## 1. Economic Developments in the Global context ## Source details **Canonical URL:** [1. Economic Developments in the Global context](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12148.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12148.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12148.pdf.json) --- ### Background and recent developments - GDP rose by about 7 percent in 2011; growth was broad-based with fastest expansion in agriculture, mining, transportation and communication, and financial services. - Activity supported by strong exports and robust investment demand from megaprojects in the natural resource sector and the public sector. - Strong capital inflows and tight monetary policy contributed to a 20 percent real appreciation of the metical in 2011, after a real depreciation of 15 percent a year earlier. ### Inflation and monetary outcomes (recent) - Twelve-month inflation: 2¾ percent in March 2012; 16½ percent at end-2010. - Core inflation: 2⅓ percent in March 2012. - Determined monetary tightening during 2010-11 decelerated broad money growth by two-thirds in 2011 from a year earlier and contributed to the appreciation of the metical. - Net international reserves (NIR) accumulation of US$331 million in 2011 and reserve coverage of 5.2 months of current-year imports. - Reserve money kept in line with program targets; RM growth projected to accelerate to about 20 percent in 2012 (see paragraph 11). ### External sector and capital flows - Current account deficit (2011): 13 percent of GDP, slightly worse than in 2010 due to strong import demand for investment goods. - FDI more than doubled relative to 2010, led by megaprojects. - Strong private capital inflows, especially megaproject-related, helped maintain reserve cover. ### Program performance and structural reforms - Program performance satisfactory: all but one of the end-2011 assessment criteria (ACs) were met. - Quantitative targets for reserve money (RM) and NIR were met comfortably. - Net credit to the government (NCG) exceeded the end-2011 AC marginally (0.1 percent of GDP) due to an unexpected calling of a government guarantee for a public enterprise (0.2 percent of GDP). - Domestic primary deficit substantially lower than expected because of strong revenue performance and domestic spending below budgeted levels; overall fiscal deficit ½ percent of GDP higher than envisaged due to rapid donor-financed capital spending pick-up in H2 2011. - Priority spending exceeded its end-year indicative floor. - Since inception of PSI in June 2010, government has used US$446 million of its US$900 million limit on nonconcessional borrowing (NCB). - A US$300million loan signed with China to build a ring road around Maputo became nonconcessional by a small margin due to a change in the discount rate applied in concessionality calculations. - Structural benchmark: Integrated Investment Program approved (March 2012); recommended to adopt more specific technical criteria for project selection. - Authorities adopted five of six modules under the financial sector contingency plan; mission recommended enhancements to three modules which authorities agreed to incorporate. ### Key projections, indicators, and policy-relevant numbers - GDP growth (2011): about 7 percent. - Staff/authorities expected growth: 6¾ percent in 2012. - Twelve-month inflation: 2¾ percent in March 2012; 16½ percent at end-2010. - Core inflation: 2⅓ percent in March 2012. - Current account deficit (2011): 13 percent of GDP. - NIR accumulation (2011): US$331 million. - Reserve coverage: 5.2 months of current-year imports. - Real exchange rate: metical real appreciation of 20 percent in 2011 (after 15 percent real depreciation in previous year). - NCG exceeded end-2011 AC by 0.1 percent of GDP due to government guarantee call of 0.2 percent of GDP. - PSI nonconcessional borrowing used: US$446 million of US$900 million limit since June 2010. - US$300million loan signed with China for Maputo ring road (became nonconcessional by a small margin). - Domestic primary deficit projected (baseline) could rise to 2.3 percent of GDP. - Selected fiscal/macro series (as presented): - Overall balance after grants: -5.2 -5.9 -6.4 -6.5 - Domestic primary balance: -2.2 -2.1 -2.3 -2.1 - Net domestic financing: 0.9 0.5 0.6 0.7 - Domestic demand impact (change): -2.0 -0.2 0.6 0.2 - Real GDP growth (percent): 7.1 7.5 6.7 7.2 - Average inflation (percent): 10.4 7.2 7.2 5.6 --- ### II. Economic Outlook and Policy Discussions ### Short-term risks and agreed countercyclical mix (2012) - Risks from global slowdown for 2012-13: weaker export demand, capital flow reversal, lower aid disbursements, limited credit availability due to deleveraging in Europe. - Partial removal of transportation bottlenecks in coal-exporting industry should mitigate some global shock effects in 2012. - Agreed countercyclical policy mix for 2012: - Fiscal: allow automatic stabilizers to function; government intends to maintain spending program under PARP. - Monetary: Banco de Moçambique (BM) to maintain accommodative monetary policy stance initiated in late 2011 to balance additional private credit provision with preserving disinflation gains. - Financial sector: intensified financial sector supervision to guard against cross-border contagion. - Expected macro outcomes: growth expected to slow to 6¾ percent in 2012 while inflation should remain well in single digits; external current account deficit and reserve cover expected to remain similar to 2011. ### Fiscal policy specifics and contingencies - Baseline reflects lower revenue collections than earlier projections based on 2012 budget law; government will maintain spending leading to domestic primary deficit that could rise by 0.2 percentage points relative to earlier projections, to 2.3 percent of GDP. - This higher deficit to be fully financed by a topping-up of World Bank assistance to avoid crowding out private sector domestic bank financing. - Larger-than-projected revenue drop would trigger provisions that limit budget execution to cautionary ceilings consistent with the Organic Budget Law (SISTAFE 2002). ### Fiscal commitments and structural benchmarks - Safeguarding priority spending: channel at least half of all spending (excluding net lending) toward priority sectors under PARP. - Containing wage bill growth: decelerate recruitment in non-priority areas and slow decompression of the pay scale; full roll-out of e-FOLHA to all provincial directorates by end-2012 (structural benchmark). - Phasing out fuel subsidy: cost recovery achieved early in 2012 but thereafter compensation required for fuel importers; authorities to complete payment of 2011 compensation by mid-2012 and explore market segmentation, cross-subsidization, and more frequent smaller price adjustments; review of price-setting formula in medium term. --- ### 11. The BM’s move toward a more accommodating stance and financial sector resilience ### Monetary policy stance and near-term outlook - BM’s move to a more accommodating stance in 2012 judged appropriate. - RM growth projected to accelerate to about 20 percent in 2012, exceeding nominal GDP growth by one-fourth, thus supporting provision of private sector credit. - BM eased key policy rates four times since last August, with cumulative reduction of its lending facility rate and reserve requirements by 300 basis points and 75 basis points, respectively. - Mission cautioned future decisions should be guided by inflation outlook and credit conditions, considering policy lags. ### Enhancing framework and preparing for inflation targeting (IT) - BM intends to continue enhancing monetary policy operations and prepare for IT in the medium term. - Coordination with government: implement MoU on exchange of information between BM and Ministry of Finance to aid liquidity forecasting. - Develop monetary instruments and deepen markets: remove structural impediments including harmonizing taxation of treasury bills and government bonds, and between collateralized and uncollateralized interbank operations (structural benchmark). - BM to improve data collection, forecasting, and forward-looking communication; issue first quarterly monetary policy report (structural benchmark). ### International reserves and reserve adequacy - Mozambique’s reserves remain comfortable; NIR growth broadly in line with economy, financial deepening, and trade openness. - Reserve accumulation pace higher than in other countries of the region helped weather the global crisis; staff projection: reserves to reach 5.9 months of current-year imports by 2017 (Appendix II). ### Financial sector surveillance and vulnerabilities - Banking sector resilient to global turmoil; system-wide indicators relatively strong. - Liquidity stress test (Box 1) — selected numbers: - Before Shock (MT Billions): Deposits 130; Assets 195 - Shock: Outflow of Funding [2](29); 20 Percent of Deposits (26); 30 Percent of Wholesale Funding(3) - Cashable Assets [1]: 54 - After Shock: Liquidity Buffer [1+2]: 25 - Under combined deposit outflows (20 percent) and funding outflows (30 percent), only two small banks would become illiquid. - TA recommendations for BM to implement: - Strengthen bank supervision; regularly use liquidity stress testing with high-frequency detailed data. - Enhance surveillance of banks’ placements abroad and deposit concentration; align NPL definition with international best practice. - Draft regulation to introduce concentration limits on banks’ placements abroad. - Improve home-host cooperation via MoUs and supervisory colleges. - Incorporate TA recommendations into contingency plan on ELA and bank resolution; establish legal framework for resolution; expand ELA to any solvent bank with temporary liquidity problems. - Secure funding and define deposit coverage for Deposit Insurance Fund (DIF); consider DIF funds for recapitalization, bridge banks, or P&A. - Authorities expect contingency plan fully operational by end-September 2012. --- ### Medium-term policies, natural resources, and social protection ### Infrastructure, borrowing, and debt - Need to close infrastructure gap; public investment program (Total Public Investment Program, 2009-16, Percent of GDP): - Total: 2009 14.6; 2010 16.0; 2011 17.1; 2012 16.3; 2013 16.4; 2014 16.1; 2015 15.1; 2016 14.4 - On budget: 2009 14.6; 2010 14.6; 2011 15.3; 2012 15.4; 2013 15.5; 2014 15.5; 2015 14.6; 2016 14.4 - Domestically financed: 2009 4.4; 2010 6.3; 2011 5.6; 2012 5.8; 2013 6.0; 2014 6.0; 2015 6.1; 2016 6.2 - Donor financed, concessional: 2009 10.2; 2010 8.3; 2011 9.0; 2012 7.6; 2013 7.0; 2014 7.0; 2015 7.0; 2016 7.0 - Non-concessional: 2009 0.0; 2010 0.0; 2011 0.7; 2012 2.1; 2013 2.6; 2014 2.6; 2015 1.5; 2016 1.2 - Memorandum: Total concessional and domestic: 2009 14.6; 2010 16.0; 2011 15.6; 2012 13.9; 2013 13.4; 2014 13.1; 2015 13.1; 2016 13.2 - Staff proposal at authorities’ request: increase NCB ceiling to US$1.5 billion (from US$900 million) to help close infrastructure gap; accommodate US$300 million ring road loan and allow additional priority projects while preserving space for future borrowing. - Reforms to support informed borrowing and project selection: use Integrated Investment Plan, second annual DSA, coordinating committees, project selection templates and manuals; pending commitments include approval of enhanced MTDS and completion of first annual domestic borrowing plan for 2013 (structural benchmark). ### Natural resources and fiscal planning - Rapid development in mining and hydrocarbon sectors; coal expansion and large offshore natural gas discoveries likely to lead to large-scale LNG production and exports beginning in 2018. - April 2012 Fund TA recommended reforms to mining and hydrocarbon fiscal regimes; authorities considering revising tax legislation in 2012. - Government plans: enhance mining and hydrocarbon revenue forecasting; assess feasibility of a stabilization fund; improve natural resource statistics; explore renegotiations of project terms where circumstances changed. - Second reconciliation country report completed in March 2012 advancing EITI membership (awaiting EITI Secretariat assessment). ### Promoting inclusive growth and social protection - Despite sustained growth, poverty reduction has stalled; growth less pro-poor over time. - PARP 2011-14 pillars: promoting employment; production and productivity in agriculture; human and social development; governance; and macroeconomic stability. - Staff finds PARP appropriate; emphasizes agriculture, exports, and employment; recommends vigorous implementation. - Fiscal space for social protection (Box 2): - Staff analysis suggests additional fiscal space of 2½ percent of GDP could be created cumulatively during 2012-22 for priority spending programs. - Government target of reaching 815,000 poor households would require annual resources of 0.4-0.8 percent of GDP over next few years. - Government allocations to social protection will rise from 0.4 at present to 0.8 percent of GDP over next few years; under best circumstances fiscal space for social protection could rise to 1.4 percent of GDP early in next decade. - Implementation challenges: targeting, beneficiary identification, payment procedures, monitoring, capacity building at district level, donor coordination/common fund. --- ### Structural benchmarks, program modifications, and DSA conclusions ### Selected structural benchmarks and expected dates - Bank of Mozambique to publish first quarterly monetary policy report — Expected Date: End-May 2012. - Government to complete rollout of e-FOLHA to all provincial directorates — Expected Date: End-June 2012. - Ministry of Finance to make functional a new single taxpayer database and identification number — Expected Date: End-June 2012. - Government to submit to Parliament amendment to Corporate Income Tax Law on equalization measures — Expected Date: End-September 2012. - Minister of Finance to approve time-bound action plan for IPSAS-compatible reporting — Expected Date: End-October 2012. - Government to adopt Annual Borrowing Plan for 2013 — Expected Date: End-January 2013. ### Program modifications and targets - Proposed modifications to ACs and indicative targets to implement countercyclical stance: - End-June 2012 ACs on reserve money and NIR and the indicative floor on government revenues adjusted. - AC on nonconcessional external borrowing raised consistent with infrastructure needs, absorptive capacity, debt sustainability, and macro stability. - Indicative target on priority spending redefined to incorporate social action, labor and employment outlays. ### DSA key conclusions and risks - DSA update: Mozambique remains at low risk of debt distress under baseline despite planned temporary increase in public investment partly financed by nonconcessional external borrowing. - Debt indicators vulnerable to exchange rate depreciation and negative exports shock; stress tests show sensitivity to a one-time depreciation and an export shock tailored to aluminum price volatility. - High investment/low growth (nonconcessional resources not used productively) scenario: external debt indicators deteriorate but remain below thresholds; underscores importance of selecting high-return projects when using nonconcessional financing. - Staff recommendations: continue prudent macroeconomic policies, strengthen debt management and project selection capacity, sustain revenue administration efforts, and maintain a broadly stable domestic primary fiscal deficit while supporting infrastructure investment. --- *Source: IMF staff report — 1. Economic Developments in the Global context (Republic of Mozambique).* ### 1. Economic Developments in the Global context ....................................................................... ### 1. Economic Developments in the Global context ### Background and recent developments - The Mozambican economy recorded a strong performance in 2011: GDP rose by about 7 percent. - Growth was broad-based: agriculture, mining, transportation and communication, and financial services registered the fastest expansion. - Activity was supported by strong exports and robust investment demand from megaprojects in the natural resource sector and the public sector. - Strong capital inflows and tight monetary policy contributed to a 20 percent real appreciation of the metical in 2011, after a real depreciation of 15 percent a year earlier. ### Inflation and monetary outcomes (recent) - Twelve-month inflation decelerated sharply to 2¾ percent in March 2012, compared to 16½ percent at end-2010. - Core inflation fell to 2⅓ percent in March 2012. - Determined monetary tightening during 2010-11 decelerated broad money growth by two-thirds in 2011 from a year earlier and contributed to the appreciation of the metical. - Net international reserves (NIR) accumulation of US$331 million in 2011 and reserve coverage of 5.2 months of current-year imports. ### External sector and capital flows - Both megaprojects‘ and traditional exports were buoyant in 2011; strong import demand for investment goods resulted in a slight worsening of the current account deficit to 13 percent of GDP. - FDI more than doubled relative to 2010, led by megaprojects. - Strong private capital inflows, especially by megaprojects, helped maintain reserve cover. ### Program performance and structural reforms - Program performance remained satisfactory; all but one of the end-2011 assessment criteria (ACs) were met. - Quantitative targets for reserve money (RM) and NIR were met comfortably. - Net credit to the government (NCG) exceeded the end-2011 AC marginally (0.1 percent of GDP) due to an unexpected calling of a government guarantee for a public enterprise (0.2 percent of GDP). - The domestic primary deficit was substantially lower than expected because of strong revenue performance and domestic spending below budgeted levels, but the overall fiscal deficit was ½ percent of GDP higher than envisaged due to rapid donor-financed capital spending pick-up in H2 2011. - Priority spending exceeded its end-year indicative floor. - Since the inception of the PSI-supported program in June 2010, the government has used US$446 million of its US$900 million limit on nonconcessional borrowing (NCB). - A US$300million loan was signed with China to build a ring road around Maputo; the loan became nonconcessional by a small margin due to a change in the discount rate applied in concessionality calculations. - The structural benchmark on approval of the Integrated Investment Program for March 2012 was observed; the plan sets a strategic vision and lists about two dozen infrastructure investment priorities but would benefit from more specific technical criteria for project selection. - Authorities adopted five of the six modules under the financial sector contingency plan (end-November 2011 benchmark); mission recommended enhancements to three modules, which authorities agreed to incorporate. --- ### II. Economic Outlook and Policy Discussions ### Short-term challenge: mitigating the impact of the global slowdown - The worsened global economic outlook for 2012-13 poses risks through weaker export demand, capital flow reversal, lower aid disbursements, and more limited credit availability due to deleveraging in Europe. - The partial removal of transportation bottlenecks in the coal-exporting industry should mitigate some global shock effects in 2012. ### Agreed countercyclical policy mix (2012) - Fiscal: allow automatic stabilizers to function to support domestic demand; government intends to maintain spending program under PARP. - Monetary: Banco de Moçambique (BM) will maintain the accommodative monetary policy stance initiated in late 2011 to balance additional private credit provision with preserving disinflation gains. - Financial sector: intensified financial sector supervision to guard against cross-border contagion. - Expected macro outcomes: economic growth is expected to slow to 6¾ percent in 2012 while inflation should remain well in single digits. The external current account deficit and reserve cover are expected to remain similar to 2011. ### Fiscal policy specifics and contingencies - Baseline scenario reflects lower revenue collections than earlier projections based on the 2012 budget law; the government will maintain spending leading to a domestic primary deficit that could rise by 0.2 percentage points relative to earlier projections, to 2.3 percent of GDP. - This higher deficit would be fully financed by a topping-up of World Bank assistance to avoid crowding out private sector domestic bank financing. - A larger-than-projected drop in revenues would trigger provisions that limit budget execution to cautionary ceilings consistent with the Organic Budget Law (SISTAFE 2002). ### Fiscal policy commitments and structural benchmarks - Safeguarding priority spending: the government will channel at least half of all spending (excluding net lending) toward priority sectors under PARP. - Containing wage bill growth: decelerate recruitment in non-priority areas and slow the pace of decompression of the pay scale; strengthen monitoring via full roll-out of the electronic salary payment system (e-FOLHA) to all provincial directorates by end-2012 (structural benchmark). - Phasing out the fuel subsidy: cost recovery achieved early in 2012 but subsequent global oil price increases prompted compensation for fuel importers; authorities to complete payment of 2011 compensation by mid-2012 and explore market segmentation, cross-subsidization options, and more frequent smaller price adjustments to contain fiscal risks; review of the price-setting formula in the medium term. --- ### Key projections, indicators, and policy-relevant numbers - GDP growth (2011): about 7 percent. - Twelve-month inflation: 2¾ percent in March 2012; 16½ percent at end-2010. - Core inflation: 2⅓ percent in March 2012. - Current account deficit (2011): 13 percent of GDP. - NIR accumulation (2011): US$331 million. - Reserve coverage: 5.2 months of current-year imports. - Real exchange rate: metical real appreciation of 20 percent in 2011 (after 15 percent real depreciation in previous year). - NCG exceeded end-2011 AC by 0.1 percent of GDP due to a government guarantee call of 0.2 percent of GDP. - PSI nonconcessional borrowing used: US$446 million of US$900 million limit since June 2010. - US$300million loan signed with China for Maputo ring road (became nonconcessional by a small margin). - Domestic primary deficit projected (baseline) could rise to 2.3 percent of GDP. - Staff/authorities expected growth: 6¾ percent in 2012. Selected fiscal and macro numbers (as presented) - Overall balance after grants: -5.2 -5.9 -6.4 -6.5 - Domestic primary balance: -2.2 -2.1 -2.3 -2.1 - Net domestic financing: 0.9 0.5 0.6 0.7 - Memorandum items: Domestic demand impact (change from the previous year) -2.0 -0.2 0.6 0.2 - Real GDP growth (percent): 7.1 7.5 6.7 7.2 - Average inflation (percent): 10.4 7.2 7.2 5.6 --- ### Monetary policy and liquidity management - Monetary tightening in 2010-11 reined in broad money and credit growth and contributed to disinflation and currency appreciation. - Following tightening, BM began to lower rates in late 2011 and adopt an accommodative stance in 2012 to support credit to the private sector while safeguarding disinflation gains. - Reserve money was kept in line with program targets, helping achieve the disinflation objective. --- *Source: IMF staff report — 1. Economic Developments in the Global context (Republic of Mozambique).* ### 11. The BM’s move toward a more ### 11. The BM’s move toward a more ### Monetary policy stance and near-term outlook - The BM’s move toward a more accommodating monetary policy stance in 2012 is appropriate. - RM growth is projected to accelerate to about 20 percent, exceeding nominal GDP growth by one-fourth, thus supporting the provision of private sector credit. - The BM has eased key policy rates four times since last August, with a cumulative reduction of its lending facility rate and reserve requirements by 300 basis points and 75 basis points, respectively. - The mission cautioned that future policy decisions should continue to be guided by both the inflation outlook and credit conditions, taking into consideration the lags before the effects of policy changes become apparent. ### Enhancing monetary policy framework and preparing for inflation targeting (IT) - The BM intends to continue enhancing the current framework for monetary policy operations and prepare for adoption of an IT framework in the medium term. - Improving coordination with the government - Implementation of the Memorandum of Understanding on the exchange of information between the BM and the Ministry of Finance will help the BM in its liquidity forecasting. - Developing monetary policy instruments and financial markets - Following Fund TA advice, the BM will further refine its monetary policy instruments. - The authorities will remove structural impediments to financial market development, including by harmonizing the taxation of treasury bills and government bonds, and also between collateralized and uncollateralized interbank market operations (structural benchmark). - Preparing for an inflation-targeting (IT) framework - The BM will improve data collection and analysis, forecasting modeling, and forward-looking communication. - The BM will issue its first quarterly monetary policy report to transparently explain its policy intentions (structural benchmark). ### International reserves - Mozambique’s level of international reserves remains comfortable. - NIR growth has been broadly in line with the growth of the economy, the deepening of the financial sector, and increased trade openness. - The relatively higher reserve accumulation pace than in other countries of the region has helped weather the global crisis and is consistent with ongoing structural changes likely to increase required reserve levels over time. ### Financial sector surveillance and resilience - Although the banking sector remains resilient to the global financial turmoil, the BM will intensify its financial sector surveillance. - System-wide indicators are relatively strong; liquidity stress tests show banks could withstand a sizable funding shock on both domestic deposits and funding from domestic and foreign institutions. - Assessment of contagion risk from distressed foreign parent institutions, particularly Portuguese banks which dominate the market, suggests domestic banks would have some buffers to cope with impaired deposits placed abroad. - The BM should intensify financial sector surveillance in response. ### Banking vulnerabilities and regulatory recommendations (Box 1) - Liquidity stress test scenario results - Before Shock (MT Billions): Deposits 130; Assets 195 - Shock: Outflow of Funding [2](29); 20 Percent of Deposits (26); 30 Percent of Wholesale Funding(3) - Cashable Assets [1]: 54 - After Shock: Liquidity Buffer [1+2]: 25 - Under a scenario with outflows in both deposits (20 percent) and funding from domestic and foreign institutions (30 percent), only two small banks would become illiquid. - TA recommendations the BM considers implementing: - Further strengthen bank supervision - Analyze funding risks, regularly use a liquidity stress testing framework based on highly frequent detailed data on banks’ placements and funding (instrument, maturity, currency). - Enhance surveillance of banks’ placements abroad and deposit concentration. - Align NPL definition and recording with international best standards to enhance transparency. - Draft regulation to introduce concentration limits on banks’ placements abroad, including with related parties. - Improve home-host cooperation - Strengthen through MoUs with home supervisors of foreign-owned banks; seek participation in supervisory colleges and exchange of information in crises. - Adjust crisis management arrangements - Incorporate Fund TA recommendations into the financial sector contingency plan, especially modules on emergency liquidity assistance (ELA) and bank resolution. - Establish an adequate legal framework for a resolution regime. - Expand ELA to any solvent bank facing a temporary liquidity problem, not only systemic institutions. - Secure funding and define deposit coverage for the Deposit Insurance Fund (DIF); consider DIF funds also for recapitalization, bridge banks, or purchase and assumption (P&A). - Authorities expect to have the contingency plan fully operational by end-September 2012. ### Medium-term policies: infrastructure, borrowing, and debt - Medium-term outlook remains favorable, but the government needs to close the infrastructure gap, maintain external and fiscal sustainability, and promote inclusive growth. - Public investment needs - Vast need to rehabilitate and upgrade infrastructure; urban-rural and interprovincial disparities persist. - Donor support trends and implications - Net aid flows declined from a crisis-related peak of 14½ percent of GDP in 2009 to 12 percent of GDP in 2011, and are projected to level off to below 10 percent of GDP from 2012 onward. - Donors are conditioning general budget support on performance and shifting funds toward sector or project support, complicating predictability. - Mozambique: Total Public Investment Program, 2009-16 (Percent of GDP) - Total: 2009 14.6; 2010 16.0; 2011 17.1; 2012 16.3; 2013 16.4; 2014 16.1; 2015 15.1; 2016 14.4 - On budget: 2009 14.6; 2010 14.6; 2011 15.3; 2012 15.4; 2013 15.5; 2014 15.5; 2015 14.6; 2016 14.4 - Domestically financed: 2009 4.4; 2010 6.3; 2011 5.6; 2012 5.8; 2013 6.0; 2014 6.0; 2015 6.1; 2016 6.2 - Donor financed, concessional: 2009 10.2; 2010 8.3; 2011 9.0; 2012 7.6; 2013 7.0; 2014 7.0; 2015 7.0; 2016 7.0 - Non-concessional: 2009 0.0; 2010 0.0; 2011 0.7; 2012 2.1; 2013 2.6; 2014 2.6; 2015 1.5; 2016 1.2 - Memorandum: Total concessional and domestic: 2009 14.6; 2010 16.0; 2011 15.6; 2012 13.9; 2013 13.4; 2014 13.1; 2015 13.1; 2016 13.2 - Source: IMF staff calculations; Credit line from Portugal noted. - Nonconcessional borrowing - At authorities’ request, staff proposes increasing the NCB ceiling to US$1.5 billion (from current US$900 million) to help close the infrastructure gap; this would accommodate a $300 million ring road loan that was inadvertently nonconcessional and allow additional priority projects while preserving space for future borrowing. - Justification: strengthened macroeconomic performance, slower-than-anticipated loan disbursements, improved debt indicators relative to the last DSA, projects’ large import component, and underutilized labor markets. - Reforms to support informed borrowing and project selection - Use Integrated Investment Plan, authorities’ second annual DSA, coordinating committees, project selection templates and manuals. - Pending commitments include approval by the Council of Ministers of an enhanced medium-term debt strategy (MTDS) and completion of a first annual domestic borrowing plan for 2013 (structural benchmark). ### Natural resources and fiscal planning - Mozambique is entering rapid development of mining and hydrocarbon sectors with likely major macro-fiscal implications by the end of this decade. - Coal production expanding; huge offshore natural gas discoveries likely to lead to large-scale LNG production and exports beginning in 2018. - Plans and reforms - April 2012 Fund TA recommended reforms to mining and hydrocarbon fiscal regimes; authorities are considering revising relevant tax legislation this year. - Government plans to enhance mining and hydrocarbon revenue forecasting, assess feasibility of creating a stabilization fund, and improve statistics on natural resources. - Exploring renegotiations of terms under existing natural resource sector projects where circumstances have changed. - Completion of the second reconciliation country report in March 2012 advanced Mozambique’s progress toward full EITI membership (awaiting EITI Secretariat assessment). ### Promoting inclusive growth and social protection - Poverty and growth - Despite sustained economic growth and strides toward the Millennium Development Goals, poverty reduction has stalled. - Staff analysis indicates growth has not been as pro-poor as in peer countries and has become less pro-poor over time. - Structural rigidities, narrow productive base, low agricultural productivity (three-fourths of population work in agriculture), and slow business environment reforms contribute to stalled poverty reduction. - Government Poverty Reduction Strategy (PARP) 2011-14 - PARP’s three main and two supporting pillars focus on promoting employment; production and productivity in agriculture; human and social development; governance; and macroeconomic stability. - Staffs find PARP appropriate to sustain poverty reduction and make growth more inclusive; emphasize agriculture, exports, and employment. - PARP commits to developing focused and better-designed social protection programs. - Implementation progress and challenges - Authorities initiated reforms in agriculture, fast-track measures to improve the business environment, and a revamped social protection system supported by Fund, World Bank, and ILO/UNICEF cooperation. - Mission encouraged continued efforts and a bold approach to reduce poverty. - Fiscal space for social protection (Box 2) - Staff analysis suggests additional fiscal space of 2½ percent of GDP could be created cumulatively during 2012-22 for priority spending programs; drivers include revenue administration reforms and reprioritization via phasing out the fuel subsidy, offsetting trend aid decline. - Government target of reaching 815,000 poor households would require annual resources of 0.4-0.8 percent of GDP over the next few years, using part of the newly created fiscal space; consistent with sustainable medium-term fiscal framework. - Using a larger share of fiscal space for social protection could be considered in the longer term but would compete with priorities such as infrastructure. - Fiscal space could be larger than 2½ percent of GDP if resources from natural resources or donors materialize. - Implementation challenges: enhance targeting and beneficiary identification, payment procedures, monitoring systems, capacity building at district level, and donor coordination/possible common fund. _Italic source attribution: Source: Bank of Mozambique; IMF staff._ ### 25. Deepening structural reforms is ### 25. Deepening structural reforms is ### Role of structural reforms - Structural reforms are crucial in supporting implementation of the PARP’s five pillars and in ensuring sustained economic growth and macroeconomic stability. - Many structural reforms embedded in the authorities‘ economic program under the PSI—including as structural conditionality—specifically support the PARP‘s supporting pillar on maintaining a stable macroeconomic environment, including reforms in: - tax administration and policy; - public financial management; and - the fiscal and monetary policy frameworks. - Reforms targeting the PARP‘s job creation pillar support private sector activity, including: - reforms aimed at financial sector stability and development; and - reforms aimed at improving the business climate. - Governance is being promoted by reforms related to the anti-corruption and AML/CFT frameworks. ### Structural Benchmarks (selected) - The Bank of Mozambique will publish its first quarterly monetary policy report, as described in paragraph 11 of the MEFP dated November 14, 2011. - Expected Date of Implementation: End-May 2012 - Macro relevance: Enhance transparency and accountability of monetary policy, thereby better anchoring price expectations and facilitating the transition to inflation targeting. - The Government will complete the rollout of the e-Folha electronic salary payment system to all provincial directorates, as described in paragraph 19 of the MEFP dated November 14, 2011. - Expected Date of Implementation: End-June 2012 - Macro relevance: Improve budget planning and execution, and enhance the authorities‘ handle on the wage bill. - The Ministry of Finance will make fully functional a new single taxpayer database and identification number, as described in paragraph 23 of the MEFP dated November 14, 2011. - Expected Date of Implementation: End-June 2012 - Macro relevance: Help create fiscal space and shore up the authorities‘ revenue objectives. - The Government will submit to Parliament an amendment to the Corporate Income Tax Law reflecting measures derived from an impact study on the equalization of the tax treatment between Treasury bills and Government bonds and between collateralized and uncollateralized interbank market operations, to take effect in 2013, as described in paragraph 10 of the MEFP dated November 14, 2011. - Expected Date of Implementation: End-September 2012 - Macro relevance: Enhance the effectiveness of money market operations, develop domestic financial markets and improve the liquidity of government securities. - The Minister of Finance will approve a time-bound action plan for IPSAS-compatible reporting, as described in paragraph 19 of this MEFP. - Expected Date of Implementation: End-October 2012 - Macro relevance: Improve the reporting and monitoring of budget execution. - The Government will adopt an Annual Borrowing Plan for 2013, as described in paragraph 20 of this MEFP. - Expected Date of Implementation: End-January 2013 - Macro relevance: Improve debt management through better internal planning and communication with the market, thereby reducing issuance cost. - Structural Conditionality, 2012-13 ### Program modifications and targets - Modifications are proposed for several assessment criteria (ACs) and indicative targets: - The end-June 2012 ACs on reserve money and net international reserves and the indicative floor on government revenues were adjusted according to performance to date and the authorities‘ short-term policy objectives to implement a countercyclical policy stance. - The AC on nonconcessional external borrowing was raised based on Mozambique‘s infrastructure needs, consistent with absorptive capacity, debt sustainability, and macroeconomic stability. - The indicative target on priority spending has been redefined to incorporate outlays related to social action, labor and employment. ### Staff appraisal: performance in 2011 and near-term risks - Findings on 2011 performance: - Mozambique’s economic performance in 2011 was described as remarkable. - Economic growth remained buoyant and macroeconomic stability was maintained owing to a prudent macroeconomic policy mix that effectively brought down inflation, kept debt indicators in check, and helped strengthen Mozambique‘s international reserves. - A minor non-observance of the limit on net credit to the government did not compromise the underlying prudent fiscal policy stance and Mozambique‘s satisfactory implementation of its economic program under the PSI. - Near-term outlook and risks: - The global downturn is likely to have repercussions on economic activity going forward. - Mozambique‘s prudent track record provides ample buffers to pursue a countercyclical policy stance this year and next to support economic growth. - Recommended countercyclical measures include: - allowing automatic stabilizers to function to keep spending at budgeted levels; and - pursuing an accommodative monetary policy stance to support the provision of credit to the economy. - Authorities are encouraged to remain vigilant about the re-emergence of inflation pressures that could compromise recent disinflation gains. - The authorities‘ intention to step up financial sector supervision is crucial to guard against potential cross-border contagion. ### Policy recommendations and priorities - Implement the PARP vigorously to address stagnation in poverty reduction despite strong economic growth. - Implementation challenges include necessary inter-ministerial coordination and development of bold sectoral strategies. - Encouraging first steps include fast-track measures to improve the business environment and progress on a revamped social protection system. - Authorities are urged to prevent the costly fuel subsidy from reemerging and eroding fiscal space for priority spending. - Authorities should persevere and work with civil society and development partners in PARP implementation. - Exercise prudent borrowing and project selection to address infrastructure gaps while preserving debt sustainability: - Continue debt management and project selection reforms to make informed decisions and preserve comfortable debt indicators. - Be mindful of risks from an overly aggressive use of nonconcessional borrowing given a trend decline in donor support. - The proposed increase in the program‘s nonconcessional borrowing ceiling aims to balance addressing infrastructure bottlenecks with preserving space for future high-return projects. - Harness the natural resource sector over the long run to help afford infrastructure needs: - Commended intentions include modernizing fiscal regimes for mining and hydrocarbon sectors and planned institutional enhancements to manage natural resource wealth. - Staff encourages continued efforts to get full EITI membership. *REPUBLIC OF MOZAMBIQUE, INTERNATIONAL MONETARY FUND.* ### 32. Based on program performance and ### 32. Based on program performance and ### Staff recommendation and program actions - Staff recommends completion of the fourth review under the PSI. - Staff recommends a waiver for the minor nonobservance of the end-December AC on net credit to the government. - Staff recommends the modification of ACs. ### Macroeconomic outlook (selected indicators and projections) - Nominal GDP (MT billion): 266 313 372 371 430 426 484 553 632 721 823 - Nominal GDP growth: 10.8 17.5 18.9 18.6 15.6 14.9 13.6 14.2 14.3 14.1 14.1 - Real GDP growth: 6.3 6.8 7.2 7.1 7.5 6.7 7.2 7.8 7.8 7.8 7.8 - GDP per capita (US$): 471 439 578 580 607 632 675 741 814 893 978 - Consumer price index (annual average): 3.3 12.7 10.8 10.4 7.2 7.2 5.6 5.6 5.6 5.6 5.6 - Consumer price index (end of period): 4.2 16.6 8.4 5.5 5.6 5.6 5.6 5.7 5.5 5.6 5.6 - Exchange rate, MT per US dollar, eop: 27.5 32.8 ... 27.1 ... - External current account, before grants (percent of GDP): -19.1 -18.1 -16.9 -18.8 -15.9 -17.3 -16.8 -16.2 -15.5 -15.0 -14.4 - External current account, after grants (percent of GDP): -12.2 -11.7 -11.2 -13.1 -11.1 -12.7 -12.4 -11.9 -11.3 -10.9 -10.5 ### External sector (selected) - Merchandise exports (annual percent change): -19.1 8.7 13.5 19.0 12.2 12.3 14.2 11.9 11.0 9.4 9.3 - Merchandise exports, excluding megaprojects: 4.3 -20.5 8.1 14.4 3.1 4.0 4.0 4.4 5.5 5.5 6.0 - Merchandise imports (annual percent change): -6.1 2.6 14.7 19.2 5.6 6.5 9.6 8.6 7.6 7.3 7.3 - Terms of trade (percent change): -0.7 14.4 7.0 18.1 9.5 13.3 9.5 7.8 4.0 0.2 -1.5 ### Monetary and credit developments - Reserve money (annual percent change): 27.3 29.2 13.2 8.5 18.3 20.2 18.1 19.8 20.3 21.3 21.9 - M3 (Broad Money) (annual percent change): 32.6 22.8 11.7 8.1 18.9 20.2 18.6 19.5 19.5 19.6 21.1 - Credit to the economy (annual percent change): 58.6 29.3 17.4 6.3 21.8 22.8 23.2 23.5 23.7 23.9 24.1 - Credit to the economy (percent of GDP): 26.8 29.5 28.7 26.5 30.3 28.3 30.7 33.2 35.9 39.0 42.4 ### Investment and saving (percent of GDP) - Gross domestic investment: 16.5 22.0 21.2 24.3 22.0 22.8 24.3 24.7 24.1 24.3 24.5 - Gross domestic savings (excluding grants): -2.6 3.9 4.3 5.5 6.1 5.5 7.4 8.5 8.6 9.3 10.0 - External current account, before grants (US$ millions): -1,908 -1,718 -2,149 -2,401 -2,166 -2,463 -2,602 -2,800 -3,008 -3,257 -3,502 - External current account, after grants (US$ millions): -1,220 -1,113 -1,422 -1,667 -1,508 -1,802 -1,917 -2,068 -2,187 -2,367 -2,544 ### Government finances (levels and percent of GDP) - Total revenue (percent of GDP): 17.6 20.6 21.4 21.9 22.2 22.2 22.6 22.9 23.2 23.5 23.6 - Total expenditure and net lending (percent of GDP): 32.6 33.6 32.6 34.5 34.6 35.2 35.5 35.6 34.9 34.9 34.7 - Overall balance, before grants (percent of GDP): -15.0 -13.0 -11.3 -12.7 -12.4 -13.0 -12.9 -12.7 -11.7 -11.4 -11.1 - Grants received (percent of GDP): 9.5 9.1 7.7 7.7 6.5 6.6 6.3 6.1 6.1 6.1 6.1 - Overall balance, after grants (percent of GDP): -5.5 -4.0 -3.5 -4.9 -5.9 -6.4 -6.6 -6.6 -5.6 -5.3 -4.9 - Domestic primary balance, before grants (percent of GDP): -4.3 -3.7 -3.1 -2.2 -2.1 -2.3 -2.1 -1.8 -1.8 -1.7 -1.7 - Total public debt (percent of GDP): 40.5 36.8 31.7 34.4 37.6 41.4 43.9 46.6 47.0 47.0 46.6 - Of which: external: 37.3 34.5 29.7 31.5 35.2 38.3 40.6 43.0 43.1 43.0 42.4 - Of which: domestic: 3.2 2.4 2.0 2.9 2.4 3.1 3.4 3.6 3.8 4.0 4.2 ### Government finances (billions of Meticais, selected lines) - Total revenue (Billions of Meticais): 46.7 36 4.4 87 9.4 681.1 295.5 494.5 7 (note: table formatting in source; full series provided in source tables) - Tax revenue (Billions of Meticais): 41.4 75 6.5 469.9 471.5 483.8 582.9 0 (note: full series in source tables) - Total expenditure and net lending (Billions of Meticais): 86.7 0105.2 0121.4 1128.2 6148.9 1150.0 9 (note: full series in source tables) - Current expenditure (Billions of Meticais): 47.8 759.5 673.6 571.5 084.4 684.4 6 (note: full series in source tables) ### Monetary survey and banking sector (selected) - Net international reserves (end of period, US$ millions): 1,840 1,908 2,030 2,238 2,280 2,438 2,719 3,117 3,526 3,950 4,482 - Gross international reserves (end of period, US$ millions): 2,012 2,099 2,227 2,429 2,474 2,626 2,905 3,299 3,673 4,060 4,557 - M3 (M2 in source memorandum) levels and 12-month percent change presented in source tables (e.g., M2 72.5 85.3 95.1 95.9 99.9 104.0 99.4 121.3 121.0 128.8) - Policy lending rate (end-of-period): 11.5 15.5 ... 16.0 ... 15.0 ... - T-bill 91 days rate: 9.5 14.7 ... 14.3 ... 11.8 ... ### Balance of payments (selected, US$ millions) - Current account balance (US$ millions): -1,220 -1,113 -1,422 -1,667 -1,508 -1,803 -1,918 -2,069 -2,188 -2,367 -2,545 - Trade balance for goods (US$ millions): -1,275 -1,179 -1,380 -1,411 -1,283 -1,344 -1,329 -1,325 -1,288 -1,288 -1,284 - Exports, f.o.b. (US$ millions): 2,147 2,333 2,649 2,776 2,972 3,116 3,558 3,982 4,420 4,835 5,286 - Imports, f.o.b. (US$ millions): -3,422 -3,512 -4,029 -4,187 -4,255 -4,460 -4,887 -5,306 -5,708 -6,123 -6,570 - Megaprojects: Megaproject exports and imports series are provided in the source tables (e.g., Of which: Megaproject exports 1,311 1,668 1,931 ...) - Net foreign direct investment (US$ millions): 890 790 1,009 2,090 1,018 1,590 1,575 1,749 1,890 1,912 1,976 - Overall balance (US$ millions): 194 581 223 312 512 002 813 984 094 245 33 ### Financial soundness indicators (banking sector) - Regulatory capital to risk-weighted assets: 5.5 14.0 16.5 18.0 13.4 12.5 14.2 13.9 15.1 14.4 15.3 18.7 17.8 17.1 - Nonperforming loans to gross loans (percent): 23.4 22.0 13.8 5.9 3.5 3.1 2.6 1.9 1.8 1.9 2.3 2.3 2.4 2.6 - Return on assets: 0.1 1.6 1.4 1.5 1.9 4.0 3.8 3.5 3.0 2.6 2.9 3.0 2.6 2.5 - Liquid assets to total assets (percent): 34.6 53.9 45.2 38.3 31.1 33.9 36.0 36.2 27.9 22.4 ... 27.8 ### Program quantitative targets and indicative targets (selected) - Indicative ceiling / assessment criteria examples (Millions of meticais, unless otherwise specified): - Net credit to the government (cumulative ceiling): -362 -362 -74 NM 2,896 3,066 3,360 NM 2,795 -2,645 -2,645 -745 2,500 - Stock of reserve money (ceiling): 33,708 33,400 31,436 M 36,053 36,053 33,275 M 33,800 ... 36,734 36,923 37,031 39,985 - Stock of net international reserves of the BM (floor, US$ millions): 1,905 1,905 2,130 M 2,030 2,038 2,238 M 2,091 ... 2,154 2,207 2,323 2,438 - New nonconcessional external debt contracted or guaranteed (cumulative ceiling over program, US$ millions): 900 900 146 M 900 900 146 M 900 ... 900 1,500 1,500 1,500 - Indicative target examples: - Government revenue (cumulative floor): 56,382 56,382 60,490 M 76,792 76,792 81,119 M 20,272 ... 45,556 45,256 69,687 94,568 - Priority spending (cumulative floor): 40,839 40,839 40,589 NM 58,000 58,000 58,242 M 10,500 ... 24,500 24,500 35,934 72,563 ### Structural benchmarks and status (2011–12) - Continuous: Any new contracting of nonconcessional external borrowing or guarantees by the Central Government and selected SOEs to be for transportation and electricity infrastructure investment — Status: Met. Macroeconomic importance: Ensure use of commercial borrowing for growth enhancing investment so as to safeguard debt sustainability. - End-March 2011: Ministerial decree requiring project selection protocol and standard project evaluation template — Status: Met. Macroeconomic importance: Improve analysis and selection of public investment projects. - End-March 2011: Action plan to simplify tax system, expand tax base, assess corporate tax rate reduction and incentives rationalization — Status: Met. Macroeconomic importance: Support envisaged further rise in revenue-to-GDP ratio and help contain fiscal deficit. - End-March 2011: Decrees to create Debt Management Committee (DMC) and Project Coordination Committee (PCC) — Status: Met. Macroeconomic importance: Enhance debt management and project selection. - End-July 2011: First quarterly report on civil servant population and wage payments based on e-FOLHA and e-CAF enhancements — Status: Met. Macroeconomic importance: Strike balance between modernizing the civil service and keeping the wage bill in line with macro stability. - End-July 2011: Submission to Parliament of administrative reforms package to fight corruption (multiple legal revisions) — Status: Met in October. Macroeconomic importance: Ensure adequate governance standards. - End-November 2011: Bank of Mozambique to adopt financial sector contingency plan modules (closing/liquidating banks, takeovers, bailouts, emergency liquidity assistance) — Status: Partially met. Macroeconomic importance: Safeguard macro stability and soundness of banking system. - End-March 2012: Minister of Planning and Development to approve an Integrated Investment Program, in consultation with PCC — Status: Met. Macroeconomic importance: Improve selection of public investment projects. *Sources: Mozambican authorities; and IMF staff estimates and projections.* ### APPENDIX I. LETTER OF INTENT ### APPENDIX I. LETTER OF INTENT ### Overview and request - The Government of Mozambique requests completion of the fourth review under the Policy Support Instrument (PSI). - Transmitted attachments: Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding. - Date of letter: May 10, 2012. - Signatories: Manuel Chang, Minister of Finance; Ernesto Gouveia Gove, Governor, Bank of Mozambique. ### Recent economic developments and performance under the program - 2011 economic growth: 7.1 percent (quarterly data estimate). - Inflation developments: - Twelve-month headline inflation: 5.5 percent at end-2011; 2.5 percent in February 2012; peak of 16.6 percent at end-2010. - Core inflation (excluding food and fuel): 5.9 percent at end-2011; 2.4 percent at end-February 2012. - External sector and reserves: - External current account deficit: 13 percent of GDP (preliminary). - International reserves: equivalent to 4.8 months of imports (better-than-expected level). - Program compliance and outcomes: - All end-December 2011 quantitative assessment criteria (AC) were met comfortably, except for net credit to the government (NCG). - Reserve money (RM) growth slowed from 29¼ percent in 2010 to 8½ in 2011, meeting the relevant end-December AC. - Bank of Mozambique observed with ample margin all quarterly targets on net international reserves (NIR) through end-December 2011. - Fiscal outcomes: end-September indicative target and end-December AC for NCG were marginally exceeded due to a government guarantee for a public enterprise called by a domestic bank; excluding this outlay the targets would have been met. - Priority spending indicative target for the year met overall, despite slight underperformance at end-September. - Nonconcessional borrowing (NCB) usage under the program ceiling reached US$446 million after signing a US$300 million credit to build a ring road around Maputo (in addition to loans for rehabilitation of Maputo and Nacala airports). - Structural benchmark progress: - Integrated Investment Program approved by the Minister of Planning and Development on March 26, developed with Project Selection Committee (PCC). - Financial sector contingency plan: five of six envisaged modules adopted; Fund TA suggested enhancements. ### Implementation of the PARP (Poverty Reduction Strategy Paper, 2011–14) - General: PARP formally adopted May 3, 2011; MEFP supports implementation and the PARP’s three main pillars. - Agriculture (Agricultural Reform Strategy—PEDSA): - Objective: double agricultural production by 2020. - Targets and measures: - Expand number of land leasing titles (DUATs) to 2,842 in 2012, from 2,701 in 2011. - Offer extension services to 10 percent of agricultural producers in 2012 and to 15 percent in 2014. - Set up silos in 5 provinces to improve market access. - Council of Ministers to adopt a new agricultural investment plan by end-June 2012; plan to be disseminated in a road-show later in 2012. - Employment and business climate: - Decree approved February 2 simplifying issuance of 84 types of licenses for 9 areas of activity. - Council of Ministers approved an action plan in early March to accelerate business climate reforms in 2012, including measures to reduce by half the number of procedures to start a business. - Other measures: adoption of the bankruptcy code by Parliament, completion of an inventory of business licenses, approval of a credit registry model. - Successor five-year Strategic Plan to Improve the Business Environment to be submitted for Cabinet approval in Q4 2012. - Social and human development: - Health: increase ratio of health workers to 100,000 inhabitants from 66 in 2012 to 69 in 2014. - Education: boost net rate of schooling at age 6 in first grade from 73 to 79 percent during the period. - Social infrastructure: stepped-up investment plans to improve access to water, basic sanitation, electricity, dwelling, and urban transport services. - Social protection systems being enhanced with support from ILO, UNICEF, the Bank, and the Fund. ### Macroeconomic policies A. Economic objectives - Medium-term growth objective: sustain high growth of 7½ to 8 percent over the next five years. - Short-run risk: global slowdown could temporarily lower growth by up to one percentage point in 2012. - External current account: set to improve slightly and hover around 12 percent of GDP during the next five years. - Reserves coverage: projected to exceed 5 months of imports. - Inflation objective: achieve 5 to 6 percent during the period, barring external price shocks. B. Macroeconomic policy mix - Fiscal and monetary policies geared to safeguard macroeconomic stability and debt sustainability while supporting investment and social development. - Temporary surge in public investment planned to close infrastructure gap and support PARP objectives. - Fiscal balances projected: - Overall fiscal deficit: 5 to 6½ percent of GDP during the period. - Domestic primary deficit: 2 to 2½ percent of GDP (limited by strong revenue effort and restraint in domestic current spending). - Development partner support and NCB within program ceiling to keep domestic bank financing below 1 percent of GDP. - Monetary stance: sufficiently accommodating to support objectives while primarily aiming to preserve low inflation; RM expansion slightly faster than nominal GDP growth. C. Monetary and exchange rate policies - 2012 stance: more accommodating but consistent with annual inflation objective of 5 to 6 percent. - RM growth projection: about 20 percent in 2012, "exceeding nominal GDP growth by one-fourth." - Measures to enhance monetary policy operations: - Monitoring government accounts: implementation of MoU signed March 25, 2011 on exchange of information between BM and MoF is proceeding well; continued improvements in timely exchange of information. - Develop domestic repo market: implement measures from November 14, 2011 MEFP by end-July 2012 to improve interbank and repo markets; convert FPD credit facility into a repo operation during 2012 to shift market preference toward collateralized operations. - Assess equalization of tax treatment between BT and OT and between collateralized and uncollateralized interbank operations; any equalization measures to be reflected in an amendment to the Corporate Income Tax Law to be submitted to Parliament by end-September 2012 to take effect in 2013 (structural benchmark). - Inflation-targeting (IT) preparation: - Continue improving data collection and analysis, forecasting modeling, forward-looking communication, and short-term liquidity forecasting. - Publish first quarterly monetary policy report by end-May 2012 (structural benchmark). - Exchange rate policy: maintain a flexible exchange rate regime; BM to allow exchange rate to adjust freely and monitor real effective exchange rate vis-à-vis a broad basket of currencies. - Commitment to Article VIII, sections 2, 3, and 4: BM will monitor implementation of new foreign exchange regulations and inform IMF staff of developments potentially inconsistent with Article VIII principles. D. Fiscal policy - 2012 countercyclical stance: slight increase in fiscal deficit to cushion impact of global slowdown while safeguarding disinflation gains. - Revenue risks: revenue collections may fall short of 2012 budget law targets given external environment. - Domestic primary deficit: could rise by 0.2 percentage points relative to earlier projections, to 2¼ of GDP in 2012; higher deficit to be fully financed by additional World Bank financing to avoid crowding out private sector credit. - Contingency procedures: a further projected drop in revenues would trigger budget execution limits consistent with the Organic Budget Law (SISTAFE 2002), based on Decree No. 1/2011 (Delegação de Competência sobre a Excecução do Orçamento) adopted February 2, 2012 and Ministerial Circular No 4/2012 issued December 30, 2011. - Salary policy: - Gradual implementation supportive of PARP priority sector recruitments. - Decelerate decompression of salary scale and pace of recruitment in non-priority areas; emphasize human capital accumulation. - Strengthen wage bill execution via rapid expansion of electronic salary payment system (e-FOLHA). - Wage bill expected to decline to around 8½ per cent of GDP over the medium term. - e-FOLHA rollout status: by end-February rolled out to 152 provincial directorates; target to complete rollout to all 172 directorates by end-June 2012 (structural benchmark) and to entire central level by end-2012. - Continue producing quarterly wage bill reports for monitoring and control. - Priority spending under PARP: - Target rise from MT 58 billion in 2011 to MT 73 billion in 2012. - Share of projected total expenditures (excluding net lending): rise from 50 to 53 percent. - Full mapping of priority spending aligned with PARP’s three main and two supporting pillars to be completed by end-July 2012. *Source: APPENDIX I. LETTER OF INTENT, May 10, 2012.* ### 18. We will support implementation of the PARP by expanding social protection while ### 18. We will support implementation of the PARP by expanding social protection while ### Enhancing social protection and fuel subsidy reform - Enhancing social protection - The Government is supporting implementation of revamped social protection programs approved by the Council of Ministers in September 2011 and financed under the 2012 budget. - The Ministry for Women and Social Action (MMAS) is strengthening operational systems for delivery of cash transfers and launching public works programs. - First public works pilots expected to be launched in 2 cities and 4 provinces this year. - MMAS revising targeting and beneficiary identification mechanisms, payment procedures, and monitoring and evaluation systems. - Working with development partners to establish a common fund for social protection to guarantee complementary funding for institutional capacity investments and medium-term expansion of beneficiaries. - MMAS and MoF will regularly assess the costing and affordability of increasing existing transfer amounts. - Government allocations to social protection will rise from 0.4 at present to 0.8 percent of GDP over the next few years when the Government‘s envisaged target of 815,000 beneficiaries under both the cash transfer and public works programs could possibly be achieved. - Under the best circumstances, the fiscal space for social protection could further rise to 1.4 percent of GDP early in the next decade. - Phasing out the fuel subsidy - Government committed to fully eliminating the costly fuel subsidy at the earliest possible moment. - Cost recovery effectively achieved early in 2012, but subsequent global oil price increases caused need for compensation for fuel importers. - Short-run measures: exploring options for cross-subsidization of various petroleum products through greater segmentation of the market and relatively more frequent and smaller price adjustments than in the past. - Medium-term measures: reviewing avenues to improve the price-setting formula that has temporarily been suspended. - The Government will complete paying compensation to fuel importers for incurred 2011 losses by end-May 2012, consistent with the agreement reached with them. ### Structural reforms — A. Public Financial Management and Reporting - Expanding budget coverage and system integration - Rollout of the e-SISTAFE budget execution system will be completed by 2015 covering 98 percent of all spending, as per the September 2011 rollout plan. - Aim to increase the e-SISTAFE coverage to 47 percent this year. - An action plan for 2012-14 has been completed and will be adopted by end-May 2012, covering IT hardware and software development and technical skills among staff. - Enhancing quality in PFM processes - Implementing measures to reinforce control and audit functions and step up training at the provincial level, based on Fund TA and studies by the General Financial Inspectorate. - Expect full compliance with real-time recording of the expenditure chain by 2013. - Migrating to IPSAS-compatible reporting - Will gradually reform the State Account format and content according to IPSAS. - Prepare the 2011-13 State Account reports under the old and new format. - The Minister of Finance will approve a time-bound action plan for IPSAS-compatible reporting by end-October 2012 (structural benchmark). - The action plan will define procedures required to elaborate the State Account of 2014 in the new IPSAS-compatible format. - Success hinges on strengthening capacity at the Accounting Directorate. - Expanding fiscal decentralization - Rolling out a district development monitoring system (SMdDD) to assess districts‘ administrative performance. - 33 districts assessed in 2011; goal to assess 80 districts in 2012 and all 128 districts in 2013. - Assessments will be made public to local district councils and communities. ### Structural reforms — B. Debt Management and Investment Planning - Integrated Investment Plan - Completed the Integrated Investment Plan outlining strategic vision, selection procedures, and assessment of top priority projects; will be a rolling document updated with further analysis focusing on projects‘ economic and social returns and lower-cost alternatives. - Completing DSA and MTDS - Second annual debt sustainability analysis (DSA) completed in early-May 2012. - Plan to finalize and submit enhanced medium-term debt strategy (MTDS) for approval by the Council of Ministers by end-June 2012, some three months behind initial schedule. - Advisory committees - Debt Management Committee (DMC) and Project Coordination Committee (PCC) meet quarterly and issued regular reports. - PCC supervised application of new project selection template and drafting of the Integrated Investment Plan. - Project preparation manual expected to be adopted by end-May 2012, with World Bank support. - Strengthening MoF debt unit - Overhauled debt database supported DSA preparation. - Debt unit to complete an operating procedures manual by end-June 2012 for approval by the Minister of Finance. - Debt unit started producing quarterly debt reports since Q4 2011 and will continue; starting in June 2012 these reports will include up-to-date information on evolution of public and publicly-guaranteed debt, contracting of loans, cost and risk indicators, and a link to MTDS scenarios. - Annual Domestic Borrowing Plan for 2013 - Will draw up and publish a first annual domestic borrowing plan for 2013 upon approval of that year‘s budget law but no later than end-January. - The plan will include quarterly financing and repayment projections and be consistent with projected net annual financing needs and cash flow throughout the year (structural benchmark). ### Structural reforms — C. Tax Administration - Single taxpayer database and registration number - Structural benchmark: make the database functional by end-June 2012. - Expectation: by end-2012, some 80 percent of corporate taxpayers and 20 percent of individual taxpayers will be registered in the database throughout the country. - Enhancing tax payment efficiency - Revise tax legislation to accommodate e-tax implementation: VAT by end-2012 and large corporate and personal income taxes by end-June 2013. - Opportunity to address tax refund inefficiencies related to personal income tax and VAT and revise or possibly eliminate stamp tax obligations on administrative acts based on a recent study. - Fostering tax payments through banks - Action Plan for Tax Payments through Banks adopted. - Introduce payment through banks for custom duties, VAT, and simplified tax for small taxpayers (ISPC) by end-2013 and all income taxes by July 2014. - Will seek technical support from development partners to accelerate implementation schedule. - Reinforcing the large taxpayers unit (LTD-DCAT) - Modern management procedures reinforced through large taxpayer‘s liaison agents and a dedicated data collection information system to be fully operational by end-June 2012. - Unit to build expertise on natural resources and strategic sectors to enable targeted audits and improve revenue forecasting. - Collections by the LTD-DCAT are projected to rise from 56 percent in 2011 to 58 percent in 2012, 63 percent in 2013, and 70 percent in 2014. - Single-window trade facilitation project (JUE) - JUE will be rolled out to the country‘s seven main entry points by end-2012 and collect 70 percent of all customs revenues. - Expected to rise to 90 percent end-2013. ### Structural reforms — D. Improving Natural Resource Management - EITI progress - Second reconciliation country report completed in mid-March and presented at a March 30 seminar; report fully addressed guidance from the EITI Secretariat. - Strengthening capacity and fiscal regime review - Forthcoming Fund TA under the Topical Trust Fund for Managing Natural Resources Wealth (TTF-MNRW) to support review and implementation of reforms to mining and hydrocarbon fiscal regime. - Will examine methods for appropriate valuation of mineral assets for fiscal purposes and revisit taxation of capital gains. - Intention to submit revised legislation to Parliament expeditiously, possibly as early as end 2012. - Other measures - Enhance mining and hydrocarbon revenue forecasting. - Assess feasibility of creating a stabilization fund to support long-term development strategy. - Improve statistics on natural resources. - Explore mutually beneficial renegotiations of terms under existing projects where changes in circumstances may have led to a misalignment, while respecting existing Government commitments. ### Structural reforms — E. Good Governance Framework - Anti-corruption legislation implementation - Government will ensure proper implementation of anti-corruption legislation upon its approval by Parliament. - With technical support from partners, Government will produce a time-bound and costed action plan, including institutional reforms required to fully implement the anti-corruption legislative package. - Updating Governance Anti-Corruption Strategy - Update the 2006-10 Governance Anti-Corruption Strategy by end-July 2012, based on available studies and relevant documents (Second National Study on Governance and Corruption Analysis, 2009–14 Integrated Justice Strategy, report on implementation of the African Peer Review Mechanism (MARP) in Mozambique). - Strategy will be implemented, disseminated to, and discussed with key stakeholders. - PARP matrix will be revised to incorporate key measures under the action plan and the broader Governance Anti-Corruption Strategy. ### Financial Sector Policies — A. Financial Sector Surveillance - Strengthening supervision - Bank of Mozambique (BM) re-assessing banking sector vulnerabilities to tensions in the Euro area with Fund TA guidance and considering options to lessen cross-border contagion risks. - Migration to Basel II to enhance risk-based banking supervision is expected to be concluded in 2014. - Financial sector contingency plan - Authorities aim to adjust the draft plan incorporating recent Fund TA recommendations, especially on emergency liquidity assistance and bank resolution. - Full plan expected to be operational by end-September 2012. - Deposit Insurance Fund (DIF) - Aim to make the DIF, created in 2010, an integral component of the financial stability framework. - In coordination with MoF, assess options to secure funding and decide on deposit coverage expeditiously. ### Financial Sector Policies — B. Fighting Money Laundering and Terrorism Financing - AML/CFT framework implementation - MoF established and appointed members of the high-level AML/CFT National Task Force in December 2011. - AML/CFT law approved by the Council of Ministers and formally submitted to Parliament on April 19, 2012. - AML/CFT strategic plan prepared by GIFIM approved by the Council of Ministers on April 17, 2012. - Strategic plan aims to foster national, regional, and international cooperation; strengthen the AML/CFT institutional framework; and promote capacity building and outreach. ### Financial Sector Policies — C. Financial Sector Development Strategy - Financial Sector Development Strategy (FSDS) for 2011-20 - Close to officially launching FSDS for 2011-20, including measures to enhance financial inclusion, competition, consumer protection, and financial literacy. - Three strategic and operational bodies (Steering Committee, Technical Advisory Committee, Implementation Unit) set up in November 2011 and fully operational. - FSDS approval by the Council of Ministers delayed to May 2012 to incorporate Steering Committee recommendations. - Plan to launch FSDS dissemination in June through a World Bank-organized workshop and work with development partners to fund implementation. ### Financial Sector Policies — D. Payment System - Payment system reforms and oversight - Following rollout of the real time gross settlement system in national currency (MTR) in 2010, BM working on improving monitoring of risks in the electronic clearing system (CEL). - Adopt a payment systems oversight policy strategy and procedures manual by end-August 2012. - Complete self-assessment of the MTR and CEL against the Core Principles for Systemically Important Payment Systems by end-August 2012. - Retail payments network and SIMO - Launch a retail payments network shared by BM and commercial banks. - Retail payments company SIMO established in June 2011; pilot phase expected to be completed during 2012. - Platform expected to handle all retail transactions and support interbank services, such as electronic funds transfers and mobile banking, after pilot. ### Program monitoring and benchmarks - Reviews and structural benchmarks - Proposed modifications of quantitative assessment criteria and indicative targets for end-June, end-September, and end-December 2012 are presented in Table 1; proposed structural benchmarks are listed in Table 2. - The fifth PSI review expected to be completed by end-2012 and the sixth and last PSI review by June 13, 2013. - Selected quantitative figures (as presented) - Net credit to the government (cumulative ceiling) entries in table: -362 -362 -74 NM 2,896 3,066 3,360 NM 2,795 -2,645 -2,645 -745 2,500 - Stock of reserve money (ceiling): 33,708 33,400 31,436 M 36,053 36,053 33,275 M 33,800 36,734 36,923 37,031 39,985 - Stock of net international reserves of the BM (floor, US$ millions): 1,905 1,905 2,130 M 2,030 2,038 2,238 M 2,091 2,154 2,207 2,323 2,438 - New nonconcessional external debt contracted or guaranteed (cumulative ceiling over duration, US$ millions): 900 900 146 M 900 900 146 M 900 900 1,500 1,500 1,500 - Government revenue (cumulative floor): 56,382 56,382 60,490 M 76,792 76,792 81,119 M 20,272 45,556 45,256 69,687 94,568 - Priority spending (cumulative floor): 40,839 40,839 40,589 NM 58,000 58,000 58,242 M 10,500 24,500 24,500 35,934 72,563 - Structural benchmarks with expected dates - The Bank of Mozambique will publish its first quarterly monetary policy report, as described in paragraph 11 of the MEFP dated November 14, 2011. — End-May 2012 - The Government will complete the rollout of the e-Folha electronic salary payment system to all provincial directorates, as described in paragraph 19 of the MEFP dated November 14, 2011. — End-June 2012 - The Ministry of Finance will make fully functional a new single taxpayer database and identification number, as described in paragraph 23 of the MEFP dated November 14, 2011. — End-June 2012 - The Government will submit to Parliament an amendment to the Corporate Income Tax Law reflecting measures derived from an impact study on the equalization of the tax treatment between Treasury bills and Government bonds and between collateralized and uncollateralized interbank market operations, to take effect in 2013, as described in paragraph 10 of the MEFP dated November 14, 2011. — End-September 2012 - The Minister of Finance will approve a time-bound action plan for IPSAS-compatible reporting, as described in paragraph 19 of this MEFP. — End-October 2012 - The Government will adopt an Annual Borrowing Plan for 2013, as described in paragraph 20 of this MEFP. — End-January 2013 *Source: REPUBLIC OF MOZAMBIQUE — INTERNATIONAL MONETARY FUND (content as provided).* ### 1. This Technical Memorandum of Understanding (TMU) defines the quantitative assessment ### _cr12148 - 1. This Technical Memorandum of Understanding (TMU) defines the quantitative assessment ### Purpose and scope - Defines the quantitative assessment criteria, indicative targets, and structural benchmarks to monitor implementation of the Fund-supported program under the Policy Support Instrument (PSI). - Establishes terms and timeframe for transmitting data to enable Fund staff to monitor program implementation. ### Definitions (A–J) - A. Net credit to the central government (NCG) - NCG = outstanding bank credits to the central government minus the central government's deposits with the banking system, excluding deposits in project accounts with the banking system, recapitalization bonds issued to the Bank of Mozambique (BM), and proceeds from the signing fee for mineral resource exploration. - Credits comprise bank loans, advances to the central government and holdings of central government securities and promissory notes. - NCG calculated from balance sheets of the monetary authority and commercial banks as per the monetary survey. - Limits on the change in NCG by the banking system are cumulative from end-December of the previous year. - Net disbursements on the nonconcessional Portuguese credit line are excluded from the NCG assessment criterion for program purposes (paragraph 4). - B. Government revenue and financing - Revenue includes receipts of the General Directorate of Tax (Direcção Geral dos Impostos, DGI), the General Directorate of Customs (Direcção Geral das Alfândegas, DGA), and nontax revenue, including certain own-generated revenues of districts and some line ministries as defined in the budget. - Net receipts from privatization received by the National Directorate of State Assets (Direcção Nacional do Património do Estado) and unrealized profits transferred by the central bank to the treasury will not be considered as revenue (above the line) and will be accounted for as other domestic financing (below the line). - Revenue is considered collected when received by government collecting agencies, in cash or checks, or through transfers into the respective bank account. - C. Priority social spending - Based on PARPA categories expanded to incorporate all areas under the new PARP; includes spending in: (i) education; (ii) health; (iii) HIV/AIDS; (iv) infrastructure development; (v) agriculture; (vi) rural development; (vii) governance and judicial system; and (viii) social action, labor and employment. - D. Reserve money - Reserve money = currency issued by the BM + commercial banks‘ holdings at the BM. - Target defined as the average of the daily end-of-day stocks in the month of the test date; monitored and reported by the BM. - E. Net international reserves (NIR) - NIR of the BM = reserve assets minus reserve liabilities. - Reserve assets include: (a) monetary gold; (b) holdings of SDRs; (c) reserve position at the IMF; (d) holdings of foreign exchange; and (e) claims on nonresidents, such as deposits abroad (excluding the central government‘s savings accounts related to mineral resource extraction concessions). - Reserve assets exclude assets pledged or encumbered (assets not readily available). - Reserve liabilities include: (a) all short-term foreign exchange liabilities to nonresidents with original maturity of up to and including one year; and (b) all liabilities to the IMF. - F. New nonconcessional external debt contracted or guaranteed (maturity > one year) - Ceiling applies to external debt contracted or guaranteed by the central government, the BM, the Road Fund, the water authorities (FIPAG), and the electricity company (EDM). - Also applies to debt by these three state-owned enterprises from domestic banks or other state-owned enterprises contractually inter-related to external nonconcessional loans. - Applies to external debt with original maturity ≥ one year and grant element below 35 percent. Grant element calculated using currency-specific discount rates based on OECD commercial interest reference rates in accordance with the annual Budget Law. - Concept of `debt` as per Point 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements (adopted August 3, 1979; amended August 31, 2009; effective December 1, 2009). - Ceiling also applies to commitments contracted or guaranteed for which value has not been received. Assessed cumulatively from beginning of the program on a continuous basis. - G. Stock of short-term external public debt outstanding - Central government will not contract or guarantee external debt with original maturity < one year. - Applies to debt as defined in Point 9 of the Guidelines (as above) and to commitments contracted or guaranteed for which value has not been received. - Excludes short-term, import-related trade credits. Assessed continuously. - H. External payments arrears - Government undertakes not to incur payments arrears on external debt owed or guaranteed by the central government, except arrears arising from government debt being renegotiated with creditors. Assessed continuously. - I. Foreign program assistance - Defined as grants and loans received by the Ministry of Finance through BM accounts excluding those related to projects (Table 1). - J. Actual external debt service payments - Defined as cash payments on external debt service obligations of the government and central bank, including obligations to Paris Club and other bilateral creditors rescheduled under enhanced HIPC Initiative completion point terms, multilateral creditors, and private creditors, but excluding obligations to the IMF (Table 1). ### Adjusters to quantitative targets - A. Net international reserves (NIR) floors 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. - B. Net credit to central government (NCG) ceilings 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 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 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. - C. Reserve money ceiling adjusted: - upward by the excess of the stock of currency in circulation above the level envisaged in the program (both defined as the average of the daily end-of-day stocks in the month of the test date). - Specific program adjusters: up to MT 750 million for end-December 2011 and up to MT 250 million for end-March, end-June, end-September and end-December 2012 (Table 1). - Ceiling adjusted downward/upward to reflect decreases/increases in the legal reserve requirement on liabilities in commercial banks; adjuster = change in reserve requirement coefficient × amount of commercial banks‘ liabilities subject to reserve requirement at end of the period of constitution of required reserves prior to the change. ### Data and reporting requirements - Government to provide Fund staff: - monthly and quarterly data needed to monitor 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 (detailed 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 data on external arrears; - monthly budget execution reports (to be published) with a time lag not exceeding 45 days; - the "mapa fiscal" with a time lag not exceeding 60 days; - monthly monetary survey data with a time lag not exceeding 30 days; - monthly data on gross international reserves, with composition by original currencies and converted to US dollars at actual exchange rates; - quarterly balance-of-payments data with a time lag not exceeding 65 days; - monthly disbursements on the nonconcessional Portuguese credit line with a time lag not exceeding 30 days. - Monetary survey from the BM must 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. - Government to provide documentation concerning external loan agreements once signed and effective. ### TMU Table 1 highlights (selected reported figures) - Net foreign program assistance (US$ mn) series includes values: 1045 1363 770 223 363 (table excerpt). - Gross foreign program assistance series includes values: 1197 751 529 425 130 90 (table excerpt). - Net foreign program assistance (MT mn) series includes values: 3,170 1,400 925 966 2,032 6,699 811 981 (table excerpt). - Stock of outstanding currency (MTm): 22,512 20,065 23,650 21,899 21,230 23,440 24,222 27,593. - Stock of outstanding currency (MTm), Prog. Def: 21,901 19,802 23,600 21,168 21,499 22,995 23,905 26,672. - Source for the table: Mozambican authorities and IMF staff estimates. ### Reserve adequacy assessment (Appendix II) — key findings - Reserves grew more than threefold over the past decade; gross international reserves reached USD 2.4 billion at end-2011. - Reserves estimated at 5.2 months of current-year imports at end-2011. - Boost to reserves to 5.4 months of imports in 2009 resulted from the SDR allocation and use of Fund resources under the Exogenous Shock Facility (ESF). - Staff medium-term reserves projection: 5.9 months of current-year imports by 2017. - On average, gross aid inflows to the central government accounted for more than 12 percent of GDP over 2003-11. - Using the cost-benefit reserve adequacy metric for LICs, a level above 5 months of imports is adequate for Mozambique given the low cost of holding reserves because most external debt is concessional. - The soundness of fundamentals, reflected in fiscal performance and CPIA, mitigates probability and depth of shocks. - Noted risks and implications: - Anticipated decline in aid flows from traditional donors and transformation into a major commodity exporter increase needs to protect against price volatility and exogenous shocks. - Recommendation implied: increasing reserves would be consistent with upcoming structural changes. ### Debt Sustainability Analysis (DSA) — summary points - Update of joint IMF/IDA DSA from May 24, 2011 reflecting recent macroeconomic developments. - Main result: Mozambique remains at a low risk of debt distress while government plans to temporarily increase public investment partially financed by external borrowing on nonconcessional terms over the next few years. - Emphasis that further improvements in debt management and project selection capacity are key to using nonconcessional resources productively. - Public debt is largely external; evolution of public debt indicators mirrors that of external debt. - DSA uses the standard low-income countries (LIC) DSA framework and the CPIA indicative threshold for a medium performer (Mozambique CPIA average rating 3.71 during 2008–10). - Document prepared by IMF and IDA staff; date: May 11, 2012. *Excerpted and summarized from the Technical Memorandum of Understanding and associated appendices as provided.* ### 5. This DSA is consistent with the ### _cr12148 - 5. This DSA is consistent with the ### Macroeconomic framework (update) - The DSA is consistent with the macroeconomic framework outlined in the Staff Report for the Fourth Review under the Policy Support Instrument. - Key adjustments since the previous DSA: - Revised medium-term macroeconomic framework that: - Assumes a temporary, albeit small, dent in economic growth in 2012 due to the global downturn. - Assumes a slightly improved outlook over the medium to long term driven by booming investment and production in the mining and hydrocarbon sectors. - Assumes Mozambique will continue its prudent macroeconomic policy mix, with a broadly stable domestic primary fiscal deficit, supported by sustained revenue administration effort. - Projects the external current account deficit to gradually improve as export growth from megaprojects in the natural resource sector outpaces import growth. - Projects stronger-than-previously-projected FDI inflows reflecting the booming mining sector and new discoveries in the hydrocarbon sector, continuing over the medium term before tapering off in the long run. - Revised public investment profile reflecting: - Slower-than-previously-projected disbursements of nonconcessional external borrowing (NCB) contracted at the time of the previous DSA. - Revised projections reflecting new NCB contracted recently. - A proposed increase in the NCB ceiling to US$1.5 billion under the IMF-supported program to finance projects considered critical under the authorities‘ public investment plan. - Assumption that loans contracted under the NCB ceiling are disbursed throughout the next four years. - Updated disbursements under the Portuguese credit line reflecting realized disbursements. - Revised grant financing projections reflecting a lower grant component in external financing in line with the increase of the NCB ceiling. - Noted signed nonconcessional loans to date: - (i) in December 2010, a loan from China amounting US$66 million to modernize Maputo airport; - (ii) in April 2011, a loan from Brazil for the construction of Nacala airport of US$80 million; - (iii) in February 2012, a US$300 million loan from China for the construction of a ring road around Maputo. ### Evolution of selected macroeconomic indicators (comparative: Previous DSA vs Current DSA) - Real GDP growth (%) - 2010: Previous DSA 6.6; Current DSA 6.8 - 2011: Previous DSA 7.2; Current DSA 7.1 - 2012: Previous DSA 7.5; Current DSA 6.7 - 2013: Previous DSA 7.9; Current DSA 7.2 - 2014: Previous DSA 7.8; Current DSA 7.8 - Nominal GDP (US$ mill) - 2010: Previous DSA 9.8; Current DSA 9.5 - 2011: Previous DSA 12.1; Current DSA 12.8 - 2012: Previous DSA 13.5; Current DSA 14.2 - 2013: Previous DSA 15.1; Current DSA 15.5 - 2014: Previous DSA 16.5; Current DSA 17.3 - Primary fiscal deficit (% of GDP) - 2010: Previous DSA 2.9; Current DSA 3.1 - 2011: Previous DSA 5.5; Current DSA 4.0 - 2012: Previous DSA 5.8; Current DSA 5.2 - 2013: Previous DSA 5.5; Current DSA 5.2 - 2014: Previous DSA 4.8; Current DSA 5.2 - Current account deficit (% of GDP) - 2010: Previous DSA 10.2; Current DSA 11.7 - 2011: Previous DSA 11.4; Current DSA 13.1 - 2012: Previous DSA 10.9; Current DSA 12.7 - 2013: Previous DSA 10.9; Current DSA 12.4 - 2014: Previous DSA 10.7; Current DSA 11.9 - FDI (% of GDP) - 2010: Previous DSA 8.1; Current DSA 8.3 - 2011: Previous DSA 7.2; Current DSA 16.4 - 2012: Previous DSA 7.1; Current DSA 11.2 - 2013: Previous DSA 6.5; Current DSA 10.2 - 2014: Previous DSA 7.0; Current DSA 10.1 - Use of NCB ceiling (% of GDP) - 2010: Previous DSA - ; Current DSA - - 2011: Previous DSA 2.1; Current DSA 1.5 - 2012: Previous DSA 2.4; Current DSA 2.5 - 2013: Previous DSA 2.2; Current DSA 3.2 - 2014: Previous DSA 1.8; Current DSA 3.4 - Disbursements under PTL (% of GDP) 1/ - 2010: Previous DSA 1.3; Current DSA 1.4 - 2011: Previous DSA 1.9; Current DSA 1.8 - 2012: Previous DSA 1.4; Current DSA 0.9 - 2013: Previous DSA 1.1; Current DSA 0.9 - 2014: Previous DSA 0.8; Current DSA 0.5 - Grant financing (% of GDP) 2/ - 2010: Previous DSA ... ; Current DSA ... - 2011: Previous DSA 9.3; Current DSA 9.2 - 2012: Previous DSA 9.0; Current DSA 8.7 - 2013: Previous DSA 8.9; Current DSA 8.1 - 2014: Previous DSA 8.8; Current DSA 8.0 - Footnotes (preserve source terminology): - 2/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new disbursements). - 1/ Portuguese credit line. ### External debt sustainability (baseline and stress scenarios) - Baseline findings: - Under the baseline scenario, all debt indicators remain well below their respective thresholds, including in the longer term. - External debt remains vulnerable to exchange rate volatility. - Debt indicators are projected to increase over the next few years as authorities temporarily step up borrowing to address the country‘s infrastructure gap. - Stress-test findings: - Stress tests reveal Mozambique‘s external debt is particularly vulnerable to a one-time depreciation of the exchange rate and a negative exports shock. - The standard export shock has been tailored to capture Mozambique‘s true vulnerability from an export shock, represented by the historical volatility of prices of aluminum, which accounts for roughly half of Mozambique‘s export proceeds. - Scenario analysis: - Historical scenario recurrence is judged unreliable because it does not account for structural changes in the post-civil war economy and improvements under successive Fund-supported programs. - A customized high investment-low growth scenario (non-concessional resources not used productively) assumes foreign financing and related spending remain unchanged in nominal terms but that public investment projects yield a much lower impact on GDP growth. Under this scenario: - External debt indicators would deteriorate but remain well below their respective thresholds. - The substantial increase relative to the baseline underscores the importance of selecting projects with high economic returns, particularly when using nonconcessional financing. ### Public sector debt sustainability - Key points: - Evolution of public debt indicators (including domestic debt) mirrors external indicators due to the predominance of external debt. - Medium-term increase in public debt reflects the temporary surge in public investment financed by external borrowing on non-concessional terms. - Over the longer term, public debt stock projections assume a marginal increase in domestic debt from about 2.2 percent of GDP at end-2010 to 5.7 per-cent of GDP in 2032. - As public investment surge tapers off, the primary deficit is expected to moderate. - Scenario A2 indicates that continued high primary deficits could pose a risk to public debt sustainability. ### Conclusions (summary of implications) - Debt indicators remain below thresholds under baseline but are vulnerable to exchange rate and export shocks. - Continued careful selection of public investment projects and maintenance of prudent macroeconomic policies are critical, especially when scaling up nonconcessional external borrowing. - Sustained revenue administration efforts and a broadly stable domestic primary fiscal deficit are central to preserving debt sustainability while supporting infrastructure investment. *Source: IMF staff DSA update as presented in the provided content unit.* ### 11. Mozambique’s external debt ### 11. Mozambique’s external debt ### Overview and risk assessment - Mozambique’s external debt dynamics continue to show a low risk of debt distress. - Its external and public debt levels are expected to remain well below the respective indicative thresholds for debt distress, as the government plans to temporarily increase public investment financed by external borrowing on non-concessional terms. - Nonetheless, debt vulnerability will increase, as debt ratios under stress tests and under the high-investment/low growth scenario approach the relevant thresholds. - This emphasizes the need for the authorities to continue to pursue prudent macroeconomic policies and structural reforms to boost their debt management and project selection capacity, building on the initial reform steps in those areas under their IMF-supported program and those implemented with World Bank assistance. ### Projections and key indicators (selected figures from the Baseline Scenario, 2009–2032) - External debt (sequence shown in table): 64.3 64.3 50.5 53.1 52.7 52.8 51.7 50.9 50.3 48.6 53.7 - o/w public and publicly guaranteed (PPG): 38.4 39.0 31.5 38.3 40.6 43.1 43.4 43.5 43.1 39.6 33.4 - Change in external debt: -2.0 0.0 -13.9 2.7 -0.4 0.1 -1.2 -0.8 -0.6 -0.2 0.9 - Identified net debt-creating flows: 3.2 6.7 -19.9 -1.6 -1.2 -1.8 -2.2 -1.5 -1.2 1.3 2.0 - Non-interest current account deficit: 10.7 10.1 11.7 10.7 3.4 11.2 10.9 10.4 9.9 9.6 9.2 9.3 9.4 9.1 - Exports: 27.7 31.4 27.0 27.0 28.0 28.0 27.8 27.3 26.8 26.4 29.7 - Imports: 45.1 49.2 44.3 42.7 42.9 42.0 40.7 39.6 38.5 36.7 40.2 - PV of external debt (selected projection series): ......36.5 37.3 37.2 37.3 36.6 36.0 35.7 35.3 42.9 - PV of PPG external debt (selected series): ......17.5 22.5 25.1 27.6 28.3 28.6 28.5 26.2 22.7 - PV of external debt — in percent of exports (selected series): ......135.0 138.5 132.8 133.3 131.5 132.0 133.0 133.6 144.8 - PV of PPG external debt — in percent of exports (selected series): ......64.7 83.3 89.5 98.4 101.8 104.9 106.3 99.2 76.5 - PV of PPG external debt — in percent of government revenues (selected series): ......80.0 101.2 111.2 120.5 122.1 121.7 120.6 106.5 86.0 - Debt service-to-exports ratio (in percent): 18.4 34.7 12.3 16.4 16.4 16.9 16.1 16.6 14.5 17.0 21.2 - PPG debt service-to-exports ratio (in percent): 1.7 2.2 2.2 3.8 4.2 5.2 6.5 7.3 7.6 7.6 5.7 - Total gross financing need (Billions of U.S. dollars): 0.7 1.2 -0.2 0.6 0.8 0.9 0.9 1.1 1.2 3.2 11.3 ### Stress tests and sensitivity analysis (selected outcomes) - Stress testing framework includes alternative scenarios and bound tests; the most extreme stress test is the test that yields the highest ratio in 2022 (varies by indicator). - Representative stress scenarios shown in Table 2: - Baseline PV of debt-to-GDP ratio (selected years): 22 25 28 28 29 29 26 23 - A1. Key variables at their historical averages in 2012-2032 (PV of debt-to-GDP): 22 27 31 35 36 38 36 23 - A3. High Investment/Low growth (PV of debt-to-GDP): 22 26 29 30 31 31 30 27 - Bound tests include: - B1. Real GDP growth at historical average minus one standard deviation (selected indicator outcomes reported in tables). - B2. Export value growth at historical average minus one standard deviation. - B6. One-time 30 percent nominal depreciation relative to the baseline in 2013 (featured as a severe shock in several series). - Debt service and debt-service-to-exports and debt-service-to-revenue ratios show increases under some stress and alternative scenarios; examples from Table 2: - Debt service-to-exports ratio (Baseline and selected scenarios): Baseline 4 4 5 7 7 8 8 6; A3 High Investment/Low growth 4 4 5 7 8 9 10 - Debt service-to-revenue ratio (Baseline and selected scenarios): Baseline 5 5 6 8 9 9 8 6; A3 High Investment/Low growth 5 6 7 8 9 10 10 ### Public sector debt dynamics (selected items from Table 3a and 3b) - Public sector debt (series): 41.6 41.4 34.4 41.4 43.9 46.7 47.2 47.5 47.3 44.4 39.1 - o/w foreign-currency denominated: 38.4 39.0 31.5 38.3 40.6 43.1 43.4 43.5 43.1 39.6 33.4 - Change in public sector debt: -0.5 -0.2 -7.0 7.0 2.6 2.8 0.5 0.3 -0.2 -0.5 -0.3 - Primary deficit (series): 5.0 3.1 4.0 3.1 1.0 5.2 5.2 5.2 4.2 3.8 3.4 4.5 2.5 -1.3 2.2 - Revenue and grants (percent of GDP): 27.1 29.7 29.6 28.8 28.9 29.0 29.3 29.6 29.8 29.8 29.2 - Grants (of revenues): 9.5 9.1 7.7 6.6 6.3 6.1 6.1 6.1 6.1 5.2 2.8 - PV of public sector debt (selected series): ......20.4 25.6 28.5 31.2 32.1 32.6 32.7 31.0 28.3 - Gross financing need (selected years, percent of GDP): 5.9 4.7 5.4 7.1 7.3 7.5 6.8 6.6 6.3 5.3 1.2 ### Policy implications and recommendations (text preserved from source) - Authorities should continue to pursue prudent macroeconomic policies and structural reforms to boost their debt management and project selection capacity, building on the initial reform steps in those areas under their IMF-supported program and those implemented with World Bank assistance. *Source: Republic of Mozambique — IMF staff estimates and projections (chapter "11. Mozambique’s external debt").* ### APPENDIX I. RELATIONS WITH THE FUND .............................................................................. 2 ### APPENDIX I. RELATIONS WITH THE FUND ### I. Membership Status - Joined: September 24, 1984 - Article VIII ### II. General Resources Account (SDR Million; %Quota) - Quota: 113.60 100.00 - Fund holdings of currency (Exchange Rate): 113.60 100.00 - Reserve Tranche Position: 0.0.1 0.0.1 ### III. SDR Department (SDR Million; %Allocation) - Net cumulative allocation: 108.84 100.00 - Holdings: 107.02 98.33 ### IV. Outstanding Purchases and Loans (SDR Million; %Allocation) - ESF Arrangements: 113.60 100.00 - ECF Arrangements: 8.12 7.15 ### V. Latest Financial Arrangements (Dates and SDR Million) - ESF: Amount Approved 113.60; Amount Drawn 113.60; Date of Expiration Jun 30, 2009; Arrangement Date Jun 28, 2010 - ECF (former PRGF): Amount Approved 11.36; Amount Drawn 11.36; Date of Expiration Jul 06, 2004; Arrangement Date Jul 05, 2007 - ECF: Amount Approved 87.20; Amount Drawn 78.80; Date of Expiration Jun 28, 1999; Arrangement Date Jun 28, 2003 ### VI. Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs) - Forthcoming Principal: - 2012: 0.97 - 2013: 1.95 - 2014: 1.95 - 2015: 23.09 - 2016: 23.70 - Forthcoming Charges/Interest: - 2012: 0.00 - 2013: 0.29 - 2014: 0.30 - 2015: 0.26 - 2016: 0.20 - Forthcoming Total: - 2012: 0.98 - 2013: 2.24 - 2014: 2.25 - 2015: 23.35 - 2016: 23.90 ### VII. Implementation of HIPC Initiative - Original Framework - Decision point date: Apr 1998 - Assistance committed by all creditors (US$ Million): 1,716.00 - Of which: IMF assistance (US$ million): 124.60 - (SDR equivalent in millions): 93.17 - Completion point date: Jun. 1999 - Enhanced Framework - Decision point date: Apr 2000 - Assistance committed by all creditors (US$ Million): 306.00 - Of which: IMF assistance (US$ million): 18.46 - (SDR equivalent in millions): 13.73 - Completion point date: Sep. 2001 - Disbursement of IMF assistance (SDR Million) - Assistance disbursed to the member: 93.17 13.73 106.90 - Interim assistance: -- 2.31 2.31 - Completion point balance: 93.17 11.42 104.58 - Additional disbursement of interest income: -- 1.10 1.10 - Total disbursements: 93.17 14.83 108.00 ### VIII. Implementation of Multilateral Debt Relief Initiative (MDRI) - I. MDRI-eligible debt (SDR Million): 106.56 - Financed by: MDRI Trust: 83.05 - Remaining HIPC resources: 23.51 - II. Debt Relief by Facility (SDR Million) - Delivery Date January 2006: GRA N/A; PRGF 106.56; Total 106.56 ### IX. Implementation of Post-Catastrophe Debt Relief (PCDR) - Not Applicable ### X. Safeguards assessment - An update safeguards assessment of the Bank of Mozambique (BM) was completed on January 11, 2010 for the ESF. - Findings: - Improvements in financial reporting practices following implementation of IFRS. - Noted vulnerabilities in oversight mechanism for external and internal auditing, controls, financial reporting, and in the BM‘s legal structure. - Recommendation: - BM should commission an external quality assurance review of the internal audit function. ### XI. Exchange Rate Arrangement - De jure and de facto floating exchange rate arrangement. - Exchange rate largely determined in the interbank foreign exchange market (MCI). - Bank of Mozambique (BM) interventions: to smooth seasonal fluctuations, provide foreign exchange liquidity received by the government in the form of aid, and sterilize domestic liquidity as part of monetary policy operations. - Article VIII acceptance: - On May 20, 2011, Mozambique accepted obligations under Article VIII, Sections 2, 3, and 4 of the Fund‘s Articles of Agreement (Country Report No. 11/149). - Foreign exchange legal/regulatory framework: - New foreign exchange law—"Foreign Exchange Law" Law No. 11/2009—came into effect on March 11, 2009. - Regulation for the Foreign Exchange Law (Decreto No. 83/2010) issued on December 31, 2010. - Regulation and BM implementing norms fully removed existing exchange restrictions subject to Article VIII, Sections 2, 3, and 4 as of July 11, 2011. - Two existing multiple currency practices (MCP) removed: - MCP from the foreign exchange auction system removed on April 27, 2011 through adoption of a new regulation on the interbank exchange market. - MCP arising from absence of a mechanism to prevent potential deviations between BM rates for interbank transactions and transactions with government/public entities/World Bank removed on July 1, 2011 via a new mechanism; relevant parties notified on August 11, 2011. ### XII. AML/CFT framework - Mozambique's first AML/CFT Mutual Evaluation Report by ESAAMLG has been adopted by ESAAMLG and published on its website. - FATF ICRG status: FATF ICRG maintains Mozambique in a pool of jurisdictions which may be taken up for review. - Actions and observations: - Financial Intelligence Unit (GIFIM) has begun operations and is working towards membership of the Egmont Group of Financial Intelligence Units. - Number of suspicious transaction reports (STRs) still appears to be low. - Once the AML/CFT law is approved by Parliament, BM intends to issue implementing guidelines. - National AML/CFT Task Force established and members appointed in December 2011. - AML/CFT strategic plan approved by the Council of Ministers and will be submitted to ESAAMLG. ### XIII. Article IV Consultation - Mozambique on a 24-month Article IV cycle due to approval of the successor PSI in June 2010 (Decision No 12794–(02/76), as amended by Decision No 12854–(02/96)). - 2011 Article IV consultation completed by the Executive Board on June 17, 2011 (Country Report No. 11/149). - Executive Directors' conclusions: - Commended authorities for prudent policies and strong economic performance. - Noted medium-term prospects favorable, but significant challenges remain in managing macroeconomic risks and ensuring equitable sharing of growth benefits. - Emphasized safeguarding price stability and containing inflation expectations as key priorities. - Welcomed new Poverty Reduction Strategy (PARP) and its focus on structural reforms to improve productivity in labor-intensive sectors, job creation, and social and human development. - Supported prudent fiscal stance aimed at preserving macroeconomic stability and debt sustainability. - Encouraged prudent approach to generating additional budgetary revenue from the natural resource sector while protecting foreign investment. - Emphasized importance of prudent borrowing strategy, strengthening debt management, and improving investment planning. - Noted banking system resilience during global crisis and recommended continued vigilance regarding vulnerabilities. ### XIV. Ex post assessment of performance under Fund-supported programs - An ex post assessment (EPA) of Mozambique's performance under Fund-Supported Programs since 1987 was undertaken in December 2003. - EPA circulated to the Executive Board on November 21, 2003 (Country Report No. 04/53). - Directors' conclusions: - Commended authorities for sound macroeconomic policies and wide-ranging structural reforms contributing to strong growth and decline in poverty rates. - Urged authorities to continue consolidating macroeconomic stability and deepen structural reforms to sustain growth, encourage employment creation, and further reduce poverty. ### XV. FSAP participation and ROSCs - FSAP for Mozambique undertaken during the first quarter of 2003; Financial Sector Stability Assessment circulated November 19, 2003 (Country Report No. 04/52). - FSAP update in February 2009; related Financial Sector Stability Assessment circulated to the Board on June 19, 2009 (Country Report No. 10/12). - ROSC on fiscal transparency issued on February 22, 2001; updated in context of 2002 and 2003 Article IV consultations; ROSC updated in May 2008. - ROSC data module prepared June 2002 and issued March 5, 2003; data module updated in August 2005. ### XVI. Management’s visit - Mr. Kato, Deputy Managing Director, visited Maputo, Mozambique in July 2005 (at authorities' invitation). - The Managing Director visited Mozambique in August 2007 for a meeting with the African Consultative Group on Quotas, Voice, and Representation. ### XVII. Resident representative - Mr. Victor Lledo has been the IMF‘s resident representative to Mozambique since June 21, 2010. ### XVIII. Technical Assistance (2005–2012) — Overview (As of April 16, 2012) - Finance Department: - February 2008 Mission: Update of Safeguard Assessment — Bank of Mozambique - Fiscal Affairs Department (selected items and counterparts): - April 2012 Mission: Fiscal Regime of the Extractive Sector — Ministry of Finance; Ministry of Mineral Resources - March–April 2102 Peripatetic expert: Public Accounting — Ministry of Finance - March–April 2102 Mission: Public Financial Management Reforms — Ministry of Finance - November 2011 Mission: Tax Administration — Ministry of Finance - September 2011 Peripatetic expert: Public Accounting — Ministry of Finance - September 2011 Peripatetic expert: Tax Administration — Ministry of Finance - April 2011 Peripatetic expert: Tax Administration — Ministry of Finance - April 2011 Mission: Follow-Up on Revenue Administration — Ministry of Finance - March 2011 Mission: Public Financial Management Reforms — Ministry of Finance - March 2011 Peripatetic expert: Public Accounting — Ministry of Finance - April–May 2010 Mission: Revenue Administration Reform — Ministry of Finance - April 2010 Mission: Public Financial Management Reforms — Ministry of Finance - Feb.-Mar. 2010 Mission: Tax Policy Review — Ministry of Finance - May 2009 Mission: Tax Administration Reform — Ministry of Finance - April 2008 Mission: Public Financial Management Reforms — Ministry of Finance - April–May 2008 Mission: Revenue Administration Reform — Ministry of Finance - Oct.–Nov. 2007 Mission: Tax Administration Inspection — Ministry of Finance - September 2007 Mission: Public Private Partnerships and Fiscal Risks — Ministry of Finance - August 2007 Peripatetic expert: Tax Policy and Administration — Ministry of Finance - August 2007 Mission: Fiscal ROSC Update and Public Financial Management inspection — Ministry of Finance - April–May 2007 Mission: Tax Administration Inspection — Ministry of Finance - April–May 2007 Mission: Petroleum Fiscal Regime — Ministry of Finance; Ministry of Mineral Resources - December 2006 Mission: Tax Administration — Ministry of Finance - March 2006 Mission: Tax Policy Review — Ministry of Finance - Monetary and Financial Sectors (selected items and counterparts): - May 2012 Short-term Expert: Monetary Policy Framework — Bank of Mozambique - April 2012 Short-term Expert: Stress testing — Bank of Mozambique - February 2012 Short-term Expert: Developing a payment system oversight function — Bank of Mozambique - December 2011 Short-term Expert: Developing a payment system oversight function — Bank of Mozambique - September 2011 Mission: Follow-up on Medium-Term Debt Strategy and Capacity to Conduct Debt and Project Analysis — Minister of Finance; Bank of Mozambique - August 2011 Short-term Expert: Monetary Policy Framework — Bank of Mozambique - September 2010 Mission: Follow-up on Medium-Term Debt Strategy, Debt Markets, and Capacity to Conduct Debt and Project Analysis — Minister of Finance; Bank of Mozambique - June 2010 Mission: Medium-Term Debt Strategy, Debt Markets, and Capacity to Conduct Debt and Project Analysis — Minister of Finance; Bank of Mozambique - April 2010 Short-term Expert: Strengthening Monetary Policy Formulation and Implementation — Bank of Mozambique - November 2009 Short-term Expert: Strengthening Monetary Policy Formulation and Implementation — Bank of Mozambique - May 2009 Mission: 2009 FSAP Follow up — Bank of Mozambique - February 2009 Mission: TA on Central Banking and Monetary Policy Formulation — Bank of Mozambique - May 2008 Mission: Strengthening Monetary Policy Formulation and Implementation — Bank of Mozambique - December 2007 Mission: Implementation of IFRS for Central Bank Accounts — Bank of Mozambique - August 2007 Mission: Post-FSAP TA Assessment: Banking supervision, Monetary Policy and Operations — Bank of Mozambique - April 2007 Short-term consultant: Banking Supervision — Bank of Mozambique - October 2006 Mission: Post-FSAP TA Assessment: Banking supervision, Monetary Policy and Operations — Bank of Mozambique - Feb-March 2006 Mission: AML/CFT legislation — Bank of Mozambique - Jan–Feb 2006 Short-term consultant: Monetary Policy Framework — Bank of Mozambique - Jan–Feb 2006 Short-term consultant: Monetary Operations — Bank of Mozambique - January 2006 Short-term consultant: Exchange Rate Management — Bank of Mozambique - Statistics (selected items and counterparts): - April 2012 Mission: Government Finance Statistics — National Institute of Statistics - March–April 2012 Mission: Consumer Price Statistics — National Institute of Statistics - November–December 2011 Mission: Balance of Payments — Bank of Mozambique - February 2010 Mission: Multitopic GDDS — National Institute of Statistics - March–April 2008 Mission: National Accounts Statistics — National Institute of Statistics - February 2008 Mission: Balance of Payments Statistics — Bank of Mozambique - December 2007 Mission: Balance of Payments Statistics — Bank of Mozambique - November 2007 Mission: Monetary and Financial Statistics — Bank of Mozambique - June–July 2006 Mission: Consumer Price Statistics — National Institute of Statistics (INE) - August 2005–July 2006 Long-term consultant: National Accounts Statistics — National Institute of Statistics - July 2005 Mission: Government Finance Statistics — National Institute of Statistics *Source: APPENDIX I. RELATIONS WITH THE FUND (As of March 31, 2012).* ### 4. The teams agreed on the following division of labor: ### 4. The teams agreed on the following division of labor ### Division of labor: macro-critical structural reform areas - Debt management and investment planning reforms - Fund: continue to play a key role in building government capacity to assess debt sustainability and define a coherent debt strategy through TA and continued support from HQ; provide TA support to strengthen debt management capacity; continue to play a key role in helping the authorities plan investments, in line with recent TA and program commitments; Fund review missions will provide further opportunities to assess progress and discuss possible actions with the Bank. - Bank: on-site assistance from the Bank to strengthen debt management capacity; take a lead in enhancing project evaluation and prioritization, and monitoring processes and protocols from its office in Mozambique. - Public financial management reform - Bank and Fund: cooperate in rolling out the new PFM system to cover local administrations and SOEs engaging in large-scale infrastructure investments. - Fund: secure support through regular TA missions from its RTAC office. - Bank: provide ongoing consultation from its local office and supervision missions of projects under implementation in this area. - Fund program review missions: further opportunities to assess progress. - Tax administration reforms - Fund: provide support through ongoing advice based on regular TA. - Bank: advance reforms in this area in the context of its business environment policies and portfolio. - Social safety net reform - Bank: take a lead through continued TA in the design of more comprehensive and performing safety nets, in cooperation with other development partners and international organizations (including UNICEF and ILO); also taking the lead in public pension reforms. - Fund: identify the fiscal space for the safety nets. - Collaborators: discuss results on a regular basis to inform policy discussions with the authorities. - Natural resource wealth - Fund: provide TA under the newly established Topical Trust Fund for Managing Natural Resource Wealth (TTF-MNRW), relating to the fiscal regime of the extractive sector, revenue forecasting, and natural resource statistics. - Bank: support implementation of EITI through its Multi-donor Trust Fund (MDTF); fund update of the mining law and regulations and the model mining contract; fund development of a concessions database for gas and mining projects to support forecasting and contract monitoring. - Investment climate reform - Bank: take a lead in working with government to enhance the investment climate by cutting red tape and simplifying the legal and regulatory framework. - Results: shared on an ongoing basis and discussed during Fund program review missions. - Financial sector stability and development - Fund: continue to help the Bank of Mozambique build capacity to assess risks to financial stability of the banking sector. - Bank: take the lead in supporting financial sector development and reforms, including through enhanced financial inclusion, competition, consumer protection, and financial literacy. - Results: shared and discussed regularly. ### Requests for information between teams (Section 5) - Fund team requests: - To be kept informed of progress in the above macro-critical structural reform areas. - Timing: when milestones are reached; and at least semiannually during Fund program review missions. - Bank team requests: - To be kept informed of the Fund's assessments of macroeconomic policies and prospects, and analytical work on areas under the Fund‘s lead, as well as on recommendations of Fund TA missions. - Timing: in the context of Fund program review and other missions, and at least semi-annually. ### Bank and Fund planned activities in macro-critical structural reform areas, April 2012–March 2013 (highlights) - 1. Bank Work Program - Country Partnership Strategy FY12-15 — April 2012 - FSTAP project support to financial sector reforms — Ongoing / Ongoing - Structural reforms: procurement, decentralization, business environment, financial sector — Ongoing / Ongoing - Support on targeted, sustainable safety net measures (including public works system) — Ongoing / Ongoing - 2. Fund Work Program - Fourth PSI Review — March 2012 / June 2012 - Updated macro framework data and PSI review staff report — PSI reviews Apr.-Dec. 2012 - TA follow-up mission on PFM (budget execution) — Mar-Apr. 2012 / June 2012 - TA follow-up on public accounting — Mar-Apr. 2012 / June 2012 - TA on fiscal regime of the extractive sector — April 2012 / June 2012 - TA on price statistics — April 2012 / June 2012 - TA follow-up on GFS fiscal data (GFSM 2001) — April 2012 / June 2012 - TA follow-up mission on tax policy — May 2012 / July 2012 - TA on stress testing — May 2012 / July 2012 - TA on monetary policy formulation — May 2012 / July 2012 - TA on payment system oversight — Sept. 2012 / Nov. 2012 - 3. Joint Work Program - PFM: continue to monitor consolidation and expansion of e-SISTAFE — Ongoing / Ongoing - Policy advice on public sector salary reforms (incl. pensions) — Ongoing / Ongoing - Review of tax policy — TBD / TBD - Policy advice on natural resource wealth management — Ongoing / Ongoing - Social Protection: Design of programs and assessment of fiscal space — Ongoing / Ongoing ### Note on timing and delivery - The table lists Title, Products, Timing of Missions, and Expected delivery date for the activities above (April 2012–March 2013). ### Appendix III — Statistical issues (summary) - I. Assessment of Data Adequacy for Surveillance - General: Data provision has some shortcomings, but is broadly adequate for surveillance. - Concern: continued high reliance on external funding raises concerns about sustainability of INE programs. - Authorities' efforts: participation in the Fund‘s General Data Dissemination System (GDDS) and in the external sector module of the GDDS Project for Anglophone African Countries (funded by the U.K. Department for International Development (DFID)). - Weaknesses: national accounts, prices, and government finance statistics. - Real sector statistics - National accounts: prepared by INE in accordance with the 1993 System of National Accounts (1993 SNA). - In August 2007: INE released quarterly GDP estimates at constant prices covering 2000–07 and a revised annual GDP series for 1991–2006, with 2003 as the new base year. - Work in progress: strengthen quarterly national accounts compilation at current prices; incorporate new household income and expenditure survey and economic censuses/new business registry. - Price indices: revamped consumer price index for Maputo based on 2008–09 household survey released in February 2011; national index integrating Maputo, Beira, and Nampula released in April 2006. - Methodology: INE adopted new software from INE Portugal to correct a probable downward bias from carry-forward techniques. - Outstanding issues: improve housing market rent sample and expand coverage to Quelimane and Greater Maputo; insufficient sectoral labor market and employment data. - Monetary and financial statistics - 2004 work plan to implement the Monetary and Financial Statistics Manual (MFSM) and develop an integrated monetary database (IMD). - November 2007: IMD completed, allowing accurate and timely monthly monetary statistics and reducing Bank of Mozambique‘s reporting burden. - Balance of payments - With STA assistance, BM made significant progress toward compiling and disseminating BOP and IIP statistics aligned with BPM5. - Needs: strengthen IT (data warehouse and on-line analytical processing tools); exclude price and exchange rate fluctuation effects from reserve asset flows; apply methodology to estimate reinvested profits and stocks of financial assets and liabilities held abroad by the nonfinancial public sector; improve business surveys; publish methodological notes and more data (Reserves Template, FDI, goods trade, current transfers); begin gradual process to implement BPM6. - Joint work: improve external trade data, especially price and volume indices. - II. Data Standards and Quality - Mozambique commenced participation in the GDDS in November 2003; has since not updated much of its metadata. - May 2005: update of the June 2002 data module of the Report on the Observance of Standards and Codes (Data ROSC) prepared. - Improvements in institutional environment and resource allocation aimed to address weaknesses; methodological soundness, accuracy, and reliability began to show improvements. - III. Reporting to STA - Mozambique does not report fiscal data for publication in the IFS or the Government Finance Statistic Yearbook (GFSY). - Mozambique now reports monthly monetary data to STA using standardized reporting forms (SRFs); these enhanced data are published in the International Financial Statistics (IFS) Supplement. - 2007: BM started to compile and report comprehensive IIP data in the Balance of Payments Statistics Yearbook. ### Table of Common Indicators Required for Surveillance (As of April 16, 2012) — selected datapoints and frequencies - Exchange Rates: Date of latest observation — March 2012; Date received — March 2012; Frequency of Data — D; Frequency of Reporting — W; Frequency of publication — D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation — March 2012; Date received — March 2012; Frequency of Data — D; Frequency of Reporting — W; Frequency of publication — D. - Reserve/Base Money: Date of latest observation — March 2012; Date received — April 2012; Frequency of Data — M; Frequency of Reporting — M; Frequency of publication — M; Data Quality – Methodological soundness — LO, O, LO, O; Data Quality Accuracy and reliability — LO, LO, O, O, LO. - Broad Money: Date of latest observation — Feb. 2012; Date received — April 2012; Frequency of Data — M; Frequency of Reporting — M; Frequency of publication — M. - Central Bank Balance Sheet: Date of latest observation — Feb. 2012; Date received — April 2012; Frequency of Data — M; Frequency of Reporting — M; Frequency of publication — M. - Consolidated Balance Sheet of the Banking System: Date of latest observation — Feb. 2012; Date received — April 2012; Frequency of Data — M; Frequency of Reporting — M; Frequency of publication — M. - Interest Rates: Date of latest observation — March 2012; Date received — April 2012; Frequency of Data — M; Frequency of Reporting — M; Frequency of publication — M. - Consumer Price Index: Date of latest observation — March 2012; Date received — April 2012; Frequency of Data — M; Frequency of Reporting — M; Frequency of publication — M; Data Quality – Methodological soundness — O, LO, LNO, O; Data Quality Accuracy and reliability — LNO, LO, LO, O, O. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation — Dec. 2011; Date received — Feb. 2012; Frequency of Data — M,Q; Frequency of Reporting — Q; Frequency of publication — Q; Data Quality – Methodological soundness — LO, LNO, LO, O; Data Quality Accuracy and reliability — LO, O, LO, O, LNO. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation — 2011 Q4; Date received — March 2012; Frequency of Data — Q; Frequency of Reporting — Q; Frequency of publication — Q. - External Current Account Balance: Date of latest observation — 2011 Q4; Date received — Feb. 2012; Frequency of Data — Q; Frequency of Reporting — I; Frequency of publication — I; Data Quality – Methodological soundness — LO, LNO, LO, O; Data Quality Accuracy and reliability — LO, LNO, LO, LO, LNO. - Exports and Imports of Goods and Services: Date of latest observation — 2011 Q4; Date received — Feb. 2012; Frequency of Data — Q; Frequency of Reporting — I; Frequency of publication — I. - GDP/GNP: Date of latest observation — 2011 Q4; Date received — March 2012; Frequency of Data — Q; Frequency of Reporting — Q; Frequency of publication — I; Data Quality – Methodological soundness — O, LO, O, LO; Data Quality Accuracy and reliability — LNO, LO, LO, O, LO. - Gross External Debt: Date of latest observation — Dec. 2010; Date received — Oct. 2011; Frequency of Data — A; Frequency of Reporting — I; Frequency of publication — I. - International Investment Position: Date of latest observation — 2007; Date received — May 2009; Frequency of Data — A; Frequency of Reporting — A; Frequency of publication — A. ### IMF Executive Board completion of Fourth PSI review (Press Release No. 12/206) - Press Release date: June 6, 2012. - Action: Executive Board completed the fourth review of Mozambique‘s economic program under the Policy Support Instrument (PSI) and approved a waiver for the minor nonobservance of the end-December 2011 assessment criterion on net credit to the government. - Background: The Executive Board approved Mozambique‘s second three-year PSI on June 14, 2010. - Mr. Min Zhu (Deputy Managing Director and Acting Chair) key messages: - "Mozambique‘s sound policies and strong economic performance are commendable." - Economic growth remained buoyant in 2011 and inflation was successfully contained. - Prospects for economic growth over the medium term are good; short-term risks from the global environment should be properly managed. - Authorities envisage a countercyclical policy mix for 2012 to sustain economic growth: keep spending at budgeted levels and pursue an accommodative monetary policy; important to safeguard recent disinflation gains. - PARP 2011–14 aims to reinvigorate poverty reduction; important to implement plans vigorously. - Structural reform agenda: maintain reform momentum to strengthen debt management, investment planning, and public financial management given plans to have greater recourse to nonconcessional resources. - Proper management of mining and emerging hydrocarbon sectors, together with strong tax administration effort, will help enhance fiscal resources; plans to modernize fiscal regimes for mining and petroleum and to obtain full EITI membership move in the right direction. *Source: _cr12148 - 4. The teams agreed on the following division of labor* ### 2011. The net international reserves target was also met as well as the indicative target on priority ### _cr12148 - 2011. The net international reserves target was also met as well as the indicative target on priority ### Economic prospects and policies - Growth was estimated at 7.1 percent in 2011. - Headline inflation declined from double digits in 2009 and in 2010 to around 5 percent at end- 2011 and 2.5 percent in February 2012. - Mozambique largely met the objectives underlying its economic program despite an adverse external environment and natural disasters earlier in 2012 which damaged infrastructures. - Exports and FDI have remained robust, resulting in a better than expected level of international reserves. - The global slowdown poses risks to the outlook, but growth is projected to remain elevated in the medium term. ### Fiscal policy - Authorities committed to implement their fiscal reform program despite a weakening global environment and prospects of declining donor support. - Fiscal policy in 2012 will be countercyclical. - Revenues may be less than the estimates contained in the 2012 budget law if downside risks materialize. - To cushion the economy and meet PARP objectives, expenditures will remain as programmed. - This may result in an increase in the primary deficit by 0.2 percent to 2.3 percent of GDP; this increase would be fully financed by additional World Bank financing. - Some 53 percent of projected total expenditures, minus net lending, will be targeted towards the PARP priority areas. - Social safety nets: expansion of the cash transfer mechanism to the most vulnerable groups and implementation of public works programs. - Authorities committed to wage restraint and fully eliminating the fuel subsidy. - Integrated Investment Program approval: met the structural benchmark designed to prioritize and improve public investment project selection. ### Monetary and financial sector developments - Monetary policy in 2012 will continue to be accommodative to mitigate the global downturn, while the Bank of Mozambique (BM) remains committed to meeting its inflation objective. - Authorities continue progress toward preparing for an inflation targeting framework in the medium term. - Ministry of Finance and BM strengthening collaboration and information sharing under their MoU signed in March 2011 to improve liquidity forecasting. - With Fund TA, BM continues to develop the domestic repo market to improve money market management and liquidity of government securities. - Authorities committed to maintaining the flexible exchange rate regime and monitoring foreign exchange market consistency with Article VIII principles. - BM is improving financial sector surveillance with Fund TA: assessments of euro area turmoil risks, enhancing risk-based supervision, and completing a financial sector contingency plan. - Authorities will consider options to make the Deposit Insurance Fund operational. - The AML/CFT law was submitted to parliament on April 19, 2012; authorities expect the framework to be operational soon. ### Implementation of the PARP 2011-2014 - Authorities aim to double agricultural production by 2020 through the Agricultural Reform Strategy (PEDSA). - Steps taken: improve agricultural production and productivity; strengthen legal mechanisms to facilitate access to land; improve quality of seeds and fertilizers; enhance production techniques and market access. - Measures to boost private sector activity and employment: decree simplifying procedures for 84 types of licenses; action plan to reduce by half the number of procedures required to start a business; enact a bankruptcy code; complete an inventory of business licenses; approve a credit registry model. - Commitment to continued increased public expenditure for priority projects aimed at improving social safety nets, increasing employment and bridging the infrastructure gap. ### Structural reforms - Strong commitment to reforms improving control in budget execution and public financial management (PFM). - Implementation of the public financial management system progressing; timely donor support and TA important for completion. - Plan to complete implementation of e-SISTAFE budgeting system by 2015 covering some 98 percent of spending; projected coverage increased to 47 percent for the current year. - Complementary targets: full compliance with real time recording of the expenditure chain by 2013; migration of public accounts to an international public financial accounting standards compatible format. - Continued expansion of fiscal decentralization, modernization of debt management and investment planning, and completion of the first annual domestic borrowing plan for 2013 to signal borrowing intentions to market participants. - Tax administration reforms: implementation of a single taxpayer database and registration number; tax payments through banks; strengthening the large taxpayers unit. - Natural resources management: authorities seek reforms to mining and hydrocarbon fiscal regime, appreciation of prospective Fund TA under the Topical Trust Fund for Managing Natural Resources Wealth, willingness to consider mutually beneficial renegotiations of existing projects where necessary, and progress towards full EITI membership. - Commitment to prudent and transparent management of natural resources for population benefit. ### Conclusion and program request - Authorities reiterate commitment to sound macroeconomic policies and value Fund advice and TA. - In view of solid performance under the program, authorities seek the Executive Board‘s approval of their request for the completion of the fourth review under the PSI, the related waiver for the nonobservance of the end-2011 AC on NCG, and modifications of end-June 2012 ACs. * _cr12148 - 2011. The net international reserves target was also met as well as the indicative target on priority* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12148.pdf_