## _cr1512

## Source details

**Canonical URL:** [_cr1512](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1512.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1512.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1512.pdf.json)

---

### GDP Rebasing and recent developments
- Rebased national accounts issued in July resulted in an 11 percent increase in the level of GDP for 2009, with only modest changes in sectoral composition.
- Real GDP expanded by 7.2 percent in the first half of 2014, led by extractive industries, construction, manufacturing, utilities, and financial services.
- Twelve-month consumer price inflation fell to 1.3 percent in October 2014.
- Real effective exchange rate broadly stable since 2012.
- Budget implementation H1 2014 broadly as anticipated; supplementary budget in July implies more expansionary stance:
  - Staff project total expenditure in 2014 about 0.3 percent of GDP higher than expected during the 2nd PSI review.
  - Increase attributed to a 0.8 percent of GDP increase in current spending.
  - Additional domestic bank financing needed of 1.1 percent of GDP under those assumptions.
- H1 2014 current account deficit narrowed by 15 percent versus same period last year:
  - Export revenues fell by 8.4 percent.
  - Imports fell by 7.5 percent.
- Bank of Mozambique strengthened NIR position but dollar valuation losses occurred due to US$ strengthening.
- Program performance through June 2014: all but one assessment criterion (AC) met; more than half of September indicative targets missed (3 of 8 met).
- Structural benchmarks: 3 of 7 met on time; others rescheduled by 3-9 months; Integrated Investment Plan SB out of reach in near term due to capacity limits.
- Political: Frelimo won elections mid-October 2014 with reduced margin; truce agreement with Renamo signed early September 2014 with potential additional integration/demobilization costs.

### Box: GDP Rebasing — key points
- July 2014 rebasing: GDP revised upward by about 11 percent for 2009; base year changed from 2003 to 2009.
- Changes in historical real growth rates marginal; modest sectoral composition changes due to short base-year lag and coal production starting only in 2011.
- INE adopted new Classification of Economic Activities; methodological improvements and planned refinements (intermediate consumption rates, financial services output, consumption of fixed capital in government, quarterly GDP in current prices once data available).
- Improved data sharing (Revenue Authority and INE) expected to improve industrial and financial sector estimates.

### Impact of global developments, inflation, monetary, and fiscal — condensed findings
- Growth outlook: robust despite weak global growth and floods in early 2013; megaproject export growth offset by investment-related and fuel imports.
- Reserve cover: maintained at about 4 month of projected non-megaproject imports since 2010.
- Inflation and monetary:
  - Inflation low since 2012; temporary rise after early 2013 floods.
  - Slowing velocity and strong private sector credit signal financial deepening; looser money growth since 2012 may generate inflationary pressures.
  - Mt/US$ depreciated somewhat since mid-2011; rate vs Rand appreciated slightly.
  - BM policy rates and T-bill rates stable; banks’ lending rates remain very high.
  - Reserve money slightly exceeded program targets in June 2014 as currency in circulation picked up.
- Fiscal developments:
  - Windfall capital gains tax receipts in 2012-14 added to revenue but not expected to continue.
  - Election and one-off expenses major drivers of higher current spending in 2014.
  - External loans gradually replacing grants for capital spending.
  - Swing in domestic primary balance (and net domestic financing) reflects windfall revenues in 2013-14.

### Economic outlook and risks
- Medium-term growth projection: growth projected to remain at 7½-8 percent.
- Sectoral drivers: construction of megaprojects and infrastructure, transport and communications, large-scale agriculture, financial services; coal production expected to stay flat in 2015.
- Inflation projection: projected to remain within BM’s target range of 5-6 percent.
- Balance of payments: large natural-resource investments financed by FDI/private funding to dominate BOP, widening current account deficit to 50 percent of GDP over next 4-5 years with gas liquefaction plant construction.
- Major project scale and timeline:
  - Rovuma basin LNG first-phase cost at least $40 billion (or 2.5 times estimated 2014 GDP); possible expansion to $100 billion; LNG production expected to start in 2020.
  - Government mining revenue to remain small for next decade.
- Downside risks:
  - Lower-than-expected international coal prices and high transport costs could postpone planned production expansions.
  - Weakening international gas prices could affect megaproject plans.
  - If broader growth risks materialize, fiscal consolidation harder but risk of debt distress likely to remain moderate.
- Policy focus: maintain macro stability, invest in infrastructure and social sectors, foster inclusive growth and capacity building; new household survey results expected in H2 2015 to inform poverty reduction and medium-term strategy.

### Policy stance and priorities for 2015
- Macroeconomic policy mix aims to:
  - Slow recent rapid expansion of government expenditure to maintain fiscal sustainability.
  - Preserve low-inflation environment while facilitating private activity and credit access.
  - Reinvigorate structural reform agenda.

### Fiscal stance and 2015 budget outlook
- Draft 2015 budget aims to reverse 2014 expansion and return to prudent stance.
- Draft envisages lowering current spending by 1.1 percentage points of GDP compared to 2014 projections (excluding one-off 2014 spending related to elections and EMATUM).
- Expenditure containment plus revenue-broadening would reduce domestic primary deficit in 2015 by 2 percentage points of GDP and overall fiscal deficit after grants by 3 percent.
- Consolidation should protect social spending (basic health, education, social assistance).

### Tax revenue and administration
- Total revenue projected at 25.4 percent of GDP in 2015.
- Past performance: averaged an annual increase of tax revenues of 1¼ percentage points of GDP during 2010-14.
- Authorities’ revenue measures: broaden taxpayer base, improve efficiency, audits, register taxpayers in e-Tax, expand e-Tax beyond VAT and simplified small taxpayer regime, modernize Tax Authority organizational structure.
- Revised fiscal regime for new mining and hydrocarbon laws approved August 2014 (some provisions not reflecting best international practice).
- VAT administration and refunds:
  - 2015 VAT collection to be administered on a net (of refund requests) basis.
  - Securitization of unpaid VAT refund stock projected at $250-300 million by end-2014.
  - Private placement covering whole refund backlog expected Q1 2015.
- Inclusion of ex-ante rule for windfall revenue in draft 2015 Budget Law:
  - Commitment to spend additional windfall revenue on infrastructure (consistent with capacity) and debt reduction.
  - Authorities requested exit clause for national emergencies or temporary cash-flow difficulties from shortfalls in external budget support.
- Staff emphasized need for effective medium-term fiscal framework to define fiscal anchor and guide allocation.

### Expenditure consolidation details (2015)
- Total expenditure in draft 2015 budget is 4.5 percentage points of GDP lower than in 2014.
- Consolidation drivers:
  - One-off 2014 spending not continuing in 2015: EMATUM quasi-fiscal operations (1.9 percent of GDP) and elections (0.6 percent of GDP).
  - Wage bill reduction target: 0.4 percentage points of GDP via slower hiring, direct bank wage payments, enhanced overtime control, verification of civil servants registry (e-CAF) in 2015.
  - Investment spending and net lending to be reduced by 1.8 percentage points of GDP (of which 0.7 percent is domestically financed) to a level of 16 percent of GDP.

### Public sector wages and SOEs
- Government wage bill:
  - Growing at more than 20 percent per year on average for last 5 years.
  - Projected to reach 11.1 percent of GDP in 2014.
  - Authorities agree to gradually reduce relative size of wage bill.
- SOE supervision:
  - Ministry of Finance to submit report covering all 14 fully state-owned enterprises to Council of Ministers by end-December 2014.
  - Four of six largest SOEs published 2013 annual reports; remaining two finalizing them.
  - About 120 public corporations supervised by IGEPE; draft Law on Corporate Sector of the State (SEE) prepared.
  - Government plans portfolio consolidation, privatization, liquidation over medium term.
  - EMATUM subject to stricter SOE financial controls and external audit of 2013 accounts to be published by end-2014.

### Fiscal risks and transparency
- Fiscal risks identified from: reliance on donor support, natural disasters, public enterprise activities, major/multi-annual infrastructure contracts, guarantees, contingent liabilities, quasi-fiscal activities.
- World Bank assistance in November 2014 to design Fiscal Risk Unit (FRU) in Ministry of Finance:
  - FRU to be set up by March 2015.
  - FRU will prepare comprehensive fiscal risk statement for annual budget documents; will need time and significant training to become operational.
- Windfall revenue:
  - Cumulative one-off capital gain tax receipts from transfers in large natural resource projects about 8.1 percent of GDP in 2012-14.
  - Draft 2015 Budget Law includes ex-ante rule for use of windfall revenue (only public investment, debt repayment, national emergencies).

### Monetary policy and financial sector reforms
- BM policy stance for 2015: safeguard low inflation while lowering private sector borrowing costs.
- BM to target slightly slower reserve money growth in 2015 than in 2014.
- Staff observations:
  - Private sector credit as share of GDP among highest in Sub-Saharan Africa after rapid credit expansion.
  - Limited SME access and high borrowing costs due mainly to structural rigidities.
  - Recommended reforms: promote competition, transparency, financial literacy, establish private credit registries.
- Inflation readiness:
  - BM to remain vigilant; dampen monetary expansion if inflation exceeds medium-term target of 5-6 percent.
- Operational measures:
  - BM developed new inflation forecasting model; cut standing lending facility (FPC) rate by 75 basis points to 7½ percent in early November.
  - Corridor between FPC and FPD rates narrowed to 600 basis points.
  - Reform allowing T-bonds as collateral in money market operations delayed; target completion September 2015.
- Banking sector:
  - Banks appear well capitalized; stress tests suggest resilience.
  - Credit portfolio concentration main risk.
  - NPL definition aligned to international standards as of January 2014; NPL ratio marginally higher, average 3.5 percent at end-June 2014.
  - Simulation of Financial Sector Contingency Plan planned early 2015 with World Bank support.
  - Operationalization of Deposit Insurance Fund delayed over size and contribution mechanism.

### Financial inclusion and regulatory progress
- FSDS 2013-22 implementation started slowly.
- Initiatives:
  - BM and stock exchange launched financial literacy programs.
  - BM drafted regulations to promote banking access and protect mobile banking customers.
  - BM formulating National Financial Inclusion Strategy.
  - Law on Creation of Private Credit Registry Bureaus submitted to Parliament in February (awaiting approval).
  - Movable Collateral Bill drafting delayed.
  - Implementing regulation of Law on AML/CFT approved by Council of Ministers in August 2014.
  - BM Directive for commercial banks on AML/CFT expected by March 2015.

### Investment planning, debt management, and business environment
- Investment planning capacity urgent; IIP SB missed.
- Government actions:
  - Strengthen Investment Evaluation Committee; mandate technical assessment by Committee for any new public investment project ≥ $50 million for 2016 and subsequent budgets.
- Public debt management:
  - DSA updated October 2014; coverage expanded to include government guarantees.
  - Weaknesses: debt data quality, internal consistency, analysis.
  - Debt Management Strategy review by end-June 2015.
  - Need to strengthen coordination between public investment planning and debt management.
- Business environment:
  - Doing Business ranking improved from 142nd in 2014 to 127th out of 189 in Doing Business 2015.
  - Improvements in starting a business, construction permits, registering property.
  - Further improvements needed in access to credit, contract enforcement, insolvency resolution, access to electricity.

### Program issues, structural benchmarks, and timelines
- Waiver requested for non-observance of June 2014 AC on reserve money; deviation minor and did not harm program objectives.
- Proposal to reschedule three SBs and replace missed SB on IIP with remedial action:
  - IT application for tax payments through banks for VAT and ISPC rescheduled from end-Oct 2014 to June 2015 and broadened to include income tax payments.
  - Payment or securitization of VAT reimbursement requests up to end-2013 rescheduled from end-Dec 2014 to end-March 2015 and broadened to requests up to end-2014.
  - Establish movable collateral registry rescheduled from end-Dec 2014 to September 2015.
  - Missed IIP SB to be replaced by remedial action (budget guidelines/technical assessment).
- ACs (end-June 2015), ITs and SBs through end-2015 proposed (MEFP Tables 2 and 4).

### Staff appraisal: outlook, risks, and policy priorities
- Assessment:
  - Economy strong and resilient; PSI program performance mixed.
  - All but one June 2014 AC met; reserve money missed by small margin; inflation below BM target.
  - Q3 developments mixed due to fiscal slippages; structural reform delays need reinvigoration.
- Risks:
  - Lower coal prices, high transport costs, weaker global gas markets could affect LNG investments.
  - Mining revenue small; near-term budget impact limited; risk of debt distress likely moderate.
  - Challenge: make growth more inclusive via agricultural productivity and private job creation.
- Policy recommendations:
  - Return fiscal policy to prudent stance in 2015; draft budget contains appropriate measures needing endorsement.
  - Monetary authorities stay vigilant to keep inflation near medium-term target and build foreign reserves.
  - Step up implementation to remove structural obstacles to financial market development.
  - Reinvigorate structural reforms: PFM reforms, fiscal risk identification, revenue administration (clear VAT backlog), SOE supervision, deepen money and capital markets, strengthen banking supervision and contingency framework.
  - Build institutional capacity to manage future LNG boom.
  - Strengthen transparency, due process, monitoring in investment planning and project financing to preserve debt sustainability.

### Recommendation and IMF staff assessment (PSI review)
- Staff recommends completion of the third PSI review.
- Program performance mixed; envisaged fiscal adjustment in 2015 and reinvigorated structural reforms keep outlook strong.
- Staff supports waiver for non-observance of reserve money AC end-June 2014 as deviation minor and not harmful.
- Staff supports authorities’ request to modify end-December ACs and IT consistent with program objectives.
- Authorities’ requests (Letter of Intent, December 12, 2014):
  - Completion of third PSI review.
  - Modification of three ACs and one IT for December 2014.
  - Set ACs/ITs for end-June 2015 and ITs for end-March, end-September, end-December 2015.
  - Reschedule existing SBs and set new SBs for 2015 reflecting earlier delays.
  - Government transmitted MEFP supporting requests.
- Government commitments:
  - Maintain macro stability, promote inclusive growth and reduce poverty.
  - Consult IMF before policy revisions; provide requested information; authorize publication of Letter of Intent and associated staff report.

### Recent economic developments and performance under the program (detailed)
- Growth H1 2014: estimated 7.2 percent year-on-year.
- Credit expansion slowed from 35.4 percent in September 2013 to 20.8 percent in September 2014.
- H1 2014 current account deficit declined to $2.6 billion; exports $1.8 billion (of which $1.1 billion from megaprojects).
- Revenue collections first 9 months 2014: 20.8 percent of GDP (over 4 percentage points higher than year earlier).
- Capital gain tax collected in March: $523 million, about 3.1 percent of GDP.
- Expenditures up to September 2014: 26.8 percent of GDP, 2.6 percentage points higher than a year earlier.
- Capital expenditure execution low; fiscal deficit before grants 5.3 percent of GDP by end-September financed by grants (3.2 percent) and external financing (2.8 percent), enabling government net deposits 0.7 percent of GDP.
- FDI flows more than doubled in first six months of 2014 vs prior year, mainly mining investment.
- International reserves $3.1 billion at end-September 2014 (~4.4 months of current imports excluding megaprojects).

### Macroeconomic policies (2014–19)
- Growth expectations:
  - 2014: 7.5 percent.
  - 2015: 7.7 percent.
  - Medium-term: average 7-8 percent per year.
- Inflation 2014:
  - Expected average 2.6 percent and year-on-year 3.0 percent.
  - 2015-17 expected to rise to medium-term objective of average annual 5-6 percent.
- External current account 2015–19: deficit expected to deteriorate due to megaproject imports; reserve cover ratio about 2.4 and 4.0 months including and excluding megaprojects, respectively.
- Fiscal objective: reduce after-grants deficit gradually to around 5 percent of GDP in 2019; revenues average 25.6 percent of GDP 2015-2019 absent further windfall taxes.
- Monetary stance for 2015:
  - BM seeks base money growth of 18.5 percent in 2015 and monitor risks; tighten if inflation exceeds medium-term target.
- Exchange rate: commitment to flexible exchange rate regime; BM to monitor real effective exchange rate.
- Article VIII commitments: authorities committed to sections 2, 3, 4 of Fund’s Articles.

### Public finance structural reforms
- Investment planning and IIP:
  - SB to refine IIP by end-June 2014 missed; revised IIP prepared October 2014 but partial.
  - Budget guidelines by May 2015 to require Investment Evaluation Committee technical assessment for new projects ≥ $50 million.
- Debt sustainability and management:
  - DSA updated October 2014; key indicators below critical thresholds in baseline but vulnerable to FDI/exchange rate shocks.
  - Debt Management Strategy to be revised by end-June 2015.
- PFM and e-SISTAFE:
  - Increase share of expenditures paid through e-SISTAFE: end-2014 target 65 percent expected met; 70 percent in 2015; 75 percent in 2016.
  - Use e-SISTAFE to record real-time commitments; expand to salaries via e-Folha by end-December 2015.

### Wage bill management and cash management
- Wage bill risen to around 11 percent of GDP due to hiring and real wage increases.
- Reforms/transparency:
  - 85 percent of civil servants registered in e-CAF receive salary directly in bank account.
  - Proof-of-life audit planned for 2015.
  - e-Folha: 70 percent of registered civil servants paid through e-Folha by end-October 2014; plan to increase to 95 percent by end-2015.
- Treasury single account (CUT):
  - Circular No. 02/GAB-MF/2014 to reduce bank accounts outside CUT.
  - Mapping of all government bank accounts outside CUT by end-March 2015.
  - All revenues to be transferred into CUT regardless of classification.
  - 71 percent of spending units (UGBs) have direct access to system.

### Revenue administration, VAT refunds, e-Tax, and SOE transparency
- VAT refund securitization preparation: unpaid VAT refund requests estimated $250-300 million by end-2014; private placement expected Q1 2015 (SB).
- e-Tax rollout:
  - 51 percent of VAT taxpayers and 100 percent of small taxpayers (ISPC) have updated data in e-tax.
  - Piloted VAT/ISPC collection in two tax offices; roll-out starting November 2014; aim to collect VAT and ISPC through e-tax by end-2015.
  - Pilot income taxes in e-tax by end-2015; full e-tax by end-2016.
  - Interim bank-based tax payment application pilot December 2014; operational nationwide by end-June 2015 (SB).
- Revenue Authority (AT) modernization with IMF TA; taskforce to revamp organization.
- EITI and extractive sector transparency: 2012 report being drafted; mining cadaster online; draft regulations for mining/hydrocarbon laws for early 2015.

### Public enterprises supervision and reform details
- 14 fully state-owned enterprises monitored by Ministry of Finance subject to special controls.
- EMATUM subject to strict controls; external audit of 2013 accounts requested and to be published by end-2014.
- Portfolio consolidation: reduced by 2 enterprises since Jan 2014 to total 117 public corporations; aim to sell non-strategic holdings with <20 percent participation.

### Financial sector policies, supervision, and development
- Monetary policy framework improvements and forecasting models with IMF TA; shadow forecast process since September 2014.
- Liquidity management: improve forecasts of currency in circulation and government cash flow; MF sharing weekly short-term stats with BM.
- Move toward repo operations; T-bonds as collateral reform target completion September 2015 (SB).
- Financial surveillance:
  - Quarterly stress testing; June 2014 stress test shows low systemic distress risk; credit concentration largest risk.
  - NPL ratio 3.5 percent at end-June 2014.
  - Risk-based supervision processes; Basel II compatibility study ongoing, revision by end-June 2015.
  - Financial Sector Contingency Plan simulation exercise planned Q1 2015.
  - Deposit Insurance Fund implementation discussions continuing; government initial contribution expected in 2015.
- FSDS objectives and milestones; National Financial Inclusion Strategy by end-December 2015; BM Financial Literacy Program launched October 2014.

### AML/CFT, Payment System, and business environment
- AML/CFT regulation approved by Cabinet in August 2014; awaiting publication in State Gazette.
- BM AML/CFT guidelines for banks expected March 2015.
- Payment System Oversight:
  - First annual oversight report completed October 2014 (SB).
  - Findings: national payment system improved; liquidity management and credit risk slightly lagging.
  - Onsite inspection of Mkesh in October 2014; M-pesa inspection postponed to H1 2015.
- SIMO retail payments: seventeen ATMs and seventeen POS connected; gradual connection of remaining banks.
- Business environment:
  - Anti-corruption package: new Penal Code approved July 2014; Penal Procedural Code pending.
  - e-BAÚ platform launched August 2014; property registration reduced to 2 days in Maputo pilot.
  - Citizen portal (www.portaldacidadão.gov.mz) expected 2015.

### Program monitoring, quantitative targets, TMU adjusters, and structural benchmarks
- Proposed ACs and ITs through December 2015 shown in Tables; 4th PSI review expected by end-June 2015; 5th review by end-December 2015.
- Selected Table 1 values preserved verbatim in source (examples):
  - Net credit to central government (cumulative ceiling): Prog. 889; Adj. -14,249; Act. -13,192; Status NM; ... (multiple entries preserved).
  - Stock of reserve money (ceiling): 45,100; 45,100; 45,007; M; 48,023; 48,023; 48,933; NM; 50,689; 50,689; 52,713; NM.
  - Stock of net international reserves of BM (floor, US$ millions): 2,961; 3,452; 3,192; NM; 3,107; 3,107; 3,182; M; 3,188; 3,188; 3,100; NM.
  - New nonconcessional external debt cumulative ceiling (US$ millions): 1,200; 1,200; 926; M; 1,500; 1,500; 978; M; 1,500; 1,500; 1,298; M.
- TMU adjusters (selected):
  - NIR targets downward adjuster: shortfall in external program aid less debt service (up to US$200 million).
  - NIR upward adjuster: windfall capital gain tax receipts beyond US$30 million (less payments on VAT refunds and domestic debt reduction).
  - NCG adjusters: similar provisions including privatization proceeds, domestic financing changes, and natural disaster outlays up to MT equivalent of US$20 million.
- Table 2 and TMU table excerpts preserved verbatim in source (programmed VAT requests/refunds and windfall figures).

### New sector and fiscal laws for mining and hydrocarbons
- August 2014 parliamentary approval of four new natural resource laws (sectoral and fiscal).
- Positive elements: improved transparency, reporting obligations, consultation rules, public tender requirements, consolidated fiscal regimes with audited annual accounts.
- Problematic provisions/risks:
  - Hydrocarbon law earmarks 25 percent share of production for domestic market and mandates some goods/services be provided exclusively by Mozambican companies — potential inefficiencies.
  - Encouragement of government/private sector participation beyond current 10-15 percent stakes; financing of government share unclear.
  - New institutional set-up (Extractive Industries High Authority, National Mining Institute) may create coordination challenges.
  - Mining fiscal law flaws: lower domestic royalty rates, mineral valuation rules, royalties assessed on production rather than sales, non-deductibility of royalties for corporate income tax.
- Scale and fiscal risk:
  - Envisaged investment cost about $40 billion (close to 2.5 times 2014 GDP) assuming four onshore liquefaction trains.
  - Government/ENH participation financed through borrowing could become fiscal risk; local bond market shallow relative to needs.

### IMF Press Release highlights (Executive Board completes third PSI review — Press Release No. 15/01, January 5, 2015)
- Third PSI review completed; Board decision on lapse of time basis.
- Key macro points:
  - Growth forecast 7.5 percent for 2014.
  - Low inflation: 12-month Maputo average through November 2.4 percent.
  - Expansionary and higher-than-programmed fiscal stance; reserve money modestly above target.
  - Mixed PSI performance: June quantitative ACs mostly met; slippages in second half and delays in structural reforms.
- Policy priorities:
  - Maintain growth while preserving fiscal and debt sustainability; initiate fiscal consolidation in 2015 budget.
  - BM to remain vigilant on inflation.
  - Structural reform priorities: VAT and tax administration, PFM reforms, transparent public investment management and borrowing, business environment, financial sector development.
  - Completion of LNG contract negotiations key milestone.
  - With likely decline in foreign aid, Mozambique will need to borrow for infrastructure and human capital; strengthen investment planning and debt management.
  - Reinvigorate reforms in PFM, monetary policy tools, banking supervision, and business facilitation to sustain inclusive growth.

*Source: _cr1512 - 48. AML/CFT Framework. The regulation of the Law on AML/CFT was approved by the Cabinet (PDF chapter/section).*

### 1. GDP Rebasing  ___________________________________________________________________________________6

### 1. GDP Rebasing

### Background and recent developments
- Rebased national accounts issued in July resulted in an 11 percent increase in the level of GDP for 2009, but only modest changes in the sectoral composition.  
- Real GDP expanded by 7.2 percent in the first half of 2014, led by the extractive industries, construction, manufacturing, utilities, and financial services.  
- Twelve-month consumer price inflation fell to 1.3 percent in October 2014, helped by favorable import prices, a bumper harvest that held down food prices, and stability in administered prices (fuels, public transport, and utilities).  
- The real effective exchange rate has been broadly stable since 2012.  
- Budget implementation in the first half of 2014 was broadly as anticipated, but the supplementary budget adopted in July implies a more expansionary fiscal stance than programmed: staff project total expenditure in 2014 about 0.3 percent of GDP higher than expected during the 2nd PSI review, attributed to a 0.8 percent of GDP increase in current spending.  
- Given unchanged revenue projections and lower expected grants, this would result in a need for additional domestic bank financing of 1.1 percent of GDP. Preliminary data through September show revenue slightly lower, relatively low priority spending, and large other spending—likely related to the elections and the truce agreement; with slightly lower and late disbursements in external financing this led to a substantially higher use of domestic financing than programmed.  
- In the first half of 2014, the current account deficit narrowed by 15 percent compared with the same period last year, due to a slowing down of the investment activities by megaprojects. Exports revenues fell by 8.4 percent while imports fell by 7.5 percent.  
- The Bank of Mozambique (BM) continued to strengthen its net international reserves (NIR) position, although its value in dollar terms experienced sizeable valuation losses owing to the strengthening of the U.S. dollar.  
- Program performance through June 2014: all but one assessment criterion (AC) through June were met, but more than half of the indicative targets for September were missed. Three of 8 indicative targets (ITs) were met; three were missed by small margins (reserve money, government revenue and priority spending); one (NIR) missed due to valuation losses. The target for net credit to government was missed by a significant margin due to slightly lower revenue, spending pressures and lower and delayed foreign financing.  
- Structural agenda progress: only 3 of 7 structural benchmarks (SBs) were met on time; three others have follow-up but have been rescheduled by 3-9 months. The June 2014 SB on the Integrated Investment Plan is out of reach in the near future due to deep capacity limitations.  
- Political developments: Frelimo won the presidential and parliamentary elections in mid-October 2014 with a significantly reduced margin. President-elect Nyusi’s new government expected to take office in January or February 2015. A truce agreement between Frelimo and Renamo signed in early September 2014 improved security but is likely to require additional spending to help integrate Renamo troops into the army and police or demobilize them.

### Box 1 — GDP Rebasing: key points
- In July 2014, GDP data were revised upward by about 11 percent for 2009 with a switch from 2003 to 2009 as the base year.  
- Changes in real growth rates in the historical data series were marginal and there were only modest changes in sectoral composition. The more modest changes compared with other recent rebasing episodes reflect the short time lag between base years (only 6 years) and the fact that coal production started only in 2011 after the new base year.  
- INE adopted a new Classification of Economic Activities consistent with international standards: merger of agriculture and fisheries; split between coal and natural gas under extractive industry; split between transportation and communications.  
- INE improvements and planned refinements include updating estimated rates for intermediate consumption, methodological improvements in estimates of financial services output and consumption of fixed capital in government, and compilation of quarterly GDP in current prices based on the expenditure approach once data become available. Improved data sharing among government authorities, particularly between the Revenue Authority and INE, should improve estimates for industrial and financial sector activity.

### Impact of global developments, inflation and monetary developments, and fiscal developments — condensed findings
- Growth outlook: Despite weak global growth and floods in early 2013, Mozambique’s growth outlook remains robust; megaprojects’ export growth has been counterbalanced by investment-related and fuel imports.  
- Reserve cover: In the face of strong private capital inflows and import growth, reserve cover was maintained at about 4 month of projected non-megaproject imports since 2010.  
- Inflation and monetary: Inflation has remained low since 2012 despite a temporary rise related to floods in early 2013. Slowing velocity and strong private sector credit signal financial deepening, but looser money growth since 2012 may generate some inflationary pressures. The Mt/US$ exchange rate depreciated somewhat since mid-2011, while the rate against the South African rand appreciated slightly. BM policy rates and T-bill rates have been stable, but banks’ lending rates remain very high. Reserve money exceeded program targets slightly in June 2014 as currency in circulation picked up.  
- Fiscal developments: Windfall capital gains tax receipts in 2012-14 added to buoyant revenue collections but are not expected to continue. Election and other one-off expenses are major drivers of higher current spending in 2014. External loans are gradually replacing grants for the financing of capital spending. The swing in the domestic primary balance (and net domestic financing) reflects windfall revenues in 2013-14.

### Economic outlook and risks
- Medium-term growth projection: growth is projected to be broad-based and remain at 7½-8 percent.  
- Sectoral drivers: growth expected to be led by construction of megaprojects and infrastructure investments, transport and communications, large-scale agriculture, and financial services. Coal production expected to stay flat in 2015.  
- Inflation projection: inflation is projected to remain within the BM’s target range of 5-6 percent.  
- Balance of payments: large investments in natural resource projects financed by FDI and private funding will continue to dominate the balance of payments, further widening the current account deficit to 50 percent of GDP over the next 4-5 years with the construction of the gas liquefaction plants.  
- Major project scale and timeline: the Rovuma basin LNG project has a first-phase cost of at least $40 billion (or 2.5 times estimated 2014 GDP) and could be expanded to $100 billion later on; LNG production is expected to start only in 2020. Government mining revenue will remain small for the next decade.  
- Downside risks: lower-than-expected international coal prices and high transport costs have caused mining companies to suffer losses; unless coal prices recover and costs are contained, planned production expansions after the new Nacala railway becomes operational in early 2015 may be postponed. A further weakening in the outlook for international gas prices could affect megaproject plans. If broader risks to growth materialize, fiscal consolidation would become more difficult, but the risk of debt distress would likely remain moderate.  
- Policy focus: Mozambique’s medium-term policy agenda remains focused on maintaining macroeconomic stability, investing in infrastructure and social sectors, fostering inclusive growth and capacity building. Preparations for transition to a resource-rich era need to accelerate under the new government. Improvements in the business climate for non-resource sectors such as agriculture are important given that currently 80 percent of the labor force work in agriculture and population growth is high. A new household survey is underway with results expected in the second half of 2015 to inform a new poverty reduction and medium-term development strategy.

### Policy stance and priorities
- For 2015 the updated macroeconomic policy mix aims to:  
  - Slow the recent rapid expansion of government expenditure in order to maintain fiscal sustainability.  
  - Preserve a low-inflation environment while facilitating private economic activity and access to credit.  
  - Reinvigorate the structural reform agenda.  

*Source: REPUBLIC OF MOZAMBIQUE / INTERNATIONAL MONETARY FUND*

### 10.      The authorities and staff reached an understanding that the 2015 budget needs to

### _cr1512 - 10.      The authorities and staff reached an understanding that the 2015 budget needs to

### Fiscal stance and 2015 budget outlook
- Draft 2015 budget aims to reverse the 2014 expansion and return to a more prudent policy stance.
- Draft envisages lowering current spending by 1.1 percentage points of GDP compared to 2014 projections (excluding one-off spending in 2014 related to the elections and EMATUM).
- Expenditure containment coupled with revenue-broadening would reduce the domestic primary deficit in 2015 by 2 percentage points of GDP and the overall fiscal deficit after grants by 3 percent.
- The consolidation should protect social spending such as basic health and education and social assistance programs.

### Tax revenue
- Total revenue is projected to reach 25.4 percent of GDP in 2015.
- Mozambique’s past performance: averaged an annual increase of tax revenues of 1¼ percentage points of GDP during 2010-14.
- Authorities’ revenue measures include:
  - broadening the taxpayer base,
  - improving efficiency,
  - audits,
  - registering taxpayers in the electronic tax payment (e-Tax) system and expanding e-Tax beyond VAT and the simplified small tax payer regime,
  - modernizing the organizational structure of the Tax Authority.
- Revised fiscal regime for new mining and hydrocarbon laws approved by parliament in August 2014 (some provisions do not reflect best international practice).
- VAT administration and refunds:
  - 2015 VAT collection to be administered on a net (of refund requests) basis.
  - Securitization of stock of unpaid VAT refund requests projected at $250-300 million by end-2014.
  - Private placement covering whole refund backlog expected in the first quarter of 2015.
- Agreement to include an ex-ante rule for the use of windfall revenue in the draft 2015 Budget Law:
  - explicit commitment to spend additional windfall revenue on infrastructure investments (consistent with implementation capacity) and debt reduction,
  - authorities requested an exit clause for national emergencies or cash flow difficulties associated with temporary shortfalls in external budget support.
- Staff emphasized need for an effective medium-term fiscal framework to define a fiscal anchor and guide resource allocation.

### Expenditure consolidation details
- Total expenditure in draft 2015 budget is 4.5 percentage points of GDP lower than in 2014.
- Consolidation drivers:
  - One-off 2014 spending not continuing in 2015: EMATUM quasi-fiscal operations (1.9 percent of GDP) and elections (0.6 percent of GDP).
  - Wage bill reduction target: 0.4 percentage points of GDP via slower hiring, direct bank wage payments, enhanced control of overtime, and verification of the civil servants registry (e-CAF) in 2015.
  - Public investment projects to undergo more rigorous assessment; investment spending and net lending to be reduced by 1.8 percentage points of GDP (of which 0.7 percent is domestically financed) to a level of 16 percent of GDP (noted as still high by international comparison).

### Public sector wages and SOEs
- Government wage bill:
  - Has been growing at more than 20 percent per year on average for the last 5 years.
  - Projected to reach 11.1 percent of GDP in 2014.
  - Authorities agreed on the need to gradually reduce the relative size of the wage bill over time.
- Supervision of public enterprises:
  - Ministry of Finance to submit a report covering all 14 fully state-owned enterprises (SOEs) to the Council of Ministers by end-December 2014.
  - Four of the six largest SOEs already published their 2013 annual reports; remaining two are finalizing them.
  - About 120 public corporations supervised by the State Shareholding Management Institute (IGEPE); a draft Law on the Corporate Sector of the State (SEE) was prepared.
  - Government plans to consolidate participation in enterprises over the medium term, including through privatization and liquidation.
  - EMATUM subject to stricter SOE financial controls; submitted quarterly operating and financial reports to Ministries of Finance and Fisheries in July 2014; external audit of EMATUM’s 2013 accounts commissioned and to be published (by end-2014).

### Fiscal risks and fiscal transparency
- Fiscal transparency assessment highlighted considerable fiscal risks from:
  - reliance on donor support for external financing,
  - susceptibility to natural disasters,
  - activities of public enterprises,
  - major and multi-annual infrastructure contracts,
  - guarantees granted, contingent liabilities and quasi-fiscal activities.
- World Bank assistance in November 2014 in design of a Fiscal Risk Unit (FRU) in the Ministry of Finance:
  - FRU to be set up by March 2015.
  - FRU tasked with preparing a comprehensive statement on fiscal risks for inclusion in annual budget documents.
  - FRU will need time and significant training to become operational.

### Monetary policy and financial sector reforms
- BM policy stance for 2015 aims to safeguard a low inflation environment while lowering private sector borrowing costs.
- BM will target a slightly slower reserve money growth in 2015 than in 2014 to moderate broad money and credit growth.
- Staff observations:
  - Private sector credit as a share of GDP stands among the highest in Sub-Saharan Africa after several years of rapid credit expansion.
  - Limited SME access to credit and high borrowing costs attributed mainly to structural rigidities.
  - Reforms recommended: promote competition, transparency, financial literacy, establish private credit registries.
- Inflation target and readiness:
  - BM to remain vigilant and dampen monetary expansion should exogenous factors push inflation above its medium-term target of 5-6 percent.
- Operational measures and market development:
  - BM strengthened inflation analysis and forecasting; developed a new inflation forecasting model.
  - BM cut its standing lending facility (FPC) rate by 75 basis points to 7½ percent in early November.
  - Corridor between FPC and standing deposit facility (FPD) rates narrowed to 600 basis points (still wide).
  - Reform to allow T-bonds as collateral in money market operations delayed; BM and Stock Exchange committed to resolve legal and IT issues and complete by September 2015.
- Banking sector soundness and supervision:
  - Banks appear well capitalized; stress tests suggest the system is resilient.
  - Credit portfolio concentration remains main source of risk.
  - Definition of NPLs aligned to international standards as of January 2014; recent data show only marginally higher levels of NPLs.
  - Simulation exercise of the Financial Sector Contingency Plan planned for early 2015 with World Bank support.
  - Operationalization of the Deposit Insurance Fund delayed over appropriate size and contribution mechanism.

### Financial inclusion and regulatory progress
- Implementation of the 2013-22 Financial Sector Development Strategy (FSDS) has started slowly.
- Initiatives:
  - BM and stock exchange launched financial literacy programs (TV, radio, lectures).
  - BM drafted regulations to promote access to banking services and protect mobile banking customers.
  - BM formulating a National Financial Inclusion Strategy.
  - Law on the Creation of Private Credit Registry Bureaus submitted to Parliament in February (awaiting approval).
  - Movable Collateral Bill drafting delayed due to lack of experience.
  - Implementing regulation of the Law on AML/CFT approved by Council of Ministers in August 2014.
  - BM’s Directive for commercial banks on AML/CFT expected to be approved by March 2015.

### Investment planning, debt management, and business environment
- Investment planning capacity development is urgent; the structural benchmark on refining the Integrated Investment Program (IIP) by end-June 2014 was missed.
- Government agreed to:
  - Strengthen the Investment Evaluation Committee (previously inactive).
  - Mandate technical assessment by the Committee for any new public investment project to be considered for the 2016 and subsequent budgets with a value of $50 million or more.
- Public debt management:
  - Update of DSA prepared in October 2014; coverage expanded to include government guarantees.
  - Weaknesses: quality of debt data, internal consistency, and analysis.
  - Debt Management Strategy to be reviewed by end-June 2015.
  - Staff stressed need to strengthen institutional coordination between public investment planning and debt management.
- Business environment:
  - Doing Business ranking improved from 142nd in 2014 to 127th (out of 189) in “Doing Business 2015”.
  - Improvements in starting a business, construction permits, and registering property.
  - Business Environment Improvement Strategy (2013-17) being implemented: electronic platform for registration and licensing launched; unified website planned in 2015.
  - Further improvements needed in access to credit, contract enforcement, resolving insolvency, and access to electricity.

### Program issues, structural benchmarks, and timelines
- Waiver requested for non-observance of one assessment criterion for June 2014 (reserve money) on basis deviation was minor and did not harm program objectives.
- Proposal to reschedule three structural benchmarks (SBs) and replace a missed SB on the IIP with remedial action:
  - End-October 2014 SB (IT application for tax payments through banks for VAT and ISPC) proposed to be rescheduled to June 2015 and broadened to include income tax payments.
  - End-December 2014 SB on payment or securitization of stock of valid VAT reimbursement requests submitted up to end-2013 proposed to be rescheduled to end-March 2015 and broadened to all VAT reimbursement requests submitted up to end-2014.
  - End-December 2014 SB on establishing a movable collateral registry proposed to be rescheduled to September 2015.
  - Missed SB on the IIP proposed to be replaced by remedial action described in paragraph 22.
- ACs (for end-June 2015), ITs and SBs through end-2015 are proposed (MEFP Tables 2 and 4).

### Staff appraisal: outlook, risks, and policy priorities
- General assessment:
  - Mozambique’s economy remains strong and resilient; performance under the PSI-supported program has been mixed.
  - All but one assessment criterion for June 2014 were met; reserve money target missed by a small margin while inflation remained well below BM’s target range.
  - Third-quarter developments more mixed due to fiscal slippages.
  - Structural reform implementation experienced delays and should be reinvigorated.
- Outlook and risks:
  - Economic outlook remains strong and growth is broad-based, yet downward risks have risen.
  - Risks include lower-than-expected international coal prices, high transport costs, and a substantial weakening of global gas markets affecting planned LNG investments.
  - Mining revenue still small; near-term budget impact limited; risk of debt distress likely to remain moderate.
  - Key challenge: make growth more inclusive by enhancing agricultural productivity and private sector job creation.
- Policy recommendations and priorities:
  - Return fiscal policy to a more prudent stance in 2015; draft budget contains appropriate revenue and expenditure measures but requires endorsement and parliamentary approval.
  - Monetary authorities should stay vigilant to keep inflation near the medium-term target and build foreign reserves to maintain adequate import cover.
  - Step up implementation of measures to remove structural obstacles that inhibit development of financial markets.
  - Reinvigorate structural reforms including PFM reforms, identification of fiscal risks, revenue administration (clearing VAT refund backlog), supervising public enterprises, deepening money and capital markets, and strengthening banking supervision and financial contingency framework.
  - Build institutional capacity to prepare for managing the future LNG boom.
  - Strengthen transparency, due process, and monitoring in investment planning and project financing to preserve debt sustainability.

*Source: _cr1512 - 10.      The authorities and staff reached an understanding that the 2015 budget needs to (IMF staff report content).*

### 34.      Staff recommends the completion of the third PSI review. Program performance has

### _cr1512 - 34. Staff recommends the completion of the third PSI review. Program performance has

### Recommendation and IMF staff assessment
- Staff recommends the completion of the third Policy Support Instrument (PSI) review.
- Program performance has been mixed recently, but with the envisaged fiscal adjustment in 2015 and renewed vigor in structural reforms the economic outlook remains strong.
- The attached MEFP outlines the macroeconomic objectives and policies for the period ahead.
- Staff supports a waiver for the non-observance of the assessment criterion on reserve money at end-June 2014 on the basis that the deviation was minor and has not harmed the achievement of the program’s objectives.
- Staff supports the authorities’ request to modify the end-December assessment criteria and indicative target as these would be consistent with the achievement of the program’s objectives.

### Authorities’ requests and actions (from Letter of Intent, December 12, 2014)
- The Government of Mozambique requests:
  - Completion of the third review under the PSI.
  - Modification of three assessment criteria and one indicative target for December 2014 to reflect continuation of trends observed in September: increased demand for cash in circulation, valuation changes on reserves, and additional government financing needs related, among other factors, to the Agreement for a Permanent Cessation of Military Hostilities in September 2014.
  - Setting assessment criteria and indicative targets for end-June 2015, and indicative targets for end-March, end-September, and end-December 2015.
  - Rescheduling existing structural benchmarks and setting new structural benchmarks for 2015, in part reflecting delays in the implementation of earlier benchmarks.
- The Government transmitted the Memorandum of Economic and Financial Policies (MEFP) in support of these requests.

### Government program objectives and commitments
- The Government’s economic program aims to:
  - Maintain macroeconomic stability.
  - Promote inclusive growth through public investment and the promotion of productive employment.
  - Reduce poverty.
- The Government states that the policies in the MEFP are adequate to achieve the objectives of the PSI-supported program and stands ready to take any additional measures necessary to achieve policy objectives.
- The Government will consult with the IMF—at its own initiative or whenever the Managing Director requests such a consultation—before any revision to the policies contained in the MEFP, in accordance with Fund policy.
- The Government will provide the IMF with such information as the IMF may request to assess progress in implementing economic and financial policies and achieving program objectives.
- The Government authorizes publication of the Letter of Intent, attachments, and the associated staff report.

### Key dates and references in the text
- End-June 2014 (assessment criterion on reserve money non-observance and waiver basis).
- September 2014 (observed trends; Agreement for a Permanent Cessation of Military Hostilities).
- December 12, 2014 (Letter of Intent date).
- Requests to set/modify assessment criteria and indicative targets for:
  - December 2014 (modifications requested).
  - End-June 2015 (assessment criteria and indicative targets).
  - End-March 2015 (indicative target).
  - End-September 2015 (indicative target).
  - End-December 2015 (indicative target).

*Source: Excerpt from IMF staff report and Letter of Intent (Maputo, December 12, 2014).*

### 1. This MEFP (i) describes recent developments and performance of the Government‘s

### _cr1512 - 1. This MEFP (i) describes recent developments and performance of the Government‘s

### I. Recent economic developments and performance under the program
- Overall assessment
  - The Mozambican economy remains strong and was little affected so far by the weak global economy.
- Growth
  - Growth in H1 2014 estimated at 7.2 percent compared with the same period of the previous year.
  - Growth moderated by slightly lower-than-projected performance in extractive industries (coal production) and transport due to some constraints in the railway system.
  - Extractive industry was among the sectors with highest growth rates. Other main growth sectors: financial services, manufacturing, and restaurants and hotels.
- Inflation and monetary developments
  - Annual inflation rate of 1.3 percent in October (year-on-year), well below the same period last year.
  - Contributing factors: unchanged administered prices, an increase in domestic food supply, decline in international commodity prices.
  - Reserve money target for June 2014 was overshot largely due to unexpected movements in currency in circulation.
  - Year-on-year credit expansion slowed from 35.4 percent in September 2013 to 20.8 percent in September 2014.
- Exchange rate and FX management
  - Real effective exchange rate of the Metical remained overall stable throughout 2014.
  - Slight nominal depreciation against the US Dollar and appreciation against the Rand.
  - Greater availability of foreign currency in the market; Bank of Mozambique (BM) continued to ensure availability of foreign exchange for essential imports and to smoothen temporary exchange rate volatilities.
- External current account (H1 2014)
  - Current account deficit declined by 15 percent to $2.6 billion (compared with the same period last year).
  - Imports reduced by 7.5 percent, reflecting slowing investment activities by megaprojects.
  - Export revenues fell by 8.4 percent to $1.8 billion (of which $1.1 billion from megaprojects).
  - Commodity price impacts: aluminum (9 percent) and coal (16 percent) price declines.
- Budget implementation (first 9 months of 2014 / up to September 2014)
  - Revenue collections in the first 9 months of 2014 reached 20.8 percent of GDP, over 4 percentage points of GDP higher than a year ago.
  - Capital gain tax collected in March: $523 million, about 3.1 percent of GDP.
  - Expenditures up to September 2014 amounted to 26.8 percent of GDP, 2.6 percentage points higher than a year ago; current expenditures led the acceleration (wage bill and goods and services).
  - Capital expenditure performance reached 1.4 percent of projected 2014 GDP, mostly domestically financed; externally financed capital expenditure and net lending execution rates below 2013.
  - Fiscal deficit before grants stood at 5.3 percent of GDP by end-September, financed by grants (3.2 percent of GDP) and external financing (2.8 percent of GDP), enabling government to constitute net deposits (0.7 percent of GDP).
- FDI, aid/loan disbursements, reserves
  - FDI flows more than doubled in first six months of 2014 compared with same period previous year, mainly related to mining investment (gas and coal).
  - Windfall revenues from sale of shares in natural gas sector boosted international reserves to $3.1 billion at end-September 2014 (about 4.4 months of current imports of goods and non-factor services excluding mega projects).
- Program performance (through June / September targets)
  - All but one assessment criterion (AC) through June were met; AC for reserve money missed by small margin due to larger-than-programmed rise in currency in circulation.
  - September indicative targets (IT): 3 of 8 met. Three targets missed by small margins: reserve money, priority spending, government revenues. One target missed for technical reasons due to US dollar strengthening causing valuation losses in NIR basket. One target missed by significant margin: net credit to government due to extra unexpected spending (peace/political stability agreement, election-related spending, increases in wages and current transfers).
  - Structural benchmarks (SBs): 3 of 7 met on time; three rescheduled by 3-9 months; one no longer attainable. SBs on Integrated Investment Program cannot be met soon due to technical assistance constraints and limited capacity; remedial actions suggested. SBs on tax payment through banks, clearance of VAT refund backlog, and establishment of movable collateral registry need rescheduling.

### II. Macroeconomic policies
#### A. Economic objectives and outlook (2014–19)
- Growth outlook
  - Economy expected to grow by 7.5 percent in 2014 and 7.7 per-cent in 2015.
  - Drivers: strong growth in financial services, electricity, construction, transport and communications.
  - Agriculture 2014/2015 harvest subject to climate risks (drought and above-normal rainfall).
  - Completion of transport investments by 2015 (Nacala railway, Nampula airport, upgraded Sena railway) would allow increase in coal production and exports, conditional on world market conditions.
  - Medium-term projection: average growth of 7-8 percent a year due to infrastructure projects and natural gas liquefaction development.
- Inflation outlook
  - Expected average and year-on-year inflation rates of 2.6 and 3.0 percent respectively for 2014.
  - 2015-17 inflation expected to rise to medium-term objective of average annual inflation of 5-6 percent per annum.
- External current account (2015–19)
  - Balance of payments driven by large investments in natural resource projects.
  - Current account deficit expected to deteriorate due to megaprojects’ imports of machinery, equipment and services.
  - Expected reserve cover ratio of about 2.4 and 4.0 months of projected imports of goods and services, including and excluding megaprojects, respectively.

#### B. Macroeconomic policy mix
- Fiscal objective
  - Reduce after-grants fiscal deficit gradually to around 5 percent of GDP in 2019.
  - Revenues should average some 25.6 percent of GDP per annum during 2015-2019, in the absence of further windfall capital gains taxes.
  - Expectation of slowing growth of current expenditure and falling investment expenditures as external financing reduces.
  - Fiscal policy geared to maintain debt at sustainable levels, gradually reduce dependence on external financing, and minimize debt portfolio currency risk exposure.
- Monetary policy objective
  - Assure price stability and create environment conducive to high growth of credit to private sector to support investment and production.

#### C. Monetary and exchange rate policy
- Monetary stance for 2015
  - Bank of Mozambique (BM) will continue interventions to ensure reserve money growth consistent with price stability.
  - BM will seek to keep base money growth to 18.5 percent in 2015 and monitor risks, standing ready to tighten if inflation significantly exceeds medium-term target.
- Exchange rate regime
  - Continued commitment to a flexible exchange rate regime; BM will allow exchange rate to adjust freely and closely monitor real effective exchange rate vis-à-vis a broad basket of currencies.
- Article VIII commitments
  - Mozambican authorities committed to obligations under Article VIII, sections 2, 3, and 4 of the Fund’s Articles of Agreement.
  - BM will monitor implementation of new foreign exchange regulations and keep IMF staff informed of developments that could run against Article VIII principles.

#### D. Fiscal policy
- Fiscal stance and 2015 outlook
  - Fiscal stance for 2014 is expansionary; overall fiscal deficit after grants expected to increase from 2.8 percent of GDP in 2013 to 10.6 percent of GDP in 2014.
  - Consolidation required in 2015 to avoid future problems.
  - Adjustment to fiscal deficit after grants to 7.5 percent of GDP in 2015 through combination of revenue efforts and expenditure restraint.
- Revised 2014 budget adjustments and extra spending
  - Additional election financing brought total budgeted cost of elections to around $136 million.
  - Additional $25 million for investment projects that lost foreign support in 2013; Parliament allocated additional $100 million to priority sectors.
  - Law 29/2014 on Definitive Cessation of Military Hostilities required extra expenditure of $15 million.
- Revenue outlook for 2015
  - Continued efforts to strengthen revenue collections gradually and improve revenue administration in medium term.
- Expenditure policy for 2015 (priorities and measures)
  - 2015 budget to prioritize economic and social infrastructure, human capital, expansion and diversification of public goods and services, and public sector reforms.
  - Some reduction in spending relative to GDP will be needed.
  - Wage bill policy measures:
    - Decelerate pace of new hiring and creation of new institutions in Public Administration.
    - Payment of wages via direct bank transfer to prevent circumvention of salary fund.
    - Enhance rigor in payment of allowances related to extra hours.
    - Verification of civil servants registry (e-CAF) in 2015.
  - Strengthening social protection:
    - Continuous implementation of Basic Social Protection program in 2015 requires MT 3.522, 3 million, of which MT 2.339, 9 will be raised domestically and MT 1.182,4 from external financing.
    - Number of beneficiaries expected to increase by 25 percent from 439.144 in 2014 to 550.000 in 2015.
  - Subsidies for petroleum products:
    - Government currently subsidizes only diesel prices for general consumption (other than megaprojects, construction, public works and other large consumers); full diesel price charged to megaprojects, construction companies, and roads and railway companies.
    - Amount of compensation paid to fuel importers in 2013 was 0.6 percent of GDP related to fuel sales in 2012; amount due and paid in 2014 (mainly on fuel sales during 2013) was 0.05 percent of GDP.
    - Expectation that recent drop in international fuel prices will contain amount of compensation due in 2015 (on fuel sales during 2014).
  - Other subsidies:
    - Government continues to subsidize price of bread flour, public transportation, and school feeding programs.
    - Subsidy cost expected to reach 0.1 percent of GDP at end-December 2014; draft 2015 budget envisages continuation.
  - Electricity tariffs:
    - Low electricity tariffs have required government to forgive debt owed by EDM in the past.
    - Tariff study completed and submitted to Cabinet; approval depends on Cabinet agenda.
    - EDM’s performance contract under negotiation and expected to be signed during the 1st quarter of 2015.
- Deficit and financing (2015)
  - Budget deficit for 2015 before grants forecast at 11.1 percent of GDP.
  - Financing composition: domestic credit of 1.1 percent of GDP, foreign credit of 6.4 percent of GDP, and grants of 3.6 percent of GDP.
  - Domestic primary deficit projected to narrow to 0.9 percent of GDP.

### III. Public finance structural reforms
#### Investment planning and debt management
- Integrated Investment Program (IIP)
  - Structural benchmark to refine IIP by end-June 2014 was missed due to technical assistance constraints and limited capacity; difficulties in collecting and processing information from many line ministry projects.
  - Government will prepare a detailed report on main weaknesses with a roadmap to implement reform.
  - A revised IIP was prepared in October 2014 providing more financial information for investment projects with secured funding, but still too partial to adequately inform DSA and Medium-Term Fiscal Framework (MTFF).
  - Strengthening investment planning will be part of implementing Framework for Planning and Budget System (SPO) over next few years, including instruments for design and project selection.
  - Planned assessment of linkages between planning and budgeting instruments under upcoming review.
  - Structural benchmark: budget guidelines to be issued by May 2015 will require mandatory technical assessment by Investment Evaluation Committee for any new public investment project of value $50 million or more to be considered for 2016 and subsequent budgets.
- Debt sustainability and management
  - DSA updated in October 2014 (including borrowing scenarios and sensitivity analysis); all key indicators remain below critical thresholds in baseline but vulnerable to shocks like FDI and exchange rate.
  - Expanded DSA and public debt/budget execution reports to include government guarantees.
  - Reconciled stock of public external debt with creditors and upgraded debt management software (CSDRMS2000+).
  - IMF technical assistance mission planned in December on debt reconciliation and projecting debt service and loan disbursement profiles.
  - Plan to revise Debt Management Strategy by end-June 2015.
- Guarantee management
  - With 2013 public debt report published in May 2014, started to disclose all government debt guarantees and beneficiaries.
  - Developing capacity to assess probability and impact of potential default on guarantees; Ministry of Finance regularly monitors projects benefiting from guarantees.

#### Public Financial Management (PFM)
- PFM governance and coordination
  - Plan to establish a PFM User Forum including line ministries, provinces, private sector and development partners to provide oversight, strategic direction and monitor reform progress.
  - Strengthen staffing of technical team (CEDSIF) to coordinate PFM User Forum.
- Expenditure coverage and tracking (e-SISTAFE)
  - Substantial efforts to increase coverage of integrated financial management system (e-SISTAFE).
  - Commitment to increase share of expenditures paid through e-SISTAFE directly to beneficiary; end-2014 target of 65 percent of total spending expected to be met.
  - System expected to reach 70 percent in 2015 and 75 percent in 2016, which requires completion by end-2015 of geographical roll out, technical conditions permitting.
  - Major reform: start using e-SISTAFE to record real-time expenditure commitments and verifications; successfully tested for public debt service and plan to expand to salaries paid through e-Folha by end-December 2015.
  - Roll-out will require substantial training, minor rule adjustments, and development of cash management techniques.

*Source: _cr1512 - 1. This MEFP (i) describes recent developments and performance of the Government‘s*

### 22. Wage bill management. The government wage bill has risen to around 11 percent of GDP

### 22. Wage bill management. The government wage bill has risen to around 11 percent of GDP

### Wage bill management
- The government wage bill has risen to around 11 percent of GDP due to substantial hiring in the social sectors and for the elections and the recent real wage increases granted.
- The government is considering ways to gradually reduce the relative size of the wage bill.
- Reforms and transparency improvements:
  - 85 percent of civil servants registered in the civil service registry (e-CAF) now receive their salary directly in their bank account.
  - Plan to conduct a proof-of-life audit for all registered civil servants in 2015.
  - Government committed to expanding the electronic salary processing system (e-Folha).
    - By end-October 2014, 70 percent of registered civil servants were paid through e-Folha.
    - Plan to increase coverage to 95 percent by end-2015.

### Cash management
- Extending the use of the treasury single account (CUT) is a high priority.
  - Administrative order to reduce the number of bank accounts outside the CUT: Circular No. 02/GAB-MF/2014.
  - Additional instructions are needed to ensure enforcement in the financial sector.
  - Plan to complete a mapping of all government bank accounts outside the CUT by end-March 2015.
  - To increase CUT use, all revenues will be transferred into the CUT regardless of their classification.
- 71 percent of spending units (UGBs) currently have direct access to the system.

### Clarifying the scope of the public sector
- Ongoing identification of:
  - (i) public funds, autonomous entities, and other bodies of public law with legal, administrative and financial autonomy (“equiparados”),
  - (ii) public enterprises and corporations owned and/or controlled by the State,
  - (iii) minority state shareholdings in private companies,
  - (iv) indirect shareholdings of the State, via other public entities.
- The statute of public funds and autonomous entities has been drafted and is expected to be approved in 2015.

### Fiscal risk management and fiscal rule for windfall revenue
- A World Bank mission in November 2014 is expected to assist in the design of a fiscal risk unit in the Ministry of Finance.
  - This unit will be set up by end-March 2015.
  - Will enable the Government to produce an initial description of fiscal risks for inclusion in the 2016 budget documentation by October 2015.
- Windfall revenue:
  - Cumulative one-off capital gain tax receipts from transfers of ownership stakes in large natural resource projects were about 8.1 percent of GDP in 2012-14.
  - Draft 2015 Budget Law includes an ex-ante rule for the use of windfall revenue (structural benchmark) to ensure use only for public investment, debt repayment, and national emergencies.
  - Footnote: In case of temporary severe cash constraints generated by unexpected shortfalls in budget support, windfall deposits could be used on a temporary basis.

### Revenue administration — VAT and VAT refunds
- Preparation for securitization of unpaid VAT refund requests, estimated at $250-300 million by end-2014.
  - Expected private placement covering the whole stock of arrears to take place in the first quarter of 2015 (structural benchmark).
  - 2015 budget proposal includes VAT revenue on a net (of refund requests) basis.

### Implementation of e-Tax and tax payment systems
- e-Tax registration and rollout:
  - 51 percent of VAT taxpayers and 100 percent of the small taxpayers subject to the simplified tax (ISPC) have updated their data in e-tax (e-tributacao).
  - Piloted e-tax to collect VAT and ISPC in two tax offices; roll-out plan to expand to all tax offices starting in November 2014.
  - Intention to collect VAT and ISPC through e-tax by end-2015, technical conditions permitting.
  - Pilot income taxes in e-tax by end-2015.
  - On-line taxpayers’ portal connected to e-tax to be developed by end-September 2015.
- Interim bank-based tax payment application:
  - Full implementation of e-tax expected by end-2016; during transition an IT application outside e-tax was created to pay all taxes through banks.
  - Application allows on-line submission and electronic payment of VAT, ISPC, corporate income tax, and personal income tax.
  - Currently testing with two commercial banks; pilot in December 2014 involving several tax offices and banks.
  - Intend to expand nationally and make it fully operational by end-June 2015 (structural benchmark).

### Modernizing the Revenue Authority (AT)
- For 2015, the AT will revamp its organizational structure with IMF technical assistance.
- A taskforce to assess current organization and improve managerial practices.
- Planned improvements include:
  - (i) enhancing management of large taxpayers,
  - (ii) improving management capability,
  - (iii) strengthening the audit function,
  - (iv) developing expertise in natural resource revenue collection.

### Natural resource management and transparency
- Extractive Industry Transparency Initiative (EITI):
  - Fifth report related to 2012 being drafted according to new EITI principles; expected finalized end-December 2014.
  - Mining cadaster accessible online; contracts, legislation, regulations, reports and publications from the extractive sector available on Government website.
  - Public education campaign ongoing; promotion via TV and radio debates.
- Mining and Hydrocarbon Legislation:
  - Mining and Hydrocarbon Laws approved by Parliament in August 2014.
  - Drafting of respective regulations for consultation and Cabinet submission in first quarter of 2015.
- Strengthening Mining and Hydrocarbon Tax Regime:
  - Revised Mining and Hydrocarbon Fiscal Laws approved by Parliament in August 2014.
  - Preparing respective regulations for Cabinet submission by end-2014.
- Development of natural gas liquefaction:
  - Law authorizing Government to establish special regime for the LNG project approved by Parliament in August 2014 for Rovuma Basin, areas 1 and 4.
  - Decree-Law for the special LNG regime being finalized and expected to be approved by the Council of Ministers by end-December 2014.

### Public enterprises supervision and reform
- Strengthening supervision per MEFP of April 13, 2014:
  - 14 fully state-owned enterprises (SOEs) monitored by the Ministry of Finance are subject to special controls.
    - Four of the six largest SOEs published their 2013 reports and accounts; the remaining two are finalizing their reports.
    - Expect to submit a report about all 14 SOEs to the Council of Ministers by end-December 2014.
    - SOE indebtedness subject to authorization by the Ministry of Finance based on case-by-case financial sustainability analysis.
  - Public corporations supervised by IGEPE:
    - Draft law on the Corporate Sector of the State (SEE) prepared and consulted; recommendations being incorporated and draft vetted by the Legal Office.
    - Expect submission to the Council of Ministers before the end of 2014.
  - Portfolio consolidation and privatization:
    - Since January 2014, reduced the portfolio by 2 enterprises (4 sold and 2 new, including EMATUM, were incorporated) to a total of 117 public corporations.
    - Aim to sell all shares in non-strategic companies where government participation is below 20 percent.
    - With World Bank assistance, actions include: (i) preparing a financial assessment of state shareholdings; (ii) compiling information on indirect participation; (iii) training public managers in governance; (iv) consolidating financial statements; (v) standardizing remuneration of state enterprise managers; (vi) improving control of indirect state holdings via business plan assessment and participation in general meetings.
- EMATUM:
  - Subject to strict financial controls in line with SOE framework.
  - Submitted quarterly operating and financial reports to the Ministries of Finance (MF) and Fisheries in July 2014.
  - Government requested external audit of EMATUM’s 2013 accounts by an international audit firm, to be published by end-2014.
  - Starting with the 2013 accounts, EMATUM will publish its audited annual reports.

### Financial sector policies — monetary policy formulation and implementation
- Monetary policy framework improvements:
  - BM will continue to strengthen the monetary policy framework and improve analytical capacity and communication, including improving its inflation forecast model with IMF technical assistance.
  - Basic model structure set up and calibrated for the Mozambican economy; shadow forecast process initiated since September 2014.
  - BM intends to introduce improvements in the forward-looking component of the Monetary Policy Committee press release and in the Monetary Policy Report following the forecasting system conclusion.
- Liquidity management and forecasting:
  - Progress in improving liquidity management framework; need to improve forecasts of currency in circulation and government cash flow and deepen money markets.
  - MF and BM coordination:
    - Under MoU, MF shares weekly short-term statistics on government operations with BM.
    - MF will provide BM with historical information on classifications of payments to improve forecast accuracy.
  - Data collection mechanism under review.
    - With IMF technical assistance, work to improve currency and government operations forecasting framework, including lengthening the horizon of high frequency liquidity forecasts to one month, or a full quarter.
- Money market management:
  - BM moving toward relying more on repo operations in liquidity management.
  - Reform to allow T-bonds as collateral in money market operations is underway.
    - BM, MF, and the Stock Exchange working to resolve legal and IT issues to complete reform by September 2015 (structural benchmark).

### Financial sector surveillance
- Strengthening banking system supervision and crisis management remains a commitment.
- Stress testing and NPLs:
  - Stress testing carried out quarterly; data collection remains main obstacle.
  - June 2014 stress test report produced and submitted to the BM Board.
    - Results show low risk of financial sector distress but credit concentration is the largest source of risk.
  - Stress test reporting for the second half of 2014 under preparation.
  - Adoption of revised NPL definition starting in January 2014 increased the NPL ratio slightly; average ratio remains low at 3.5 percent at end-June 2014.
- Risk-based supervision and Basel II adoption:
  - All banks submitted risk management programs to BM.
  - On-site inspections conducted based on each bank’s risk profile; four banks with high and medium systemic relevance inspected in 2014.
  - Draft regulation on concentration limits, including investment abroad, revised with IMF technical assistance and BM Board inputs.
  - Ongoing study using June 2014 data to assess compatibility of draft regulation with Basel II; revision expected completed by end-June 2015.
- Financial Sector Contingency Plan:
  - BM Board approved terms of reference requesting World Bank technical assistance.
  - Technical assistance started in November 2014; action plan for simulation exercise approved by BM board in late-November 2014.
  - Simulation exercise expected to be initiated in the first quarter of 2015.
- Deposit Insurance Fund (DIF):
  - DIF Executive Board completed report on implementation process; submitted to BM Board in October 2014.
  - Discussions among DIF, MF and BM in final stage on deposits coverage, effective starting date for DIF, and annual premium to be paid by banks.
  - DIF Board has benefited from KfW technical expertise and is discussing KfW financial support.
  - Government expects to make its initial contribution to the DIF in 2015.

### Financial sector development (FSDS 2013-2022) and targeted reforms
- FSDS main objectives:
  - (i) maintain financial sector stability;
  - (ii) increase access to financial services and products and eliminate structural constraints that limit financial intermediation and access;
  - (iii) increase supply of private capital to support private sector development.
- Implementation and milestones:
  - First semester 2014 progress report being prepared by an inter-agency working group by end-2014.
- Promoting financial inclusion:
  - Prepare National Financial Inclusion Strategy (ENIF) by end-December 2015; diagnostic work underway.
  - BM launched Financial Literacy Program in October 2014 with TV and radio broadcasts and nationwide lectures.
  - Following Government approval of Decree 30/2014 in June allowing creation of banking agents, BM will approve related regulation by end-March 2015.
- Credit registry bureaus (CRB):
  - Proposal of Law on creation of private credit registry bureaus submitted to Parliament in February 2014 but not approved due to heavy parliamentary agenda.
  - Regulation to be approved within six months of Law approval.
- Mobile banking and electronic money regulation:
  - Plan to approve new electronic money regulation by June 2015 to protect users and ensure separation of funds in mobile operators’ trust accounts.
- Promoting competition and transparency in banking:
  - Bank Notice 01/GBM/2014 on regulation of bank cards approved in June 2014 and published.
  - BM Board approved draft revision of Notice 05/GBM/2009 in July to promote transparency of prices and commissions; consulting commercial banks and expect final approval in June 2015.
- Capital market development and Central Securities Depository (CSD):
  - Stock Exchange financial education program implemented in 2014, including National Capital Market Conference and visits to 4 provinces.
  - Technological and operational conditions for full CSD operation established in June 2014:
    - (i) approval of legal framework related to CSD operations; (ii) user training for brokers and custodians.
    - Data Verification and Migration started; registrations of new securities occurred in the 4th quarter of the year.
- Movable collateral framework:
  - First phase diagnostic study completed in October 2014.
  - Second phase—preparation of draft collateral law—underway with technical assistance in November.
  - Submission of the Law to the Council of Ministers envisaged for December 2014 (structural benchmark) delayed; now envisaged in September 2015 (structural benchmark) with technical assistance from GIZ.

*Republic of Mozambique — IMF Staff Report chapter on wage bill, fiscal, natural resource, public enterprise, and financial sector policies.*

### 48. AML/CFT Framework. The regulation of the Law on AML/CFT was approved by the Cabinet

### _cr1512 - 48. AML/CFT Framework. The regulation of the Law on AML/CFT was approved by the Cabinet

### AML/CFT Framework
- The regulation of the Law on AML/CFT was approved by the Cabinet in August 2014 and is now awaiting publication in the State Gazette.
- The BM’s guidelines for commercial banks on AML/CFT are expected to be approved in March 2015.

### Payment System — Reforms and Oversight
- Enhancing BM oversight practices:
  - The first annual oversight report was completed in October 2014 (structural benchmark for November).
  - The report is based on the methodology approved by the BIS in 2001 on core principles for systemically important payment system.
  - Main findings: the national payment system has made significant improvements in compliance with national and international standards, while liquidity management and credit risk in the system are slightly lagging behind.
  - The Payment System Oversight Unit undertook an ad-hoc inspection of Mkesh in October 2014.
  - The onsite inspection of M-pesa was postponed to the first semester of 2015 to benefit from the MEFMI technical assistance mission scheduled for March 2015 on the implementation of the BIS Principles for Financial Market Infrastructure of 2012.
- Developing the retail payments network (SIMO):
  - Seventeen ATM ́s and seventeen POS from three major banks and one medium-sized bank are connected to SIMO.
  - Connection for remaining banks is expected to take place gradually, with individual schedules being established with operators.

### Good Governance and Business Environment
- Anti-Corruption Package:
  - Parliament approved the new Penal Code in July 2014.
  - Approval of the Penal Procedural Code is still pending.
  - The draft Action Plan for effective implementation of the 5-law anti-corruption package is under discussion and is expected to be submitted to the Council of Ministers by end-2014.
- Business Environment Improvement Strategy (EMAN II 2013-2017) implementation highlights:
  - Registration and licensing of economic activities is speeding up.
  - Single Form approved in December 2013 harmonizes procedures for registering companies; pilot phase implemented in the City of Maputo, Xai-Xai, Inhambane, Beira, Nampula and Pemba.
  - Transition to electronic means (e-BAÚ) is being monitored and evaluated; Single Form is being implemented in the same provinces as e-BAÚ for smooth integration.
  - e-BAÚ electronic platform launched in August 2014 and operating in the city of Maputo (Balcão de Atendimento da Cidade de Maputo), bringing together all units related to the process of licensing of economic activities.
    - e-BAÚ enabled the registration of property within 2 days rather than the 10 day legal limit.
    - e-BAÚ decreased travel and time costs for economic agents.
    - e-BAÚ is being expanded to the provinces of Maputo, Cabo Delgado, Nampula, Sofala, Inhambane and Gaza, with expectation to cover the whole country in 2015.
  - A website (www.portaldacidadão.gov.mz) is expected to be launched in 2015 as a tool for the private sector for disclosure of all information related to procedures, required documents, time, cost, legislation, licensing and complementary services.

### Program Monitoring, Quantitative Targets, and Structural Benchmarks
- The proposed assessment criteria and indicative targets up to December 2015 are shown in Table 2; Table 4 lists proposed structural benchmarks.
- The 4th PSI review is expected to be completed by end-June 2015 (as specified in the MEFP date April 23, 2014) and the 5th review by end-December 2015.
- Selected quantitative values and statuses from Table 1 and related tables (preserved verbatim where given):
  - Assessment Criteria for end-June/December (examples from Table 1):
    - Net credit to the central government (cumulative ceiling): Prog. 889; Adj. -14,249; Act. -13,192; Status NM; Prog. -7,985; Adj. -7,985; Act. -8,247; Status M; Prog. -13,721; Adj. -13,721; Act. -4,425; Status NM.
    - Stock of reserve money (ceiling): 45,100; 45,100; 45,007; M; 48,023; 48,023; 48,933; NM; 50,689; 50,689; 52,713; NM.
    - Stock of net international reserves of the BM (floor, US$ millions): 2,961; 3,452; 3,192; NM; 3,107; 3,107; 3,182; M; 3,188; 3,188; 3,100; NM.
    - New nonconcessional external debt contracted or guaranteed... (cumulative ceiling over the duration of the program, US$ millions): 1,200; 1,200; 926; M; 1,500; 1,500; 978; M; 1,500; 1,500; 1,298; M.
  - Indicative targets (examples):
    - Government revenue (cumulative floor): 25,519; 41,583; 41,193; NM; 75,365; 75,365; 75,552; M; 112,616; 112,616; 109,976; NM.
    - Priority spending (cumulative floor): 20,686; 20,686; 21,664; M; 46,299; 46,299; 47,652; M; 80,738; 80,738; 78,986; NM.
  - Table 2 proposed indicative targets (selected entries preserved verbatim):
    - Net credit to the central government (cumulative ceiling): -2,954; 2,594; 4,146; -1,902; -5,675; 6,391.
    - Stock of reserve money (ceiling): 54,370; 55,299; 53,559; 58,866; 62,940; 65,529.
    - Stock of net international reserves of the BM (floor, US$ millions): 3,397; 3,147; 2,990; 3,048; 3,201; 3,398.
    - New nonconcessional external debt ... (US$ millions): 1,500; 1,500; 1,500; 1,500; 1,500; 1,500.
    - Government revenue (cumulative floor): 143,957; 143,957; 30,200; 69,460; 110,230; 151,000.
    - Priority spending (cumulative floor): 121,294; 119,000; ... (Targets for 2015 to be redefined with the new government during the 4th PSI review.)
- Structural Benchmarks (Table 3 highlights and statuses):
  - Revised IIP with financial information: End-June 2014 — Not met (proposed to be reformulated).
  - Government will present VAT collections on a net basis in the 2015 budget proposal documents: End-October 2014 — Met.
  - Finalize and fully operationalize IT application for tax payments through banks for VAT and ISPC: End-October 2014 — Not met (proposed to be rescheduled to June 2015 and broadened).
  - Board of BM will approve action plan for simulation exercise pertaining to Financial Sector Contingency Plan: End-November 2014 — Met.
  - BM will issue the first annual payments systems oversight report: End-November 2014 — Met.
  - Government will either pay or securitize stock of valid VAT reimbursement requests submitted up to end-2013: End-December 2014 — Not met (proposed to be rescheduled to March 2015 and broadened).
  - Government will establish a movable collateral registry: End-December 2014 — Not met (proposed to be rescheduled to end-Sept. 2015).
- Proposed Structural Benchmarks for Dec. 2014-2015 (selected entries from Table 4):
  - Government will issue budget guidelines requiring mandatory technical assessment by the Investment Evaluation Committee for new public investment projects of a value of $50 million or more: End-May 2015 — Proposed remedial action to missed June 2014 IIP SBM.
  - Government will either pay or securitize the stock of valid VAT reimbursement requests submitted up to end-2014: End-March 2015 — Proposed to be rescheduled and broadened from end-Dec. 2014.
  - Finalize and fully operationalize IT application for payments of VAT, ISPC, and corporate and personal income taxes through banks: End-June 2015 — Proposed to be rescheduled and broadened from end-Oct. 2014.
  - The use of T-bonds as collateral in money market operations will become operational: End-September 2015 — Proposed Deepening capital markets.
  - Government will include in the draft 2015 budget a fiscal rule on the use of windfall revenue only for investment spending, debt reduction and exceptional needs: End-June 2015 — Proposed Ensuring fiscal sustainability.
  - Government will establish a movable collateral registry: End-September 2015 — Proposed to be rescheduled from end-Dec. 2014; Deepening financial markets.

### Technical Memorandum of Understanding — Adjusters (selected)
- The TMU dated April 23, 2014 remains in effect except for updates on adjustors for net international reserves and net credit to central government, and Tables 1-2.
- Adjusters for Net international reserves (NIR) quantitative targets (floors):
  - Downward by the shortfall in external program aid less debt service payments (up to US$200 million) compared to 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 (Table 2).
  - 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.
- Adjusters for Net credit to central government (NCG) quantitative targets (ceilings):
  - Upward by the shortfall in the MT value of external program aid receipts less debt service payments (up to the MT equivalent of US$200 million at exchange rates prevailing at the respective test dates) compared to program baseline (Table 1).
  - Downward by any windfall capital gain tax receipts 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 (Table 2).
  - 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$20 million at exchange rates prevailing at the respective test dates.
- TMU Table excerpts (preserved values):
  - Net foreign program assistance (US$ mn) by quarter: 55-1885 1226 (layout preserved from source).
  - Cumulative net foreign program assistance in US dollars: 103-186779105 (layout preserved from source).
  - Net foreign program assistance (MT mn) by quarter: 1,698-5502,670389831 (layout preserved).
  - TMU Table 2 (Programmed VAT Requests and Refunds, 2014) selected values:
    - Windfall capital gains tax, in millions of meticais: 16,16100016,161.
    - Windfall capital gains tax, in millions of dollars: 523000523.
    - Budgeted VAT refund payments, in millions of meticais: 1,1251,1251,1251,1254,500.
    - Budgeted VAT refund payments, in millions of dollars: 36363736144.

### New Sector and Fiscal Laws for the Mining and Hydrocarbon Sectors (Annex I)
- In August 2014 the Mozambican parliament approved four new natural resource laws—sectoral laws for mining and hydrocarbons, and corresponding fiscal regime laws.
- Positive elements:
  - Improve transparency via requirements for publication of main elements of all exploration and production contracts.
  - Strengthen reporting obligations from companies in extractive industries, in line with EITI.
  - Clear consultation rules between government, companies and local communities.
  - Requirements for public tenders to award contracts rather than direct negotiation.
  - Fiscal regimes consolidate extractive industry taxation rules into a single document and require companies to present annual financial accounts certified by an independent auditor.
- Problematic provisions and risks:
  - New hydrocarbon law earmarks a 25 percent share of production for the domestic market, and mandates some goods and services be provided exclusively by Mozambican companies; these could lead to inefficiencies if implicit subsidies in domestic pricing exist or if domestic suppliers lack capacity.
  - Hydrocarbon law encourages government and private sector to expand participation beyond current 10-15 percent stakes; financing of government share is unclear.
  - New institutional set-up (Extractive Industries High Authority and new National Mining Institute) may generate coordination challenges with overlapping mandates and limited institutional capacity.
  - Mining fiscal law flaws noted: lower royalty rates for the domestic market (equivalent to an export tax leading to tax leakage and complicated administration), mineral valuation rules, assessment of royalties on production (rather than sales), and non-deductibility of royalties for corporate income tax assessment.
- Scale and fiscal risk note:
  - The cost of envisaged investment is about $40 billion, close to 2.5 times 2014 GDP, assuming construction of four onshore liquefaction trains. The total investment amount would vary with the number of trains or if floating liquefaction facilities are constructed.
  - Participation by the government or ENH financed through new borrowing could become a source of fiscal risk. Local bond market participation by Mozambican nationals will be challenging given the shallow bond market relative to financing needs.

### IMF Press Release — Executive Board Completes Third PSI Review for Mozambique (Press Release No. 15/01, January 5, 2015)
- The IMF Executive Board completed the third review of Mozambique’s economic performance under the program supported by the Policy Support Instrument (PSI). The Board’s decision was taken on a lapse of time basis.
- Key macroeconomic points:
  - Growth is forecast at 7.5 percent for 2014.
  - Low inflation: 12-month Maputo average through November was 2.4 percent.
  - There was an expansionary and higher than programmed fiscal stance and reserve money running modestly above target.
  - Performance under the PSI-supported program has been mixed—while all but one of the quantitative assessment criteria were met at end-June, there were slippages during the second half of the year and delays in implementing structural reforms.
- Policy messages and priorities:
  - Main short-term challenge: maintain growth momentum while preserving fiscal and debt sustainability.
  - Fiscal consolidation needs to be initiated in the 2015 budget to restore prudent fiscal management.
  - Bank of Mozambique should stay vigilant and adhere to its medium-term inflation target.
  - Key structural reform priorities: improving VAT and overall tax administration, continuing public financial management reforms, strengthening institutional capacity for transparent public investment management and borrowing, and enhancing business environment and financial sector development.
  - Completion of contract negotiations for LNG production is a critical milestone for launching one of the largest projects in sub-Saharan Africa.
  - Despite global risks, growth is expected to remain strong and broad-based in the medium term, boosted by the natural resource boom and infrastructure investment.
  - Fiscal adjustment over the medium term is essential to preserve debt sustainability and macroeconomic stability; this requires measures to contain current spending pressures while bringing investment to a more sustainable level.
  - With foreign aid likely to decline over the medium term, Mozambique will need to borrow to provide additional resources for targeted improvements in physical infrastructure and human capital.
  - To ensure efficiency of investment and borrowing, it is essential to further strengthen investment planning and implementation, as well as debt management.
  - Structural reforms in public financial management, monetary policy tools, banking supervision, and business facilitation should be implemented vigorously to sustain growth and make it more inclusive.

*Source: _cr1512 - 48. AML/CFT Framework. The regulation of the Law on AML/CFT was approved by the Cabinet (PDF chapter/section).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1512.pdf_