Press Release No. 05/282

Press Release: IMF Executive Board Completes Third Review Under the Three-Year PRGF Arrangement for Mozambique and Approves US$2.3 Million Disbursement

December 19, 2005

The Executive Board of the International Monetary Fund (IMF) today completed the third review of Mozambique's economic performance under an SDR 11.4 million (about US$16.4 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 04/153).

The completion of the review enables the release of an amount equivalent to SDR 1.6 million (about US$2.3 million), which will bring total disbursements under the PRGF arrangement to an amount equivalent to SDR 6.5 million (about US$9.4 million).

The Executive Board also agreed to a modification of the performance criteria on net international reserves and net domestic assets for end-December 2005, mainly to reflect higher-than expected grain imports triggered by ongoing drought affecting part of the country.

Following the Executive Board's discussion on Mozambique's economic performance, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"The Mozambique economy continued to perform well in 2005 despite the spike in petroleum prices and the impact of the drought. However, the drought has left about 800,000 people in need of food aid until the next crop season starting in March 2006-an area of great concern. The authorities are to be commended on their improved program performance, which has helped maintain macroeconomic stability and contributed to robust economic growth. The good fiscal performance is especially noteworthy.

"Looking ahead, the main challenge will be to maintain high and broad-based economic growth and make further progress in alleviating poverty. This will require persevering with the stabilization effort, improving the investment climate, and pursuing a gradual fiscal consolidation through enhanced domestic revenue collection and a reform of expenditure management.

"Under the 2006 fiscal framework, the revenue effort is to be supported by the establishment of a Central Revenue Authority. Recurrent spending is to be contained in order to ensure that priority spending, especially in the social sector and on infrastructure, can be maintained. Furthermore, the authorities will aim to ensure that inflows of foreign aid are allocated to the most economically and socially productive purposes. The recent agreement transferring majority ownership of the Cahora Bassa dam operating company to Mozambique, which is to be welcomed, provides the authorities with the opportunity to pursue further the infrastructure development of the country that is needed to reduce poverty.

"The authorities' commitment to strengthen public expenditure management and improve the quality of government spending is commendable. At the same time, there is a need to reinvigorate public sector reform, and implement fiscal decentralization in a manner that leads to enhanced accountability and better service delivery, while avoiding wasteful spending. Administrative capacity and financial reporting at the district level require further strengthening. The donor community is encouraged to help bring off-budget donor-funded projects on-budget.

"The Bank of Mozambique is encouraged to continue to target reserve money to control inflation, and pursue a flexible exchange rate regime to cushion against exogenous shocks. Introduction of consolidated supervision and international financial reporting standards should strengthen the banking system and deepen access to credit. The currency reform scheduled for 2006 should be well sequenced and accompanied by an information campaign covering the entire country.

"To improve governance and reduce the costs of doing business, the authorities will work on a revised anti-corruption strategy and new procurement, labor market, and commercial legislation.

"The authorities' medium term framework provides a firm basis for the new Plano de Acção para Redução da Pobreza Absoluta (Action Plan for the Reduction of Absolute Poverty--PARPA) for 2006-09. Prudent macroeconomic policies, the launching of a second wave of reforms, and continued donor assistance should help Mozambique move toward achievement of the Millennium Development Goals," Mr. Kato said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.