## 1. Fiscal Transparency: Lessons and Reforms Triggered by the EMATUM Case

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### Background and recent developments
- Political context:
  - President Nyusi sworn in January (post-October 2014 elections); peace agreement renewed last September.
  - Renamo contested results and called for political decentralization.
  - New government expressed strong commitment to the PSI-supported program.
- Growth and inflation in 2014:
  - Real GDP expanded by 7.4 percent.
  - End-year inflation fell to one percent.
  - Drivers of low inflation: stable exchange rate against the South African rand, low food prices, and stable administered prices (fuels, public transportation, and utilities).
  - Anticipated inflation pressures in the second half of 2015 due to depreciation of the metical against the US dollar and overdue adjustments in some administered prices.
- Foreign exchange market and reserves:
  - Net international reserves (NIR) declined as the Bank of Mozambique (BM) intervened heavily to stabilize the FX market.
  - NIR declined by $600 million, and the metical depreciated by 14.4 percent versus the US dollar between September 2014 and March 2015.
  - Conditions began to normalize in Q2 2015 as political uncertainty abated, seasonal dollar inflows returned, and BM moderated interventions.

### Fiscal developments and EMATUM-related impacts
- 2014 fiscal stance and one-off factors:
  - Overall fiscal deficit increased from 2.8 to 10.4 percent of GDP.
  - Domestic primary balance worsened from a surplus of 0.9 percent of GDP to a deficit of 4.1 percent of GDP.
  - One-off factors accounted for about half of the fiscal loosening:
    - Electoral spending: 0.9 percent of GDP.
    - Inclusion in the budget of the non-commercial spending of EMATUM: 2.8 percent of GDP.
- Public debt and expenditure trends:
  - Public debt has been rising fast since 2012.
  - Large windfall revenues in 2013-2014 financed a sharp increase in expenditure, generating a need for consolidation beginning in 2015.
- Selected fiscal indicators (table excerpts, years 2012–2016 context):
  - Total revenue: 22.4, 26.9, 27.3, 27.8, 24.8, 25.4, 25.5, 25.7
  - Total expenditure and net lending: 31.4, 34.9, 42.0, 43.3, 39.5, 36.4, 36.9, 34.6
  - Overall balance, before grants: -9.1, -8.1, -14.7, -15.4, -14.7, -11.1, -11.4, -8.9
  - Overall balance after grants: -4.0, -2.8, -10.6, -10.4, -9.7, -7.5, -6.5, -5.5
  - Net external financing: 3.3, 5.8, 9.4, 8.9, 6.0, 6.4, 5.7, 5.4
  - Net domestic financing: 0.7, -3.0, 1.2, 1.4, 3.7, 1.1, 0.8, 0.0
  - Domestic primary balance (memorandum): -1.0, 0.9, -2.9, -4.1, -3.6, -0.9, -1.2, 0.8
  - Real GDP growth (memorandum): 7.1, 7.4, 7.4, 7.4, 7.4, 7.0, 7.0, 8.2
  - Average CPI inflation (memorandum): 2.1, 4.2, 2.3, 2.3, 2.3, 4.0, 4.0, 5.6

### EMATUM: transaction, corrective actions, and fiscal risk
- Transaction and issues:
  - In 2013 EMATUM obtained an $850 million loan from international banks, guaranteed by the government and repackaged as private loan participation notes in September 2013.
  - Project combined tuna fishing and a maritime security component; not on the official Integrated Investment Plan; government guarantee breached the Budget Law ceiling; feasibility study covered only $500 million; procurement proceeded without tender from a single source.
- Corrective actions:
  - Parliament required incorporation of the non-commercial part into 2014 budget documents and authorized an increase in the ceiling for guarantees to regularize the transaction.
  - Audit Court certified amounts spent through the procurement contract; government began disclosing guarantees in budget reports.
  - EMATUM published 2013 audited financial accounts in December 2014 and audited 2014 accounts in May 2015.
  - Authorities increased maritime security component from $350 million to $500 million and amended fiscal tables and the general government account ledger for the Audit Court.
- Financial specifics and fiscal exposure:
  - Government to take over in full the maritime security component: $500 million.
  - Re-assess whether the company can service the rest of the loan: $350 million.
  - Initial loan interest rate: 6.3 percent.
  - Notes sold at a discount (around 8 percent).
  - Audit Court indicated value of goods procured amounted to $762 million.
  - Administrative fees, commissions and other costs: about $88 million.
- Lessons and outstanding risks:
  - Need for transparent competition in procurement and competitive cost options.
  - Questionable decision to set up a public sector tuna fishing company without tangible private investment.
  - EMATUM remains a source of substantial fiscal risk; privatization (partial or full) should be considered to limit potential losses.

### Program performance and structural reforms
- Assessment criteria and targets (end-2014 and Q1 2015):
  - Three end-December assessment criteria were not met: NCG and reserve money exceeded program targets by small margins; December 2014 NIR target missed by $265 million.
  - March 2015: Indicative NIR target missed by $478 million; March NCG target met; reserve money target missed by a small margin.
  - December indicative target on priority spending not met due to delays in execution of some externally-financed projects; scope of priority spending being redefined.
- Structural benchmarks (selected):
  - March benchmark on securitization of a stock of MT 8.2 billion in outstanding VAT refunds was met.
  - 2015 budget included a rule on the use of windfall revenues (June benchmark).
  - May benchmark on public investment project evaluation requirement not met; proposed rephasing to July.
  - June benchmark on the IT application for e-tax is on track.

### Monetary and external sector developments
- Inflation and monetary aggregates:
  - Inflation contained since 2012; end-year inflation 2014: one percent.
  - Reserve money, broad money (M3), and credit to the economy expanded rapidly, generating potential inflationary pressures.
  - Reserve money exceeded program targets slightly in December 2014 as currency in circulation picked up.
- Exchange rate and central bank actions:
  - Metical depreciated by 14.4 percent against the US dollar between September 2014 and March 2015.
  - BM intervened aggressively in FX market; net central bank foreign exchange sales were substantial.
  - Dollar deposits in banking system declined.
  - Net international reserves experienced an unprecedented loss; BM curtailed FX sales after March aiding gradual recovery.
- External sector dynamics:
  - Terms of trade gains reversed since 2011 due to weakening international commodity prices.
  - Overall trade deficit narrowed, but non-megaproject trade deficit increased due to lower export prices and sizeable fuel imports.
  - Current account deficit expected to hover around 40-50 percent of GDP over the next 4-5 years with construction of gas liquefaction plants; financed by FDI and private funding through offshore SPVs.

### Economic outlook and risks
- Growth projections:
  - Growth of 7 percent expected in 2015 (revised down by ½ percent mainly due to floods earlier in the year).
  - Medium-term growth projected to remain in the 7½-8 percent range, supported by large natural gas projects.
- Sectoral and commodity risks:
  - A further fall in global coal prices could dampen growth in 2016 by as much as ½ percentage point.
  - LNG production expected to start only in 2020-21; fiscal revenues from LNG could reach $1 trillion over a period of 30-40 years, but have little near-term effect.
- Current account and financing:
  - Current account deficit large but not a significant BOP risk because construction financed by FDI and private funding through offshore SPVs.
  - SPVs will mobilize large financing required and the government will obtain 65-70 percent of the net revenues once projects reach maturity.
- Inclusiveness and poverty:
  - Elasticity of poverty to growth is very low by international standards; employment opportunities remain limited beyond large corporations in booming sectors.

### Policy objectives and recommended actions
- Main objectives:
  - Reverse recent rapid expansion of government expenditure and external borrowing to maintain fiscal sustainability.
  - Adjust economic policies to help rebuild international reserves.
  - Reinvigorate the structural reform agenda.
- Fiscal consolidation emphasis:
  - Consolidation beginning in 2015 needed given sharp increase in expenditure financed by windfall revenues in 2013-2014.
  - Fiscal multiplier expected to be low as most adjustment falls on public investment, which has high import content.
  - Government efforts to increase cost efficiency and value-for-money in public procurement highlighted; scope to generate savings through greater use of competitive tenders.
- Revenue and expenditure measures (2015):
  - 2015 budget envisaged overall fiscal deficit (after grants) to decline to 6.5 percent of GDP — a level estimated to stabilize public debt.
  - Domestic primary balance to improve by about 2.7 percent of GDP.
  - Fiscal adjustment driven by a reduction of about 2.6 percent of GDP (excluding one-off factors) in public spending.
  - Total revenues projected to expand by 0.7 percent of GDP in 2015.
  - Total expenditure in the 2015 budget: 6.4 percent of GDP lower than in 2014 (or 2.6 percent of GDP lower excluding one-off factors).
  - Wage bill: planned reduction by 0.5 percent of GDP in 2015 via deceleration of new hiring and enhanced controls.
  - Protection of priority spending: priority spending still accounts for 63.5 percent of total expenditure in the 2015 budget.

### Fiscal transparency, fiscal risk management and PFM reforms
- Strengthening supervision of enterprises with state participation:
  - Legislative initiatives to strengthen controls; enforcement of requirements to publish annual reports; new system to track and monitor financial information.
  - Improved transparency around EMATUM operations.
- Fiscal Transparency Evaluation (FTE) published; authorities committed to implementing recommendations, including improved management of fiscal risks.
- 2015 budget started reporting potential sources of fiscal risk, including a list of PPPs.
- Planned new annex on fiscal risks for the 2016 budget covering general fiscal risks and specific risks from public and publicly guaranteed debt, PPPs and SOEs.
- Creation of a fiscal risk unit planned to support these objectives.
- Reforms to define and monitor priority spending:
  - New Five-year Government Plan (PQG) approved in April 2015.
  - Preparation of a more detailed program classifier for the 2016 budget.
  - Budget execution reports to be modified to ensure consistency with initial budget allocations.

### Public investment management and debt management
- Public investment management:
  - Budget guidelines require mandatory technical assessment of investment projects exceeding $50 million for inclusion in the revised Integrated Investment Plan.
  - All new projects added to the revised IIP and subject to 2016 budget allocations will require mandatory assessment by the Investment Evaluation Committee (structural benchmark).
- Strengthening public debt management:
  - Debt management software (CSDRMS2000+) upgraded in September 2014.
  - By end August 2015, revise Debt Management Strategy with World Bank technical assistance.
  - 2015 domestic borrowing plan to be elaborated by end June 2015.
- Guarantee management policy:
  - Database to manage all guarantees built; plan to develop capacity to assess probability and impact of potential default with WB and IMF TA.

### Tax administration and revenue mobilization
- VAT refund arrears and securitization:
  - Stock of valid VAT refund arrears as of end-2014: MT 8.2 billion.
  - Securitized through a private placement of Treasury bills (structural benchmark for March 2015); benchmark met.
- Windfall revenue rule:
  - Ex-ante rule in 2015 Budget Law: use windfall resources only for public investment, debt repayment, and national emergencies.
- Revenue administration measures:
  - Reforms to broaden the taxpayer base, expansion of e-Tax, enhanced tax audits, modernizing the Tax Authority.
  - Registration of taxpayers into new electronic system reached 55 percent of all VAT taxpayers by March 2015; target: 65 percent by end-2015.
  - e-Tax collection system coverage includes 14 of largest tax offices; target to expand to 32 tax offices by end-2015.

### Monetary policy, reserve adequacy and exchange rate assessment (Annex I highlights)
- Determinants of reserve accumulation:
  - Donor disbursements and capital gains taxes boost reserves; fuel imports and valuation changes reduce reserves.
  - Capital gains tax windfalls (2012–2014Q1) totaled over US$1.3 billion; no further large payments expected immediately.
- Recent reserve losses (twelve months after accumulation turned negative):
  - Total reserve loss: US$700 million.
  - Fuel-related FX sales: US$673 million.
  - Valuation losses: about US$120 million.
- Exchange rate assessment:
  - Metical depreciated by about 14 percent against the US dollar from September 2014 to March 2015.
  - EBA-lite implies overvaluation of 13 percent; CGER variants produce mixed results.
  - IMF staff judgment: metical may remain overvalued by 5-10 percent.
- Reserve adequacy metrics (end-March 2015):
  - Reserve cover relative to non-megaproject imports: 4.3 months.
  - Reserve cover relative to total imports: 2.7 months.
  - Reserve cover relative to broad money: 44 percent.
  - Reserves relative to short-term debt: reserves cover short-term debt six-fold.
- IMF(2015)-based optimal reserve level estimates (months of 2016 imports, assuming 6 percent cost of holding reserves):
  - Baseline (Flexible exchange rate, not resource rich): 2.7
  - Natural resource rich: 3.6
  - Fixed exchange rate: 6.8
  - Fixed exchange rate and natural resource rich: 9.3
- Policy implications:
  - Authorities to limit FX intervention to smoothing while rebuilding reserves; target to elevate reserve cover from 4.3 months (excluding megaprojects) to above 4.5 months by year end.
  - Operational constraint: tight domestic FX market limits BM’s ability to rebuild reserves through outright dollar purchases without inducing artificial depreciation pressures.

### Financial sector supervision, contingency planning and inclusion
- Bank soundness and risks:
  - Banks are well capitalized with low NPLs; at end-December 2014 NPL ratio was 3.3 percent.
  - Stress tests indicate banking system resilient; credit concentration is main source of risk.
  - Rapid credit expansion: potential risk; needs careful monitoring.
- Financial Sector Contingency Plan and Deposit Insurance Fund (DIF):
  - Crisis simulation exercise carried out on April 25, 2015; detailed report expected by end-September 2015.
  - Government committed initial contribution of MT 60 million in the 2015 budget to the DIF; commercial banks contributed MT 15 million in January 2015.
  - KfW disbursement of €3.5 million being pursued.
- Financial sector development and inclusion:
  - National Financial Inclusion Strategy to be submitted by BM by end-December 2015.
  - Law on creation of private credit registry bureaus to be resubmitted to Parliament by end-June 2015.
  - Draft Law on movable collateral to be finalized by end-June 2015; rephased submission to Council of Ministers by mid-November 2015.

### Debt sustainability update and key DSA findings
- Risk classification:
  - Mozambique remains at moderate risk of external public debt distress.
  - Baseline: all variables remain below relevant thresholds.
  - Shock scenarios: several variables breach thresholds under various shocks.
- Baseline and medium-term assumptions:
  - Real GDP growth projected in the 7-8 percent range on average in the longer term.
  - LNG plants assumed under construction during 2016–22; one train assumed to start production in 2020, second in 2021, third and fourth in 2023; total investment projected at $40 billion.
  - Non-interest external current account deficit projected to rise to over 40 percent of GDP in the medium term due to LNG-related imports; principally financed through FDI and private external borrowing.
- Public and external debt metrics (selected series and projections):
  - PV of PPG external debt (percent of GDP series as presented): 30.4, 31.9, 32.0, 32.9, 34.0, 35.6, 34.5, 34.1, 28.9
  - Total external debt (public and private) projected to peak at about 137 percent of GDP in 2020.
  - Public sector debt (percent of GDP series as presented): 40.8, 52.2, 57.5, 61.0, 59.8, 58.9, 58.1, 57.4, 52.8, 45.6, 33.3
  - PV of debt in terms of GDP peaks around 35.6 percent (in 2019) in the public DSA.
- Stress-test outcomes and vulnerabilities:
  - Combination shock (reductions in non-debt creating FDI, export prices and growth in 2016-2017) could push PV of debt/GDP ratio to a peak of about 70 percent.
  - Some severe shocks breach debt/exports threshold of 150 percent.
  - Breaches under stress tests would be reversed by LNG production coming on stream; scenario outcomes depend on assumptions about imports and financing behavior.
- Policy implications from DSA:
  - Strengthen debt management and investment planning capacity to ensure public investments selected from pipeline yield intended payoffs.
  - Commence gradual fiscal consolidation envisaged in program to place public debt on a downward trajectory while maintaining key public investment priorities.
  - Take time-sensitive steps to ensure LNG production materializes to lock in beneficial effects on GDP and fiscal revenue.

### Program issues, conditionality and staff appraisal
- Program adjustments and waivers:
  - Waivers requested for non-observance of three ACs for December 2014 (reserve money, NCG, and NIR) on the grounds deviations were minor or remedial actions committed.
  - Revised ACs on NCG, reserve money, and NIR for June 2015 proposed to reflect recent developments.
  - Structural benchmark rescheduling: May SB requiring assessment of projects exceeding $50 million proposed to be rescheduled to July.
- Staff appraisal — key judgments:
  - Mozambique’s economy remains robust with high growth and low inflation expected to continue in 2015 and medium term.
  - Macro outlook tied to natural resource sector development; enabling legislation in late 2014 improved prospects for timely investment in gas sector.
  - Policy priorities emphasized: rebuild international reserves buffers; implement large and front-loaded fiscal adjustment while protecting priority social spending; strengthen public investment management and project appraisal; improve fiscal risk management and transparency; continue bank supervision and financial sector reforms.
  - Staff recommends completion of the fourth PSI review and supports waivers and proposed modifications consistent with achieving core program objectives.

*Source: REPUBLIC OF MOZAMBIQUE — IMF staff report chapter "1. Fiscal Transparency: Lessons and Reforms Triggered by the EMATUM Case" and associated MEFP, Annex I, Tables and DSA excerpts (selected).*

### 1. Fiscal Transparency: Lessons and Reforms Triggered by the EMATUM Case ___________________ 14

### 1. Fiscal Transparency: Lessons and Reforms Triggered by the EMATUM Case

### Background and recent developments
- Political context:
  - President Nyusi sworn in January (post-October 2014 elections); peace agreement renewed last September.
  - Some political tension reemerged as Renamo contested results and called for political decentralization.
  - New government expressed strong commitment to the PSI-supported program.
- Growth and inflation in 2014:
  - Real GDP expanded by 7.4 percent, led by financial services, extractive industries, and agriculture.
  - End-year inflation fell to one percent.
  - Drivers of low inflation: stable exchange rate against the South African rand, low food prices, and stable administered prices (fuels, public transportation, and utilities).
  - Anticipated inflation pressures in the second half of 2015 due to: depreciation of the metical against the US dollar, and long overdue adjustments in some administered prices.
- Foreign exchange market and reserves:
  - Net international reserves (NIR) declined as the Bank of Mozambique (BM) intervened heavily to stabilize the FX market.
  - NIR declined by $600 million, and the metical depreciated by 14.4 percent versus the US dollar between September 2014 and March 2015.
  - Conditions began to normalize in Q2 2015 as political uncertainty abated, seasonal dollar inflows returned, and BM moderated interventions.

### Fiscal developments and EMATUM-related impacts
- 2014 fiscal stance:
  - Overall fiscal deficit increased from 2.8 to 10.4 percent of GDP despite continued strong revenue performance.
  - Domestic primary balance worsened from a surplus of 0.9 percent of GDP to a deficit of 4.1 percent of GDP.
  - One-off factors accounted for about half of the fiscal loosening:
    - Electoral spending: 0.9 percent of GDP.
    - Inclusion in the budget of the non-commercial spending of EMATUM: 2.8 percent of GDP.
- Public debt and expenditure trends (figures summarized in source):
  - Public debt has been rising fast since 2012.
  - Large windfall revenues in 2013-2014 were used to finance a sharp increase in expenditure, generating a serious need for consolidation beginning in 2015.
- Key fiscal table excerpts (selected indicators as presented):
  - Total revenue: 22.4, 26.9, 27.3, 27.8, 24.8, 25.4, 25.5, 25.7 (years 2012–2016, various columns in table).
  - Total expenditure and net lending: 31.4, 34.9, 42.0, 43.3, 39.5, 36.4, 36.9, 34.6 (same table context).
  - Overall balance, before grants: -9.1, -8.1, -14.7, -15.4, -14.7, -11.1, -11.4, -8.9.
  - Overall balance after grants: -4.0, -2.8, -10.6, -10.4, -9.7, -7.5, -6.5, -5.5.
  - Net external financing: 3.3, 5.8, 9.4, 8.9, 6.0, 6.4, 5.7, 5.4.
  - Net domestic financing: 0.7, -3.0, 1.2, 1.4, 3.7, 1.1, 0.8, 0.0.
  - Domestic primary balance (memorandum): -1.0, 0.9, -2.9, -4.1, -3.6, -0.9, -1.2, 0.8.
  - Real GDP growth (memorandum): 7.1, 7.4, 7.4, 7.4, 7.4, 7.0, 7.0, 8.2.
  - Average CPI inflation (memorandum): 2.1, 4.2, 2.3, 2.3, 2.3, 4.0, 4.0, 5.6.

### Program performance and structural reforms
- Assessment criteria and targets:
  - Three end-December assessment criteria were not met:
    - Net credit to the government (NCG) and reserve money exceeded program targets by small margins.
    - December 2014 NIR target missed by $265 million.
  - March 2015:
    - Indicative NIR target missed by $478 million.
    - March target on NCG was met.
    - Reserve money target missed again by a small margin.
  - December indicative target on priority spending was not met due to delays in execution of some externally-financed projects; scope of priority spending is being redefined (Annex II).
- Structural benchmarks:
  - March structural benchmark on securitization of a stock of MT 8.2 billion (1.5 percent of GDP) in outstanding VAT refunds was met.
  - 2015 budget included a rule on the use of windfall revenues (June benchmark).
  - May benchmark on public investment project evaluation requirement was not met; proposed rephasing to July to align with budget cycle.
  - June benchmark on the IT application for e-tax is on track.

### Monetary and external sector developments
- Inflation and monetary aggregates:
  - Inflation contained since 2012; end-year inflation 2014: one percent.
  - Reserve money exceeded program targets slightly in December 2014 as currency in circulation picked up.
  - Reserve money, broad money (M3), and credit to the economy expanded rapidly, generating potential inflationary pressures.
- Exchange rate and central bank actions:
  - Metical depreciated by 14.4 percent against the US dollar between September 2014 and March 2015.
  - BM intervened aggressively in FX market; net central bank foreign exchange sales were substantial (figure in source).
  - Dollar deposits in banking system declined.
  - Net international reserves experienced an unprecedented loss.
- External sector:
  - Terms of trade gains reversed since 2011 due to weakening international commodity prices.
  - Overall trade deficit narrowed, but non-megaproject trade deficit increased due to lower export prices and sizeable fuel imports.
  - Current account deficit expected to hover around 40-50 percent of GDP over the next 4-5 years with construction of gas liquefaction plants; financed by FDI and private funding through offshore SPVs.

### Economic outlook and risks
- Growth projections:
  - Growth of 7 percent is expected in 2015, revised down by ½ percent mainly due to floods earlier in the year.
  - Medium-term growth projected to remain in the 7½-8 percent range, supported by large natural gas projects.
  - Despite metical depreciation in Q1 2015, acceleration of inflation in 2015 expected to remain moderate due to quick recovery from floods, low international prices, and tightening of policies.
- Sectoral and commodity risks:
  - If global coal prices fall further than baseline assumptions, expansion plans in coal mines could be threatened, potentially dampening growth in 2016 by as much as ½ percentage point.
  - LNG production expected to start only in 2020-21; fiscal revenues from LNG could reach $1 trillion over a period of 30-40 years (as noted in source), but have little near-term effect.
- Current account and financing:
  - Current account deficit large but not a significant BOP risk because construction financed by FDI and private funding through offshore SPVs.
  - SPVs will mobilize large financing required and the government will obtain 65-70 percent of the net revenues once projects reach maturity.
- Inclusiveness and poverty:
  - Over the medium term, growth will need to be more inclusive; elasticity of poverty to growth is very low by international standards and employment opportunities remain limited beyond large corporations in booming sectors.

### Policy objectives and recommended actions (as discussed)
- Main objectives stated:
  - Reverse the recent rapid expansion of government expenditure and external borrowing to maintain fiscal sustainability.
  - Adjust economic policies to help rebuild international reserves.
  - Reinvigorate the structural reform agenda.
- Fiscal consolidation emphasis:
  - Need for consolidation beginning in 2015 given sharp increase in expenditure financed by windfall revenues in 2013-2014.
  - Fiscal multiplier expected to be low as most adjustment falls on public investment, which has a high import content.
  - Government efforts to increase cost efficiency and value-for-money in public procurement highlighted as scope to generate savings through greater use of competitive tenders.

*Source: REPUBLIC OF MOZAMBIQUE — IMF staff report chapter "1. Fiscal Transparency: Lessons and Reforms Triggered by the EMATUM Case" (excerpts).*

### 8.      A debt sustainability update indicates that the external debt risk rating remains

### _cr15223 - 8.      A debt sustainability update indicates that the external debt risk rating remains

### Debt Sustainability
- External debt risk rating: remains moderate.
- Baseline scenario: all variables remain below the relevant thresholds.
- Shock scenarios: several variables breach thresholds under various shock scenarios.

### Fiscal Policy and Reforms — Overview
- 2015 budget objectives:
  - Overall fiscal deficit (after grants) envisaged to decline to 6.5 percent of GDP — a level estimated to stabilize public debt.
  - Domestic primary balance to improve by about 2.7 percent of GDP.
  - Fiscal adjustment driven by a reduction of about 2.6 percent of GDP (excluding one-off factors) in public spending.
  - Public investment reduction expected given high levels of public investment (15½ per-cent of GDP in 2014) and limited progress in improving public investment management.
  - Public investment’s high import content expected to reduce foreign exchange pressures.

### Tax Revenue
- Total revenues projected to expand by 0.7 percent of GDP in 2015.
- Revenue mobilization measures:
  - Reforms to broaden the taxpayer base.
  - Expansion of the electronic tax payment (e-Tax) system.
  - Enhanced tax audits.
  - Modernizing the Tax Authority to improve its efficiency.
- Historical revenue performance: annual average increases of 1¼ percentage of GDP over 2010-14, excluding windfall taxes.

### Strengthening Tax Administration — Key Actions and Outcomes
- VAT refund arrears:
  - Stock of valid VAT refund arrears as of end-2014: MT 8.2 billion.
  - Securitized through a private placement of Treasury bills (structural benchmark for March 2015).
  - Operation addressed liquidity crunch for commodity exporters.
- Windfall revenue rule:
  - Ex-ante rule included in the 2015 Budget Law (structural benchmark for June 2015).
  - Rule: use windfall resources only for public investment, debt repayment, and national emergencies.
- Agreement with staff: develop an effective medium-term fiscal framework with a more formal fiscal anchor.

### Expenditure Policy — 2015 Measures
- Total expenditure in the 2015 budget: 6.4 percent of GDP lower than in 2014 (or 2.6 percent of GDP lower excluding one-off factors).
- Wage bill: planned reduction by 0.5 percent of GDP in 2015 via deceleration of new hiring and enhanced controls.
- Public investment projects:
  - More rigorous evaluation procedures to enhance investment efficiency and value for money.
  - No project exceeding $50 million authorized for inclusion in the multi-year list of priority investment without a prior feasibility study and technical evaluation by the Ministry of Economy and Finance.
- Protection of priority spending: priority spending still accounts for 63.5 percent of total expenditure in the 2015 budget.

### Fiscal Transparency and Risk Management
- Strengthening supervision of enterprises with state participation:
  - Legislative initiatives to strengthen controls.
  - Enforcement of requirements to publish annual reports.
  - New system to track and monitor financial information.
  - Improved transparency around EMATUM operations.
- Fiscal Transparency Evaluation (FTE) published; authorities committed to implementing recommendations, including improved management of fiscal risks.
- 2015 budget started reporting potential sources of fiscal risk, including a list of PPPs.
- Planned: new annex on fiscal risks for the 2016 budget covering general fiscal risks and specific risks from public and publicly guaranteed debt, PPPs and SOEs.
- Creation of a fiscal risk unit planned to support these objectives.

### Box 1 — EMATUM: Lessons and Reforms
- Background:
  - In 2013 EMATUM obtained an $850 million loan from international banks, guaranteed by the government and repackaged as private loan participation notes in September 2013.
  - Project combined tuna fishing and a maritime security component.
  - Project was not on the official Integrated Investment Plan; government guarantee breached the Budget Law ceiling; feasibility study covered only $500 million; procurement proceeded without tender from a single source.
- Corrective actions taken:
  - Parliament required incorporation of the non-commercial part into 2014 budget documents and authorized an increase in the ceiling for guarantees to regularize the transaction.
  - Audit Court certified amounts spent through the procurement contract; government began disclosing guarantees in budget reports.
  - EMATUM published its 2013 audited financial accounts in December 2014 and audited 2014 accounts in May 2015.
  - Authorities increased the maritime security component from $350 million to $500 million and amended fiscal tables and the general government account ledger for the Audit Court.
- Lessons and outstanding risks:
  - Need for transparent competition in procurement and competitive cost options.
  - Questionable decision to set up a public sector tuna fishing company without tangible private investment.
  - Government to restructure EMATUM debt:
    - Government to take over in full the maritime security component: $500 million.
    - Re-assess whether the company can service the rest of the loan: $350 million.
  - EMATUM remains a source of substantial fiscal risk; privatization (partial or full) should be considered to limit potential losses.
- Transaction details noted by Audit Court and report footnote:
  - Initial loan interest rate: 6.3 percent.
  - Notes sold at a discount (around 8 percent).
  - Audit Court indicated value of goods procured amounted to $762 million.
  - Administrative fees, commissions and other costs: about $88 million.

### Monetary and Exchange Rate Policies; Financial Sector Reforms
- Need to rebuild international reserves buffers after late 2014 and early 2015 foreign exchange market intervention.
- Exchange rate assessment:
  - Metical depreciated against the dollar but did not depreciate against main trade partner currencies.
  - Metical is now likely overvalued by 5-10 percent (see updated external assessment, Annex 1).
- Reserve objectives and targets:
  - End-year target of $2.9 billion NIR, implying an accumulation of $400 million from the end-March level and resulting in an adequate cover of 4.7 months of non-megaproject imports.
- Policy measures:
  - Authorities envisage a large and front-loaded fiscal adjustment to support reserve rebuilding.
  - BM committed to exchange rate flexibility and significantly reduced foreign exchange sales since March, aiding gradual recovery of NIR and reducing the spread between auction and interbank rates.
- Monetary policy stance:
  - BM intends to moderate reserve money growth to support policy adjustment and rebuild NIR buffers, which should moderate broad money and credit growth.
  - Private sector credit as a share of GDP stands among the highest in Sub-Saharan Africa.
  - Reforms to promote competition and information sharing on credit risk (including private credit registries) recommended to lower borrowing costs and credit risk.
- Analytical and operational strengthening at BM:
  - Enhanced inflation forecasting model developed with IMF technical assistance and currently being tested.
  - Ongoing improvements to liquidity forecasting model.
  - Structural benchmark (September 2015): allow T-bonds as collateral in money market operations to develop domestic financial markets.

### Financial Sector Supervision and Reforms
- Bank soundness: banks are well capitalized with low non-performing loans (NPLs).
- Stress tests: banking system resilient; credit concentration is main source of risk.
- Rapid credit expansion: potential risk; needs careful monitoring.
- Recent exercises and expected deliverables:
  - Financial Sector Contingency Plan simulation completed in Q1 2015 with World Bank support.
  - Expected milestones within the year: adoption of the Law on the Creation of Private Credit Registry Bureaus, launch of the National Financial Inclusion Strategy, drafting of a Movable Collateral Bill.

### Medium-Term Reforms and Public Investment Management
- Investment planning and project evaluation:
  - Staff urged reinvigoration of capacity development in investment planning and project evaluation due to repeated delays.
  - Immediate requirement: all new public investment projects exceeding $50 million (about 0.3 percent of GDP) subject to mandatory centralized technical assessment before inclusion in the Integrated Public Investment Plan and/or the 2016 budget (July and December 2015 structural benchmarks).
- Public debt management:
  - Quality of public debt data improved; public debt management capacity should be further strengthened.
  - Government considering measures to improve institutional coordination between public investment planning and debt management.
  - Authorities to revise Debt Management Strategy by end August 2015.
- Natural resources management:
  - Legislation providing fiscal stability for investors in massive gas reserves passed; remaining issues include project finance structure and LNG marketing with tax implications to be carefully assessed.
  - Negotiations should proceed to secure a final investment decision in 2015.
  - Authorities published the 5th EITI Report (based on 2012 data).

### Energy Sector and Fuel Imports
- Authorities requested technical assistance from the Fund and World Bank for crucial energy sector reforms.
- Energy pricing:
  - Energy prices not adjusted since 2011.
  - An increase of at least 25 percent seems needed to prevent operational losses of the National Electricity Company (EDM).
- Short-term needs:
  - Authorities seeking funding for emergency investment projects to stabilize distribution grids; these require careful appraisal and assessment against competing projects.
- Fuel imports system reforms needed to:
  - Increase transparency of tender process.
  - Limit impact on NIR.
  - Audit import volumes and eliminate existing subsidies.
- Political economy considerations: reforms should be introduced carefully to avoid unexpected disruptions and protect the poor.

### Program Issues and Conditionality
- Waivers requested for non-observance of three assessment criteria (ACs) for December 2014 and modifications proposed for three ACs for June 2015.
  - Waivers requested for non-observance of ACs on reserve money and net credit to government at end-December 2014 due to minor and temporary deviations.
  - Waiver for non-observance of the AC on NIR requested based on stronger than anticipated BOP pressures, still broadly adequate NIR level, authorities’ ambitious 2015 target, and strong commitment to policy adjustment.
  - Revised ACs on NCG, reserve money, and NIR for June 2015 proposed to reflect recent developments.
- Structural benchmark rescheduling:
  - One SB (May benchmark) requiring projects exceeding $50 million to be subject to mandatory assessment proposed to be rescheduled to July because of delays in the 2016 budget preparation cycle.
- Program targets through end-2015:
  - ACs (for end-December 2015), indicative targets (ITs) and new SBs proposed (MEFP Tables 1 and 2).
  - Five new SBs aim to strengthen public financial management (public investment planning, fiscal risk management, public expenditure monitoring) and deepen financial sector reforms.

### Staff Appraisal — Key Judgments
- Macro outlook:
  - Mozambique’s economy remains robust with a strong track record of high growth and low inflation expected to continue in 2015 and over the medium term.
  - Outlook tied to development of the natural resource sector; enabling legislation in late 2014 improved prospects for timely investment in the gas sector.
  - Large private investment projects in coal and energy under active consideration.
  - Strategic location offers prospects to attract FDI in other sectors.
- Policy priorities emphasized by staff:
  - Rebuild international reserves buffers.
  - Implement large and front-loaded fiscal adjustment while protecting priority social spending.
  - Strengthen public investment management and project appraisal.
  - Improve fiscal risk management and transparency.
  - Continue bank supervision and financial sector reforms to monitor rapid credit expansion and enhance financial inclusion.

*Source: _cr15223 - 8.      A debt sustainability update indicates that the external debt risk rating remains*

### 27.      Following policy slippages in 2014, the new government is taking appropriate

### 27.      Following policy slippages in 2014, the new government is taking appropriate measures.

### Fiscal situation and near-term policy actions
- The overall fiscal deficit in 2014 exceeded 10 percent of GDP—one of the highest in Sub-Saharan Africa.
- Public debt (including guarantees) has been rising fast and could exceed 60 percent of GDP in 2015.
- The 2015 budget implies an implicit fiscal adjustment of over 3 percent of GDP.
- Rigorous implementation of the 2015 budget is essential to restore fiscal sustainability.
- Corrective measures have been taken to improve transparency and fiscal risk management following questions raised by the EMATUM borrowing in 2013.

### Monetary and exchange rate policy
- The Bank of Mozambique (BM) is committed to tightening liquidity and building reserve buffers while allowing exchange rate flexibility as a policy anchor.
- The authorities reiterated their commitment to a flexible exchange rate regime; the metical depreciated by about 14 percent (in nominal terms) against the dollar since September 2014 after two years of relative stability.
- The BM has started to accumulate reserves after the trough observed at end-March and will tighten liquidity conditions to support reserve accumulation.

### Medium-term challenges and structural reforms
- Growth is high, but not broad-based.
- The elasticity of poverty to growth is 0.1 percent, one of the lowest in the world, indicating the need for more inclusive policies and focused public spending on social and pro-poor programs.
- Infrastructure gaps remain in roads, ports, electricity, water and sanitation, while debt has been rising fast and fiscal space is limited—requiring special attention to prioritization of public investment.
- Positive steps already taken:
  - Merger of the Planning and Finance Ministries.
  - New rules to prepare lists of priority investment projects.
  - Knowledge exchanges with Chile and South Africa on project appraisal and management.
  - Lessons derived from the EMATUM case.
- Structural reforms are ongoing; capacity building efforts should continue to support limited implementation capacity.

### Staff assessment and program recommendations
- Staff recommends the completion of the fourth PSI review.
- Although program performance has been mixed, authorities have taken corrective measures and the 2015 budget confirms a commitment to strong fiscal adjustment.
- Recent debates in Parliament and civil society indicate broad consensus on the need to consolidate public finances and rein in public debt, supporting the credibility of fiscal adjustment implementation.
- Staff supports:
  - Waivers for the non-observance of three ACs at end-December 2014 on the basis that deviations were minor or remedial actions have been committed to.
  - The authorities’ request to modify the end-June ACs.
  - Modification of the structural benchmark agenda for 2015-16.
  - Setting of ITs for end-September 2015 and ACs for end-December 2015, as the new targets better reflect recent developments and remain consistent with achieving core program objectives.
- The attached MEFP outlines macroeconomic objectives and policies for the period ahead.

### Key statistics (selected from the chapter)
- Overall fiscal deficit in 2014: exceeded 10 percent of GDP.
- Public debt could exceed 60 percent of GDP in 2015.
- Implicit fiscal adjustment in 2015 budget: over 3 percent of GDP.
- Elasticity of poverty to growth: 0.1 percent.
- Metical depreciation since September 2014: about 14 percent (nominal).
- Net international reserves (end of period) examples from tables: 2,604; 2,995; 3,147 (values in millions of U.S. dollars shown in tables).
- External current account, before grants (selected years, millions of U.S. dollars): -6,997; -7,341; -7,119; -6,788; -9,040; -7,033; -8,445; -8,883; -11,054; -11,705; -12,777 (as reported in tables).
- Nominal GDP (MT billion) examples from tables: 424; 470; 526; 526; 595; 591; 676; 770; 878; 1000; 1242 (as reported in tables).

*Source: REPUBLIC OF MOZAMBIQUE, INTERNATIONAL MONETARY FUND*

### Annex I. Mozambique: External Balance and Reserve Adequacy

### Annex I. Mozambique: External Balance and Reserve Adequacy Assessment

### Overview
- Purpose: assess external balance and reserve adequacy in Mozambique, updating June 2013 analysis and focusing on: practical issues with reserve accumulation (beyond BOP aggregates), exchange rate alignment with fundamentals (EBA-lite and CGER checks), and multiple metrics of reserve adequacy given recent NIR declines due to Bank of Mozambique (BM) interventions.
- Prepared by: Christian Henn and Keiichiro Inui (IMF staff).

### Determinants of Reserve Accumulation
- Four historical drivers of potential international reserve accumulation:
  - Donor disbursements (budget support) — unambiguously boost reserves.
  - Capital gains taxes from natural resource companies (paid in US$) — unambiguously boost reserves.
  - Fuel imports — directly reduce reserves when BM provides foreign exchange to the Imopetro bank syndicate.
  - Valuation changes — can increase or decrease the stock of reserves.
- Notable operational detail: BM does not typically build reserves through outright dollar purchases from the market; interventions have been mostly one-sided (FX sales to meet syndicate/fuel needs), with fuel imports seasonal peaks in Q1 and Q4.
- Capital gains tax windfalls (2012–2014Q1) totaled over US$1.3 billion and left NIR still exceeding pre-windfall levels by over US$350 million. No further large capital gains tax payments expected in the immediate future.

### Recent Reserve Losses and Attribution
- Period: Starting Q2 2014 potential reserve accumulation dipped atypically into negative territory.
- Main drivers:
  - Higher BM FX sales for Imopetro fuel imports due to BOP terms-of-trade shock and political uncertainty (elections) causing domestic FX scarcity.
  - Valuation losses from dollar appreciation vis-à-vis other reserve currencies concentrated in H2 2014.
- Quantified outcomes (twelve months after potential accumulation turned negative):
  - Total reserve loss: US$700 million.
  - Fuel-related FX sales: US$673 million (well above 2009-13 average of roughly US$300 million).
  - Non-fuel related intervention explains up to US$180 million of reserve losses.
  - Valuation losses explained about US$120 million of reserve losses.
- Historical and comparative intervention figures:
  - Non-fuel interventions were US$197 million in 2014 and US$180 million to date in 2015 versus an average of US$167 million during 2009-2012.
  - Non-fuel interventions Q2 2014–Q1 2015 totaled US$523 million compared to US$345 million on average during 2009-13.
  - Quarterly non-fuel intervention detail (Q2/Q3/Q4/Q1): Q2 2014: US$129m (2009-13 avg US$60m); Q3 2014: US$53m (US$69m); Q4 2014: US$160m (US$55m); Q1 2015: US$180m (US$161m).

### Exchange Rate Assessment
- Nominal and real movements:
  - Metical depreciated by about 14 percent against the US dollar from September 2014 to March 2015.
  - This depreciation largely mirrors the dollar’s global appreciation (US NEER) but is relatively strong versus many Sub-Saharan peers.
  - Since June 2013 the metical has appreciated against the South African rand; metical remained stable against the rand during the BOP weakening, potentially limiting needed adjustment.
- EBA-lite and CGER results:
  - EBA-lite: current account deficit is about 6 percent of GDP higher than consistent-with-desirable-policies level -> implies overvaluation of 13 percent.
  - CGER variants:
    - External sustainability (ES) approach (non-megaproject economy): Current Account Gap -5.2 percent of GDP -> Overvaluation 10.5 percent.
    - Purchasing Power Parity (PPP): Overvaluation 2.9 percent.
    - Equilibrium Real Exchange Rate (ERER): Undervaluation -7.2 percent.
  - IMF staff judgment: metical may remain overvalued by 5-10 percent, considering EBA-lite and two of three CGER approaches and recent exchange rate pressures.

  - Table of 2015 valuation estimates (IMF staff estimates):
    - EBA-Lite: Current Account Gap (percent of GDP) -6.3; Overvaluation (+) / Undervaluation (-) 12.9
    - Equilibrium Real Exchange Rate (ERER): Current Account Gap - ; Overvaluation/Undervaluation -7.2
    - External Sustainability (ES): Current Account Gap -5.2; Overvaluation/Undervaluation 10.5
    - Purchasing Power Parity (PPP): Current Account Gap - ; Overvaluation/Undervaluation 2.9

### Reserve Adequacy Metrics and Optimal Levels
- Coverage ratios (end-March 2015 reserves used for Mozambique):
  - Reserve cover relative to non-megaproject imports: 4.3 months (stated as slightly higher than most peers).
  - Reserve cover relative to total imports: 2.7 months (noted as the optimal level of total import cover under IMF(2015) methodology).
  - Reserve cover relative to broad money: 44 percent (in line with peers).
  - Reserves relative to short-term debt: reserves cover short-term debt six-fold.
- Caveats: recent Balance of Payments revisions reclassifying some services imports as megaproject imports increased import-cover ratios by around one month; such data improvements remain ongoing and require cautious interpretation.
- Cost and opportunity-cost considerations:
  - Net holding cost of reserves can safely be assumed to exceed 6 percent.
  - Evidence suggests Mozambique yields lie in the 8-10 percent range (government-guaranteed EMATUM external loan and domestic Treasury Bonds).
  - Return on hard currency reserves is low, below 2 percent.
  - The marginal product of public capital may be higher given development needs, implying opportunity costs of holding reserves.
- IMF(2015)-based optimal reserve level estimates (months of 2016 imports; assumes 6 percent cost of holding reserves):
  - Baseline (Flexible exchange rate, not resource rich): 2.7
  - Natural resource rich: 3.6
  - Fixed exchange rate: 6.8
  - Fixed exchange rate and natural resource rich: 9.3
- Staff interpretation:
  - Total import cover currently at optimal level of 2.7 months.
  - For non-megaproject imports, 4.5 months is a prudent reserve cover; current observed 4.3 months should be raised.
  - Emphasis on exchange rate flexibility to absorb shocks; otherwise reserve needs would be substantially higher.
  - Importance of gradual reserve rebuild given anticipated greater reliance on natural resource exports (expanded coal production and forthcoming LNG production).

### Policy Implications and Authorities' Response
- Given absence of further capital gains tax windfalls, donor inflows act as a natural cap to possible reserve accumulation.
- Authorities' policy stance in the program:
  - Limit FX intervention to smoothing volatility while rebuilding reserves.
  - Target to elevate reserve cover from current 4.3 months of projected imports (excluding megaprojects) to above 4.5 months by year end.
- Operational constraint: a tight domestic FX market limits BM’s ability to rebuild reserves through outright dollar purchases without inducing artificial depreciation pressures; donor inflows therefore constrain reserve accumulation possibilities.

*Source: IMF staff estimates.*

### 52.9 percent in 2010, to 63.5 percent in

### _cr15223 - 52.9 percent in 2010, to 63.5 percent in

### Priority social spending: evolution and limitations
- Social protection and job creation (“other” category in Figure 1) tripled over the period, from 1.2 to 3.6 percent of total spending.
- Despite a revised definition adopted in 2015, close to 60 percent of spending, on average, was considered “priority” over the last six years.
- Three limitations of the current priority spending indicator:
  - It is too broad and does not prioritize across program types within the same expenditure category. Example concerns:
    - Spending on basic education (e.g. school materials) and/or critical health (e.g. purchase of vaccines) is considered a priority to the same degree as spending on items less likely to impact social indicators.
    - Entire ministries’ expenditures (including overhead costs, use of cars, purchase of office equipment) could be treated the same as critical social programs.
  - Monitoring is hampered by lack of comprehensive timely data:
    - Priority spending is partially financed by external sources.
    - Several donors now channel contributions through the treasury single account (TSA), but an important share is executed outside the system and reported with delays (around three months).
    - As a result, targets initially missed were considered met in subsequent reviews due to data revisions.
  - Targets depend on donor disbursements beyond authorities’ control:
    - Domestically financed priority spending has historically performed largely as expected.
    - External disbursement can be affected by Mozambique’s implementation capacity and donor countries’ budgetary constraints.
    - When donor disbursement fell short, related priority spending declined and priority spending targets were often missed.

### Reforms to define and monitor priority spending
- Government actions under way:
  - A new Five-year Government Plan (PQG) approved in April 2015 includes the national poverty reduction strategy.
  - Reforms to strengthen the link between planning instruments, budget execution and results.
  - Preparation of a more detailed program classifier for the 2016 budget to better identify and prioritize critical spending.
  - Budget execution reports will be modified to use the same classification to ensure consistency with initial budget allocations.
- Intended outcome:
  - A new indicator with a narrower scope of priority spending and improved consistency between budget allocations and execution reporting.

### Letter of Intent and MEFP: overview and requests (Maputo, June 12, 2015)
- Government requests:
  - Completion of the fourth review under the Policy Support Instrument (PSI).
  - Modification of three assessment criteria and one indicative target for June 2015 to account for revised projections addressing:
    - Substantial decline in net international reserves amid strong balance of payment pressures.
    - Valuation changes on reserves.
    - Slightly higher-than-projected expansion of monetary aggregates.
  - Set assessment criteria and indicative targets for end-December 2015, and indicative targets for end-September.
  - Reschedule one existing structural benchmark and set new structural benchmarks for 2015-16.
- Attachments transmitted with the Letter of Intent:
  - Memorandum of Economic and Financial Policies (MEFP).
  - Technical Memorandum of Understanding.

### Recent economic developments and program performance (MEFP summary)
- Economic growth and sector drivers:
  - 2014 estimated growth rate: 7.4 percent.
  - Growth drivers: rebound in agriculture (recovery from 2013 floods), manufacturing, vibrant financial services, continued high growth in mining (somewhat decelerating due to global coal market).
- Inflation and monetary aggregates:
  - Inflation fell to 1.1 percent at end-December 2014 (compared with 3 percent at end-2013).
  - Average inflation in 2014: 2.3 percent.
  - Monetary aggregates exceeded program projections due to higher demand for money, particularly currency in circulation.
- Exchange rate and FX intervention:
  - Depreciation of the metical vis-à-vis the US dollar of 14 percent in the interbank market in Q4 2014 and Q1 2015.
  - Central Bank FX interventions: sold USD 320 million in Q4 2014 and USD 469 million in Q1 2015; FX sales reached only USD 12 million in April (2015).
  - Net international reserves declined but remain at broadly adequate levels.
- External current account:
  - Merchandise exports fell by 5 percent due to lower commodity prices.
  - Current account deficit declined by 7 percent to USD 5,797 million in 2014.
  - Current account deficit: 36 percent of GDP in 2014 compared to 42 percent in 2013.
  - Non-megaproject current account balance deteriorated in 2014, driven by a decrease of 2½ percent of GDP in merchandise exports.
- Budget execution and fiscal outcomes:
  - Overall fiscal deficit after grants increased from 2.8 percent in 2013 to 10.4 percent of GDP in 2014.
  - Domestic primary balance decreased from 0.9 percent to -4.1 percent of GDP.
  - One-off factors in 2014: electoral spending (0.9 percent of GDP) and inclusion of maritime security component of the loan to EMATUM (2.8 percent of GDP).
  - Revenue collection in 2014: 27.8 percent of GDP.
  - Total public spending at end-December 2014: 43.3 percent of GDP (an increase of 8.4 percent of GDP compared with 2013).
- FDI, aid, and reserves:
  - Cumulative FDI inflows in 2014: USD 4,902 million (declined by 21 percent).
  - Gross aid flows in 2014: USD 1,466 million; budget support: USD 393 million.
  - Stock of reserves at end-December 2014: USD 2,882 million (decline of $113 million compared with 2013).
- Program performance through end-December 2014:
  - Three assessment criteria (AC) not met; all indicative targets met.
  - Reserve money target exceeded by 1.5 percent (faster growth than program).
  - Net International Reserves target missed by US$ 265 million.
  - Cumulative Net Credit to Government exceeded target by about 0.2 percent of GDP.
- Performance through end-March 2015:
  - Net international reserve target continued to fall short by a substantial amount in 2015Q1.
  - Reserve money target was not observed by 0.1 percent of GDP.
  - Net Credit to Government (NCG) target was met by a large margin.
  - End-March structural benchmark on payment/securitization of stock of VAT refund requests was met (transaction completed in March; amounts revised in early April due to reassessment by certain companies).
  - Remaining measures for June and September 2015 are on track.

### Macroeconomic policies and outlook
- Economic objectives and Five Year Program (2015-2019):
  - Main priorities: employment creation, poverty reduction, greater competitiveness through higher productivity.
  - Five national development priorities: (i) consolidation of national unity, peace and sovereignty; (ii) development of human and social capital; (iii) promotion of employment, productivity and competitiveness; (iv) development of economic and social infrastructure; and (v) sustainable and transparent management of natural resources and the environment.
  - Three supporting pillars: (i) democratic rule of law, good governance and decentralization; (ii) promoting balanced and sustainable macroeconomic environment; (iii) strengthening international cooperation.
- Government projections and targets:
  - GDP growth: government expects 7.0 percent in 2015 and acceleration towards the 7-8 percent range during 2016-2019.
  - Average inflation projected at 4.0 percent and end of period at 5.5 percent in 2015; subsequently remain within medium-term objective of 5-6 percent.
  - External current account deficit projected at 38.2 percent of GDP in 2015, to be financed by FDI.
  - Overall fiscal deficit (after grants) expected to decline from 10.4 percent of GDP in 2014 to 6.5 percent of GDP in 2015; medium-term deficit expected to remain in the 5-6 percent of GDP range.
- Monetary policy stance for 2015:
  - Reserve money growth target: 16.5 percent in 2015.
  - Aim to maintain reserves in 2015 at least at the level observed at end-2014.
  - Commitment to a flexible exchange rate regime; allow exchange rate to adjust freely and monitor real effective exchange rate.
  - Commitment to Article VIII, sections 2, 3, and 4 of the Fund’s Articles of Agreement and monitoring of new foreign exchange regulations.
- Fiscal policy details and priorities:
  - Revenue expected to grow by 0.8 percent of GDP in 2015 (excluding any possible one-off revenues from capital gain taxes and VAT refunds).
  - Expenditures expected to decline by 6.4 percent of GDP in 2015.
  - Resulting overall fiscal deficit (after grants) expected to decline to 6.5 percent of GDP.
  - Revenue administration: Revenue Authority updating reform program after TADAT mission.
  - 2015 spending priorities: post-flood reconstruction and social reintegration; implementation of technological Pilot Census; provision of basic infrastructure (roads, bridges, power, water and sanitation); continuation of social protection programs; operationalization of the Fund for Peace and National Reconciliation.
- Wage bill and social protection:
  - Wage bill expected to decline to 10.9 percent of GDP in 2015.
  - New hiring of civil servants in 2015: about 11,019 new hires (focus on education and health).
  - Number of beneficiaries of social protection programs to increase by 25 percent, from 439,144 in 2014 to 550,000 in 2015.
  - Basic Social Protection program in 2015 to absorb about 0.6 percent of GDP.
  - Over 2016-19, Basic Social Protection percentage of GDP to gradually increase by around 0.1 percent per year, achieving one percent of GDP by end of period.
- Subsidies and energy sector:
  - Diesel subsidies: Government continued to subsidize only diesel prices for general consumption (other than megaprojects, construction, public works and other large consumers), not other fuels.
  - Compensation paid to fuel importers in 2014 was 0.14 percent of GDP related to fuel sales in 2013; amount due in 2014 was (4.6 billion meticais) to be paid in 2015 through budget payments and/or cost recovery through the price-setting formula.
  - Fuel price for large consumers including megaprojects adjusted on April 16, 2015 to equalize with general consumer market prices.
  - Government studying ways to make fuel import system more transparent and limit impact on net international reserves; may adjust price formula if justified.
  - Other subsidies: bread flour, public transportation, school feeding programs estimated at 0.5 percent of GDP in 2015 (same level as 2014).
  - Electricity tariffs from 2010 make EDM financially unsustainable; revised tariff proposal expected to be submitted to cabinet by June 2015.
  - EDM performance contract: new board submitted proposal; expected to be signed by July 2015.

### Public finance structural reforms: introduction
- Section heading indicates focus on Investment Planning and Debt Management as the next topic of the MEFP and public finance structural reforms.

*Republic of Mozambique — IMF staff report excerpt*

### 12. Public Investment Management. We developed budget guidelines for a mandatory

### _cr15223 - 12. Public Investment Management. We developed budget guidelines for a mandatory

### Public investment management
- Budget guidelines require a mandatory technical assessment of investment projects exceeding the value of $50 million for inclusion in the revised integrated investment plan.
- All new projects added to the revised Integrated Investment Plan, and subject to budget allocations starting in the 2016 budget, will be required to have a mandatory assessment by the Investment Evaluation Committee, or any other governmental body created to replace this Committee in the new MEF structure (structural benchmark).
- Government will continue to improve public investment management, including closer analysis of the relationship between public investment and debt sustainability.
- Institutions in charge of design and implementation of public investment projects will be strengthened so that project selection and evaluation conform to sound practices.
- A mission was sent to Chile in November 2014 to learn from their public investment management experience.

### Strengthening public debt management
- Debt management software (CSDRMS2000+) was upgraded in September 2014.
- Continued reconciliation of stock of public external debt with creditors.
- Annual debt reports include analysis of cost and risk associated with the public debt portfolio; commitment to include such analysis in budget execution reports.
- By end August 2015, revise Debt Management Strategy with World Bank technical assistance; will consider domestic borrowing strategies to develop domestic capital markets.
- The 2015 budget was approved by Parliament; the 2015 domestic borrowing plan will be elaborated by end June 2015.

### Guarantee management policy
- Projects benefiting from guarantees are regularly monitored by the Ministry of Economy and Finance to minimize default risk.
- A database to manage all guarantees has been built.
- Plan to develop capacity to assess probability and impact of potential default of this exposure with technical assistance from the World Bank and IMF.

### Public Financial Management (PFM) reform process
- Terms of Reference prepared to establish the SISTAFE National Meeting and SISTAFE User Forum to analyze, discuss, evaluate and disseminate SISTAFE reforms; intended to enhance communication and consultation between line ministries, provinces, private sector and development partners.
- PFM vision to be revised by end 2015, updating macroeconomic assumptions and action plan based on lessons from 2010-2014 implementation.

### Expenditure coverage and tracking (e-SISTAFE / e-SISTAFE direct payments)
- By end 2014, share of expenditures paid through e-SISTAFE directly to the beneficiary reached 67.83 percent of total spending (target initially 65 percent).
- Targets: 70 percent planned for end 2015, and 75 percent in 2016.
- Completion of system’s geographical roll out by end 2015, technical conditions permitting.
- Footnote: 81.1 percent of spending units (UGB’s) currently have direct access to the system (1,247 of a total of 1,538).

### Real time registration of commitments
- Test phase conducted with payment of debt service; discussions ongoing on use of expenditure chain stages for payment of wages.
- Implement revised procedures for payment of wages under Ministerial Diploma no. 210/2014 of December 9.
- Asset module of e-SISTAFE to be developed and made operational; real-time recording of commitment and verification of expenditures to be mandatory for all units operating within e-SISTAFE by January 2016 (structural benchmark).

### Wage bill management
- Expansion of e-Folha for State agencies and institutions with e-SISTAFE underway.
- At end of March 2015, 294,322 civil servants and State agents registered in e-CAF.
- Of those registered in e-CAF, 254,016 are paid through direct transfers, including 232,085 paid through e-Folha.
- Plan to increase percentage of staff registered in e-CAF being paid by e-Folha to 95 percent by end-2015.
- Intend to undertake a Proof of Life audit of all registered civil servants in 2015.

### Cash management and Treasury Single Account (CUT)
- Commitment to extend use of CUT; Circular No. 02/GAB-MF/2014 aims to reduce number of bank accounts outside CUT.
- Consultations ongoing with line ministries and commercial banks to map government bank accounts outside CUT; process expected to conclude by June 2015 and followed by action plan to ensure all revenues are transferred into CUT, including own revenues of budgetary institutions.

### Scope of the public sector and legal framework
- Revision of the SISTAFE Law expected by January 2016 to broaden public sector scope and align with international standards.
- New law defining statute of public funds and autonomous entities has been drafted and is under revision.

### Fiscal risk management
- Ministries of Finance and Planning and Development merged into Ministry of Economy and Finance; new ministry structure to incorporate a fiscal risk management unit by end December 2015.
- Commit to prepare an initial statement of fiscal risks for inclusion in the 2016 budget documentation by October 2015, with IMF technical assistance (structural benchmark).
- Statement will highlight general risks from macroeconomic assumption changes and risks associated with state guarantees, PPPs, and large public sector or public sector participated corporations.
- Follow-up IMF technical assistance to implement recommendations of 2014 fiscal transparency evaluation report.

### Fiscal rule for windfall revenue
- Large and regular influx of natural resource revenue from LNG expected to start in a decade.
- Additional capital gain taxes from transfers of ownership stakes in large natural resource projects might occur in next few years.
- Draft 2015 Budget Law includes an ex-ante rule for use of extraordinary revenues, including windfall revenue, to ensure use only for public investment, debt repayment, and national emergencies (structural benchmark June 2015).
- Note: In case of temporary severe cash constraints generated by unexpected shortfalls in budget support, windfall deposits could be used on a temporary basis.

### PEFA assessment
- Plan to conduct Fourth PEFA evaluation to cover 2012-2014 to provide independent assessment of progress on PFM based on current PEFA methodology, comparing with 2011 PEFA exercise.

### VAT administration and VAT securitization
- Securitization of stock of unpaid VAT refund requests totaling about 8.2 billion meticais (cumulative stock as of end 2014 reconciled with creditor companies) completed through private placement in April 2015; slight delay due to data reconciliation with a major creditor company.
- All technical work completed by March as planned.
- Net VAT system introduced in 2015 budget.
- Plan to conduct assessment of VAT system for megaprojects with IMF technical assistance by end September 2015; action plan expected to revise VAT Code accordingly.

### Implementation of e-Tax
- Registration of taxpayers into new electronic system reached 55 percent of all VAT taxpayers by March 2015.
- Target: 65 percent by end-2015.
- e-Tax collection system for VAT and ISPC rolled out starting November 2014; current coverage includes 14 of largest tax offices.
- Commitment to expand e-tax collections by end-2015 to 32 tax offices of total 66, technical conditions permitting.
- Plan to publicly launch online taxpayers’ portal connected to e-tax by end November 2015.

### Tax payment through banks
- Alignment of procedures to validate and conduct bank payment reconciliations achieved with two banks; contracts being prepared with other commercial banks.
- Public campaigns planned to invite taxpayers to use the system.
- By end 2015 expect to cover the majority of taxpayers, enabling electronic control of revenue collected by DGI.

### Modernizing the Revenue Authority (AT)
- TADAT diagnostic tool assessment with IMF technical assistance conducted in March; report concluded in May 2015.
- Action plan to address recommendations to be elaborated by the third quarter of 2015.
- Main weaknesses: integrity of registered taxpayers base; low ratios of ontime filing of tax returns and payment of tax obligations.
- Task force to assess AT organization structure with IMF technical assistance by third quarter of 2015.
- Plan to revise customs tariffs to promote agriculture by reducing costs of production factors and agricultural inputs.

### Extractive Industry Transparency Initiative (EITI)
- 5th EITI Report (based on 2012 data) prepared and published on Mozambican EITI website; launched in Maputo in April, 2015 and to be disseminated nationwide.
- Report contains information about 56 companies (gas sector and mining); overall discrepancy between payments and receipts is less than 1.5 percent (EITI Coordination Committee limit in Mozambique is 3 percent).
- Mozambique fully complies with new EITI standards.
- Preparation of 6th EITI report started, to incorporate 2013 and 2014 data.

### Mining and hydrocarbon legislation and fiscal regime
- Law on Hydrocarbon and Mining approved in August 2014; preparation of regulations ongoing and expected to be submitted to Cabinet by end-July 2015.
- Regulations of mining and hydrocarbon fiscal regimes (benefited from IMF technical assistance) under consultation; expected to be submitted to Cabinet for approval by end-June 2015.

### Development of natural gas liquefaction
- Decree-Law to operationalize development of natural gas liquefaction plants in the Rovuma Basin Project approved in December 2014.
- Discussions ongoing to amend the Exploration and Production Concession Contract (EPCC) requested by Concessionaire of Area 1.
- Concessionaires of Area 1 and 4 engaged in trade agreement discussions to implement LNG projects in Rovuma Basin focusing on Golfinho and Coral fields and to develop unused deposits of Prosperidade and Mamba, which will require a unitization agreement.

### Strengthening supervision of public enterprises and state participation
- 2013 Annual Reports and financial accounts of six largest State Owned Enterprises (SOE’s) published as envisaged in December 2014 MEFP.
- Summary report on operations and fiscal risks of all 14 SOEs elaborated and expected to be submitted to Council of Ministers by end September 2015.
- Proposal for a Law on the Corporate Sector of the State (companies where state participation is below 100 percent) submitted to Council of Ministers at end-2014 and expected to be discussed in June 2015 before submission to Parliament.
- IGEPE consolidating State portfolio including through privatization and liquidation; stronger follow-up and control system for state corporations being introduced.
- New software to report financial information to become operational by end-July 2015 to collect/analyze financial statements and identify potential fiscal risks.
- Pilot system starting August 2015 with 5 largest corporations, which will also be subject to performance contracts.

### EMATUM transparency and government actions
- External audit report on EMATUM 2013 operations published in December 2014.
- Additional defense equipment purchased by EMATUM for Ministry of Defense ($150 million) added transparently into 2014 State financial accounts (CGE), bringing total portion of spending for maritime security to $500 million.
- 2014 external audit report of EMATUM published on May 29th 2015.
- Company to publish its revised business plan by end-July 2015.
- Government will take over the part of the loan ($500 million) not associated with commercial tuna fishing activities and will monitor EMATUM operations through company’s quarterly reports.

### Monetary policy framework and central bank developments (BM)
- BM to strengthen monetary policy framework, improve analytical tools and communication, and improve inflation forecast model with IMF technical assistance.
- Forecasting and Policy Analysis System including a money block finalized; shadow forecasts under new framework monitored by BM Monetary Policy Committee since December 2014.
- New liquidity forecasting framework developed with IMF technical assistance; preliminary results show better performance for currency demand and impact of government operations; plan to adopt new framework by December 2015.
- Under MoU, MF shares weekly short-term statistics on government operations with BM; MF to provide BM with historical payment classification information to improve forecasting.

### Money market management and legal/IT reforms
- Legal issues for functionality of money market under reform to allow T-bonds as collateral resolved and await approval; IT adjustments to BM IT platform required.
- IT action expected to be completed by September 2015 (structural benchmark).
- Commitment to increase trading activity in monetary market, especially secured transactions.
- Plan to implement fully by end-January 2016 the law requiring 20 percent withholding tax on interests earned on T-bills, OTs, and secured and unsecured interbank transactions (structural benchmark).

### Financial sector surveillance, stress testing, and NPLs
- Stress testing carried out quarterly; December 2014 stress test report submitted to BM Board.
- Results indicate low risk of financial sector distress; credit concentration remains largest source of risk.
- Revised NPL definition adoption started January 2014; at end-December 2014 NPL ratio was 3.3 percent.

### Risk-based supervision and Basel II-related reforms
- By end-February 2015, four large banks subject to on-site inspections; four new inspections in progress expected finalized by end-June 2015 (one large bank, three medium-size banks).
- On-site inspection activity to gradually cover whole banking sector under new methodology.
- Study assessing compatibility of draft regulation on concentration limits with Basel II principles finalized; analysis ongoing to determine prudential weights under new regulation.
- Revision of draft regulation on concentration limits, including investment abroad, to be completed by end-September 2015.

*Republic of Mozambique — IMF staff report content unit*

### 42. Financial Sector Contingency Plan. Following the approval by the Board of BM of an

### 42. Financial Sector Contingency Plan. Following the approval by the Board of BM of an

### Financial Sector Contingency Plan
- Following the approval by the Board of BM of an action plan in November 2014, the first crisis simulation exercise was carried out on April 25, 2015, with the technical support from the World Bank.
- A detailed report from this exercise is expected to be submitted to the BM board by end-September 2015.
- An action plan will be developed later to address the risks identified in the simulation exercise.

### Deposit Insurance Fund (DIF)
- The Executive Board of DIF plans to submit its report on funding and implementing the DIF to the BM Board by June 2015.
- The Government has committed its initial contribution of MT 60 million in the 2015 budget, which is expected to be disbursed in the third quarter of 2015.
- The commercial banks have already made their initial contributions of MT 15 million in January 2015.
- The Executive Board of DIF continues to work with KfW to secure its disbursement of €3.5 million.
- The remaining funding gap will be closed through investment returns on the initial contributions of these three sources, which is expected to take 4-5 years.
- The Executive Board of DIF is actively seeking additional financial support from the government and international institutions, which would shorten the period before the DIF becomes fully functional.

### Financial Sector Development (FSDS 2013-2022)
- Main objectives:
  - (i) maintain financial sector stability;
  - (ii) increase access to financial services and products, eliminating structural constraints in the economy, specifically those that limit financial intermediation and access to financial services;
  - (iii) increase the supply of private capital to support private sector development.
- Implementation findings for the first half of 2014:
  - Most planned activities were implemented, some as prior actions of the World Bank’s DPO I.
  - Actions focused on: (i) financial stability; (ii) financial inclusion and education; and (iii) debt market.
  - Some activities could not be undertaken due to insufficient financial resources.
  - The World Bank has committed technical assistance to support development of the debt market and preparation of the national financial inclusion strategy.
  - A proposal is under consideration for the revision of the FSDS Steering Committee Membership, consistent with the new Government structure.

- Promoting financial inclusion:
  - The BM intends to submit to the Council of Ministers the National Financial Inclusion Strategy by end-December, 2015 (structural benchmark).
  - Two regulations, Notice 1/GBM/2015 on “bank agencies opening criteria” and Notice 2/GBM/2015 on “connection to the single national electronic payment network”, were published in the official Gazette in April 2015.
  - The Notice on the “Regime of Access and practicing of banking agents activity” was approved in April 2015 while the Notice on “cash recirculation” is expected to be finalized by end-September 2015.
  - These 3 governor ́s notices are intending to contribute in the improvement of the access and usage of financial services throughout the country.

- Establishing credit registry bureaus (CRB):
  - The proposal of Law on the creation of private credit registry bureaus was submitted to Parliament in February 2014, but was not discussed due to a very heavy parliamentary agenda in 2014.
  - Given the change in Government, the Law will be resubmitted to the Parliament by end-June 2015.

- Promotion of mobile banking:
  - A new regulation on electronic money has been drafted and submitted to the BM board for approval expected by end-June 2015.
  - The new regulation imposes a requirement for the E-money issuers to deposit the funds received against issuing of E-money in a custody account (termed “trust account”) as a mean of protection of the money owed to E-money holders, should they need to redeem it.

- Promotion of competition within the banking sector:
  - The first stage of the revision of the Notice 05/GBM/2009 has been completed.
  - The new Notice seeks to include a new and broad list of denomination of free of charge financial products and services.
  - The draft Notice will follow a process of dissemination amongst the main stakeholders, before its final approval by end-December 2015.

- Centralizing the registry of security holdings:
  - The establishment of the Central Securities Depository in June 2014 allowed all transactions to be done through the central securities depository, improving:
    - (i) clearing and settlement trading;
    - (ii) coding of securities;
    - (iii) registration of securities and holders;
    - (iv) registration of issuer entities not listed in Mozambique Stock Exchange; and
    - (v) payments of interest and dividend.
  - As a result, the volume of transactions increased as they now occur in every working day rather than 3 days a week.
  - The number of securities listed in the Stock Exchange increased from 34 in early 2014 to 43 at end-2014.
  - In 2014 the trading volume increased by 127 percent (to 4,606 million MT) relative to 2013.
  - The capitalization level increased to about 42,214 million MT at end-December 2014, corresponding to an increase of 17 percent compared to 2013.
  - The Stock Exchange is drafting terms of reference for the acquisition of a new system to modernize the existing trading system.

- Moveable collateral framework:
  - The draft Law on the moveable collateral will be finalized by end-June 2015, following discussions with technical assistance from GIZ.
  - A workshop is envisaged to take place in July 2015 to consult with main stakeholders, which will delay its submission to Council of Ministers by mid-November 2015 (rephased structural benchmark for September 2015).

### AML/CFT Framework
- The guidelines for commercial banks on AML/CFT have been finalized and approved by the BM Board in May 2015.
- The Guidelines include standards to promote compliance with the obligations described in Law no. 14/2013 and its Regulation.

### Payment System — Reforms in the Payment System
- Developing the retail payments network (SIMO):
  - A new regulation on the connection to the single national electronic payment network has been approved, awaiting its publication.
  - The new regulation (Notice 02/GBM/2015) includes, among other issues, the migration schedule within 12 months agreed with the banks.

### Business Environment (EMAN II 2013-2017)
- Implementation is underway.
- Registration and licensing of economic activities:
  - The e-BAU platform is currently being installed in Maputo (Matola), Gaza, Inhambane, Sofala, Tete, Nampula and Cabo Delgado, and completion is expected by June 2015.
  - Installation phase will be followed by on-the-job training activities for front and back offices officials.
  - The website www.portaldacidadão.gov.mz will be upgraded by June 2015 to improve disclosure of business-relevant information.
- Licensing time reductions:
  - The time for licensing commercial activities reduced and can be done in one day or next day, if there is a need to conduct inspections in the business locations.
  - Implemented in the provinces and City of Maputo, Xai-Xai, Inhambane, Beira Nampula, Pemba and Tete.
  - Industrial licensing of big projects is now done on average within 15 days and the simplified licensing reduced to 1 day.
- Interoperability processes are underway among multiple institutions including Ministry of Justice, Constitutional Affairs and Religious, Revenue Authority, Ministry of Agriculture and Food Security, Ministry of Labour, Employment and Social Security and Ministry of Land, Environment and Rural Development.
- Medium-term commitment to review policies and strategies for industry and small and medium business.

### Program Monitoring
- Proposed assessment criteria and indicative targets up to December 2015 are shown in Table 1.
- Table 2 includes a list of existing and proposed structural benchmarks.
- The 5th PSI review is expected to be completed by end-December 2015 (as specified in the MEFP date December 12, 2014) and the 6th review by June 15, 2016.

- Selected exact figures from Table 1 (Indicative Targets and Assessment Criteria):
  - Net credit to the central government (cumulative ceiling): 2,594 2,594 4,122 NM 4,146 4,146 -2,532 M -1,902 -2,826 -5,675 -3,785 6,391 4,895
  - Stock of reserve money (ceiling): 55,299 55,299 56,969 NM 53,559 53,559 54,112 NM 58,866 58,230 62,940 61,938 65,529 64,411
  - Stock of net international reserves of the BM (floor, US$ millions): 3,147 3,147 2,881 NM 2,990 2,990 2,512 NM 3,048 2,550 3,201 2,650 3,398 2,889
  - New nonconcessional external debt contracted or guaranteed by the central government or the BM or selected state-owned enterprises with maturity of one year or more (cumulative ceiling over the duration of the program, US$ millions): 2 1,500 1,500 1,298 M 1,500 1,500 1,298 M 1,500 1,500 1,500 1,500 1,500 1,500
  - Government revenue (cumulative floor): 3 143,957 143,957 146,397 M 30,200 30,200 30,833 M 69,460 70,093 110,230 110,230 151,000 151,000
  - Priority spending (cumulative floor): 3 119,000 119,000 115,698 NM

### Structural Benchmarks for 2015-16 (selected entries from Table 2)
- Government will issue budget guidelines requiring a mandatory technical assessment by the Investment Evaluation Committee for new public investment projects to be included in the 2016 and subsequent budgets of a value of $50 million or more. (¶17 of the MEFP dated December 12, 2014)
  - Date of Implementation: End-May 2015
  - Status: Not met. Proposed to be rescheduled to July 2015
  - Macroeconomic Relevance: Strengthening public investment management

- The government will either pay or securitize the stock of valid VAT reimbursement requests submitted up to end-2014. (¶ 27 of the MEFP dated December 12, 2014)
  - Date of Implementation: End-March 2015
  - Status: Met
  - Macroeconomic Relevance: Strengthening tax administration

- The Government will finalize and fully operationalize the IT application for payments of VAT, ISPC, and corporate and personal income taxes through banks. (¶29 of the MEFP dated December 12, 2014)
  - Date of Implementation: End-June 2015
  - Status: Approved in 3rd Review
  - Macroeconomic Relevance: Strengthening tax administration

- The use of T-bonds as collateral in money market operations will become operational. (¶41 of the MEFP dated December 12, 2014)
  - Date of Implementation: End-September 2015
  - Status: Approved in 3rd Review
  - Macroeconomic Relevance: Deepening capital markets

- The 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. (¶26 of the MEFP dated December 12, 2014)
  - Date of Implementation: End-June 2015
  - Status: Approved in 3rd Review
  - Macroeconomic Relevance: Ensuring fiscal sustainability

- The draft law on the establishment of a movable collateral registry will be submitted to the Council of Ministers. (¶47 of the MEFP dated December 12, 2014 and ¶44 of this MEFP)
  - Date of Implementation: End-September 2015
  - Status: Not expected to be met. Proposed to be rescheduled to November 2015
  - Macroeconomic Relevance: Deepening financial markets

- Other proposed benchmarks (selected):
  - Produce an assessment on fiscal risks for inclusion in the 2016 budget documents. — End-October 2015 — Proposed — Improving the management of fiscal risks (PFM)
  - Complete mandatory assessments by the Investment Evaluation Committee of all public investment projects exceeding $50 million included in the 2016 budget and/or the revised IIP. — End-December 2015 — Proposed — Strengthening public investment management (PFM)
  - Submit to the Council of Ministers the National Financial Inclusion Strategy by the Bank of Mozambique. — End-December 2015 — Proposed — Increasing access to financial services
  - Issue a decree or administrative order that makes the real-time recording of the commitment and verification of expenditures mandatory for all units operating within e-SISTAFE. — End-January 2016 — Proposed — Strengthening expenditure coverage and tracking (PFM)
  - Enforce the law that requires 20 percent withholding tax on interests earned on T-bills, OTs, secured and unsecured interbank transactions. — End-January 2016 — Proposed — Developing the Interbank Money Market

### Attachment II. Technical Memorandum of Understanding (TMU) — Definitions (selected)
- Purpose:
  - The TMU defines the quantitative assessment criteria, indicative targets, and structural benchmarks on the basis of which the implementation of the Fund-supported program under the Policy Support Instrument (PSI) will be monitored.
  - The TMU establishes terms and timeframe for transmitting data to enable Fund staff to monitor program implementation.
  - Date of TMU heading: June 12, 2015

- A. Net credit to the central government (NCG):
  - Defined as the difference between the outstanding amount of bank credits to the central government and the central government's deposits with the banking system, excluding deposits in project accounts with the banking system, recapitalization bonds issued to the Bank of Mozambique (BM), and proceeds from the signing fee for mineral resource exploration.
  - Credits comprise bank loans, advances to the central government and holdings of central government securities and promissory notes.
  - NCG will be calculated based on data from balance sheets of the monetary authority and commercial banks as per the monetary survey.
  - Limits on the change in NCG by the banking system will be cumulative from end-December of the previous year.

- B. Government revenue and financing:
  - Revenue includes all receipts of the General Directorate of Tax (Direcção Geral dos Impostos, DGI), the General Directorate of Customs (Direcção Geral das Alfândegas, DGA), and nontax revenue, including certain own-generated revenues of districts and some line ministries, as defined in the budget.
  - Revenue is gross revenue net of verified VAT refund requests (pedidos verificadas de reembolsos solicitados).
  - Net receipts from privatization received by the National Directorate of State Assets (Direcção Nacional do Património do Estado) and unrealized profits transferred by the central bank to the treasury will not be considered as revenue and will be accounted for as other domestic financing.

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

- D. Reserve money:
  - Defined as the sum of currency issued by the BM and commercial banks’ holdings at the BM.
  - The target is defined in terms of the average of the daily end-of-day stocks in the month of the test date.
  - The reserve money stock will be monitored and reported by the BM.

- E. Net international reserves (NIR):
  - Defined as reserve assets minus reserve liabilities.
  - BM’s reserve assets include: (a) monetary gold; (b) holdings of SDRs; (c) reserve position at the IMF; (d) holdings of foreign exchange; and (e) claims on nonresidents, such as deposits abroad (excluding the central government’s savings accounts related to mineral resource extraction concessions).
  - Reserve assets exclude assets pledged or otherwise encumbered.
  - BM’s reserve liabilities include: (a) all short-term foreign exchange liabilities to nonresidents with original maturity of up to and including one year; and (b) all liabilities to the IMF.

- F. New nonconcessional external debt contracted or guaranteed by the central government, the BM, and selected state-owned enterprises, with maturity of more than one year:
  - Ceiling applies to external debt contracted or guaranteed by central government, the BM, the Road Fund, FIPAG, EDM, ENH, or enterprises and agencies in which the above entities hold a majority stake.
  - Also applies to debt contracted by these four state-owned enterprises from domestic banks or from other state-owned enterprises that is contractually inter-related to external nonconcessional loans.
  - Applies to external debt with original maturity of one year or more and with a grant element below 35 percent.
  - Grant element is calculated using a discount rate of 5 percent.
  - Term ‘debt’ as per Point 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements adopted August 3, 1979, as amended August 31, 2009, effective December 1, 2009.
  - Concept of external debt is defined on basis of residency of the creditor.
  - Assessment criterion is cumulative from the beginning of the program and assessed on a continuous basis.

- G. Stock of short-term external debt contracted or guaranteed by the central government:
  - (Definition continues beyond provided text.)

*Source: _cr15223 - 42. Financial Sector Contingency Plan. Following the approval by the Board of BM of an*

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

### _cr15223 - 12.      The central government will not contract or guarantee external debt with original

### Assessment criterion: short-term external debt
- The central government will not contract or guarantee external debt with original maturity of less than one year.
- This assessment criterion applies to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements adopted on August 3, 1979, as amended August 31, 2009, effective December 1, 2009.
- The concept of external debt is defined on the basis of the residency of the creditor.
- Excluded from this assessment criterion are short-term, import-related trade credits.
- This assessment criterion will be assessed on a continuous basis.

### External payments arrears of the central government
- The government undertakes not to incur payments arrears on external debt contracted or guaranteed by the central government, with the exception of external payments arrears arising from central government debt that is being renegotiated with creditors.
- This assessment criterion will be assessed on a continuous basis.

### Foreign program assistance
- Foreign program assistance is defined as grants and loans received by the Ministry of Finance through BM accounts excluding those related to projects (Table 1).

### Actual external debt service payments
- Actual external debt service payments are defined as cash payments on external debt service obligations of the central government and central bank, including obligations to Paris Club and other bilateral creditors rescheduled under enhanced HIPC Initiative completion point terms, multilateral creditors, and private creditors, but excluding obligations to the IMF (Table 1).

### Adjusters — Net international reserves (NIR)
- The quantitative targets (floors) for net international reserves (NIR) will be adjusted:
  - downward by the shortfall in external program aid less debt service payments (up to US$200 million), compared to the program baseline (Table 1);
  - upward by any windfall capital gain tax receipts in excess of US$30 million collected during the program period;
  - downward/upward for any revision made to the end-year figures corresponding to the previous year; and
  - downward to accommodate higher external outlays because of natural disasters, up to US$20 million.

### Adjusters — Net credit to central government (NCG)
- The quantitative targets (ceilings) for net credit to the central government (NCG) will be adjusted:
  - upward by the shortfall in the MT value of external program aid receipts less debt service payments (up to the MT equivalent of US$200 million at exchange rates prevailing at the respective test dates), compared to the program baseline (Table 1);
  - downward by any windfall capital gain tax receipts in excess of US$ 30 million collected during the program period;
  - downward by privatization proceeds in excess of those envisaged in the program, unless these proceeds are deposited in the government’s savings accounts abroad;
  - downward (upward) for any increase (decrease) in domestic financing from the nonfinancial private sector; and
  - upward to accommodate the higher locally-financed outlays because of natural disasters, up to the MT equivalent of US$20 million at exchange rates prevailing at the respective test dates.

### Adjuster — Reserve money
- The ceiling on reserve money for every test date will be adjusted downward/upward to reflect decreases/increases in the legal reserve requirement on the liabilities in commercial banks.
- The adjuster will be calculated as the change in the reserve requirement coefficient multiplied by the amount of commercial banks’ liabilities subject to reserve requirement, considered at the end of the period of constitution of the required reserves prior to the change in regulation.

### Adjuster — Government revenue
- The quantitative targets (floors) for government revenue will be adjusted upward by any windfall capital gain tax receipts in excess of US$ 30 million collected during the program period.

### Data and other reporting obligations
- The Government will provide Fund staff with:
  - monthly and quarterly data needed to monitor program implementation in relation to the program’s quantitative targets and broader economic developments;
  - weekly updates of the daily data set out in Table 1;
  - weekly data set out in Table 4 of the TMU dated May 26, 2005;
  - monthly updates of the foreign exchange cash flow of the BM;
  - monthly data on government revenues (in detail according to the fiscal table) with a lag not exceeding one month;
  - monthly data on verified VAT refund requests;
  - monthly information on the balance of government savings accounts abroad;
  - monthly data on domestic arrears;
  - monthly data on external arrears;
  - monthly budget execution reports (that will also be published) with a time lag not exceeding 45 days;
  - the “mapa fiscal” with a time lag not exceeding 60 days;
  - monthly monetary survey data with a time lag not exceeding 30 days;
  - monthly data on gross international reserves, with the composition by original currencies and converted to US dollars at the actual exchange rates;
  - quarterly balance-of-payments data with a time lag not exceeding 65 days;
  - monthly disbursements on the nonconcessional Portuguese credit line with a time lag not exceeding 30 days.
- The monetary survey made available by the BM will clearly identify donor-financed project deposits (with a breakdown between foreign and domestic currency) included in net credit to the government in both the central bank’s and commercial banks’ balance sheets.
- The Government will provide Fund staff with documentation concerning external loan agreements once these have been signed and become effective.

### TMU Table 1 highlights (Net Foreign Assistance, 2014Q4-2015Q4)
- Net foreign program assistance (US$ mn): 90 69 -56 -54 221
- Gross foreign program assistance: 176 103 193 6268
- Program grants: 122 80 193 695
- Program loans: 54 24 00 173
- External debt service: 86 35 75 90 47
- Cumulative net foreign program assistance in US dollars: 113 69 13 -41 181
- Gross foreign program assistance (another row): 394 103 123 159 427
- External debt service (another row): 281 351 092 002 47
- Net foreign program assistance (MT mn): 2,924 2,355 -1,943 -1,890 7,746
- Gross foreign program assistance (MT mn): 5,705 3,540 676 1,274 9,380
- Program grants (MT mn): 3,956 2,731 676 1,274 3,332
- Program loans (MT mn): 1,750 809 00 6,048
- External debt service (MT mn): 2,781 1,185 2,619 3,165 1,634
- Cumulative Net foreign program assistance in MTN millions: 3,610 2,355 412 -1,478 6,268
- Gross foreign program assistance (MTN millions): 12,490 3,540 4,217 5,491 14,870
- External debt service (MTN millions): 8,880 1,185 3,804 6,969 8,602
- Source: Mozambican authorities and IMF staff estimates.
- Table title: TMU Table 1. Mozambique: Net Foreign Assistance, 2014Q4-2015Q4

### Debt Sustainability Analysis (DSA) — overview and risk assessment
- This DSA updates the joint IMF/IDA DSA from April 2014.
- Mozambique remains at moderate risk of external public debt distress.
- Key indicators continue to remain below the thresholds in the baseline scenario, but gradual fiscal consolidation, as agreed under the program, is needed to keep debt sustainable.
- Further improvements in debt management and investment planning capacity are essential to appropriately balance consolidation with the importance of public investment for development.
- There is a current large pipeline of upcoming investments that need to be appropriately scrutinized and contracted at a measured pace to retain debt sustainability.
- Public debt is largely external; evolution of total public debt indicators mirrors that of public external debt.
- Private external debt is expected to increase rapidly in importance, driven by investment in the natural gas sector, and to comprise the majority of external debt by the end of this decade.
- The authorities were in broad agreement with the DSA outlook and presentation; their technical comments have been taken on board.

### Underlying DSA assumptions and macroeconomic outlook
- The DSA is based on the standard low-income countries (LIC) DSA framework.
- Compared to the previous DSA, main changes:
  - The medium-term macroeconomic framework has been updated but is similar to the last DSA.
  - Economic growth was 7.4 percent in 2014 and projected at 7 percent in 2015 (compared to 8.3 and 8.2 percent respectively in the previous DSA).
  - Reasons for slower growth include slower-than-expected increases in coal production, political uncertainties before the presidential election in 2014, and the effects of the floods in early 2015.
  - Growth is expected to accelerate over the medium term on the back of extractive industries and infrastructure investments.
  - The overall fiscal deficit was higher in 2014, with expenditure loosening influenced by the electoral cycle and one-off spending on maritime security (2.8 percent of GDP).
  - Substantial fiscal consolidation is expected in 2015, mainly through a reduction in public spending and continued improvement in domestic revenue mobilization.
  - The current account deficit is projected to remain in the range of 38-45 percent of GDP over the medium term reflecting significant imports related to development of the gas and coal sectors; these imports are financed primarily by non-debt creating FDI.
- From 2020 onwards staff adopts a relatively conservative approach with public debt stocks falling by less than implied by projected growth (and the fiscal deficit path) due to uncertainty surrounding the LNG development, resulting in modestly positive residuals in the analysis of public debt.

### Box 1 — Macroeconomic Assumptions 2015–35 (baseline scenario)
- Real GDP growth projected in the 7-8 percent range on average in the longer term.
- Growth expected to accelerate over the medium term, supported by expansion in coal mining and infrastructure investments.
- A sharp increase in growth in 2020 reflects assumed coming on line of the first natural gas production plant (“train”) and related exports in that year.
- LNG sector assumptions:
  - LNG plants assumed under construction during 2016–22.
  - Projection assumes a moderate-sized plant consisting of four LNG manufacturing units (“trains”).
  - One train assumed to start production in 2020, second in 2021, third and fourth in 2023.
  - Total investment projected at $40 billion.
  - Annual LNG output will reach 20 million tons in 2023, contributing more than 20 percent of nominal GDP by then.
  - These assumptions are labeled conservative given potential project size but adequate before a final investment decision by investors.
- Consumer price inflation projected to remain in the authorities’ target range of 5–6 percent over the medium term.
- Export growth projected to remain around 7 percent a year in the longer term as coal and LNG exports stabilize; short-term export growth shows sharp changes due to large coal and LNG development project cycles, with growth almost doubling in 2020-23 due to LNG exports coming on line.
- Imports projected to show abrupt jumps in 2016-2023 during the LNG plant construction phase, stabilizing at around 8 percent a year in the long term.
- The non-interest external current account deficit projected to rise to over 40 percent of GDP in the medium term largely driven by LNG-related imports; principally financed through FDI and private external borrowing; averaging 14 percent of GDP in the long term as coal exports increase and LNG exports start.
- The non-interest primary fiscal deficit projected to widen in 2014 reflecting expansionary election-year budget, including one-off maritime security expenditure (2.8 percent of GDP).
- Fiscal balance expected to improve in the medium to long term as revenue efforts continue, the wage bill and public investment taper off, and other non-interest current expenditure falls in percent of fast-growing GDP.
- Fiscal balance expected to improve further beyond 2020 once LNG revenue commences.

### External borrowing profile and pipeline (as of June 2015)
- New borrowing generally contained since the last DSA, but pending applications for large bilateral loans increased and now surpass US$ 2.2 billion.
- The pipeline does not include all priority projects of the government’s five-year investment plan.
- Pipeline expected to lead to increase in external borrowing compared to previous DSA; more costly domestic financing being scaled back to achieve envisaged fiscal consolidation.
- About two-thirds of this external loan pipeline envisaged to be contracted on concessional terms; total borrowing approaches the pipeline of 2012-13 (US$ 3 billion) which elevated risk from low to moderate in Country Report 13/200.
- Note on past: Non-concessional borrowing had been high in 2013 because of the government guarantee for Loan Participation Notes (LNP) of $850 million (6 percent of GDP) issued on behalf of EMATUM; government incorporated $500 million as government debt in the 2014 budget related to maritime security. The DSA already included publicly-guaranteed debt.
- Authorities envisage signing most of the loans in Text Table 2 only after completing work on the medium term fiscal framework.

### Text Table 2 — Large Bilateral Loans in the Pipeline, as of June 2015 (selected figures)
- Loan amount total: 2,259.5 (US$ millions)
- Non-concessional loans total: 799.8
  - China: Fiber Optic in Metropolitan Areas EXIMBANK is evaluating feasibility study. 185.4
  - Transmission line Caia-Nacala EXIMBANK is evaluating feasibility study. 400.0
  - Road N380 Chimuarra - Namacurra EXIMBANK is evaluating feasibility study. 120.0
  - Road N1 Sunate - Macomia EXIMBANK is evaluating feasibility study. 94.4
- Bilateral concessional loans total: 1,459.7
  - China: 3 Grocery Warehouses Financing agreement is under negotiation. 60.0
  - Rehabilitation of Chipembe Dam EXIMBANK is evaluating feasibility study. 90.3
  - Road/Bridge Rio Lurio EXIMBANK is evaluating feasibility study. 65.4
  - Modernization of Irrigation in Chokwe EXIMBANK is evaluating feasibility study. 78.0
  - Digital Migration I EXIMBANK is evaluating feasibility study. 60.0
  - Digital Migration II Proposal sent to China; awaiting response. 223.0
  - Maputo Exposition Grounds Under consideration. No financing yet requested from EXIMBANK. 150.0
  - Hydropower Dam Lurio Under consideration. No financing yet requested to EXIMBANK. 450.0
  - Japan: Nacala Port Phase II Signature expected by mid-2015. 283.0

### Private sector debt and medium-term borrowing
- International Investment Position data puts private external debt at 31 percent of GDP in 2014.
- Private external debt projected to rise to some 85 percent by 2020, somewhat less steeply than in the previous DSA because more financing is now expected through equity.
- The ratio is expected to fall back to 49 percent by 2025 when LNG is exported and private borrowing is being amortized.
- This debt is mobilized and repaid entirely through offshore SPVs, which limits risk to the domestic financial system.

### External debt sustainability projections and risks
- Total external debt (public and private) projected to peak at about 137 percent of GDP in 2020.
- By 2020 private sector debt will represent about two thirds of total external debt.
- Increase in private external debt mainly driven by investments in the natural gas sector; coal sector investments projected to be financed through FDI.
- Significant build-up of private sector external debt needs monitoring to contain vulnerabilities, though risks are limited due to financing through offshore SPVs.
- With renowned global companies leading investments in natural resource sector, the risk for government contingent liabilities or other vulnerabilities beyond natural resource operations is deemed modest.
- Risk of BOP pressures emerging as a direct result of megaproject-related investment activity considered to be low, but care required once revenues materialize due to volatility of world commodity prices and potential exchange rate appreciation risks.

*Source: Republic of Mozambique — INTERNATIONAL MONETARY FUND (extracted content).*

### 3.      All public external debt indicators remain below their respective thresholds in the baseline

### 3.      All public external debt indicators remain below their respective thresholds in the baseline

### Baseline debt trajectory and key statistics
- The PV of debt in terms of GDP now peaks around 35.6 percent (in 2019), compared to a peak of 33 percent in the previous DSA.
- The beginning of LNG production and the ensuing surge in GDP would reduce the ratio down to a 30-32 percent range in the next decade (Table 1).
- Under the baseline scenario, the PV of public debt remains below 45 percent of GDP throughout, therefore remaining well contained and below the indicative benchmarks that research has linked to increased probability of debt distress.
- Debt service indicators remain substantially below their thresholds, including under stress tests, and reflect conservative assumptions regarding the grant element for future borrowing.

### Stress-test results and vulnerabilities
- External debt ratios are sensitive to FDI, terms-of-trade and exchange rate shocks.
- The threshold for the PV of debt to GDP ratio is breached under the most extreme stress tests for a sustained period.
- A combination shock consisting of reductions in non-debt creating FDI, export prices and growth in 2016-2017 would:
  - push the PV of debt/GDP ratio well above the 40 percent threshold during the next 15 years, with a peak of about 70 percent (Figure 1).
  - in this and two other severe shock scenarios (sharp depreciation of the metical in 2016, or a shock to FDI) the PV of debt will also breach the debt/exports threshold of 150 percent of exports.
- The charts in Figure 1 display the stress test with the most adverse outcome in 2025.
- The impact of the standard shocks in the DSA template is heightened by the fact that the standard stress tests revert to historical values, which are significantly different from current and expected values because of the structural change in the Mozambican economy resulting from the large-scale exploitation of coal and natural gas since 2011.
- The historical scenario has been excluded from Figure 1 because it shows unrealistically fast declines of public debt ratios over the medium term by fixing the current account deficit at an historical average of 19.2 percent of GDP — much lower than the 38-45 percent of GDP deficits — resulting in unrealistically fast declines of public debt ratios.
- The scenario in which variables are at their historical levels has been omitted given that it generates negative debt as a result of the large changes in variables in the baseline arising from LNG activities.
- The breach of the debt/exports threshold under stress tests should not be overemphasized as a fall in FDI would likely be linked to lower imports rather than higher borrowing as implicitly assumed in the standard shock scenario.

### Public sector debt dynamics and policy implications
- The evolution of public debt indicators (including domestic debt) mirrors that of the external indicators because of the predominance of external debt (Table 3 and Figure 2).
- The medium-term increase in public debt reflects the gradual contraction of loans currently in the pipeline leading to a temporary buildup in externally-financed public investment toward the end of this decade.
- The DSA assumes that about 10 years after the start of LNG exports the public sector will dedicate an increasing share of resources to pay back debt.
- It is essential for debt sustainability to prioritize appropriately the investment projects currently in the pipeline, particularly given other potential funding needs for investment projects (including in the energy sector) that are not yet in the pipeline.
- This borrowing plan will need to be consistent with the envisaged gradual reduction in the fiscal primary deficit over the medium run to place public debt on a downward trajectory.
- Ensuring that LNG production materializes is crucial for Mozambique’s debt sustainability:
  - The authorities have made significant progress in establishing legal frameworks for the sector, but further time-sensitive steps need to be taken this year to ensure that LNG investment can move forward.
  - The LNG sector is expected to contribute significantly to GDP, exports and government revenue.
  - A gradual public investment scaling-up, as under the baseline scenario, anticipating some LNG revenue would be appropriate given Mozambique’s infrastructure investment needs.
  - If there are delays in project take-off or LNG production or revenue is much lower than expected, the debt ratios would be higher over the medium to long term.
- The breaches under the stress tests would be reversed by the coming on stream of LNG production, and seem manageable against the backdrop of the authorities’ strong track record of prudent economic management.

### Conclusion and risk classification
- While the standard DSA shocks indicate that Mozambique would be in the moderate risk of external public debt distress category, public investment should continue to move forward.
- Projects need to be appropriately prioritized to maintain debt sustainability given a large loan pipeline.
- Even against the background of a temporarily accelerated pace of disbursements toward the end of this decade, the baseline debt trajectories remain below their respective thresholds throughout.

*Source: _cr15223 - 3.      All public external debt indicators remain below their respective thresholds in the baseline*

### 9.      This analysis highlights three important points for debt sustainability. First, it will be

### _cr15223 - 9.      This analysis highlights three important points for debt sustainability. First, it will be

### Debt sustainability: three headline points
- It will be important to continue to improve debt management and investment planning capacity to ensure that the most deserving public investment projects are selected and yield their desired payoff. This is becoming even more important, because of the full loan pipeline.
- It will be important for the authorities to commence the gradual fiscal consolidation envisaged in their program to place public debt on a gradual downward trajectory over the medium term while addressing key public investment priorities.
- It continues to be important—including from a debt sustainability perspective—to take the essential time-sensitive steps to ensure that LNG production materializes in order to lock in the beneficial effects on GDP and fiscal revenue.

### Indicators of public and publicly guaranteed external debt (selected values, 2015–2035)
- PV of external debt (percent of GDP, series as presented): 61.5, 67.2, 75.8, 83.6, 98.3, 115.5, 120.0, 83.0, 52.3
- PV of PPG external debt (percent of GDP, series as presented): 30.4, 31.9, 32.0, 32.9, 34.0, 35.6, 34.5, 34.1, 28.9
- PV of external debt (percent of exports, series as presented): 221.0, 236.5, 267.5, 277.8, 307.3, 344.1, 306.2, 176.4, 131.4
- PV of PPG external debt (percent of exports, series as presented): 109.4, 112.1, 113.1, 109.2, 106.2, 106.0, 88.1, 72.5, 72.5
- PV of PPG external debt (percent of government revenues, series as presented): 109.3, 124.8, 124.8, 127.0, 130.8, 136.5, 132.2, 127.5, 103.7
- Debt service-to-exports ratio (in percent, series as presented): 9.4, 11.0, 28.8, 27.6, 27.1, 27.0, 27.2, 29.3, 25.6, 15.8, 17.2
- PPG debt service-to-exports ratio (in percent, series as presented): 1.9, 2.7, 15.5, 7.8, 9.2, 8.8, 8.1, 7.7, 6.0, 4.1, 6.3
- Total gross financing need (Billions of U.S. dollars, series as presented): 1.4, 0.5, 2.1, 3.2, 4.2, 4.6, 6.6, 6.8, 6.5, 2.8, -1.1

### Key macroeconomic assumptions (selected series as presented)
- Real GDP growth (in percent): 7.1, 7.4, 7.4, 7.3, 0.9, 7.0, 8.2, 7.9, 8.0, 7.9, 17.6, 9.4, 7.0, 6.8, 7.8
- GDP deflator in US dollar terms (change in percent): 4.8, -2.2, -0.5, 2.4, 8.6, -4.9, 3.6, 3.4, 3.4, 3.5, 3.5, 2.1, 2.4, 2.4, 2.5
- Effective interest rate (percent): 1.1, 1.1, 1.1, 1.6, 0.7, 4.6, 4.3, 4.3, 4.3, 4.5, 4.7, 4.4, 4.0, 4.2, 4.1
- Growth of exports of G&S (US dollar terms, in percent): 28.3, -3.8, -2.7, 11.2, 15.9, 4.1, 11.7, 18.4, 18.8, 17.1, 41.9, 18.7, 4.8, 3.6, 11.0
- Growth of imports of G&S (US dollar terms, in percent): 59.0, 2.5, -6.3, 19.2, 24.3, 2.6, 15.1, 8.3, 21.4, 9.0, 13.7, 11.7, 10.3, 7.6, 7.6
- Grant element of new public sector borrowing (in percent, series as presented): 34.5, 31.9, 31.5, 30.6, 28.5, 27.5, 30.7, 26.6, 18.2, 24.1
- Government revenues (excluding grants, in percent of GDP, series as presented): 22.4, 26.9, 27.8, 25.5, 25.7, 25.9, 26.0, 26.1, 26.1, 26.8, 27.8, 27.1
- Grant-equivalent financing (in percent of GDP, series as presented): 7.2, 5.6, 5.3, 4.9, 4.5, 3.8, 1.9, 0.8, 1.6
- Grant-equivalent financing (in percent of external financing, series as presented): 62.0, 54.8, 49.9, 46.3, 41.8, 38.6, 34.2, 22.9, 30.4

### Public sector debt (baseline scenario, selected values)
- Public sector debt (percent of GDP, series as presented): 40.8, 52.2, 57.5, 61.0, 59.8, 58.9, 58.1, 57.4, 52.8, 45.6, 33.3
- Foreign-currency denominated share of public sector debt (percent of GDP, series as presented): 35.2, 43.4, 48.9, 50.6, 50.5, 51.4, 52.5, 54.2, 51.6, 47.6, 36.5
- Change in public sector debt (percent of GDP, series as presented): 3.2, 11.5, 5.3, 3.5, -1.2, -0.9, -0.8, -0.7, -4.5, -0.5, -1.4
- Primary deficit (percent of GDP, series as presented): 2.9, 1.8, 9.3, 3.5, 2.2, 5.0, 3.6, 4.0, 4.2, 2.9, 2.1, 3.6, -0.4, -1.0, -0.7
- Revenue and grants (percent of GDP, series as presented): 27.5, 32.2, 32.9, 30.4, 29.1, 28.7, 28.4, 28.1, 27.6, 27.4, 28.0
- PV of public sector debt (percent of GDP, series as presented): 39.1, 42.3, 41.3, 40.4, 39.5, 38.8, 35.8, 32.2, 25.6
- Gross financing need (percent of GDP, series as presented): 4.6, 3.6, 18.0, 12.3, 11.4, 11.9, 12.3, 11.3, 10.0, 8.8, 6.6
- PV of public sector debt-to-revenue and grants ratio (in percent, series as presented): 118.8, 139.1, 141.9, 140.5, 139.3, 138.2, 129.5, 117.5, 91.4
- Debt service-to-revenue and grants ratio (in percent, series as presented): 6.0, 5.4, 26.4, 24.2, 26.7, 27.6, 28.5, 29.7, 28.7, 33.7, 27.1

### Sensitivity analysis and stress tests (selected highlights)
- PV of debt-to-GDP ratio (baseline and selected scenarios, percent):
  - Baseline (2015–2035 snapshot series as presented): 32, 32, 33, 34, 36, 35, 34, 29
  - A1 (key variables at historical averages 2015-2035): 32, 24, 18, 80, -33, 08, 7 (as presented in Table 2)
  - A2 (new public sector loans on less favorable terms): 23, 23, 33, 36, 39, 42, 42, 45, 43
  - B6 (one-time 30 percent nominal depreciation relative to baseline in 2016): 32, 45, 46, 47, 50, 48, 47, 40
- PV of debt-to-exports ratio (baseline and selected scenarios, percent):
  - Baseline (series as presented): 112, 113, 109, 106, 106, 88, 73, 73
  - A2 (less favorable financing): 211, 211, 181, 120, 122, 126, 108, 95, 107
  - B6 (one-time 30 percent nominal depreciation): 112, 112, 108, 105, 105, 87, 71, 71
- PV of debt-to-revenue ratio (baseline and selected scenarios, percent):
  - Baseline (series as presented): 125, 125, 127, 131, 137, 132, 127, 104
  - A2 (less favorable financing): 212, 513, 013, 915, 016, 216, 216, 7153 (as presented)
  - B6 (one-time 30 percent nominal depreciation): 125, 174, 177, 182, 190, 184, 176, 143
- Debt service-to-exports ratio and debt service-to-revenue ratio (selected baseline values):
  - Debt service-to-exports ratio baseline (series as presented): 89, 98, 88, 46
  - Debt service-to-revenue ratio baseline (series as presented): 91, 01, 01, 01, 09, 79

(Note: Tables 1–4 and Figure 1–2 present multiple scenario series and bound tests including combinations of shocks, one-time depreciations, and alternative financing terms. The most extreme stress test is defined as the test that yields the highest ratio on or before 2025.)

### Policy implications and recommendations (derived from the analysis)
- Strengthen debt management and investment planning capacity so that public investments selected from the loan pipeline generate their intended payoffs.
- Begin the gradual fiscal consolidation envisaged in the program to place public debt on a gradual downward trajectory over the medium term while maintaining key public investment priorities.
- Take time-sensitive steps to ensure LNG production materializes to capture beneficial effects on GDP and fiscal revenue and to improve debt sustainability metrics.

*Sources: Country authorities; and staff estimates and projections.*

### 1. Introduction

### _cr15223 - 1. Introduction

### 1. Introduction
- The Mozambican authorities value continued Fund engagement and the Policy Support Instrument (PSI) arrangement.
- Authorities request Executive Board approval for completion of the fourth PSI review and modification of assessment criteria.
- Candid discussions during the fourth PSI review are a key source of policy support for sustainable development.

### 2. Recent Economic Developments and Outlook
- Growth and poverty
  - Steady economic growth averaging 7-8 percent over the past five years.
  - Poverty incidence declined from 69.4 percent in 1996/97 to less than 54 percent in 2009, and is expected to reach 42 percent in 2014.
  - Economic growth in 2014 remained robust [7.4 percent], driven by rebound in agriculture and manufacturing, buoyant financial sector services, and continued strength in the extractive sector (decelerating due to a less favorable coal market outlook).
- Risks and projections
  - Downside risks from commodity price and terms of trade shocks and floods in early 2014.
  - Medium-term outlook projected to be consistent with the average trend achieved over the past five years.
  - Need to boost activity in employment-generating sectors (agriculture, manufacturing) by reducing structural bottlenecks.
- Government strategy and reforms
  - Government’s Five Year Plan (2015-2019) focuses on employment creation, poverty reduction, enhancing competitiveness and productivity, and augmenting fiscal space for investment projects.
  - Proposed reforms include improving transportation logistics for SMEs and megaprojects, strengthening agricultural and manufacturing value chains, bolstering human capital development, and creating a friendly business environment.
- Fiscal stance and 2014–2015 fiscal developments
  - Fiscal stance calibrated to support broad-based growth while preserving sustainability.
  - 2014 budget law enacted in early 2015 and amended in May 2015 to increase fiscal space for elections-related expenditures.
  - Total revenues reached 28 percent of GDP in 2014.
  - Total expenditures including net lending amounted 40 percent of GDP in 2014, 5.1 percentage points higher than the same period of 2013.
  - Revenue excluding the one-off capital gain tax is projected to rise by 0.9 percentage points of GDP in 2015.
  - Total expenditure including net lending is projected to decline to 36.0 percent of GDP in 2015.
  - Overall fiscal deficit expected to decline to 6.5 percent of GDP in 2015, from 11 percent of GDP reached in 2014.
- Monetary and exchange rate developments
  - Policy geared to safeguard price and exchange rate stability and boost competitiveness over the medium-term.
  - Annual inflation for twelve months ending in May was 1.2 percent.
  - Depreciation pressures between Q4 2014 and end-March 2015 due to US dollar strength vs. the Metical, higher demand for imports excluding mega projects, weaker non-mega project exports, currency volatility around the 2014 elections, and containment in budget support disbursement.
  - Bank of Mozambique (BM) intervened by selling US$ 320 million in Q4 2014 and US$ 478 million in Q1 2015, contributing to significant reserve losses.
  - Going forward the BM will continue to adjust policy to anchor inflation expectations and improve competitiveness.

### 3. Program Performance
- Overall assessment
  - Program remains broadly on track.
  - Authorities committed to enhancing macroeconomic and structural reforms, yielding substantial improvements.
- Performance criteria and targets
  - Two out of six end-December performance criteria (PC) were missed by a small margin: net credit to the government (NCG) and reserve money growth.
  - Assessment criterion on net international reserves (NIR) deviated from the target by US$ 265 million due to interventions to address depreciation pressures and exchange rate volatility.
  - Through March 2015, foreign exchange market pressures persisted and NIR was missed by US$ 478 million.
  - Reserve money target was missed marginally by US$ 15.3 million.
- Causes and policy response
  - Slower than anticipated return of currency in circulation into the banking system in Q1 2015 led to higher money growth.
  - Continued depreciation pressures from sluggish decline in demand for imports.
  - BM measures to allow Metical to depreciate further by about 7.0 percent from March to June.
  - BM will continue to adjust policy instruments to gradually contain money growth and help stabilize the exchange rate.
- Structural benchmarks
  - End-March structural benchmark on securitization of VAT arrears amounting US$ 500 million was met.
  - Completion of the review of the Integrated Investment Plan (IIP) rescheduled to end-December 2015 to align with the Five Year Plan (2015-2019) and 2016 budget cycle.

### 4. Structural Policies
- Overarching objective
  - Foster inclusive growth by accelerating economic diversification and transformation, enhancing fiscal stance, and improving the monetary policy framework.
- Fiscal Policy
  - Medium-term fiscal strategy aims at fiscal consolidation through strengthening fiscal structural reforms.
  - Continue reforms to broaden the tax base, increase tax administration efficiency, tax rents from the hydrocarbon sector, and improve management of fiscal risks.
  - Continue e-Tax module implementation targeting registration of taxpayers: target to increase registration to 55 percent of all VAT taxpayers in 2015.
  - Enhance tax payments through banks and modernize the Revenue Authority to support revenue mobilization.
  - Expenditure policy focuses on increasing and diversifying public goods provision, augmenting fiscal space for priority sectors, containing the pace of recurrent expenditure increases (mostly the wage bill), and strengthening capacity for project selection, implementation and monitoring.
  - Public debt management reforms: remove from the pipeline priority investments lacking robust feasibility studies and evaluations.
  - From the next budget cycle, all projects exceeding US$ 50 million will be subject to mandatory technical assessment and approval by the Investment Evaluation Committee prior to budget inclusion.
- Monetary and Exchange Rate Policy
  - Maintain price and exchange rate stability.
  - BM will strengthen the monetary policy framework, improve analytical capacity including inflation forecasting model with IMF technical assistance, and enhance communication in monetary policy decision-making.
  - BM will improve liquidity forecasting, banking supervision, macro-prudential regulations, and increase financial deepening and diversification.
- Financial Sector Policies
  - Improve financial deepening and inclusion to foster inclusive growth and sustainable development.
  - Continue implementing Financial Sector Development Strategy (FSDS 2013-2022) with development partner support.
  - Actions focus on financial stability, financial inclusion and education, and improvement in the debt market.
  - Additional measures: establish credit registry bureaus, promote mobile banking, steer competition in the banking sector, and create a moveable collateral registry.

### 5. Concluding Remarks
- Authorities reaffirm commitment to a comprehensive reform agenda to improve macroeconomic management and unleash growth potential.
- Challenges remain significant, driven by global uncertainty and downside risks from exogenous shocks.
- Policy priorities will center on gradually removing structural bottlenecks to economic competitiveness and productivity to enhance economic resilience.

*Source: _cr15223 - 1. Introduction*

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