structural benchmarks and timelines:
  - Adoption by Council of Ministers of PPP, Concessions and Megaprojects Law by end-September 2010.
  - Finalize multi-year debt strategy by end-November 2010 (structural benchmark).
  - Complete and publish first semiannual debt sustainability analysis by end-September 2010 (structural benchmark).
  - Adoption of e-Tributação strategic planning done: e-Tributação Strategic Planning Document — Met — May 15, 2010.
  - Creation of an EITI Secretariat — Met — March 31, 2010.
  - Adoption of a financial sector contingency plan — In progress — May 31, 2010 (likely delayed to end-September 2010 in narrative).

### IX. Macroeconomic projections and key indicators (selected series, 2008–15)
- Real GDP, percent change: 6.7 6.3 6.5 7.5 7.6 7.9 7.8 7.8
- Inflation, eop, percent change: 6.2 4.2 8.0 5.6 5.6 5.6 5.6 5.6
- Inflation, average, percent change: 10.3 3.3 9.3 5.6 5.6 5.6 5.6 5.6
- Current account deficit (after grants), percent of GDP: -11.9 -11.9 -13.6 -12.8 -13.5 -13.4 -13.0 -12.8
- Gross external reserves, months of projected imports: 4.6 5.1 4.9 5.3 5.6 5.7 5.5 5.3
- Primary domestic fiscal deficit, percent of GDP: -3.2 -4.4 -4.2 -4.6 -4.4 -4.0 -3.8 -3.7
- Overall fiscal deficit (after grants), percent of GDP: -2.3 -5.6 -4.7 -7.2 -6.8 -6.1 -5.3 -5.1
- Private sector credit, percent change: 45.9 58.6 19.1 14.0 14.9 15.8 15.7 15.8
- Private sector credit, percent of GDP: 18.8 27.1 27.8 27.9 28.1 28.6 29.1 29.6
- Reserve money, percent change: 7.8 7.3 19.5 14.7 15.0 15.1 14.9 15.0

### X. Staff appraisal and recommendations
- Staff endorses authorities’ direction: accelerate infrastructure-led development within a prudent fiscal and monetary framework.
- Emphasized policy advice:
  - Cautious use of nonconcessional borrowing; prioritize project quality and implement a comprehensive debt strategy.
  - Strengthen debt management capacity and investment planning to safeguard debt sustainability and macro stability.
  - Maintain prudent monetary policy to contain domestic demand pressures while supporting financial deepening.
  - Continue PFM, tax administration, and financial sector reforms; provide extensive Fund TA in these areas.
- Executive Board actions (noted in document excerpts):
  - Completion of the sixth PSI review and the second ESF review recommended.
  - Waiver for the nonobservance of the end-December 2009 reserve money AC/PC recommended.
  - Approval of the proposed successor three-year PSI covering 2010–13 recommended.

*Source: Executive Summary and excerpts from IMF staff report—_cr10174.*

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

### Executive Summary

### I. Exiting the Global Financial Crisis

- Mozambique showed considerable resilience to the global crisis:
  - Real GDP grew by 6⅓ percent in 2009, driven by construction, energy, and financial sectors.
  - Large declines occurred in export receipts and private capital inflows; SDR allocation and ESF resources helped cushion the impact.
- Policy response and outcomes:
  - Authorities eased fiscal and monetary policies to support activity and facilitated substitution of foreign borrowing with domestic credit expansion.
  - Inflation remained subdued because of low commodity prices and a fuel price subsidy introduced in May 2009, with some pick up toward year-end due to rebounding international prices and currency depreciation.
  - All quantitative targets for end-December 2009 were met except the reserve money target; authorities request a waiver for nonobservance.
  - Reserve money target missed due to unpredictable year-end surge in seasonal currency demand and structural shift from ‘unbanked’ to ‘banked’ economy.
  - The central bank (BM) committed to restraining monetary growth in 2010.
  - Structural reforms are on track; one benchmark (development of a financial sector contingency plan) will be delayed by four months because of difficulties in securing World Bank funding.
- Outlook and sequencing:
  - Growth forecast: 6½ percent in 2010, led by new megaprojects and stepped-up public investment.
  - Inflation: expected to remain in single digits despite a temporary spike related to gradual removal of fuel subsidy launched in March 2010.
  - External sector: projected sharp rise in investment-related imports, but recovery in export prices should contain the current account deficit and keep international reserves comfortable.
- Donor relations:
  - Donor budget support was temporarily suspended over governance concerns after October 2009 elections but resumed in April 2010 following government commitments on governance reforms.
  - Resumption of aid, plus stepped-up foreign exchange sales by the central bank, narrowed the wedge between official and retail market exchange rates.

### II. A New PSI—Setting Policies for Sustained Growth (Overview)

- Rationale for successor program:
  - Authorities seek to accelerate economic development and maintain macroeconomic stability through a successor three-year PSI.
  - The retrospective on prior programs and a high-level conference informed policy options and program design.
- Strategic objectives:
  - Diversify the productive base and increase private sector role to create employment and reduce poverty.
  - Expand transportation and electricity infrastructure networks, with consideration of tapping nonconcessional external resources.
- Staff guidance on external borrowing and macro stability:
  - Staff analysis confirms relatively low capital abundance and investment rates, and suggests a cautious borrowing approach to preserve macroeconomic stability and debt sustainability.
  - Other supportive policies include improving the business climate to foster private sector activity.

### II.B Achievements in Past Programs (Selected Findings)

- Macroeconomic performance over 2004–09:
  - Real GDP growth averaged almost 8 percent during 2004–09.
  - Poverty rate fell from 69 percent in 1997 to 54 percent in 2003 (last full assessment); new household survey results pending.
  - Inflation has generally remained in single digits, with spikes during global food and fuel price surges.
  - Current account deficit (after grants) improved from around 18 percent of GDP during 2000–03 to about 10 percent of GDP in 2004–09, driven by megaproject exports (notably Mozal).
  - Capital inflows averaged 20 percent of GDP during 2004–09; aid exceeded 13 percent of GDP in the last four years.
  - International reserves generally exceeded four months of imports and were further boosted in 2009 by ESF access and SDR allocation.
  - Low public debt burden and, after MDRI/HIPC debt relief, low risk of external debt distress.
- Program performance and flexibility:
  - The PSI proved flexible to accommodate shocks (fuel and food price surge; global crisis).
  - Authorities showed strong program ownership and a commendable implementation record.
  - Difficulties in predicting cash demand amid rapid banking expansion in rural areas contributed to miss on reserve money target.

### II.C Mozambique’s Macroeconomic Challenges (Summary)

- Major challenges:
  - Diversification of the productive base and acceleration of private sector-driven growth for employment and poverty reduction.
  - Infrastructure deficits in transportation and electricity constraining growth; authorities consider nonconcessional external resources to finance expansion.
- Policy trade-offs emphasized:
  - Need for a cautious approach to nonconcessional borrowing to maintain macroeconomic stability and debt sustainability.
  - Complementary reforms to improve business climate, public financial management, tax policy and administration, monetary policy framework, and financial sector supervision.

### II.D Design of the New Program (Key Features)

- Financing and fiscal stance:
  - Limited and time-bound expansion of untied nonconcessional external borrowing and domestic financing to boost infrastructure investment.
  - Maintain a prudent fiscal policy stance to keep the primary domestic deficit broadly unchanged.
- Monetary policy:
  - Sufficiently tight to contain domestic demand pressures while providing room for private sector credit expansion.
- Structural reform priorities:
  - Improve capacity for informed decision making through:
    - Promoting debt management.
    - Developing a borrowing strategy.
    - Improving investment planning.
  - Continue ongoing reforms in public financial management, tax policy and administration, the monetary policy framework, and financial sector supervision.
- Implementation support:
  - Staff supports waiver for nonobservance of end-December 2009 reserve money assessment/performance criterion.
  - Staff supports completion of final PSI/ESF program reviews and approval of the successor PSI.

### III. Program Monitoring

- Program monitoring will follow the successor PSI framework with continued quantitative and structural benchmarks (details in attachments and technical memorandum).

### IV. Staff Appraisal

- Staff appraisal endorses:
  - The authorities’ overall program direction to accelerate infrastructure-led development within a prudent fiscal and monetary framework.
  - Cautious use of nonconcessional borrowing, strengthened debt management, and enhanced investment planning to safeguard debt sustainability and macro stability.

*Source: Executive Summary, _cr10174 - Executive Summary*

### 9.      Program performance was generally very strong (Box 2). The authorities showed

### 9.      Program performance was generally very strong (Box 2). The authorities showed

### Program performance and ownership
- Program performance was generally very strong.  
- The authorities showed commendable ownership in pursuing sound economic policies underpinned by a focus on structural reforms aimed at enhancing economic policy-making.  
- A protracted period of political stability contributed importantly to securing these results.  
- The authorities felt greater ownership under the PSI than under prior programs; they appreciated the self-discipline imposed by a Fund program even as conditionality declined over time.  
- The authorities valued the Fund’s enhanced flexibility in response to exogenous shocks and saw the program relationship as instrumental in helping build capacity in economic policy making.  
- The authorities considered a successor PSI particularly useful as Mozambique faces more complicated policy issues, such as accessing market financing; close engagement with the Fund would provide expertise and act as a counterbalance against overly ambitious and optimistic plans.

### Box 2 — A Strong Track Record in Program Implementation Since 2004
- Macroeconomic policy mix aimed to preserve macroeconomic stability:
  - Fiscal policy sought to avoid domestic financing to make room for private sector credit. Fiscal deficits were almost exclusively financed on concessional terms, thanks to strong donor engagement. Nonconcessional borrowing was limited to near zero under the Fund-supported programs.
  - Monetary policy successfully managed to contain inflation, relying on reserve money as the operational target.
- Program design was flexible:
  - Program targets were loosened to accommodate the authorities’ response to the food and fuel price surge and, more recently, to the global crisis.
  - The performance criterion (PC) on the domestic primary deficit was relaxed at the fourth PRGF review to use the fiscal space created by the MDRI for additional priority spending. It was subsequently replaced by a PC on net credit to the government, which allowed for unexpected aid to be spent.
- Program implementation reflected strong ownership:
  - The reviews were completed on time.
  - Fiscal policy and NIR targets were generally met. But the reserve money target was regularly overshot because of difficulties in predicting demand for cash in a country transitioning to a banked economy.
  - Observance of structural conditionality improved over time. Some two-thirds of structural measures under the PRGF were implemented on time, compared to four-fifths under the PSI.
  - Compliance was lowest in reforms outside the Fund’s area of expertise, reflecting a lack of follow-up by development partners, although compliance improved markedly under the PSI.
  - Structural conditionality was streamlined: prior actions were discontinued after the fourth PRGF review in mid-2006; structural performance/assessment criteria were halved over time and discontinued altogether after the third PSI review in late 2008.
  - Structural conditionality focused on measures within the Fund’s core area of expertise and was supported by extensive technical assistance (TA) on public financial management (PFM), tax policy and administration, and monetary and financial sector policies. Selection benefited from close cooperation between area and functional departments and the TA coordinator operating from the local Fund office.

### Mozambique’s macroeconomic challenges
- Economic expansion has gradually decelerated and become dependent on megaprojects in the natural resources sector.
  - Megaprojects’ spillovers to the rest of the economy have been limited due to shallow vertical and horizontal integration, high physical capital intensity, profit repatriation patterns, and low tax revenue contributions.
  - Sectoral contributions to growth have been uneven, with subdued participation of the private sector outside megaprojects.
  - Private investment has not taken off as much as in most peer countries, little employment has been generated, and development indicators, while improving, are still low.
  - The traditional export sector has lagged, concentrating the export base and heightening external vulnerability: by end-2008, exports of aluminum, electricity, and natural gas accounted for about 60 percent of total exports.
- To sustain improvements in living standards, policies must diversify the productive and export base and increase the role of the private sector.
  - These challenges were discussed at a three-day high-level conference in Namaacha, which helped shape program discussions.

### Namaacha Conference — key conclusions (Box 3)
- Attended by 140 participants from government, private sector, academia, civil society, and development partners.
- Broad recognition that economic growth and macroeconomic stability since the end of the civil war needed to be preserved, but growth was trending down and poverty remained high.
- Agreement that higher and more inclusive growth requires encouraging private sector–driven economic activity.
- Discussed strategies included boosting public investment, creating a more enabling business environment, developing key sectors (agro-industries, textile, tourism), enhancing regional integration, and better tapping Mozambique’s comparative advantages.
- Final seminar day focused on informed borrowing decisions if Mozambique tapped commercial financing; Bank and Fund experts explained bonds, (syndicated) loans, financing from bilateral development banks, and Public-Private Partnerships (PPP), and urged building institutional capacity for debt management and a multi-year external and domestic borrowing strategy.

### Investment, growth, and debt sustainability
- Authorities aim to boost public investment—especially in transport and electricity—to enable private sector activity and regional trade; financing could include nonconcessional external resources if concessional funds and revenue efforts prove insufficient.
- Staff analysis: boosting investment has potential merits but staff simulations show that a permanent increase in public investment over the next two decades financed exclusively at market terms would noticeably worsen Mozambique’s debt indicators and impact macroeconomic stability.
  - Recommendation: adopt a more limited and time-bound scaling up of investment, prioritize project quality, and develop a consistent cross-sectoral investment strategy to ensure crowding in of private investment.
- Empirical results (Box 4):
  - A 1 percent increase in the rate of public investment could raise output growth by up to 0.5 percent on impact.
  - A 1 percent increase in the rate of private investment could raise output growth by up to 1.3 percent on impact.
  - Public investment can yield higher growth provided the business environment and economic governance improve; persistence of expansionary effects depends on how much public investment promotes future private investment.

### Design of the successor PSI — balancing development and stability
- The successor PSI intends to support development objectives while safeguarding macroeconomic stability.
  - Authorities seek a significant step-up in public investment financed by broadening financing options to include nonconcessional borrowing, concessions, and PPPs, while retaining macroeconomic stability as an overriding priority.
- A time-bound increase in public investment could be consistent with debt sustainability and stability but carries risks:
  - It would require a changed fiscal stance over the next few years focused on creating fiscal space mainly through a sustained revenue effort and increased nonconcessional and domestic borrowing.
  - Staff and authorities agreed that the virtually zero limit on nonconcessional external borrowing under prior programs was inconsistent with development needs and should be relaxed.
  - Increased domestic financing appears feasible given the sharp increase in financial intermediation, providing room to finance the budget without crowding out private credit.
  - An excessive and permanent expansion of public investment could undermine debt sustainability, create undesirable domestic demand pressures, and strain institutional capacity.
- Program commitments:
  - Embed expansion of public investment in transport and energy over the next three years within a prudent macroeconomic policy mix.
  - Authorities committed to keeping the domestic primary balance broadly stable during the program period and tightening monetary policy to ward off inflationary pressures while supporting continued financial deepening. (MEFP ¶5-10)

### Macroeconomic outlook and contingencies
- The envisaged policy stance is not expected to increase domestic demand pressures nor burden the current account and reserve levels:
  - High import content and external financing of planned investment and underutilized labor markets should contain inflationary effects and prevent crowding out of private investment.
  - While higher imports could worsen the current account deficit, this is expected to be broadly offset by a recovery in export prices and a larger, more diversified export base from new megaprojects.
  - This should broadly stabilize reserve cover over the medium term and prepare the country to service debt from envisaged new external borrowing.
  - Note: The Rio Doce coal mine is expected to launch production and exports in 2011, and investment is ongoing to allow an increase in Mozambique’s natural gas and titanium exports by half during 2011–13.
- If the investment program overextends the economy’s capacity, authorities would adjust macroeconomic policies:
  - Monitor for inflationary pressures and signs of crowding out of private sector activity.
  - Tighten monetary policy and revisit budgetary spending plans to contain government financing needs if necessary.

### Structural reform focus under the successor PSI
- Initial structural conditionality will focus on enabling informed decisions for financing the investment program, strengthening debt management, developing a coherent borrowing strategy, and creating a sound framework for PPPs and concessions.
- As progress is made, structural conditionality will shift back to reforms to:
  - Strengthen public financial management,
  - Modernize tax policy and administration,
  - Support the BM’s move toward an inflation targeting framework,
  - Foster financial sector soundness and deepening.
- Extensive Fund TA is being provided in those areas to facilitate selection of priority measures during the three-year program.
- Reform measures outside the Fund’s core areas (e.g., improving the business environment) will be taken up by other development partners.

### Selected indicators, 2008–15 (Actual and Projections)
- Real GDP, percent change: 6.7 6.3 6.5 7.5 7.6 7.9 7.8 7.8
- Inflation, eop, percent change: 6.2 4.2 8.0 5.6 5.6 5.6 5.6 5.6
- Inflation, average, percent change: 10.3 3.3 9.3 5.6 5.6 5.6 5.6 5.6
- Current account deficit (after grants), percent of GDP: -11.9 -11.9 -13.6 -12.8 -13.5 -13.4 -13.0 -12.8
- Gross external reserves, months of projected imports: 4.6 5.1 4.9 5.3 5.6 5.7 5.5 5.3
- Primary domestic fiscal deficit, percent of GDP: -3.2 -4.4 -4.2 -4.6 -4.4 -4.0 -3.8 -3.7
- Overall fiscal deficit (after grants), percent of GDP: -2.3 -5.6 -4.7 -7.2 -6.8 -6.1 -5.3 -5.1
- Fiscal external financing, percent of GDP: 4.0 5.1 4.3 6.3 5.9 5.4 4.5 4.3
- Net credit to government, percent of GDP: -1.7 0.3 0.3 0.9 0.9 0.7 0.8 0.8
- Private sector credit, percent change: 45.9 58.6 19.1 14.0 14.9 15.8 15.7 15.8
- Private sector credit, percent of GDP: 18.8 27.1 27.8 27.9 28.1 28.6 29.1 29.6
- Reserve money, percent change: 7.8 7.3 19.5 14.7 15.0 15.1 14.9 15.0

*Source: IMF staff report as provided in the content unit.*

### 22.      The adjusted policy mix aiming to support Mozambique’s development objectives

### The adjusted policy mix aiming to support Mozambique’s development objectives

### Creation and sources of fiscal space
- Program envisions additional fiscal space through:
  - revenue collections increase of 1½ percent of GDP;
  - moderate expansion of domestic financing of ½ percent of GDP;
  - nonconcessional external borrowing of 2½ percent of GDP.
- Past programs created fiscal space primarily through:
  - a sustained revenue effort and expanded donor support.
- A recent assessment concluded Mozambique’s potential tax ratio could exceed 21 percent of GDP in the long run.
- Gross aid flows are projected to decline somewhat during the program period.
- The revenue effort reflects ongoing improvements in tax administration and tax policy supported by Fund TA.

### Allocation and fiscal balances
- Additional fiscal space will largely be channeled to support the public investment program.
- Fiscal stance and key balance projections:
  - overall fiscal deficit (after grants) will temporarily rise by about 2 percentage points, to a peak of about 7 percent of GDP by 2011;
  - domestic primary deficit will remain broadly stable at about 4 to 4½ percent of GDP during the program period;
  - fuel subsidy accounted for spending of above 1 percent of GDP in 2009; since end-March average retail fuel prices adjusted in two steps by a cumulative 30 percent.
- Authorities intend to contain current expenditure and unwind the crisis-year fiscal stimulus.
- Authorities remain committed to expanding priority social expenditure consistent with PARPA; PARPA-defined priority expenditure averaged three-fifths of total spending during 2007–09 and will be broadly maintained going forward (an indicative floor introduced to the program).

### Public investment program priorities and magnitude
- Authorities plan to step up public investment to remove bottlenecks in transportation and energy infrastructure.
- Current indications point toward a front-loaded expansion of the investment program of 5½ percent of GDP over the next two years, which would abate somewhat thereafter.
- Total public investment program (percent of GDP) highlighted for 2009–15 includes:
  - Total: 13.1 (2009), 15.4 (2010), 18.6 (2011), 18.4 (2012), 18.0 (2013), 17.4 (2014), 17.3 (2015)
  - On budget: 13.1 (2009), 13.9 (2010), 17.1 (2011), 17.0 (2012), 16.8 (2013), 16.3 (2014), 16.5 (2015)
  - Domestically financed: 4.5 (2009), 6.1 (2010), 6.5 (2011), 6.8 (2012), 6.9 (2013), 7.0 (2014), 7.3 (2015)
  - Donor financed, concessional: 8.6 (2009), 7.8 (2010), 7.8 (2011), 7.8 (2012), 7.8 (2013), 7.8 (2014), 7.8 (2015)
  - Nonconcessional: 0.0 (2009), 0.0 (2010), 2.8 (2011), 2.5 (2012), 2.2 (2013), 1.6 (2014), 1.4 (2015)
- Implementation modalities:
  - projects financed/co-financed by development partners and implemented through budget or selected SOEs (Road Fund, FIPAG, EDM);
  - some projects planned under concessions or PPPs with strengthened legal framework;
  - emphasis on feasibility studies and recovering costs via concessions, user fees, and tolls where appropriate.

### Borrowing strategy, debt sustainability, and limits
- Authorities prefer concessional financing but will assess higher domestic borrowing and nonconcessional external resources for priority infrastructure.
- Staff analysis indicates limited recourse consistent with macroeconomic stability and debt sustainability:
  - domestic financing up to 1 percent of GDP per year;
  - untied nonconcessional external borrowing averaging 2½ percent of GDP per year (a cumulative US$900 million during the program period).
- Debt sustainability analysis:
  - confirms Mozambique’s low risk of debt distress overall but identifies heightened vulnerabilities;
  - key debt indicators remain under DSF thresholds but are temporarily exceeded under some stress tests.
- Program commitments to manage risks include:
  - limiting new contracting of nonconcessional external borrowing or guarantees by the Central Government and selected SOEs to transportation and electricity infrastructure (continuous assessment criterion);
  - finalization of a comprehensive debt strategy to assess risk profile and fiscal and macroeconomic implications of new borrowing (expected by end-November 2010);
  - completion of first Government Debt Sustainability Analysis by end-September 2010.

### Enhancing investment planning and debt management (structural reforms)
- Agreed structural reforms and benchmarks:
  - Adoption by Council of Ministers of PPP, Concessions and Megaprojects Law by end-September 2010.
  - Finalize multi-year debt strategy by end-November 2010 (structural benchmark).
  - Complete and publish first semiannual debt sustainability analysis by end-September 2010 (structural benchmark).
- Strengthening institutional capacity:
  - beef up debt unit in the Ministry of Finance with additional staff;
  - create a debt monitoring committee with members from specialized services (including central bank);
  - establish a PPP approval/gateway process and create a PPP unit in the Ministry of Finance.

### Fiscal coverage, reporting, and SOE integration
- Authorities intend to broaden budget coverage by integrating Road Fund, FIPAG, and EDM into fiscal analysis.
- They will develop a fiscal template to consolidate revenue, expenditure, and financing of the central government and those entities for regular quarterly consolidated fiscal accounts later in the year.
- The planned Law on Public Enterprises will further stipulate reporting requirements of SOEs to the government.

### Monetary policy, inflation, and liquidity management
- Monetary policy objectives and projections:
  - BM aims to contain inflation to below 6 percent over the medium term, with a temporary spike to 9 percent in 2010 from removal of the fuel subsidy.
  - BM raised its key policy rate (FPC) from 11½ to 12½ percent in April 2010.
  - Reserve money will remain the operational target in the near future, with the program target defined as a monthly average rather than an end-period stock.
- Structural/operational work:
  - BM deciding whether to move to an inflation targeting framework over the next two years, supported by significant Fund TA; prerequisites include selecting the inflation target, improving projection and transmission analysis, strengthening monetary instruments, and improving communications.
  - BM working on liquidity demand forecasting to capture shift toward a banked economy.
- Challenges from increased borrowing:
  - nonconcessional and domestic borrowing increases raise liquidity and foreign exchange management challenges;
  - potential for temporary appreciation and excess liquidity if borrowing timing is not aligned with investment-related imports;
  - large inflows may require greater sterilization and coordination between BM and the government and a cost-sharing mechanism to be concluded;
  - BM must balance ensuring adequate foreign reserves for debt-service payments against avoiding excessive reserve accumulation that constrains private sector credit growth.

### Exchange regime and Article VIII commitments
- Authorities working to remove remaining exchange restrictions on payments and transfers for current international transactions via implementing foreign exchange regulations following the foreign exchange law of March 11, 2009.
- Adoption of implementing regulations was scheduled for Council of Ministers in August 2010 after private sector consultations in June/July; authorities intend to accept Article VIII obligations following issuance of the regulations.

*Source: IMF staff and Memorandum on Economic and Financial Policies (MEFP) excerpts from the provided content.*

### 36.      Several steps will be implemented to strengthen the financial sector. The

### 36.      Several steps will be implemented to strengthen the financial sector. The

### Financial sector measures and supervision
- The government and the BM will ensure expeditious follow-up on the recommendations of the 2009 Financial Sector Assessment Program (FSAP) update and recent TA.
- A Financial Sector Action Plan will be developed to implement the FSAP recommendations by end-July 2010.
- Authorities will step-up risk management and develop deposit insurance.
- Following rapid credit growth over the last two years, the BM will closely supervise activities in the banking system and encourage banks to develop a stress testing framework.
- Close attention will be devoted to assessing liquidity conditions and the quality of loan portfolios.
- Authorities intend to take important steps to make the AML/CFT framework more effective in the near future.

### Improving the business environment, economic governance, and statistics
- The government intends to implement a broad range of measures to improve the business environment, improve economic governance, and transparency.
- Authorities are working with the Bank on implementing a vast range of fast-track measures to:
  - ease red tape,
  - streamline the granting of business-related licenses,
  - improve bankruptcy proceedings,
  - facilitate trading across borders.
- The authorities reiterated their commitment to implement their action plan to enhance transparency and accountability in the natural resources sector to become a full member of EITI within the envisaged timeframe of two years, i.e., by May 2011.
- Based on Fund TA, the government will improve its statistical system, particularly improving data quality of the quarterly national accounts, consumer prices index, government finance statistics, and megaprojects.

### Program monitoring (changes under the successor PSI)
- Three changes were made to the quantitative program targets under the successor PSI compared to the expiring PSI/ESF program (MEFP Table 1):
  - The ceiling on nonconcessional borrowing is modified to allow untied external borrowing at larger amounts compared to the previous limits that were virtually nil, to support the authorities’ development objectives.
  - The reserve money target is to be met henceforth on an average basis, which in light of intra-month volatility should help the BM’s ability to observe the target.
  - An indicative floor on priority spending, as defined in the authorities’ poverty reduction strategy PARPA, has been introduced to ensure that the expansion in the authorities’ public investment program does not impair expenditure on PARPA objectives, such as in the areas of health and education.

### Staff appraisal: performance, resilience, and risks
- The Mozambican authorities are commended for the successful implementation of their first three-year PSI.
- Despite external shocks—the food and oil price shock and then the global financial crisis—the authorities kept the economy on course through appropriate fiscal and monetary policies.
- Authorities made significant headways in structural reform areas, including PFM, tax policy and administration, the monetary policy framework, and financial sector supervision.
- Mozambique fits the characteristics of a mature stabilizer, with strong economic growth, low inflation, comfortable external reserves, and sustainable debt.
- Mozambique showed remarkable resilience to the global crisis; economic performance in 2009 was stronger than expected despite declines in export proceeds and private capital inflows.
- Authorities loosened fiscal and monetary policies to support economic activity; an accommodating monetary policy helped substitute foreign borrowing with domestic credit at a crucial time.
- The BM exceeded the reserve money target for end-December 2009, resulting in the need for a waiver, which the staff supports, as the BM is committed to restraining monetary growth in 2010.
- Strong revenue performance, reflecting past efforts to strengthen tax administration, kept automatic stabilizers small and resulted in a lower-than-anticipated domestic primary deficit.
- With an improved economic outlook, the authorities’ plans to unwind in 2010 the policy easing from last year are considered appropriate.

### Development strategy, investment, and macroeconomic balance
- Authorities intend to raise economic growth outside megaprojects in the natural resources sector, which requires removing identified bottlenecks so the private sector can develop.
- Focus on developing infrastructure in the energy and transport sectors is emphasized, but needs to be complemented by targeted measures to improve the business environment, develop sectoral growth strategies, and foster regional trade integration.
- Success hinges on preserving macroeconomic stability and low debt vulnerabilities and putting in place a modern framework for investment planning and PPPs backed by best practices in financial management, accounting, and risk sharing with the private sector.
- Moving too forcefully with the intended investment push could erode prior gains and risk leaving the country worse off.

### Design and aims of the successor PSI
- The successor PSI aims to balance addressing development needs and preserving macroeconomic stability by accommodating a temporary increase in public investment, partially financed through nonconcessional external borrowing, while keeping domestic demand pressures in check.
- Authorities need to significantly improve economic decision making for selecting investment projects and financing options.
- Structural reform focus includes:
  - debt management (development of a coherent debt strategy and the finalization of the authorities’ first own DSA),
  - investment planning.
- Continued strong implementation of fiscal structural reforms in PFM and tax policy and administration will support the program’s fiscal stance.
- Authorities are encouraged to continue efforts to improve liquidity forecasting and management, which should help preparations for possibly adopting an inflation targeting framework during the program period.

*Source: IMF staff report excerpt (paragraphs 36–42).*

### 43.      Based on program performance to date and the authorities’ commitment to

### _cr10174 - 43.      Based on program performance to date and the authorities’ commitment to

### Executive recommendations
- Staff recommends:
  - Completion of the sixth PSI review and the second review under the ESF arrangement.
  - Waiver for the nonobservance of the end-December 2009 AC/PC on reserve money, as corrective action is being taken.
  - Approval of the proposed successor three-year PSI covering the period 2010–13.

### Macroeconomic outlook and selected indicators (2008–15)
- Nominal GDP (MT billion): 240 260 263 300 306 348 396 451 514 585
- Nominal GDP growth: 15.5 8.2 9.8 15.5 16.3 13.6 13.9 13.9 13.8 13.9
- Real GDP growth: 6.7 4.5 6.3 5.4 6.5 7.5 7.6 7.9 7.8 7.8
- GDP per capita (US$): 478 445 465 471 473 488 542 604 657 699
- Consumer price index (annual average): 10.3 3.5 3.3 9.5 9.3 5.6 5.6 5.6 5.6 5.6
- Consumer price index (end of period): 6.2 5.4 4.2 8.0 8.0 5.6 5.6 5.6 5.6 5.6

### External sector highlights
- Merchandise exports (annual percent change): 10.0 -26.5 -30.2 9.8 12.7 27.2 8.1 6.6 8.9 9.3
- Merchandise exports, excluding megaprojects: 41.1 -22.3 -26.8 4.3 4.5 2.7 3.8 4.9 6.2 6.6
- Merchandise imports: 29.6 -10.0 -11.0 0.8 10.7 13.1 9.6 9.3 8.7 9.1
- Terms of trade: -3.9 -12.7 -8.5 4.3 1.5 12.0 0.1 0.4 -1.2 -3.5
- External current account, before grants (percent of GDP): -19.7 -17.8 -18.9 -19.3 -20.6 -20.5 -21.0 -20.9 -20.4 -20.2
- External current account, after grants (percent of GDP): -11.9 -11.0 -11.9 -11.5 -13.6 -12.8 -13.5 -13.4 -13.0 -12.8

### Money, credit, and reserves
- Reserve money (annual percent change): 7.8 18.0 27.3 16.0 19.5 14.7 15.0 15.1 14.9 15.0
- M2 (annual percent change): 26.0 28.6 34.6 20.4 22.6 21.6 17.2 16.9 16.0 15.3
- M3 (Broad Money) (annual percent change): 20.3 25.6 32.6 18.3 21.1 23.1 16.6 16.3 15.4 14.7
- Credit to the economy (annual percent change): 45.9 44.6 58.6 17.8 19.1 14.0 14.9 15.8 15.7 15.8
- Net international reserves (end of period): 1,644 1,758 1,834 1,711 1,930 2,334 2,766 3,088 3,320 3,556
- Gross international reserves (end of period): 1,660 1,929 2,012 1,904 2,128 2,530 2,959 3,278 3,476 3,652
- Months of projected imports of goods and nonfactor services: 4.6 5.4 5.1 5.0 4.9 5.3 5.6 5.7 5.5 5.3

### Government finances (percent of GDP and MT Billions)
- Total revenue (percent of GDP): 16.0 16.4 17.8 16.7 18.4 18.7 19.2 19.7 20.0 20.3
- Total expenditure and net lending (percent of GDP): 27.9 30.1 32.9 31.4 31.9 35.4 35.2 35.0 34.5 34.6
- Overall balance, before grants (percent of GDP): -11.8 -13.7 -15.2 -14.7 -13.5 -16.7 -16.1 -15.3 -14.5 -14.2
- Total grants (percent of GDP): 9.4 9.3 9.6 10.8 8.8 9.4 9.3 9.2 9.2 9.2
- Overall balance, after grants (percent of GDP): -2.3 -4.3 -5.6 -3.9 -4.7 -7.2 -6.8 -6.1 -5.3 -5.1
- Domestic primary balance, before grants (percent of GDP): -3.2 -5.3 -4.4 -5.1 -4.2 -4.6 -4.4 -4.0 -3.8 -3.7
- External financing (incl. debt relief) (percent of GDP): 4.0 3.1 5.1 2.1 4.3 6.3 5.9 5.4 4.5 4.3
- Net domestic financing (percent of GDP): -1.7 0.8 0.3 1.8 0.3 0.9 0.9 0.7 0.8 0.8

- Selected MT Billions (2008–15 projections, Table 2):
  - Total revenue (MT Billions): 38.27 42.55 46.73 56.47 65.09 75.97 88.71 102.72 118.89
  - Total expenditure and net lending (MT Billions): 66.85 77.99 86.70 97.87 123.07 139.65 157.78 177.01 202.23
  - Capital expenditure (MT Billions): 27.74 30.46 34.41 42.64 49.63 57.65 65.95 75.98 87.99
  - Grants received (MT Billions): 22.64 24.16 25.30 26.85 32.79 36.73 41.57 47.08 53.62
  - Overall balance, after grants (MT Billions): -5.57 -11.28 -14.67 -14.55 -25.19 -26.95 -27.50 -27.21 -29.72

### Balance of payments and external financing (US$ millions, Table 5)
- Current account balance (US$ millions): -1,179 -1,034 -1,171 -1,391 -1,380 -1,646 -1,858 -2,001 -2,140
- Trade balance for goods (US$ millions): -990 -1,328 -1,390 -1,500 -1,403 -1,575 -1,799 -1,949 -2,121
- Exports, f.o.b. (US$ millions): 2,653 1,951 1,853 2,089 2,656 2,872 3,062 3,334 3,645
- Imports, f.o.b. (US$ millions): -3,643 -3,279 -3,243 -3,589 -4,059 -4,447 -4,861 -5,283 -5,766
- Of which: Megaprojects (exports) (US$ millions): 1,851 1,328 1,265 1,474 2,026 2,217 2,375 2,605 2,868
- Capital and financial account balance (US$ millions): 1,188 1,188 1,439 1,491 1,785 2,077 2,181 2,232 2,376
- Net foreign direct investment (US$ millions): 587 532 878 917 732 748 802 908 1,016
- Reserve assets (change) (US$ millions): -140 -269 -352 -120 -403 -428 -320 -198 -175
- Net international reserves (US$ millions): 1,644 1,758 1,834 1,930 2,334 2,766 3,088 3,320 3,556
- Months of projected imports of goods and nonfactor services: 4.6 5.4 5.1 5.0 4.9 5.3 5.6 5.7 5.5 5.3

### Indicators of capacity to repay the Fund (Table 6)
- Outstanding Fund credit (millions of SDRs), selected years: 109.1 123.2 122.2 120.8 118.8 116.9 96.6 72.9 49.7 27.0 4.3 0.0 ...
- Outstanding Fund credit (millions of U.S. dollars), selected years: 168.4 190.9 188.9 186.7 183.8 180.8 149.5 112.8 76.9 41.8 6.6 0.0 ...
- Net use of Fund credit (millions of SDRs) (cumulative/disbursements and repayments): Disbursements 85.2 28.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 113.6; Repayments 0.2 1.0 1.5 1.9 1.9 21.7 39.3 43.1 42.6 42.6 22.7 4.3 222.7

### Financial sector and banking soundness (Table 7)
- Capital adequacy (Regulatory capital to risk-weighted assets): e.g., 2008: 13.9; Mar-09: 17.0; Jun-09: 18.1; Sep-09: 16.6; Dec-09: 15.1
- Foreign exchange loans to total loans (percent): 64.7 69.9 70.8 67.3 63.9 45.0 31.5 40.1 36.1 33.1 36.2 32.4 (2001–Dec-09 series included)
- Nonperforming loans to gross loans (percent): 23.4 22.0 14.4 6.4 3.8 3.3 0.9 2.0 2.0 2.2 2.0 2.0
- Return on assets (percent): 0.1 1.6 1.2 1.4 1.8 3.5 1.9 3.5 0.9 1.6 3.1 3.0

### Quantitative assessment and performance criteria (Table 8)
- Stock of reserve money (ceiling) (Millions of meticais): Indicative targets include 19,762 20,512 21,102 22,685 23,685 24,464 21,031 24,567 25,753 28,173 (periods shown)
- Stock of net international reserves of the BM (floor, US$ millions): examples include 1,487 1,484 1,851 1,758 1,725 1,834 1,711 1,759 1,885 1,930
- New nonconcessional external debt contracted or guaranteed (ceiling, US$ millions): 5 5 5 5 5 5 5 200 200 200 (as shown)

### Structural conditionality and implementation status (Table 9 and related)
- Structural conditions with status and expected date:
  - Approval by the Minister of Finance of the e-Tributação (e-tax) Strategic Planning Document — Met — May 15, 2010
  - Strengthening the Revenue Authority (Administração Tributária, AT): enhancing the management IT system and approving the new organic structure — May 31, 2010 (measures (i) and (ii) completed; (iii) expected by target date)
  - Creation of an EITI Secretariat — Met — March 31, 2010
  - Adoption of a financial sector contingency plan — In progress — May 31, 2010

### Government requests and commitments (Letter of Intent, May 24, 2010)
- Government requests:
  - Completion of the sixth PSI review and the second ESF review.
  - Approval of a successor PSI for 2010-13.
- Government statements:
  - All quantitative assessment/performance criteria through end-December 2009 were met, except for the one on reserve money, for which a waiver is requested.
  - Reserve money exceeded the program ceiling due to year-end seasonal surge and structural shift from expansion of banking services.
  - Strong progress reported on structural reform program.
  - Government considers policies in the MEFP adequate for successor PSI objectives and stands ready to take additional measures as necessary.
  - Commitment to consult with the IMF on policy revisions and to provide requested information to assess progress.

*Source: Republic of Mozambique—IMF staff report content as provided in the supplied document excerpts.*

### 1.      Mozambique showed considerable resilience to the global economic crisis. Real GDP

### _cr10174 - 1.      Mozambique showed considerable resilience to the global economic crisis. Real GDP

### Recent performance and crisis response
- Real GDP expanded by 6⅓ percent in 2009, much stronger than expected.
- Economic activity benefited from dynamic construction, energy, and financial sectors.
- The global crisis triggered large declines in export receipts and private external borrowing.
- External reserves impact was mitigated by the SDR allocation and ESF resources, resulting in an import reserve coverage above 5 months.
- The government eased macroeconomic policies; an accommodating monetary policy facilitated substitution of foreign borrowing with an exceptionally strong private sector credit expansion.
- A strong revenue performance kept the size of the automatic stabilizers small and resulted in a lower-than-expected domestic primary fiscal deficit.
- All quantitative performance/assessment criteria (P/AC) were met through end-December 2009, except for reserve money (waiver requested) because base money exceeded the program ceiling due to year-end seasonal surge and structural shift from banking expansion.
- Structural reform progress: the Extractive Industry Transparency Initiative (EITI) secretariat was created at end-March 2010; Revenue Authority benchmarks (organizational strengthening and adoption of the e-tax Strategic Planning Document) are being implemented. The financial sector contingency plan envisaged for end-May is likely to be completed by end-September 2010.

### Objectives and policies going forward
- Government priorities:
  - Maintain macroeconomic stability.
  - Encourage additional national and foreign direct investment in the natural resources export sector.
  - Significantly step up public investment in transport and electricity infrastructure, partly financed through nonconcessional external borrowing and/or Public-Private Partnerships (PPP).
  - Improve the business climate.
  - Reap benefits from regional integration.
- Institutional and planning actions:
  - Update Mozambique’s Five-Year Government Program (PQG) for 2010–14 and adopt it by mid-2010.
  - Supplement with an updated Poverty Reduction Strategy to be finalized in the second half of 2010, before the first review under the PSI.

### Macroeconomic outlook
- Growth projections:
  - Real GDP growth should accelerate to 6½ percent in 2010 and 7¾ percent by 2013, largely because of new megaprojects, stepped-up public investment, and larger private sector participation.
- Inflation:
  - Continued prudent policies should keep inflation at around 6 percent on average over the medium term, with a temporary spike in 2010 to above 9 percent following gradual removal of the fuel subsidy.
- External accounts and reserves:
  - The current account (after grants) is expected to hover around 14 percent of GDP over the next three years.
  - International reserves are expected to remain above five months of imports over the next three years.

### Macroeconomic policy mix
- 2010 stance:
  - The Bank of Mozambique (BM) will begin to reverse the sharp easing of monetary policy as global credit markets recover, to help ward off inflationary pressures from exchange rate depreciation and fuel subsidy removal and to sustain credit quality.
  - Fiscal policy: continued strength in revenue collections should allow a full reversal of automatic stabilizers and a moderate reduction in the primary domestic deficit relative to 2009.
- Medium term:
  - Government will gradually and prudently increase public investment to close transport and electricity infrastructure gaps, financed by higher domestic and external borrowing over a limited time horizon.
  - Part of external borrowing expected on nonconcessional terms; limited time horizon and focus on high-growth-return projects intended to keep debt sustainability intact.
  - Investments are not expected to crowd out private investment nor create pressure on domestic demand because investments have a high import component and labor markets are underutilized.
  - Authorities will adjust macroeconomic policies if domestic demand pressures materialize.

### Fiscal policy — 2010 budget implementation and medium-term stance
- 2010 fiscal target:
  - Government aims to reduce the domestic primary deficit by ¼ percentage point, to 4.2 percent of GDP, in 2010.
  - 2010 budget law anticipates efficiency gains that could boost the revenue-to-GDP ratio by 0.7 percentage point, to 18¾ percent of GDP, but budget execution will be based on more conservative assumptions.
- Budget execution ceilings (legal framework actions dated April 27, 2010 and Circular Ministerial May 18, 2010):
  - Ceilings: (i) 90 percent for goods and services and other current expenditures; (ii) 85 percent for civil service wages and transfers; (iii) 90 percent for domestically financed capital spending.
  - Spending currently envisaged to be MT 6.7 billion (2.2 percent of GDP) below appropriations in the 2010 budget law; decision to spend beyond ceilings by mid-November.
- Fuel subsidy policy:
  - Phasing out initiated; aim to gradually restore market-based retail prices by the third quarter of 2010 with full pass-through depending on international prices.
  - Government will explicitly show fuel subsidies in budget documents and consider replacing them with better targeted alternatives.

- Medium-term fiscal stance:
  - Enhanced borrowing from domestic and external sources over a limited time horizon of five years, leading to a temporary rise in the overall fiscal deficit (after grants).
  - Government commits to preserve the domestic primary deficit at around 4 percent of GDP.
  - Expected efficiency gains in revenue administration of 2 percent of GDP will be channeled toward enhancing domestic spending priorities without additional financing.

### Stepping up investment — priorities and projects
- Central government investment focus: transport and electricity infrastructure, with priority to projects that could catalyze private investment.
- Any new contracting of nonconcessional external borrowing or guarantees by the Central Government and selected SOEs will be in those sectors (continuous structural benchmark).
- Government assessing prioritization and sequencing of projects to be completed by first program review; financing/co-financing expected from development partners and PPPs for some projects.
- Specific high-priority projects under evaluation:
  - The international airport of Nacala in Nampula province.
  - Rehabilitation of the port of Beira.
  - Expansion of electricity production at the Cahora-Bassa dam.
  - Construction of a power line between the Cahora-Bassa dam and Maputo.
  - Expansion and/or rehabilitation of the road network, including completion of the transit corridor connecting the port of Beira with Zimbabwe (rehabilitation of remaining section from Beira to Inchope (120 km)) and the road between Gaza and Maputo (170 km).

### Borrowing strategy and debt management
- Financing principles:
  - Rely first on strengthening revenue collections, grants, and concessional borrowing before increasing domestic and external financing.
- Domestic financing:
  - Government will limit annual recourse to domestic financing to less than 1 percent of GDP over the medium term to avoid crowding out private sector.
  - For 2010, ceiling on net credit to the government is set at MT -1743  million for end-June (indicating net accumulation in deposits) and MT 933  million for end-December (quantitative AC); these levels reflect a drawdown of deposits related to advance World Bank budget support in late 2009.
  - Government and BM will enhance coordination on cash flow management to facilitate BM’s liquidity forecasting and monetary operations.
- External financing:
  - Concessional donor funds will remain prime sources of financing.
  - Government intends to contract nonconcessional external borrowing of no more than US$900 million during the three-year program period, averaging about 2½ percent of GDP per year.
  - Contracting or guaranteeing of nonconcessional external loans by central government and key SOEs for priority infrastructure and energy projects limited to US$200 million for 2010 (continuous quantitative AC).
- Debt strategy and capacity building:
  - By end-November 2010, finalize a comprehensive multi-year debt strategy with FSTAP technical support.
  - First semi-annual debt sustainability analysis (DSA) to be completed and published by end-September 2010 (structural benchmark).
  - Debt unit in the Ministry of Finance to add qualified staff; creation of a debt management committee (DMC) comprising Ministries of Finance, Planning and Development, the BM, and others.

### Priority social spending and fiscal coverage
- Priority social spending:
  - Defined consistent with PARPA classification; averaged 17.3 percent of GDP during 2007-09, representing 62 percent of total expenditure.
  - To be raised to 19.1 percent of GDP in 2010, equivalent to about 62.3 percent of total spending.
  - An indicative floor of such spending is incorporated in the program.
- Expanding budget coverage:
  - Government will integrate the Road Fund, the water authority (FIPAG), and the electricity company (EDM) into fiscal and debt analysis.
  - By end-June 2010, develop a fiscal template consolidating revenue, expenditure, and financing of the central government and those entities.
  - By end-August 2010, produce quarterly consolidated fiscal accounts beginning in 2008.
- Revenue effort:
  - Government will strive to raise its revenue-to-GDP ratio by 1.5 percentage points during the program period; a quantitative indicative target will monitor progress.
  - Key initiatives:
    - Roll out of electronic tax system e-Tributação (e-tax): e-Tributação Strategic Planning document approved on May 15, 2010; in 2010 approve a procedure manual on corporate income tax collection as a pilot for e-tax roll-out; introduce online tax filing and possibility to pay taxes via bank transfer.
    - Reinforcing large taxpayers unit (LTU): national coordination unit for large taxpayers will initiate operations by end-June 2010.
    - Tax policy: assess recommendations of recent Fund technical assistance by time of first program review; create legal basis for tax treatment of new financial instruments, including mutual funds, leasing, and securitized loans.

*Source: IMF country report content provided in the supplied document.*

### 21.      The government will continue implementing a reform of the civil service pay scale. It

### _cr10174 - 21.      The government will continue implementing a reform of the civil service pay scale. It

### Civil service pay scale reform
- Approved a new salary policy in September 2008 to be phased in over the medium term in a very gradual manner, in line with the need to preserve macroeconomic stability and fiscal sustainability.
- The gradual approach will stabilize the wage bill below 9¼ percent of GDP over the medium term.
- Policy objectives:
  - Simplify and rationalize the salary scales across ministries.
  - Decompress the scales consistent with qualification and responsibility.
  - Reform the system of housing and other allowances.
  - Harmonize the salary policy with the pension system.
- Further technical work, supported by development partners, will be undertaken in 2010 to determine specific elements and sequencing of reform steps.

### Strengthening public financial management (PFM)
- Framework documents: PFM vision paper and the 2010–12 SISTAFE Action Plan and Budget.
- Short-run key measures:
  - Continued implementation of SISTAFE system:
    - e-SISTAFE to be rolled out to 15 districts and 35 institutions.
    - Budget execution through e-SISTAFE to gradually increase to 37.5 percent of the executed budget by end-2010.
    - Program classifiers to be developed consistent with sectoral accounting, planning and reporting needs.
  - Rolling out e-FOLHA:
    - By end-September 2010 the salary calculation and processing functionality will be rolled out to 8 sectors at the central level and to the City and Province of Maputo for a gradual introduction of direct salary payments into bank accounts.
  - Improved integration of internal audit in e-SISTAFE:
    - The General Inspectorate of Finance (IGF) will move toward risk-based audits in light of the gradual roll-out of e-SISTAFE.
    - IGF will issue a circular to financial departments of line ministries by September 2010 specifying that internal audit will be based on electronic e-SISTAFE reports wherever the system is used.
    - IGF will reinforce its work program on state owned enterprises and PPPs to reflect emerging fiscal risks from stepping up infrastructure investments.
  - Improving aid management:
    - The MF will actively encourage donors to use the single- and multi-currency treasury accounts at the BM for disbursing project aid.
  - Reinforcing investment planning, limiting fiscal and quasi-fiscal risks, and maximizing economic benefits:
    - By end-September 2010, the Council of Ministers will adopt a PPP Law applicable to mega projects and other concessions, including in power generation (structural benchmark).
    - The law will include creation of the PPP unit within the Ministry of Finance and mechanisms to formalize the PPP approval process, introducing “gateway” decision points requiring Minister of Finance consensus before PPPs proceed.
    - The PPP unit should be operational by end-2010 and will support the gateway process and improve financial oversight of PPPs, including mandated regular reporting of financial statements to the PPP unit.
  - Improving the framework for public enterprises:
    - A Public Enterprises Law will be adopted by the Council of Ministers by end-July 2010.
    - Law provisions: ringfence commercial activities of state-owned entities; require quarterly financial reporting to the Ministry of Finance; require annual tabulation of financial and other assets to the General State Accounts; reaffirm requirement to obtain approval by the Minister of Finance for all borrowing.
  - Enhancing procurement systems:
    - Following the Country Procurement Assessment Report (CPAR), the government will adopt terms of reference for procurement audits to assess integrity and transparency.
    - Ministries to be audited in 2011 will be selected by December 2010.
    - By end-June 2010, a strategy for training and capacity development will be defined.
    - By end-December 2010, terms of reference for development of a career in government procurement and certification of experts will be formulated.

### Reforming the National Institute for Social Security (INSS)
- Government reassessing approach to reform the INSS to limit fiscal risks and improve governance and transparency.
- Adoption of a new investment strategy delayed pending conceptual work with World Bank technical assistance.
- New investment strategy aims solely at protecting the interest of beneficiaries and to be approved by end-June 2010.
- INSS actions and deadlines:
  - Publish audited financial statements of 2008 by end-August 2010 and of 2009 by end-2010.
  - Assess financial viability based on an updated actuarial study that takes into account financial statements through 2007, and by-end 2010 initiate corrective actions to guarantee financial equilibrium of the INSS (to be implemented by INSS or submitted to the Council of Ministers).
  - Adopt new organizational structure by end-October 2010.
  - Introduce an IT system during 2010 to improve registration of contributors and claimants and strengthen collection of contributions.

### Enhancing governance in the natural resources sector
- Government committed to becoming a full member of EITI within two years, i.e., by May 2011.
- EITI Secretariat actions and deadlines:
  - Launch a dedicated EITI website by end July 2010.
  - Produce and distribute relevant brochures on EITI by end-July 2010.
  - Elaborate terms of reference for the EITI auditor by end September 2010.
  - Appoint the qualified EITI auditor by end November 2010.

### Monetary and exchange rate policies
- Banco de Moçambique (BM) commitment:
  - Prudent monetary and exchange rate policies aimed at containing inflation at around 6 percent on average over the medium term.
  - Monetary expansion consistent with this objective expected to leave room for private sector credit expansion.
- Exchange rate approach:
  - BM will pay close attention to the real effective exchange rate vis-à-vis a broad basket of currencies to allow free adjustment to trade and financial flows while safeguarding international reserves.
  - BM will be cautious in managing reserves in light of increasing external obligations.
- Potential move to inflation targeting:
  - BM will decide whether to move to an inflation targeting framework over the next two years.
  - Supported by IMF technical assistance, BM actions to establish prerequisites:
    - (i) Assess which inflation rate should be targeted and what core inflation rate should be used.
    - (ii) Enhance monitoring, understanding, and capacity to project the monetary transmission mechanism.
    - (iii) Adopt and implement new monetary instruments to steer monetary conditions effectively.
    - (iv) Improve communications strategy with the public.
- Interim period policy:
  - BM will continue reserve money targeting.
  - Challenges: structural shifts and seasonal surges in demand for currency.
  - Measures:
    - Improve reserve money targeting based on monthly averages to neutralize the spike in cash during the last two weeks of each month.
    - Further enhance liquidity and foreign exchange management through enhanced coordination with the Ministry of Finance on domestic and external borrowing plans, aid management, and cash flow projections, and with banks on liquidity requirements, given potentially significant increase in foreign exchange inflows from government borrowing plans.
- Government intent regarding IMF Articles of Agreement:
  - Government intends to accept the obligations under Article VIII sections 2, 3, and 4 in due course.
  - Official communication will be sent as soon as the implementation regulation has been brought in line with the new legislative framework that came into effect on March 11, 2009.

### Financial sector policies
- Follow-up to 2009 FSAP update and recent technical assistance:
  - Develop Financial Sector Action Plan:
    - Interagency task force to finalize action plan to implement FSAP recommendations by end-July 2010.
    - Plan to include measures to enhance access to finance and financial market development, strengthen compliance with Basel Core Principles, and complete payments system modernization.
  - Stepping up risk management:
    - BM will issue regulation (Aviso) on risk management by end-December 2010.
    - Government working on draft decree on deposit insurance intended to be issued by year-end.
  - Enhancing supervision of banking system:
    - BM to closely supervise banking activities following rapid credit growth over the last two years and encourage banks to develop stress testing frameworks.
    - Close attention to liquidity conditions and quality of loan portfolios.
  - Fighting money laundering and financial crime:
    - Following Inter-Ministerial Civil Service Committee approval in April 2010 to hire new staff, Gabinete de Informação Financeira—GIFIM will immediately launch recruitment and proceed with capacity building supported by development partners.
    - Draft amendment to the 2002 AML law to remove incompatibilities between the law establishing GIFIM and the AML law will be submitted to Parliament by end-August 2010.

### Other structural policies
- Business environment reforms:
  - Government intensifying reforms to improve the business environment to raise growth potential, diversify exports, and stimulate new investment.
  - In coordination with the World Bank, implement a range of fast-track measures by end-2010 to ease red tape, streamline business-related licenses, improve bankruptcy proceedings, and facilitate trading across borders.
- Statistical improvements:
  - Government aims to improve statistical data compilation and dissemination to facilitate migration to the Special Data Dissemination System (SDDS) in due course.
  - Focus areas: quarterly national accounts, consumer prices index, government finance statistics, and megaprojects, consistent with IMF technical assistance.
  - INE actions:
    - Choose a new calculating software before the new rebased Maputo CPI is launched in 2011 to remove possible bias of the CPI.
    - Increase geographic coverage of the CPI by including the Greater Maputo area and the populous province of Zambezia.

### Program monitoring and targets
- First PSI review expected to be completed by end-December 2010 and the second PSI review by end-June 2011.
- Quantitative and indicative target highlights (as presented):
  - Net credit to the government (cumulative ceiling) and other monetary and external indicators specified for end-June and end-December monitoring dates (detailed numerical table entries appear in the source).
  - Reserve money targets to be monitored as average of the daily stock in the month of the test date (from June 2010, this is average of the daily stock of reserve money and FDP in the third month of the quarter).
- Structural benchmarks for successor PSI (selected):
  - Continuous: Any new contracting of nonconcessional external borrowing or guarantees by the Central Government and selected SOEs subject to related continuous quantitative AC will be for transportation and electricity infrastructure investment, as described in paragraph 14 of the MEFP.
  - End-September 2010: Adoption by Council of Ministers of PPP, Concessions and Megaprojects Law, as described in paragraph 22 of the MEFP.
  - End-November 2010: Finalization of a comprehensive debt strategy that will assess the risk profile and the fiscal and macroeconomic implications of new borrowing, as described in paragraph 16 of the MEFP.
  - End-September 2010: Completion of first Government Debt Sustainability Analysis, as described in paragraph 17 of the MEFP.

*Source: Republic of Mozambique: Policy and technical measures and associated timelines as presented in the provided IMF program document excerpt.*

### 11. The central government will not contract or guarantee external debt with original

### _cr10174 - 11. The central government will not contract or guarantee external debt with original

### Assessment criteria on short-term external debt and arrears
- The central government will not contract or guarantee external debt with original maturity of less than one year.
- This assessment criterion applies to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements adopted on August 3, 1979, as amended August 31, 2009, effective December 1, 2009, and to commitments contracted or guaranteed for which value has not been received.
- Excluded from this assessment criterion are short-term, import-related trade credits.
- This assessment criterion 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, except for external payments arrears arising from government debt that is being renegotiated with creditors.
- This assessment criterion (arrears) will be assessed on a continuous basis.

### Definitions relevant to external assistance and debt service
- Foreign program assistance: grants and loans received by the Ministry of Finance through BM accounts excluding those related to projects (Table 1).
- Actual external debt service payments: 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).

### Quantitative target adjusters
- Net international reserves (NIR) quantitative targets (floors) will be adjusted:
  - downward by the shortfall in external program aid less debt service payments (up to US$100 million), compared to the program baseline (Table 1);
  - downward/upward for any revision made to the end-year figures corresponding to the previous year;
  - downward to accommodate higher external outlays because of natural disasters, up to US$20 million.
- Net credit to central government (NCG) quantitative targets (ceilings) will be adjusted:
  - upward by the shortfall in the MT value of external program aid receipts less debt service payments (up to the MT equivalent of US$100 million at exchange rates prevailing at the respective test dates), compared to the program baseline (Table 1);
  - downward by privatization proceeds in excess of those envisaged in the program, unless these proceeds are deposited in the government’s savings accounts abroad;
  - downward (upward) for any increase (decrease) in domestic financing from the nonfinancial private sector;
  - upward to accommodate the higher locally-financed outlays because of natural disasters, up to the MT equivalent of US$20 million at exchange rates prevailing at the respective test dates.
- Reserve money quantitative target (ceiling) will be adjusted upward by the excess of the stock of currency in circulation above the level envisaged in the program.
  - The target is defined as the average of the daily end-of-day stocks in the month of the test date.
  - The target will be adjusted up to MT 500 million for end-March, end-June, and end-September and up to MT 750 million for end-December (Table 1).

### Data and reporting obligations
- The government will provide Fund staff with:
  - monthly and quarterly data needed to monitor program implementation in relation to the program’s quantitative targets and broader economic 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 (that will also be published) with a time lag not exceeding 45 days;
  - monthly data on gross international reserves, with the composition by original currencies and converted to US dollars at the actual exchange rates.
- The monetary survey made available by the BM 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.
- The government will provide Fund staff with documentation concerning external loan agreements once these have been signed and become effective.

### Key DSA findings and public debt indicators (end-2009)
- The joint IMF-World Bank LIC DSA based on end-2009 debt stocks indicates Mozambique’s risk of debt distress remains low.
- External public and publicly guaranteed (PPG) debt stock at end-2009:
  - US$3.45 billion in nominal terms
  - US$1.59 billion in PV terms (Table 1)
- Creditor composition of external debt stock:
  - 67 percent owed to multilateral creditors
  - 33 percent owed to bilateral creditors
  - Outstanding obligations to commercial creditors were negligible
  - The debt stock includes about US$0.7 billion in obligations to non-Paris Club creditors that at end-2009 had not yet granted debt relief comparable to the HIPC Initiative.
- Private sector external debt accounts for about two-fifths of Mozambique’s total external debt; significant borrowing of about US$0.8 billion in 2007 related to the Cahora-Bassa hydroelectric power station.
- Tabulated excerpt (selected figures from Table 1):
  - Public and Publicly Guaranteed Debt: 3,745 (Millions of US dollars)
  - Domestic Debt: 1 294
  - External Debt: 3,451
  - Multilateral Creditors: 2,307
  - IMF: 171
  - IDA: 1,339
  - African Development Bank: 385
  - Other Multilaterals: 411
  - Bilateral Creditors: 1,144
  - Paris-Club: 742
  - Non-Paris Club: 1,070
  - Commercial Creditors: 0.0
  - Total Private and Non-Guaranteed External Debt: 2,605
  - Memorandum Items:
    - Total public and private external debt: 6,055
    - PV of external Debt: 4,510
    - PV of PPG external debt: 1,589
    - PV of non-PPG external debt: 2,921
    - Nominal GDP in US dollars: 9,831

### Debt relief and creditor negotiations
- Mozambique benefited from HIPC Initiative assistance in 2001 and MDRI relief in 2006, with the latter reducing the debt stock by US$1.9 billion in nominal terms in 2006.
  - MDRI relief breakdown: AfDF US$464.5 million; IDA US$1.3 billion; IMF US$120.6 million.
- Authorities have worked to conclude debt relief with Paris Club creditors; engagements with Japan and Russia noted (agreements pending finalization).
- Negotiations ongoing with non-Paris Club bilateral creditors: Angola, Bulgaria, India, Iraq, Libya, and Poland. The DSA projections assume negotiations with non-Paris Club creditors will be concluded during 2010.

### Domestic debt and contingent liabilities
- Central government’s domestic debt at end-2009 amounted to 3 percent of GDP.
- Central government domestic debt excludes domestic obligations incurred by SOEs.
- The stock of external PPG debt incorporates external borrowing of the central government on-lent to SOEs; Ministry of Finance holds a veto on SOE external borrowing.
- Government concluded four-party framework credit line agreements with Portugal totaling €700 million (about 10 percent of GDP) to help finance infrastructure investment during 2010–15.
  - Lines of credit: €100 million, €400 million, and €200 million signed in late 2008, late 2009 and early 2010, respectively.
  - Terms: €400 million concessional; remaining €300 million have a low grant element and relatively short maturity.
  - Government refrained from providing external guarantees but has guaranteed repayments to the domestic bank.
  - These loans are incorporated into the DSA as part of public external debt.

### Macroeconomic and debt management context
- Projected real GDP growth is below the 8 percent average over the past decade; growth was supported by large aid flows and high private capital inflows averaging about 20 percent of GDP.
- Government aims to raise public investment from an average of 11 percent of GDP during the past decade to about 15 percent of GDP over the medium term (or to 17 percent of GDP including the Portuguese credit lines).
- Continued public investment likely to remain around 13 percent of GDP beyond the medium term.
- Tapering of significant donor assistance seems likely; government will need to rely more on domestic resources and external financing on commercial terms.
- Fund’s new Debt Limits Policy (November 2009) classified Mozambique as a lower vulnerability/lower capacity country; debt management capacity considered limited.
- Specific commitments under the Fund-supported program:
  - complete first own semiannual debt sustainability analysis by end-September 2010;
  - develop a multi-year debt strategy by end-November 2010.
- Authorities receiving World Bank technical assistance (FSTAP) and a Medium-Term Debt Strategy (MDTS) technical assistance mission scheduled for June 2010.

### Investment, growth impact, and borrowing assumptions
- Empirical estimates cited on public investment impact:
  - Burnside and Collier (1997): a sustained increase in grant-financed investment by one percent of GDP raised real GDP growth in low-income countries with good policy implementation by about 0.4 percentage points.
  - Benito-Spinetto and Moll (2005) World Bank study: a one percent of GDP increase in grant-financed investment increased growth by 0.25 percentage points.
  - Vitek (forthcoming IMF Working Paper, 2010): for Mozambique, a one percent of GDP increase in public infrastructure investment would raise output growth by 0.5 percentage points.
- Costly external financing can reduce the growth impact of public investment due to negative spillovers on fiscal and external balances and private investment.
- Government plans and projections:
  - Prepare impact studies and initially focus on projects with presumed high rate of return and assured financial viability.
  - Plan to undertake infrastructure investment financed by nonconcessional borrowing over the medium term ranging between 1½ and 3 percent of GDP and averaging about 2 percent of GDP per year (US$300 million from 2011 to 2013 then falling to US$250 million by 2015).
  - Projections incorporate continued nonconcessional borrowing at around 1 percent of GDP thereafter.

*Source: Mozambican authorities and IMF/World Bank staff documents as presented in the content unit.*

### 15. The growth impact projections for the DSA are broadly in line with recent

### _cr10174 - 15. The growth impact projections for the DSA are broadly in line with recent

### Growth impact projections
- Investment is expected to raise real GDP growth by about 1 to 1½ percentage points over the next few years, with limited spillover effects into the longer term.
- The rate of return of further investment can be expected to fall; investment beyond the medium term is conservatively projected to raise real GDP growth by 0.3 percentage points.
- Real GDP growth is projected to approach 8 percent over the next few years and stabilize around 7½ percent in the longer term.
- The growth impact above includes the impact of higher infrastructure investment raising growth by 1 to 1½ percentage points in the medium term and by about ⅓ percentage points in the longer term.

### Financing and borrowing assumptions
- Central government borrowing for its own budgetary spending is assumed to be on IDA and AfDB terms.
- The grant element on this borrowing averages about 47 percent over the projection period.
- Projections incorporate a limited amount of borrowing on nonconcessional terms.
- Nonconcessional borrowing (sovereign or loans mediated by official bilateral creditors) is assumed to have a 10-year maturity, with one year of grace and an interest rate of 5 percent.

### Box 1 — Key medium-term macroeconomic assumptions (2010–30)
- Real GDP growth: approach 8 percent in the next few years; stabilize around 7½ percent in the longer term.
- Contribution of infrastructure investment: raise growth by 1 to 1½ percentage points in the medium term and by about ⅓ percentage points in the longer term.
- Consumer price inflation: projected to stabilize around 5½ percent over the forecast period.
- Grant-equivalent of total external financing: projected to fall from an average of over 11 percent of GDP during 2010-15 toward 7 percent of GDP by the end of the forecast period.
- Concessional borrowing through the budget: projected to trend down from 3.8 percent of GDP in the medium term to 3.4 percent in the longer term.
- All IDA financing is expected to be through loans.
- Public sector borrowing (including nonconcessional): projected to rise from an annual average of around 5 percent of GDP during 1999–2009 to over 7 percent of GDP during 2010–15, declining toward 4½ percent of GDP thereafter.
- Growth of exports of goods and services: projected to slightly accelerate from about 11 percent per year over 2010–15 to over 12 percent thereafter.
- Import growth: projected to remain steady around 10 percent per year in the medium term, then accelerating to about 11 percent.
- Noninterest current account deficit after grants: projected to widen from about 10 percent of GDP in 2009 to about 12 percent in the medium term, then narrow toward 9 percent of GDP in the longer term.
- Fiscal revenues: expected to rise from about 18 percent of GDP in 2009 to about 20 percent of GDP in 2015; total revenue projected to reach about 22 percent of GDP by the end of the forecast period.
- Domestic primary balance: assumed to remain steady under 4 percent of GDP, with domestic financing between ½ and 1 percent of GDP.
- Primary spending: projected to rise to nearly 35 percent of GDP in 2015, then level off to around 31 percent of GDP.

### External debt sustainability — baseline projections
- Under the baseline scenario, all debt indicators remain well below their respective thresholds, including in the longer term.
- PV of PPG external debt:
  - 17 percent of GDP in 2009;
  - about 31 percent of GDP in 2015 (threshold: 40 percent);
  - below 25 percent of GDP by 2030.
  - In terms of exports: 67 percent in 2009; about 112 percent by 2015 (threshold: 150 percent); 68 percent by 2030.
  - Relative to government revenues: 94 percent in 2009; 154 percent in 2015 (threshold: 250 percent); 104 percent by 2030.
- Debt service on PPG external debt:
  - nearly 2 percent of exports in 2009;
  - rise to 7½ percent in 2016;
  - decrease towards 4 percent by 2030 (threshold: 20 percent).
  - As percent of fiscal revenues: below 3 percent in 2009; over 11 percent in 2016; towards 6 percent by 2030.

### Sensitivity and stress tests
- Debt sustainability indicators are sensitive to shocks.
- A 30 percent depreciation of the exchange rate versus the U.S. dollar (B6) and the combination shock (B5) would temporarily and marginally breach the PV of debt-to-GDP threshold.
- Standard export shock (B2) would raise the PV of debt-to-exports ratio to 190 percent by 2015, exceeding the relevant threshold; this shock is extreme because it is based on a standard deviation driven by 2009 circumstances.
- A modified export shock, reflecting historical volatility of aluminum prices, brings the PV of debt-to-exports ratio to but not exceeding the relevant threshold.
- Mozambique’s export volatility is expected to decline over the medium term as the export base diversifies (electricity, coal, minerals e.g., titanium, and possibly oil).

### Alternative scenarios and risks
- Historical scenario (A1): PV of debt-to-GDP approaches but remains below the threshold; does not account for structural changes and policy improvements post-civil war.
- High investment–low growth scenario (A3):
  - Real GDP growth would remain between 6½ and 7 percent (about 1 to 1½ percentage points below the baseline in the medium term and about ½ percentage points in the longer term).
  - Foreign financing and related spending remain unchanged in nominal terms; lower domestic revenues generate higher financing requirements met by additional external commercial borrowing.
  - Domestic primary balance deteriorates by about 1½ percent of GDP compared to the baseline by end of forecast period.
  - Additional financing rises to about 3 percent of GDP by end of forecast period.

### Public sector debt dynamics
- Public debt (including domestic debt) mirrors external indicators due to predominance of external debt; medium-term increase reflects temporary surge in externally financed public investment on nonconcessional terms.
- Domestic debt projected to marginally increase from about 3 percent of GDP at end-2009 to 4 percent of GDP in 2030.
- Public debt indicators:
  - Public debt obligations: 29 percent of GDP at end-2009; expected to rise to 48 percent of GDP in 2015; decline towards 42 percent of GDP by 2030.
  - PV of public debt: 20 percent of GDP at end-2009; over 35 percent of GDP in 2015; trend back down to 29 percent of GDP by 2030.
  - Evolution of PV of debt and of debt service relative to revenues (including grants) is similar.
- Stress tests show public sector debt ratios are most vulnerable to:
  - increase in other debt-creating flows (B5),
  - one-time depreciation of the exchange rate (B4),
  - temporarily lower GDP growth (B1).
- If the primary deficit were held at the high 2010 level, debt indicators rise noticeably in the long run; reversing the eased fiscal stance is emphasized.

### Views of the authorities
- Authorities broadly agree with the DSA conclusions.
- They reiterated intention to adopt a cautious approach to nonconcessional borrowing and ensure such borrowing is exclusively channeled to infrastructure projects with a high economic rate of return.
- Authorities committed to strengthening debt management and developing a medium-term debt strategy; these intentions are anchored in their new PSI-supported economic program.

### Conclusions
- IMF staff view: Mozambique continues to face a low risk of debt distress.
- External debt levels are expected to remain below indicative thresholds for debt distress.
- Government plans to temporarily increase public investment financed by external nonconcessional borrowing will noticeably increase debt vulnerabilities; stress tests show debt ratios approach, and in some instances temporarily and marginally exceed, relevant thresholds.
- Public debt is expected to decline beyond the medium term, but stress tests indicate vulnerabilities due to the large share of external debt in total debt.

*Source: _cr10174 - 15. The growth impact projections for the DSA are broadly in line with recent*

### 26. This calls for a cautious approach with nonconcessional borrowing and resolve

### 26. This calls for a cautious approach with nonconcessional borrowing and resolve to improve debt management capacity

### Policy guidance and recommendations
- Continue to rely on concessional borrowing and grants to minimize future debt service.
- Any nonconcessional external financing of new projects ought to be considered case by case, based on:
  - economic return;
  - impact on debt sustainability;
  - potential effects on the financing decisions of donors and concessional lenders.
- Strengthen debt management capacity and implement a comprehensive debt strategy as part of the successor PSI commitments to contain debt vulnerabilities.
- Pursue prudent macroeconomic policies and structural reforms to boost debt management capacity and improve public investment decision-making and borrowing decisions.

### Key macroeconomic outlook and program objectives
- Real GDP growth: "Real GDP grew by 6⅓ percent in 2009."
- Growth projections: "Real GDP growth should increase to 6½ percent in 2010 and 7¾ percent by 2013."
- Inflation: "Continued prudent macroeconomic policies should keep inflation at around 6 percent on average over the medium-term, with a temporary spike in 2010 to above 9 percent following the gradual removal of the fuel subsidy."
- External position: "The current account deficit (after grants) and international reserves are expected to hover around 13 percent of GDP and above five months of imports over the next three years."
- Program financing stance: limited expansion of nonconcessional external borrowing and domestic financing to boost infrastructure investment while maintaining a prudent fiscal policy stance and keeping the primary domestic deficit broadly unchanged.
- Monetary policy: sufficiently tight to keep domestic demand pressures in check while providing ample room for private sector credit expansion.

### Debt dynamics and vulnerabilities (selected indicators and projections)
- Baseline concern: authorities should minimize nonconcessional borrowing to contain future debt service pressures and debt vulnerabilities.
- Public sector debt (selected historical and projection levels, in percent of GDP):
  - Public sector debt headline levels shown in Table 4 include values such as 21.9, 25.4, 29.3 (historical entries) and projected averages like 42.7, 46.4, 42.0, 45.2 (projection columns).
- Automatic debt dynamics and contributions:
  - Contribution from nominal interest rate (examples in table): 1.8, 2.3, 1.6, 2.5, 0.8, 1.6, 1.3, 1.5, 1.8, 2.0, 2.1, 1.7, 2.2, 2.4, 2.3 (series shown under "Contribution from nominal interest rate").
  - Contribution from real GDP growth (examples): -4.2, -3.2, -3.2, -7.9, 5.5, -3.3, -4.0, -4.2, -4.4, -4.5, -4.7, -4.2, -4.2, -4.3, -4.3 (series shown under "Contribution from real GDP growth").
- Debt service and PV ratios (selected entries from sensitivity and DSA tables):
  - Debt service-to-exports ratio entries include values such as 40.7, 19.2, 20.0, 23.8, and later projected/memo entries like 7.0, 17.4, 11.3, 12.8, 17.4, 21.6, 23.1, 17.3, 24.4, 23.5, 24.6 (table excerpts).
  - PV of PPG external debt (in percent of exports or revenue—table excerpts): sample values shown include 16.8, 16.8, 20.7, 24.7, 27.3, 28.9, 30.5, 31.3, 27.2, 28.3, 24.7, 27.1 (series under "PV of PPG external debt").
- Grant-equivalent financing and grant element of new borrowing:
  - Grant-equivalent financing (in percent of external financing) shown in projections: values such as 74.2, 64.4, 66.0, 67.7, 70.9, 72.4, 69.3, 73.9, 71.0, 73.6 (table excerpts).
  - Grant element of new public sector borrowing (examples in projections): 39.0, 23.4, 24.8, 26.3, 29.6, 30.9, 29.0, 34.4, 35.9, 35.6 (table excerpts).

### Stress tests and alternative scenarios (high-level)
- The DSA presents a range of alternative scenarios and bound tests, including:
  - A1: Key variables at their historical averages in 2010-2030.
  - A3: Alternative Scenario: No Growth Impact of NCB-Financed Investment (i.e., nonconcessional borrowing-financed investment yields no growth impact).
  - B1–B5: Bound tests applying shocks such as real GDP growth at historical average minus one standard deviation, export value growth shock, US dollar GDP deflator shock, net non-debt-creating flows shock, and combinations using one-half standard deviation shocks.
  - B6: One-time 30 percent nominal depreciation relative to the baseline in 2011.
- The most extreme stress test is identified as the test yielding the highest ratio in 2020 (noted across figures and tables); specific extreme shocks vary by indicator (e.g., one-time depreciation or exports shock depending on the indicator).

### Program and institutional support
- IMF decisions and program:
  - The Executive Board completed the sixth and final review of Mozambique's PSI and approved a new three-year PSI (Press Release No. 10/242, June 14, 2010).
  - The Board completed the second review under the ESF and approved the third and final disbursement of SDR 14.2 million (about US$21 million).
  - A waiver was granted for the nonobservance of the end-December 2009 assessment criterion on the ceiling on reserve money.
- Structural reform priorities under the successor PSI include:
  - Strengthening public financial management;
  - Tax policy and administration reforms;
  - Formulating and implementing a comprehensive debt strategy and improving investment planning;
  - Strengthening the Bank of Mozambique’s liquidity forecasting and management;
  - Measures to improve the business environment to facilitate private sector development.
- Technical assistance and statistical capacity building:
  - IMF technical assistance provided across fiscal affairs, monetary and capital markets, statistics, and finance with specific missions listed (2006–10).
  - Data weaknesses noted in national accounts, prices, and government finance statistics; participation in GDDS and IFS reporting improvements highlighted.

*Source: IMF staff report and informational annex (Mozambique DSA and PSI documentation, May–June 2010).*

### Introduction

### Introduction

### Program performance and 2009 outcomes
- Authorities value continued Fund support and constructive policy dialogue and request approval of a successor PSI arrangement.
- Under the current PSI arrangement, all quantitative assessment/performance criteria through end-December 2009 were met except the one on reserve money; the authorities request a waiver.
- Reserve money exceeded the program ceiling because of difficulties predicting demand for currency in circulation due to year-end seasonal surge and structural shift from the expansion of banking services.
- Progress in implementing structural reforms; authorities request Directors’ support for completion of the sixth review under the PSI and the second review under the ESF.
- Mozambique showed considerable resilience to the global economic crisis in 2009:
  - Real GDP growth was much stronger than expected in 2009, supported by construction, energy, and financial sectors.
  - Global downturn triggered a large decline in export receipts and private external borrowing.
  - Impact on external reserves mitigated by the SDR allocation and ESF resources, resulting in reserve coverage above 5 months of imports.
  - Government eased macroeconomic policies; accommodating monetary policy facilitated substitution of foreign borrowing with strong domestic private sector credit expansion.
  - Revenue performance kept the size of automatic stabilizers small and resulted in a lower-than-expected domestic primary fiscal deficit.

### Objectives and outlook under the successor PSI arrangement
- Despite strong GDP growth over the past decade, concerns remain:
  - Capital-intensive export sectors are growing while activity in the rest of the economy is below potential.
  - Labor-intensive growth is yet to be meaningfully exploited.
  - Growth has been trending down over the last few years, slowing progress in reducing poverty and improving development indicators.
- Authorities’ policy focus:
  - Facilitate private sector development and sustainable economic growth.
  - Enhance economic growth and rural development with impact on the poor via job creation and expansion.
  - Accelerate measures to improve the business environment and support small and medium-sized enterprises.
  - Improve selection and prioritization of public investment to maximize employment creation, poverty reduction, and crowd-in private investment.
  - Strengthen institutions to reap benefits from regional integration.
- Policy framework and planning:
  - Parliament approved the Government’s Five-Year Government Program for 2010-14.
  - An updated Poverty Reduction Strategy will be drafted in a consultative process and finalized in the second half of 2010, taking into account the publication of the results of the Household Survey.
- Macroeconomic outlook:
  - Real GDP growth should accelerate to 6½ percent in 2010 and above 7 percent by 2013, facilitated largely by new megaprojects, stepped-up public investment in areas with an expected large growth dividend, and larger private sector participation.
  - Continued prudent macroeconomic policies should keep inflation low over the medium-term, with a temporary spike in 2010 following the gradual removal of the fuel subsidy.
  - Since the publication of the staff report, another fuel price increase has taken place, in line with program commitments.
  - Authorities’ investment plans are not anticipated to fundamentally burden the current account; international reserve levels are expected to remain above 5 months of imports over the next three years.

### Fiscal policy
- Target: Reduce the domestic primary deficit to 4.2 percent of GDP in 2010.
- Means:
  - Further improvements in tax administration and current expenditure restraint.
  - The 2010 budget law anticipates strong efficiency gains in tax administration that could boost the revenue-to-GDP ratio to 18¾ percent of GDP.
  - Budget execution will be based on more conservative assumptions.
- Public investment and financing plans:
  - Step-up implementation of public investments in transport and electricity infrastructure using domestic and international financing.
  - Limit annual recourse to domestic financing to less than 1 percent of GDP over the medium term to avoid crowding out the private sector.
  - Concessional donor funding will remain the prime source of financing in the foreseeable future.
  - Given the size of planned investment plans, authorities are considering external non-concessional borrowing averaging about 2½ percent of GDP per year during the next three years.
  - To support growing external financing, finalize by end-2010 a comprehensive multi-year debt strategy and continue to strengthen debt management, including training staff to facilitate semi-annual production of a debt sustainability analysis (DSA).
  - The first such analysis will be completed and published by end-September 2010.

### Monetary and exchange rate policies
- Bank of Mozambique (BM) commitments:
  - Implement prudent monetary and exchange rate policies aimed at containing inflation at single-digit on average over the medium term.
  - Contain inflationary pressures from the recent depreciation of the metical and spillovers from higher domestic fuel prices due to removal of the fuel subsidy.
  - Pay close attention to the real effective exchange rate vis-à-vis a broad basket of currencies to allow the exchange rate to adjust freely while safeguarding international reserves.
- Strengthening monetary policy implementation during the new PSI program:
  - (i) Assess which inflation rate should be targeted and what core inflation rate should be used to assess inflationary conditions;
  - (ii) Enhance monitoring, understanding, and capacity to project the monetary transmission mechanism;
  - (iii) Select and implement new monetary instruments to steer monetary conditions effectively;
  - (iv) Improve communications strategy with the public.

### Structural reforms and statistics
- Business environment reforms to raise growth potential, diversify exports, and stimulate investment:
  - Implement a range of fast-track measures to ease red tape, streamline granting of business-related licenses, improve bankruptcy proceedings, and facilitate trading across borders.
- Statistical improvements:
  - Focus on improving data quality for quarterly national accounts, consumer price index, government finance statistics, and megaprojects.
  - Request Fund TA and advice.
  - National Statistics Institute (INE) will improve calculation and rebase of the CPI and increase geographical coverage.
  - Ensure INE’s Strategic Plan is aligned with government planning and budgeting cycle.
- Public financial management (PFM) reforms (short run measures):
  - (i) Implement SISTAFE system (e-SISTAFE) to more districts and other institutions, and expand coverage of budget execution;
  - (ii) Salary calculation in e-SISTAFE;
  - (iii) Integration of internal audit in e-SISTAFE system;
  - (iv) Improvement in aid management;
  - (v) Strengthening of investment planning, limiting fiscal and quasi-fiscal risks, and maximizing economic benefits;
  - (v) Improvements of the framework for public enterprises;
  - (vi) Enhancement of procurement systems.
- Other reforms:
  - (i) Reform National Institute for Social Security (INSS) to limit fiscal risks and improve governance and transparency;
  - (ii) Enhance governance in the natural resources sector; Government committed to becoming a full member of EITI within the envisaged timeframe of two years.
- Governance progress:
  - Authorities and Program Aid Partners (PAPs) agreed on several economic and political governance issues during the last Annual Review concluded in May 2010.
  - Authorities committed to accelerate reforms in this area to sustain growth and poverty reduction without increasing inequalities.

### Conclusion and requests
- Mozambique has enormous potential for rapid economic growth; authorities’ reforms aim to unleash that potential.
- Identifying additional resources to finance an ambitious investment program is a major objective, but success depends on combining prudent macroeconomic management with identification of the right public investments.
- Securing additional financing must be complemented by improving the business environment, allowing greater flexibility in land and labor markets, and improving logistics for trade to unleash private sector initiative.
- Authorities committed to accelerate the broader reform agenda and mobilize requisite financing without compromising debt sustainability; recognize need for additional capacity and good governance.
- Authorities request:
  - Completion of the sixth review under the PSI,
  - Completion of the second review under the ESF,
  - Approval of the successor three-year PSI for the period 2010-2013.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10174.pdf*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10174.pdf_