I.  Introduction

1.  This policy framework paper (PFP), prepared by the government of Mozambique in collaboration with the staffs of the IMF and the World Bank, sets out the government's objectives and policies for the period 1998–2000. In June 1996, Mozambique launched a three-year structural adjustment program for 1996–98 supported by an Enhanced Structural Adjustment Facility (ESAF) arrangement. The midterm review of the program supported under the second year arrangement was completed on April 7, 1998. In support of the structural reforms, the World Bank approved a Third Economic Recovery Credit (TERC) on February 4, 1997; another adjustment operation, the Economic Management Reform (EMR) operation, is expected to be approved in 1998.

2.  Growth. Real GDP growth rose from an average of 6.9 percent a year in 1993–96 to 12.4 percent in 1997, well in excess of the 6 percent program target (Table 1).¹ Growth was broad-based, with transport and communications, manufacturing, energy, and services showing double-digit growth rates. Good weather, a high level of foreign assistance, privatization and low inflation explain the rising activity level.

3.  Prices. The 12-month inflation rate declined from 16.6 percent at end-1996 to 5.8 percent at end-1997 (the lowest rate since independence in 1975). This achievement was brought about by better monetary control, favorable weather conditions, and, in 1997, by a decline in import prices. Another contributing factor was the near stability of the metical, resulting from tight monetary policy, and high levels of foreign aid. In nominal terms, the metical depreciated by only 1.5 percent in 1997, while in real effective terms the metical appreciated by 14.6 percent.

4.  Fiscal trends. An increase in foreign aid (grants and concessional loans) allowed expenditure to rise by 2.6 percentage points of GDP in 1997, while increasing government net repayments to the banking system to 1.9 percent of GDP. Revenue collections, which had been outpaced by nominal GDP since 1993, increased by 1 percentage point of GDP, and the overall deficit before grants expanded by 1.6 percentage points of GDP to 14.3 percent of GDP in 1997. The revenue turnaround was achieved mainly by improving tax and customs administration. Current expenditures grew from 11.8 percent of GDP in 1996 to 13.4 percent in 1997, with pension payments to demobilized military personnel accounting for one-third of the increase. Capital expenditures share in GDP increased from 14.1 percent in 1996 to 15.2 percent in 1997; the share of health and education in current expenditures also increased from 25.2 percent in 1996 to 25.6 percent in 1997.

5.  Money and credit. Broad money expanded by 24 percent in 1997, broadly in line with nominal GDP. Base money grew by only 15 percent and the multiplier increased, as competition and deposit mobilization efforts by commercial banks resulted in a shift from currency toward deposits, particularly time deposits.² Credit to the private sector expanded by 53 percent, or 45 percent in real terms; this rapid credit expansion did not give rise to inflationary pressures largely because the government was able to make room for the private sector by increasing its net repayments to the banking sector or by allowing foreign assistance to remain sterilized with the central bank. Credit demand was particularly strong in privatized industries, not only for working capital but also for new investment.

6.  External sector. The current account balance (both before and after grants) improved by approximately 5 percentage points of GDP, allowing net international reserves to increase to four months of imports at end-1997. The balance of trade improved for both goods and services. Merchandise exports declined slightly in 1997, largely owing to a weather-related decline in cashew nuts. Nontraditional merchandise exports and service receipts, however, grew strongly. Imports contracted in 1997, reflecting mainly lower import prices and the completion of the rehabilitation of Cahora Bassa electricity transmission lines.

7.  Performance in early 1998. Economic activity continued unabated in early 1998, with present estimates pointing to a real growth rate of 9 percent for the year. The 12-month inflation rate for the period ended June 1998 was just 1 percent, compared with more than 6 percent in the same period of 1997. For the year as a whole, the inflation rate is expected to be below 6 percent, compared with an 8 percent target. The metical continues to be fairly stable, having depreciated by 4 percent in the year ending in June 1998. In real effective terms, the metical peaked in January 1998 15 percent above its end-1996 value, but has depreciated since then by 2 percent (January–May 1998). Broad money in the five months ending in May 1998 expanded by 3 percent, and the net foreign assets of the banking system declined by US$19 million. Credit expansion in early 1998 remained strong. Regarding fiscal trends, revenue growth in the first quarter of 1998 outpaced that of current expenditure, and government savings were higher than programmed. This outcome, together with lower-than-programmed capital spending owing to a shortfall in project financing, led to a better-than-programmed overall deficit before grants. As a result, the government accumulated deposits in the banking system instead of using bank financing as programmed. The external current account appears to be weakening in early 1998, despite a recovery of exports.

8.  Medium and long-term strategy. Mozambique’s medium- and long-term goals are to create the conditions for poverty-reducing sustainable economic growth while lowering the country’s dependence on external aid. The government’s economic strategy for 1998–2000 is to capitalize on the gains achieved in 1997 in both macroeconomic stabilization and economic liberalization to encourage a rapid private sector expansion. The main elements of the program are (a) fiscal adjustment underpinned by tax and customs reforms, effective expenditure controls, and increased allocations to the social sectors; and (b) structural reforms in such key areas as taxation (including the introduction of a value-added tax), expenditure management, and public administration, which comprises civil service reform, decentralization, and capacity building. Special attention will be given to the delivery of services in health and education, and to the assessment of poverty trends. Other areas of concentration include private sector development, and the deepening of financial and foreign exchange markets. A matrix of structural policies to be implemented in 1998–2000 is provided in the Appendix.

9.  Macroeconomic targets. The program objectives for 1998–2000 are (a) limiting price increases to 6–8 percent a year; (b) achieving real GDP growth (excluding large projects) of about 7 percent a year; and (c) maintaining gross international reserves at about five months of imports in 1998, declining to four months in 2000.

10.  Investment. Given the likely decline of foreign assistance for investment purposes in the medium to long term, the government will continue to take steps to raise the productivity of investment. Its strategy to achieve this objective is to gradually replace public with private sector investment, to carefully select investment projects, to review the existing project portfolio, and to implement sector-wide approach programs formulated in collaboration with donors. Another key component of the government’s strategy to raise the productivity of investment and increase long-run competitiveness is to expand outlays in education and health. Private investment is assumed to increase from 19.5 percent of total GDP in 1997 to about 26 percent in 2007. While these results reflect for the most part the implementation of large projects, the government also recognizes the need to promote small-scale agriculture and manufacturing. Projected rates of GDP and investment growth show considerable fluctuation from year to year because of the large projects, such as the aluminum smelter and the Cahora Bassa hydropower project, whose effects tend to be lumpy. For example, these projects are responsible for the rise in investment to 35 percent in 1998 from 29.5 percent of GDP in 1997, its continued increase until 2001 (40 percent of GDP), and its sharp decline by 5 percentage points of GDP in 2002.

11.  Domestic Saving. Domestic saving is projected to increase from 14 percent of GDP in 1997 to about 26 percent in 2007. This improvement will lower the country’s dependence on external aid. The government’s strategy for attaining this objective is to raise public saving by increasing tax revenue as a percent of GDP (excluding large projects), while avoiding high tax rates that have an adverse impact on private savings. Therefore, it will continue its efforts to strengthen tax administration, broaden the tax base (through structural reforms described below), and cut low priority expenditures. The expected improvement in private saving will result in part from the large projects, which will lead to both an increase in production and in debt service payments and dividends to foreign residents. Private savings are also expected to increase with financial deepening (see below).

A.  Financial Sector

12.  The increased competition in the financial sector of Mozambique has been accompanied by rapid modernization and financial deepening. The restructuring of the banking system was completed in 1997 with the sale of the last state-owned bank, Banco Popular de Desenvolvimento. Financial deepening is evident in the growing volume and variety of financial instruments offered to the public. Nevertheless, there are still obstacles to financial intermediation, such as the limited availability of collateral, the small number of clients with proper accounting and business management practices, deficiencies in the judiciary system, and the high cost of registering loans. As a result, real interest rates and interest rate spreads still remain high albeit declining.

13.  The government’s financial sector plans for 1998–2000 include increasing the use of indirect monetary policy instruments, developing a competitive and sound banking system, enhancing the payments system, and further deepening foreign exchange, money, and capital markets. In doing so, the government will use market incentives to encourage financial intermediaries to reduce spreads and become more sensitive to interest rate trends. The government will also strengthen monetary and fiscal policy coordination and monitoring, domestic liquidity and foreign exchange management, and bank supervision.

14.  The Bank of Mozambique is taking steps to promote the development of an active money market. It has indicated its readiness to place and discount central bank or treasury bills as required by its policy stance. Similarly, the government has committed itself to meeting all its short-term treasury needs through placements of government securities in the money market from mid-1998 onward. In this context, quarterly net domestic assets ceilings for individual banks have been made indicative only and consideration will be given to shifting the semi-annual net domestic assets ceilings to an indicative basis as well. These actions, together with changes in reserve requirement regulations implemented in May 1998, are expected to encourage more active liquidity management by commercial banks. The Bank of Mozambique is also taking steps to establish an electronic network among commercial banks, so as to allow for online transactions in foreign and domestic currencies by mid-1999. Modifications to the commercial bank plan of accounts adopted in September 1997, as well as ongoing improvements in the Bank of Mozambique’s accounting practices, particularly those regarding foreign exchange transactions, are expected to further improve the statistical base for policy making.

15.  The supervisory authorities subscribe to the core principles of bank supervision of the Basle Committee and intend to apply them fully to the institutions they supervise. The Bank of Mozambique will continue to carry out annual on-site inspections of all banks operating in the country, and it will require banks to publish half-yearly financial statements starting in 1999. A new Financial Institutions Law was submitted to the Assembly of the Republic in late 1997. The Bank of Mozambique is also studying the need to introduce regulations regarding micro-credits, venture capital firms, failure of financial institutions, and deposit insurance.

16.  The Bank of Mozambique will endeavor to modernize the payments system to help reduce the costs of financial intermediation. A law on the use of checks was promulgated in 1997. A register of bad checks will be put into operation by September 1998. The standardization of checks scheduled for early 1999 should speed up check clearance and processing. The introduction of an electronic system of interbank settlements is also being considered.

B.  Public Finance

17.  In 1998–2000, the government will introduce tax reforms and strengthen tax administration, so as to establish a base for long-term revenue growth, and reduce major distortions in the tax system. On the expenditure side, the focus will be on continued prioritization of expenditures and improvements in expenditure management and controls. Treasury operations, public accounting, and auditing functions will also be assessed with a view to reinforcing them where necessary. The delivery of public services will be enhanced through public administration reform aimed, inter alia, at decentralizing functions, improving incentives, and building human capacity in the civil service.

18.  A replacement of the turnover and consumption taxes with a value-added tax (VAT) and excise taxes on a few products is the centerpiece of the government’s effort to increase the efficiency of Mozambique’s indirect tax system. The government is committed to completing all preparations for the introduction of the VAT by December 1998, and to introducing the new tax in April 1999. The VAT rate has been of 17 percent has been proposed to the Council of Ministers. A special, simplified regime will apply to firms with annual sales of Mt 50–100 million, while those with sales below Mt 50 million will be exempted.

19.  Significant progress has been made towards the introduction of the VAT. Coordination between customs and the VAT unit has improved; existing legislation has been revised; and the VAT code was submitted to the Council of Ministers in July 1998. A publicity campaign to inform the public ahead of the VAT introduction has been launched. A reorganization of the VAT unit to deal effectively with the final stages of the implementation has been completed. The selection of the software that will be used to support the new tax will be made by end-August 1998. The VAT taxpayer register, as well as its reconciliation with the existing turnover and industrial tax registers, will be implemented by end-November 1998.

20.  The government is undertaking a comprehensive program of customs reform aimed at modernizing and improving customs administration; the program is now in full swing and beginning to bear fruit. Personnel are being redeployed, and new staff members are being recruited and trained. Controls on border crossings in the south of the country have been strengthened, and action is being extended to the center and north. Further enhancements are expected in early 1999 when the computerization of customs will begin in full force after the completion of a pilot project in four sites. To simplify import procedures, the import licensing document (BRI), the preshipment inspection company’s clear report of findings (CRF), and the existing customs clearance form (despacho aduaneiro) will be replaced by a single administrative document (SAD) in October 1998. The government also plans to review the role of preshipment inspection in the context of the introduction of SAD. Procurement procedures will be liberalized and its regulations will apply only to imports financed by donors that so require. Laws on setting special tribunals and regulations for resolving disputes concerning customs matters are being prepared and will be submitted to the Assembly of the Republic in June 1999.

21.  As a result of improvements in the administration of direct taxes, the government was able to lower tax rates to make them more equitable while reducing evasion. In May 1998, the personal income tax rates and tax bands were restructured, and the top rate was lowered from 30 percent to 20 percent. Similarly, the government intends to change the structure of corporate profits tax rates, which at present are sector specific and range from 35 to 45 percent. The objective is to unify them at 35 percent in the second half of 1998, with the exception of agriculture for which a transitory regime is being studied.

22.  The government is fully aware of the benefits of trade liberalization to the development of an efficient domestic economy, and it remains committed to the goal of reducing protection to levels that would not cause misallocation of resources. In November 1996, it adopted a new tariff structure that reduced the average nominal tariff rate by 8 percentage points to 11 percent. The government intends to further lower the top import tariff rate from 35 per cent to 30 percent by April 1999. Further reductions will be made after due consideration of their effects on the economy.

23.  The government is also taking steps to reduce export tax exemptions. The percentage of imports benefitting from these exemptions declined from 44 percent in 1996 to 23 percent in 1997. In November 1996, the government also revised the investment law regulations to reduce the import tax exemptions granted to new investments. In 1999, it will reevaluate the role of tax incentives in general, including those provided under the investment law, the industrial duty-free zone law, and the Zambezi valley special tax regime with a view to assessing their adequacy and effectiveness.

24.  In 1997, the government began a comprehensive review of its expenditure management practices, with a view to improving the coverage and classification of budget expenditures, and to enhancing fiscal planning, accounting, and auditing. The central objectives of this reform program are to increase the efficiency, transparency, and accountability of the process of public expenditure management, to create effective tools for the prioritization of expenditures, and to guarantee the sustainability of public expenditure programs. In the context of this program, a new budgetary framework law was adopted, and a medium-term expenditure framework is being developed to help match expenditure priorities with resource availability.

25.  In 1998–2000, government efforts will focus on the implementation of the new budgetary framework and classification system, the reform of the public accounting system, and the strengthening of the treasury and auditing functions. The medium-term fiscal framework will be used in the formulation of the 1999 budget. A computerized budget management system will be introduced by the end of 1998. Off-budget flows will be identified in time for their inclusion in the budget for fiscal year 2000. A new public accounting system is being developed, a draft of which is expected to be completed by mid-1999.

26.  Government pension payments in 1997 were significantly higher than programmed, because of an unexpectedly large number of applications by demobilized soldiers. While the problem seems limited to the pensions for demobilized soldiers, the government has decided to conduct an actuarial analysis of the public sector pension schemes and that of the National Social Security Institute. The government is also considering a voluntary scheme for exchanging a lump sum for pension rights in the case of demobilized soldiers. If there are indications that a sufficient number of demobilized soldiers are interested in such a scheme, the government will seek financing from foreign donors.

27.  The Treasury will undertake a study to define steps to improve liquidity forecasting and management. A unit to monitor the financial performance of all enterprises in which the government has shareholding participation has already been set up. The unit is undertaking an inventory of all the enterprises in which the government holds any share of ownership, as well as the dividends obtained from these firms. In addition, the government hopes to establish a system to monitor the financial performance of these enterprises. This system should provide timely and reliable information on these enterprises and aid in making strategic decisions regarding the future of state-owned shares, including the timing and mechanisms for their eventual sale. The Treasury has also established a database on lending agreements between public and private enterprises and the government. Debt service due to the government on these agreements will be projected for the next ten years, and will continue to be included in future budgets.

C.  Public Administration and Governance

28.  The government attaches priority to its program of public administration reform, consisting of civil service reform, decentralization, and capacity building. Regarding civil service reform, the ratio of the highest to the lowest salary was decompressed in April 1998 from 9.6:1 to 13.2:1. Further salary decompression, bringing the ratio to 17:1, is planned for April 1999, together with the implementation of a new system of career streams and remuneration. The government intends to set transparent regulations regarding the "topping up" of civil service salaries in the context of the reform. A decree instituting competitive entry examinations, and establishing career progression and reclassification rules will be promulgated by September 1998. Regarding decentralization, local elections were carried out in 33 localities in June 1998, and the government intends to submit a local tax code to the Council of Ministers by September 30, 1998. The new career and remuneration system contains incentives for civil servants assigned to provinces and districts. The public administration reform also includes a program for capacity building in the public administration, consisting of training, management development, and general institution strengthening.

29.  The government recognizes the need for greater transparency and accountability in public affairs. In 1997, it submitted to the Assembly of the Republic laws creating an independent High Authority to combat corruption and a code of ethics for public officials. The Assembly has already approved the latter but has not yet acted on the former, as members of the Assembly seek to obtain assurances that the High Authority would not cause the law enforcement agencies, including the Inspectorate-General of Finance, to relax their own efforts. Members of the Assembly have also proposed that, instead of this measure, consideration be given to providing additional resources to the judicial system to ensure the observance of law and order and to protect civil liberties. In the meantime, the government is considering measures to limit the judicial caseload, conduct more frequent audits of government agencies, improve procurement procedures, and increase the transparency of administrative decisions. The government will also ensure that the budget has resources available to conduct the 1999 elections.

D.  Agricultural Sector

30.  Development of smallholder agriculture is the key to the government’s policy of poverty reduction through economic growth. The government is discussing with donors a comprehensive five-year expenditure program in the areas of agriculture and natural resource management (PROAGRI). The program is scheduled for implementation in early 1999, and it will be complemented by efforts to improve the circulation of goods and persons through the expansion and maintenance of feeder roads. A key element of PROAGRI is an agricultural policy framework, including a land policy, whose aim is to secure land and natural resource tenure rights for communities, concessionaires, and smallholders. The program also aims at strengthening the government’s management of natural resources. PROAGRI will put in place a program of rationalized and coordinated investments, supported by a wide group of donors, and designed to foster long-term growth of agriculture. Finally, institutional reforms envisaged in the program will rationalize and raise the efficiency of public sector activities in the areas of agricultural research, extension, and natural resource management.

31.  The government recognizes the importance of the security of smallholders’ land tenure for food security and poverty reduction. The Land Law adopted in 1997 protects the customary rights of traditional communities. Before end-1998, additional legislation defining traditional communities will be submitted to the Assembly of the Republic. A draft of the regulations implementing the new land law will be discussed in public fora throughout the country, and the views of smallholders, local communities, and private investors will be incorporated before the regulations are adopted.

32.  The government believes that it is not viable for it to subsidize either the production or the marketing of agricultural crops. Therefore, as of the 1998/99 agricultural season, the government will discontinue the use of minimum and reference prices, except for cotton, where oligopsonistic market conditions are prevalent. Instead, the government will undertake information campaigns to keep producers abreast of international and domestic price developments. In the case of cotton, the government’s price policy will strive to ensure that the benefits as well as risks, coming from fluctuations in world price are shared by both peasants and traders.

E.  Private Sector Development and Enterprise Reform

33.  The government’s privatization program is nearing completion. The privatization of large enterprises in the Technical Unit for Restructuring of Enterprises (UTRE) list will be completed during 1998. This program had privatized 85 large enterprises as of June 1998. Of the remaining four enterprises on UTRE’s list, three (two irrigation companies, and a brewery) will be sold and EMOSE, an insurer, will be converted to a public limited-liability company with the goal of finding a strategic private partner for it in the future. About 20 large enterprises will remain state-owned after UTRE completes its work. Over 900 medium-size and small enterprises had been sold as of early June 1998, and the remaining are expected to be sold by June 1999.

34.  The government is examining the status of the remaining companies under majority government ownership to ensure good management and financial performance. Most of the companies in which the government still retains majority ownership are utilities and public services, which require close regulatory follow-up. In 1997, the oil and electricity sectors were opened to competition. In 1998–2000, the performance of the remaining public enterprises will be strengthened through several mechanisms, such as performance-based management contracts (in the case of water companies), restructuring and pursuit of a strategic partner (the airline company and possibly the telecommunications company), and the granting of concessions to the private sector (railway lines and port terminals). The objective is to ensure that these enterprises operate strictly along commercial lines, with greater management autonomy, subject to greater financial accountability, and with no explicit or implicit subsidization.

35.  Excessive and inadequate regulation, particularly of commerce, remains one of the major impediments to private sector development in Mozambique. The government has made progress, however, particularly since the adoption early in 1997 of the government’s action plan for the removal of administrative barriers to investment and enterprise entry. A new commercial law was approved by the Assembly of the Republic in May and promulgated in June; the accompanying regulations are expected bo be approved shortly. The transformation of the Center for Promotion of Investment (CPI) from an investment approval into an investment promotion agency is completed.

36.  The government will continue to simplify business registration and licensing requirements and the import process will be streamlined with the introduction of the single customs document; import legislation will also be simplified. A new industrial law will be submitted to the Assembly shortly, and a thorough revision of the outdated commercial code is in process. The commercial code is a complex and comprehensive legislation, and the government expects to have the new draft ready for submission to the Technical Council of Justice by end-1999. The government is committed to maintaining a close dialogue with the private sector, not only at annual private sector conferences, but more generally by keeping abreast of private sector needs and views.

F.  Social Policies³

37.  Overall strategy. The government's medium-term social objective is to improve poverty indicators to levels that at least match those of sub-Saharan African countries. Its strategy is to (a) promote poverty-reducing growth, particularly through support of rural development as mentioned above; (b) develop human resources through an increase in the quantity and quality of social services (health and education); and (c) strengthen safety nets aimed at assisting the poorest and most vulnerable groups. An integrated Health Sector Recovery Program has been in place since end-1995, and a similar program in the area of education will be adopted before the end of 1998. Both programs’ progress and impact will be measured against specific targets identified in the programs. The government will maintain reliable and timely monitoring systems to follow the relevant indicators.

38.  Despite fiscal austerity, the government has succeeded in increasing the delivery of services in health and education in real terms by 32 percent and 59 percent, respectively, between 1991 and 1997.⁴ The government is committed to further expanding the share of the social sectors in total domestically-financed current expenditure over 1998–2000 and to improving their effectiveness through the development and implementation of integrated sector programs.

39.  Health. The government's Health Sector Recovery Program aims at bringing Mozambique's infant, child, and maternal mortality rates down to sub-Saharan levels by the turn of the century. This goal is to be achieved by expanding health coverage, particularly primary health care, from an estimated 40 percent of the population to 60 percent by 2000. The program focuses on (a) increasing access to, and the quality of, health care services through the rehabilitation and construction of primary care facilities and rural hospitals, the provision of adequate medical supplies and pharmaceuticals, and the support of the nutrition program for severely malnourished children; (b) improving the institutional and management capacity of the Ministry of Health, at both the central and provincial levels; and (c) developing human resources through the training of health workers, particularly mid-level health care professionals, and enhancement of medical training. Whereas preliminary health indicators show improvements in 1997, the outbreak of a cholera epidemic at the end of 1997 reflects the continued vulnerability of health to underlying social conditions.

40.  Key health targets for the sectoral program period (1995–2001) include an increase in DPT(3) vaccination coverage from 55 percent to 80 percent (60–65 percent by mid-1999); a reduction in the maternal mortality rate from 2.34 to 1 per 1,000 live births; and a reduction in the infant mortality rate from 162 to 120 per 1,000 live births. The progress and impact of the program will be measured against specific targets and actions set out in the Health Sector Recovery Program and in annual implementation reports prepared by the Ministry of Health. Key targets for mid-1999 are listed in the policy matrix in the Appendix.

41.  Education. Although coverage of primary education has increased substantially since the end of the war, education access and quality indicators for Mozambique remain extremely low, particularly among girls. The government’s goals for the education sector are (a) to improve the quality of primary and secondary education; (b) to increase access to education; and (c) to improve the management of the education system through the decentralization of budget, authority, and training.

42.  The ultimate objective of the integrated sector program will be to achieve education coverage for all by the year 2010, coupled with substantial quality improvements. For the year 2000, the program targets an increase in the primary school gross enrollment rate to about 80 percent up from 62 percent in 1996. The program will support a considerable expansion of the school network to increase access to primary and secondary education; it will include special programs for girls and for the five provinces that currently have the lowest coverage indicators. In addition, a number of measures will be carried out to improve the quality of education, including a comprehensive revision of the curriculum (within the next five years), and a major overhaul of the teacher training system to increase the number of qualified teachers. Key targets for 1998–2000 are listed in the policy matrix in the Appendix.

43.  Social safety nets. In a low-income country such as Mozambique, there is limited scope for the use of income redistribution schemes. The social safety nets, therefore, need to be well focused, targeting only the most vulnerable segments of the population. In 1997, the government undertook a review of the existing formal social safety nets and reorganized the income transfer scheme to improve its targeting. Presently, the government is completing a poverty assessment based on the results of a nationwide household survey conducted in 1996. It will be used to design a Poverty Action Plan that will serve to evaluate and possibly redirect the government efforts in this area. The objective of the plan will be to create an integrated social safety net for the entire country, replacing the fragmented and uncoordinated safety nets existing now. A food security strategy is being developed and is scheduled to be submitted to the Council of Ministers before September 1998.

G.  Transport and Telecommunications Sectors

44.  The government considers the rehabilitation and development of transportation in Mozambique as critical to developing smallholder agriculture, generating foreign exchange, and catalyzing regional growth around the transport corridors. The government’s ongoing, sectorwide road program will continue to rehabilitate priority roads and bridges, as well as feeder roads. The program also seeks to improve maintenance and supports the ongoing reform of the financial and administrative framework for the management of roads. The priority areas in capacity building are supervision and local contractor development.

45.  The government is granting concessions for the operation of ports and railways to the private sector to improve their efficiency. Potential concessionaires for the ports and railway lines of CFM-South and CFM-North have been identified. The government expects to sign the memorandum of understanding for the concession of CFM-South by September 1998, and to have completed the evaluation of proposals for CFM-North by December 1998. The government is taking action to identify private sector operators interested in concessions for CFM-Center (including the port of Beira but excluding the Sena line), and it expects to have completed the bidding process and evaluation of bids by September 1999.

46.  The Maputo Corridor development initiative, launched in 1996 by the governments of South Africa and Mozambique, is beginning to bear fruit. Construction of a 460-km toll road between Maputo and Witbank, the largest single component of the project, commenced in April 1998 and should be completed in 1999. Other components of the project are the rehabilitation and management of the port of Maputo and the upgrade of the existing railway between Gauteng and Maputo and of Maputo’s container terminal.

47.  A tender for the privatization of the national airline, Linhas Aereas de Moçambique (LAM), completed in October 1997, did not result in offers acceptable to the government. The government intends to complete the restructuring process by transforming LAM into a limited-liability company, in preparation for the possible sale of shares on the forthcoming stock market. In the meantime, the government is committed to continuing efforts to improve LAM’s financial and operational performance. LAM has made profits in 1997 and progress is being made toward securing a strategic partner by December 1998.

48.  The operational and financial performance of Telecomunicações de Moçambique (TDM) has improved in recent years. Nevertheless, the high cost and low penetration of telecommunications in Mozambique remain a considerable impediment to private sector development, and the company’s profits are coming under increasing pressure from global industry changes. The government is exploring options for increasing private sector participation in this sector and for the restructuring and possible privatization of TDM. The outline of its present strategy is to gradually open all areas of service to new service providers and to relax restrictions on private and foreign investment. TDM’s monopoly in basic voice telephony would be maintained while the company is being restructured.

H.  Energy Sector

49.  The government expects the exploitation of Mozambique’s energy resources to become a major generator of economic growth and foreign exchange earnings in the medium term. Several large private sector projects under consideration (see section V) are premised on the utilization of these resources. The Cahora Bassa Hydropower company resumed electricity exports in 1997.⁵ Exploitation of the Moatize coal deposits and construction of new hydropower plants are also under consideration. A comprehensive strategy for the development of these resources will be sent to the Council of Ministers by September 1998. The strategy aims at increasing energy exports, as well as fostering the participation of the private sector in energy supply and distribution. It also covers institutional and policy reforms required for attracting private sector investments, as well as tax and royalty policies.

50.  The government is committed to providing the conditions for the development of affordable household energy sources, as well as ensuring their long-term sustainability. The electricity law promulgated in July 1997 provides a framework for the restructuring of the power sector by opening the transmission and distribution systems to private sector entrants, including the establishment of a regulatory agency. Moreover, the financial management of Electricidade de Moçambique (EDM), the state electricity company, will be improved by redeploying the billing information system and by adopting new, simpler electricity tariffs and tariff adjustment mechanisms.

51.  The government is transforming the state petroleum company, PETROMOC, into a limited liability company and is restructuring and downsizing it. To this end, the government will complete an inventory of PETROMOC’s assets and adopt and implement a formal asset divestiture plan by end-1998. The private oil companies operating in the sector are creating a joint company to ensure that import costs do not increase as a result of the fragmentation of import operations.

I.  Environment

52.  The effective and careful management of Mozambique’s natural resources is critical for future national welfare, especially in the context of the envisaged rapid growth in tourism, commercial agriculture, and large manufacturing and extractive industries. Legislation that includes environmental assessment requirements was adopted in 1997; presently, the government is developing detailed regulations and guidelines for its implementation. During 1998/99 (in the context of PROAGRI), the government will complete the development of a national forest and wildlife program, as well as a review of existing legislation governing all aspects of exploitation of natural resources, including concession policies and the protection of community rights. Mozambique, South Africa, and Swaziland have launched the Lubombo Spatial Development Initiative, a program to develop eco-tourism and, to a lesser extent, agricultural potential of northern Kwazulu-Natal, eastern Swaziland, and the southern part of the Maputo province. A national coastal zone management program is under preparation, and a new strategy for water resource management, including a framework for water allocation, pricing, and demand management of the southern rivers, is being developed.

53.  Under its National Water Policy adopted in 1995, the government is preparing for the privatization of management of the five major urban water companies before June 1999. To ensure the future sustainability of these water systems, the government will reform tariff structures and raise their levels, both for urban water supply and bulk water provided from major reservoirs. Tariffs will be increased in real terms prior to the signing of the management contracts. In rural areas, the government is establishing community-driven systems of provision of water services, with the goal of increasing the population’s access to safe water.

54.  Over the medium term, the government projects an average GDP growth rate above 7 percent, excluding the effect of large private sector projects. This projection is based on a number of factors. First, there is substantial scope for agricultural expansion in the near future provided that supportive sectoral policies are implemented. Second, the potential for an expansion of activities connected with the transportation corridors servicing neighboring countries is also considerable, particularly now that progress is being made in the granting of concessions for rail connections. Third, industry is also expected to show continued growth spearheaded by privatized enterprises that are rehabilitating factories in a number of sectors. Finally, the continued rehabilitation of Mozambique’s infrastructure is also expected to expand the construction sector over the medium term.

55.  All debt sustainability indicators indicate that Mozambique’s external debt burden is unsustainable in the medium to long term. Even after considering the impact of traditional debt-relief mechanisms, the public sector debt-to-exports ratio (on net present value terms) would remain above 250 percent through 2003. On the same basis, public debt service would peak at 22 percent of exports in 2000 and would fall below 15 percent after 2003.

56.  In view of its heavy external burden and vulnerability to external shocks, its strong track record of adjustment over a long period, its unsustainable debt service burden after receipt of Paris Club debt relief on Naples terms, and its status as an ESAF-eligible and IDA-only country, Mozambique was considered eligible for assistance under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) by the Executive Boards of the IMF and IDA in April 1998. The completion point under the Initiative is expected in mid-1999. Bilateral and multilateral assistance to Mozambique under the HIPC Initiative would be additional to debt relief provided by bilateral creditors under traditional debt-relief mechanisms, and would include a stock-of-debt operation following the completion point. The debt service ratio would fall below 10 percent after 2001, once HIPC assistance is considered.

57.  Even if exceptional assistance is granted, progress toward external viability in the long term will require that the government (a) give considerable weight to the degree of concessionality when making decisions on foreign borrowing; (b) avoid assuming, or providing guarantees on any new debt with a grant element of less than 35 percent,⁶ independent of the maturity, except for normal short-term, import-related credit or rescheduling agreements. The government is also committed to completing the bilateral agreements with Paris Club creditors and negotiating comparable terms with non-Paris Club official bilateral creditors in accordance with the latest Paris Club debt rescheduling agreement.

58.  Financing requirements for 1998–99. External financing requirements for 1998 will amount to about US$1.8 billion, including rescheduling of arrears on debt to non-Paris Club and commercial creditors (Table 4). For 1999, the required amount is expected to decline to US$1.4 billion. Total identified financing amounts to US$855 million in 1998 and US$1.1 billion in 1999, of which US$410 million will be disbursed from IDA commitments. Disbursements from expected new loans amount to about US$146 million in 1998 and US$296 million in 1999, while direct foreign investment is expected to reach US$141 million in 1998 and US$273 million in 1999. Financing gaps of US$669 million and US$193 million are projected for 1998 and 1999, respectively; no financing gaps are expected after considering debt relief from non-Paris Club creditors on terms comparable to those granted by the Paris Club under Naples terms and potential exceptional assistance from bilateral and multilateral creditors under the HIPC Initiative.⁷ Firmer financing assurances for 1999 will be provided in the context of a Consultative Group meeting scheduled for September 1998.

59.  In 1996, the government created the National Statistics Institute (INE) with the objective of improving the accuracy and timeliness of statistical data and implementing the provisions of the Statistics Law. A five-year twinning arrangement with two European statistics institutes is in place and should help strengthen capacity building within INE. The initial emphasis of this collaboration effort is on updating the Statistics Master Plan.

60.  During 1998, the national accounts compiled by INE will be revised to incorporate the results of the 1996 household survey. Also, a new national price index integrating the price indices for Maputo, Beira, and Nampula will be ready for publication before the end of the year. The statistical abstract for the national household survey (IAF) was issued in June 1998, and the census results will be published by mid-1999.

61.  The government is also investing a substantial effort in improving financial statistics. Preliminary monetary surveys are now regularly compiled within 45 days of the month’s closure; the Bank of Mozambique is committed to further improving their accuracy and analytical value. The new budgetary framework law will facilitate the classification of public finance data according to economic/functional criteria. The government is seeking technical assistance to address weaknesses that have been identified in the collection of balance of payments information and in forecasting the likely volume of foreign exchange transactions.

B.  Technical Assistance

62.  Mozambique will continue to require assistance in training its managers and professionals in macroeconomics and financial matters, which are at the heart of the successful implementation of the development strategy outlined in this policy framework paper. The priority areas are financial statistics, customs and tax administration, treasury operations, balance of payments statistics, international reserve management, banking supervision and interbank markets. Technical assistance on structural and sectoral matters is also being provided under World Bank and bilateral projects. Long-term external technical assistance in these areas is being progressively reduced in favor of short-term, specific consultations and increased efforts in local capacity building.