Press Release No. 04/120

Press Release: IMF Approves In Principle US$16.6 Million PRGF Arrangement for Mozambique

June 21, 2004

The Executive Board of the International Monetary Fund (IMF) today approved in principle a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for Mozambique in an amount equivalent to SDR 11.36 million (about US$16.6 million) to support the government's economic program into 2006. The arrangement will become effective upon a further decision to be adopted by the Fund following the World Bank's Executive Board review of the first progress report of Mozambique's Poverty Reduction Strategy Paper (PRSP), which is scheduled for July 6, 2004. At that time, Mozambique will be entitled to the release of an amount equivalent to SDR 1.62 million (about US$2.4 million) under the arrangement.

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participative process involving civil society and development partners and articulated in a 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 5 ½-year grace period on principal payments.

Following the IMF Executive Board's discussion on Mozambique, Takatoshi Kato, Deputy Managing Director and Acting Chairman, stated:

"Mozambique's economic performance was again broadly satisfactory in 2003 and the first half of 2004. Real GDP growth remained strong and the external position further strengthened. In addition, significant progress has been made in recent years toward meeting the government's poverty reduction objectives. The population living below the poverty line declined from almost 70 percent in 1996 to 54 percent in 2002.

"The authorities' economic program for 2004-06 seeks to consolidate macroeconomic stability and address an important agenda of pending structural reforms, in order to sustain growth, promote employment, and further reduce poverty.

"Continued fiscal consolidation is an essential element of the authorities' program. Achievement of the fiscal targets, while allowing for additional resources for the priority sectors, will require strict control over the wage bill and restraint in non-essential outlays, as well as further efforts to strengthen revenue and improve public expenditure management. The authorities are also implementing a reform of the public sector to increase its efficiency and improve the quality of government services.

"With technical assistance from the Fund, the Bank of Mozambique will take several steps to enhance monetary and exchange rate management in order to achieve the targeted reduction in inflation. In particular, the central bank will seek to strengthen monetary control by limiting its intervention in the foreign exchange market to achieving the program's international reserve targets.

"The authorities remain committed to strengthening the financial system, fostering a healthy competitive environment, and expanding access to financial services by the poor. The recent approval of a new Financial Institutions Law and the diagnostic review of the largest bank, which will be followed by similar reviews of the other main institutions, constitute important steps in this regard. In addition, vigorous implementation of the reforms envisaged in the program to lower the cost of doing business, ease labor rigidities, and strengthen governance and the judicial system will be key to encouraging private sector development, sustaining strong growth, and further reducing poverty," Mr. Kato said.

ANNEX

Recent Economic Developments

Following generally good performance during 2002, macroeconomic developments remained favorable in 2003. The government's target of real GDP growth of 7 percent is likely to have been met. Inflation however increased to 13.8 percent during 2003, largely as a result of the strengthening of the South African rand vis-à-vis the US dollar, against which the metical remained largely unchanged.

The government's domestic primary deficit increased to 4.0 percent of GDP in 2003. Total revenue rose slightly to 14.3 percent of GDP and current expenditure was kept broadly unchanged at 16 percent of GDP. Tax receipts increased strongly, owing to the implementation of a new tax code for personal and corporate income taxes, the full year effect of a new, more transparent fiscal incentives code approved in 2002 and adjustments in specific fuel taxes.

Monetary policy has been conducted in the context of a managed float exchange rate regime, which has de facto operated as an informal peg to the US dollar since the first half of 2002.

Program Summary

The economic program for 2004-06 envisages an increase in real GDP growth to over 8 percent in 2004. Following a sharp increase in megaproject exports in 2004, real GDP growth is expected to slow to 6.5 percent a year in 2005-6. The fiscal program will seek to continue with the process of fiscal consolidation in order to reduce pressure on domestic interest rates while allowing for appropriate spending in the priority sectors, in line with Mozambique's PRSP. Over the medium term, the external current account deficit will continue to be strongly influenced by developments in the megaprojects. The authorities intend to take several steps to strengthen monetary control.

The fiscal program envisages a reduction in the domestic primary deficit to 3.3 percent of GDP in 2004, with the overall deficit grants declining to 3.8 percent of GDP. Total revenue is programmed to rise further by 0.3 percent point of GDP in 2004, to 14.6 percent of GDP. Several reforms in the area of tax administration will be implemented in the context of a technical assistance program that is being supported by the Fund and several donors. The program includes several measures to strengthen public sector management and improve fiscal transparency. The medium-term fiscal scenario envisages a reduction in the domestic primary deficit to 3 percent of GDP in 2006, with the deficit after grants declining to 3.2 percent of GDP over the same period.

The new program will seek to remove a number of obstacles to private sector development. Specifically, the program focuses on lowering the cost of doing business in Mozambique, addressing labor rigidities to further enhance competitiveness and export diversification, and also further improve governance and the judicial system. In addition, a number of steps will be taken to strengthen the financial sector and expand access to financial services by the poor.

Mozambique became a member of the IMF on September 24, 1984. Its quota is SDR 113.6 million (about US$166 million) and its outstanding use of Fund resources currently totals SDR 136.97 million (about US$200 million).