Press Release No. 00/73

Press Release: IMF Completes Second Review under PRGF for Mozambique and Approves Second Annual PRGF Loan

December 19, 2000

The Executive Board of the International Monetary Fund (IMF) completed the second review of Mozambique's program under the Poverty Reduction and Growth Facility (PRGF)¹ and approved a second annual loan to support the government's economic program. The completion of this review enables Mozambique to draw an amount equivalent to SDR 8.4 million (about US$11 million) from the IMF.

Mozambique's three-year program, originally supported under the Enhanced Structural Adjustment Facility (ESAF), was approved on June 28, 1999 (see Press Release No 99/25), in an amount equivalent to SDR58.8 million (about US$76 million). In March 2000, the access under the program was augmented to the equivalent amount of SDR87.2 million (about US$113 million), of which an amount equivalent to SDR 45.2 million (about US$58 million) has been disbursed. On April 12, 2000, the IMF and the World Bank agreed that Mozambique had met the requirements to receive debt relief from its external creditors under the HIPC Initiative (see Press Release No 00/28).

In commenting on today's Executive Board discussion on Mozambique, Shigemitsu Sugisaki, Deputy Managing Director of the IMF and Acting Chairman of the session said:

"Mozambique has broadly maintained its good record of program implementation, despite the devastating floods at the beginning of 2000. The authorities recognize the risks to macroeconomic stability from the rapid monetary expansion during the current year and the consequent pickup in inflation, and have taken action to reassert monetary control. However, continued monetary restraint will be required in the period ahead to bring inflation down to single digits.

"The authorities' objective of raising significantly the revenue effort over the coming years is a crucial complement to external aid in supporting poverty reduction spending while consolidating the fiscal position. Close attention will be needed to ensure that spending in other areas, including wages, remains prudent, and that the efficiency of all spending continues to be enhanced.

"In their effort to improve transparency in government operations, the authorities have started the publication of a quarterly budget execution report and completed a review of fiscal transparency in the context of the code of good practices on fiscal transparency. In this regard, the authorities' commitment to including information on poverty-related expenditures in the quarterly budget execution report is particularly welcome.

"The government, as minority owner, and the private shareholders, have made progress in addressing the liquidity and solvency problems of two troubled banks in Mozambique. Concluding the recapitalization in the timeframe envisaged under the program is critical in the interest of a sound banking system. In the meantime, the safeguard measures put in place by the central bank should be strictly enforced.

"The authorities have taken steps to improve the functioning of the judiciary including the opening of a new center for judicial studies and training and the completion of a draft new commercial code. Looking ahead, the authorities should speed up their work on judicial reform," Mr. Sugisaki said.

ANNEX

Program Summary

Since the inception of the present PRGF arrangement in June 1999, economic developments in Mozambique have been marked by a slowdown of economic growth, a rekindling of inflation, and a weakening external current account linked in large part to the serious flooding that afflicted the country in February-March 2000.

The medium-term Government Program contains four primary objectives: the reduction of absolute poverty through programs in health, education, and rural development; the attainment of rapid and sustainable growth through the creation of a favorable environment for the private sector, together with the improvement of the country's fiscal position; the economic development of rural areas in order to reduce regional inequality; and the consolidation of peace, national unity, justice, and democracy. The medium-term macroeconomic outlook projects GDP growth of about 10 percent in 2001; in subsequent years, GDP growth is expected to average 6 percent a year.

Bringing down inflation through a slowdown of monetary expansion, and restoring health to the banking system are the most important immediate objectives of monetary and financial sector policy.

Following a review of the system of tax and customs exemptions, the government has recently adopted measures to improve the administration of exemptions and will proceed under the program with a comprehensive fiscal reform, including of the legal basis of tax incentives. These changes in fiscal tax policy and tax administration are expected to yield significant revenue gains by 2002.

A significant increase in government expenditure in 2001 reflects outlays for flood reconstruction, higher social spending, a boost in the government wage bill, and onetime outlays for bank recapitalization.

The government will continue to implement a strong structural reform agenda. The program aims at strengthening the financial sector, rationalizing tax policy and tax administration, and improving fiscal accountability. A new commercial code will also be submitted to the National Assembly by July 2001. Comprehensive reform in these and other areas will be key to improving the environment for private sector development.

The government remains committed to preparing the full PRSP and meeting the other conditions for reaching the completion point under the enhanced HIPC Initiative by end-March 2001. This will be an important step in implementing its poverty reduction program. In this regard, a draft health sector strategic plan is expected to be ready in the near future and activities to implement the HIV/AIDS strategic plan are being organized. Also, the share of recurrent health and education expenditures in total recurrent expenditure increased in the 2000 budget and is expected to increase further in the 2001 budget.

Mozambique joined the IMF on September 24, 1984, and its quota is SDR 113.6 million (about US$147 million). Its outstanding use of IMF financing currently totals SDR 166.1 million (about US$215 million).