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Republic of Mozambique and the IMF News Brief: IMF Completes Fourth Review Under Mozambique's PRGF Arrangement
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Mozambique—Letter
of Intent,
Memorandum of Economic and Financial Policies,
and Technical Memorandum of Understanding
Mr. Horst Köhler 1. The Executive Board of the Fund approved a three-year Poverty Reduction and Growth Facility (PRGF) arrangement for Mozambique on June 28, 1999. The attached memorandum of economic and financial policies describes progress under the government's reform program for the year 2001 and sets out the objectives and policies that it intends to pursue during 2002. On this basis, the government requests that the fifth loan under the PRGF arrangement in an amount equivalent to SDR 8.4 million be disbursed following the completion of the fourth review under the arrangement, and further requests that the period of the PRGF arrangement be extended for 12 months to allow time for the completion of the remaining reviews and related disbursements envisaged under the arrangement. 2. The Government of Mozambique will provide such information as the Fund requests in connection with the progress made in implementing the economic and financial policies and achieving the objectives of the program. 3. The Government of Mozambique believes that the policies and measures set out in the attached memorandum are adequate to achieve the objectives of its program and will take any further measures that may become appropriate for this purpose. During the remaining period of the arrangement, including the period of the requested extension, Mozambique will continue to consult with the Managing Director on the adoption of any measures that may be appropriate, at the initiative of the government or whenever the Managing Director requests such a consultation. Moreover, after the period of the PRGF arrangement and while Mozambique has outstanding financial obligations to the Fund arising from loans under the arrangement, the government will consult with the Fund from time to time, at the initiative of the government or whenever the Managing Director requests consultation on Mozambique's economic and financial policies. 4. The Government of Mozambique will conduct with the Fund the fifth review of the three-year PRGF arrangement not later than end-November 2002, based on quantitative and structural performance criteria for end-June 2002 and end-July 2002, respectively. Sincerely yours,
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Memorandum of Economic and Financial
Policies of I. Recent Developments and Program Implementation 1. The Government of Mozambique presents this memorandum in support of its request for the fifth loan disbursement under the Poverty Reduction and Growth Facility (PRGF) arrangement for Mozambique approved by the Executive Board of the Fund on June 28, 1999. The economic and financial policies and related structural reforms here described are intended to secure the stable macroeconomic framework that is critical to sustained growth and poverty reduction, as underscored in the government's National Action Plan for the Reduction of Absolute Poverty (PARPA) which was presented in 2001 as Mozambique's poverty reduction strategy paper (PRSP) in the context of the PRGF-supported program. 2. The Mozambican economy has recovered strongly from the devastating 2000 floods, which limited growth to under 2 percent. Aided by the first full year of production of the MOZAL aluminum smelter, and buoyant agricultural production and construction activity, growth is estimated to have reached 13.9 percent in 2001. The current account of the balance of payments narrowed from 11.8 percent of GDP in 2000 (excluding grants and large projects) to 10.7 percent of GDP in 2001, and gross international reserves of the Bank of Mozambique (BM) increased to US$727 million, or the equivalent of six months of imports of goods and services. However, price developments were less favorable; after declining early in 2001, the 12-month rate of inflation increased very sharply in the last quarter of the year, reaching 22 percent in December. 3. Implementation of the economic policies set out in the PARPA was supported by the observance of all of the quantitative performance criteria through December 2001 established under the PRGF arrangement (Table 1). The fiscal outturn for 2001 was stronger than programmed as regards both revenue (0.5 percentage point of GDP higher) and expenditure (4.2 percentage points lower). The revenue gains were generated by income and international trade taxes, reflecting continued improvements in coverage of taxable transactions. Expenditure shortfalls were recorded mainly in capital investment 2.0 percent of GDP, owing to lower-than-envisaged external project assistance. In response to large and unexpected delays in disbursements of external budget support in the latter part of 2001, the government resorted to cash control of current expenditure. As a result, wage payments and expenditure in goods and services were 0.5 percent and 0.6 percent of GDP lower than programmed respectively. The domestic primary balance deficit (excluding bank restructuring net lending) was 5.6 percent of GDP, compared with the program target of 6.2 percent, and in nominal terms it remained well below the performance criterion for end-2001. 4. The performance criteria on the net domestic assets and net international reserves of the BM were observed—the latter by a large margin. However, reserve money continued to exceed the program benchmark. Following a period of sustained pressure on the metical, the BM acted to tighten liquidity conditions. Reserve requirements calculated over each two-week period were increased by 3.5 percentage points to 11.5 percent with effect from July 2001, and the interest rate on liquidity support operations (facilidade permanente de cedência) was increased to 35 percent and maintained above the treasury bill rate. Although pressure on the exchange rate rapidly abated, the 12-month rate of broad money growth remained in excess of 40 percent through October. The impact of larger reserve requirements was partially offset by incomplete compliance with reserve requirements, especially by Banco Austral (BA), and by a shift in government deposits from the central bank to commercial banks. In response to these difficulties, the BM has tightened the enforcement of reserve requirements, issued new regulations to increase penalties for noncompliance, and introduced a daily minimum requirement of 10 percent. In addition, the BM placed higher volumes of treasury bills in the market and gradually increased its sales of foreign exchange to sterilize the liquidity impact of government expenditures financed with external budget support. These measures have begun to improve monetary control, with the 12-month rate of broad money growth declining from 43 percent in June 2001 to 30 percent in March 2002. 5. After averaging over 3 percent per month in the final quarter of 2001, the monthly increase in the consumer price index slowed to an average of under 0.2 percent per month in the first four months of 2002. However, the 12-month rate of inflation stood at 22 percent in April 2002. The metical has remained broadly stable vis-à-vis the U.S. dollar since October 2001. As a result of this stability, the recent sharp depreciation in the South African rand, and the higher rates of inflation in Mozambique, the 12 percent depreciation of the trade-weighted real effective exchange rate during the first half of 2001 has been largely reversed. 6. Further progress was made in the implementation of structural reforms in tax policy and public expenditure management (Table 2). The new income tax law (lei de bases do sistema tributário), which rationalizes corporate and personal income taxes and broadens the tax base, was submitted to the parliament in December (a performance criterion), and preparations are under way, with external assistance, for its implementation in time for its full application to 2003 incomes. Adoption of a new code of fiscal incentives, which establishes standard concessions for foreign investors (including transparent rules for investors in large projects) was delayed, pending the approval of the new income tax law. Although a draft was completed in May 2001, further rounds of consultations were held and the code will come into force in June 2002 (a performance criterion). Steps to improve tax administration included the launching of a large taxpayer unit in Maputo in December 2001 (a structural benchmark). The budget for 2002 was prepared using the new expenditure classification that will, inter alia, allow for a more detailed reporting of priority social spending. A new public financial management law, which, building on the results of the fiscal transparency assessment (ROSC) establishes the basis for fundamental improvements in public expenditure management (PEM), was approved by the parliament in October 2001. Work has now begun on the long and challenging process of implementing these reforms in PEM throughout government. 7. Difficulties in the financial sector came to the fore in 2001 after private shareholders in the insolvent BA refused to participate in its recapitalization. The government purchased the BA for US$1 and the central bank took control of the bank in April, appointing interim management to prepare the bank for reprivatization. At the end of December 2001, the BA was successfully sold to Amalgamated Banks of South Africa (ABSA). The final costs of recapitalizing the bank will depend on a further review of the bank's assets, to be completed by July. The net cost to the government of the BA sale is currently estimated at US$107 million, which corresponds to the sale price of US$10 million, net of the costs of recapitalization. In addition, the government is assuming the cost of pension obligations, which, subject to an actuarial review, are estimated at Mt 497 billion. Since the central bank's intervention in the BA in April 2001, delinquent loans in the amount of Mt 102 billion have been recovered as of end-December 2001. 8. Banco Comerçial de Moçambique (BCM) was recapitalized in late 2000 and March 2001, on the basis of the bank's 1999 accounts. The size of this capital injection, including government's participation pro rata to its 49 percent shareholding, was in line with the amounts established in the program. However, a further capital deficiency later became apparent and the audited accounts for December 2000, which were received by the BM in August 2001, indicated that the recapitalization had not been large enough to cover losses incurred in 2000. Resolution of this capital deficiency was delayed by the merger of BCM with Banco Internacional de Moçambique (BIM), which took place in November 2001. The BM initially established a deadline of end-March 2002 for the recapitalization, which was subsequently extended to end-April to allow additional time to ascertain the reasons for the capital shortfall and establish safeguards to limit the potential for further losses. 9. With assistance from the Fund and the World Bank, steps have been taken to strengthen banking supervision. In line with program benchmarks, regulations were issued in October 2001 to commence consolidated supervision of related financial institutions, and, in October, regulations on connected lending were tightened by lowering limits on bank lending to shareholders and board members. In line with priorities identified in the context of discussions with World Bank staff on a new Economic Management and Public Sector Operation (EMPSO), the BM also tightened in March 2002 licensing requirements for financial institutions by significantly raising the minimum own capital requirements (in the case of banks, from the equivalent of US$800,000 to US$2.7 million); at the same time, it issued guidelines on the role of its banking supervision department, reiterating the central bank's regulatory powers and referencing the relevant legislation. 10. Progress has been made towards the development of a strategic plan for the reform of the whole justice system, although the government regrets that this was not completed as had been expected by end-2001. A draft of the strategic plan was provided to the staff of the World Bank in February 2002; adoption of the final plan will form a condition for the release of the second tranche of the proposed EMPSO credit from IDA. A draft of the operational plan for the reform of the Ministry of Justice, consistent with the integrated plan for the entire system, was also completed in February 2002. The corresponding operational plans for the other three branches of the system—the Supreme Court, the Administrative Court and the Attorney-General—will be drafted by end-June 2002 and finalized by end-September 2002. The Commercial Code, which was drafted during 2001, and which subsequently went through a consultation process with civil society and the private sector, has been submitted to parliament where it will be debated shortly. II. The Medium-Term Context 11. As established in the PARPA, the government's key medium-term objectives are (i) the reduction of absolute poverty; (ii) the attainment of high and sustainable growth through the creation of an enabling environment for the private sector; (iii) the reduction of regional inequalities; and (iv) the consolidation of peace, national unity, and democracy. Achievement of these objectives will be supported, inter alia, by the maintenance of a stable macroeconomic environment. As described below, the government is drawing upon processes already in place to ensure comprehensive monitoring of the implementation of the PARPA with the participation of interested parties, including parliament. 12. The medium-term strategy elaborated in the PARPA calls for fiscal consolidation, including a widening of the tax base, to facilitate a reduction in foreign aid dependency and safeguard fiscal and debt sustainability. At the same time, this strategy will help to ensure that inflows of external assistance remain within the country's absorptive capacity and do not generate adverse macroeconomic consequences. While this broad strategy remains appropriate, some revisions to the macroeconomic framework will be required to take account of new developments. In particular, one of the envisaged large foreign private investments (or megaprojects), the Maputo Iron and Steel Project, which was due to begin construction in 2002, has been put on hold in the wake of the bankruptcy of its largest participant, Enron. As was recognized in the PARPA, further work is needed to assess the macroeconomic impacts of HIV/AIDS; this is continuing with the assistance of the World Bank and will be incorporated into revisions of the medium-term expenditure framework later this year. 13. In line with the strategy in the PARPA, the medium-term framework envisages a continuation of rapid growth at an average annual rate of 8 percent through 2010, with inflation declining to a range of 5 to 7 percent. In support of these objectives, and taking into account an expected gradual decline in external assistance over the medium term, the primary fiscal deficit (excluding bank restructuring costs) would be reduced from 5.6 percent in 2001 to 2.5 percent in 2005. As a result, the government would be able to avoid recourse to domestic borrowing while at the same time meeting the cost of the redemption of bonds issued for bank recapitalization. Improvements in domestic resource mobilization, especially through the new income tax regime, increased revenues from megaprojets, and more effective use of government spending, will be key to ensuring that these objectives can be maintained while meeting the expenditure priorities set out in the PARPA. Improvements in public savings are also expected to contribute to a gradual reduction in the current account deficit from under 24 percent of GDP in 2001 to about 11 percent in 2005 (excluding grants). At the same time, the net present value (NPV) of Mozambique's external debt, which is estimated to have declined to about 116 percent of exports in 2001 as a result of debt relief granted under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC) is expected to continue to fall over the medium term. Partly as a result of strong import growth in connection with megaprojects, the import coverage of gross international reserves is expected to decline from the current high level of 6.4 months of imports in 2001 to about 4 months over the medium term. III. Program for the Remainder of 2002 14. The program for 2002 is designed to foster rapid growth and further improvements in priority spending, both of which support the attainment of the poverty reduction goals. To safeguard macroeconomic stability, protect those vulnerable to inflation, and return to the path set out in the PARPA, policies will be geared to reducing inflation from 22 percent at end-2001 to 8 percent at end-2002. Although growth is expected to slow after the strong recovery in 2001, buoyant agricultural production and large foreign investments are expected to contribute to growth of 9 percent in 2002. 15. Against the background of strong private sector activity, fiscal policy will support the moderation of demand pressures to contain inflation while protecting social spending. In line with the budgetary framework of the PARPA, the government envisages a reduction in its primary deficit (excluding bank restructuring costs) to 3.4 percent of GDP in 2002. Revenues are expected to amount to 13.0 percent of GDP in 2002. The government is also considering an increase in the petroleum excise tax to restore the real value eroded since its last increase in October 1997, but is concerned that such an increase should be timed to avoid further increases in pump prices. To ascertain better the implications of raising the petroleum tax, including the consequences for key transport prices, the government intends to make this issue the subject of a poverty and social impact assessment to be conducted in mid-2002. In addition, small gains in collections are expected from the operations of the large taxpayer units in Maputo and Beira. 16. Public expenditure will continue to be channeled toward the PARPA priorities, which are expected to account for 67 percent of noninterest expenditure in 2002 (excluding expenditures for bank restructuring), up from 66.2 percent in 2001. The government is committed to the PARPA medium-term objectives and will use its quarterly and semi-annual budget implementation reports to closely monitor expenditures for PARPA priority areas to ensure meeting of PARPA objectives. Within this total, spending on education will decline from the peak levels reached in 2001 as envisaged in the PARPA. while spending on health will increase. 17. The budget for 2002 envisages a wage bill of Mt 6.0 trillion to accommodate (i) a general wage increase of 11.7 percent; (ii) automatic promotions under the new career system (corresponding to a 3.5 percent increase in the wage bill); and (iii) the hiring of about 4,000 teachers and 800 health workers as contemplated in the PARPA. Despite the sharp increase in inflation that became apparent after the budget was submitted to parliament, and an increase of 22 percent in the minimum wage that was agreed in May, the government intends to limit the wage bill in 2002 to this budgeted amount. In this regard, the unexpected shortfall in wage payments from the budgeted amount in 2001 provides additional room for the higher general wage increase of 18 percent that was granted after the decision was reached on the minimum wage; nevertheless, the wage bill would fall back from 6.6 percent of GDP in 2001 to 6.3 percent in 2002. Current spending on goods and services would decline to 3.5 percent of GDP with savings expected in nonpriority areas. Capital expenditure is expected to decline to 12.6 percent of GDP, as reconstruction after the flood damage in 2000 draws to a close. However, both domestic and external interest payments are expected to rise on account, respectively, of the servicing of the new bank recapitalization bonds and the end of the deferral of payments to the Paris Club that was granted to provide additional support in the aftermath of the floods. Expenditures on bank recapitalization, which are classified as net lending and largely take the form of interest-earning bonds, are estimated to total Mt 2,390 billion in 2002. Excluding the issuance of these bonds, the government would not need to resort to domestic financing in 2002. 18. The reduction in the 12-month rate of inflation to about 8 percent by end-2002 will be supported by a prudent monetary stance that aims at reducing the growth in broad money just under 20 percent by end-2002 from the rate of almost 30 percent in March 2002. With net international reserves of the BM roughly unchanged, the monetary program would accommodate growth in credit to the private sector of 22 percent to meet the needs of the expanding economy. 19. Monetary control will be assisted by strict enforcement of reserve requirements, which until January 2002 had been undermined by the BA's persistent noncompliance and the adverse signal that this noncompliance sent to the system. With the recapitalization of the BA and the imposition of stronger and accelerating penalties for noncompliance in early January, full observance of reserve requirements has since been recorded for the banking system as a whole. To improve control of liquidity management, the BM will continue to work closely with the treasury in coordinating government spending and the absorption of any excess liquidity through sales of foreign exchange and treasury bills. While the envisaged deceleration in inflation should generate some room for reducing interest rates during 2002, interest rate rates will continue to be determined by liquidity conditions. 20. In line with its commitment to an efficient, equitable, and transparent process for recovery of the BA's nonperforming loans that are reflected in the sales contract, the government has decided on the following course of action. First, as provided for in the sales contract, the new management of the BA is seeking to collect on nonperforming loans. In this regard, the contract provides attractive incentives for the BA to pursue these loans. Second, all nonperforming loans that are fully provided for and considered unrecoverable by the BA have been transferred to the government on payment of a nominal sum of one metical. The purchase by the government took place in May, immediately after the completion of a review of the BA's loan portfolio. This constituted a crucial first step toward using all available means to swiftly pursue the most delinquent debtors. Subsequently, the government will use its powers of execução fiscal to pursue collection of these nonperforming loans, where necessary. In line with understandings reached with World Bank staff, the government will include reporting on the progress of debt collection efforts in the budget execution reports that are published on a quarterly basis. 21. In light of the further capital shortfall in BIM in which, following the merger with BCM, government is now a 23 percent shareholder, the authorities developed a strategy to ensure that the recapitalization take place without undue delay while at the same time putting in place safeguards to minimize the use of government funds and limit the potential for future losses in the bank. In line with this strategy, shareholders approved an initial capital injection of US$10 million; this took place on May 29 with government contributing 23 percent. BM has also required, and issued tenders for, an independent opinion to clarify the scale of, and reasons for, the bank's losses and the reported sharp increase in the liabilities of the bank's pension fund. Depending on the outcome of these studies, which are expected to be completed by September 2002, an additional capital need may emerge; on the basis of available information, this is not expected to exceed US$33 million, of which government would contribute no more than 23 percent. The BM has also required that BIM produce a business plan, including a plan to recover nonperforming loans, to show how the bank's performance can be improved. Finally, the government has reiterated, at the special shareholders meeting on April 29, its intention to divest its shareholding in BIM. In line with the government's policy of withdrawing from banking operations, the government's contribution to the recapitalization is in the form of preference shares that can be converted to voting shares when the government divests from BIM. 22. In light of the problems recently experienced in the banking sector, the central bank has enhanced its regulations and tightened enforcement. These efforts are to continue during 2002. The BM has strengthened the enforcement of capital adequacy ratios by strictly applying the penalties envisaged in the law to noncompliant banks and is now prepared to withdraw the banking license of any bank that remains in prolonged noncompliance. To improve the monitoring of prudential ratios, the BM issued a circular on March 30, 2002 requesting banks to provide all the information needed to assess compliance with capital adequacy requirements on a monthly basis. This amended the earlier requirement of semiannual reporting on capital adequacy. To ensure the accuracy and timeliness of data provided to the supervision department, existing penalties for providing late or incomplete data will be rigorously applied, and the supervision department intends to insist on external audits to clarify data inconsistencies, as provided for in the regulations. The BM will follow up rigorously on the implementation of new regulations, including through on-site inspections, and will ensure that, for banks that are not in compliance with the regulations, timetables will be agreed with the supervision department for unwinding connected lending that exceeds the stipulated limits. To improve the operations of banking supervision, the BM intends to complete installation of the new information system in the supervision department by end-September 2002. The government has also requested Mozambique's participation in the Financial Sector Assessment Program. 23. Following the promulgation of the public financial management law in February 2002, the government has begun to implement reforms in public expenditure management that are designed to yield major improvements in the transparency and accountability of the budgetary process. First, the government has implemented in the 2002 budget the more detailed new functional expenditure classifier, which facilitates monitoring of priority expenditures. The budget execution report for the first quarter of 2002, issued in mid-May, reported for the first time on expenditure incurred while using the functional classification as recommended by the IMF's Government Finance Statistics Manual. Second, new procedures are being followed to broaden the coverage of budget execution reports to incorporate all externally financed public projects and programs; this information was included in the report on the first quarter. Third, to support the implementation of the new financial administration system (SISTAFE), the Ministry of Planning and Finance issued in March a ministerial circular (despacho ministerial) to strengthen the coordination unit (UTRAFE) and establish a steering committee of deputy directors in the ministry. A decree establishing regulations under the financial management law will be issued in June 2002 [benchmark]. The government has also requested the Fund to provide a long-term fiscal consultant to assist UTRAFE in the implementation of the SISTAFE. 24. Tax reform has been a priority of the government's reform endeavors under successive IMF-supported programs and will remain so in 2002 with the implementation of the new income tax law. The government attaches high priority to ensuring that the new tax law is fully applicable to incomes generated from January 1, 2003 onward. To this end, the tax codes for corporate and individual income taxes will be approved by the Council of Ministers in July (a performance criterion). The rates to be included in these codes, after a process of consultation with the private sector, will be geared to ensuring that the tax reform supports the revenue objectives for the medium term set out in the PARPA. Passage of new income tax law will also facilitate the approval, in June 2002, of the new fiscal incentives code to establish standard concessions for foreign investors, including transparent rules for investors in large projects (performance criterion). In addition, to improve the efficiency of the tax system, the Council of Ministers will approve in July regulations for a new annual property tax on vehicles based on engine size, and it will approve in June regulations eliminating the stamp duty on transactions subject to the value-added tax (VAT). 25. The government recognizes the importance of public sector reform and has begun to develop a strategy in this area, focusing on decentralizing government activities, addressing corruption and improving the effectiveness of the civil service through training and salary reforms. At the same time, work is under way to define more precisely the role of government, recognizing that decisions on this issue will be a crucial first step toward determining the course of public sector reform. 26. The government will adhere to its intention to reduce the top tariff rate from 30 percent to 25 percent. The rate reduction will now become effective in January 2003 as part of Mozambique's participation in the Southern African Development Community (SADC) Trade Protocol, at which point the government will apply the reduction in the top tariff rate to all of Mozambique's trading partners. 27. In the cashew sector, government policy is focused on assisting in the replanting and rehabilitation of trees, in line with the objective of increasing productivity and restoring cashew production to 100,000 tons by 2005. In accordance with the government's existing policy, the export tax on raw cashews is to be maintained at 18 percent in 2002, and the proceeds of the tax be used to finance improvements in the sector's productivity. The sugar sector has attracted sizable foreign direct investment in recent years, and the rehabilitation of four sugar mills is expected to be completed by 2005, when annual production is projected to reach 400,000 tons. In the interim, while production is running well below the capacity of the mills and costs are correspondingly high, the import surcharge on sugar imports imposed in 1999 will remain in place. This policy will continue to be subject to annual reviews, taking into account developments in the domestic and the highly distorted international sugar markets. To alleviate pressure from imports of sugar from Zimbabwe that evade the import surcharge, in April 2002 the government granted a temporary VAT exemption for sugar. The sector is benefiting from limited preferential access to regional markets under the SADC Trade Protocol, to the United States, and, since 2001, to the European Union. 28. The government recognizes the crucial importance of timely debt-service payments in view of Mozambique having reached its enhanced HIPC Initiative completion point in September 2001 and agreement with the Paris Club in November 2001. The government aims to reach bilateral agreements with individual Paris Club creditors by the deadline of end-June 2002 and is continuing to seek agreements on comparable terms with non-Paris Club creditors. The government realizes that for Mozambique to fully benefit from its new post-HIPC Initiative status and avoid the risk of a recurrence of debt problems, it must strengthen its debt management capacity in order to ensure timely debt service payments. It intends to continue to improve its external debt database; prepare detailed monthly debt service projections; and extend its monitoring of debt data and assessment of debt-related vulnerabilities to private sector debt. 29. The government has prepared detailed plans for monitoring implementation of the PARPA. Based on existing procedures, the government will report annually on the attainment of PARPA objectives. A first such progress report on PARPA implementation, as requested by parliament, is expected to be available by mid-August 2002. In addition, quarterly budget execution reports will continue to be provided. The government is preparing its second full household survey, which has been designed for comparability with the initial 1997 survey. The results of the survey, which should facilitate analysis of the links between the recent rapid growth and poverty reduction, should be available in 2003. 30. The government is aware that, despite progress in recent years in improving Mozambique's statistical databases, significant shortcomings remain. To address these issues, the government has requested participation in a data Report on the Observance of Standards and Codes (ROSC) in the second half of 2002. In the meantime, the government will proceed with ongoing efforts to revise Mozambique's balance of payments in accordance with of the IMF's Balance of Payments Manual (fifth edition). 31. During the period of the PRGF-supported program, the government will not impose or intensify restrictions on payments and transfers for current international transactions; will not introduce multiple currency practices; will not conclude bilateral payments agreements that are inconsistent with Article VIII of the Fund's Articles of Agreement; and will not impose or intensify import restrictions for balance of payments reasons. Furthermore, the government will not incur any new external payments arrears, except in cases where despite good faith efforts by the government, debt-restructuring agreements remain pending. IV. Program Monitoring The quantitative performance criteria and benchmarks that will be used to evaluate the implementation of the program are shown in Table 3 of this memorandum, with further definitions and explanations contained in a technical memorandum of understanding annexed to this memorandum. The first five quantitative targets represent key financial objectives of the program. As in the past, the program's floor on net international reserves (NIR) and the ceiling on net domestic assets (NDA) will be adjusted for higher or lower disbursements of external budget support than envisaged in the program. In addition, a similar adjustor has been added for external debt-service payments. Thus, if debt-service payments arising from final agreements with creditors are higher than programmed, the NIR floor will be lowered, and the NDA ceiling raised to account for this; conversely, if debt-service payments are lower than programmed, the NIR floor will be raised. The other quantitative targets will help to maintain a sustainable external debt position. A number of structural performance criteria and benchmarks, drawn from this memorandum, are shown in Table 4. The government understands that its ability to request disbursement of the sixth loan under the extended PRGF arrangement will be contingent upon the observance of the quantitative performance criteria for end-June 2002 set out in Table 3, the structural performance criteria set out in Table 4, and upon the completion of the fifth review of the program, which is expected to take place, at the latest, by the end of November 2002, subject to approval of the requested extension of the PRGF arrangement.
Technical Memorandum of Understanding
June 3, 2002 The purpose of this technical memorandum of understanding (TMU) is to describe concepts and definitions that are being used in the monitoring of the third year of the Poverty Reduction and Growth Facility (PRGF)-supported program, including the following:
This memorandum also describes the adjusters that will be applied to certain quantitative targets of the program. Central government domestic primary deficit The central government domestic primary deficit is defined as central government revenue, less noninterest current expenditure, less locally financed capital expenditure, less locally financed net lending, and excluding the cost of bank restructuring/recapitalization. Net lending is derived as gross lending to enterprises through acordos de retrocessão (excluding acordos de retrocessão that were required by donors), plus food aid disbursed but not collected in the period, minus repayments by enterprises of loans obtained through acordos de retrocessão and through refinancing agreements with the Bank of Mozambique, minus food aid collected but not disbursed in the period. The cost of bank recapitalization/ restructuring is, for the purpose of the program, defined as the government's contributions during 2002 to the costs of recapitalizing Banco Internacional de Moçambique (BIM) and Banco Austral (BA), including the respective pension funds, in the form of cash payments, securities issued, or loans extended. The central government encompasses all institutions whose revenue and expenditure are included in the state budget (orçamento do Estado): central government ministries, agencies, and the administration of 11 provinces. Although local governments (33 municipalities, or autarquias) are not included because they are independent, the bulk of their revenue is registered in the state budget as transfers to local government. Central government revenue, expenditure, and financing Revenue is defined to include all receipts of the National Directorate of Taxes and Audit (Direcção Nacional de Impostos e Auditoría, DNIA), the National Directorate of Customs (Direcção Nacional de Alfândegas, DNA), and the net receipts from privatization received by the National Directorate of State Assets (Direcção Nacional do Património do Estado). For the purposes of program monitoring, revenue is considered as collected at the time when revenue is received by the DNIA from private agents or other government-collecting agencies in cash or checks, or through transfer into a DNIA bank account. Expenditure is defined as government outlays transferred from treasury accounts to other government accounts or private sector accounts and includes spending reported to the National Directorate of Public Accounting (despesas liquidadas) and any further treasury advances (operações de Tesouraria) that have been transferred out of treasury accounts but whose use has not yet been reported to the National Directorate of Public Accounting. Any expenditure arrears will be treated like expenditure for the purpose of monitoring the ceiling on the domestic primary deficit. For program-monitoring purposes, expenditure carried out in the current budget year but accounted for as expenditure under the previous budget (período complementar) is treated as spending during the current budget year. The financing of the budget deficit is measured as transfers into treasury accounts and from these accounts to accounts of the institutions included in the central government, as defined above, as well as transfers from private sector accounts. All treasury accounts held at the central bank are being monitored for purposes of measuring the financing of the budget deficit. There are no treasury accounts outside the central bank. Any discrepancy between the overall deficit (revenue less expenditure, as defined above) and its financing will be included as "unallocated revenue/expenditure" in the budget balance. Net domestic assets Net domestic assets of the Bank of Mozambique are defined as reserve money minus net foreign assets of the Bank of Mozambique. The foreign currency component of reserve money and the net foreign assets is valued at program exchange rates; net foreign assets are defined to exclude the effect of any stock adjustments in medium- and long-term liabilities. The central bank's foreign currency-denominated assets and liabilities are converted in its balance sheet to meticais at actual exchange rates. For purposes of program monitoring, these amounts are converted into U.S. dollars at the agreed program exchange rate. Stock adjustments in the central bank's medium- and long-term liabilities are understood to mean any changes that are not the result of foreign exchange flows, such as write-offs, interest capitalization, etc. Net international reserves Net international reserves are defined as reserve assets minus reserve liabilities. The Bank of Mozambique's reserve assets include (a) monetary gold; (b) holdings of SDRs; (c) reserve position at the IMF; (d) holdings of foreign exchange; and (e) claims on nonresidents, such as deposits abroad. Reserve assets exclude assets pledged or otherwise encumbered, including but not limited to assets used as collateral or guarantee for a third-party external liability (assets not readily available.) The Bank of Mozambique's reserve liabilities include (a) all short-term foreign exchange liabilities to nonresidents with original maturity of up to and including one year; and (b) all liabilities to the IMF. New nonconcessional debt contracted or guaranteed by the government or the Bank of Mozambique with maturity of more than one year The term "debt" will have the meaning set forth in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000. Government debt is outstanding debt owed or guaranteed by the Republic of Mozambique or the Bank of Mozambique (but does not include debt of any political subdivision or government-owned entity with a separate legal personality that is not otherwise owed or guaranteed by the Republic of Mozambique). The government will not contract or guarantee external debt with original maturity of one year or more with a grant element of less than 35 percent, calculated using a discount rate based on Organization for Economic Cooperation and Development (OECD) commercial interest rates. This performance criterion applies not only to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Stock of short-term external public debt outstanding The government will not contract or guarantee external debt with original maturity of less than one year. This performance criterion applies not only to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are short-term, import-related trade credits. External payments arrears The government undertakes not to accumulate payments arrears on external government debt with original maturity of one year or more owed or guaranteed by the government, with the exception of external payments arrears arising from government debt that is being renegotiated with creditors, including Paris Club creditors. Foreign program assistance Foreign program assistance is defined as grants and loans received by the Ministry of Planning and Finance through Bank of Mozambique accounts. Actual external debt-service payments Actual external debt-service payments are defined as cash payments on external debt-service obligations of the government and central bank, including obligations to Paris Club and other bilateral creditors rescheduled under enhanced HIPC Initiative completion point terms, multilateral creditors, and private creditors.
Adjusters The quantitative targets (floors) for the central bank's net international reserves will be adjusted upward (downward) for any excess (shortfall) of foreign program assistance; and downward (upward) to the extent that actual payments of external debt service exceed (fall short of) programmed amounts.
The quantitative targets (ceilings) for the central bank's net domestic assets will be adjusted upward (downward) for any shortfall (excess) of foreign program assistance; and downward (upward) to the extent that actual payments of external debt service fall short of (exceed) programmed amounts; The quantitative targets (ceilings) for the central bank's net domestic assets and reserve money will be adjusted downward to the extent that eligible bank reserves fall short of 11.51 percent of resident deposits in commercial banks, excluding government-earmarked funds (fundos consignados), at the end of each quarter. Data reporting In addition to providing the monthly and quarterly data needed to monitor program implementation in relation to the programs' quantitative targets and broader economic developments, the authorities will provide weekly updates of the daily data set out in Table 1 of this attachment and the weekly data set out in Table 2 of this attachment. Monthly updates will also be provided of the updates of the foreign exchange cash flow of the Bank of Mozambique as set out in Table 3.
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