Press Release No. 99/25

The International Monetary Fund (IMF) today approved a three-year loan for Mozambique under the Enhanced Structural Adjustment Facility (ESAF),¹ equivalent to SDR 58.8 million (about US$78.50 million) to support the government’s 1999-2002 economic reform program. The first annual loan will be disbursed in three equal installments, the first equivalent to SDR 8.4 million (about US$11.21 million) will be available on July 8, 1999.

In commenting on the Executive Board’s discussion of Mozambique’s request, Shigemitsu Sugisaki, Deputy Managing Director of the International Monetary Fund (IMF), made the following statement:

"Directors welcomed the authorities’ commitment to macroeconomic stabilization and the structural reforms. These were key determinants of Mozambique’s strong economic performance in 1998 when real GDP grew by over 10 percent per year, inflation fell to single-digit levels, and international reserves rose substantially.

"Directors recognized the scale of the challenges facing Mozambique, above all to reduce the high incidence of poverty. They stressed that, to meet the tasks that would fall to the public sector in addressing poverty and developmental needs, without sacrificing macroeconomic stability, it would be necessary to increase government revenue, strengthen tax administration, and reduce exemptions and tax distortions. In this connection, Directors welcomed the recent introduction of the value-added tax. While recognizing the progress already achieved in the area of trade liberalization, they stressed the benefits of further reducing tariff rates. Over time, Directors looked forward to a strengthening fiscal position permitting a decline in Mozambique’s heavy dependence on foreign aid.

"Directors encouraged the authorities to persevere on the reform path and welcomed the emphasis given in the government’s program to the efficiency and transparency of government operations, carrying forward civil service reform, the improvement of the legal and judicial system, the development of the financial system, and the encouragement of private sector participation in the provision of public services.

"Directors noted with satisfaction the intended strengthening of education and health services, which would benefit from the substantial prospective debt relief under the HIPC Initiative. Directors welcomed the authorities’ continuing efforts to strengthen the provision and targetingof social services. They looked forward to the forceful implementation of the recently adopted Poverty Action Plan and adequate allocation of government spending in the social sector and building up human capital," Sugisaki said.

ANNEX

Program Summary

Macroeconomic performance improved markedly during the three-year ESAF program that expires in July 1999, under which Mozambique consolidated its recovery from war and raised depressed per capita income. This strong performance was fostered by prudent fiscal and monetary policies, political stability, and favorable external developments. Increased confidence in the economy was reflected in higher levels of foreign aid, long-term capital inflows, and a stable exchange rate.

Medium-Term Strategy

The government’s medium-term program addresses key structural problems while aiming to consolidate economic growth, projected at about 10% in 1999 and 7% annually during 2000-01. The expected slowdown in 2000, after a three-year spurt of double-digit growth will in part be caused by the end of construction of the Mozal aluminum smelter. Annual inflation which has declined from 70% in 1994 to less than 1% in 1998, is expected to be held near 5% in 1999 onward. The level of gross international reserves is expected to remain at the equivalent of about five months of imports of goods and nonfactor services during 1999-2001.

To achieve these objectives, the government’s program continues to emphasize financial discipline, outward-looking policies, and the creation of an environment conducive to private investment. Financial policies in 1999-2000 are geared toward maintaining stable macroeconomic conditions and dealing with the peak in foreign aid expected in 1999. A domestic primary budget deficit of 2.6% of GDP, before grants is targeted in 1999. Total revenue is projected to increase by 1 percentage point relative to GDP during 1999-2000, the result of replacing turnover and consumption taxes with the VAT and selected excise taxes and of improving customs administration. Current expenditure is programmed to increase by 1 percentage point of GDP in 1999. Broad money growth will be limited to 17% in 1999 and 13% in 2000.

Structural Reforms

A package of budgetary reforms is being implemented, as well as a public enterprise restructuring and privatization program. Over 1, 300 public enterprises have been privatized, granted for concession or liquidated to date. Regarding public administration reform, revised career streams and a new compensation system have been implemented; an additional step was taken in the shortening the range in civil service salaries between the highest and lowest paid. In support of the central bank’s change from using individual bank ceilings on net domestic assets to indirect instruments of monetary control, the current system of sporadic central bank money market operations will be converted to a system of regular treasury bill auctions. At the same time, steps will be taken to increase economic security and eliminate administrative barriers to investment and trade. By making these structural reforms, the government seeks to: promote fiscal sustainability, improve the efficiency and transparency of the budgetary process, ensure the sustainability of public expenditure programs, reduce further the extent of state participation in the economy,develop an efficient and accountable public administration, improve monetary management, create a competitive and sound banking system, and increase the openness of the economy.

In the social sector, despite the impressive macroeconomic achievements of the last three years, poverty remains a compelling issue. The national poverty assessment of 1998 found that about 70% of the population still lives below the poverty line, and social indicators for Mozambique are less favorable than corresponding averages in other sub-Saharan African countries.

There are still areas of macroeconomic concern too, government revenue collection is relatively low as a percentage of GDP, which together with pressing needs for infrastructure and social services, has led to a heavy dependence on foreign aid. Moreover, domestic savings is low, the legal and regulatory environment for private sector activity needs strengthening, and public administration is handicapped by a lack of qualified staff. The success of Mozambique’s new program will thus depend on the implementation of strong reforms in all these areas.

Mozambique joined the IMF on September 24, 1984, and its quota is SDR 113.6 million (about US$151.65 million). Its outstanding use of IMF financing currently totals SDR 148.56 million (about US$198.32 million).

Mozambique: Selected Economic and Financial Indicators, 1997-2001 1997 1998 1999 2000 2001 Prog. Proj. Proj. (Annual percentage change, unless otherwise specified) National income and prices Nominal GDP (in billions of meticais) 39,693 46,134 52,913 60,177 67,790 Nominal GDP (in millions of U.S. dollars) 3,438 3,893 4,147 4,505 4,940 Real GDP 11.3 12.0 9.7 7.0 7.2 Real GDP per capita 8.9 9.5 7.3 4.6 4.9 GDP deflator 11.1 3.8 4.5 6.3 5.1 Consumer price index (annual average) 6.4 0.6 1.5 6.6 5.0 Consumer price index (end of period) 5.8 -1.3 5.5 5.0 5.0 External sector Merchandise exports 1.7 7.9 18.6 9.4 57.8 Merchandise imports - 2.9 14.3 60.8 -20.5 -3.1 Merchandise export volume 1.7 13.0 15.9 7.2 54.4 Merchandise import volume 5.7 19.3 57.6 -22.3 -4.3 Terms of trade 8.8 -0.3 0.3 -0.2 0.9 Nominal effective exchange rate (end of period)1 6.5 -5.7 -2.4 … … Real effective exchange rate (end of period)1 9.4 -9.7 -6.9 … … Government budget Total revenue 31.8 14.9 17.9 20.2 17.0 Total expenditure and net lending 34.7 7.5 28.9 5.6 9.0 Current expenditure 38.8 23.3 24.2 9.0 10.2 Capital expenditure and net lending 31.3 -5.5 33.7 2.2 7.8 (Annual change in percent of beginning-period broad money, unless otherwise specified) Money and credit Net domestic assets 11.8 9.3 1.6 23.0 21.6 Of which: net credit to the government - 22.3 -16.0 -11.1 3.7 1.3 credit to the rest of the economy 31.1 17.7 17.5 18.9 19.4 Broad money (M2) 24.4 19.2 16.5 12.8 12.6 Velocity (GDP/ average M2) 5.9 5.7 5.6 5.6 5.6 Rediscount rate (in percent; end of period; 1999 end-June) 13.0 10.0 10.0 … … (In percent of GDP) Investment and saving Gross domestic investment 19.1 20.4 35.5 25.6 19.8 Government 8.0 9.3 10.6 10.7 10.5 Other sectors 11.1 11.1 24.8 14.8 9.3 Gross national savings 5.5 4.2 10.7 6.7 7.5 Government 9.7 7.6 10.6 7.3 7.4 Other sectors - 4.3 -3.3 0.1 -0.6 0.1 Government budget Total revenue 11.6 11.5 11.8 12.5 13.0 Total expenditure and net lending 23.9 22.1 24.9 23.1 22.3 Overall balance before grants - 11.9 -10.7 -13.0 -10.6 -9.4 Total grants 9.3 8.3 12.1 7.0 6.4 Overall balance after grants - 2.6 -2.4 -1.0 -3.5 -3.0 Domestic primary balance 0.7 -0.6 -2.6 -1.7 -1.6 Domestic bank financing - 3.3 -2.3 -1.8 0.6 0.2 External sector Current account balance before grants - 17.8 -20.5 -34.1 -23.7 -15.9 Current account balance after grants - 8.7 -12.4 -22.4 -16.8 -9.6 (In percent of exports of goods and nonfactor services) Net present value of total external debt outstanding2 710.8 699.2 505.2 475.7 406.5 External debt service (nonfinancial public sector) Scheduled, before debt relief 66.2 72.8 68.0 79.7 57.9 Scheduled, after debt relief in Naples terms 19.2 20.1 24.6 26.5 19.2 Scheduled, after HIPC assistance3 ... ... 15.5 13.4 9.1 (In percent of government revenue) External debt service (nonfinancial public sector) Scheduled, before debt relief 73.9 77.1 73.3 83.3 70.5 Scheduled, after debt relief in Naples terms 22.6 23.7 30.0 30.7 26.0 Scheduled, after HIPC assistance3 ... ... 19.0 15.5 12.3 (In millions of U.S. dollars, unless otherwise specified) External current account after grants - 298 -483 -931 -759 -475 Overall balance of payments - 98 -204 -196 -485 -473 Gross international reserves (end of period) 532 625 734 647 567 in months of imports of goods and nonfactor services 6.8 6.7 5.0 5.5 5.0 in percent of broad money 82.8 82.7 83.4 65.2 50.7 Total external debt (end of period) 7,439 8,344 7,682 8,069 8,215 External arrears (public sector; end of period)4 741 762 0 0 0 Exchange rate (meticais per U.S. dollar; end of period) 11,543 12,366 ... ... ... Sources: Mozambican authorities; and IMF staff estimates and projections. 1A minus sign indicates depreciation. Figure for 1999 represents change over 12 months through March. 2Public and publicly guaranteed debt after rescheduling, in percent of three-year export average. 3Based on the amount committed at the decision point. 4In view of the best efforts being undertaken by Mozambique to conclude debt-rescheduling agreements, the country is deemed to have no arrears outstanding for programming purposes. 1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years with a 5½ year grace period.