## Mozambique: Impact of Global Developments

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---

### Background and recent developments
- Real GDP expanded by 6.6 percent in the first half of 2013; overall growth for 2013 is projected to reach 7.1 percent.
- Sector drivers: extractive industries, financial services, transport and communications, and government services.
- Agriculture projected to grow at about 5 percent in 2013 after recovery from early-2013 floods.
- Annual inflation stood at 3.3 percent in November 2013; end-year inflation projected to remain around 4½ percent.
- Fiscal windfalls materially affected 2013 outcomes:
  - Receipt of $224 million early in the year.
  - Additional $400 million capital gains tax received in August 2013 from the sale of shares in gas concessions in the Rovuma basin.
  - The initial windfall funded the 2013 supplementary budget; the $400 million was to be spent in the 2014 budget.
- Excluding windfalls:
  - Revenue performance in line with program through September 2013.
  - Capital expenditure execution lagged partly due to delays in donor disbursements.
- External developments:
  - External current account deficit widened in H1 2013 due to flood-related export disruptions and rising merchandise and service imports tied to megaproject activity financed by FDI.
  - Donor disbursement delays contributed to NIR deterioration, later more than offset by the $400 million receipt.

### Debt, guarantees, and program performance
- EMATUM guarantee and issuance:
  - Government guaranteed Loan Participation Notes of $850 million (6 percent of GDP) for EMATUM.
  - EMATUM Finance issued $500 million of 7-year notes in early September 2013; issuance was topped up to $850 million in late September 2013.
  - Effective interest rate on the issuance was 8.5 percent.
  - Operation included quasi-fiscal activities (defense/maritime security) and established a Mozambican benchmark in international capital markets.
- Program performance through end-June 2013:
  - All end-June assessment criteria (ACs) were met.
  - All but one indicative target (IT) for June and September were met; priority spending was some 10 percent short in both periods.
  - Structural reform implementation: 4 of 7 structural benchmarks (SBMs) met; 2 expected with up to 3 months delay; critical SBM on the Integrated Investment Plan (IIP) was missed (IIP approved with delay but lacked specificity and operational links to budget and DSA).

### Inflation and monetary developments
- Low inflation aided by prudent macroeconomic policy, slight metical appreciation, stability in administered prices, and recovery of domestic fruit and vegetable production.
- Bank of Mozambique (BM) maintained an active monetary stance to stimulate credit expansion; looser broad money since 2012 fed private sector credit growth that may generate inflationary pressures.
- Exchange rate and interest rates:
  - Mt/$ exchange rate depreciated somewhat in 2012 but was fairly stable in 2013; the metical appreciated against the rand in 2013.
  - BM policy rates and T-bill rates declined, while banks’ lending rate remained sticky.
- Reserve money was in line with program targets, supporting the low-inflation environment.

### Fiscal developments and 2014 budget stance
- 2014 budget is expansionary:
  - Total expenditure projected to rise from 36.3 percent of GDP in 2013 to 40.0 percent of GDP in 2014.
  - Increase reflects allocation of $400 million of 2013 capital gains taxes mostly for one-off needs and a 2.3 percent of GDP increase in goods and services spending, including quasi-fiscal part of EMATUM’s operations (2.1 percent of GDP) for coast guard and maritime security (mostly imported equipment).
  - Overall deficit after grants projected to rise from 4½ percent of GDP to 12½ percent of GDP; domestic primary balance to turn into a deficit of 6 percent of GDP.
  - Foreign borrowing projected to increase with inclusion of EMATUM’s nonconcessional external borrowing ($350 million); domestic borrowing reflects mainly drawdown of deposits accumulated in 2013.
- Selected fiscal and macro figures (as presented in source):
  - Total revenue: 20.7, 23.5, 24.5, 27.4, 23.5, 26.0, 23.7.
  - Total expenditure and net lending: 33.6, 32.9, 36.3, 36.3, 35.5, 40.6, 40.0.
  - Real GDP growth series: 7.3, 7.2, 7.0, 7.1, 8.5, 8.0, 8.5 (percent).
  - Average CPI inflation series: 10.4, 2.1, 5.5, 4.4, 5.6, 5.6, 5.6 (percent).
  - (Full tabulated fiscal indicators are presented in the source tables.)

### Revenue administration and VAT measures
- Actions to reinforce revenue administration:
  - Strengthen the large taxpayers unit, implement the single taxpayer database, foster tax payments through banks.
- Revenue effort and contingencies:
  - Excluding one-off tax receipts and coal royalties, budget envisages an underlying revenue effort that would raise collections by 1 percent of GDP in 2014 based on higher corporate profitability and collection efforts.
  - Staff and authorities agreed to use a more conservative revenue increase for the program baseline and identified contingent expenditure cuts if budgeted revenue scenario does not materialize.
- VAT administration SBMs and proposed benchmarks:
  - Plan to gradually reduce stock of pending VAT arrears, avoid new arrears, and optimize administration and refund processes (SBM for end-October 2013).
  - Validation process for VAT reimbursement requests pending as of end-2013 by end-March 2014 (proposed SBM).
  - Clear backlog of refund requests, possibly via securitization, by end-2014.
  - Action plan for transition to managing VAT on a net basis to enable budgeting VAT collections on a net basis from 2015 (proposed SBM for end-October 2014).
- Managing windfall receipts:
  - Staff suggested a budget rule channeling windfall revenue mainly to investment and barring use of one-off receipts to finance increases in recurrent spending.
  - Government noted annual budget law limits use of revenue windfalls beyond budgeted amounts to investment spending or debt reduction, with deviations allowed only in exceptional cases.
  - Fund assistance offered to develop a broader budget rule with a medium-term timeframe.

### Economic outlook and risks
- Outlook:
  - 2014 growth expected to accelerate to over 8 percent with agriculture recovery, increased railway capacity, and implementation of infrastructure projects.
  - Over the next five years, coal production and exports, LNG plant construction, and boosts in transport, communication and construction sectors projected to raise growth to close to 8 percent per year.
  - BM medium-term inflation target is 5-6 percent per year; low import prices and vigilant monetary policy could keep inflation in that range in 2014.
  - Before LNG export stage, large investments financed by FDI and private borrowing will be required; current account deficits (excluding grants) projected at some 45 percent of GDP.
- Risks:
  - External: exposure to climate disasters, commodity price shocks (coal, gas, fuel), and decline in donor funding.
  - Domestic: delays in upgrading transport infrastructure (railways, ports), electricity supply constraints.
  - New vulnerabilities: possible policy slippages ahead of October 2014 presidential elections and intensified security concerns in certain regions.

### Fiscal policy and priority spending (mission support)
- Priority spending and public investment:
  - Spending for priority sectors will continue to rise, reaching 68 percent of primary expenditures (excluding net lending).
  - Allocation to social protection: MT 2.5 billion (0.5 percent of GDP).
  - Public investment set to accelerate in 2014, reaching 15 percent of GDP; slightly less than half of public investment financing is from external resources.
  - Domestically financed investment spending budgeted to increase to 8 percent of GDP in 2014.
- Budget mechanics and wage bill:
  - Budget contingency: 10 percent of expenditure subject to special approval by the Ministry of Finance in the last quarter.
  - Public wage bill at 11 percent of GDP; budgeted to rise by 13 percent in nominal terms in 2014 (after a 22 percent rise in 2013).
  - Near-term measures: strengthen control of wage bill execution and complete rollout of electronic wage payment system (e-Folha) to all central government entities registered in e-CAF.
- Staff advice:
  - Stronger efforts to ensure value-for-money on large public investment program and allocate adequate resources for operating and maintaining new infrastructure.
  - Enhance efficiency of public investment as debt levels approach the indicative risk threshold of 40 percent of GDP in NPV terms.
  - Strengthen link between investment spending and the PARP; prioritize agriculture to make growth more inclusive.

### EMATUM, guarantees, and debt implications
- EMATUM borrowing scale: $850 million or 6 percent of GDP.
- Policy response:
  - Authorities intend to delay contracting other nonconcessional debt to remain within the PSI external debt ceiling ($1.2 billion).
  - Projects likely to be delayed include a new road, development of a free trade zone, and the Moamba Major dam.
- Debt sustainability assessment:
  - Preliminary update shows debt sustainability outlook not significantly affected by extension of the guarantee for EMATUM as long as some other nonconcessional debt in the pipeline for 2013-14 is delayed.
  - The “moderate” risk of debt distress rating is maintained.
- Governance and transparency concerns:
  - Staff and donors raised concerns about lack of transparency on use of funds and secretive project evaluation and implementation outside macroeconomic strategy and PARP priorities.
  - Recommendation: hold more comprehensive discussions of overall expenditure priorities with all stakeholders.
  - Observation: a normal sovereign Eurobond issue—rather than a privately-placed loan participation note—would likely have reduced borrowing costs.
- Parliamentary and legal actions:
  - Parliament approved an increase in the guarantee limit to accommodate the $500 million guarantee extended to EMATUM.
  - Government intends to reform the Organic Budget Law to require an Annex on Fiscal Risks, including guaranteed debt and other risks.

### State-owned enterprises (SOEs) oversight
- State Enterprise Act approved February 2013; implementation regulations being prepared.
- IGEPE oversight:
  - Oversight of 117 SOEs.
  - Aim to reduce number of SOEs by about half over time through liquidation and privatization.
  - Agreed business plans with five large enterprises.
  - Aim to improve SOE financial reporting with World Bank/DfID assistance.
- Government working on strategy for SOE participation in infrastructure projects with World Bank support.

### Monetary policy, credit growth, and financial sector reforms
- Liquidity and credit:
  - BM stepped up liquidity management to preserve reserve money path under the program.
  - Credit to the economy grew 35 percent year-on-year by September, up from 18.3 percent at end-2012.
  - Household credit growth remains high; credit to business accelerated.
  - Staff urged BM to monitor credit growth and distribution closely.
- Interest rates and transmission:
  - Banks’ lending rates remain high; interest rate transmission is weak.
  - BM cut its policy rate by 3.75 percentage points between mid-2012 and August 2013, but banks’ average lending rates have hardly moved.
  - Segmented interbank market with 3–4 dominant large banks and smaller banks.
- Monetary policy for 2014:
  - Agreed to maintain a low-inflation environment; authorities intend to dampen reserve money growth slightly.
  - Unwinding of sizeable government deposits accumulated in 2013 will provide a significant monetary impulse and requires closer coordination between Treasury and BM.
  - Staff emphasized tightening monetary policy if inflation picks up.
  - Programmed reserve money path through 2014 implies gradual deceleration in growth of monetary aggregates and credit throughout 2014.
- Framework improvements:
  - Progress on developing domestic repo market, quarterly monetary reports, and strengthening inflation forecasting with IMF technical assistance.

### Financial sector supervision, safety nets, and regulatory reforms
- Supervision and crisis management:
  - BM agreed to shore up supervision and crisis management; follow-up actions to be accelerated.
  - No signs of spillover from European financial markets; Portuguese-dominated banking sector locally funded and independently operating.
  - First stress test conducted in spring 2013; regular stress tests planned.
  - New legislation aligning classification of non-performing loans to international standards effective January 2014.
  - Risk-based supervision started; Basel II Capital Accord effective by January 2014.
  - Financial Sector Contingency Plan published June 2013; simulation exercises planned by late 2014.
  - Deposit Insurance Fund (DIF) to become operational by end-2013 with initial funding, fee structure and guarantee limit established.
- Financial Sector Development Strategy (FSDS) 2013-22 approved April 2013; BM developing National Financial Inclusion Strategy.
- AML/CFT:
  - New legislation approved August 2013; Action Plan for implementation of GAFI/FATF Standards adopted July 2013.
  - Recommendation: strengthen capacity of BM’s Banking Supervision Department (BSD) and Financial Intelligence Unit.

### Investment planning and public debt management
- Developments:
  - Ministry of Finance prepared updated DSA as part of 2014 budget process, yet without including the EMATUM guarantee.
  - Government approved an Integrated Investment Program (IIP) in September 2013 identifying major investment projects for 2014-17; IIP not prioritized and lacks sufficient financial information.
  - MPD’s Consultative Council approved Public Project Preparation and Selection Manual; dissemination and mandatory use pending.
- Agreed actions:
  - Strengthen linkage among the budget, the IIP, and Public Debt Management Strategy; incorporate costs and risks associated with public debt portfolio, including guarantees, in quarterly budget execution reports.
  - Strengthen the IIP: include financial information for projects with financing secured by mid-2014 (proposed structural benchmark).
  - Strengthen project evaluation: publish Manual and summary forms for Council of Ministers–approved projects; ensure 2015–17 MTEF incorporates main project selection and evaluation criteria.

### Program adjustments, performance, and risks
- Proposed program modifications:
  - Modify several assessment criteria and indicative targets to reflect over-performance related to revenue windfalls and expenditure developments through end-September.
  - Proposed modification of end-December 2013 ACs on net credit to government and NIR and the indicative floors on government revenues and priority spending.
  - New ACs for June 2014 proposed, new adjusters for further revenue windfalls introduced, and new SBMs proposed for 2014.
- Performance under the PSI:
  - Mozambique’s performance under the PSI broadly satisfactory; all ACs for end-June met.
  - Structural reform progress slow: 4 of 7 SBMs met.
  - Strong macroeconomic policies supported growth while maintaining low inflation.
  - Windfalls strengthened international reserve position.
- Remaining risks:
  - Significant external and domestic risks, including commodity price developments and pressures for policy reversals in run-up to elections.

### Selected program macro and external projections (selected series as presented)
- Key macro indicators (2010–18 series, selected rows reproduced as in source):
  - Nominal GDP (MT billion): 315 365 408 454 461 520 528 601 684 779 887
  - Nominal GDP growth: 18.3 15.8 11.8 12.3 13.0 14.6 14.4 13.9 13.7 14.0 13.9
  - Real GDP growth: 7.1 7.3 7.2 7.0 7.1 8.5 8.3 7.9 7.7 7.9 7.8
  - Consumer price index (annual average): 12.7 10.4 2.1 5.5 4.4 5.6 5.6 5.6 5.6 5.6 5.6
- External sector (selected):
  - External current account, before grants (percent of GDP): -18.5 -31.3 -49.4 -43.4 -45.8 -44.8 -46.5 -46.2 -42.1 -47.9 -46.7
  - Net international reserves (end of period, US$ millions): 1,908 2,239 2,605 2,704 3,061 3,023 3,262 3,725 4,404 5,215 5,974
- Government finances (selected, percent of GDP):
  - Total revenue (percent of GDP): 19.6 20.8 23.3 24.5 27.4 23.5 23.7 24.4 24.9 25.5 25.6
  - Total expenditure and net lending (percent of GDP): 32.9 33.7 32.6 36.3 36.3 35.5 40.0 35.8 35.5 34.5 33.5
  - Overall balance, after grants (percent of GDP): -4.3 -5.3 -4.1 -6.7 -4.6 -7.2 -12.5 -8.2 -7.9 -6.8 -6.0
  - Total public debt (percent of GDP): 45.8 39.6 41.9 47.8 44.3 50.9 46.9 49.3 51.6 52.6 52.5
- Monetary and banking (selected):
  - Credit to the economy (percent change, 12-month): 29.3 6.4 18.3 21.5 22.3 26.4 27.0 23.9 35.4 21.5 32.3
  - Reserve money (percent change, 12-month): 29.2 8.5 19.7 21.7 22.3 20.7 21.8 18.3 17.9 17.9 18.5

### Structural benchmarks (status and proposed)
- 2013 SBMs (selected statuses):
  - e-Folha/e-CAF action plan: End-June 2013 — Met.
  - Expansion of salary payments by direct bank transfer: End-December 2013 — Not met (proposed reset to March 2014).
  - Submission of IIP with sufficient specifics: End-June 2013 — Not met (IIP submitted in July, approved September 2013).
  - Draft law on private credit registry bureaus: End-November 2013 — Not met (proposed reset to February 2014).
  - Plan to reduce pending VAT arrears and optimize refund process: End-October 2013 — Met.
- Proposed 2014 SBMs (selected dates):
  - Submission to Parliament of draft law on private credit registry bureaus: End-February 2014.
  - Government to finalize validation process for VAT reimbursement requests pending as of end-December 2013 and provide note to IMF staff: End-March 2014.
  - Government to complete expansion of salary payments by direct bank transfer to e-CAF institutions with direct access to e-SISTAFE: End-March 2014.
  - MPD to approve and share with IMF staff a revised IIP with financial information for projects with financing secured: End-June 2014.
  - Government to present VAT collections on a net basis in the 2015 budget proposal documents: End-October 2014.
  - Government to implement simplified tax payments via banks within e-tributacao and issue notice to taxpayers: End-October 2014.
  - Board of BM to approve action plan for simulation exercise on Financial Contingency Plan: End-November 2014.
  - BM to issue first annual payments systems oversight report: End-November 2014.
  - Government to establish a moveable collateral registry: End-December 2014.

*Source: _cr1420 - 1. Mozambique: Impact of Global Developments; 12. The mission supported the authorities’ emphasis on priority spending in the 2014 budget; 29. The policy stance for 2014 is expansionary; 32. Staff recommends completion of the first review under the PSI; Appendix I: Letter of Intent; TMU excerpts, International Monetary Fund.*

### 1. Mozambique: Impact of Global Developments _____________________________________________ 5

### Mozambique: Impact of Global Developments

### Background and recent developments
- Real GDP expanded by 6.6 percent in the first half of 2013, driven by extractive industries, financial services, transport and communications, and government services. Overall growth for 2013 is projected to reach 7.1 percent.
- Agriculture is projected to grow at about 5 percent in 2013 after recovery from early-2013 floods that damaged crops, transport infrastructure and electricity transmission lines.
- Annual inflation stood at 3.3 percent in November 2013. End-year inflation is projected to remain around 4½ percent, below the authorities’ medium-term target.
- Fiscal windfalls materially affected 2013 outcomes:
  - Receipt of $224 million early in the year.
  - Additional $400 million capital gains tax received in August 2013 from the sale of shares in gas concessions in the Rovuma basin.
  - The initial windfall funded the 2013 supplementary budget (flood recovery and wage concessions); the $400 million was to be spent in the 2014 budget.
- Excluding windfall receipts, revenue performance was in line with the program through September 2013. Capital expenditure execution lagged partly due to delays in donor disbursements.
- External current account deficit widened in H1 2013 due to flood-related export disruptions and rising merchandise and service imports tied to megaproject activity financed by FDI. Donor disbursement delays contributed to NIR deterioration, later more than offset by the $400 million receipt.

### Debt, guarantees, and program performance
- The government guaranteed Loan Participation Notes of $850 million (6 percent of GDP) for EMATUM (Empresa Moçambicana de Atum, S. A.), established in August 2013 by three public entities.
  - EMATUM Finance issued $500 million of 7-year notes in a private offer in early September 2013; issuance was topped up to $850 million in late September 2013.
  - Effective interest rate on the issuance was 8.5 percent.
  - The operation had broader scope including quasi-fiscal activities in defense/maritime security and established a Mozambican benchmark in international capital markets.
- Program performance through end-June 2013:
  - All end-June assessment criteria (ACs) were met.
  - All but one indicative target (IT) for June and September were met; priority spending was some 10 percent short in both periods.
  - Structural reform implementation: 4 of 7 structural benchmarks (SBMs) met; 2 expected with up to 3 months delay; critical SBM on the Integrated Investment Plan (IIP) was missed (IIP approved with delay but lacked specificity and operational links to budget and DSA).

### Inflation and monetary developments
- Low inflation aided by prudent macroeconomic policy, slight metical appreciation, stability in administered prices (fuels, public transport, utilities), and recovery of domestic fruit and vegetable production.
- The Bank of Mozambique maintained an active monetary stance to stimulate credit expansion; looser broad money since 2012 fed private sector credit growth that may generate inflationary pressures.
- The Mt/$ exchange rate depreciated somewhat in 2012 but was fairly stable in 2013; the metical appreciated against the rand in 2013.
- Policy and market interest rates:
  - BM policy rates and T-bill rates declined, while banks’ lending rate remained sticky.
- Reserve money was in line with program targets, supporting the low-inflation environment.

### Fiscal developments and 2014 budget stance
- The 2014 budget embodies an expansionary impulse:
  - Total expenditure projected to rise from 36.3 percent of GDP in 2013 to 40.0 percent of GDP in 2014.
  - Increase reflects allocation of $400 million of 2013 capital gains taxes mostly for one-off needs (elections, capital expenditure) and a 2.3 percent of GDP increase in goods and services spending, in particular the quasi-fiscal part of EMATUM’s operations (2.1 percent of GDP) to establish a coast guard and maritime security system (mostly imported equipment).
  - Overall deficit after grants projected to rise from 4½ percent of GDP to 12½ percent of GDP; domestic primary balance to turn into a deficit of 6 percent of GDP.
  - Start-up of maritime security and capital expenditure is expected to have a large import component, moderating domestic demand impact.
  - Foreign borrowing projected to increase with inclusion of EMATUM’s nonconcessional external borrowing ($350 million); domestic borrowing reflects mainly drawdown of deposits accumulated in 2013.
- Key fiscal figures and projections (selected):
  - Total revenue: 20.7, 23.5, 24.5, 27.4, 23.5, 26.0, 23.7 (table-format series as presented in source).
  - Total expenditure and net lending: 33.6, 32.9, 36.3, 36.3, 35.5, 40.6, 40.0 (table-format series as presented in source).
  - Real GDP growth series in source: 7.3, 7.2, 7.0, 7.1, 8.5, 8.0, 8.5 (percent).
  - Average CPI inflation series in source: 10.4, 2.1, 5.5, 4.4, 5.6, 5.6, 5.6 (percent).
  - (Note: full tabulated fiscal indicators are presented in the source tables.)

### Revenue administration and policy measures
- Continued need to reinforce revenue administration; Tax Authority actions include strengthening the large taxpayers unit, implementing the single taxpayer database, and fostering tax payments through banks.
- Revenue effort:
  - Excluding one-off tax receipts and coal royalties, the budget envisages an underlying revenue effort that would raise collections by 1 percent of GDP in 2014 based on higher corporate profitability and collection efforts.
  - Staff and authorities agreed to use a more conservative revenue increase for the program baseline and identified contingent expenditure cuts if the budgeted revenue scenario does not materialize.
- VAT administration improvements (structural benchmarks and proposed benchmarks):
  - Plan to gradually reduce stock of pending VAT arrears, avoid new arrears, and optimize administration and refund processes (SBM for end-October 2013).
  - Validation process for VAT reimbursement requests pending as of end-2013 by end-March 2014 (proposed SBM).
  - Clear backlog of refund requests, possibly via securitization, by end-2014.
  - Action plan for transition to managing VAT on a net basis to enable budgeting VAT collections on a net basis from 2015 (proposed SBM for end-October 2014).
- Managing windfall receipts:
  - Staff suggested a budget rule channeling windfall revenue mainly to investment and barring use of one-off receipts to finance increases in recurrent spending that could compromise fiscal sustainability.
  - Government noted annual budget law limits use of revenue windfalls beyond budgeted amounts to investment spending or debt reduction, with deviations considered only in exceptional cases (such as natural disasters).
  - Fund assistance offered to develop a broader budget rule with a medium-term timeframe.

### Economic outlook and risks
- Outlook:
  - 2014 growth expected to accelerate to over 8 percent with agriculture recovery, increased railway capacity, and implementation of infrastructure projects.
  - Over the next five years, coal production and exports, LNG plant construction, and boosts in transport, communication and construction sectors projected to raise growth to close to 8 percent per year.
  - BM medium-term inflation target is 5-6 percent per year; low import prices and vigilant monetary policy could keep inflation in that range in 2014.
  - Before LNG export stage, large investments financed by FDI and private borrowing will be required; current account deficits (excluding grants) projected at some 45 percent of GDP.
- Risks:
  - External: exposure to climate disasters, commodity price shocks (coal, gas, fuel), and decline in donor funding.
  - Domestic: delays in upgrading transport infrastructure (railways, ports), electricity supply constraints.
  - New vulnerabilities: possible policy slippages ahead of October 2014 presidential elections and intensified security concerns in certain regions.

### Policy understanding for 2014
- Staff and authorities reached an understanding on a macroeconomic policy mix for 2014 consistent with the objectives of the three-year PSI program:
  - Preserve macroeconomic stability.
  - Ensure strong public and private investment and facilitate credit to the economy.
  - Preserve a low-inflation environment.
  - Continue structural reforms.

*Source: _cr1420 - 1. Mozambique: Impact of Global Developments_, IMF staff and Mozambican authorities.*

### 12.      The mission supported the authorities’ emphasis on priority spending in the 2014

### The mission supported the authorities’ emphasis on priority spending in the 2014 budget

### Fiscal policy and priority spending
- Spending for priority sectors will continue to rise, reaching 68 percent of primary expenditures (excluding net lending).
- Allocation to social protection: MT 2.5 billion (0.5 percent of GDP).
- Public investment:
  - Public investment is set to accelerate in 2014, reaching 15 percent of GDP.
  - Slightly less than half of public investment financing is from external resources.
- Budget contingency: 10 percent of expenditure subject to special approval by the Ministry of Finance in the last quarter of the year.
- Public wage bill:
  - At 11 percent of GDP, the public wage bill is high by international standards.
  - The wage bill is budgeted to rise by 13 percent in nominal terms in 2014 (after a 22 percent rise in 2013).
  - Near-term measures: strengthen control of wage bill execution and complete rollout of electronic wage payment system (e-Folha) to all central government entities registered in the integrated database (e-CAF).
- Domestically financed investment spending is budgeted to increase to 8 percent of GDP in 2014.
  - Authorities acknowledge such high levels are likely not sustainable over the medium term and note financing by windfall receipts received in 2013 and expected further windfall revenues in late 2013/early 2014.
  - Staff advice: stronger efforts to ensure value-for-money on the large public investment program and allocate adequate resources for operating and maintaining new infrastructure.
- Medium-term caution: enhance efficiency of public investment as debt levels approach the indicative risk threshold of 40 percent of GDP in NPV terms.
- Sectoral prioritization recommendation: strengthen link between investment spending and the PARP; given about ¾ of the population makes a living on agriculture, focus investment to improve productivity in agriculture to make growth more inclusive.

### EMATUM, government guarantees, and external debt implications
- Scale of EMATUM borrowing: $850 million or 6 percent of GDP.
- Policy response:
  - Authorities intend to delay contracting other nonconcessional debt in the pipeline to remain within the PSI external debt ceiling ($1.2 billion).
  - Projects likely to be delayed include a new road, development of a free trade zone, and the Moamba Major dam.
- Debt sustainability assessment:
  - Preliminary update shows the debt sustainability outlook is not significantly affected by extension of the guarantee for EMATUM as long as some other nonconcessional debt in the pipeline for 2013-14 is delayed.
  - The “moderate” risk of debt distress rating is maintained.
- Governance and transparency concerns:
  - Staff and donors raised concerns about lack of transparency on the use of the funds and the secretive manner in which the project was evaluated, selected, and implemented outside macroeconomic strategy and PARP priorities.
  - Recommendation: hold more comprehensive discussions of overall expenditure priorities with all stakeholders.
  - Observation: a normal sovereign Eurobond issue—rather than a privately-placed loan participation note—would likely have reduced borrowing costs and served as a preferable benchmark.
- Parliamentary and legal actions:
  - With the 2014 budget, parliament approved an increase in the guarantee limit to accommodate the $500 million guarantee extended to EMATUM.
  - The government intends to reform the Organic Budget Law to require an Annex on Fiscal Risks, including guaranteed debt and other risks such as quasi-fiscal operations and public-private partnerships.
- Oversight measures: government noted EMATUM will be subjected to strict financial controls and will have its accounts audited.

### State-owned enterprises (SOEs) oversight
- State Enterprise Act approved in February 2013; implementation regulations being prepared to strengthen oversight.
- IGEPE (oversight body) responsibilities:
  - Oversight of 117 SOEs.
  - Aim to reduce the number of SOEs by about half over time through liquidation and privatization.
  - Agreed business plans with five large enterprises.
  - Aim to improve financial reporting from SOEs with assistance from the World Bank/DfID.
- Government working on strategy for SOE participation in infrastructure projects (including electricity generation and distribution and LNG production) with World Bank support.

### Fiscal regime for mining and hydrocarbons
- Work advanced substantially; authorities incorporated Fund suggestions including preventing an excessively burdensome fiscal regime that could discourage investment.
- Legal texts being revised after public consultation to align more with international best practice and to combine relevant tax issues in a single legal document.
- Submission of draft fiscal regimes to Parliament expected in time for the next ordinary session in May 2014.

### Monetary policy, credit growth, and financial sector reforms
- Liquidity and credit:
  - BM stepped up liquidity management to preserve the reserve money path under the program.
  - Credit to the economy grew 35 percent year-on-year by September, up from 18.3 percent at end-2012.
  - Household credit growth remains high; credit to business accelerated.
  - Staff urged BM to monitor credit growth and distribution closely.
- Interest rates and transmission:
  - Banks’ lending rates remain high; interest rate transmission is weak.
  - BM cut its policy rate by 3.75 percentage points between mid-2012 and August 2013, but banks’ average lending rates have hardly moved.
  - Segmented interbank market between 3–4 dominant large banks and smaller banks.
  - Authorities concerned about high lending rates and low SME access to credit; staff highlighted structural rigidities to be addressed over time.
- Monetary policy in 2014:
  - Staff and authorities agreed monetary policy should maintain a low-inflation environment in 2014.
  - Authorities intend to dampen reserve money growth slightly.
  - Unwinding of sizeable government deposits accumulated in 2013 will provide a significant monetary impulse and requires closer coordination between Treasury and BM.
  - Staff emphasized close monitoring of inflation and credit growth/composition and tightening monetary policy if inflation picks up.
  - Programmed reserve money path through 2014 implies gradual deceleration in growth of monetary aggregates and credit throughout 2014.
- Monetary policy framework improvements:
  - Progress on developing the domestic repo market to improve money market management and liquidity of government securities.
  - BM refining policy formulation and communication through quarterly monetary reports and strengthening inflation forecasting with IMF technical assistance.

### Financial sector supervision, safety nets, and regulatory reforms
- Supervision and crisis management:
  - BM agreed on importance of shoring up supervision and crisis management but follow-up actions should be accelerated.
  - No signs of spillover from European financial markets due to locally funded, independently operating Portuguese-dominated banking sector.
  - Financial soundness indicators remain robust; banks profitable; rapid credit growth poses monitoring need.
  - Stress tests planned regularly but data collection and methodology strengthening has been slow; first stress test conducted in spring 2013.
  - New legislation aligning classification of non-performing loans to international standards effective January 2014.
  - Risk-based supervision has started; Basel II Capital Accord effective by January 2014.
  - Financial Sector Contingency Plan published June 2013; simulation exercises planned only by late 2014.
  - Deposit Insurance Fund (DIF) to become operational by end-2013 with initial funding, fee structure and guarantee limit established.
- Financial Sector Development Strategy (FSDS) 2013-22:
  - Approved by Council of Ministers in April 2013.
  - BM developing a National Financial Inclusion Strategy to implement FSDS.
  - Law on private credit registry bureaus was to be submitted to Parliament in November 2013 (structural benchmark) but delayed.
  - Government intends to work on a collateral bill to establish a moveable collateral registry by end-2014 (proposed structural benchmark).
- AML/CFT framework:
  - New legislation approved in August 2013; regulations being prepared; new bank guidelines on AML/CFT at advanced stage.
  - Law [14/2007] establishing the Financial Intelligence Unit under review.
  - Action Plan for implementation of GAFI/FATF Standards adopted July 2013.
  - Recommendation: strengthen capacity of BM’s Banking Supervision Department (BSD) and Financial Intelligence Unit; IMF provided initial training to assist BSD develop risk-based oversight of money laundering and terrorist financing risks.

### Investment planning and public debt management
- Developments:
  - Ministry of Finance prepared an updated DSA as part of the 2014 budget process, yet without including the EMATUM guarantee.
  - Government approved an Integrated Investment Program (IIP) in September 2013 identifying major investment projects for 2014-17.
  - IIP is not prioritized and lacks sufficient financial information to align the budget and the DSA with the IIP.
  - MPD’s Consultative Council approved a Public Project Preparation and Selection Manual, including a summary form with project information; dissemination to sectoral ministries and mandatory use remain pending.
  - Need for more systematic follow-up and monitoring of project implementation and substantial capacity reinforcement.
- Agreed actions to strengthen planning and debt management:
  - Strengthen linkage among the budget, the IIP, and the Public Debt Management Strategy; incorporate analysis of costs and risks associated with public debt portfolio, including guarantees, in quarterly budget execution reports; extend Debt Management Strategy at its first review to explicitly include government guarantees.
  - Strengthen the IIP: authorities will include in the IIP financial information for projects with financing secured to inform the DSA, medium-term fiscal framework, and the budget by mid-2014. The revised IIP will include summary project descriptions in line with the project summary table already developed (proposed structural benchmark).
  - Strengthen project evaluation: publish the Public Project Preparation Selection Manual and the summary form for projects approved by the Council of Ministers on its webpage, and ensure the 2015–17 Medium-Term Fiscal Framework incorporates main project selection and evaluation criteria identified in the Manual.

### Program adjustments, performance, and risks
- Program modifications proposed:
  - Modifications to several assessment criteria and indicative targets to reflect over-performance related to receipt of revenue windfalls and expenditure developments through end-September.
  - Proposed modification of end-December 2013 ACs on net credit to the government and net international reserves and the indicative floors on government revenues and priority spending.
  - New ACs for June 2014 proposed, new adjusters for further revenue windfalls introduced, and new structural benchmarks proposed for 2014.
- Performance under the PSI:
  - Mozambique’s performance under the program supported by the PSI has been broadly satisfactory, though progress on structural reform agenda is slow.
  - Strong macroeconomic policies supported growth while maintaining low inflation.
  - Fiscal performance broadly on track even excluding windfall receipts; windfalls also strengthened international reserve position.
  - Lower-than-programmed priority spending partly reflected delays in external financing and did not compromise program objectives.
  - Structural benchmarks: authorities met 4 of 7 structural benchmarks.
- Risks:
  - Significant external and domestic risks remain despite a strong outlook.
  - External risks include commodity price developments.
  - Domestic risks include pressures for policy reversals in the run-up to the elections and renewed civil disturbances.

*Source: _cr1420 - 12.      The mission supported the authorities’ emphasis on priority spending in the 2014*

### 29.      The policy stance for 2014 is expansionary. The budget envisages a significant

### _cr1420 - 29.      The policy stance for 2014 is expansionary. The budget envisages a significant

### Fiscal policy stance and implementation (2014)
- The policy stance for 2014 is expansionary.
- The budget envisages a significant expansion in infrastructure spending that could support growth, financed by the windfall capital gain taxes saved from 2013.
- The budget also includes a sizeable pick-up in goods and services outlays, financed in part by nonconcessional external borrowing.
- Budget implementation in the priority areas needs to be strengthened, including through:
  - closer tie-in with the PARP pillars; and
  - more effective cooperation with donors.
- Monetary policy has also been expansionary; a more prudent approach, together with the favorable outlook for international prices, would facilitate the achievement of the medium-term inflation target.

### Nonconcessional external borrowing and debt management
- Tapping into nonconcessional external borrowing can help to finance the country’s vast infrastructure needs, but such borrowing should be based on clear investment priorities as it carries significant risks.
- Mozambique’s public debt level has been rising.
- There is a need to ensure that borrowing finances public investment projects that are transparently prioritized, monitored, and evaluated in order to:
  - ensure value-for-money;
  - maximize the efficiency of investment; and
  - preserve debt sustainability.
- Transparency and adherence to due process in investment planning, selection and financing need to be strengthened to:
  - enhance the efficiency of such investments; and
  - continue to attract donor support and other external financing.

### Structural reforms and preparation for natural resource developments
- Structural reforms across a broad spectrum of policies envisaged under the PSI should be implemented vigorously to prepare for the natural resource boom and make growth more inclusive.
- Staff welcomed progress toward modernizing the fiscal regimes for the booming mining and emerging hydrocarbon sectors.
- Ongoing reforms in:
  - public financial management,
  - tax administration, and
  - financial sector development
  should raise the country’s macroeconomic management capacity.
- Reforms to improve the enabling environment for the private sector will be needed to:
  - facilitate employment opportunities outside the resource sector; and
  - take advantage of the infrastructure improvements under way.

*Source: _cr1420 - 29. The policy stance for 2014 is expansionary. The budget envisages a significant*

### 32.      Staff recommends completion of the first review under the PSI. Program

### _cr1420 - 32.      Staff recommends completion of the first review under the PSI. Program

### Staff recommendation and program actions
- Staff recommends completion of the first review under the PSI.
- Rationale: program performance has been satisfactory with all ACs for end-June met; the authorities’ solid ownership of the Fund-supported program; and actions taken to address transparency and governance issues raised by the guarantee provided on the external borrowing of a public enterprise.
- Staff also recommends:
  - the proposed modifications of ACs and ITs for December 2013,
  - the setting of ACs and ITs for March and June 2014,
  - and of SBMs for 2014 (Tables 7–9).

### Key macroeconomic indicators (selected, 2010–18 series)
- Nominal GDP (MT billion): 315 365 408 454 461 520 528 601 684 779 887
- Nominal GDP growth: 18.3 15.8 11.8 12.3 13.0 14.6 14.4 13.9 13.7 14.0 13.9
- Real GDP growth: 7.1 7.3 7.2 7.0 7.1 8.5 8.3 7.9 7.7 7.9 7.8
- GDP per capita (US$): 398 510 567 640 590 684 640 698 759 827 900
- GDP deflator: 10.5 7.9 4.3 5.0 5.5 5.6 5.6 5.6 5.6 5.6 5.6
- Consumer price index (annual average): 12.7 10.4 2.1 5.5 4.4 5.6 5.6 5.6 5.6 5.6 5.6
- Exchange rate, MT per US dollar, eop: 32.6 27.3 29.8 ...
- Exchange rate, MT per US dollar, per.avg.: 33.0 29.1 28.5 ...

### External sector (selected)
- Merchandise exports: 8.7 33.6 23.6 13.8 3.5 20.9 18.6 17.4 21.6 13.3 19.7
- Merchandise exports, excluding megaprojects: -20.5 65.8 48.4 4.0 9.9 26.2 6.9 9.2 11.2 11.3 15.8
- Merchandise imports: 2.6 52.8 47.2 15.3 9.2 11.3 7.8 14.4 4.4 19.6 7.1
- Merchandise imports, excluding megaprojects: -0.7 46.2 50.8 15.2 3.3 8.4 6.1 2.9 9.7 5.2 5.5
- External current account, before grants (percent of GDP): -18.5 -31.3 -49.4 -43.4 -45.8 -44.8 -46.5 -46.2 -42.1 -47.9 -46.7
- External current account, after grants (percent of GDP): -11.7 -24.4 -45.6 -39.9 -42.2 -41.3 -43.4 -43.6 -39.9 -46.1 -45.2
- External current account (US$ millions), before grants: -1,770 -3,922 -7,056 -6,373 -6,984 -7,158 -7,882 -8,738 -8,882 -11,276 -12,272
- External current account (US$ millions), after grants: -1,113 -3,059 -6,517 -5,854 -6,442 -6,608 -7,364 -8,252 -8,429 -10,855 -11,872
- Net international reserves (end of period, US$ millions): 1,908 2,239 2,605 2,704 3,061 3,023 3,262 3,725 4,404 5,215 5,974
- Gross international reserves (end of period, US$ millions): 2,099 2,428 2,799 2,894 3,252 3,211 3,449 3,877 4,519 5,294 6,017
- Months of projected imports of goods and nonfactor services: 3.3 2.4 2.6 2.8 2.7 2.6 2.6 2.7 2.7 2.8 3.2
- Months of imports excl. megaprojects: 4.2 3.0 3.9 3.7 4.4 3.7 4.7 4.9 5.8 5.4 5.3

### Government finances (selected, levels and percent of GDP)
- Total revenue (percent of GDP): 19.6 20.8 23.3 24.5 27.4 23.5 23.7 24.4 24.9 25.5 25.6
- Total expenditure and net lending (percent of GDP): 32.9 33.7 32.6 36.3 36.3 35.5 40.0 35.8 35.5 34.5 33.5
- Overall balance, before grants (percent of GDP): -13.2 -13.1 -9.5 -11.8 -8.9 -12.0 -16.3 -11.4 -10.6 -9.0 -7.9
- Total grants (percent of GDP): 9.0 7.8 5.4 5.1 4.3 4.8 3.8 3.2 2.6 2.2 1.9
- Overall balance, after grants (percent of GDP): -4.3 -5.3 -4.1 -6.7 -4.6 -7.2 -12.5 -8.2 -7.9 -6.8 -6.0
- Domestic primary balance, before grants (percent of GDP): -4.1 -2.9 -1.0 -2.7 0.0 -1.7 -6.1 -2.1 -1.5 -0.7 -0.1
- External financing (incl. debt relief, percent of GDP): 4.2 3.7 4.2 5.7 6.6 6.4 9.6 6.7 6.4 5.4 4.7
- Net domestic financing (percent of GDP): 0.0 1.6 0.7 1.0 -2.0 0.8 2.9 1.6 1.5 1.4 1.3
- Total public debt (percent of GDP): 45.8 39.6 41.9 47.8 44.3 50.9 46.9 49.3 51.6 52.6 52.5
  - External: 39.9 32.9 36.1 41.6 39.2 44.7 42.1 43.5 45.1 45.4 45.0
  - Domestic: 6.0 6.7 5.8 6.2 5.2 6.2 4.8 5.7 6.6 7.1 7.6

### Fiscal composition and flows (selected, percent of GDP and MT billions)
- Total revenue (billions of Meticais): 61.6 75.8 94.8 111.4 126.3 122.5 125.3
- Tax revenue (percent of GDP): 53.7 66.2 80.9 92.8 108.2 101.1 104.5
- Nontax revenue (percent of GDP): 7.9 9.6 14.0 18.6 18.1 21.3 20.8
- Total expenditure and net lending (percent of GDP): 103.5 122.8 133.1 164.9 167.5 184.6 211.5
- Current expenditure (percent of GDP): 57.9 68.5 78.3 94.3 95.6 103.7 120.5
- Capital expenditure (percent of GDP): 43.7 50.6 50.4 66.5 62.1 73.8 79.1
- Domestic primary balance, before grants, above the line (percent of GDP): -12.9 -10.7 -4.1 -12.3 0.1 -8.8 -32.2
- Overall balance, after grants (percent of GDP): -13.2 -19.2 -16.8 -30.6 -21.4 -37.3 -66.3
- Net external financing (percent of GDP): 13.2 13.5 13.8 26.0 30.6 33.2 50.9
- Disbursements (percent of GDP): 14.3 14.6 15.4 29.2 33.8 37.3 54.8

### Monetary and banking indicators (selected)
- Reserve money (percent change, 12-month): 29.2 8.5 19.7 21.7 22.3 20.7 21.8 18.3 17.9 17.9 18.5
- M3 (percent change, 12-month): 22.8 9.4 29.4 28.0 22.0 21.8 22.5 20.4 19.0 20.0 19.4
- Credit to the economy (percent change, 12-month): 29.3 6.4 18.3 21.5 22.3 26.4 27.0 23.9 35.4 21.5 32.3
- Net international reserves (Bank of Mozambique, US$ billions, quarterly): 1.9 2.2 2.6 2.3 2.4 2.3 2.6 2.9 3.1 3.0 3.2 3.3 (series across quarters)
- Monetary Survey: M3 (Billions of Meticais): 85.3 105.7 132.7 128.2 137.6 138.0 148.8 145.6 157.9 160.6 153.9 164.9 174.0 191.1

### Balance of payments and external financing (selected, 2010–18 projections)
- Current account balance (US$ millions): -1,113 -3,059 -6,426 -5,854 -6,621 -7,364 -8,252 -8,429 -10,855 -11,872
- Trade balance for goods (US$ millions): -1,179 -2,249 -4,048 -3,163 -4,640 -4,570 -5,088 -4,356 -5,636 -5,078
  - Exports, f.o.b. (US$ millions): 2,333 3,118 3,856 3,950 3,989 4,729 5,554 6,756 7,652 9,160
  - Megaproject exports (US$ millions): 1,668 2,015 2,219 2,623 2,249 2,807 3,454 4,420 5,052 6,147
  - Other exports (US$ millions): 665 1,103 1,637 1,326 1,741 1,922 2,100 2,336 2,601 3,012
  - Imports, f.o.b. (US$ millions): -3,512 -5,368 -7,903 -7,112 -8,629 -9,299 -10,642 -11,112 -13,289 -14,237
  - Megaproject imports (US$ millions): -900 -1,547 -2,143 -2,494 -2,435 -2,779 -3,769 -3,626 -5,269 -5,757
  - Other imports (US$ millions): -2,613 -3,820 -5,760 -4,618 -6,194 -6,520 -6,873 -7,487 -8,019 -8,481
- Trade balance for services (US$ millions): -506 -1,482 -3,273 -3,225 -3,201 -3,688 -3,959 -4,318 -4,793 -5,943
- Income balance (US$ millions): -85 -190 -35 -23 -6 -176 -310 -891 -1,604 -2,097
  - Dividend payments by megaprojects (US$ millions): 0 -157 0 -17 -6 -159 -210 -652 -1,212 -1,447
- Current transfers balance (US$ millions): 657 863 929 557 1,226 1,070 1,105 1,136 1,179 1,245
  - External grants (US$ millions): 605 785 538 520 541 519 487 453 421 400
- Capital and financial account balance (US$ millions): 1,663 3,364 6,748 5,954 6,998 7,563 8,714 9,108 11,666 12,630
  - Net foreign direct investment (US$ millions): 1,340 2,599 5,215 4,719 5,519 4,703 4,629 4,709 4,653 5,130
  - Net foreign borrowing by general government (US$ millions): 468 531 546 961 1,095 1,414 1,306 1,351 1,264 1,139
- Overall balance (US$ millions): 608 323 236 100 458 320 199 462 679 812 758
- Memorandum: Net international reserves (US$ millions): 1,908 2,239 2,605 2,704 3,061 3,262 3,725 4,404 5,215 5,974

### Financial soundness indicators for banking sector (selected, 2003–13)
- Regulatory capital to risk-weighted assets: 16.5 18.0 13.4 12.5 14.2 13.9 15.1 14.4 17.1 17.9 15.1
- Regulatory Tier I capital to risk-weighted assets: 14.7 16.0 13.6 10.7 12.1 12.4 13.0 13.7 16.1 16.9 14.4
- Capital (net worth) to assets: 7.4 7.4 6.6 6.3 7.2 7.5 7.7 8.0 9.0 9.5 8.7
- Foreign exchange loans to total loans: 60.8 62.0 51.4 33.2 28.5 32.8 32.4 29.5 25.1 28.1 27.8
- Nonperforming loans to gross loans: 13.8 5.9 3.5 3.1 2.6 1.9 1.8 1.9 2.6 3.2 3.0
- Return on assets: 1.4 1.5 1.9 4.0 3.8 3.5 3.0 2.6 2.5 1.9 2.0
- Return on equity: 18.6 20.6 26.9 60.8 50.7 44.7 36.4 36.6 32.9 19.,6 22.4

### Program quantitative assessment criteria and indicative targets (Table 7, selected)
- Net credit to the central government (cumulative ceiling, Millions of meticais):
  - End-March Prog./Adj./Act.: -5,858 -2,835 -10,144 M1,504 4,497 -24,874 M895 -12,242 889 -32,316 13,605
- Stock of reserve money (ceiling, Millions of meticais): 40,787 40,787 40,697 M43,817 43,817 43,187 M47,493 47,493 45,100 48,023 50,689 55,567
- Stock of net international reserves of the BM (floor, US$ millions): 2,360 2,260 2,295 M2,621 2,521 2,857 M2,704 3,061 2,961 3,036 3,236 3,262
- New nonconcessional external debt contracted or guaranteed by the central government or the BM or selected state-owned enterprises with maturity of one year or more (cumulative ceiling over the duration of the program, US$ millions): 1,200 1,200 0 M1,200 1,200 895 M1,200 1,200 1,200 1,200 1,200 1,200
- Government revenue (cumulative floor, net of verified VAT refund requests): 55,760 55,760 57,738 M81,891 81,891 98,685 M111,419 126,285 25,519 58,036 91,537 125,266
- Priority spending (cumulative floor): 43,748 43,748 39,210 NM76,041 76,041 68,498 NM119,025 117,617 20,686 45,244 79,007 135,716

### Structural benchmarks (Tables 8–9)
- 2013 structural benchmarks (status):
  - Government approval of action plan for expansion of electronic payroll (e-Folha) and integrated civil service database (e-CAF): End-June 2013 — Met.
  - Completion of expansion of salary payments by direct bank transfer to all institutions covered by e-CAF and with direct access to e-SISTAFE: End-December 2013 — Not met. Proposed to be reset to March 2014.
  - Submission of Integrated Investment Plan (IIP) to Council of Ministers with sufficient specific information to analyze impact of related borrowing on debt sustainability: End-June 2013 — Not met. Less specific IIP submitted in July and approved in September 2013.
  - Submission of the 2nd Strategic Plan to Improve the Business Environment to the Council of Ministers: End-August 2013 — Met.
  - Submission to Parliament of draft law on creation of private credit registry bureaus: End-November 2013 — Not met. Proposed to be reset to February 2014.
  - Staffing a payment systems oversight unit in the BM and begin operations by end-November 2013: End-November 2013 — Met.
  - Preparation of a plan to gradually reduce the stock of pending VAT arrears, avoid accumulation of new arrears, and optimize administration and refund process: End-October 2013 — Met.
- Proposed structural benchmarks for 2014 (dates of implementation):
  - Submission to Parliament of draft law on creation of private credit registry bureaus: End-February 2014
  - Government will finalize validation process for stock of VAT reimbursement requests pending as of end-December 2013 and provide a note to Fund staff: End-March 2014
  - Government will complete expansion of salary payments by direct bank transfer to all institutions covered by e-CAF and with direct access to e-SISTAFE: End-March 2014
  - Ministry of Planning and Development will approve and share with IMF staff a revised IIP with financial information for projects with financing secured and summary project information to inform the DSA, MTEF and the budget: End-June 2014
  - Government will present VAT collections on a net basis in the 2015 budget proposal documents: End-October 2014
  - Government will implement a simplified and more accurate system of tax payments through banks within the new e-tax system (e-tributacao), and the Revenue Authority will issue a notice informing taxpayers about the new procedures: End-October 2014
  - Board of BM will approve action plan for simulation exercise pertaining to the Financial Contingency Plan: End-November 2014
  - BM will issue the first annual payments systems oversight report: End-November 2014
  - Government will establish a moveable collateral registry: End-December 2014

*INTERNATIONAL MONETARY FUND; REPUBLIC OF MOZAMBIQUE*

### Appendix I: Letter of Intent

### Appendix I: Letter of Intent

### Letter of Intent — Key Commitments and Context
- Government of Mozambique requests completion of the first review under the Policy Support Instrument (PSI) and modification of several assessment criteria and indicative targets for December 2013.
- Transmits attached Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding.
- Government affirms policies in the MEFP are adequate to achieve PSI objectives and commits to consult the IMF in advance of any revision to MEFP policies and to provide requested information.
- Government authorizes publication of this Letter of Intent, its attachments and the associated staff report.

*Signatories: Manuel Chang, Minister of Finance; Ernesto Gouveia Gove, Governor, Bank of Mozambique.*

### Recent Economic Developments and Programme Performance
- Economic growth and inflation:
  - Growth: first half of 2013 reached 6.6 percent.
  - Maputo City CPI 12-month rate: 4.3 percent in September (3.9 percent on average).
  - Medium-term inflation target maintained at 5-6 percent per year.
- Fiscal developments:
  - Indicative revenue target for June met.
  - Unanticipated US$400 million (2.7 percent of GDP) capital gains tax from sale of a gas concession received in the third quarter.
  - Supplementary budget approved in August to incorporate windfall revenue of $224 million and address flood rehabilitation and public sector needs.
  - Government expects budget to be fully implemented during remainder of 2013; domestic primary deficit (before additional $400 million windfall to be allocated in 2014 budget only) expected somewhat below programmed 2.7 percent of GDP.
- Government-guaranteed foreign borrowing (EMATUM):
  - EMATUM established August 2013 by three public entities.
  - Issued $500 million of government-guaranteed 7-year Loan Participation Notes in early September, topped up to $850 million (6 percent of GDP) in late September.
  - Proceeds to finance purchase of 24 tuna fishing vessels and 3 patrol vessels and related equipment.
- External sector:
  - 2012 current account deficit reached 45 percent of GDP, up from 24 per-cent in 2011.
  - First half of 2013 exports 28 percent lower than a year earlier.
  - Merchandise imports up 5 percent year-on-year in first half of 2013.
  - Foreign direct investment reached $3.1 billion, mostly in extractive industries.
  - Net international reserves (NIR) at end-September stood at $2.9 billion, exceeding program objectives, benefiting from $400 million windfall in August.
- Program targets and execution:
  - All assessment criteria for June and indicative targets for September were met except indicative targets on priority spending for June and September.
  - Shortfalls in priority spending partly due to delays in donor disbursements and possible statistical underreporting of externally financed spending outside the Treasury single account.

### Structural Reform Progress (recent and planned)
- Completed / ongoing measures:
  - Approval of the Action Plan for Expansion of the Electronic Payment System (including e-folha) and Civil Service Integrated Database (e-CAF).
  - Integrated Investment Plan submitted to Council of Ministers end-July; further work to link with debt sustainability analysis.
  - 2nd Strategic Plan to Improve the Business Environment (EMAN II) submitted to Council of Ministers.
  - VAT arrears reduction plan developed.
  - Payment systems oversight unit in Bank of Mozambique staffed as planned in November 2013.
- Remaining measures and timelines:
  - Draft law for private credit registry bureaus submission to Parliament delayed; expected before February 2014.
  - Full implementation of payment of salaries by direct bank transfer to all institutions covered by e-CAF and with direct access to e-SISTAFE expected by March 2014 (was expected by December 2013).
  - Expansion of e-Folha to all civil servants in institutions with direct access to e-SISTAFE (about 90% of all civil servants) by end-2014 (structural benchmark).

### Macroeconomic Policy: Objectives, Outlook, and Policy Mix
- Growth outlook:
  - 2014 growth expected to reach 8.3 percent due to agricultural recovery, increased railway capacity, and infrastructure projects.
  - Next five years: projected growth "close to 8 percent per year" driven by coal, infrastructure, LNG, transport, communication and construction sectors.
- External outlook:
  - Current account deficits excluding grants of some 45 percent of GDP are projected until the end of the decade until LNG reaches export stage.
- Policy mix:
  - Fiscal policy: somewhat expansionary in light of October 2014 parliamentary elections.
  - Monetary policy: aimed at containing resulting domestic demand to keep inflation low; base money growth to be kept lower in 2014 than in 2013 to contain demand pressures.
  - Exchange rate: commitment to a flexible exchange rate regime.
  - Central Bank objective: price stability consistent with medium-term inflation objective of 5-6 percent; target base money growth slightly above nominal GDP to create monetary space for increased private sector credit while tightening liquidity management given expansionary fiscal policy.

### Fiscal Policy — Detailed Objectives and Measures
- 2013 revisions and outcomes:
  - Revenue (net VAT) revised up to 24.3 percent of GDP to reflect capital gains.
  - Expenditure increased to 36.3 percent of GDP to cover salary readjustment, municipal elections, and post-flood reconstruction.
  - Overall deficit before grants remained at around 12 percent of GDP; primary deficit is 2.6 percent of GDP.
- 2014 budget proposal:
  - Includes $400 million windfall revenue received in August 2013.
  - Total spending will reach about 40 percent of GDP (PSI-supported program definition).
  - Domestic primary balance before grants projected at 6.1 percent of GDP.
- Expenditure composition and priorities:
  - 2014 budget allocates 64.2 percent of total expenditure (excluding debt and financial operations) to priority sectors:
    - Education: 18.1 percent of total expenditure (excluding debt and financial operations).
    - Infrastructure: 14.8 percent.
    - Agriculture and rural development: 10.5 percent.
    - Health: 9.1 percent.
  - Public investment budgeted to exceed 15 percent of GDP in 2014.
- Wage bill:
  - Wage bill in 2014 proposed at 10.6 percent of GDP versus 10.8 percent in revised 2013 budget.
  - Medium-term target to reduce wage bill to 8.5-9 percent of GDP.
- Financing:
  - Overall fiscal deficit (after grants) projected at 12.5 percent of GDP in 2014.
  - External financing to cover most of deficit: 9.6 percent of GDP.
  - Domestic financing: 2.9 percent of GDP, including drawdown of deposits associated with capital gains tax (2 percent of GDP).

### Fiscal Transparency and EMATUM Treatment
- Parliament recommended changes to budget law to better reflect EMATUM operations.
- Government actions:
  - Submitted revised 2014 budget proposal incorporating non-commercial activities of EMATUM equivalent to $350 million as part of Ministry of Defense appropriations; approved by Parliament on December 13, 2013.
  - Sought and obtained authorization to amend Art. 11 of the budget law to increase ceiling on government guarantees by $500 million to support EMATUM commercial activities.
  - Will subject EMATUM to strict financial controls and have its accounts audited.
  - Plans to improve fiscal risk disclosure and management following Fiscal Transparency Assessment (FTA), including changes to Organic Budget Law (SISTAFE Law) to require a mandatory Annex on Fiscal Risks in annual budget law covering guarantees, quasi-fiscal activities, and public-private partnerships.

### Structural Reforms — Public Financial Management, Investment Planning, Debt Management, and Tax Administration
- Public Financial Management reforms:
  - Expand direct salary payments via e-SISTAFE to institutions with direct access to e-SISTAFE; full expansion to all institutions covered by e-CAF with direct access expected by March 2014 (structural benchmark).
  - Expand e-Folha to all civil servants in institutions with direct access to e-SISTAFE (about 90%) by end-2014 and to all State Bodies and Institutions including those not using e-SISTAFE.
  - e-SISTAFE rollout reached 69 percent of spending units including district level; target 75 percent by end-2014 and full rollout by end-2015.
  - Commitment component of e-SISTAFE activated on July 1, 2013 to improve tracking from commitment to payment.
  - Proposal for new legal framework (Normas e Plano de Contas) to meet IPSAS submitted to public consultation and to cabinet for approval in first quarter 2014; approval by Parliament and SISTAFE Law revision expected by end-2014; IPSAS pilot accrual accounting implementation planned for 2016 with software adjustments in 2015.
  - New revenue classification prepared for use in 2015 budget.
- Investment planning and debt management:
  - Integrated Investment Programme (IIP) approved September 2013 identifying priority infrastructure projects for 2014-2017.
  - By June 2014, Ministry of Planning and Development to approve and share with IMF staff an enhanced IIP adding financial information for projects with secured financing to inform DSA, MTFF and budget (structural benchmark).
  - Public Project Preparation and Selection Manual approved by MPD Consultative Council; summary form for Council of Ministers-approved projects to be published on MPD’s webpage; Methodological Guidelines for 2015-17 MTFF to be revised to incorporate selection and evaluation criteria and manual to be published by December 2014.
  - Debt Sustainability Analysis (DSA) prepared as part of 2014 Draft Budget showed debt remains sustainable.
  - Commitments: incorporate analysis of costs and risks associated with public debt portfolio including guarantees in budget execution reports; extend Debt Management Strategy in 2015 to explicitly include government guarantees.
  - Guarantee included in 2013 third quarter budget execution report; quarterly public debt report coverage to be expanded to include government guarantees from first quarter of 2014.
- Tax administration:
  - VAT arrears reduction plan developed to prevent accumulation of new arrears and optimize refunds administration and processing.

*Source: Letter of Intent and attached Memorandum of Economic and Financial Policies (MEFP), Maputo, December 20, 2013.*

### 16. Tax Administration

### 16. Tax Administration

### VAT administration and reimbursements
- A plan was prepared to gradually reduce the stock of pending VAT arrears, avoid accumulation of new arrears, and optimize the administration and refund process (structural benchmark for end-October 2013).
- The plan was refined with IMF technical assistance.
- Implementation steps and timing:
  - By end-October 2013: preparation of the plan (structural benchmark — met).
  - By March 2014: the Government will finalize the validation process for the stock of VAT reimbursement requests pending as of end-December 2013 (structural benchmark).
    - A note with the validation process and final amounts of effective VAT refunds will be shared with IMF staff.
  - The stock of valid reimbursement requests will be either fully paid or securitized by end-2014.
  - The Government will implement new legal, accounting and budgeting procedures to prevent delays in processing new refund requests and ensure timely reimbursements.
  - The Government will ensure that the 2015 budget proposal includes VAT collections on a net basis (structural benchmark for end-October 2014).

### Implementation of e-tax and payment via banks for VAT and ISPC
- Rollout plan and scope:
  - VAT and ISPC (simplified tax for small taxpayers) are the first taxes to be collected via the new e-tax system.
  - All relevant taxpayers will be registered in the single e-tax database with a single taxpayer identification number (NUIT).
  - About half of the 1,205 large taxpayer records have been updated already.
  - All 127,000 VAT and ISPC taxpayer records will be updated by end-September 2014.
  - A new, simplified and more accurate system of tax payments via banks will be possible for VAT and ISPC beginning in October 2014.
  - The revenue authority will issue a notice informing taxpayers of the new procedures (structural benchmark).
  - Payments via banks will be further improved with the introduction of the online taxpayers portal through which taxpayers will be able to calculate their tax assessments and make payments.
- Structural benchmark timing:
  - Implementation of the simplified VAT and ISPC payment system and issuance of taxpayer notice — end-October 2014.

### Strengthening Large Taxpayer Units (UGCs and DCAT)
- Progress and actions:
  - The Large Taxpayer Unit (UGCs) Management Database was fully installed in Beira and Nampula, and connections established; it is currently operational in the three UGCs (Maputo, Beira and Nampula).
  - Human resources of the Large Taxpayer Units will be reinforced in light of their contribution to total revenue collection by end-2014.
  - The specialized natural resource unit (DCAT) will be strengthened.

### Tax policy work and transfer pricing
- Tax policy studies and regulations:
  - The Government is conducting a study to verify possible inconsistencies between the general ISPC regime and the simplified taxation regimes for VAT, IRPC and IRPS. The study is expected to be completed by the end of 2013.
  - The draft Transfer Price Regulations is near completion with IMF technical assistance and will be submitted to the Council of Ministers for approval by June 2014 following the Action Plan for its implementation.

### Double Taxation Agreements (DTAs)
- Status and objectives:
  - Mozambique ratified agreements to prevent double taxation with 9 countries.
  - These agreements are being renegotiated, mostly to reduce revenue losses resulting from the deliberate incorporation of companies in countries with which Mozambique has signed a double taxation agreement.

*Source: _cr1420 - 16. Tax Administration*

### 1.      This Technical Memorandum of Understanding (TMU) defines the quantitative assessment

### _cr1420 - 1.      This Technical Memorandum of Understanding (TMU) defines the quantitative assessment

### Definitions and scope
- Purpose: Defines quantitative assessment criteria, indicative targets, structural benchmarks, and data transmission terms/timeframe for monitoring the Fund-supported program under the Policy Support Instrument (PSI).
- General: Limits on changes in indicators (e.g., NCG) are cumulative from end-December of the previous year.

#### A. Net credit to the central government (NCG)
- Definition: Difference between outstanding bank credits to the central government and the central government's deposits with the banking system, excluding:
  - deposits in project accounts with the banking system,
  - recapitalization bonds issued to the Bank of Mozambique (BM),
  - 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.
- Data source: Balance sheets of the monetary authority and commercial banks per the monetary survey.
- Treatment: Limits on change in NCG by the banking system are cumulative from end-December of the previous year.
- Coverage: Central government includes institutions whose revenue and expenditure are included in the state budget (Orçamento do Estado): central government ministries, agencies without financial autonomy, and the administration of 11 provinces. Local governments (43 municipalities or autarquias) are not included.
- Exclusion for program purposes: Net disbursements on the nonconcessional Portuguese credit line are excluded from NCG assessment criterion (paragraph 4).

#### B. Government revenue and financing
- Revenue defined to include all receipts of:
  - General Directorate of Tax (Direcção Geral dos Impostos, DGI),
  - General Directorate of Customs (Direcção Geral das Alfândegas, DGA),
  - nontax revenue, including certain own-generated revenues of districts and some line ministries as defined in the budget.
- Revenue is gross revenue net of verified VAT refund requests (pedidos verificadas de reembolsos solicitados).
- Exclusions: 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).
- Timing: Revenue considered collected when received by relevant government collecting agencies in cash, checks, or transfers into the respective bank account.

#### C. Priority social spending
- Based on PARPA program categories expanded to incorporate areas under new PARP. Includes total spending in sectors:
  - (i) education; (ii) health; (iii) HIV/AIDS; (iv) infrastructure development; (v) agriculture; (vi) rural development; (vii) governance and judicial system; (viii) social action, labor and employment.

#### D. Reserve money
- Definition: Sum of currency issued by the BM and commercial banks’ holdings at the BM.
- Target definition: Average of the daily end-of-day stocks in the month of the test date.
- Monitoring: Reserve money stock will be monitored and reported by the BM.

#### E. Net international reserves (NIR)
- Definition: Reserve assets minus reserve liabilities of the BM.
- Reserve assets include:
  - (a) monetary gold;
  - (b) holdings of SDRs;
  - (c) reserve position at the IMF;
  - (d) holdings of foreign exchange;
  - (e) claims on nonresidents, such as deposits abroad (excluding the central government’s savings accounts related to mineral resource extraction concessions).
- Exclusions: Reserve assets exclude assets pledged or otherwise encumbered (assets not readily available).
- Reserve liabilities include:
  - (a) all short-term foreign exchange liabilities to nonresidents with original maturity of up to and including one year;
  - (b) all liabilities to the IMF.

#### F. New nonconcessional external debt contracted or guaranteed (maturity > 1 year)
- Coverage: Applies to central government, BM, Road Fund, water authorities (FIPAG), electricity company (EDM), hydrocarbon company (ENH), and enterprises/agencies in which the above hold a majority stake; also to related domestic debt inter-related to external nonconcessional loans.
- Criterion: External debt with original maturity of one year or more and with a grant element below 35 percent.
- Grant element: Calculated using a discount rate of 5 percent.
- Definition of debt: As in Point 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements adopted on August 3, 1979, as amended August 31, 2009, effective December 1, 2009.
- Assessment: Cumulative from the beginning of the program and assessed continuously.

#### G. Stock of short-term external debt (original maturity < 1 year)
- Policy: Central government will not contract or guarantee external debt with original maturity of less than one year.
- Scope: Applies to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements adopted on August 3, 1979, as amended August 31, 2009, effective December 1, 2009.
- Exclusion: Short-term, import-related trade credits are excluded.
- Assessment: Continuous.

#### H. External payments arrears of the central government
- Commitment: Government undertakes not to incur payments arrears on external debt contracted or guaranteed by the central government, except arrears arising from central government debt being renegotiated with creditors.
- Assessment: Continuous.

#### 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 central government and central bank, including obligations to:
  - Paris Club and other bilateral creditors rescheduled under enhanced HIPC Initiative completion point terms,
  - multilateral creditors,
  - private creditors,
- Exclusion: Obligations to the IMF excluded (Table 1).

### Adjusters to quantitative targets
- A. Net international reserves (NIR) targets (floors) will be adjusted:
  - downward by the shortfall in external program aid less debt service payments (up to US$100 million), compared to the program baseline (Table 1);
  - upward by any windfall capital gain tax receipts (beyond the programmed amounts) in excess of US$ 30 million collected during the program period, less (i) payments beyond those programmed on outstanding VAT refund requests, and (ii) any other debt reduction operations vis-à-vis the domestic nonbank sector;
  - 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) targets (ceilings) will be adjusted:
  - upward by the shortfall in the MT value of external program aid receipts less debt service payments (up to the MT equivalent of US$100 million at exchange rates prevailing at the respective test dates), compared to the program baseline (Table 1);
  - downward by any windfall capital gain tax receipts (beyond the programmed amounts) in excess of US$ 30 million collected during the program period, less (i) payments beyond those programmed on outstanding VAT refund requests, and (ii) any other debt reduction operations vis-à-vis the domestic nonbank sector;
  - downward by privatization proceeds in excess of those envisaged in the program, unless these proceeds are deposited in the government’s savings accounts abroad;
  - downward (upward) for any increase (decrease) in domestic financing from the nonfinancial private sector;
  - upward to accommodate the higher locally-financed outlays because of natural disasters, up to the MT equivalent of US$20 million at exchange rates prevailing at the respective test dates.

- C. Reserve money ceiling adjustments:
  - 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 (considered at the end of the period of constitution of the required reserves prior to the change).

- D. Government revenue targets (floors):
  - Adjusted upward by any windfall capital gain tax receipts (beyond the programmed amounts) in excess of US$ 30 million collected during the program period.

### Data and reporting requirements
- Government will provide Fund staff with:
  - monthly and quarterly data needed to monitor program implementation 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 data on verified VAT refund requests;
  - monthly information on the balance of government savings accounts abroad;
  - monthly data on domestic arrears;
  - monthly data on external arrears;
  - monthly budget execution reports (that will also 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 requirement: BM’s monetary survey must clearly identify donor-financed project deposits (breakdown between foreign and domestic currency) included in net credit to the government in both the central bank’s and commercial banks’ balance sheets.
- Documentation: Government will provide Fund staff with external loan agreements once signed and effective.

### Key table excerpt (TMU Table 1. Mozambique: Net Foreign Assistance, 2013-14)
- Presentation in source (selected rows as they appear):
  - Net foreign program assistance (US$ mn)3751131935037236-10
  - Gross foreign program assistance451161542341018828741
  - Program grants456712474101882241
  - Program loans04930160002650
  - External debt service4141414151515151
  - Cumulative net foreign program assistance in US dollars3781913845087322312
  - Gross foreign program assistance45161315549101189476517
  - External debt service418212416551103154205
  - Net foreign program assistance (MT mn)1912,1293,4085,8251,6441,0967,239-394
  - Gross foreign program assistance1,3553,4974,6407,1163,1052,7408,9691,293
  - Program grants1,3552,0123,7312,2523,1052,7406791,293
  - Program loans01,4859094,864008,2910
  - External debt service1,1641,3691,2321,2911,4611,6441,7311,687
  - Cumulative Net foreign program assistance in MTN millions1912,3205,72811,5531,6442,7409,9799,585
  - Gross foreign program assistance1,3554,8529,49316,6083,1055,84514,81516,107
  - External debt service1,1642,5323,7655,0561,4613,1054,8366,522
- Source line in table: "Source: Mozambican authorities and IMF staff estimates."

### Press Release highlights (Press Release No. 14/12, January 16, 2014)
- IMF completed the first review under the three-year PSI for the Republic of Mozambique.
- Macroeconomic performance: real GDP growth for 2013 estimated at 7.1 percent; inflation remains moderate.
- Program status: PSI-supported program broadly on track. All assessment criteria were met and most indicative targets; some slippage on structural reforms.
- Risks: Uncertain global economy; new risks associated with the political/security environment; a recent government guarantee for large-scale borrowing by a public enterprise raised transparency and prioritization issues.
- 2014 outlook and policy emphasis:
  - Authorities’ program emphasizes preserving macroeconomic stability and debt sustainability while promoting social development.
  - Real growth projected at 8.3 percent.
  - Monetary policy: recent action expansionary; a more prudent approach in 2014 could facilitate achievement of medium-term inflation target.
  - Fiscal: 2014 budget envisages a significant expansion in infrastructure spending and a sizeable pick-up in goods and services outlays, financed in part by nonconcessional external borrowing.
- Policy recommendations:
  - Implement structural reforms vigorously to foster sustained and more inclusive growth.
  - Strengthen debt management and investment planning and implementation to ensure value-for-money, maximize efficiency of investment, and preserve debt sustainability.
  - Complete new mining and hydrocarbon legislation, related fiscal regimes, and implementation regulations to facilitate economic development of natural resources.

*Republic of Mozambique — International Monetary Fund (TMU excerpt).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1420.pdf_