Press Release No. 97/28

Press Release: IMF Approves Second Annual ESAF Loan for Mozambique

June 24, 1997

The International Monetary Fund (IMF) has approved the second annual loan for Mozambique under the Enhanced Structural Adjustment Facility (ESAF)¹ in an amount equivalent to SDR 25.2 million (about US$35 million), to support the government’s economic program for 1997/98. The loan will be disbursed in two equal semiannual installments.

Background

Mozambique’s economic performance since 1996 has been commendable, thanks to the government’s persistence with strong economic reforms. The government met all the objectives of the 1996/97 program, supported by the first annual loan under the ESAF approved on June 21, 1996 (see 96/33). Good weather led to an excellent harvest, and the industrial and service sectors continued to expand rapidly, spurred by reforms such as privatization and an environment of political and social stability. Real GDP increased by 6.4 percent in 1996 from 1.5 percent in 1995, aided by an improvement in the terms of trade for commodities which also helped boost income and economic activity, while end-of-period inflation declined sharply to 16.6 percent from 54 percent. The government carried out a number of structural reforms, including the privatization of the Commercial Bank of Mozambique, a reform of the customs duty and consumption tax structures, creation of an interbank market for foreign exchange, and the reduction of export barriers.

The 1997/98 Program

In the context of a medium-term strategy, the program for 1997/98, supported by the second annual ESAF loan, aims to increase nonenergy GDP by 5 percent in 1997 and total GDP growth by 6 percent; to cut end-of-period inflation to 14 percent in 1997 from 16.6 percent in 1996; and to increase gross international reserves to the equivalent of about 5.1 months of imports of goods and nonfactor services in 1997 from 4.4 months in 1996.

To these ends, the government will restrict the overall budget deficit before grants to 21.5 percent of GDP, after a deficit of 17 percent of GDP in 1996. The increase in the deficit is duealmost entirely to expenditure on special programs, including social spending, and to the inclusion in the budget of operations that were formerly off budget. If these transactions are excluded, the increase in the fiscal deficit in 1997 is only 0.3 percent of GDP. Thus, the fiscal stance is similar to that in 1996 and will permit a build up of international reserves, as well as a substantial increase in real net credit to the productive sectors of the economy. The program envisages a tight monetary policy and maintenance of a floating exchange rate system. Both these policies are supportive of the program’s inflation and balance of payments objectives.

Structural Reforms

Mozambique attaches high priority to removing structural impediments to growth and stabilization. A comprehensive program of reform is being carried out to improve revenue performance, simplify and rationalize the tax system, increase the efficiency of public administration, develop financial markets and strengthen bank supervision, encourage sustainable agricultural development, and remove obstacles to private sector development. In the area of taxation, the government will focus on strengthening administration, reducing exemptions, and modernizing the direct and indirect tax systems to encourage compliance and remove distortions. The government will continue its program of privatization, with a view to completing it by mid-1999. Another major priority is the reform and strengthening of public administration. Plans include greater decentralization of decision-making; increased transparency and accountability in government; and civil service reforms aimed at decompressing salaries.

Addressing Social Needs

Mozambique is committed to expanding the share of the social sectors in total spending and to improving the effectiveness of social expenditure. The 1997/98 program targets an increase in such spending in order to reduce poverty and to improve the human capital base. There is also an emphasis on smallholder agricultural development to raise rural income levels.

The Challenge Ahead

Mozambique to date has made a sizable adjustment effort, which has been well supported by international donors. Such assistance will continue to be needed if Mozambique is to achieve its medium-term economic objectives. Mozambique is a strong candidate for assistance under the Initiative for Heavily Indebted Poor Countries (HIPC). It is hoped that the understanding reached between Russia and the Chairman of the Paris Club in the runup to the Denver Summit of the Eight will be approved by the Paris Club, and will allow the IMF Executive Board to make an early determination of Mozambique’s eligibility for assistance under the HIPC Initiative.

Mozambique joined the IMF on September 24, 1984; its quota is SDR 84.0 million (about US$117 million); and its outstanding use of IMF credit currently totals SDR 133 million (about US$185 million).