## _cr1532 ## Source details **Canonical URL:** [_cr1532](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1532.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1532.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1532.pdf.json) --- ### PREFACE AND MISSION - FAD mission to Maputo, Mozambique: November 11-25, 2013, to conduct a pilot Fiscal Transparency Evaluation (FTE). - Mission leadership and participants: Led by Mr. Xavier Rame; included Ms. Iyabo Masha, Ms. Delphine Moretti, Ms. Esther Palacio, Mr. Dalmo Palmeira, Ms. Juana Aristizabal, Mr. Sefa Pamuksuz (experts). - Objective: assess Mozambique’s fiscal reporting, forecasting and budgeting, and fiscal risks analysis and management practices against the IMF’s draft Fiscal Transparency Code (FTC) (consultation draft of July 1, 2013). - Stakeholders engaged: DNO, DNT, DNCP, IGF, DNPE, DEAE, AT, INE, CEDSIF, PPP Unit, INSS, IGEPE, Bank of Mozambique. - Note: Report based on information available as of November 2013; data in text, figures, and tables are IMF mission team estimates unless otherwise specified. ### EXECUTIVE SUMMARY — KEY FINDINGS - Overall assessment: - Most aspects of fiscal reporting and budgeting aligned with basic and good practices under the FTC. - Weaknesses in fiscal reporting could be addressed in short-term by ongoing reforms. - Disclosure and management of fiscal risks inadequate; need medium-term improvements, especially with expected increases in natural resource revenues. - Positive achievements and practices: - SISTAFE Law adopted in 2002 provides comprehensive PFM legal framework. - Fiscal reports cover budgetary central government and part of general government; provide information on value of some assets and liabilities. - e-SISTAFE improved frequency and timeliness of fiscal reports; classified in accordance with international standards. - Planning and budgeting frameworks provide comprehensive and timely projections. - Operational donor coordination and strong central controls over sub-national government borrowing. - Measured improvement: Open Budget Index score rose from 28 to 47 between 2010 and 2012; ranking from 68/94 to 55/100. - Principal weaknesses: - No complete and up-to-date inventory of public sector entities. - Limited institutional coverage: social security fund and numerous autonomous entities lack complete reliable reporting. - Government fiscal reporting prepared on a modified cash basis; important balance sheet elements not reported. - Budget documents recognize no fiscal risks apart from external financing; no strategy for managing them. - Major risk sources: reliance on donor support for external financing; exogenous shocks from natural disasters; activities of public enterprises; large multi-annual infrastructure contracts; contingent liabilities and quasi-fiscal activities. - State owns shares in at least 156 public enterprises and publicly-owned corporations; net asset value largely unknown; IGEPE oversight limited. - Recommendations (summary): 7 recommendations including clarifying institutional boundaries, expanding balance sheet coverage, enhancing forecast transparency and fiscal risk management, improving disclosure in hydrocarbon sector, and enhancing oversight of public enterprises. - Fiscal Transparency Action Plan included at end of report. ### FISCAL REPORTING — STRUCTURE, COVERAGE, TIMELINESS (SELECTED) - Assessed reports: Quarterly Budget Execution (REO), Quarterly Fiscal Statistics, Quarterly Debt Report, CGE (annual financial statements), Fiscal Statistics (annual), Annual Debt Report. - Institutional coverage: budgetary central government. - Stocks coverage: limited—cash, debt, some financial assets; tangible asset information partial; many reports prepared on a cash basis. - Classification frameworks: Economic (GFSM 1986, ongoing conversion to GFSM 2001), Administrative, Functional (COFOG). - Publication frequency and timeliness (Table 1.1): - Quarterly Budget Execution: Quarterly; 45 days. - Quarterly Fiscal Statistics: Quarterly; 75 days. - Quarterly Debt Report: Quarterly; 45 days. - CGE (annual): Annual; More than 15 months after the end of the fiscal year. (The volume IV of the CGE (Inventory of State Assets) is not published.) - Fiscal Statistics for 2010, 2011 and 2012 made available on the Ministry of Finance website end-2013. - Annual Debt Report: Last publication: 2013 (Debt report for 2012). ### COVERAGE OF PUBLIC SECTOR ENTITIES (SECTION 1.1) - Legal definition and registers: - SISTAFE Law (9/2002) defines public sector but scope not fully consistent with GFSM; ambiguity over corporations created under private law. - INE SNA register not updated since 2005. - DNT register excludes publicly–owned corporations and lacks exhaustive update procedures. - IGEPE maintains register of State shareholdings but: no assessment of control; register incomplete (e.g., “free” shares in concession projects not reported). - IMF staff tentative entity lists (not exhaustive): - Central government: Government units and at least 30 budgetary and extra-budgetary bodies. - General government: central government; INSS; 53 Municipalities; at least 36 Autonomous Institutions. - Public sector: general government; at least 44 non-financial Public Corporations; at least 3 financial Public Corporations (BoM, BNI, EMOSE). - Two types of public corporations: created under public law (fully owned) and created under private law (may not be fully owned). - Problems estimating scope and control: indirect and cross-shareholdings hard to assess; examples of omissions (GIPS, EMATUM). ### COVERAGE OF INSTITUTIONS, STOCKS, AND FLOWS (TABLE FIGURES PRESERVED) - Consolidated reports: CGE consolidates Budgetary Central Government and provides financial information on public entities within Central Government and General Government; SISTAFE requires inclusion of Autonomous Institutions relying on State transfers > ⅔ of resources. - Stand-alone financial statements: Municipalities, INSS, autonomous institutions, and Public Corporations legally required to prepare statements but not systematically available or centralized at MoF; accounting bases differ (Government: modified cash-basis; public corporations: accrual/IFRS); INSS not published statements since 2009. - IMF staff estimates (2012, Table 1.3 — Percent of GDP): - I. General Government sector, aggregated: Revenue net from transfers 29.7%; Expenditures net from transfers 42.1%; Balance (net lending / borrowing) -12.4% - Central government, aggregated (1): Revenue net from transfers 28.8%; Expenditures net from transfers 41.0%; Balance -12.2% - Local government (43 entities): Revenue net from transfers 0.9%; Expenditures net from transfers 1.2%; Balance -0.2% - II. Public corporation sector, aggregated: Revenue net from transfers 14.6%; Expenditures net from transfers 12.6%; Balance 1.3% - 1 Non-financial Public Enterprises (14): 5.4% revenue; 4.1% expenditures; 1.3% balance - 2 Non-financial Public Corporations (At least 32): 6.6% revenue; 6.6% expenditures; 0.0% balance - 3 Financial Public Corporations (2): 0.4% revenue; 40.0% expenditures; 0.0% balance - Public corporations (1+2+3, excl. BoM) At least 48: 12.4% revenue; 11.1% expenditures; 1.3% balance - Bank of Mozambique (BoM) (1): 2.2% revenue; 1.5% expenditures; 0.7% balance - III. Public sector, aggregated (I +II): 44.3% revenue; 54.7% expenditures; -11.1% balance - IMF staff estimate: public corporations account for at least one third of public resources; assets and liabilities account for at least 43% and 37% of GDP respectively (see Table 1.4). - Asset and liability estimates (Table 1.4 — Percent of GDP, 2012): - I. General Government sector, aggregated: Assets 26.7%; Liabilities 41.0%; Net Worth -14.4% - Central government, aggregated (1): N/I for Assets, Liabilities 26.7%; Net Worth -14.4% - II. Public corporation sector, aggregated: Assets 43.4%; Liabilities 37.1%; Net Worth 11.6% - 1 Non-financial Public Enterprises (14): Assets 13.3%; Liabilities 6.1%; Net Worth 7.2% - 2 Non-financial Public Corporations (At least 32): Assets 6.8%; Liabilities 4.9%; Net Worth 1.9% - 3 Financial Public Corporations (2): Assets 2.1%; Liabilities 1.0%; Net Worth 1.1% - Public corporations (1+2+3, excl. BoM) At least 48: Assets 22.2%; Liabilities 12.0%; Net Worth 10.2% - Bank of Mozambique (BoM) (1): Assets 21.2%; Liabilities 25.1%; Net Worth 1.5% - III. Public sector, aggregated (I +II): Assets 70.0%; Liabilities 78.1%; Net Worth -2.8% ### COVERAGE OF FLOWS - Basis and scope: Consolidated fiscal reports prepared on a cash basis; cash flow coverage in the CGE could be improved. - Specific issues: - Capital gains or exceptional revenue deposited at the Central Bank are recorded as revenue when transferred to the TSA (example: exceptional capital gain tax ~0.1 percent of GDP). - Tax revenue recorded with significant delay in the financial system due to breakdown/classification issues. - Some expenses and revenues not captured in in-year accounts; reintegrated at year-end via manual input (own/earmarked revenues of some bodies, externally financed projects); completeness difficult to assess. ### ACCRUAL FLOWS, TAX EXPENDITURES, AND TIMELINESS - Accrual flows: Not captured in consolidated fiscal reports; missing accruals linked to changes in value of assets/liabilities (e.g., variation on receivables/payables, valuation changes on financial assets, net accrual of public service pensions liabilities). - Tax expenditures: - Reported annually in CGE; amounted to 3 percent of GDP in 2012 (Figure 1.5). - Information limited: no sectoral breakdown, methodology, legal basis, or budgetary targets disclosed; VAT refunds wrongly reported as tax expenditures. - Expected to rise with investment projects and gas/oil revenue. - Frequency and timeliness: - In-year reports (Good): Quarterly budget execution reports published within 45 days; quarterly fiscal statistics published 15–30 days after budget reports. - Timeliness of annual financial statements (Not met): CGE published seventeen months after fiscal year end; stages: five months to prepare CGE; six months to submit external auditor’s report to Parliament; about six months for deliberations and approval. - Ongoing reform: implement accrual accounting based on international standards by 2025; authorities expect CGE and audit opinion available to Parliament before end of September of following year (as one outcome). ### QUALITY AND INTEGRITY OF FISCAL REPORTS - Classification (Good): Administrative, economic, and functional (COFOG) classifications used; program classification piloted since 2008. - Fiscal statistics: Cash-based; GFSM 2001 implementation started in 2012; 2010–2012 cash data converted to GFSM 2001; 2010 data published earlier, 2011–2012 published end-2013. - Data consistency (Basic): Basic reconciliation published (overall balance with financing); no reconciliation between CGE and BoM monetary accounts (coverage difference example as of December 31, 2012: BoM monetary accounts cash deposits 73,250 millions of MT; CGE cash deposits 21,673 millions of MT). - Statistical integrity (Basic): Fiscal statistics produced by DPE of the MoF (not independent); responsibility delegated from INE to DPE in 2012. - External audit (Good): Administrative Tribunal (TA) independent and audits CGE; opinion focuses on legality and includes comments but not a true and fair opinion; summary citizens’ audit published for 2009 CGE. - Reliability of financial statements (Not met): Mixed accounting principles not fully applied; most expenditures/revenues recorded on cash-basis; commitments not reported in CGE 2012; TA identified concerns on completeness and reliability in 2011 CGE. ### SUMMARY ASSESSMENTS (HIGHLIGHTS FROM TABLE 1.5) - Structure of the Public sector: Not Met; Importance: High. - Coverage of Institutions: Basic; Importance: High. - Coverage of Stocks: Basic; Importance: High (shareholdings ~22% of GDP not valued at current prices). - Coverage of Flows: Basic; Importance: Medium. - Tax Expenditures: Basic; Importance: Medium (TE increased from 1% to 3% of GDP in last 3 years). - Frequency of In-year Fiscal Reports: Good; Importance: Low. - Timeliness of Annual Financial Statements: Not met; Importance: High. - Classification: Good; Importance: Low. - Data Consistency: Basic; Importance: Low. - Statistical Integrity: Basic; Importance: Medium. - External Audit: Good; Importance: Low. - Statistical dissemination: Basic (GDDS); Importance: Medium. ### FISCAL FORECASTING & BUDGETING (SELECTED) - Budget unity (Good): Annual budget law covers 25 ministries, 11 provinces, 128 districts, 43 municipalities, and 14 public enterprises; Social Security Fund revenues/expenditures not included. - Gross budgeting (Basic): VAT refunds presented as expenditures though not expenditures; authorities committed to present VAT net from 2015. - Macroeconomic forecasts (Basic): Forecasts include real GDP growth rate, nominal GDP, exchange rate, inflation (proxy for GDP deflator); forecasts based on simple models by DNP, BoM, DNO; projected nominal GDP consistently above actual GDP (possible upward bias in revenue forecast). - Medium-Term Budget Framework (Advanced): CFMP 2014–16 provides 3-year perspective; capital expenditure ~one third of total expenditure; during 2005–12 expenditure outturn on average 14 percent lower than preceding year estimate (mostly due to lower capital expenditure implementation). - Timeliness: - Fiscal Strategy Report (Basic): REO describes macro/fiscal developments and revisions (example: 2013 GDP forecast revised from 8.4 percent to 7 percent due to floods). - Budget Submission (Advanced): Draft budget tabled before September 30; public availability at same time. - Budget Approval (Good): Budget law approved before start of financial year; approval dates: Fiscal Year 2012: December 15, 2011; FY2013: December 14, 2012; FY2014: December 13, 2013. - Legal framework (Advanced): Constitution, SISTAFE Law (9/2012), SISTAFE Regulation (Decree 23/2004) provide comprehensive PFM legal framework. - Policy orientation: - Fiscal Policy Objectives (Not met): Vision of Public Finances 2011–25 sets objectives; CFMP sets targets (public wages 10% of GDP yearly; allocate 67% of investments to priority programs); government objective to increase domestic revenues by ½ percent of GDP annually; government does not regularly report whether targets met. - Performance Information (Basic): Program budgeting under development; objectives/goals/indicators not uniform. - Citizens’ Guide to the Budget (Basic): Summaries published since 2012; recommendations to use simpler terminology and include distributional impacts. - Fiscal Sustainability Analysis (Basic): Vision of Public Finances 2011–25 provides 15-year projections; DSA covers 20-year horizon but 2013 DSA update not published; recommendation to use 20–30 year horizons and more scenarios. - Credibility: - Independent evaluation (Not Met): No independent scrutiny of macroeconomic and fiscal forecasts. - Supplementary Budget (Good): Legal provisions for revising budget; in 2012 budget revised with increase of 10% from approved budget with Legislative approval. - Forecast reconciliation (Not met): REO compares forecasts but does not explain impact of new policy measures on projections. ### FISCAL RISK ANALYSIS & MANAGEMENT (CHAPTER 3 HIGHLIGHTS) - Fiscal risks defined broadly: macroeconomic volatility and specific sources (guarantees, tax disputes, asset/liability valuation changes). - Mozambique-specific risk observations: - High and diverse fiscal risks: volatile GDP growth and revenues due to exogenous shocks and natural disasters. - Hydrocarbon discoveries and major projects will complicate medium-term forecasting. - State-owned enterprises significant source of fiscal risk; quasi-fiscal activities and defined benefit pensions add pressure. - Disclosure and active management of risks currently low; no robust analysis or detailed disclosure of rights/obligations in major contracts; no strategy for SOE/contingent liabilities/quasi-fiscal activities. - Recommendation: Increase quality and frequency of information on fiscal risks to strengthen transparency and credibility. ### SPECIFIC FISCAL RISKS (SELECTED, 2013 — TABLE 3.2) - Quantified items (Percent of GDP / Millions of $ / Source): - Public enterprises external debt guarantees: 0.45 / 67 / 2012 Public Debt Management Report - EMATUM publicly guaranteed external debt: 5.65 / 850 (note: reintegration of $350 million reduced guarantee to $500 million as of January 1, 2014) - Subsidies to public enterprises: 0.17 / 26 / 2013 budget proposal - Price subsidies (Wheat flour, transportation, and fuel): 0.52 / 78 / 2013 budget proposal - Major and Multi-annual Contracts: 33.14 / 4,984 / 2014-16 MTEF - Natural disasters (total average cost of 2013 damages): 3.32 / 500 / Plan for Mitigation of Natural Disasters - Total quantified risks: 43.25 / 6,505 - Other fiscal risks not quantified: quasi fiscal activities; PPPs; public sector pension liability; VAT arrears not reported; unreported expenditure arrears; exposure to donors’ financing volatility. - Donor financing risk: grants account for more than 10 percent of government revenues. ### RISK AREAS AND OBSERVATIONS - Allowances for contingencies: - Contingency provision appears under “Provisional appropriation” in “Other current expenses”; ~0.35% of total budget expenditure for 2011–14. - No transparent criteria for use; no in-year/year-end explanatory reports. - Assets and liability management: - Borrowing rules: annual Budget Law authorizes state borrowing; limits on domestic interest rates and minimum loan term of 3 years; 2013 budget law set annual ceiling of MT183 million (~$6 million) on guarantees but $850 million EMATUM guarantee breached ceiling (reduced to $500 million in 2014). - Debt management: Debt Report analyzes central government debt; strategy oversight on other public sector debts (leases, PPPs) unclear. - IGEPE manages shareholdings but lacks fair value monitoring and comprehensive risk analysis. - Natural resources: - Coal exploitation ongoing; large off-shore natural gas discoveries (Rovuma basin survey indicates total gas reserve in two areas could reach 150 trillion cubic feet). - CGE reports mega-project fiscal revenue only 1 percent of GDP in 2012. - Mozambique is EITI member; EITI reports 2008–2011 exist. - Underlying assumptions and risk scenarios for natural resources not disclosed. - Guarantees and transparency: - Outstanding stock of government guarantees not reported; 2014 budget sets cap of around $526 million for guarantees. - Since 2014 Debt Report includes annual flows of guarantees granted but not stock. - No procedures for assessing/monitoring financial risks of granted guarantees. - Financial sector exposure: - Not quantified or disclosed annually; Deposit Insurance Fund created but not in operation. - About 85 percent of banking system assets held by three largest banks; deposits at commercial banks almost 40 percent of GDP for last two years. - Major and multi-annual contracts: - PPP Law (15/2011) overhauls PPP oversight; PPP Unit created but limited publication of existing project data; TA has mandate for auditing PPPs and large projects. - Environmental risks: - Master Plan for Disaster Prevention and Mitigation approved but lacks fiscal dimension. - Cost of reconstruction for 2013 floods estimated at $500 million (3.3 percent of GDP); Post-Disaster Reconstruction Plan to be implemented over next three years; 2013 supplementary budget provided $150 million. ### FISCAL COORDINATION (SELECTED) - Subnational governments (Good): Aggregated information included in CGE; municipal borrowing limits by Law 1/2008; decentralization measures and resource-sharing systems in progress. - Public corporations (Basic): Treasury monitors 14 public enterprises; IGEPE manages ownership in 143 companies; fair value of holdings not monitored; direct transfers disclosed but indirect transfers and fiscal risks from SOEs not assessed. - Quasi-fiscal activity (Not Met): Lack of qualitative discussion in budget; energy tariffs set below cost recovery; quasi-fiscal activities estimated in 2009 at 7% of GDP (or 19% of budget). - Health and social security (Not Met): Dual social security system; civil service pensions treated within budget; INSS audited reports not published since 2010; actuarial study needed. ### SUMMARY ASSESSMENTS (TABLE 3.3 HIGHLIGHTS) - Macroeconomic Risks: Basic; High importance. - Specific Fiscal Risks: Basic; High importance. - Natural Resources: Not met; High importance. - Guarantees: Not met; High importance. - Financial Sector Exposure: Not met; Medium importance. - Major and Multi-Annual Contracts: Not met; High importance. - Environmental Risks: Not met; Medium importance. - Subnational Governments: Good; Low importance. - Public Corporations: Basic; Medium importance. - Quasi-fiscal activity: Not met; Medium importance. - Health and Social Security: Not met; High importance. - Additional stats: Capital expenditures exceeded 10 percent of GDP in 16 out of the last 20 years. ### RECOMMENDATIONS (SELECTED AND SEQUENCED ACTIONS) - 4.0 Clarify Institutional Boundaries and Expand Institutional Coverage - a. Adopt internationally accepted criteria for classification of institutional units. - b. Prepare fiscal reports for at least aggregate general government. - c. Clarify and strengthen reporting requirements of autonomous institutions and public corporations. - 4.1 Expand Balance Sheet Coverage and Clarify Accounting Standards - a. Value and recognize government commitments and liabilities under long term contracts. - b. Value and recognize infrastructure assets. - c. Value and disclose obligations and off-balance sheet items from funded and pay-as-you-go pension schemes. - d. Value, record and analyze tax expenditures and tax related liabilities. - e. Clarify accounting standards and improve presentation of financial statements. - 4.2 Improve Accuracy and Transparency of Fiscal Forecasts - a. Improve forecasting quality, minimize forecast errors, and disclose assumptions underlying projections. - b. Disclose and explain any material changes to previous fiscal forecasts. - 4.3 Improve Analysis of Fiscal Risks - a. Analyze sensitivity of fiscal forecast to different macroeconomic assumptions (Year 1–4 sequencing: analysis, publish sensitivity, publish alternative scenarios, probabilistic analysis). - b. Produce alternative macro-fiscal scenarios. - c. Publish a comprehensive statement of fiscal risks and strategy for managing quantifiable risks (Year 1–5 sequencing: qualitative statement to published quantified statements including likelihood and strategy). - d. Set out largest contingent liabilities, magnitude and likelihood, and management strategy. - 4.4 Improve Disclosure of Fiscal Risks (specific actions and sequencing) - a. Develop a government guarantee management policy: Year 1 publish list/adopt policy; Year 2 estimate likelihood of guarantees being called and disclose values; Year 3 provision in budgets/accounts for guarantees likely to be called. - b. Publish annual report on financial performance of public enterprises and equity holdings: Year 1 survey of numbers/activities; Year 2 overview of aggregate financial position; Year 3 prospects; Year 4 risks; Year 5 consolidated position. - c. Manage and disclose INSS fiscal risks: Year 1 calculate projected position for 20-year horizon every three years; Year 2 prepare strategy; Year 3 disclose strategy; Year 4 update projections. - d. Actively manage major and multi-annual contracts: Year 1 publish annual list with rights/obligations; Year 2 set legal limit on accumulated obligations. - e. Clarify and publish criteria to access and use budget contingencies and create a new module in quarterly execution report detailing contingency use. - Other recommendations (selected): Improve transparency and risk management in hydrocarbon and natural resource sector; enhance financial oversight of public enterprises. *Source: IMF staff Fiscal Transparency Evaluation mission to the Republic of Mozambique, November 11-25, 2013.* ### PREFACE _________________________________________________________________________________________ 6 ### _cr1532 - PREFACE _________________________________________________________________________________________ 6 ### Preface and Mission - A Fiscal Affairs Department (FAD) mission from the International Monetary Fund visited Maputo, Mozambique during the period November 11-25, 2013 to conduct a pilot Fiscal Transparency Evaluation (FTE). - Mission leadership and participants: - Led by Mr. Xavier Rame. - Included Ms. Iyabo Masha (African Department), Ms. Delphine Moretti (FAD), Ms. Esther Palacio (African Department), Mr. Dalmo Palmeira, Ms. Juana Aristizabal, and Mr. Sefa Pamuksuz (experts). - Objective: assess Mozambique’s fiscal reporting, forecasting and budgeting, and fiscal risks analysis and management practices against the IMF’s draft Fiscal Transparency Code (FTC) (consultation draft of July 1, 2013). - Stakeholder engagements included: National Directorate of the Budget (DNO), National Directorate of the Treasury (DNT), National Directorate of Public Accounting (DNCP), Inspectorate General of Finance (IGF), National Directorate of Public Assets (DNPE), Directorate of Studies and Economic Analysis (DEAE), Revenue Authority (AT), National Institute of Statistics (INE), Centre for Development of Information Systems Finance (CEDSIF), Public Private Partnerships Unit, National Institute of Social Security (INSS), State Equity Holdings Management Institute (IGEPE) and the Bank of Mozambique. - The report is based on information available as of November 2013; data in text, figures, and tables are IMF mission team estimates unless otherwise specified. ### Executive summary — Key findings - Overall assessment: - Mozambique’s program of budget reforms has brought most aspects of fiscal reporting and budgeting into line with basic and good practices under the IMF’s Fiscal Transparency Code. - Weaknesses in fiscal reporting could be addressed in the short-term by ongoing reforms. - Disclosure and management of fiscal risks are inadequate and should be improved on the medium term, especially given expected increases in natural resource revenues. - Positive achievements and practices: - In 2002, Mozambique adopted a comprehensive public financial management legal framework (SISTAFE Law). - Fiscal reports cover the budgetary central government and part of the general government, and provide information on the value of some assets and liabilities. - The development and roll-out of the SISTAFE Information System (e-SISTAFE) improved frequency and timeliness of fiscal reports, classified in accordance with international standards. - Planning and budgeting frameworks provide comprehensive and timely projections regarding public finance developments. - A well-defined mechanism for coordination of donor funding is operational. - Central controls over sub-national governments are well established, including strict borrowing limits. - Measured improvements: International Budget Partnership’s Open Budget Index score increased from 28 to 47 out of 100 between 2010 and 2012; ranking moved from 68th out of 94 countries to 55th out of 100 countries. - Principal weaknesses: - No complete and up-to-date inventory of public sector entities is maintained. - Institutional coverage of fiscal reports is limited; social security fund and numerous autonomous entities lack complete and reliable reporting. - Government fiscal reporting is prepared on a modified cash basis; important balance sheet elements (current value of arrears, shares of corporations owned by the State) are not reported. - Apart from risks to external financing, budget documents recognize no fiscal risks and no strategy for managing them. - Major risk sources: reliance on donor support for external financing; susceptibility to exogenous shocks from natural disasters; activities of public enterprises; large and multi-annual infrastructure contracts; contingent liabilities and quasi-fiscal activities. - Need to enhance credibility, transparency, and scrutiny of official fiscal forecasts, particularly in light of recent natural gas discoveries and ongoing petroleum exploitation. - The State owns shares in at least 156 public enterprises and publicly-owned corporations; their net asset value remains largely unknown. IGEPE has exerted limited oversight on financial assets and risks associated with these entities. ### Recommendations (summary) - The report issues 7 recommendations to materially enhance the fiscal information base and transparency: - Clarify institutional boundaries and expand institutional coverage. - Expand balance sheet coverage and clarify the accounting standards. - Enhance the accuracy and the transparency of official forecasts. - Improve the analysis and management of fiscal risks. - Develop disclosures of fiscal risks. - Improve transparency and risk management in the hydrocarbon and natural resource sector. - Enhance the financial oversight of public enterprises. - A “Fiscal Transparency Action Plan” with actions required to implement these reforms is included at the end of the report. ### Fiscal reporting — Structure and coverage (high-level) - Fiscal reports assessed include: Quarterly Budget Execution (REO), Quarterly Fiscal Statistics, Quarterly Debt Report, CGE (annual financial statements), Fiscal Statistics (annual), and Annual Debt Report. - Institutional coverage: budgetary central government. - Flows coverage: revenue, expenditures, financing (varies by report). - Stocks coverage: limited—cash, debt, some financial assets; tangible asset information is partial; many reports prepared on a cash basis. - Classification frameworks used: Economic (GFSM 1986, ongoing conversion to GFSM 2001), Administrative, Functional (COFOG). - Publication frequency and timeliness examples preserved exactly as reported in Table 1.1: - Quarterly Budget Execution: Quarterly; 45 days. - Quarterly Fiscal Statistics: Quarterly; 75 days. - Quarterly Debt Report: Quarterly; 45 days. - CGE (annual): Annual; More than 15 months after the end of the fiscal year. (The volume IV of the CGE (Inventory of State Assets) is not published.) - Fiscal Statistics for 2010, 2011 and 2012 made available on the Ministry of Finance website end-2013. - Annual Debt Report: Last publication: 2013 (Debt report for 2012). ### Assessments and thematic structure of the report - The report is organized across major themes and chapters: - Fiscal Reporting (coverage, frequency and timeliness, quality, integrity). - Fiscal Forecasting and Budgeting (comprehensiveness of budget documentation, timeliness, legal framework, policy orientation, credibility). - Fiscal Risk Analysis and Management (risk disclosure and analysis, risk management, fiscal coordination). - Recommendations and Fiscal Transparency Action Plan. - Figures and tables catalogued in the report include, among others: - Figures: 1.1 through 3.8 covering public sector overview, financial statements, state shareholdings estimates, VAT refundable liabilities, macro-fiscal projections, risk indicators, budget contingencies, public deposits, and fiscal impacts of disasters. - Tables: 1.0 through 3.3 covering summary assessments against the Fiscal Transparency Code, lists of consolidated ex-post fiscal reports, distribution of public sector resources and assets, summary assessments of fiscal reporting, forecasting and budgeting, and fiscal risk analysis and management. *Source: IMF staff Fiscal Transparency Evaluation mission to the Republic of Mozambique, November 11-25, 2013.* ### 1.1 Coverage of Fiscal Reports ### 1.1 Coverage of Fiscal Reports ### 1.1.1 Structure of the Public Sector (Not Met) - Legal definition: - The SISTAFE Law (9/2002) defines the public sector to include the State’s bodies and institutions (both at the central and local levels), the autonomous institutions, the local government, and the public enterprises. - The scope is not fully defined or consistent with international standards such as the IMF’s Government Finance Statistics Manual (GFSM): the law does not specify whether corporations created under private law that are owned and/or controlled by the State should be considered state enterprises. - Registers of public entities: - INE register for SNA 1993 sector national accounts established but not updated since 2005. - National Directorate of the Treasury (DNT) register excludes publicly–owned corporations and lacks procedures to ensure exhaustive, timely updates. - State Equity Holdings Management Institute (IGEPE) maintains a register of State shareholdings but: - No assessment undertaken of State control over corporations where it holds shares directly or via another entity. - Register is incomplete: “free” shares owned by the State in concession projects are not reported. - IMF staff tentative entity lists and structure (not exhaustive): - Central government comprises Government units and at least 30 budgetary and extra-budgetary bodies (Autonomous Institutions that are not financially autonomous). - General government comprises central government; Social Security fund (INSS); 53 Municipalities; at least 36 Autonomous Institutions. - Public sector comprises general government; at least 44 non-financial Public Corporations; at least 3 financial Public Corporations: Bank of Mozambique (BoM), National Investment Bank (BNI), Mozambican Insurance Company (EMOSE). - Two types of Public Corporations controlled by the State: - Corporations created under public law (Public Enterprises and State Enterprises) fully owned by the State. - Corporations created under private law that may not be fully owned by the State. - Problems estimating scope and control: - Indirect shareholdings and cross-shareholdings are difficult to assess. - Example: GIPS (created under private law December 2011) not reported in authorities’ inventory despite public-body shareholder (SERSSE); its subsidiary EMATUM not reported though shareholders are three State bodies. - IMF Staff list of non-financial public corporations: State owned at least 50% of shares includes 14 corporations created under public law and 32 under private law. ### 1.1.2 Coverage of Institutions (Basic) - Consolidated reports: - The CGE consolidates the Budgetary Central Government and provides financial information on public entities within the Central Government and General Government. - Under SISTAFE Law, expenses, revenues and financing operations of the Government and financial information of Autonomous Institutions that rely on State transfers for more than ⅔ of their resources are reported in the CGE. - Information on revenue and expenditure is provided for the majority of municipalities and for public enterprises created by public law. - Stand-alone financial statements: - Municipalities, INSS, autonomous institutions, and Public Corporations are legally required to prepare financial statements, but these are not systematically available or centralized at the MoF. - Accounting bases differ: Government reports on a modified cash-basis; publicly-owned corporations report on an accrual basis. - INSS has not published financial statements since 2009 following an audit that identified significant accounting flaws. - Table 1.2 key legal/technical points (accounting bases preserved): - Government units: SISTAFE Law — By law, modified cash. In practice, most expenditure is recorded on a cash basis. - Autonomous Institutions: SISTAFE Law and law/decree creating entities — By law, modified cash. Information not available about current practice. - Social Security Fund (INSS): Law creating the entity — Accrual basis. - Municipalities: Law 2/1997, art.77 — Modified cash. - Public Enterprises: Law 6/2012 — Accrual basis (IFRS). - Publicly-owned corporations (SA or SARL) under Private Law — Accrual basis (IFRS and PGC-PE), annual. - Reliability of consolidated fiscal situation: - Consolidated fiscal situation at general government and public sector levels cannot be assessed reliably. - IMF staff broad estimates based on 2012 CGE and limited financial information on other public entities. - Limitations: no public information on social security fund and autonomous entities’ financial operations; only partial information on public corporations. - IMF staff estimate: in 2012 public corporations account for at least one third of public resources; their assets and liabilities of the public sector account at least for 43% and 37% of GDP respectively (see Tables below). - Table 1.3 (Estimates of the Distribution of Public Sector Resources, Percent of GDP, 2012) — selected figures preserved exactly: - I. General Government sector, aggregated: Revenue net from transfers 29.7%; Expenditures net from transfers 42.1%; Balance (net lending / borrowing) -12.4% - Central government, aggregated (1): Revenue net from transfers 28.8%; Expenditures net from transfers 41.0%; Balance -12.2% - Local government (43 entities): Revenue net from transfers 0.9%; Expenditures net from transfers 1.2%; Balance -0.2% - II. Public corporation sector, aggregated: Revenue net from transfers 14.6%; Expenditures net from transfers 12.6%; Balance 1.3% - 1 Non-financial Public Enterprises (14): 5.4% revenue; 4.1% expenditures; 1.3% balance - 2 Non-financial Public Corporations (At least 32): 6.6% revenue; 6.6% expenditures; 0.0% balance - 3 Financial Public Corporations (2): 0.4% revenue; 40.0% expenditures; 0.0% balance - Public corporations (1+2+3, excl. BoM) At least 48: 12.4% revenue; 11.1% expenditures; 1.3% balance - Bank of Mozambique (BoM) (1): 2.2% revenue; 1.5% expenditures; 0.7% balance - III. Public sector, aggregated (I +II): 44.3% revenue; 54.7% expenditures; -11.1% balance - Notes: Source IMF staff estimates, CGE, IGEPE. N/I : not informed. ### 1.1.3 Coverage of Stocks (Basic) - CGE stock coverage: - CGE includes Budgetary Central Government’s cash position, debt, and financial assets. - SISTAFE Law requires reporting of financial and property assets and liabilities, but in practice reporting is limited to cash balances, debt, and financial assets. - Appendices provide a list of State’s shareholdings and information on State’s tangible assets. - Reliability and understandability of CGE information needs improvement. - Significant unreported assets and liabilities likely exist: - Liabilities related to: - Obligations under long-term contracts in 4,130 investment projects approved by the government, of which 2,884 are currently implemented. - Public service pension schemes administered by Previdência Social. At least two Public Corporations (Bank of Mozambique and Radio Mozambique) have employee benefit liabilities (including pensions) amounting respectively to 2,469 and 814 millions of meticals (MT) in 2011 (on a net basis). - Refundable taxes, mainly refundable VAT: debt estimated at 6.2 billions of MT as at December 31, 2012 and at 8.5 billions of MT as at June 30, 2013 (approximately 2 percent of GDP). - Expenditure arrears (e.g., fuel subsidies). IMF staff estimates these arrears could amount to 623 millions of MT. - Tangible assets related to: - Infrastructures: public capital expenditure exceeded 10 percent of GDP in 16 out of the past 20 years. - Land and subsoil assets related to discovery of hydrocarbon resources (recognition only if valuation is reliable). - Valuation of State’s shareholdings: - State’s direct shareholdings reported in CGE at book value; IMF staff estimates current value would account at least for 22 percent of GDP. - Figure estimates based on sample: 5 public enterprises and 11 publicly-owned corporations representing 27 percent of the total book value reported in CGE; equity values calculated from latest financial statements and compared to CGE book value. - Table 1.4 (Estimates of the Distribution of Public Sector Assets and Liabilities, Percent of GDP, 2012) — selected figures preserved exactly: - I. General Government sector, aggregated: Assets 26.7%; Liabilities 41.0%; Net Worth -14.4% - Central government, aggregated (1): N/I for Assets, Liabilities 26.7%; Net Worth -14.4% - II. Public corporation sector, aggregated: Assets 43.4%; Liabilities 37.1%; Net Worth 11.6% - 1 Non-financial Public Enterprises (14): Assets 13.3%; Liabilities 6.1%; Net Worth 7.2% - 2 Non-financial Public Corporations (At least 32): Assets 6.8%; Liabilities 4.9%; Net Worth 1.9% - 3 Financial Public Corporations (2): Assets 2.1%; Liabilities 1.0%; Net Worth 1.1% - Public corporations (1+2+3, excl. BoM) At least 48: Assets 22.2%; Liabilities 12.0%; Net Worth 10.2% - Bank of Mozambique (BoM) (1): Assets 21.2%; Liabilities 25.1%; Net Worth 1.5% - III. Public sector, aggregated (I +II): Assets 70.0%; Liabilities 78.1%; Net Worth -2.8% - Notes: Source IMF staff estimates, CGE, IGEPE. N/I: not informed. ### 1.1.4 Coverage of Flows (Basic) - Basis and scope: - Mozambique’s consolidated fiscal reports are prepared on a cash basis and cover flows related to revenue, expenditure, and financing. - Cash flow coverage in the CGE could be improved. - Specific flow issues: - Capital gains or exceptional revenue deposited at the Central Bank are recorded as revenue in government accounts when transferred to the Treasury Single Account (TSA). Example: exceptional capital gain tax amounting to approximately 0.1 percent of GDP. - Some tax revenue collected by the tax administration is recorded in the financial system with significant delay due to difficulties breaking down and classifying amounts collected. - Some expenses and revenues are not captured in in-year accounts and are reintegrated at year-end via manual data input; these include own and earmarked revenues of some bodies and autonomous institutions that are part of the budgetary central government, and externally financed projects. The completeness of year-end reintegration is difficult to assess. *Source: _cr1532 - 1.1 Coverage of Fiscal Reports (PDF).* ### 15. Accrual flows are not captured in the consolidated fiscal reports. Most of these flows are ### 15. Accrual flows are not captured in the consolidated fiscal reports. Most of these flows are ### Accrual flows and missing balance sheet items - Accrual flows are not captured in the consolidated fiscal reports. - Most missing accrual flows are linked to missing changes in value of assets and liabilities in the consolidated fiscal reports. Examples include: - The annual gross variation on current receivables and payables (e.g., tax liabilities, see figure 1.4). - The valuation changes on the Government’s holdings of financial assets. - The annual net accrual of the public service pensions liabilities. ### Tax expenditures (Basic) - Mozambique’s tax expenditures are reported annually in the CGE but require more substantial analysis and information. - Reported facts: - Tax expenditures are authorized by law. - The annual consolidated fiscal report includes a summary of tax revenue losses, estimated by type of tax. - They amounted to 3 percent of GDP in 2012 (see Figure 1.5). - Expectations and information gaps: - With an increased number of investment projects and an expected boom of fiscal revenue related to gas and oil production, the value of the tax expenditures is expected to rise in the coming years. - The information provided in the CGE is limited to date: - It does not include a breakdown by sector or policy area. - The methodology used to determine their value, the legal basis supporting exemptions, and the budgetary goals and targets for tax expenditures defined by the government are not disclosed. - While the main expenditures are related to imported goods, very little information and analysis is provided in the CGE. - Information on tax expenditures related to investment projects is scarce. - Additional reporting issue: - VAT refunds are currently wrongly reported as tax expenditures. ### Frequency and timeliness of fiscal reporting - In-year reports (Good): - Quarterly budget execution reports are produced and published within 45 days of the end of each quarter. They include: - (i) budget execution rates for expenditures presented by economic and functional classifications, - (ii) execution rates for central, provincial, district and municipal levels, - (iii) revenue collection rates, - (iv) adjustments to the revenue forecast, and - (v) the revised total expenditure and deficit, when supplementary budgets have been approved. - Quarterly fiscal statistics reports are based on the budget execution reports and prepared in the GFSM 1986 statistical format. They are published between 15 to 30 days after the publication of the budget reports. - Timeliness of annual financial statements (Not met): - The CGE is published seventeen months after the end of the fiscal year. - Stages leading to its release include: - (i) five months to prepare the CGE; - (ii) six months to submit the external auditor’s report to the Parliament; - (iii) about six months for deliberations on the report and the approval of the CGE by the Parliament. - Although preparation time is reasonable, publication timing is not in line with international good practices. - Ongoing reform: - The public accounting modernization aims at: (i) improving reliability and timeliness of financial reporting at all levels of government; and (ii) implementing accrual accounting, based on international standards, by 2025. - Authorities expect the CGE (and the audit opinion) to be available to the Parliament before the end of September of the following year (as one outcome). ### Quality of fiscal reports - Classification (Good): - Administrative and economic classifications, as well as a functional classification based on COFOG, are used in the fiscal reports. - Program classification is used in the budget to present expenditures of six priority programs. - Introduction of program classification started in 2008 via pilots and extended in budget proposals since 2009 but is at early stages and not used for budget reporting. - Government committed to use a new economic classifier for revenues from concessions and sales of assets as of the 2014 budget. - Comparability between the budget and the annual financial statements has been ensured. - Revenue classification distinguishes domestic and external resources; domestic revenues include recurrent and capital, the former disaggregated by tax and non-tax. - Fiscal statistics classification: - Fiscal statistics and annual financial statements are cash-based. - Implementation of GFSM 2001 standards started in 2012. - The 2010, 2011, and 2012 cash-based fiscal data have been converted to comply with GFSM 2001 standards. - At the time of the mission, only the 2010 data were published; 2011 and 2012 data were published at the end of 2013. - Data consistency (Basic): - The FTC calls for three internal consistency checks to be regularly verified and published, but only a basic reconciliation is disclosed in the fiscal reports. - The 2012 annual financial statements include a reconciliation of the overall balance with the financing. - A consistency check on cash balances is undertaken. - No consistency check between the CGE and the Bank of Mozambique (BoM) monetary accounts is realized and published to date. - Coverage differences example (as of December 31, 2012): - Cash deposits recorded in the monetary accounts for the Government amounted to 73,250 millions of MT. - Cash deposits reported in the CGE amounted to 21,673 millions of MT. - The Ministry of Finance and BoM have committed to review accounts of State entities not covered by the State Budget and CGE but included in monetary accounts, to include explanatory notes and reconciliations in the CGE. - Other consistency checks: - Overall balances reported in the CGE and the fiscal statistics are consistent. - Debt figures reported in the CGE and the Debt Report show only a minor discrepancy. - Quarterly figures are adjusted, if needed, to match annual figures. - Historical consistency (Not applicable): - No historical revisions to fiscal statistics have been undertaken yet according to information provided by the authorities. - A fiscal statistics database was set up in 2011; data quality and consistency have been checked and updated yearly with external assistance, but published statistics do not show historical revisions. - Annual fiscal statistics published on the Ministry’s of Finance website cover 1998 to 2012; quarterly data are from 2007 up to the second quarter of 2013. - Any material revisions to historical data should be incorporated in future reports and explained. ### Integrity of fiscal reports - Statistical integrity (Basic): - Fiscal statistics are produced and disseminated by the Department of Planning and Statistics (DPE) of the Ministry of Finance, which is not independent. - The FTC calls for responsibility for verifying and disseminating fiscal statistics to be vested in a specific body that is independent. - Since 2012 the responsibility was delegated from INE (an autonomous government agency) to the DPE; production of fiscal statistics is therefore not undertaken in line with international good practices. - Regulatory environment: - The DPE is part of the DEAE and its role and responsibilities were formalized in 2012 through the 94/2012 Internal Regulations for the Directorate. - Devolution of INE’s responsibilities to the DPE was formalized in a memorandum of understanding aiming to ensure INE’s professional standards are followed by the DPE. - External audit (Good): - The Administrative Tribunal of Mozambique (Tribunal Administrativo, TA) is independent of the executive, according to the Constitution, and provides an audit opinion on the CGE. - The TA audits the CGE; its opinion focuses mainly on legality of budget execution and includes comments on reliability of information, budget performance, and detailed conclusions and recommendations. - The TA does not express an opinion on whether the financial statements present a true and fair view. - The audit report is transmitted to the Parliament and published on the Tribunal’s website after parliamentary deliberations. - A summary for citizens of the audit on the 2009 CGE has been published. - The Tribunal performs financial audits on accounts (contas de gerencia) of selected public entities; where errors/irregularities are significant they are audited and judged. - TA is a Supreme Audit Institution based on the judicial model; members are independent magistrates with powers including discharging public accountants or imposing penalties. - The Tribunal reports performing more than 450 audits annually, based on an audit plan; these reports are not published. - As part of accounting reform, the Tribunal is revising audit methodologies to meet international standards, aiming to incorporate the first set of ISSAI issued by INTOSAI in 2010; quality of audit processes is reviewed by AFROSAI every two years. - Statistical dissemination (Basic): - Mozambique participates in the IMF’s General Data Dissemination System (GDDS) since 2003. - GDDS participation is voluntary and provides recommendations on good practices; the SDDS is more prescriptive and intended for members accessing international capital markets. - Reliability of financial statements (Not met): - At the Budgetary Central Government level, accounting principles are based on the SISTAFE Law, which establishes a mixed accounting system: accrual-basis accounting for expenditure and cash-basis accounting for revenue. - These principles are not fully applied: most expenditures and revenues are recorded on a cash-basis, and commitments were not reported in the last published year-end financial statements (CGE 2012). - External auditor concerns: - The Administrative Tribunal noted progress on quality of financial information but identified several concerns on completeness and reliability of information in the 2011 CGE. - Financial statements of other public entities: - Reliability cannot be exhaustively assessed because some public entities’ financial statements and auditors’ reports are not systematically published. ### Summary (key assessments from Table 1.5) - Structure of the Public sector: - Assessment: Not Met: No registry of public sector entities consistent with international practices. - Importance: High: The public sector boundaries are not known; at least 48 public corporations may belong in public sector, representing at least one third of the PS resources. - Coverage of Institutions: - Assessment: Basic: The CGE reports on all central government entities. - Importance: High: INSS and some autonomous entities are outside of the fiscal reports (no quantification available). - Coverage of Stocks: - Assessment: Basic: The CGE Fiscal reports cover cash and all debt. - Importance: High: Most of the State’s assets and liabilities are not reported and/or not evaluated at their current value (incl. shareholdings representing around 22% of GDP). - Coverage of Flows: - Assessment: Basic: Fiscal reports cover cash revenues, expenditures and financing. - Importance: Medium: Coverage of flows can be improved by expanding the coverage of the institutions and the stocks. - Tax Expenditures: - Assessment: Basic: The estimated revenue loss from tax expenditures is published at least annually. - Importance: Medium: Information and analysis on tax expenditures shall be detailed (TE have increased from 1% to 3% of GDP in the last 3 years, and are likely to increase further in the future). - Frequency of In-year Fiscal Reports: - Assessment: Good: In-year fiscal reports are published on a quarterly basis, within a quarter. - Importance: Low: In-year reports are timely. - Timeliness of Annual Financial Statements: - Assessment: Not met: CGE sent within 5 months to TA but the published within 17 months of the end of the financial year. - Importance: High: Audited outturn too late to inform the preparation of the next year’s budget. - Classification: - Assessment: Good: Fiscal reports include administrative, economic, and functional classification consistent with international standards and information on receipts from major revenue sources. - Importance: Low. - Data Consistency: - Assessment: Basic: Fiscal reports include reconciliation between the balance and the financing. - Importance: Low: Lack of internal consistency checks may result in lack of reliability (minor discrepancy on Debt figures). - Historical Consistency: - Assessment: Not Applicable. - Statistical Integrity: - Assessment: Basic: Verification and dissemination of fiscal statistics are responsibility of specific government ministry. - Importance: Medium: Statistical integrity is supported by limited safeguard (delegation of responsibilities). - External Audit: - Assessment: Good: Supreme audit institution independent of executive audits annual financial statements and reports to legislature and public. - Importance: Low: Administrative Tribunal independence is granted by Constitution's provisions related to Judiciary Power. - Statistical dissemination: - Assessment: Basic: Fiscal statistics meet GDDS. - Importance: Medium: Participation in SDDS should be considered when access to international capital markets becomes significant. *Source: IMF staff assessment excerpted from the CGE and associated fiscal transparency review.* ### 4.4 Reliability ### 4.4 Reliability ### Summary Finding - Not met: The requirements of SISTAFE are not fully met. - High: The current accounting reform should improve the reliability of financial statements. ### Introduction - The budget is the single most important fiscal document; it sets fiscal objectives, demonstrates fiscal impact, and seeks parliamentary approval. - Budgets and fiscal projections should be based on credible macroeconomic forecasts, provide comprehensive information on aggregate fiscal objectives and budgetary plans, facilitate policy analysis and accountability, and be submitted with sufficient time for parliamentary scrutiny. - The budget process in Mozambique is regulated by the SISTAFE Law and its regulations, ensuring consistent classification and presentation of expenditure and revenue and central controls over government finances. - Budgets at all levels are generally comprehensive, with the notable exception of lack of information related to the social security fund (which collects social contributions). - The draft State budget is presented to Parliament in September and published at the same time. - Main budget documents are published and available on the Internet, including the draft budget and the Medium Term Budget Framework (MTBF or CFMP23). - Recommendations: Strengthen policy orientation of budget documentation; explicitly summarize fiscal policy objectives by setting numerical objectives for main fiscal aggregates; consider program budgeting to strengthen linkage between policy and resource allocations and increase accountability. ### Comprehensiveness of Budget Documentation (Section 2.1) - 2.1.1 Budget Unity (Good) - Budget documentation incorporates all revenues, expenditure, and financing24 by central government ministries, agencies and extra-budgetary funds. - The annual budget law covers revenue and expenditures of 25 ministries, 11 provinces, 128 districts, 43 municipalities, and 14 public enterprises. - The budget provides a breakdown of all expenses, including national security and military intelligence; there are no secret items.25 - The revenues and expenditures of the national Social Security Fund are not included in the budget documentation; SISTAFE provisions requiring their presentation in a specific annex have not been implemented.26 - 2.1.2 Gross Budgeting (Basic) - Domestic tax revenue, external resources and related expenditures are presented on a gross basis in accordance with SISTAFE.27 - The annual budget law presents all tax revenues including the VAT; VAT refunds are presented as expenditures, although these are not expenditures. - Authorities committed to present VAT on a net basis from the 2015 budget. - The budget includes external funds (grants and loans); MoF reconciles budget support, pool funds, and on-budget projects with development partners, but some grants (including in kind), mainly in health, are not yet covered. - Own-generated revenue: large portion included, but coverage not exhaustive. A 2010 MoF Circular set rules to improve timeliness of recording; internal revenue often excluded from sector programming ceilings, leading to significant increases in 2012 and 2013 collections, but a minority remain executed directly by institutions without transfer to the TSA and reporting in budget documentation.28 - 2.1.3 Macroeconomic Forecasts (Basic) - Budget documentation includes forecasts of key macroeconomic variables but does not disclose underlying assumptions. - Main budget document reviews global and domestic conditions using the IMF World Economic Outlook as context, but no detailed explanation of variables, assumptions, or risks. - Mozambique’s budget projections are based on simple forecasts of four variables produced by various agencies: real GDP growth rate, nominal GDP, exchange rate and inflation rate as proxy for the GDP deflator.29 - Department of National Planning (DNP) prepares real GDP growth rate. - Bank of Mozambique prepares exchange rate forecasts and an inflation target as part of its annual monetary program. - DNO prepares nominal GDP projection from its financial modeling program based on IS-LM model assumptions. - The exchange rate has not been explicitly referred to as a projection item since 2011 in published documents, but is used in modeling, especially for external financing. - Forecasts of fiscal aggregates rely principally on nominal GDP and inflation; real GDP growth provides context. - Capital expenditure (~one third of total expenditure) is driven by policy objectives from the Five Year Plan and external financing commitments. - Comparison of projected versus actual (Figure 2.1): projected nominal GDP is consistently above actual GDP (possible upward bias in revenue forecast); real GDP growth shows least deviation; inflation deviation is less systematic. - 2.1.4 Medium-Term Budget Framework (Advanced) - The MTBF (CFMP) covering 2014–16 provides a detailed 3-year budget perspective; first CFMP covered 2007–09. - Framework draws objectives mainly from the Plano Quinquenal do Governo (PQG) and includes projections of revenue, expenditure, and financing by economic classification and by program at central, provincial, and district levels; includes transfers to municipal level. - Covers three-year forward and provides budgetary outturns of preceding two years; forward plans provided at same level of detail for all years. - Revenue classified by collecting entity and revenue type; expenditure classified by organizational unit, function, economic category, and program. - Includes a section analyzing potential risks: deviation from macroeconomic assumptions, global developments (exchange and interest rates), and unanticipated domestic developments requiring emergency actions. - Performance and forecast errors: - Revenue forecast has on average been better than forecast. - Forecast errors have not shown gradual decline. - Large revisions to expenditures occur mainly due to insufficient disbursement of externally funded projects, forecast errors, and mid-term changes in government objectives. - During 2005–12, expenditure outturn has on average been 14 percent lower than the initial estimate in the preceding year, mostly due to lower than budgeted capital expenditure implementation. - Risk: Problem could be magnified as Mozambique’s natural gas sector takes off and unanticipated revenue becomes the norm. - Recommendation: Adoption of a fiscal rule could contribute to stronger fiscal discipline, especially with unexpected revenue such as capital gain taxes. ### Timeliness (Section 2.2) - 2.2.1 Fiscal Strategy Report (Basic) - Quarterly budget execution report, Relatório de Execução do Orçamento (REO), describes macroeconomic and fiscal developments since budget approval and changes for the current year.30 - REO includes a section31 discussing the budget balance and maintaining it despite macroeconomic changes (example: Jan-Sep 2013 REO mentions revision of GDP forecast from 8.4 percent to 7 percent due to floods). - 2.2.2 Budget Submission (Advanced) - Legislature and civil society have adequate time to scrutinize the annual budget before the financial year. - SISTAFE Law provision: annual budget to be tabled to the National Assembly before September 30 is enforced. - Draft annual budget is made available to the public at the same time. - Timeliness comparison (Table 2.2): Mozambique listed under "At least 3 months" for timeliness of budget submission among SADC countries. - 2.2.3 Budget Approval (Good) - The budget law is approved and published by the start of the financial year. - The annual budget is approved before the 15th of December, in accordance with SISTAFE Law. - Dates of approval: - Fiscal Year 2012: December 15, 2011 - Fiscal Year 2013: December 14, 2012 - Fiscal Year 2014: December 13, 2013 ### Legal Framework (Section 2.3) - 2.3.1 Legal Framework (Advanced) - Constitutional and legal frameworks clearly define government roles and responsibilities in public financial management; overall framework consistent with advanced international practices. - Key laws and regulations: the Constitution, the SISTAFE Law (9/2012), and the SISTAFE Regulation (Decree 23/2004). - Powers of government branches regarding public finance are set out in the Constitution; Parliament32 can deliberate on the Economic and Social Plan (PES), approve the budget and the CGE prepared by the government, and discusses the five-year plan (PQG). - Parliament shall not table any bill that directly or indirectly increases expenditure or reduces government revenues, or alters the outcome of the fiscal year currently underway.33 - Judiciary includes the Supreme Audit Institution (TA), which prepares its own budget proposals using the same budgeting mechanism; TA scrutinizes budget execution and audits the CGE. Organic law on administrative jurisdiction (25/2009) and law on the Third Chamber of the Administrative Court (26/2009) regulate TA functions. - 2.3.2 Revenue Collection (Good) - Laws and regulations related to revenue collection are comprehensible and accessible. - Constitution and the Tax Law (15/2002) define taxpayers’ rights and obligations, including access to an appeals process. - First instance: head of tax collection unit reviews taxpayer claim. - Second instance: reconsideration by the Legal Directorate within the Revenue Authority. - Third instance: Fiscal Tribunal (part of Administrative Tribunal) makes the final decision. - Recommendation: Improve access to information by publishing up-to-date guidance to taxpayers on how to meet rights and obligations. ### Policy Orientation (Section 2.4) - 2.4.1 Fiscal Policy Objectives (Not met) - Government has defined a number of fiscal policy objectives for main aggregates but does not regularly report on them. - Vision of Public Finances 2011–25 defines fiscal objectives and targeted values for four-year periods until 2025. - CFMP presents objectives in terms of revenues and expenditure projections from 2014 to 2016 and sets objectives: - Maintain public wages at 10 percent of GDP yearly. - Allocate 67 percent of investments to priority programs of the Poverty Reduction Strategy.34 - Government objective: increase annually domestic revenues by ½ percent of GDP to reduce dependency on external revenues. - Gap: Government does not explicitly report whether targets have been met for these fiscal objectives. - 2.4.2 Performance Information (Basic) - (Content for 2.4.2 begins after provided text; no further details available in supplied content.) *Republic of Mozambique — International Monetary Fund, Fiscal Forecasting and Budgeting (selected sections).* ### 58. The budget documentation provides information on the government’s inputs on ### _cr1532 - 58. The budget documentation provides information on the government’s inputs on ### Budget inputs, classification, and program-based budgeting - Annual budget presents the budgeted aggregated envelope for each priority sector; the CGE provides aggregated expenses incurred on each priority sector. - Finding: Expenses incurred are not disaggregated by economic classification (i.e., salaries, goods and services, transfers, subsidies). - Finding: Performance indicators are not defined in the budget documentation. - Program-based budgeting: - Program-based classification of the entire budget began in 2011. - The quality of objectives, goals, and performance indicators of programs and subprograms is not yet uniform. - CFMP (2014–16) shows only allocations of investment resources by the strategic programs of the Poverty Reduction Strategy. - None of the budget documents provides results or outputs on the priority sectors linking budgetary resources to the projections in the PES. ### Citizens’ Guide to the Budget (Basic) - Government publishes budget proposal summaries for citizens on the Ministry of Finance website since the 2012 budget. - First summary (Proposta Orçamento Cidadão 2012) published in February 2012 after parliamentary approval of the 2012 budget. - The 2014 summary was published in October 2013 when the budget proposal was submitted to Parliament. - Content of the third budget proposal summary: - economic assumptions - expenditure level proposed against the level of the previous year - revenue forecast with information on revenues from the natural resources activities - expenditures in poverty reduction priority sectors - efforts in the social protection area - Recommendations: - Use simpler terminology to improve public accessibility. - Include information on the financial impact of major policies on different income population groups. - Additional development: - Citizens’ summary on the audit report of the 2009 CGE prepared by the Supreme Audit Institution (Tribunal Administrativo) published for the first time in November 2012 (i.e., six months after the publication of the annual financial statements and of the audit report). - Recommendation: Publish the citizens’ audit summary systematically at the same time as the CGE. ### Fiscal Sustainability Analysis (Basic) - Published long-term projections: - Vision of Public Finances 2011–25 (prepared by the Ministry of Finances): - Discusses 15 year projections of main fiscal parameters to concretize the objectives of Visão 2025. - Presents baseline scenario for 2012–25 for revenue, expenditure, financing and deficit/balance. - Discusses two alternative scenarios: - One scenario: domestic revenue is gradually decreased in rates of 20 percent to 10 percent of the previous budget year. - Another scenario: increases internal revenue in rates of ½ percent to 0.1 percent of GDP of the respective year. - Debt Sustainability Analysis (DSA) (prepared by the Ministry of Finances): - Analyses evolution of public debt under different scenarios. - DSA covers a 20 year horizon. - Annual updates of the DSA are published, but with some delays. - Note: The DSA was updated in 2013 for preparing FY14 budget but was not published. - Assessment and recommendations: - Time frame of 15 years is short; it has not been updated since publication. - Recommendation: Use a 20–30 year time frame with robust scenarios to capture long-term implications of changes in the extractive industry and associated risks. - Recommendation: Include more sophisticated and varied scenarios to better assess risks. ### Credibility: Independent evaluation, supplementary budgets, and forecast reconciliation - Independent evaluation (Not Met): - Finding: No independent scrutiny of macroeconomic and fiscal forecasts; budget documentation provides only one set of forecasts and no specific entity assesses their credibility. - Recommendation: Implement independent evaluation to check macroeconomic and fiscal assumptions of the CFMP and developments during the year, including the impact of fiscal assumption changes on the budget and the need to revise the budget law. - Supplementary Budget (Good): - Legal framework (SISTAFE Law): - Article 34-1: “any ceiling set in the national budget may be amended only by law, based on a duly substantiated proposal of the government”. - Article 34-2 and article 13-3: allow increases of appropriations within national budget limits through provisional appropriations (contingencies provision) and redistribution of appropriations within limits set by Parliament. - Annual Council of Ministers decree defines competencies of central government entities to redistribute appropriations. - Practice: - Annual budget law allows increases of overall budget expenditure where collections exceed budget revenue, and only for specific categories (debt reduction, priority investment projects and deficit reduction). - Changes in expenditure composition do not require legislature approval. - Table note: In 2012 the budget was revised with an increase of 10% from the approved budget with Legislative approval. - Forecast Reconciliation (Not met): - Quarterly budget execution report (REO) compares current and previous macroeconomic forecasts but does not explain the impact of new policy measures. - Example: Last report (Jan–Sep 2013) relates the 2013 GDP forecast decrease, from 8.4 percent to 7 percent, because of a macroeconomic shock due to floods. - Recommendation: Clarify changes in forecasts caused by new government actions included in projections and from other sources. ### Summary assessment highlights (from Table 2.4) - Selected principles with assessments and importance (verbatim): - 1.1 Unity — Good: Budget documentation incorporates all revenues, expenditure, and financing by central government ministries, agencies and extra-budgetary funds. Importance: Low. - 1.2 Gross Budgeting — Basic: All tax domestic and external revenues and associated expenditures are presented on a gross basis. Importance: Low. - 1.3 Macroeconomic Forecast — Basic: The budget documentation includes forecasts of key macroeconomic variables. Importance: High: Few variables disclosed but not explained. Need to anticipate the natural resource boom. Rec: 3. - 1.4 Medium-Term Budget — Advanced: Budget documentation includes medium-term projections of revenues, expenditures, and financing by economic category and by ministry. Importance: Low. - 2.1 Fiscal Strategy Report — Basic: REO summarizes major changes affecting budget execution. Importance: Medium. - 2.2 Budget Submission — Advanced: The budget is submitted to the legislature 3 months before the start of the financial year. Importance: Low. - 2.3 Budget Approval — Good: The budget is approved by the start of the financial year. Importance: Low. - 3.1 Budget Legislation — Advanced: Comprehensive legal framework. Importance: Low. - 3.2 Revenue Collection — Good: Laws and regulations are comprehensive and accessible, and include appeals process. Importance: Low. - 4.1 Fiscal Policy Objectives — Not met: The government does not regularly reports on a numerical objective for the main fiscal aggregates. Importance: Medium. - 4.2 Performance Information — Basic: Program budget is under development. Importance: Medium. - 4.3 Citizens’ Guide to the Budget — Basic: Government provides an accessible description of recent fiscal performance and economic prospects. Importance: Low. - 4.4 Fiscal Sustainability — Basic: The projected evolution of the main fiscal aggregates is published, but ranges between 15 and 20 years and discusses a limited number of scenarios. Importance: Medium. - 5.1 Independent Evaluation — Not met: No external assessment of forecasts. Importance: Low. - 5.2 Supplementary Budget — Good: A supplementary budget is required prior total expenditures exceeds budgeted amounts. Importance: Low. - 5.3 Forecast Reconciliation — Not met: Differences between successive vintages of the government’s forecasts are shown at the aggregate level, but qualitative discussion of the impact of new policies is missing. Importance: Medium. ### Fiscal Risk Analysis: introduction and disclosure - Definition and scope: - Fiscal risks include uncertainty in macroeconomic variables (growth, inflation, commodity prices, unemployment) and specific sources (government guarantees, tax disputes, changes in value of government assets and liabilities). - Government ability to manage risks depends on quality of information, ability to limit exposure, and capacity to absorb fiscal consequences. - Mozambique-specific observations: - Fiscal risks are relatively high and diverse: GDP growth and government revenues are volatile due to exogenous shocks and natural disasters. - Discovery of substantial hydrocarbon deposits and major multi-annual projects will make medium-term fiscal forecasting more challenging. - State-owned enterprises (under IGEPE) are significant sources of fiscal risk. - Additional pressures: quasi-fiscal activities and a defined benefits pension system. - Disclosure and management: - Degree of disclosure and active management of risks is generally low. - Published fiscal reports do not discuss in detail how fiscal outcomes might differ from forecasts as a result of macroeconomic or specific risks. - Long-term frameworks do not include assumptions about volatile oil and gas revenues. - No robust analysis or detailed disclosure of public rights and obligations for large infrastructure projects with multi-annual contracts. - No strategy addressing specific risks from state-owned enterprises, contingent liabilities or quasi-fiscal activities. - PFM legal framework mandates comprehensive information about fiscal conditions of subnational governments; fiscal data is generally comparable across reports. - Recommendation: Increase quality and frequency of information on fiscal risks to strengthen transparency, credibility, and policy support. *Source: Republic of Mozambique — INTERNATIONAL MONETARY FUND (excerpts from the provided chapter).* ### 75. Mozambique’s fiscal operations face a variety of specific risks, a few of which are ### _cr1532 - 75. Mozambique’s fiscal operations face a variety of specific risks, a few of which are ### Specific Fiscal Risks (selected, 2013) - Table 3.2. Selected Specific Fiscal Risks, 2013 (Percent of GDP / Millions of $ / Source) - Public enterprises external debt guarantees: 0.45 / 67 / 2012 Public Debt Management Report - EMATUM publicly guaranteed external debt: 5.65 / 850 - Note: Following the reintegration in the national budget of $350 million of EMATUM debt, the guarantee granted by the government has been reduced to $500 million as of January 1, 2014. - Subsidies to public enterprises: 0.17 / 26 / 2013 budget proposal - Price subsidies (Wheat flour, transportation, and fuel): 0.52 / 78 / 2013 budget proposal - Major and Multi-annual Contracts: 33.14 / 4,984 / 2014-16 MTEF - Natural disasters (total average cost of 2013 damages): 3.32 / 500 / Plan for Mitigation of Natural Disasters - Total quantified risks: 43.25 / 6,505 - Other fiscal risks not quantified: - Quasi fiscal activities - Public private partnerships - Public Sector Pension liability - VAT arrears that are not reported in fiscal documents - Unreported expenditure arrears - Exposure to the volatility of donors financing - Donor financing risk: more than 10 percent of government revenues is accounted for by grants from donors. ### Comparability of Fiscal Data - Fiscal reports are broadly comparable: - Budget statement prepared on the same basis as the Medium Term Expenditure Framework (MTEF). - Data and presentation in the CGE are comparable to the budget document. - Budgetary outturns are not reconciled with either the fiscal statistics or final accounts. ### Allowances for Budgetary Contingencies - Contingency provision: - The contingent reserve appears in general expenses under “Provisional appropriation” included in “Other current expenses”. - It represents about 0.35% of total budget expenditure for the period 2011–14. - Governance and transparency issues: - SISTAFE law gives the Minister of Finance power to use provisions for contingencies for expenditures that cannot be foreseen or postponed. - No transparent criteria for the use of budgetary contingencies. - No in-year or year-end report explaining rationale for use, except aggregated transfers to other budget lines. ### Assets and Liability Management - Borrowing authority and limits: - State borrowing authorized by the annual Budget Law with rules on domestic borrowing: (i) limits on the interest rate (cannot exceed the medium interest rate observed on the national market); (ii) loan term minimum of 3 years. - External borrowing: emphasis on maximizing concessional debt. - 2013 annual budget law sets an annual ceiling of MT183 million (about $6 million) on State guarantees; the $850 million guarantee to EMATUM in 2013 (reduced to $500 million in 2014) breached this ceiling. - Municipalities can borrow per law 1/2008 on subnational governments financial system. - Other public entities (corporations with State shares) lack specific legal provisions and specific authorization requirements; MoF drafting a law to clarify requirements. - Debt management strategy and gaps: - Debt Report analyzes central government domestic and external debts annually. - Strategy focuses on ensuring debt sustainability, maximizing concessional funding, and limiting domestic financing. - Strategy and oversight on other public sector financial debts (leases, PPPs) and financing guarantees is unclear; some public entities may enter financial leases without approval. - Public assets management: - Some information published on government financial assets; public assets management strategy not disclosed. - IGEPE manages State shareholdings with broad objectives in its annual report but lacks comprehensive analysis of financial operations or potential financial risks. - Limited oversight on local governments’ public enterprises and participations in private corporations. - No analysis provided on State and local governments’ public enterprises or autonomous institutions’ shareholdings. ### Natural Resources - Role and transparency: - Coal exploitation ongoing; recent large off-shore natural gas discoveries and petroleum exploration likely to transform Mozambique into a major resource-rich country. - Production and explorations managed mainly via concessions and private-sector arrangements. - Government publishes limited information on value and current/projected fiscal revenue from natural resources. - CGE provides breakdown of fiscal revenue related to mega-projects (includes natural resources production): amounted to only 1 percent of GDP in 2012. - Mozambique is a member of and complies with Extractive Industries Transparency Initiative (EITI); four EITI reports exist for 2008–2011. - Forecasts: “Vision of Public Finances 2011-2025” includes rough estimates for coal and gas; CFMP provides estimates for coal. Underlying assumptions and risk scenarios not disclosed. - Scale and volatility: - Recent geological survey reports indicate total gas reserve in two areas of the Rovuma basin alone could reach 150 trillion cubic feet. - Unknown size of gas reserves and potential fiscal revenue underline volatility of projections and complexity of fiscal risk management as natural resources revenues grow. ### Financial Derivatives - No financial operations with derivatives at time of assessment. - Government may need to consider hedging strategies in coming years to smooth price volatility of natural resources (e.g., financial contracts to guarantee a certain price or minimize down-side price realizations). ### Guarantees - Reporting and limits: - Government does not report on the outstanding stock of government guarantees. - Legal framework authorizes guarantees; MoF approves loan, minimum revenue, and balance sheet guarantees. - 2014 budget contains a provision setting a cap of around $526 million for guarantees. - Since 2014, the Debt Report includes information on annual flows of guarantees granted, but stock of government guarantees is not published. - Risk management gaps: - Difficult to quantify gross exposure from guarantees due to limited information. - Ceilings for new guarantees exist in annual budget laws, but no policies for assessing projects or beneficiaries. - No procedures/policies for assessment or monitoring of financial risks associated with already-granted guarantees. - Ramp-up of infrastructure projects and use of guarantees/on-lent financing to State-owned enterprises could pose simultaneous fiscal and debt sustainability risks if obligations fall due at the same time. ### Financial Sector Exposure - Exposure not quantified or disclosed annually: - Government exposure via public financial institutions and insurance company. - Deposit Insurance Fund (FGD) created by decree 49/2010 is responsible for safeguarding financial sector stability but not in operation. - Fiscal risks from financial sector exposure extend beyond explicit guarantees or ownership; systemic deposit liabilities can pose contagion risk requiring government intervention. - Financial Sector Development Strategy 2013–22 approved to strengthen financial stability and facilitate long-term private sector financing, but no assessment of potential fiscal risks. - BoM actions and remaining gaps: - BoM enhanced financial stability framework; approved Contingency Plan and Emergency Liquidity Assistance in April 2013. - BoM reports analyze risks to financial instability but do not assess risks faced by the government. - Key financial indicators: - About 85 percent of banking system assets held by the three largest banks. - Deposits at commercial banks reach almost 40 percent of GDP for the last two years. ### Major and Multi-Annual Contracts - Need and governance: - Major projects planned to address infrastructure gaps and exploit natural resources. - Government assessing ENH involvement in LNG development and production phases to manage risks and maintain debt sustainability. - New PPP law (PPP, Large Scale Projects, and Business Concessions, 15/2011) overhauls PPP oversight: direct oversight from sectoral ministries, indirect MoF oversight over guarantees and fiscal impacts, creation of a PPP Unit and sectoral regulatory agencies. - Investment Policy Review recommends a simpler arrangement for PPP oversight instead of a four-agency approach. - Transparency and publication: - List of on-going or planned “mega-projects” regularly published in CFMP and other medium-term reports. - Ministry of Mineral Resources publishes forthcoming tenders. - Mozambique declared compliant with EITI in October 2012. - Public information on rights, obligations, and payments over contract life is limited. - PPP Law mandates CGE include PPP performance information at fiscal year end and mandates publication of PPP contracts, but law is not retroactive. - PPP unit has collected information on existing PPPs but cannot publish data unless existing projects revised according to new law. - TA has mandate for auditing PPPs, large scale projects, and business concessions. ### Environmental Risks and Natural Disasters - Exposure and planning: - Mozambique exposed to droughts, floods and cyclones; severe natural hazards could disrupt agriculture, infrastructure, power, water and sanitation, social protection, health and nutrition. - Master Plan for Disaster Prevention and Mitigation (Plano Director para Prevenção e Mitigação de Calamidades) approved but does not include the fiscal dimension. - Fiscal cost and responses: - Cost of reconstruction work for the 2013 flood estimated at $500 million (3.3 percent of GDP). - Post-Disaster Reconstruction Plan planned for implementation over the next three years. - 2013 supplementary budget provides $150 million to mitigate negative impact on the economy. - 2014 Budget proposal prioritized financing actions of the Post-Disaster Reconstruction Plan, including replacement of damaged infrastructure and resettlement of affected populations. - Reporting gap: - Fiscal reports do not identify or discuss potential impacts of natural disasters in qualitative or quantitative terms. *International Monetary Fund — Republic of Mozambique (excerpts from chapter on fiscal risks and risk management)* ### 3.3 Fiscal Coordination ### 3.3 Fiscal Coordination ### 3.3.1. Subnational Governments (Good) - Aggregated information on the financial situation of subnational governments is included in the CGE, covering revenue (including own revenues) and expenditures; institutional coverage is not yet exhaustive but includes the most significant subnational entities. - Budgetary transfers to municipalities consist of transfers from: - Municipal Compensation Fund (FCA) - Fund of Local Investment Initiative (FIIA) - Road Fund (FE) - Strategic Program for Urban Poverty Reduction (PERPU) - Municipalities have own revenues and capacity development efforts at the local level to build a sustainable revenue base. - Municipal borrowing and liabilities limited by Law 1/2008: - Municipalities can only borrow from local creditors up to three twelfths of the amount they receive from the FCA. - This amount must be repaid by the municipality by the end of the fiscal year. - Long-term borrowing from international creditors requires approval of the Ministry of Finance. - Mozambique targets gradual fiscal decentralization (“autarquização”): - A resource-sharing system was introduced. - The 2013 budget allocated 2.75 percent of the revenues generated by mining and petroleum to seven localities in three resource-rich provinces. - A decentralization policy and strategy and an updated 2011–15 Strategic Plan for the Local Administration Sector were approved. ### 3.3.2. Public Corporations (Basic) - Budget documentation provides information on direct transfers from the government to public corporations and revenue collected by the government (e.g., dividends), but indirect transfers (e.g., write-off of taxes due by public corporations) are not quantified or discussed. - Government ownership and monitoring: - Ownership exercised through the Treasury and IGEPE. - The Treasury monitors 14 public enterprises, seven of which receive financing from the budget. - IGEPE manages ownership rights of the government in 143 companies, 10 of which pay dividends. - IGEPE subsector composition: 96 Corporations, 21 Limited Corporations, and 1 Foundation; two companies are listed in Maputo Stock Exchange BVM. - Public enterprise governance and oversight: - The 14 public enterprises have administrative and financial autonomy but require MoF authorization to borrow and are subject to financial oversight. - Public Enterprises Law (6/2012) requires investment and borrowing plans of public enterprises to be approved by the sector ministry and the MoF; the Treasury must assess financial plans before borrowing based on feasibility reports. - Working capital with maturity less than two years does not need approval; legislation does not apply to enterprises controlled by IGEPE. - The MoF authorized conversion of credit liabilities of EDM into capital increase in the amount of 3,005,709,900 MT (order of April 19, 2007). - Transparency and fiscal risk concerns: - Only historical values of government shares are regularly monitored and updated; fair value of government holdings is not monitored or reflected in government accounts. - IGEPE prepares an annual activity report and submits it to Treasury, but lack of fair value monitoring limits the government’s information on fiscal risks from public enterprises. - IMF staff rough estimates: public corporations subsector could have aggregated assets and liabilities of around 43 and 37 percent of GDP respectively. - Direct transfers between government and public corporations are disclosed annually, but fiscal risks from public corporations’ financial performance are not assessed. ### 3.3.3. Quasi-Fiscal Activity (Not Met) - The budget lacks qualitative discussion of quasi-fiscal activities undertaken by public corporations; the budget provides information on price subsidies and transfers but does not link subsidies to quasi-fiscal activities (e.g., public pricing policies). - The government sets a cap for annual subsidies in the budget but may make additional transfers as needed. - Financing instruments used for public enterprises and infrastructure: - Loans (emprestimos as empresas) - Outstanding special loan agreements (acordos de retrocessão) - The MoF has authority to convert on-lent credit liabilities to capital injections. - Quasi-fiscal activities are substantial in the utilities sector: - Energy tariffs are set below cost recovery levels, affecting the financial sustainability of Electricidade de Moçambique (EDM). - Government provided transfers through cancellation of on-lent loans to EDM and is assessing alternatives to revise energy tariffs. - Administered prices for fuel are maintained, cross-subsidizing consumption of fuel outside the megaprojects. - Other price subsidies include wheat flour, fuel, and transportation. - The government has committed to gradually eliminate blanket subsidies over the medium term while targeting subsidies exclusively at vulnerable social segments. - Quantified estimates: - Quasi-fiscal activities resulting from electricity pricing policy estimated in 2009 at 7 % of GDP (or 19% of budget). ### 3.3.4. Health and Social Security (Not Met) - Dual social security system: - Social security directorate responsible for civil service pension administers two other social security benefits: funeral payment and renda vitialicia. - Funeral payment: amount paid upon pre-retirement or post-retirement death to offset funeral costs; payments are guaranteed by the government. - Renda vitialicia: means-tested lifetime income payment for eligible recipients whose private property or businesses were involved in the 1975 nationalization; government guarantees monthly income payments. - National Institute for Social Security (INSS) operates the INSS pension scheme for non-civil service employees. - A private pension law enables private companies to offer private pensions as a second pillar option. - Contribution rates and financing: - Civil service and police make compulsory pension contributions of 7 percent of their monthly salary. - Compulsory contributions of 1.5 percent and 0.5 percent of salary to the medical benefit and funeral benefit respectively. - Renda vitialicia payments are financed through income earned by the government on nationalized property and businesses (not by contributions). - Collected contributions for pension and funeral benefits do not accumulate nor are they invested; civil service pensions are part of the government budget. - INSS contribution is a flat 7 percent of monthly salary, which is invested in a variety of instruments. - Reporting and actuarial concerns: - INSS accounts are supposed to be audited by independent auditors and auditors from the Ministry of Labor, but audited reports have not been published since 2010. - A new system for civil servants’ pension is under consideration. - The International Labor Organization prepared a draft actuarial study for the whole system. - There is a pressing need for an actuarial study to determine sustainability of the pension system as liabilities will eventually have to be covered by the Treasury. - Health sector measures: - Health Strategy 2012–16 approved to better manage health care expectations by improving the public health system. - Action Plan and the Pharmaceutical Logistics Strategy adopted to address drug logistics crises and emergencies (as in the 2011 crisis). - SADC context and risk indicators: - Average annual damages are estimated at 1.3% GDP for 1993-2012. ### 3.4 Summary (Assessment Highlights and Key Statistics) - Table 3.3 summary assessments (selected items and importance levels as presented): - 1.1 Macroeconomic Risks: Basic; High importance. - 1.2 Specific Fiscal Risks: Basic; High importance. - 1.3 Comparability of Fiscal Data: Basic; Low importance. - 2.1 Allowance for Budgetary Contingencies: Basic; Low importance. Budgetary contingencies are less than 1% of total expenditures for the last four years. - 2.2 Asset and Liability Management: Basic; Medium importance. - 2.3 Natural Resources: Not met; High importance. Lack of public information on volume/current value of NR; NR represents main assets/fiscal risk. - 2.5 Guarantees: Not met; High importance. Government does not report outstanding stock of government guarantees. - 2.6 Financial Sector Exposure: Not met; Medium importance. Deposits represent 40% of GDP. - 2.7 Major and Multi-Annual Contracts: Not met; High importance. - 2.8 Environmental Risks: Not met; Medium importance. Average annual damages estimated at 1.3% GDP for 1993-2012. - 3.1 Subnational Governments: Good; Low importance. - 3.2 Public Corporations: Basic; Medium importance. - 3.3 Quasi-fiscal activity: Not met; Medium importance. QFAs from electricity pricing policy estimated in 2009 at 7 % of GDP (or 19% of budget). - 3.4 Health and Social Security: Not met; High importance. INSS financial situation and liabilities are not monitored. - Additional fiscal statistics and context: - IMF staff rough estimates: public corporations subsector could have aggregated assets and liabilities of around 43 and 37 percent of GDP respectively. - Capital expenditures exceeded 10 percent of GDP in 16 out of the last 20 years. ### Recommendations (Selected, as presented) 4.0 Clarify Institutional Boundaries and Expand Institutional Coverage - Issue: Scope of the public sector is not known; number of public corporations owned/controlled by the State is not defined; institutional coverage of fiscal reports is limited to budgetary central government. - Recommendation 1: - a. Adopt internationally accepted criteria for classification of institutional units to the general government, public corporations, and private sector. - b. Prepare fiscal reports (financial statements and/or fiscal statistics) for at least the aggregate general government sector. - c. Clarify and strengthen reporting requirements of autonomous institutions and public corporations. 4.1 Expand Balance Sheet Coverage and Clarify the Accounting Standards - Issue: Fiscal reports currently include only cash and debt stocks and list of State shareholdings (not valued at current value); do not disclose liabilities associated with pensions or long-term contracts; subsoil natural resources reserves not included. - Recommendation 2: - a. Value and recognize government commitments and liabilities under long term contracts. - b. Value and recognize infrastructure assets. (Note: capital expenditures exceeded 10 percent of GDP in 16 out of the last 20 years.) - c. Value and disclose obligations and off-balance sheet items from funded pension schemes and the pay-as-you-go scheme managed by the government and the INSS. - d. Value, record and analyze tax expenditures and tax related liabilities. - e. Clarify accounting standards and improve presentation of financial statements. 4.2 Improve the Accuracy and the Transparency of Fiscal Forecasts - Issue: Fiscal forecasts tend to underestimate revenues and overestimate expenditures; lack of accurate forecasts of donor revenues impacts implementation. - Actions: - a. Improve the quality of forecasting, minimize forecast errors, and disclose assumptions underlying projections. - b. Disclose and explain any material changes to the government’s previous fiscal forecast. 4.3 Improve the Analysis of Fiscal Risks - Issue: Fiscal prospects are subject to risks from donor support reliance, natural disasters, public enterprises, major multi-annual contracts, contingent liabilities, and quasi-fiscal activities; most risks are not recognized or analyzed in official documents and there is no management strategy. - Recommendations: - a. Analyze sensitivity of the government’s fiscal forecast to different macroeconomic assumptions. - b. Produce alternative macro-fiscal scenarios to illustrate robustness to plausible macroeconomic shocks. - c. Publish a comprehensive statement of fiscal risks and strategy for managing quantifiable risks, including guarantees, natural disasters, activities of public enterprises, assets and liabilities, quasi-fiscal activities, and the actuarial position of social security schemes. - d. Set out the government’s largest contingent liabilities, estimates of their magnitude and likelihood, and the government’s strategy for managing them. *Source: _cr1532 - 3.3 Fiscal Coordination.* ### 4.4 Improve the Disclosure of Fiscal Risks ### 4.4 Improve the Disclosure of Fiscal Risks ### Issue - Mozambique faces a wide range of fiscal risks that are not currently identified, assessed and mitigated. ### Actions - a. Develop a government guarantee management policy which identifies all government’s guarantees, their beneficiaries, and the overall financial exposure. Include information in the annual budget about the probability of the guarantees being called. - b. Publish an annual report on the overall financial performance of public enterprises, publicly owned corporations, and equity holdings by the state in private enterprises. Present direct and indirect financial support (debt forgiveness, etc.) between the government and the public sector. Enforce the publication of the annual reports of large state-owned companies. - c. Manage and disclose fiscal risks related to the social security funds (INSS). Regularly update the projected financial and actuarial positions of the funds under existing policies for at least 20 years every three years. - d. Actively manage major and multi-annual contracts, including public-private partnerships and contracts for the exploitation of natural resources. All public rights, obligations, and other exposures including the expected annual revenues and payments over the duration of the contracts should be regularly disclosed at least annually. A legal limit should be set on accumulated obligations. - e. Clarify and publish the criteria to access and use budget contingency resources and create a new module in the quarterly execution report to detail how the contingencies were used in the previous quarter. ### Sequenced Action Plan — Improve the Disclosure of Fiscal Risks (excerpt) - 4. Improve the Analysis of Fiscal Risks (context) - a. Analyze the sensitivity of the government’s fiscal forecast to different macroeconomic assumptions - Year 1: Analyze the sensitivity of the government’s fiscal forecast to different macroeconomic assumptions - Year 2: Publish analysis of sensitivity of fiscal forecasts to different macroeconomic assumptions - Year 3: Publish alternative fiscal scenarios based on alternative macroeconomic scenarios - Year 4: Publish probabilistic analysis of range of forecast fiscal outcomes based on past forecast errors - b. Publish a comprehensive statement of fiscal risks and strategy for managing quantifiable risks - Year 1: Prepare qualitative fiscal risk statement for internal management purposes - Year 2: Prepare quantified fiscal risk statement with value of exposures to quantifiable risks and draft a fiscal risk strategy - Year 3: Publish fiscal risk statement with value of exposure to quantifiable risks - Year 4: Publish fiscal risk statement with value of exposure and likelihood of quantifiable risks - Year 5: Publish fiscal risk statement with value of exposure to, likelihood of, and strategy for managing quantifiable risks - 5. Improve the Disclosure of Fiscal Risks (specific steps and sequencing) - a. Develop a government guarantee management policy - Year 1: Publish a detailed list of outstanding guarantees and adopt a government guarantee management policy - Year 2: Estimate likelihood of different classes of guarantees being called and start disclosing annually value of guarantees likely to be called in budgets and accounts - Year 3: Provision in budgets and accounts for guarantees likely to be called - b. Publish an annual report on the overall financial performance of public enterprises, publicly owned corporations, and equity holdings by the state in private enterprises - Year 1: Publish survey of numbers and activities of public corporations by economic sector - Year 2: Publish overview of aggregate financial position of public corporations sector - Year 3: Publish overview of aggregate financial position and prospects of public corporations sector - Year 4: Publish overview of aggregate financial position, prospects, and risks of public corporations sector - Year 5: Publish overview of consolidated financial position, prospects, and risks of public corporations sector - c. Manage and disclose fiscal risks related to the social security funds (INSS) - Year 1: Calculate the projected position of the fund under existing policies for the 20 year horizon at least every three years - Year 2: Government prepares a strategy including planned policy measures to address any projected deficits - Year 3: Disclose strategy including planned policy measures to address any projected deficits - Year 4: Update the projected position of the funds under existing policies for the 20 year horizon at least every three years - d. Actively manage major and multi-annual contracts - Year 1: Publish annually list of major and multi-annual contracts including all public rights, obligations and other exposures detailed - Year 2: Set a legal limit on accumulated obligations *Source: _cr1532 - 4.4 Improve the Disclosure of Fiscal Risks* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1532.pdf_