Press Release No. 07/135

Press Release: IMF Executive Board Completes Final Review of the PRGF Arrangement for Mozambique, Approves US$2.4 Million Disbursement and Approves a Three-Year Policy Support Instrument

June 18, 2007

The Executive Board of the International Monetary Fund (IMF) today completed the sixth and final review of Mozambique's economic performance under an SDR 11.36 million (about US$17.1 million) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 04/153). The completion of this final review enables the release of an amount equivalent to SDR 1.64 million (about US$2.4 million).

The Executive Board has also completed a review of the country's financing assurances and granted Mozambique's request for a waiver for the non-observance of a performance criterion on base money at end-year 2006, as it was temporary and related to the currency reform.

The Executive Board also approved a Policy Support Instrument (PSI) for Mozambique under the IMF's PSI framework, which is intended to support the nation's economic reform efforts. The PSI for Mozambique is aimed at maintaining macroeconomic stability as foreign aid is scaled up, promoting structural reforms, as well as implementing the broader policy agenda as envisaged in the Mozambican authorities' national poverty reduction strategy, Plano de Acção para Redução da Pobreza Absoluta (PARPA II). Approval of Mozambique's PSI signifies IMF endorsement of the policies outlined in the program.

The IMF's framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring, and endorsement of their policies. PSIs are voluntary and demand driven. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PSI-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. Members' performance under a PSI is normally reviewed semi-annually, irrespective of the status of the program (see Public Information Notice No. 05/145).

The Executive Board also concluded the 2007 Article IV consultation with Mozambique.

In commenting on the Executive Board decisions, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"The Mozambican authorities are to be commended on the recent impressive macroeconomic performance and overall satisfactory program performance. The economy has been resilient to numerous exogenous shocks and the outlook for 2007 and medium-term is favorable. The authorities' graduation to a PSI sends a strong signal to donors and private investors regarding the favorable economic environment.

"The strategy to consolidate macroeconomic stability in the context of a continued scaling-up of aid and the acceleration of a second wave of reforms monitored under the three-year PSI should help sustain strong broad-based growth. This strategy would require a strengthening of fiscal policy and reducing the cost of doing business and continuing to squarely address governance issues. The approval of the new mining and petroleum fiscal laws, and intention to issue implementing regulations is welcome in this regard. The authorities are also encouraged to adopt new model contracts in the mining and petroleum sectors while ensuring that all new sizeable projects abide by the principles of the new fiscal regime and the core principles of the Extractive Industries Transparency Initiative.

"The 2007 budget should continue to target a 0.5 percent of GDP rise in domestic revenue, while the share of priority expenditures exceeds 65 percent of total spending. The rollout of e-SISTAFE (public financial administration system) to all public entities at the central and provincial level, and direct execution of a greater share of current spending should improve monitoring of expenditures. The finalization of guidelines to include donor-funded projects in the single treasury account (CUT) and e-SISTAFE as well as the opening of a multicurrency CUT should be expedited to encourage the donors to transfer projects on CUT.

"The public sector reform program is at a critical juncture. The installation of a clean integrated payroll database based on a civil service census is an important first step. The government's decentralization strategy should be clarified and well sequenced with sufficient capacity building and reporting systems to ensure accountability of budgetary resources. This would help address concerns about the accountability and transparency of district spending. Progress in the anti-corruption strategy and judicial sector reform will be crucial to further strengthen the business climate.

"Good progress has been made in seeking financing for the transfer of majority ownership of the Cahora Bassa hydropower plant from Portugal to Mozambique. The authorities reiterated their commitment to non-recourse financing so not to increase the government's liabilities to commercial creditors, and ensure transparency and accountability. These principles could be applied to all future infrastructure projects whilst encouraging greater private participation to reduce risks to debt sustainability.

"The Bank of Mozambique's policy framework of base money targeting, in conjunction with a flexible exchange rate regime, is appropriate. Greater exchange rate flexibility will help cushion against exogenous shocks and improve competitiveness, and in that regard the elimination of the temporary exchange rate band is a welcome step," Mr. Kato said.