Press Information Notice: IMF Concludes Article IV Consultation with Mozambique
IMF News, April 30, 1998
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- Published: April 30, 1998
Background and reform history
- In 1987 the government launched an Economic Rehabilitation Program (ERP) supported by the IMF, involving a fundamental shift to market-based economic policies and structural reforms.
- Major reforms undertaken since then include:
- unification and stabilization of the exchange rate;
- significant tariff reforms and trade liberalization;
- elimination of most price controls;
- privatization of about 900 public enterprises;
- extensive financial sector reforms.
- Under the ERP, real GDP and exports grew on average by 6.8 percent and 15.6 percent, respectively, in the 1987-97 period.
- Mozambique remains relatively poor with social indicators below the average for sub-Saharan African countries.
1997 economic performance and drivers
- Real GDP growth in 1997 was provisionally estimated at 7.9 percent (highest level in four years and higher than the program forecast).
- Sectoral outcomes in 1997:
- Agriculture growth: 5.9 percent (decline in cashew, strong increase in cotton 43 percent and foodstuffs 22 percent);
- Transportation, industry, and services showed particularly encouraging outcomes.
- Inflation:
- 1997 end-of-period inflation: 5.8 percent (less than half of program target 14 percent; lowest since 1975).
- Inflation declined from 70 percent in 1994 to 5.8 percent in 1997.
- Monetary developments in 1997:
- Monetary expansion: 25 percent (program target 20 percent).
- Base money expansion: 16 percent (remained within target).
- Credit to the economy increased 21 percent more than programmed.
- Net foreign assets were accumulated in excess of targets.
- Factors for faster monetary expansion: higher money demand, increased money multiplier (decline in currency-to-deposits ratio; shift toward time deposits not subject to reserve requirements).
- Policy rationale: Bank of Mozambique accommodated higher money demand to avoid negative growth effects.
Fiscal developments and public expenditure (1996–1997)
- Overall deficit before grants:
- Increased from 17.0 percent of GDP in 1996 to 20.1 percent in 1997 (as foreign aid expanded).
- Revenue:
- Total revenue increased from 18.0 percent of GDP in 1996 to 20.4 percent in 1997.
- Tax revenue rose from 16.5 percent of GDP in 1996 to 18.9 percent of GDP in 1997 (strengthening of tax and customs administration; quarterly adjustment of petroleum tax rates).
- Expenditure:
- Total expenditure and net lending grew by 5.5 percent of GDP from 1996 to 1997.
- Current expenditure increased from 15.9 percent of GDP in 1996 to 18.9 percent of GDP in 1997.
- Capital expenditure rose from 18.9 percent of GDP in 1996 to 21.5 percent of GDP in 1997.
- Increases included real-term rises in health and education current expenditure; capital spending focused on transportation and water sectors.
External sector and reserves
- Merchandise exports:
- US$226 million in 1996 to US$234 million in 1997.
- Growth of merchandise exports excluding cashews: about 14 percent.
- Nontraditional exports, particularly apparel, expanding rapidly.
- Imports:
- Declined by 1 percent to US$775 million in 1997 (import substitution).
- Other external indicators:
- Surrender requirement on export proceeds eliminated in January 1997.
- Gross international reserves increased to more than six months of imports at end-December 1997.
- Metical depreciation: 4 percent in 1996 and less than 2 percent in 1997.
- Spread between market and parallel exchange rate narrowed to less than 2 percent in Q1 1998.
Structural and institutional reforms
- Progress reported in 1997:
- Privatization of customs management; full reconciliation system for import taxes due and taxes paid established.
- Preparations underway for introduction of value added tax.
- New budgetary recording and monitoring procedures introduced; public administration decentralization underway; civil service reform finalized for implementation in 1999.
- Privatization program on track for completion in mid-1999.
- Legal and regulatory framework being restructured to facilitate trade and investment; labor legislation updated.
- Last remaining state-owned bank privatized in September 1997.
- Commercial bank accounting procedures updated; new Financial Institutions Law submitted to the Assembly of the Republic; banking supervision being strengthened.
- Steps to prepare indirect monetary policy instruments: reserve requirements lowered, extended to foreign currency deposits, and made more flexible; interbank money market established in September 1997; payments system modernization underway.
HIPC Debt Initiative status
- In September 1997 IMF and World Bank Executive Boards decided Mozambique qualified for assistance under the HIPC Debt Initiative.
- On April 7, 1998 the IMF Executive Board agreed Mozambique had reached the decision point under the Initiative; completion point expected in mid-1999.
- IDA Board also made a similar decision on April 7, 1998, qualifying Mozambique for interim assistance under the Initiative.
- External debt sustainability targets at completion point agreed by Directors:
- Net present value of the debt-to-exports ratio: 200 percent.
- Debt-service-to-exports ratio: 20 percent.
- Access to enhanced debt relief contingent on satisfactory implementation of a strong program of structural reform and actions in the social area.
Executive Board assessment and policy recommendations
- Directors’ appraisal:
- Noted continued improvement in 1997: higher growth, falling inflation, improved external current account, stable nominal exchange rate, rising confidence, and increasing private investment.
- Commended authorities for adherence to the 1997/98 macroeconomic program and implementation of structural reforms.
- Monetary policy guidance:
- Most Directors agreed that accommodating higher money demand by allowing somewhat higher monetary expansion was warranted to avoid slowing growth, given no adverse price effects observed.
- Advised close monitoring of developments and quick action to curtail money and credit growth if signs of overheating appear.
- Fiscal and revenue policy:
- Emphasized need to raise public sector savings, boost export growth, and increase financial deepening due to heavy dependence on foreign aid.
- Welcomed strengthening of tax revenues in 1997 and urged maintenance or increase of improvement momentum in tax and customs administration and broadening of the tax base.
- Recommended early introduction of a value-added tax, accompanied by a public information program.
- Urged a review of the pension system to reduce the budgetary burden of pension payments.
- Welcomed new budgetary accounting framework to enhance transparency and facilitate reallocation to social programs.
- Investment and aid coordination:
- Stressed attention to investment efficiency, absorptive capacity constraints, and implications of higher investment for recurrent costs.
- Advised improvement in aid coordination and continuation of donor discussions to resolve outstanding issues.
- Privatization and public administration:
- Welcomed near-completion of privatization program; encouraged consideration of full privatization of remaining enterprises.
- Urged high priority for public administration and pension system reforms.
- Monetary and banking stability:
- Noted high level of dollarization; emphasized maintaining prudent monetary policies, adequate bank supervision, and prudent gross international reserves.
- Cautioned against further real effective appreciation of the metical.
- Trade reform:
- A few Directors disappointed with slower recent progress on trade reform; encouraged further reduction of tariff spreads and exemptions.
- Suggested SADC free trade protocol could help set more ambitious trade reform objectives.
- IMF membership obligations:
- Encouraged authorities to accept the obligations of Article VIII, Sections 2, 3, and 4 within the year.
Mozambique: Selected economic indicators, 1994–98 (highlights)
- Domestic economy (change in real GDP):
- 1994: 4.5
- 1995: 1.4
- 1996: 6.2
- 1997: 7.9
- 1998 Proj.: 9.4
- Change in consumer prices (end of period):
- 1994: 70.2
- 1995: 54.1
- 1996: 16.6
- 1997: 5.8
- 1998 Proj.: 6.0-10.0
- External economy (in millions of U.S. dollars)1:
- Exports, f.o.b.: 1994: 164; 1995: 174; 1996: 226; 1997: 234; 1998 Proj.: 325
- Imports, f.o.b.: 1994: 881; 1995: 727; 1996: 783; 1997: 775; 1998 Proj.: 965
- Current account balance: 1994: -300; 1995: -338; 1996: -359; 1997: -260; 1998 Proj.: -453
- Direct investment and project grants: 1994: 333; 1995: 274; 1996: 296; 1997: 335; 1998 Proj.: 365
- Capital account balance: 1994: -10; 1995: 64; 1996: 237; 1997: 162; 1998 Proj.: 196
- Current account balance (percent of GDP): 1994: -20.5; 1995: -22.7; 1996: -20.6; 1997: -13.4; 1998 Proj.: -20.9
- Change in real effective exchange rate (in percent; +appreciation): 1994: -3.2; 1995: -4.4; 1996: 14.9; 1997: 14.7; 1998 Proj.: ...
- Financial variables (in percent of GDP)1:
- Gross national savings: 1994: 30.5; 1995: 28.5; 1996: 27.5; 1997: 31.8; 1998 Proj.: 31.4
- Gross domestic investment: 1994: 51.0; 1995: 51.2; 1996: 48.2; 1997: 45.2; 1998 Proj.: 52.3
- Central government balance (before grants): 1994: -29.7; 1995: -20.8; 1996: -17.0; 1997: -20.1; 1998 Proj.: -19.4
- Primary balance: 1994: -28.0; 1995: -17.4; 1996: -14.4; 1997: -17.6; 1998 Proj.: -16.5
- Change in broad money (in percent): 1994: 57.6; 1995: 54.7; 1996: 21.1; 1997: 25.4; 1998 Proj.: 22.2
Press Information Notice: IMF Concludes Article IV Consultation with Mozambique — April 30, 1998 — IMF External Relations Department