Document of The World Bank
FOR OFFICIAL USE ONLY
Report No. 29262MZ
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT
FOR A
PROPOSED CREDIT
IN THE AMOUNT OF SDR 40.9 MILLION
($60 MILLION EQUIVALENT)
TO
THE REPUBLIC OF MOZAMBIQUE
FOR A
FIRST POVERTY REDUCTION SUPPORT OPERATION
一月 9, 2018
AFTP1/AFC02 Africa Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. The last Country Assistance Strategy was dated October 20, 2003
Currency Equivalents US $1 = 23,240 Metical (as of July 2003)
Abbreviations and Acronyms AAA Analytic and Advisory Activities M&E Monitoring and Evaluation APL Adjustable Program Loan MADER Ministry of Agriculture and Rural BAu Banco Austral Development BCM Banco Commercial de Moçambique MDG Millennium Development Goal BIM Banco Internacional de Moçambique MIC Ministry of Industry and Trade CAS Country Assistance Strategy MMR Maternal Mortality Rate CASCR CAS Completion Report MoH Ministry of Health CDF Comprehensive Development MoJ Ministry of Justice Framework MPF Ministry of Planning and Finance CEM Country Economic Memorandum MTFF Medium-Term Financial Framework CFAA Country Financial Accountability NGO Non-Governmental Organization Assessment NPV Net Present Value CPAR Country Procurement Assessment NWD National Water Development Review OED Operations Evaluation Department CPI Investment Promotion Center PAF Performance Assessment Framework CPPR Country Portfolio Performance PARPA Action Plan for the Reduction of Review Absolute Poverty CWIQ Core Welfare Indicators PER Public Expenditure Review Questionnaire PODE Enterprise Development Program DPFP Decentralized Planning and Finance PRGF Poverty Reduction and Growth Project Facility EFA-FTI Education for All Fast-Track PROAGRI National Program for Agricultural Initiative Development EMPSO Economic Management and Private PRSP Poverty Reduction Strategy Paper Sector Operation PSIA Poverty and Social Impact ESSP Education Sector Strategic Program Assessment ESW Economic and Sector Work PSR Public Sector Reform Project FDI Foreign Direct Investment RENAMO Mozambique National Resistance FIAS Foreign Investment Advisory Service RPED Regional Program for Enterprise FRELIMO Mozambique Liberation Front Development FY Fiscal Year SADC Southern African Development G11 Group of Eleven Donors Community GDP Gross Domestic Product SAPP Southern Africa Power Pool GEF Global Environment Facility SISTAFE Integrated Financial Management HIPC Highly Indebted Poor Country System IAS International Accounting Standards SME Small- and Medium-sized Enterprises IFPRI International Food Policy Research SWAp Sector Wide Approach Institute TA Technical Assistance IMF International Monetary Fund U5MR Under Five Mortality Rate IMR Infant Mortality Rate UN United Nations JSA Joint Staff Assessment UNCDF United Nations Capital Development JPMFS Joint Program for Macro-Financial Fund Support UNDP United Nations Development LAM Mozambique Airlines Programme
Vice President: Callisto Madavo Country Director: Darius Mans Sector Manager: Emmanuel Akpa Task Team Leaders: Antonio Franco and Johannes Zutt THE REPUBLIC OF MOZAMBIQUE FIRST POVERTY REDUCTION SUPPORT CREDIT
TABLE OF CONTENTS
I. INTRODUCTION...... 1
II. ECONOMIC DEVELOPMENTS AND POVERTY REDUCTION...... 2 A. Context of the PARPA...... 2 B. Policies, Growth and Poverty Reduction in Mozambique...... 3 C. Medium-Term Prospects...... 6 D. External Assistance to Mozambique...... 7
III. THE ACTION PLAN FOR THE REDUCTION OF ABSOLUTE POVERTY...... 8 A. The Strategy of the PARPA...... 8 B. Financing Needs for the PARPA and MDGs...... 9 C. PARPA Implementation Processes...... 12 D. Credibility of the Budget Process...... 14
IV. THE WORLD BANK GROUP STRATEGY...... 22 A. Consistency of the PRSC with the CAS...... 22 B. Supporting PARPA Implementation through the PRSC...... 23 C. Alignment Between the Bank and the other Donors in Support of the PARPA...... 24 D. Analytic Underpinnings of the PRSC...... 26
V. THE PROPOSED PRSC1 REFORM PROGRAM...... 30 A. Overview and Objectives of the PRSC Series...... 30 B. The Proposed Credit...... 31 C. Building Public Sector Capacity and Accountability...... 32 D. Improving the Investment Climate...... 43 E. Expanding Service Delivery...... 57 F. Reform Measures and Actions Taken Prior to Board...... 62 G. Credit Administration...... 65 H. Environmental Assessment and Rating...... 65
VI. Benefits and Risks...... 66
V. Conclusions...... 68
Annexes Annex 1: Program Matrix...... 69 Annex 2: Reduced PAF Matrix and Priority Actions...... 76 Annex 3 Public Financial Management...... 79 Annex 4: Letter of Development Policy ...... 88 Annex 5: Mozambique – At a Glance...... 96 Annex 6: Mozambique – Social Indicators...... 98 Annex 7: Mozambique – Key Economic Indicators...... 99 Annex 8: Mozambique – Status of Bank Group Operations...... 101 Annex 9: Relations with the IMF...... 102
Boxes Box 1: Conclusions and Recommendations of the First 2004 Joint Review...... 13 Box 2: Selection Criteria of Components of PRSC1-3...... 31
Figures Figure 1: GDP Growth and Inflation ...... 5 Figure 2: NPV of Debt-to-Exports Ratio...... 8 Figure 3: Selected Sectorial Current Expenditures...... 10 Figure 4: Prospects for Achieving the MDGs: Two Scenarios...... 11 Figure 5: Financial Calendar ...... 15 Figure 6: The Mozambique PRSC Program...... 16 Figure 7: Percentage of Firms in Mozambique Ranking Issues...... 48
Tables Table 1: Selected Poverty Indicators...... 3 Table 2: Selected Economic Indicators...... 4 Table 3: Actual and Projected GDP Growth Rates by Expenditure Category...... 6 Table 4: External Financing Requirements and Sources of Financing...... 7 Table 5: Actual Recurrent Expenditures...... 9 Table 6: Recent Performance and Medium-Term Targets for Selected MDGs...... 10 Table 7: HIPC Expenditure Tracking Assessment...... 17 Table 8: Basic Macroeconomic Indicators...... 18 Table 9: Government Finances in Percentage of GDP...... 18 Table 10: Macroeconomic Framework...... 19 Table 11: World Bank Lending Activities in Mozambique...... 25 Table 12: Analytical Underpinnings of Structural and Fiduciary Assessments...... 27 Table 13: Days taken to Resolve Business Disputes in the Court System...... 41 Table 14: Firms’ Perceptions of Specific Labor Regulatory Requirements...... 50
The Bank task team includes: Antonio Franco, Peter Moll, Maria T. Benito-Spinetto (AFTP1); Gilberto de Barros (AFTPS); Noel Kulemeka, Alexandra Valerio (AFTH1); Jean-Jacques de St. Antoine (AFTH1); Kate Kuper, Lance Morrell, Cathy Revels, (AFTU1); Joseph Narkovic (EWDAF) ; Daniel Liborio de Sousa, Jacomina de Regt, Jeeva Perumalpillai-Essex (AFTS1); Caroline Forkin (AFTS4); Harry Garnett, José Luis Macamo (AFTPR); Louise Fox (AFTPM); Michael Fuchs (AFTFS); Abdelmoula Ghzala (AFTTR); Reynold Duncan (AFTEG); Juan Navas-Sabater (CITPO); Diana Masone, Jody Kusak (AFKL); Gert van der Linde (AFTFM); Alberto Ninio (LEGAF); Slaheddine Ben-Halima, Manuel Sumbana, Jean-Jacques Verdeaux (AFTQK); Marta Madeira, Lurdes Malate, Aniceto Bila (AFC02); Michelle McCue, Paola Ridolfi, Johannes Zutt (AFCMZ). Peer reviewers are: Jeni Klugman (AFTP2); Benno Ndulu (DECRS); and Gaiv Tata (AFTPS). THE REPUBLIC OF MOZAMBIQUE FIRST POVERTY REDUCTION SUPPORT CREDIT CREDIT AND PROGRAM SUMMARY
Borrower: Republic of Mozambique
Amount: SDR 40.9 million ($60 million equivalent)
Terms: Standard IDA terms (40-year maturity, 10-year grace period)
Description: The proposed operation is a single-tranche Poverty Reduction Support Credit (PRSC) that will build on recent reforms completed by the Government of Mozambique and support implementation of the Government’s Action Plan for the Reduction of Absolute Poverty (PARPA). The proposed PRSC1 will support the policies and reforms aiming to improve the living conditions of the population by promoting growth and employment and also strengthening governance and public sector management. PRSC1 will also consolidate the basis for helping the Government to attack poverty in a comprehensive manner. Further single-tranche operations (PRSC2 and PRSC3) are expected to follow in FY05 and FY06. Benefits: The main and ultimate benefit of the operation is expected to be accelerated progress towards the Millennium Development Goals (MDGs) as a result of higher growth and improved service delivery achieved through implementation of the program supported by the credit. In addition, the operation will help the Government to maintain macroeconomic stability by helping to close an external financing gap as well as generate the domestic funds required to execute the policies and programs included in the PARPA.
Risks: The program faces several risks: (i) macroeconomic or financial sector instability as a result of terms of trade shocks, regional instability, or deteriorating financial sector performance; (ii) capacity limitations constraining program implementation; (iii) social or political pressures, possibly resulting from weaker Government commitment to reform undermining sustainability; and (iv) residual fiduciary risks to resource flows.
Estimated SDR 40.9 million ($60 million equivalent) will be disbursed on disbursements: effectiveness
Project ID Number: PE-P075805 IDA PROGRAM DOCUMENT FOR A PROPOSED CREDIT TO THE REPUBLIC OF MOZAMBIQUE FOR A FIRST POVERTY REDUCTION SUPPORT CREDIT
I. INTRODUCTION
1. This program document proposes a single-tranche Poverty Reduction Support Credit (PRSC1) to the Republic of Mozambique for SDR40.9 million ($60 million equivalent), on standard IDA terms. The proposed operation is an integral part of the Bank’s strategy to support the implementation of Mozambique’s Action Plan for the Reduction of Absolute Poverty (PARPA), as updated in April 2004 through Government revision of a rolling three-year matrix of priority actions and indicators agreed with its external partners. A key feature of the PRSC framework, which is proposed to include three operations to be delivered over FY04-06, is its focus on cross-cutting and institutional issues. Besides providing financial support to PARPA implementation, the PRSC will help close Government financing gaps which have fiscal and balance-of-payments origins.
2. Bilateral and multilateral donor assistance will be needed to implement the PARPA, as the country’s own resources fall short of the levels required to achieve the PARPA’s objectives, including the MDGs. The Government of Mozambique has made significant progress in raising revenues and improving public financial management, including completion of a medium-term financial framework (MTFF) and two recent Public Expenditure Reviews (PERs), progressive implementation of an integrated public financial management system (SISTAFE), and action to fight corruption. Nonetheless, Government-generated resources fall short of financing Mozambique’s modest medium-term development goals by about $750 million per annum. Encouraged by the Government’s track record since 1992, a group of donors (now numbering 15 and known as the Group of 15 (G15)) have agreed to provide general budget or balance-of- payments support to the Government under a formally-agreed joint program. Over 2003-04, this group of donors improved harmonization by agreeing to commit and disburse budget or balance- of-payments support against Government progress in implementing a results-oriented matrix of agreed actions and indicators that updates the PARPA. This matrix provides a framework for policy dialogue and decisions linked to PARPA implementation, and the proposed PRSC is fully aligned with it.
3. The PRSC is consistent with the Bank’s Country Assistance Strategy (CAS), which the Board considered on November 20, 2003, and also provides continuing support to the reforms supported by the recently-completed Economic Management and Private Sector Operation (EMPSO), which aimed to improve public financial management and create a better environment for private sector-led growth. EMPSO supported: (i) actions identified by the PARPA in the areas of public financial management and financial sector supervision to reduce the risk of financial crisis; (ii) improving macroeconomic stability as a prerequisite for sustaining growth over the medium-term; (iii) improving the investment climate for the private sector; and (iv) laying the foundation for legal and judicial reform, both to sustain growth and also to enable the sector to address key legal challenges of modern societies. 4. This first PRSC series for Mozambique will deepen Bank support to the Government’s reform agenda by: (i) building public sector capacity and accountability through strengthening public financial management, decreasing aid dependency, improving monitoring and evaluation (M&E), and accelerating public sector reform; (ii) improving the investment climate through strengthening the financial sector, easing constraints in the regulatory environment, and expanding infrastructure services; and (iii) enhancing service delivery in health, education, and water and sanitation. While the PRSC operations will provide financial support for implementing the whole of the PARPA, they are proposed to disburse against the upfront completion of a small number of specific reform measures (prior actions) identified in the program matrix (see Annex 1). For PRSC1, these prior actions will focus on ensuring that spending allocations are in line with agreed priorities, that risks in the fiduciary environment are reduced through progressive implementation of SISTAFE, that revenue-raising measures continue to be deployed, that public sector reform (including decentralization to local authorities) leads to improved service delivery, and that efforts to combat corruption proceed with due speed. They will also begin to focus on the completion of reforms that improve the investment climate and promote pro-poor growth. In addition, as Bank project-based financing in support of sector-wide approaches (SWAps) in agriculture, health and education comes to a close, PRSC2 and 3—thought not PRSC1—will continue to support the SWAps in these sectors with a view to optimizing their impact on poverty. In particular, Bank staff will continue to participate in SWAp reviews and provide technical assistance as needed, while the PRSC series will provide financial support to the SWAps.
5. The PRSC is based on extensive analytical work completed over the past few years, including two PERs (FY01 and FY03), a Poverty Assessment (FY04), a Country Economic Memorandum (CEM, FY01), a Country Financial Accountability Assessment (CFAA, FY02), a Country Procurement Assessment Review (CPAR, FY03), an Investment Climate Assessment (ICA, FY03), and a Financial Sector Assessment (FY03). Bank-Fund work on tracking public expenditures in HIPC countries has also played a major role in program design.
6. The Bank’s strategy, as stated in the CAS, and consistently with the strategy of most major donors in Mozambique, is progressively to increase the share of the assistance program delivered in programmatic form. The PRSC begins this process for IDA. Continuing weaknesses in Mozambique’s fiduciary framework indicate that there are risks in providing increasing levels of programmatic support, but PRSC1 helps to mitigate those risks, and the residual risks are worth taking as the Bank’s PRSC will help to sustain national interest in implementing the PARPA, promote greater harmonization among the donors, and improve the accountability of the Government to Parliament and to the people of Mozambique.
II. ECONOMIC DEVELOPMENTS AND POVERTY REDUCTION
A. CONTEXT OF THE PARPA
7. Though Mozambique remains one of the world’s poorest countries, with a GDP per capita of $210, it experienced strong poverty reduction over 1997-2003. The 1996-97 national poverty assessment found that the poverty headcount was 69% (71% rural and 62% urban) and the poverty gap 29%. The 2002-03 poverty assessment found substantial improvement in both measures, with the poverty headcount falling to 54%—well below the PARPA target of 60% by 2005—and the poverty gap to 21%. Thus, not only is a smaller share of the population below the
222 poverty line, but the average consumption levels of those remaining below the poverty line has increased in real terms (from 58% of the poverty line in 1996-97 to 62% in 2002-03). While the poverty headcount is still higher in rural areas (55.3%) than in urban areas (51.5%), in relative terms poverty fell more rapidly in rural areas (by 16 percentage points) than in urban areas (11 percentage points). In addition, access to basic services and asset ownership both improved strongly over the reported period. (Table 1 shows progress against selected indicators.) Even so, Table 1: Selected poverty indicators poverty remains deep in the rural areas, Indicator 1998 2002 where 70% of Mozambicans live. Rural Real GDP growth (%) 12.6 7.4 per capita incomes are still believed to be Real agricultural productivity 100 108.8 about $100 per annum, or half the Child immunization 26 24 national average, and health and Infant mortality rate (IMR) 149(95) 101 educational services, safer water and Gross enrolment (EP1) 81 106 electricity, are still hard to obtain (see the Dependency ratio n.a. 88.6 October 2003 CAS). Most Mozambican National literacy rate 39 43 Antenatal visits 70.7 84.5 farmers live on fewer than three hectares Households owning bicycle (%) 13.3 28.1 of land and only about one in ten is able Households owning radio (%) 28.9 45.5 to sell surplus produce, chiefly due to Source: IFPRI, GoM National Statistics Institute. poor infrastructure.
8. Studies are now under way to evaluate the linkages between economic growth and poverty reduction in Mozambique. Preliminary indications are that the linkages between rapid growth and poverty reduction are strong. Sectors experiencing significant growth have been construction, food and beverages, services, and tourism, most of which are labor-intensive. In addition, the agricultural sector, which accounts for 26% of GDP, grew by 6-8% a year over 1996-2002, which helps explain the sharp reduction of poverty in rural areas. Recent surveys show that poverty varies considerably across provinces and within communities, limiting the effectiveness of geographical targeting and community-based development initiatives. Further analytical work is planned to help determine what has been driving these results and why the decline in urban poverty has been smaller than expected.
B. Policies, Growth and Poverty Reduction in Mozambique
9. Structural reforms were initiated in Mozambique in the 1990s, even before war ended. Since 1992, the Government has restructured or privatized over 850 companies. It has reformed the financial sector by creating a central bank; adopting regulations on licensing, capital adequacy, and exposure limits; and privatizing the two state-owned banks. The Government also established a progressive investment regime, promoted free trade zones for manufactured exports, transformed the Investment Promotion Center from a regulatory to a promotion agency, and reduced administrative red tape for investors. Mozambique today has one of the most open trade regimes in southern Africa. Prices have been liberalized, except for a few consumer goods; import licenses have been abolished; and the exchange rate is fully flexible. Mozambique has also made progress in trade policy: the top tariff rate is now 25%; rates on capital goods and intermediates are between 5% and 10%; further reductions will follow as the SADC trade protocol is implemented; and collection increases resulting from improved customs management more than compensated for the decline in rates during the 1990s. New tax legislation has also been prepared. With a view to long-term fiscal sustainability, a value-added tax (VAT) was introduced in 1999; a large taxpayer unit was established in 2001; and a new income tax law was passed in 2002, rationalizing corporate and personal income taxes, reducing the corporate tax
333 from 35% to 32%, and broadening the tax base. In addition, a new code of fiscal incentives was passed, establishing standard concessions and transparent rules for foreign investors.
10. Gradual fiscal adjustment in a context of improved revenues and sustained aid has enabled Mozambique to increase spending on roads, health and education. Today 55% of the 27,000 km road network is in good or fair condition, and only 10% sometimes impassable, compared to 10% and 30% respectively in 1992. From 1994 to 1998, the Government nearly doubled its share of current expenditure on health (from 10% to 18%) and education (from 5% to 10%). Health care has improved as over 300 first-level facilities were rehabilitated or constructed, often in remote rural areas, and about nine in ten reliably carry essential drugs and medical supplies. In addition, over 3,000 lower primary schools have been rehabilitated or constructed over the 1990s, doubling the number that existed at the end of the war.
11. Prudent monetary and fiscal policies have been maintained in spite of shocks. Very high inflation in the early 1990s was brought down to single digits by 1996 and, except for flood- related rises in 2000 and 2002, it has Table 2: Selected economic indicators remained manageable. For 2003, Indicator 1990-93 1994-01 2003 inflation was 13.5%, due mainly to (avg.) (avg.) (est.) exogenous factors including a Population (million) 14.7 17.1 18.8 stronger rand, high oil import prices, Population growth (%) 2.1 2.2 1.9 and increased food prices due to the GDP (US$ billion) 2.3 3.3 4.3 regional drought. At the same time, GNI per capita (US$) 155 186 210 tax reform and improved tax GDP growth (%) 1.6 8.1 7.1 administration have increased Fiscal deficit (%) 15.5 14.7 15.5 Government revenues to 14.3% of Inflation (CPI avg., %) 40 18.4 13.5 Export growth (%) 15.4 19.8 16.2 GDP in 2003, exceeding Source: IMF and World Bank expectations. The fiscal deficit after grants is high (7.9% of GDP in 2002, including the cost of recapitalizing the banks; and 4.9% of GDP in 2003) but it is now being financed primarily by grants and concessional loans. Domestic financing has been low since the mid-1990s with the exception of the period 2000-01, when bonds were issued in response to troubles in the banking sector; in 2003 domestic financing was only 0.1% of GDP.
12. The partial privatization of two large state-owned banks in 1995-96 helped to lower inflation, but the banking system requires further strengthening. Liquidity crises at Banco Austral (BAu) and Banco Commercial de Moçambique (BCM) necessitated Government contributions to recapitalizations in both 2001 and 2002, amounting to 4% of GDP. The Government is no longer a partner in BAu, which was reprivatized in December 2001—though, as required by law, it still holds 20% of the bank’s equity in trust for the bank’s employees—and it intends to withdraw from the Banco Internacional de Moçambique (BIM, the successor to BCM), while also strengthening supervision capacities at the central bank. In March 2004, the commercial bank lending rate was 26% (compared to 35% at end-2002), but spreads were still 15-16%.
13. Sustained structural reforms and macroeconomic stability raised average growth to 9% per annum from 1997 to 2002, despite flood emergencies in both 2000 and 2001. The main drivers of this growth were foreign investment, strong agricultural performance, and large-scale project construction and production. Economic growth was 7.1% in 2003 and is projected at 7-
444 8% annually until 2006, with fluctuations mostly due to megaproject construction. Agricultural production grew at 6% per annum since 1992, as a result of liberalization, macroeconomic stabilization, infrastructure rehabilitation, input expansion, and the absence (until 2000) of weather-related shocks to production. In addition, Mozambique has attracted large-scale foreign direct investment (FDI), such as the Mozal aluminum smelter and the Sasol gas developments, which helped to boost economic activity, raise manufacturing outputs, improve the trade balance, and increase government revenues. Partly as a consequence of this FDI, the construction industry has grown strongly, increasing Figure 1: GDP growth and inflation its share of GDP from 6.6% in 1996 to 11.7% in 2002. There was also a 20.0 strong postwar rebound in manufactur- ing, which resulted from firms 15.0 bringing idle production facilities back 10.0 online: the average rate of capacity utilization rose from 20% in 1989 to 5.0 48% in 1998. GDP growth in 2003 0.0 was sourced in agriculture (7.5%), 1997 1998 1999 2000 2001 2002 2003 trade (6.0%), extractive industry (31.6%), manufacturing (12.8%), and GDP growth transport and communications (8.6%), indicating a widening base. Inflation (avg)
14. This growth has reduced poverty, but sustainability, which is critical to reach Mozambique’s poverty-reduction targets, is an increasing concern. Sustainability will require significantly higher levels of broad-based private-sector investment. New private investment has been modest even during the high growth period of the 1990s, when it accounted for merely 2- 3% of GDP. In addition, large-scale projects will not create the jobs needed to reduce poverty on the scale that the PARPA envisages. Current and planned large-scale project investments of about $10 billion will employ only about 20,000 people, or less than 1% of the 3.7 million new workers projected to enter the job market by 2010. For the same investment, the average Mozambican firm can create about 100 times the jobs of a large-scale project.
15. Due to the limited size of the domestic market, greater penetration of international export markets represents the best long-term growth prospect for the private sector. As a result of low wages, rich natural resources, a liberal trade regime, and prudent macroeconomic and exchange rate management, Mozambique has potential for expanding a broad range of exports (including tourism) and attracting more FDI. To date there has been limited realization of this potential beyond the few large-scale projects, and most exports remain primarily resource-based and agricultural. Increasing manufacturing sales to export markets (only 6% of total sales in 2001) will be a large challenge: manufacturing remains highly concentrated; capacity utilization in the sector remains low, at about 50%; and subsectors that have served many developing countries as a platform for exports have struggled in the face of international competition.
16. Making significant progress towards the poverty reduction goals will require increasing labor-intensive manufactured exports and developing more linkages between the large-scale projects and local producers. To tap this potential, the cost of doing business needs to be reduced. Despite recent progress, regulations remain burdensome, with the consequence that local producers of simple consumer goods, such as garments and many food products (which
555 enjoy tariff protection of about 25% and natural protection from high transport costs), are often unable to compete with similar imports. Labor inflexibility, high business registration costs, and difficult access to land and capital are key factors inhibiting entry and the efficient allocation of resources as well as contributing to low productivity and competitiveness.
C. Medium-Term Prospects
· Prospects are good for maintaining annual GDP growth rates at 7- 8% and bringing inflation below 10% over the medium-term. In the base case economic scenario, small-holder agriculture, large-scale commercial agriculture, and manufacturing across all sectors and in non- traditional areas are expected to continue to grow and create jobs, while deeper regulatory reform should encourage investment in infrastructure (see Table 3). Assuming no adverse exogenous shocks and satisfactory implementation of the reform program, large-scale project construction (Mozal 2 and the gas and titanium sand developments) will drive growth in the near term and also explain its main fluctuations. As these projects begin their productive activities, they will help further to expand and diversify the export base, bring growth to local enterprises through upstream and downstream linkages, and create significant spin-off effects, such as employee training, connected infrastructure developments, and higher Government tax revenues that can support pro-poor spending. Hydroelectric power exports will also contribute to growth, and current prospecting suggests that coal, petroleum and mineral resources may contribute in the long term. If sustainably managed, Mozambique’s agro-ecological resources will remain a good basis for economic expansion. Agricultural growth is expected to remain strong, at 7% per annum or more, with rapid expansion in tobacco and sugar (the latter behind protective barriers), as only a fifth of arable land is now cultivated and there is ample scope for yield improvements, including through irrigation. With a 2,700 km coast that has many unique habitats, tourism is expected to remain one of Mozambique’s fastest growing industries and to continue expanding vigorously (luxury hotel rooms in Maputo increased from 730 in 1999 to 1,370 in 2003). Services, stemming in part from government expenditure, will also continue to expand in the medium term, particularly in transportation, accommodation, and food. 17. Sustaining Table 3: Actual growth and will projected require GDP a second real growth generation rates by ofexpenditure reforms categorydesigned (%) to improve Category 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Overall GDP (mkt prices) 11.1 12.6 7.5 1.5 13.0 7.4 7.1 8.4 6.8 6.5 Agriculture 9.5 9.5 6.5 -10.8 13.0 8.5 7.5 8.4 7.0 7.0 Fisheries 2.1 -11.0 -2.1 9.5 9.0 -4.3 13.4 3.9 3.0 3.0 Mining 21.1 20.6 -6.5 52.8 12.4 5.2 31.6 119.2 5.0 7.0 Manufacturing 31.8 14.4 14.7 20.3 27.2 4.0 12.8 28.4 10.0 10.0 Electricity and water 37.9 279.0 78.3 -6.1 13.9 6.2 -14.0 9.3 5.0 5.0 Construction 18.1 26.1 3.4 4.7 9.7 40.3 10.5 1.7 10.0 10.0 Commerce 8.2 12.1 2.5 2.4 5.7 5.4 6.0 6.0 6.0 6.0 Restaurants and hotels 35.5 -2.1 5.4 6.4 19.1 2.8 8.6 5.2 6.0 6.0 Finance and insurance 29.9 -17.4 -26.9 41.9 9.2 9.4 0.9 1.0 4.0 4.0 Real estate 2.3 9.1 3.0 -1.9 5.7 2.5 2.4 2.5 4.0 4.0 Public administration1 -0.9 2.8 18.1 4.1 12.9 3.7 10.2 10.0 6.0 6.0 Trans., communication 17.3 4.8 9.0 1.2 21.6 -13.4 8.6 13.6 8.0 8.0 Education services1 7.2 7.4 9.5 9.8 21.7 9.5 5.1 13.2 7.0 7.0 Health services1 5.1 9.5 17.1 12.1 11.9 5.3 4.9 5.9 7.0 7.0 Other services 9.2 9.7 10.0 10.5 10.3 6.6 9.0 18.5 5.0 5.0 Source: National Institute of Statistics through 2002; IMF and WB estimates and projections from 2003 to 2006.
666 Strengthening the macroeconomic environment: Mozambique needs to reduce its fiscal deficit, improve public expenditure management, reform the financial sector, and strengthen its external balance by expanding the export base and raising manufacturing and cash-crop exports back to pre-independence levels. Unleashing agriculture’s poverty-reducing potential: It needs to improve land tenure, expand access to key inputs, and facilitate rural trade by expanding road transportation. Removing the impediments to private sector growth: The investment climate, particularly for high-potential sectors such as transport, tourism, and labor-intensive manufacturing, needs to be improved through removing administrative barriers and increasing private- sector-participation in infrastructure. Improving human capital: Improving health services, expanding access to education, and controlling HIV and malaria are key to improving skills and productivity levels. Protecting natural resources: To maximize returns from natural resource extraction, Mozambique needs to strengthen its environmental institutions and policies in ways that promote growth and protect the environment.
D. External Assistance to Mozambique
18. Mozambique has benefited enormously from foreign aid, which amounts to about 15% of GDP today, compared to 6-8% for the rest of sub-Saharan Africa (excluding South Africa), and covers half of public expenditures. Even including this aid, the Government’s overall resource envelope remains far short of the requirements for meeting the MDGs. But the biggest challenge lies ahead. Aid flows to Mozambique are moving down in real terms toward the regional average, and this trend is expected to continue. Coping with this decline will require a substantial fiscal effort in the next few years. To protect macroeconomic balances, public spending will need to fall in step with the decline in aid, except to the extent that domestic resources can be mobilized. Since 1998, spending has risen sharply, while revenues have grown more modestly. Although much of the recent rise in spending is attributable to flood relief and banking recapitalization, such events cannot be ruled out in the next few years. Over the long term, increased revenue collection demands sustained growth, and here improving private sector performance is critical.
Table 4: External financing requirements and sources of financing (US$ million) Indicator 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Financing requirements 4903 1083 2361 1696 1317 1601 1272 1002 1236 1208 Current account deficit1 611 748 1152 1042 967 876 803 646 887 938 Other2 4292 335 1209 654 351 725 469 356 349 270 Direct foreign investment 64 213 382 139 255 380 342 109 213 205 Grants 313 313 434 564 469 420 536 551 502 502 Loans 352 334 501 544 167 802 395 342 521 501 Multilateral 262 252 140 222 115 259 235 237 256 257 Of which: IDA 148 150 79 98 51 149 159 172 180 185 Of which: IMF 35 34 29 60 11 11 12 5 5 5 Commercial 90 81 360 322 52 543 160 105 265 245 Debt relief 4174 224 1044 449 426 0 0 0 0 0 Source: Bank of Mozambique, IMF and staff estimates. (1) Excluding grants; (2) Amortization, changes in arrears, changes in reserves and other outflows.
777 · Continued and stable support in the form of bilateral and multilateral grants and credits will be needed to enable Mozambique to meet its development objectives. Excluding large-scale projects, Mozambique requires about $750 million per annum in external assistance (see Table 4). At the October 2003 Consultative Group meeting, Mozambique’s external partners pledged $790 million in external assistance for 2004 (75% in grants, and 40% in budget support), which is more than enough to meet the country’s financing requirements for this year. Reliance on aid flows is projected to decline gradually over the next decade, as strong growth and increased private sector financing reduce aid’s share of GDP and of the budget.
19. Mozambique’s debt is high but has been reduced to sustainable levels. In 2002 the Government paid $52 million in debt service, of which $39 million were domestic interest payments. Public debt of $2.7 billion (57% of total external debt) is mostly long-term debt owed to governments and multilateral institutions. The Bank is Mozambique’s largest creditor, holding $1.0 billion. Total public
Figure 2: Mozambique NPV of debt-to-exports ratio external debt is about 75% of 160 projections GDP (end-2002), compared to Updated CP projections 170% in 1997, or two times 2002 CAS base case 140 exports of goods and services. CAS base case (lower grants) Although domestic debt is much CAS high case 120 smaller than external debt, it Macro lowcase
) entails three times the interest t n e c r 100 obligations as a result of high
e p ( domestic interest rates. Under 80 the HIPC initiative, Mozambique received debt relief amounting to 60 about $2 billion in net present value (NPV) terms, with IDA 40 relief amounting to $875 million 2000 2005 2010 2015 2020 ($444 million in NPV terms).
III. THE ACTION PLAN FOR THE REDUCTION OF ABSOLUTE POVERTY
A. The Strategy of the PARPA
20. The PARPA is the Government’s main instrument for harmonizing international support around a locally-owned development program. In April 2001 the Council of Ministers approved the PARPA for 2001-2005, and in August 2001 the Bank and Fund Boards endorsed it as Mozambique’s first full PRSP. The PARPA’s public action strategy emphasizes economic growth, public investment in human capital and productive infrastructure, and institutional reform to improve the environment for private investment. Growth is expected to come from large-scale capital-intensive projects financed by private foreign capital; productivity and value- added gains in agriculture and manufacturing; and a general expansion in internal trade, transport and services. To implement this strategy, the PARPA identifies six priority areas for action: health, education, infrastructure, agriculture and rural development, governance, and macroeconomic and financial policies.
888 · The PARPA’s goals, objectives and strategies are appropriate to Mozambique’s circumstances today. A sound program of economic reform and management—based on privatization, financial sector reform, investment promotion, trade and price liberalization, prudent macroeconomic management and substantial public investment—has underpinned Mozambique’s ongoing economic transformation and growth record. In March 2004 the MPF reported on PARPA implementation in its annual Balanço do Plano Económico and Social (BdPES), which reports on budget execution in the previous fiscal year to the National Assembly. The Joint Staff Assessment (JSA) of the BdPES, which is before the Board today with this operation, concluded that Mozambique’s efforts to implement the PARPA are sufficient evidence of its commitment to poverty reduction, and that the strategy continues to provide a credible poverty reduction framework and a sound basis for concessional assistance.
B. Financing Needs for the PARPA and MDGs
21. Despite strenuous efforts in the 1990s, Mozambique did not progress at a pace fast enough to reach the MDGs. The PARPA’s targeted 8% growth rate would reduce the poverty rate to 50% by 2010 and double the consumption level of poor households in 12 years. In line with this projection, allocations to poverty-oriented expenditures have (appropriately) risen. In particular, current budget allocations to health and education rose from 4.1% of GDP in 1998 to 7.5% in 2003 (see Table 5), on top of cumulative GDP growth of 35% in real terms in the period. Moreover (as shown in the PER 2003), with the exception of upper secondary school and tertiary health services, education and health benefits have been distributed progressively compared to the distribution of consumption. Sustained priority spending (education and health) is anticipated in the PARPA and this is likely to ensure progress towards the PARPA goals and the MDGs, but progress will not be fast enough.
22. Moreover, pro-poor expenditures continue to depend heavily on external assistance. The split between recurrent and investment expenditures can only be examined for 2000, as full information on donor funding is available for that year only (see Table 5). In 2000, donor funding accounted for 46% of all spending on education, 70% in health, and 75% in roads and water—much on the recurrent account (for example, drugs and periodic road maintenance).
Table 5: Actual recurrent expenditure by functional classification (%GDP, 1998 to 2003), with actual recurrent and investment expenditure for 2000 Item 1998 1999 2000 2000 2000 2001 2002 2003 (Rec.) (Inv.) (Total) Total recurrent expenditures 11.2 12.2 13.5 10.6 24.1 14.5 15.8 15.9 General administration 2.3 2.6 2.2 1.7 3.9 1.9 2.0 2.0 Education 2.0 2.5 3.2 1.8 5.0 3.1 3.3 3.7 Health 2.1 2.4 2.8 0.6 3.5 3.6 3.8 3.8 Agriculture 0.2 0.3 0.3 2.9 3.2 0.2 0.2 0.2 Roads 0.7 0.7 1.0 0.7 1.6 0.7 1.5 1.7 Water .. 0.1 0.1 0.7 0.8 0.1 .. .. Residual, plus all sectors 3.9 3.6 3.9 2.2 6.1 4.9 5.0 4.6 Source: PER 2003, MoF and Bank calculations. Education includes primary, secondary and tertiary. Residual arises because projected education, health, water and roads expenditures are subtracted from ceiling recurrent expenditures. It also includes
999 all sectors other than general administration, education, health, agriculture, roads and water. Bolded figures include most external financing, while non-bolded exclude it. Difference is more evident in the investment budget than in the recurrent one.
23. A 2003 analysis of Mozambique’s development prospects concluded that, with current policies and aid flows, the MDGs that are likely to be met include only income poverty, hunger and primary enrolment. The PER 2003 found that:
In health, reallocations within the sector will not suffice to provide modest assistance to HIV/AIDS patients, much less meet the health and HIV/AIDS MDGs; In education, in-sector reallocations and efficiency improvements would suffice to achieve the key reforms, but the goal of universal primary school completion is unlikely to be attained by 2015; Figure 3: Selected Sectorial Current Expenditures In roads, the desired program is as % of GDP, 1998-2003 adequately funded, except that 4 the Government will need to Health fund periodic maintenance fully 3.5 Education by making an appropriate 3 budgetary allocation; 2.5 General administration In water, reallocations are t n e
needed but they will not suffice c 2 r e to achieve the goals in urban P 1.5 water or sanitation; and finally Roads In civil service reform, which 1 will include salary decompres- 0.5 Agriculture sion, goals can be attained 0 within the projected budget 1998 1999 2000 2001 2002 2003 envelope of 7% of GDP.
24. The PER 2003 also found that there is some scope for pro-poor spending reallocations within the Government’s overall budget. Among the PARPA non-priority sectors (35% of the budget), the PARPA identified activities that are “complementary” to the priority sectors, including policies for sustainable growth (transport and communications, technology, environ- mental management), social welfare programs, sectoral policies that contribute to income generation (business development, fisheries, mining, industry, tourism), and programs to reduce vulnerability to natural disasters. The 2003 PER suggested that consideration be given to reducing spending on these activities by holding their allocations constant in real terms or applying a modest percentage decrease throughout as they are not the key priorities.
Table 6: Recent performance and medium-term targets for selected MDGs 1990 or Most Historic Target AGR Target AGR recent recent AGR for for for for year year 2006 2006 2015 2015 Avg. real GDP growth (%) 12.6 7.1 8.0 6.5 7.2 5.5 6.4 Poverty rate 69 54 -4.0 47 -3.3 35 -3.3 Child malnutrition 26 24 -1.3 20 -4.6 13 -4.6 EP1 completion rate 30 36 1.8 59 13.1 100 8.2 Ratio of EP1 girls to boys 42 44 0.5 47 1.5 50 1.0 U5MR 207 153 -3.7 124 -5.1 78 -5.1 MMR 1,100 980 -1.2 663 -9.3 275 -9.3 HIV/AIDS prevalence rate n/a 15 n/a n/a n/a <15 n/a Malaria rate n/a 18 n/a n/a n/a <18 n/a
101010 Access to safe water n/a 57 n/a 63 2.4 78 2.4 Notes: PARPA targets for 2006 based on 2015 target and last observation for all indicators, except for EP1completion rate and ratio of EP1 girls to boys. Source: GoM, INE, IFPRI, Ministry of Education and World Bank calculations.
25. Analytical work has shown that absorptive capacity is an issue in all PARPA priority sectors, and especially in health, with its weak links between inputs and outputs, and in water, where substantial under-execution of the budget has been the norm. As a result, making faster progress towards the MDGs would require significant policy and institutional reform as well as substantial additional resources that are explicitly targeted on, and succeed in, raising absorptive capacity. With this combination, by 2015 the MDGs could also be met with regard to primary completion, HIV/AIDS and access to water, though the gender as well as the child and maternal mortality goals likely will not be met even in this scenario (see Figure 3).
Figure 4: Prospects for meeting the MDGs: two scenarios
With Current Policies, Institutions and External Resources
With Better Policies, Institutions and Additional External Resources + U n d e r 5 M a t e r n a l E n v i r o n m e n t / P o v e r t y H u n g e r E n r o l m e n t C o m p l e t i o n G e n d e r H I V / A I D S W a t e r M o r t a l i t y M o r t a l i t y O t h e r
Note: Shading indicates that MDG will be met; shading with + indicates that MDG will be met by a large margin.
26. Given Mozambique’s need for official development assistance to reach the MDGs, even with very high levels of growth, direct budget support is the best way to absorb such a large in- crease. As donors have attempted to “ringfence” their projects using technical assistance, for- eign experts, and quasi-independent project implementation units (PIUs), Government systems for service delivery have not improved. Instead, transaction costs have risen; spending has been inefficient; Government capacity and accountability has been eroded by parallel structures; and budgetary resources have been highly unpredictable. A shift to programmatic lending would help to redress these deficiencies by aligning donor financing fully with the principles of Gov- ernment ownership and leadership, as established in the PARPA, and by using Government poli- cies and the budget as the key instruments for implementing the PARPA.
27. The Government of Mozambique has managed levels of external assistance to GDP in the range of 12-15% of GDP per annum for five years or so, without ill effect. To be able to absorb these levels of assistance, Mozambique has appropriately focused on measures to increase its absorptive capacity. Decentralization, capacity-building, and public sector reform are central in this respect. Dutch disease effects associated with increased aid revenues are unlikely to have a negative impact on the tradable goods sector or overall economic growth. Macroeconomic models indicate that about US$400 million or so that Mozambique receives annually in external grant assistance accounts for about five percentage points of annual growth, but much of that
111111 assistance consists in imports of goods and services and capacity building, which raise the productivity of Mozambican residents and businesses. Budget support, of which part is spent on nontradables, tends to strengthen the exchange rate, but there is little evidence of undue strengthening to date, as agricultural products remain competitive on world markets. C. PARPA Implementation Processes
28. Since April 2003, the Government has reoriented PARPA implementation to achieving three major goals: (i) improving the effectiveness of government systems; (ii) increasing external assistance in the form of budget support; and (iii) improving budget certainty, both for the MPF and for the line ministries. In Mozambique’s post-conflict period, resources for service delivery have been transferred through the Government’s fiscal transfer system as well as through direct financing channels from the donors, resulting in parallel structures, off-budget expenditures, and special staffing structures as well as the high transaction costs that these arrangements entail. In addition, unpredictability in donor flows has repeatedly resulted in delayed budget allocations from the MPF to spending authorities, particularly at the beginning of the fiscal year. The Government wants and needs to improve performance in this area and has sought assistance from its partners, who have committed to providing a larger proportion of their aid in the form of budget support and according to a predictable calendar linked to the Government’s budget timetable. As a key step in this process, the Government worked with its external partners, including the Bank and the IMF, to formulate a single plan of action for the entire partnership, with a tighter prioritization of actions and indicators than is given in the PARPA itself. This action plan, known as the Performance Assessment Framework (PAF) matrix, aims to ensure that all groups financing the Government’s development program act in a coordinated manner and that redundancy and procedural duplication are minimized.
29. The Government will continue to work with its development partners to refine the sub-set of priority actions and indicators included in the PAF matrix and to monitor implementation. The partnership has agreed to hold biennial meetings to do so, in March-April and August- September of each year, and the Government has agreed to be held accountable for completing the actions thus defined while in return its partners have agreed to provide financial support on a more predictable basis and increasingly in the form of programmatic support. The most recent review meeting took place in March-April 2004, and was based on Government plans (as reflected in the PARPA, the PES, and the PAF matrices) and achievements (as described in its BdPES, budget execution reports, and various monitoring reports completed in the recent past) over 2003. This review consisted in a backward-looking exercise that assessed Government performance over 2003, and a forward-looking exercise that articulated more fully the partners’ priorities for 2004 and beyond, through agreement on a revised core PAF matrix. Twenty working groups completed detailed reviews in assigned areas,1 and subsequently a supra- technical steering group, chaired by the MPF, reviewed the group outputs and, in consultation with line ministries and the G15 donors,2 articulated a revised PAF matrix of key overall actions
1 The technical working groups focused on: (i) growth and macroeconomic stability; (ii) poverty; (iii) monitoring and evaluation (M&E) systems; (v) taxation; (v) budget formulation, execution and reporting; (vi) procurement; (vii) SISTAFE; (viii) public sector reform, decentralization and corruption; (ix) legal and judicial reform; (x) financial sector; (xi) the investment climate; (xii) agriculture and rural development; (xiii) the environment; (xiv) telecommunications; air and rail transportation; (xv) road transportation; (xvi) energy; (xvii) HIV/AIDS; (xviii) health care; (xix) education; and (xx) water and sanitation. 2 Participating partners included Belgium, Denmark, the European Commission, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Sweden, Switzerland, the United Kingdom and the World Bank (the G15), which in April 2004 signed a Memorandum of Understanding with the Government. Observing partners included:
121212 and indicators against which the Government agreed to be held accountable over the medium term (2003-06) (see Annex 2). The overall conclusions and recommendations of this Joint
Box 1: Overall conclusions and recommendations of the March-April 2004 Joint Review Implementation in 2003: The Joint Review found that PARPA implementation in 2003 was broadly positive. Data from the 2002-03 household survey show that the poverty headcount and poverty gap fell sharply, while growth was strong. PAF outcome targets in PARPA priority sectors (education, health, agriculture and infrastructure) were largely met. In terms of cross-cutting reforms, notable achievements in 2003 were the revision of the labor decree, the financial audit of BIM, the rise in tax revenues, integration of PARPA implementation reporting into the BdPES, passing of the decentralization law and introduction of district planning in 21 districts, functional analyses in key sectors, the launching of a corruption survey, approval of the legal and justice sector strategic plan, and good progress with implementing SISTAFE. Nonetheless, the Review found some shortfalls in meeting PAF outcome targets and fulfilling PAF priority actions. EP1 completion rates fell short of target and are off-track for meeting the MDG goal. Progress in roads rehabilitation and periodic maintenance was slow due in part to appreciation of the Rand and concerns within the VAT refund system. Pro-poor spending in 2003 was below the 67% PARPA target. The new procurement decree was not yet adopted, and legal and judicial reform was slow, with a continued poor record in prosecuting corruption cases and a rise in caseload backlog. It was also noted that Government operations were hampered by the fact that donors’ disbursements did not arrive in a timely manner. Priorities for 2004: The Review confirmed the importance of implementing priorities outlined in the 2004 PAF and wider commitments identified in the 2004 PES. Emphasis was placed on accelerating the implementation of the national HIV/AIDS response program and on initiating a forensic audit of BAu. Plans to improve planning and budgeting by streamlining and clarifying the M&E system and improving budget execution and transparency (by fully reflecting the functional classification) were welcomed. The Review stressed the importance of the Government’s good governance priorities for 2004 to adopt a new procurement code and move the legal and judicial reform program from planning to action. Actions proposed on a VAT taskforce, customs clearances, labor regulations and business registration were confirmed as important for improving the investment climate, and partners urged action to implement commitments in the areas of external audit and procurement. In the macroeconomic area, strong support was given to Government’s commitments to controlling inflation, by limiting liquidity and recourse to banking-sector financing for the budget and by donors disbursing funds more evenly and predictably over the financial year; and to helping reduce interest rates, by implementing a careful and sustained financial sector reform program that increases banking-sector competition. Reflecting the country’s changing priorities, in a few cases, actions from the 2004 PES were added to or chosen to replace actions previously identified in the PAF matrix. These included submitting the revised commercial code to parliament, divesting public equities in the banking sector, reforming the insurance sector, increasing resources allocated to anti-corruption units, and reforming and unifying the prison system. Moreover, it was agreed that some PAF indicators in the health and education sectors should be exchanged for others from the PES, since they would give a better indication of performance. A limited number of 2004 PES actions were also highlighted as being very important for PARPA implementation in 2004. These included accelerating procurement reform, achieving budget execution according to PARPA priority sectors, and ensuring a smooth flow of funds during the year by establishing sound disbursement targets. Issues to be considered for 2005 PES/PAF and budget. It was agreed that the key issues to be considered during the 2005 PES and OE process would largely relate to continuing and strengthening sector strategies and the cross-cutting reforms underway. In the latter area, these would include completion of the forensic audit of BAu and implementation of IAS in the financial sector, submission of a new and less restrictive labor law to parliament, consideration of setting quarterly disbursement targets, implementing program budgeting, extending SISTAFE implementation, achieving progress on procurement reform, strengthening audit functions, further introducing participatory district planning, implementing restructuring plans in the key Government ministries, approving an affordable medium-term pay policy, approving and implementing of a responsive anti-corruption action plan, and simplifying key codes and laws. In conclusion, the Joint Review found that good progress had been achieved in a number of areas, giving a reliable basis for the G14 donors and the World Bank to continue to provide budget or balance-of- payments support to Mozambique. Review are presented in Box 1 (on page 13).
Canada, Japan, Spain, the United States, the United Nations, the IMF, and the African Development Bank
131313 30. The Joint Review’s PAF matrix, of which the policy actions and triggers to be completed with the support of the PRSC are a subset, has clarified the relationship between inputs, outputs, and expected outcomes in the PARPA. Outcome indicators specified in the matrix are being used to measure the achievement of development goals, but because these indicators are subject to external risks or assumptions about the behaviors of stakeholders outside the Government’s control, the Government and most of its partners agreed that output indicators would be utilized to measure Government performance annually as the basis for release of budget support. A subset of these output indicators will consist of policy actions and constitute prior actions and triggers to be completed before the approval of each PRSC.
31. Since PARPA implementation is occurring through Government systems, the Government has begun to align the PARPA with its MTFF, PES, and annual budget. It has also encouraged donors to align their annual review and decision-making processes with the Government calendar. Figure 4 describes the ideal sequencing to be reached in a “steady state”, towards which there is necessarily a transition, and Figure 5 how the PRSC is embedded in the PAF M&E structure and developed over its three-year life. Specific changes include that:
PARPA implementation will be aligned with the Government’s financial year (January to December). The measurement of output and outcome targets would be aligned with the measurement of fiscal outturns and reported in MPF’s annual report on PES implementation to the parliament, the BdPES, in late February or early March. The sequence and timing of existing SWAp review processes will be aligned with the annual PARPA and PES review process, which would occur about two months after the end of the fiscal year (i.e. in late February or early March), thus allowing fiscal results from the previous fiscal year (January to December) to inform these reviews. The PARPA and PES review would precede Government-G15 agreement on an updated PAF matrix. This would allow all parties to review past progress and make indicative commitments on the basis of actual outcomes in the previous fiscal year. The PER process will be annualized and integrated into the cycle by being split into two parts – a review of the outturns of the previous fiscal year will be undertaken in time for the annual PARPA and PES review, and in addition evaluation of the budget for the next fiscal year’s budget will occur separately in August/September, before MPF finalizes and submits the budget to parliament.
D. Credibility of the Budget Process
32. The Government of Mozambique has made progress in improving macroeconomic management and budget formulation, execution, and reporting, though further work remains to be done. During 2001, the IMF and the Bank engaged the Government, in the context of the HIPC initiative, in an overall plan for public expenditure management reform which draws on different elements, including the 2001 PER, SISTAFE, and items in the Fund’s last Poverty Reduction and Growth Facility (PRGF) arrangement. This exercise developed 15 benchmarks of the quality of public expenditure management. As of January 2004, Mozambique (in line with many HIPC countries) met only five (see Table 7). The action plans developed in the context of the PERs of 2001 and 2003, the CFAA and the CPAR, reported in Annex 3, summarize the key problems in public expenditure management as well as the status of the actions which the Government is taking to improve the situation.
141414 (a) Macroeconomic management
33. Following a period of swift monetary growth and inflation in the late 1990s, Mozambique completed an adjustment through demand restriction. The effects of this adjustment are likely to
151515 Figure 5: Financial Calendar Chart
PRSC implementation
Output, outcome targets
GoM Budget Cycle
January February March April May June July August Sept. October November December January February
MPF Assessment of fiscal results from previous FY PER – Part I Review of fiscal outturns previous FY MPF PES report Budget to Parliament submitted to Parliament
Updated PARPA (GoM+G14+Bank)
SWAp reviews Annual PARPA review
PER – Part II Evaluation of new FY budget
15 Figure 6: The Mozambique PRSC Program
Examples of Analytic Underpinnings PRSC 1 inputs PRSC 2 inputs PRSC 3 inputs Poverty Assessment (2003) PER (2004) CEM (2005) Country Economic Memorandum (2001) Poverty Update PER (2005) PERs (2001 and 2003) Labor Markets and Technical Education Water Management Study CFAA (2001) Education PSIA HIV/AIDS Retrospective CPAR (2004) Health Country Status Report Institutional Governance Review Investment Climate Assessment (2003) Rural Development Strategy Legal and Judicial Assessment (2004) Financial Sector Study
March 2004 June 2004 Nov. 2004 March 2005 June 2005 Nov. 2005 March 2006 June 2006
CAS and JSA2; PAF/PRSC JSA3; PAF/PRSC JSA4; PARPA/PAF PAF/PRSC review 3 PAF/PRSC review 5; CAS PAF/PRSC Timetable review 2 review 4 Prog. Report review 6
Proposed IDA PRSC 1 PRSC 2 PRSC 3 PRSC Support $60 million $60 million $70 million
CY04 CY06 GoM CY05 Budget Cycle
New Areas to be Public financial Agriculture; primary Primary service added to the management; PSD service delivery in delivery in PRSC Program health education; rural water supply
17 Table 7: HIPC expenditure tracking assessment Budget management Benchmark description Mozambique status n
o Comprehensiveness i t
a 1. Composition of budget entity Meets Government Financial Stats. Met l
u definition of general government m
r 2. Limited off-budget transactions Off-budgets not substantial Initiated, but still substantial; some o
F receitas proprias in March 2003 budget execution report 3. Reliability of budget transactions Level/composition of outturn close Met; 95% of total budget executed to budget in 2002, but wide sector variability 4. Data on donor financing Both capital and current donor Initiated; donor financing through expenditures included central government by June 2003 Classification 5. Classification of budget Functional and/or program Initiated; expected by 2005 transactions information provided 6. Identification of poverty- Identified through use of Initiated; functional classification reducing expenditures classification system implemented at aggregate level, not 140-odd detailed level (to be done through SISTAFE, on ministry-by- ministry basis, over 2003-04) Projection 7. Quality of multi-year Projections integrated into budget Medium Term Fiscal Framework expenditure projections formulation not yet integrated into budget in an identifiable and meaningful way n
o Internal Control i t
u 8. Level of payment arrears Low level of arrears accumulated Met c
e 9. Quality of internal audit Internal audit function (whether Met, but not effective (see details x
E effective or not) in PER) 10. Use of tracking surveys Tracking use on regular basis Tracking in health was first, and it was highly successful; others may follow, but not yet regular Reconciliation 11. Quality of fiscal/banking data Reconciliation of fiscal and Initiated, but not routinely done reconciliation monetary data routinely done g
n Reporting i t
r 12. Timeliness of internal budget Monthly expenditure reports Monthly expenditure reports now o
p reports provided within 4 weeks provided within 8 weeks e
R 13. Classification used for budget Timely functional reporting Not met; see item 6. tracking derived from classification system Final Audited Accounts 14. Timeliness of accounts closure Accounts closed with 2 months of Met; periodo complementar year end reduced to 2 months in 2003 15. Timeliness of final audited Audited accounts presented to Not met; audited accounts can take accounts legislature within one year up to 2 years to be presented affect the economy for some time. On the fiscal side, the late 1990s saw a large expansion in spending, which is now expected to be contained to 26% of GDP by 2006. Growth averaged 8.6% from 1997 to 2003 (Table 8), but there is no room for complacency. Over the medium term, high growth rates, in particular in agriculture, will depend on increasing productivity, which in turn depends on satisfactorily addressing key constraints such as land use rights, transportation costs and volatile international prices. Mozambique is also experiencing the consequences of easy money in the late 1990s. In the mid 1990s, reorganization of the banking system and tight money resulted in single-digit inflation, but loose monetary policy in 1999 (M2 growth was 35%) brought inflation to 13% in 2000 and, as the exchange rate weakened pari passu, it rose to 17% in 2002. In response, monetary policy during 2002 was steadily tightened by increasing reserve requirements and raising the bank rate. Inflation finally fell back to 9% by the end of 2002, at the cost of extremely high interest rates (35% at end-2002). Partly as a result of these high interest rates, it is believed that Mozambique’s small and medium-sized enterprise
18 sector is experiencing very weak growth, with large firms that are not dependent on Mozambican financial markets explaining most of the strong growth recently. Table 8: Basic macroeconomic indicators (%GDP) 1997 1998 1999 2000 2001 2002 2003 Real GDP growth rate 11.1 12.6 7.5 1.5 13.0 7.4 7.1 Nominal GDP (Mt trillions) 39.8 46.9 51.9 56.9 71.1 85.2 102.8 Nominal GDP (US$ billions) 3.45 3.96 4.09 3.63 3.44 3.60 4.32 Inflation (period average) 6.4 0.6 2.9 12.7 9.0 16.8 13.5 Gross domestic savings/GDP 1.1 6.8 9.0 10.6 18.3 15.6 11.3 Investment/GDP 20.6 24.2 36.7 36.6 32.0 30.3 27.9 Current account balanceGDP -17.7 -18.9 -28.2 -28.7 -28.1 -24.3 -18.6 (excluding grants) Exchange rate (Mt000: US$) 11.5 11.9 12.7 15.7 20.7 23.7 23.8 NPV external debt/exports (%) 709.2 549.1 212.0 194.4 116.7 96.0 91.2 Sources: GoM, IMF and Bank staff estimates and projections. Note: Sharp decreases in external debt were due to the HIPC initiative. As the GoM was not servicing most of its debt in the mid-1990s, the reduction is mainly a book entry. The actual impact was a reduction in external debt service from about $100 million to $50 million a year.
34. Deficits after grants were less than 3% until 2000, when they began to range from 6% to 8% (see Table 9). A prudent fiscal and monetary stance, accompanied by substantial external assistance and structural reforms based mainly on privatization, tax and customs reform and trade liberalization, resulted in low inflation, high private investment and high growth rates. At the same time, since 1998 there has been a shift in resources in favor of health, education and agriculture, reflecting an increasing anti-poverty focus. Education, health and agriculture increased their combined share in total budgetary allocations from 29% in 1998 to 39% in 2001.
Table 9: Government finances in percentage of GDP 1997 1998 1999 2000 2001 2002 2003 Total revenue 11.3 11.4 12.0 13.2 13.3 14.2 14.3 Total expenditure and net lending 23.5 21.6 24.7 27.3 34.6 34.1 29.4 Current expenditure 10.6 11.2 12.2 13.5 14.5 15.8 15.9 Compensation to employees 3.6 4.5 5.8 6.7 7.0 7.3 7.5 Goods and services 3.8 3.9 3.7 3.7 3.8 3.7 3.9 Interest on public debt 1.3 1.0 0.6 0.2 0.7 1.5 1.3 Domestic 0.1 0.0 0.0 0.0 0.5 1.1 1.0 External 1.2 0.9 0.6 0.2 0.2 0.4 0.3 Transfer payments 1.9 1.9 2.1 2.9 3.1 3.3 3.2 Capital expenditure 11.9 9.8 11.6 10.6 16.6 14.3 13.0 o/w locally financed 1.8 2.1 3.4 3.6 4.4 3.7 3.6 Net lending 1.0 0.6 0.9 3.2 3.4 4.0 0.5 o/w locally financed 0.9 -0.6 0.0 3.2 3.4 2.3 -0.3 Unallocated revenues (+) 0.4 -0.2 -0.4 0.1 -0.1 0.2 -0.4 or expenditures (-) Overall balance before grants -11.7 -10.5 -13.2 -14.0 -21.4 -19.7 -15.5 Grants received 9.1 8.1 11.7 8.0 14.8 11.8 10.6 Project 4.8 4.0 5.4 3.7 9.9 7.9 6.5 Nonproject 4.3 4.1 6.3 4.3 4.9 3.9 4.1 Overall balance after grants -2.6 -2.4 -1.5 -6.0 -6.6 -7.9 -4.9 Net external borrowing 5.7 4.6 1.8 3.5 3.9 6.3 4.6 Net domestic financing -3.1 -2.3 -0.3 1.7 1.9 0.9 0.1 Transfer of HIPC assistance 0 0 0 0.8 0.7 0.6 0.2 Memorandum item: 825 856 1010 992 1187 1227 1265 Exp. and net lending (US$m)
19 35. Since 2000, fiscal policy has resulted in high deficits before grants, rising to about 20% in 2001 and 2002. These results were due to a substantial increase in spending, which grew at 17% annually in real terms from 1997 to 2002, and which was not matched by higher revenue (though revenue growth was also high). The major factors behind this sharp increase in 1999-2002 were: (i) the Government’s payment of capital contributions into BAu and BCM/BIM, pari passu with its shareholdings in these loss-making banks; (ii) an increase in the civil service wage bill of 46% in real terms (growth of 13% per year); and (iii) higher social spending made possible by debt relief granted under the HIPC initiative.
36. The fiscal position of 2000-02 cannot be maintained and will be corrected by increasing revenues and constraining expenditures. The Government’s deficit levels to date have been possible only due to high levels of foreign grants. While external assistance is likely to remain high in the short run, in the long run it is likely to converge towards the 6-8% average for sub- Saharan Africa. Therefore, fiscal adjustment, involving a relatively demanding revenue effort with measures to restrain expenditures, has become a priority of Government policy. Although there is no IMF-monitored program at present (the previous PRGF arrangement expired in June 2003 and a new arrangement will be presented to the IMF’s Board in June 2004), the IMF and the Government have agreed a fiscal framework (see Table 10) under which the overall deficit is programmed to fall to –3.2% of GDP in 2006.
Table 10: Macroeconomic framework (1997 to 2006) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Output and prices Real GDP growth rate 11.1 12.6 7.5 1.5 13.0 7.4 7.1 8.4 6.8 6.5 Inflation (period average) 6.4 0.6 2.9 12.7 9.0 16.8 13.5 12.9 7.8 7.3 Exchange rate-avg 11.5 11.9 12.7 15.7 20.7 23.7 23.8 ...... (Mt000/US$) Money and credit (12-month percent change) Broad monet (M2) 24.4 17.6 35.1 42.4 29.7 24.8 18.7 15.0 14.5 14.5 Credit to the economy 51.6 24.4 29.7 30.1 22.9 4.2 -1.1 20.3 18.8 24.0 Public finance (%GDP) Total revenue 11.3 11.4 12.0 13.2 13.3 14.2 14.3 14.6 15.0 15.2 Total exp. and net lending 23.5 21.6 24.7 27.3 34.6 34.1 29.4 27.7 26.5 25.8 Interest 1.3 1.0 0.6 0.2 0.7 1.5 1.3 1.0 1.0 0.7 Non-interest expenditure 22.2 20.6 24.1 27.1 33.9 32.6 28.5 26.7 25.5 25.1 Overall balance before grants -11.7 -10.5 -13.2 -14.0 -21.4 -19.7 -15.5 -13.1 -11.6 -10.6 Overall balance after grants -2.6 -2.4 -1.5 -6.0 -6.6 -7.9 -4.9 -3.8 -3.5 -3.2 Financing (%GDP) Foreign financing 5.7 4.6 1.8 3.5 3.9 6.3 4.6 3.8 3.7 3.4 Domestic financing -3.1 -2.2 -0.3 1.7 1.9 0.9 0.1 -0.3 -0.5 -0.5 Transfer of HIPC assistance ...... 0.8 0.7 0.6 0.2 0.3 0.3 0.3 Source: GoM and Bank staff estimates (2004) and projections (2004 to 2006). Note: Unallocated revenues and expenditures were only included in overall balance.
37. The macroeconomic framework envisages important changes on the revenue and spending sides. The macroeconomic scenario presented in Table 10 is based on reasonable assumptions of economic growth, revenue capability, and donor contributions. The fluctuations in growth reflect the large-scale projects (with their contributions rising during construction) as well as other direct foreign investment, continued donor support, and agricultural expansion. Budget revenues have been growing fast and steadily, increasing by 10% per annum in real terms between 1998 and 2003 from $450 million equivalent in 1998 to about $610 million in 2003. For sustainability, revenue should reach 16% to 17% percent by 2010, and this target is
20 achievable. On the expenditure side, spending is programmed to fall, in line with the medium- term perspective of the PARPA, from 34.1% of GDP in 2002 to 25.8% in 2006. This represents a considerable reduction (two percentage points per year) but in real terms expenditures are still growing at 4% per year between 2002 and 2010, so it is not politically unrealistic. In addition, this effort should be accompanied by re-focusing public expenditures on priority areas while improving the efficiency and poverty incidence of public spending.
38. In 2003, the Government received $655 million either through policy-based lending or budget support, and in FY04 the Government’s budget projects receipts of $710 million. Projected receipts include the credit that is before the Board today. If this credit were not made available to the Government, Mozambique law requires that the budget would need to be revised either to reduce projected expenditures by the credit amount or to show alternative methods of financing the ensuing gap.
(b) Budget formulation
39. Like many countries in sub-Saharan Africa, Mozambique experiences weak government leadership and limited prioritization in budget formulation. Historically, this has been linked with a limited orientation towards results and limited experience in results-based management. Partly due to the substantial external aid that Mozambique receives, the Government is not always able to direct expenditures in line with nationally-determined objectives. Because the MTFF is not well integrated into the budget process, annual budget adjustments are made across lines and institutions without taking into account previous performance or emerging needs, which means that the Government is not making informed, strategic, and contestable choices on inter- and intrasectoral resource allocations. Moreover, the policy process does not always and explicitly consist in Government formulation of a strategy, which donors then agree to finance in specified parts. Instead, donors make project proposals and, in a decentralized fashion, the Government commits itself to implementing some of those projects. The result is a poorly- integrated mosaic of programs based on different philosophies, of differing quality, and with widely differing cost structures. The symptoms of this fundamental problem manifest themselves in several forms:
Financial projections in the MTFF and PARPA are loosely related to actions undertaken. Government strategies can consist in broadly expressed ideals and statements of intention to produce precise analyses and recommendations (e.g. the Health Sector Strategic Plan). Outcomes are often not measured or reported, and in general have a weak connection with the policy process. Program data are limited. Basic information such as their geographical location, the intended beneficiaries, disbursements, measures of their output and impact, and so forth are not systematically collected or reported, with the result that they can be hard to find, including in the key social sectors (education, health, water and sanitation). Actual donor financing for any given fiscal year is hard to obtain, and so it is also hard to obtain information on unit costs and almost impossible, without a dedicated PER-type of exercise, to compare the relative efficiency of differing approaches and programs.
40. The main objectives of the 2004 budget are to increase domestic revenues, allocate about 65% of total expenditures to the PARPA’s priority sectors, and increase budget deposits in the
21 banking system to decrease domestic debt and contribute to lowering inflation. Revenues are expected to reach 14.6% of GDP in 2004, compared to 14.3% in 2003, with additional revenues generated through enhanced tax administration. Total expenditures and net lending will be reduced from 29.4% of GDP in 2003 to 27.7% in 2004. Salaries and other remuneration are expected to decrease (from 7.5% of GDP in 2003 to 7.3% in 2004), and goods and services are expected to increase (from 3.9% of GDP to 4.0%). Interest payments will continue to be somewhat elevated, at about 1.2% of GDP, with about 75% being for domestic debt obligations.
(c) Budget execution
41. Preliminary budget execution figures for 2003 indicate that the overall share of actual expenditures allocated to the PARPA priority sectors, excluding election spending and interest payments, was 64.9%. Within this, the priority sectors received just below 50% of the recurrent budget but over 75% of the total investment budget. The variability between the budget and actual spending in Mozambique remains a concern. The overall recurrent budget is usually implemented within 95-98% of planned spending, while average variability in the capital budget over the past ten years has been around 80-85%, with the biggest variation by far coming in donor disbursements. This may indicate an absorption problem, but much of the explanation for the large difference between budgeted aid and reported budget outturn is under-reporting and, to some extent, overly optimistic budgeting for grant-funded donor-run projects. By reducing variability in donor disbursements, the shift to budget support should reduce the variability in Mozambique’s capital budget.
42. Functional classifiers have been introduced into the budget to enable the identification of poverty-reducing expenditures, as agreed in 2001, but important additional work remains to be done to bring it to the appropriate level of detail. In particular, the functional, territorial and organic classifiers need to be revised for use in the budget and the budget execution reports, and the Government needs to proceed with its plans to introduce a source-of-funds classifier which will enable it to track the source of funds for specific projects. In this context, too, the Government needs to do more work both (i) to capture all funds that are “off-budget”3 —and (ii) to make the budget execution reports meaningful (the 4Q-FY03 report lacked analysis, and there are discrepancies between MPF and sectoral data). The implementation of SISTAFE should help to ensure the incorporation of donor funding for particular projects as well as a clearer picture of budget execution patterns through the application of the functional classifiers.
43. The 2003 PER showed that some sectors in Mozambique regularly underspend while others overspend. Underspending especially affects the water and health sectors, and in some years the roads sector. The water sector spent an average of 63% of its current budget allocation over 1999 to 2001, while the health sector spent 86% of its recurrent budget in 1999 and 80% in 2000. Provincial spending also appears to be unequal, though this impression may arise from incomplete data coverage as data do not reflect some centralized activities. There are also considerable intra-province differences in execution rates: for example, in Zambézia in the health sector, execution rates for the 1999 budget range from 98% to 52%. The PER 2003 found that there are two main causes of underspending: (i) a lack of capacity to operate the duodécimo
3 While the MPF through cross-checking has been able to track an estimated 38% of total donor off-budget flows and report on those funds through the budget, the failure of donors to ensure that their funds are captured by the MPF continues directly to disempower the MPF vis-a-vis spending agencies that receive substantial funds directly from donors.
22 allocation system, which involves replenishing accounts against a rendering of accounts (viz. proof of correct use of the funds) in the previous month; and (ii) a timing problem, as late arrival of the first duodécimos puts some sectors, whose greatest needs arise at the beginning of the year (for example, education), in difficulty. The replenishment arrangement, which is standard in the region, is appropriate because it creates a powerful incentive for accountability and helps limit overspending. Yet training continues to be needed in accounting and the use of the duodécimo system to make it work without undue delays. The timing problem can be addressed by having the relevant sectoral ministries agree with MPF to align the time pattern of advances more closely to the time pattern of expenditures. Starting in 2005 with the rollout of SISTAFE, this arrangement should change: more operational units will be brought under the single treasury account and cash advances will be eliminated as operational units instead will make commitments for which the payments will be executed by the treasury.
44. Over the past few years, the Bank has worked with the Government and other donors to complete an extensive review of Mozambique’s public financial management arrangements, covering its public expenditure, procurement and financial management systems. A CFAA was completed in December 2001; a CPAR in early 2004; and PERs in December 2001 and September 2003. A full account of this analytical work can be found in Annex 3. Both the Bank’s October 2003 CAS and this PRSC series are designed to support implementation of the action plans included in these documents.
IV. THE WORLD BANK GROUP STRATEGY
45. The proposed PRSC1 is based on the Government’s strong record over the past ten years in successfully implementing macroeconomic and structural reforms supported by the Bank, the IMF, and other donors. Successive PRGF reviews, PERs, and supervision missions for the Bank’s adjustment operation have confirmed these achievements.
A. Consistency of the PRSC with the CAS
46. The PRSC is consistent with the CAS. The base case scenario of the CAS for FY04-07 en- visages a PRSC to support Mozambique’s efforts in building public-sector capacity and account- ability, improving the investment climate, and expanding service delivery and as a basis for sus- tainable development. It was planned that the Bank through the PRSC would systematically ad- dress the issues of poverty reduction across sectors identified in the PARPA. To support the im- plementation of the PARPA, efforts to maintain macroeconomic stability will continue, but the focus is increasingly shifting to cross-cutting public sector management and to sector-level is- sues, with the key challenge being to replicate a strong macroeconomic policy and implementa- tion record at the sector level to facilitate economic transformation and permanent poverty reduc- tion. One of the key CAS objectives is to achieve a full alignment of Bank instruments with the principles of local ownership and leadership. Because Government policies and the Government budget are the key instruments for implementing the PARPA, the Bank is committed increasing- ly to providing assistance in the form of balance of payments support. Over the medium term, and provided that the Government achieves expected improvements in budget formulation and execution, the PRSC, accompanied by appropriate technical assistance, will become the main in- strument for policy dialogue and the transfer of financial resources.
23 47. This shift in lending modalities is needed because investment projects have been charac- terized by variable local ownership and poor integration with Government-funded sectoral ac- tivities, with the result that impact and sustainability has been low. As donors (including the Bank) have attempted to “ringfence” the service-delivery systems in their projects using free-s- tanding technical assistance, foreign experts, and quasi-independent PIUs, they have failed to achieve improvements in Government systems for service delivery. Instead, investment projects have tended to: (i) involve high transaction costs; (ii) promote inefficient spending (as aid has been “tied” to donor-sourced goods and services and/or allocated to donors’ favored projects); (iii) lower the effectiveness of Government structures by promoting parallel structures, off-bud- get expenditures, and special staffing arrangements; (iv) corrode the normal structures of ac- countability by making government account to donors rather than to the Administrative Tribunal and National Assembly; and (v) impede predictability in budgetary resources, due to the wide range of disbursement conditions and implementation requirements connected to large numbers of projects. To correct these imbalances, the Government has asked donors to shift to program- matic lending. Such a shift is justified on three grounds: (i) the PARPA and the PAF matrix have evolved into the overarching framework for policy dialogue and formulation both within Mozambique and between the Government and most of its external partners; (ii) progress on the macroeconomic front has lessened the need for traditional adjustment lending; and (iii) progress in planning and budget management provides increasing confidence that public resource alloca- tions are consistent with the Government’s poverty-reduction priorities.
48. It is envisaged that the transition to general budget support will be a gradual one. PRSC support will coexist initially with investment support to well-articulated sector programs and technical assistance to the development of government systems and capacities necessary for an increased reliance on those systems and capacities to channel external support. The share of pro- grammatic financing in overall financing in FY04 and FY05 will be approximately 35% (or $120 million in $295 million of new financing over the two years taken together). PRSC1 will cover primarily cross-cutting issues, policy dialogue, and other Government actions with no physical impact, while PRSC2 and 3 will increasingly embrace sectoral support (agriculture and health in FY04; education and rural water supply in FY05), thus enabling both Bank and Government learning and a continued evaluation of the appropriateness of this approach. Within each sup- ported sector, poverty priorities will be specified in the context of PARPA implementation as re- ported in the BdPES. The PRSC recognizes that conditionality in itself is ineffective in improv- ing economic policy and that domestic considerations, which are relatively immune to donor pressures, are the prime factor in achieving and sustaining economic and institutional reform. Domestic support for reforms is particularly important at this stage in Mozambique’s develop- ment, to cushion against a potential backlash from utility and infrastructure privatization and to ensure policy continuity into the new Government (to be elected in December 2004), and so the PRSC will continue to draw conditions from the PAF matrix as revised from time to time through biennial joint reviews.
B. Supporting PARPA implementation through a PRSC
49. The primary aim of the PRSC is to help achieve, and monitor progress toward achieving, a strategic subset of the objectives defined in the updated PAF matrix. Given the fact that this is the first cycle of PRSC multisectoral program support, a strong focus on PARPA implementation processes is required. Disbursements will be contingent on progress toward a subset of the PARPA’s medium-term objectives, as set out in the biennially updated PAF matrix agreed be-
24 tween the Government and its external partners. Particular emphasis is put on establishing an ad- equate M&E system for the prior actions and triggers included in the PRSC series, taking care to ensure that this system also strengthens the Government’s poverty monitoring system, including the Poverty Observatory. The information derived from the M&E system will permit an assess- ment of the impact and results of PRSC-supported activities, and future PRSC operations will be contingent on demonstrated progress against these activities. Finally, the resources provided through the PRSC will complement Government and other donor resources in financing priority programs for poverty reduction—including particularly budget and balance-of-payments support provided by the G15.
50. The PRSC series will also serve as the vehicle for policy dialogue on building public-sector capacity and accountability, with a strong focus on strengthening public financial manage- ment; improving the investment climate; and (in PRSC2 and PRSC3) expanding service deliv- ery. The PRSC series will leverage the Bank’s policy dialogue, and other Bank and donor instru- ments will be used to provide technical assistance to define and implement reforms, including support to the public sector reform program, legal and judicial reform, regulatory reform in se- lected infrastructure sectors, and decentralization to municipalities and district authorities. The PRSC series will also be complementary to parallel efforts to reduce income poverty, supported through a large portfolio of investment projects aiming to fight HIV/AIDS and expand access to education, water and sanitation, energy and transportation services. As of March 2004, total Bank commitments amounted to $810 million ($81 million grants), of which $474 million was allocated to these priority sectors and $101 million to public sector reform, including decentral- ization of planning and management authority to local levels (see Table 11).
C. Alignment between the Bank and other donors in support of the PARPA
51. Consultations between the Government and the G15 donors in 2003-04 emphasized four goals and mechanisms for coordinating policy dialogue, taking into account the desire for greater coherence and efficiency in supporting poverty reduction initiatives:
The overall development program for Mozambique is set out in the PARPA and all external support should be aligned with the PAF matrix, which serves as the framework for determining priorities and assessing the impact of chosen interventions. Coherence in policy dialogue around the PARPA and the progress review process applies not only to cross-cutting issues but also to sectoral interventions. Efficiency in donor approaches to policy dialogue, performance assessment, and project management is essential to delivering effective support for poverty reduction. Given the high transaction costs of multiple policy dialogues and multiple systems of procurement, financial management, monitoring and reporting for projects, the G15 donors agreed the goals of rationalizing and ensuring consistency in dialogue and performance assessment and using Government systems, processes, and procedures to the fullest extent possible. General budget support helps to enhance the flexibility and predictability of aid flows.
52. Agreement on these principles leads to mutual accountability—of the donors to the Gov- ernment and of the Government to the donors and to its citizens. In this context, it was agreed that the donors should increase the share of their financing that is channeled through the budget and, in order to increase donor confidence in the fiduciary system, the Government should ag- gressively pursue its program of public financial management reform, including procurement re-
25 form, improved accounting and auditing, and implementation of SISTAFE. To this end, the Government and the G15 donors, which together account for more than xx% of total official de- velopment assistance and xx% of general budget support to Mozambique, have established a joint program to support PARPA implementation, centered around the PAF matrix. In April 2004, a Memorandum of Understanding (MoU) was negotiated between the Government and the G15 as a basis for harmonizing the G15 financing instruments, ensuring predictable flows, mini- mizing transactions costs, and ensuring consistency of policy dialogue. As is the case for other participating donors, within the framework of the MoU, the Bank retains flexibility to determine specific benchmarks and form an independent judgment as to whether the
26 Table 11: World Bank lending activities in Mozambique Project Development objectives U U name S n $ d i s b EducationGovernment has madeTo increase significant access toprogress. and improve Nonetheless, quality of basic all education parties to these documents$ are$ Sector through improving education service delivery and management 7 4 Strategic 1 3 Program m m Higher Ed- To enhance internal efficiency of tertiary institutions; expand out- $ $ ucation put of graduates; and improve access, quality and curricular rele- 6 5 vance 0 6 m m HIV/AIDS To improve institutional capacity; strengthen delivery of AIDS-re- $ $ lated health services; and fund civil society projects covering pre- 5 5 vention, advocacy, and care for orphans and people living with 5 8 HIV/AIDS m m
g r a n t National To improve availability of rural water supply and sanitation ser- $ $ Water De- vices to rural communities and ensure sustainable management of 3 2 velopment water resources 6 0 1 m m National To improve quality, reliability and sustainability of urban water $ $ Water De- supply in Maputo, Beira, Quelimane, Nampula and Pemba by pro- 9 8 velopment moting private sector participation in service provision 0 1 2 m m Public Sec- To transform public service so that the citizens receive services $ $ tor Reform they need and the economy can afford, and entrepreneurs are en- 2 2 couraged to invest 5 7 . . 6 7 m m
g r a n t Decentral- To improve performance of district authorities to plan and manage $ $ ized Plan- small infrastructure investments, responding to community de- 4 4 ning and mand, by providing technical assistance and grants so that they can 2 5 Finance learn by doing m m
g r a n t Municipal To help operationalize legal and institutional framework for munic- $ $ Develop- ipal governance; and establishing and operating a mechanism for 3 2 ment providing grants to municipalities through a pilot program in five 3 9 cities to finance capital investments for municipal capacity build- . m ing and infrastructure 6 m Roads and To improve roads and protect past investments by rehabilitating $ $ Bridges priority roads and resuming regular maintenance; strengthen road 1 1 sector capacity; and develop private sector contractors and opera- 6 8 tions 2 4 m m Railway To increase the operating efficiency and improve the financial via- $ and Port bility of the three major port-rail27 systems, through concessioning, 1 Restructur- and to reduce the surface transport costs of all freight traffic 0 ing 0 m 53. It is expected that the PRSC will be aligned with the IMF’s next PRGF arrangement. Mozambique has had four Fund-supported programs since 1987. The IMF concluded the fifth and final review of its most recent program, a PRGF arrangement, in June 2003 and, in line with new guidelines for prolonged users of Fund resources, staff subsequently prepared an ex-post as- sessment of progress under this and previous programs. To help address the unfinished agenda, including in particular in matters that fall into the Fund’s core competencies (fiscal consolida- tion, financial sector reform, and monetary and exchange rate management), the Government re- quested a successor Fund program. In light of the Government’s request, Fund staff completed discussions on a macroeconomic framework for 2004-06 as well as structural reforms to be sup- ported by a successor arrangement, which, if approved, would offer Mozambique IMF resources at levels below its quota. It is expected that a new PRGF arrangement will be presented to the Fund’s Board on June 21, 2004, just before this PRSC is presented, thus enabling the Bank and the Fund to align the PRSC and PRGF cycles.
D. Analytic Underpinnings of the PRSC
54. As Table 12 shows, the first PRSC series is built on analytical work that was completed in implementing the PARPA and that informs the PRSC with respect to the adequacy of policies and institutions in areas relating to fiduciary and environmental safeguards.
55. Poverty assessment: Using the nationally representative household surveys of 1996-07 and 2002-03, the poverty headcount is estimated to have fallen from 69% to 54% in the intervening period. Thus, the goal set in the PARPA of a poverty rate of 60% by 2005 has already been achieved, with the reductions slightly swifter in rural areas. These findings, which indicate that the Government’s overall poverty program is on the right track and achieving results, broadly agree with results from other data sources: (i) MADER data indicate that the per capita growth rate of cereal crop production was 14% in the six-year period 1996-2002 (i.e., a little over 2% annually); (ii) a qualitative indicators survey (QUIBB) in 2000/01 found that poverty had de- creased by nine percentage points, using an econometric technique to link the (purely qualitative) QUIBB with the household survey of 1996; (iii) agricultural surveys indicate growth of total maize output of 7% per annum 1996-2002, while the median crop income per capita increased 27%; (iv) in the household and agricultural surveys, dramatic increases were found in the num- bers of bicycles, radios and other assets over 1996-2003; and finally (v) education and health in- dicator surveys found strong improvements, particularly in the areas of primary school atten- dance, vaccination coverage, and attended births, over 1996-2003.
56. Country economic memorandum: The last CEM was prepared in February 2001, in close collaboration with the Government. Its recommendations, which are still relevant today, focused on identifying Government actions required to improve macroeconomic stability, agricultural productivity, private-sector-led growth, and protecting the natural resource base (see paragraph 18). A new CEM, now under preparation, will review the findings of the 2001 CEM, update its recommendations, and (in light of the recent poverty assessment) analyze more fully the linkages between poverty and economic growth in Mozambique. It will also develop policies for the opti- mal use of natural resources—including land, forestry, fisheries, mining and water—and inte- grate their management into the overall growth strategy and the general policy debate about growth. Analytical work on rural development and tourism, supported by the Bank, will contrib- ute to this exercise. Some of the findings of these inquiries are expected to be incorporated into the new PARPA for the period 2006-2010.
28 Table 12: Analytical Underpinnings of Structural and Fiduciary Assessments Product D Remarks o n e Poverty as- F A second national household welfare survey was completed in sessment Y 2002-03 and reported in March 2004; trend data, drawing on a first 0 national survey completed in 1998, are being analyzed. 4 CEM F Mozambique’s growth prospects and reform agenda were thor- Y oughly reviewed in February 2001, and a new CEM is currently un- 0 der preparation. 1 PER F This was the second volume of a PER started in FY01; they will Y henceforth be completed annually to track improvements in the 0 fiduciary framework. 3 CFAA F CFAA action plan endorsed by GoM and under implementation; Y see Annex 4 for status. 0 1 CPAR F CPAR action plan endorsed by GoM and new legislation submitted Y to Parliament for approval; see Annex 4 for status. 0 4 Financial F The PRSC supports the implementation of key recommendations of sector analy- Y a joint Bank-Fund financial sector assessment completed in May sis 0 2003 and complements a proposed Financial Sector Technical As- 1 sistance project. - F Y 0 3 Legal and F This assessment found that corruption, a lack of skilled human re- judicial sec- Y sources, poor accountability for results, and numerous administra- tor assess- 0 tive weaknesses are the key sectoral challenges. ment 3 Investment F An assessment of Mozambique’s industrial performance and in- Climate As- Y vestment climate was completed in July 2003; implementation of sessment 0 recommendations is supported by the PRSC series. 3 Rural devel- F MADER has been preparing a strategy with Bank assistance in the opment Y areas of public expenditure management and rural finance. strategy 0 4 Primary F school fees Y 0 4 OED re- F The review stressed the importance of understanding Mozam- views of ad- Y bique’s political economy at the micro level as well as of sequenc- justment op- 0 ing financial sector reforms, including privatizations, in an appro- erations 2 priate manner.
57. Public expenditure management: PERs were completed in FY02 (in conjunction with the CFAA) and FY04 in a participatory process that brought together central and sectoral govern-
29 ment institutions, local and international academic and research institutes, the private sector, and a variety of donors. The recommendations of these PERs focus on improving budget formula- tion, execution and reporting to enable better tracking and informed decision-making concerning poverty-related expenditures. As the Bank and other donors provide larger proportions of their assistance in the form of budget or balance-of-payments support, the PER process will be annu- alized and closely integrated with the Government’s budget cycle to support specific reforms in the budget process. The objective of these annual PERs will be, in the first instance, to open the budget process within the executive and to stakeholders beyond the executive, to integrate donor financing within the budget, and to provide required technical support. To improve result- s-based M&E, some public expenditure analysis and review will be progressively integrated into the cycle of financial management (e.g. through analyzing several sectors each year). This will require building capacity through, inter alia, creating a cadre of public policy analysts, as MPF is now seeking to do in-house.
58. Public financial management: A CFAA was completed in 2001 in collaboration with sev- eral donors and the Government, and an IMF Review of Standards and Codes (ROSC) and a joint Bank-IMF assessment of the Government’s capacity to track poverty-reducing expenditures have also been completed. All noted recent improvements and continuing challenges in Mozam- bique’s public financial management and fiduciary systems. They also identified specific action plans for dealing with weaknesses in coordinating support and policy dialogue on these issues. Government actions being supported by the PRSC series will play a central role in helping to im- plement these action plans (see Annex 3).
59. Procurement: A CPAR was prepared in 2003 and the Government agreed with its findings, including the key recommendations of the Action Plan. In line with these recommendations, and with the support of this PRSC, a new procurement decree following international practice will be submitted to Parliament for approval, following consultations with main stakeholders. Dissemi- nation workshops for the new procurement legislation are being planned, and a new Central Poli- cy Directorate will be established. In addition, new national standard bidding documents are be- ing drafted and capacity-building programs in procurement will be offered to staff in key min- istries. These new procurement practices will be integrated into SISTAFE, with the result that procurement practices will become clearer and more transparent, leading to fewer procurement problems and therefore lower procurement costs.
60. Financial sector analyses: Since 2000, the Bank has completed a study of the financial sec- tor, AAA on Mozambique’s compliance with the Basel Principles, and a formal financial sector assessment jointly with the IMF (FSAP). The May 2003 FSAP assessment found that the poten- tial vulnerabilities of the banking system lie mostly in its loan portfolio; that banks are exposed to high credit risk due to high and volatile lending rates (themselves due to volatile inflation, high interest rate spreads and a poor lending environment); that high interest rate spreads result from large provisioning requirements, high overheads, and (for smaller well-run banks) high profit margins; and that the poor lending environment results from high corporate leverage, a low number of bankable projects, a weak repayment culture, and various legal and institutional im- pediments to credit selection and recovery. It also found that the volatility of the metical threat- ens financial sector stability and development by promoting dollarization and raising the cost of domestic public debt. The PRSC addresses a number of these issues by supporting Government action to strengthen banking supervision; improve market oversight through transitioning the banks to international accounting standards (IAS); complete the Government’s divestiture from
30 the banking system; and improve the lending environment through needed legal reforms (includ- ing the adoption of a new Commercial Code). In addition, a proposed Financial Sector Techni- cal Assistance (TA) investment project will provide follow-up TA to facilitate the implementa- tion of the main FSAP recommendations.
61. Legal and judicial sector assessment: This Bank assessment, which is under Government review, found that: (i) Mozambique’s legal and judicial sector institutions have not kept pace with economic growth in the 1990s, with the result that public confidence in them is low and they are now perceived to be a deterrent to investment and a hindrance to growth; (ii) the sector’s key problem is a relative lack of skilled human resources; (iii) the sector needs to develop result- s-focused management practices and a culture of accountability for results; (iv) while some laws (e.g. regarding land and labor) are a hindrance to growth and should be revised, the main effort should focus not on legislative but on administrative reform; (v) sector institutions must fight and be seen to fight corruption, or their reform efforts overall will become irrelevant. The PRSC se- ries responds to these findings by including conditionality linked to corruption; helping to insti- tute a results-focused management process within Government; and benchmarking Government actions intended to improve the administration of justice and also to be supported through a pro- posed Legal and Judicial Sector Capacity-Building project.
62. Investment climate assessment (ICA): The Bank, together with the Investment Promotion Center and the Confederation of Economic Associations of Mozambique, completed an ICA in 2003. From an analysis of 193 firms surveyed in 2002, the ICA found that the most severe con- straints to doing business in Mozambique included: (i) lack of access to and the high cost of fi- nance (cited by 78% of the sample); (ii) Mozambique’s uncertain policy environment; (iii) the costs imposed by regulatory and administrative procedures; and finally (iv) inadequate infra- structure. The PRSC series will help the Government to complete actions designed to ease some of these key constraints, including with respect to the time and cost involved in registering a business; labor regulations governing short-term hires, expatriate hires and retrenchment bene- fits; the time involved in clearing imports and exports, including in particular at the Ressano Gar- cia border post with South Africa; as well as the cost and reliability of electricity and telecommu- nications services. Policy dialogue will also address emerging issues, such as undue delays in the Government payment of VAT refunds.
63. Rural development strategy: The Government is expected to complete its rural development strategy by the end of 2004. This strategy is expected to underpin a revised PARPA (expected in 2005) and could provide the framework for a new reform agenda. A draft Government concept note indicates that the strategic vision is to increase the resources available for holistic rural de- velopment. Key elements of the strategy include: (i) sustainable rural development with a mul- ti-disciplinary and pluralistic approach to poverty, social and gender equity, local economic de- velopment, natural resource management, and governance; and (ii) an agriculture focus that is achieved by integrating infrastructure, technologies, institutions and capacity-building, non-farm activities, and human capital development. The strategy is expected to benefit from the poverty assessment and the agriculture income survey that were both recently completed. With a view to informing Government work on the strategy, the Bank is currently helping to complete strategic pieces of sector work on rural finance, natural resource management, public expenditure in the rural space, community-driven activities, and commercial agriculture. The findings and recom- mendations that emerge from this work will shape the Bank’s support to agriculture and rural de- velopment in PRSC2 and PRSC3.
31 64. Poverty and Social Impact Analysis: Participatory poverty and social impact analyses (PSIAs) are being carried out as part of the monitoring of PARPA implementation. This in- cludes work recently initiated by the Bank on the impact of lowering primary school fees and planned work on labor markets. In health care delivery, a planned exercise in Marginal Budget- ing for Bottlenecks will help to estimate the marginal costs of overcoming bottlenecks in the availability of inputs, access, adequacy of coverage and quality of three types of health sector services (clinical services, outreach services, and family/community services), thus enabling de- cision-makers to choose between different combinations of these services to increase coverage and improve the epidemiological impact of the service provided.
65. OED review of recent adjustment lending in Mozambique: During FY02, OED in one doc- ument reviewed eight IDA projects, including four adjustment operations, provided to Mozam- bique during FY90-FY01. The adjustment operations aimed to stabilize the post-war economy, improve public sector management, transform the economy from a centrally-planned to a mar- ket-oriented one, reallocate public spending to poverty-reducing activities, and begin to create the conditions for private-sector-led growth. While criticizing the adjustment operations for hav- ing failed to achieve poverty reduction through private-sector-led growth—a criticism that the re- cently-completed poverty assessment indicates may be misplaced—the OED review also identi- fied several key lessons. First, Government ownership and successful implementation of an ad- justment program may not suffice to achieve its objectives. In addition the operation needs to be developed in full appreciation of Mozambique’s political economy at the micro level and com- plemented by projects that could ameliorate some of the weaknesses. This is particularly true re- garding the ability of Mozambicans to participate effectively in the privatization program. Sec- ond, sequencing financial sector reforms is critical to both financial and private sector develop- ment. In particular, weak state-owned banks should be privatized before they are restructured or recapitalized; state-owned banks should be privatized before large numbers of other enterprises are privatized, or else inappropriate resource allocation may occur; state-owned banks should be privatized without permitting a sizeable residual government ownership, as this ownership could result in continued connected lending, insolvency and budget obligations; and the absence of world-class prudential regulations and supervision as well as a functioning legal system when the private sector enter the financial sector may invite moral hazard problems. The PRSC series has taken these lessons into account.
V. THE PROPOSED PRSC1 REFORM PROGRAM
A. Overview and Objectives of the PRSC Series
66. The PRSCs constitute a series of one-tranche operations over three years, designed to align the policy agenda supported by the World Bank with national policy priorities in the PARPA. The financing needs and levels will be based on the medium-term financing plan contained in the Government’s MTFF. While recognizing the importance of each of the fundamental areas in the PARPA, the PRSC series will focus the policy dialogue initially on cross-cutting issues, including particularly in governance and public financial management, before expanding the dialogue to other PARPA priority areas, such as education, health and agriculture. Within this general framework, there were four key considerations in Mozambique.
Given that this is the first PRSC cycle, a focus on the Government’s PARPA implementation processes is highly appropriate.
32 A focus on planning, budgeting and managing public service delivery, including through government restructuring and the introduction of SISTAFE, will have an important medium- and long-term benefit for service delivery. As indicated in the recent ICA, Mozambique’s growth opportunities can only be realized through decisive action to address various longstanding constraints to businesses, including the high cost of banking, labor law inflexibilities, and the high cost involved in business registration; hence these are also appropriate areas of focus. While the Bank will continue, during PRSC1, to support sector development programs in agriculture and education through existing investment projects, policy dialogue in these sectors will shift to the PRSC as these projects close during subsequent PRSC operations.
67. PRSC1 will support cross-sectoral actions to strengthen public sector performance and en- hance efficiency and effectiveness in the use of public resources. These measures will have a direct impact on poverty reduction, as they will enhance public sector capacity to implement poverty reduction programs in the priority sectors and generate additional funds for poverty re- duction by reducing leakages in the form of low allocative or operational efficiency of public ex- penditures. Key areas of reform include strengthening public financial management through im- plementing SISTAFE; reforming public procurement; reducing aid dependency through imple- menting revenue-enhancing measures; achieving demonstrable results in the public sector reform program; advancing decentralization to local authorities; and implementing a sound anti-corrup- tion strategy. It also supports reducing the highest tariff levy, from 30% to 25%.
68. PRSC2 will continue to support actions to strengthen public financial management and will also intensify the Bank’s engagement on the investment climate. In particular, a decree will be approved establishing new procurement practices that accord with international standards; a new Financial Institutions law, a bank bankruptcy law, as well as a new Commercial Code will come into force; and decree 57/03 will be revised to ease restrictions on hiring foreign labor. PRSC2 would also begin to add a sectoral focus on agriculture and health care.
Box 2: Selection criteria applied in choosing the components of PRSC1-2 from the PAF matrix
In selecting focal areas for PRSC1-2 from the PAF matrix, the Bank took into account the following criteria: Bank’s comparative advantage: Extensive AAA since 2000 has helped to diagnose the problems and identify solutions regarding in particular public financial management, governance, and the investment climate. It has also equipped the Bank to provide advice and technical assistance on designing and implementing policy and institutional reforms in these areas, where donors are seeking Bank leadership. Expected developmental benefits: The developmental benefits of the conditions included in PRSCs 1 and 2 for poverty reduction are expected to be high, as they will help to secure sustained broad-based growth as well as to improve the efficiency of public spending in the key poverty-reducing sectors and create a strong basis for increased lending through development policy operations. Government ownership: Government commitment to reforms in the areas indicated is high and long- standing, and it will help to ensure the successful implementation of measures to improve the systems. Government institutional capacity: Although the Government’s capacity in some of the reform areas (e.g. accounting, auditing, banking supervision, and legal and judicial process) remains limited, the PRSCs and complementary investment projects are intended precisely to help strengthen these capacities. Potential role of conditionality: In many cases, the conditionality included in the PRSCs will help the Government to design the reform program in greater detail and ensure its implementation.
69. PRSC3 would consolidate reform efforts regarding public financial management and the investment climate, and begin to add a sectoral focus on education and rural water supply.
33 The areas of intensive engagement for PRSC3 are indicative at this stage and would need to be reconfirmed and specified more concretely during the appraisal of PRSC2 (May 2005).
B. The Proposed Credit
70. The program that the PRSC will support and that has been agreed between the Government and the G15 is based on the PAF matrix. The Government explicitly designed the first page of this core matrix (see Annex 2) to consist in outcomes that are not directly in its control, such as the MDGs, and the following pages to include only actions that are directly in its control. In recognition of this distinction, the PRSC matrix draws its prior actions and triggers from the second and third pages, while maintaining an important monitoring stance vis-à-vis actions and indicators appearing on the first page. The Government’s commitment to addressing the MDGs is strong and is reflected in the PARPA and the PAF matrix; the overall objectives of these instruments are to sustain high levels of broad-based growth and to reduce poverty. The program defined in these instruments, and in the PRSC program matrix, will be implemented through Government systems controlled by the Government’s PES and its annual budget.
71. PRSC1 benchmarks progress in completing Government actions under three components, drawn from the Government’s Letter of Development Policy (Annex 4, para. 5):
· Building public-sector capacity and accountability: Under this component, the Government is committed to maintaining macroeconomic stability, improving public financial management, and enhancing governance. The Government will maintain macroeconomic stability through adhering to an appropriate macroeconomic framework with consistent fiscal and monetary policies. It will improve public financial management through: monitoring closely and allocating 65% of its resources to pro-poor spending; increasing budgetary efficiency, transparency and accountability by expanding coverage, ensuring a timely flow of funds, and implementing SISTAFE; and improving the timeliness and quality of the national accounts, auditing and budgetary reporting. In addition, it will reduce aid dependency through mobilizing further domestic resources; deepen its understanding of the incidence and causes of poverty through completing and analyzing the results of the second household income survey; and update the PARPA to reflect the country’s changed circumstances as well as progress in implementing reforms. Finally, the Government aims to improve governance by bringing public procurement into line with international practice; restructuring its key sectoral ministries to be more responsive to citizen needs; decentralizing the delivery of services to local authorities to expand community participation and government accountability; and fighting corruption. · Improving the investment climate: Government action in this area is intended to: strengthen the financial sector, particularly by enhancing the supervision exercised by the central bank and completing the divestiture of Government ownership in the banking sector; improve the regulatory framework by reducing impediments to entry and exit and increasing the flexibility of the labor law; and expand infrastructure services by reducing communication costs and making electricity less expensive and more reliable—all with a view to making domestic production more competitive. · Expansion of service delivery: Government action in this area under PRSC1 is limited. It will include enabling primary schools to finance locally-identified needs for basic supplies on a timely basis, through continuing the Direct Support to Schools program, which provides all schools with small grants. In addition, public expenditure reviews
34 and environmental work will be completed in the agriculture and health sectors in preparation for bringing these two sectors into PRSC2. In health, this will involve completing a planning and costing exercise to address the removal of constraints in the health system and help improve the link between health budgeting and outcomes, while in agriculture and rural development, it will involve benchmarking progress in establishing (i) a Unified National Agriculture Institute and (ii) MADER’s Strategic and Operational Monitoring System in all of its central and provincial institutions.
C. Building Public-Sector Capacity and Accountability
72. Under this component, the Government is committed to maintaining macroeconomic stability, improving public financial management, and enhancing governance. Government actions under this component are at the core of PRSC1 as well as critical to reducing fiduciary risk in Mozambique; they are also in areas where the Bank (often working with the IMF) has a comparative advantage vis-à-vis other donors. Critical follow-up actions will be supported under the remainder of the PRSC series, to ensure that gains are consolidated.
Maintaining macroeconomic stability:
73. Maintaining macroeconomic stability is critical to sustaining growth. The Government has been able to control inflation, despite some slippage since 2000-01 when flood emergencies affected the country, but volatility as well as recent rates of about 13% over the last two years indicate that continued vigilance is required. In addition, domestic interest rates need to be reduced, as they are high in real terms and involve high spreads. Under the PRSC, the Govern- ment is committed to continuing to develop and implement a macroeconomic framework that it is agreed with the IMF to ensure that the policies relating to the budget, the management of money and credit, and the exchange rate as well as to the regulation and supervision of banks and other financial institutions are consistent and allow the effective pursuit of sustainable economic growth, low inflation, and high employment. In this area, the Government and the Bank will continue to work closely with the IMF, which will remain the lead institution on the donor side.
74. To reduce aid dependency, the Government is committed to maintaining strong performance in revenue mobilization. About 50% of total expenditures are donor-financed through direct budget support or investment projects, including SWAps. Moreover, donor contributions to Government spending amount to about 10% of GDP, which is more than the average for sub-Saharan Africa, and likely to decline over the long term. Current levels of budget expenditure will not be sustainable over the long term and a fiscal adjustment is needed. This adjustment will require the Government to impose upper limits on total expenditures as well as on the budget deficit, which could in turn trigger a reduction on the impetus that fiscal policy has been generating into the economy’s growth (it has been estimated to contribute some 3% to 4% per year of annual growth). To ensure that this impetus is maintained, the economy needs to continue to grow at 7% or 8% per annum; public expenditure needs to reach higher levels of efficiency and efficacy; budget coverage needs to be expanded and enhanced to ensure that all available resources are aligned with the poverty reduction priorities as established in the PAF; and in addition domestic revenues need to continue to grow. Despite progress in implementing new direct taxes introduced in 2003 and earlier, efforts to strengthen the tax system need to continue in 2004, in particular in consolidating implemented taxes and reinforcing administration. It will be critically important to ensure adequate financial and human resources
35 for full operation of the new computerized system of taxpayers registration and tax collection system. Strengthening VAT implementation is also key, including in particular improving the Government’s efficiency in processing VAT reimbursement claims.
75. To enhance revenue collection, the Government is committed to establishing a central revenue authority (CRA). Constituent activities in this process are benchmarked in the PRSC. This will involve restructuring tax administration by reforming the National Director of Taxes (DNIA) with a view to making it a semi-autonomous directorate general (DGI). In addition, customs administration is strengthening its internal management and undergoing institutional change with a view to integrating with DGI in the future CRA. As the Aide Mémoire of the 2004 Joint Review noted, critical action to be pursued on tax policy includes: (i) approval of the regulations and procedures for legally establishing the CRA in 2005; (ii) the development of common information, communication and computerized systems for tax and customs administrations, also in 2005; and (iii) the effective establishment of the CRA with unified training and collection systems, in 2006. In addition, further capacity-building is required in revenue collection, tax projections and modeling, and tax policy analysis.
76. Through supporting such actions, PRSC1 and its successor operations will help the Government to increase domestic resource mobilization. The Government has had remarkable success in increasing revenues over the past five years, and this performance is expected to continue. In May 2003 it implemented fuel tariff adjustments and in November 2003 it introduced a withholding tax on civil service incomes: these measures together increased Government revenues in 2003 by about 0.7% of GDP. During 2004, it will increase specific fuel taxes to compensate for accumulated inflation since May 2003 and adopt an automatic quarterly adjustment mechanism to prevent their further erosion in real terms. In addition, the Government will consolidate the system for collecting indirect taxes; create a municipal tax system; and also introduce a documento único for the collection of all taxes. A draft general tax law setting out the principles of the law, the guarantees and obligations of taxpayers, and the treatment to be accorded to tax crimes will also be submitted to the National Assembly. These efforts are projected to increase total revenue by 0.3 percentage points of GDP in 2004, to 14.6% of GDP. Increased domestic revenues, combined with steady foreign financing at a level of $650 million per annum, should produce a gradual reduction of external budget dependency. In addition, the Government will continue to follow its budget rule, prohibiting recourse to domestic banking finance to cover its deficit and setting a cap on total budget expenditure and net lending. This rule helps not only to maintain budget discipline but also gradually to reduce the deficit and ensure economic stability. Even so, it remains the case that available revenues are not expected to be sufficient to attain the MDGs—an issue that requires further in-depth study.
36 Improving public financial management:
77. PRSC1 will support ongoing Government efforts to strengthen public financial management by improving budget formulation, execution and reporting. Transparency and accountability in the use of public resources is a key citizen right and government responsibility as well as a key contributor to ensuring the efficiency and efficacy of public administration. It is also a legitimate donor interest, which grows as donors begin to transfer increasing proportions of their resources through the state budget. To meet its responsibilities in this area, the Government has been modernizing its public financial management system to improve controls, decentralize planning and execution, and increase transparency and accountability. In the past decade, to sustain high growth rates and reduce poverty, the Government has allocated about 65% of total expenditures, excluding interest payments, to the PARPA’s priority sectors.4 In the context of the April 2004 Joint Review, the Government committed to maintaining pro-poor spending at 65% of total expenditures for 2004, with the social sectors receiving half of that amount, though it was also agreed that pro-poor spending targets would be revised in 2005 during preparation of the new PARPA to ensure that the target is realistic. Through 2004-06, the Government is also implementing a multi-faceted public sector reform program and, on the basis of a CFAA and the two recent PERs, improving public financial management. Maintaining and deepening this orientation will also help the Government to meet additional HIPC expenditure- tracking indicators.
78. Most of the medium-term actions identified in the 2001 PER for correcting deficiencies in Mozambique’s financial management system have been executed. The 2001 PER found serious deficiencies in fiscal management, particularly in accounting (which covered less than half of Government spending), cash management (which included a multiplicity of untracked Government accounts) and auditing (which was underfunded and ineffective). To address these deficiencies, the Government in 2001 passed a new Financial Management law to initiate modernization of the Government’s fiscal management system. This law aims to ensure: that allocations in the (one-year) state budget are based on and consistent with the PARPA and analyses drawn from the MTFF; that allocations incorporate a functional classification that enables strategic and results-oriented resource allocation; that accounting is cash-based, in accordance with international standards, so that it is possible to present a balance sheet that reflects all state assets and liabilities as well as multidimensional information customized to individual sector needs; that the payment system is computerized, on-line, integrated with the registration of accounts, and making use of a single treasury account (conta única) that registers all information on payments from all other (physical and virtual) Government bank accounts on a daily basis; that all state assets are registered and valued on a daily basis, using international depreciation practices (an important control for sectors, such as health, that operate a large network with expensive equipment); and that ensures the completion of adequate financial and performance auditing. Fully implementing the new law is a multi-year process. Complete implementation, to which the Government is strongly committed, will help significantly to reduce the level of fiduciary risk in Mozambique.
4 Resource allocation to PARPA priorities was about 66.5% of total primary expenditure in 2003, but it fell to 64.9% in 2004, principally due to extraordinary expenditures on the municipal elections held in late 2003. Even though there has been a decline in pro-poor spending as a percentage of GDP since 2000, as a consequence of the strong growth of the Mozambican economy during the intervening period, real priority spending has risen considerably. In other words, despite the decline in pro-poor spending as a percentage of GDP, more resources were in fact allocated to the PARPA priorities in 2003 than in 2000.
37 79. The key reform included in the new Financial Management law is the introduction of an integrated financial management system, SISTAFE, now underway. Introducing SISTAFE into the Government is a complex exercise, which is being benchmarked by the PRSC series. It is not without risk, and it is also likely to require more time than originally anticipated. While implementation is proceeding deliberately and in sequence, delays have been frequent, and tangible improvements in public financial management are still some time off. To date, to prepare for this introduction, the Government has completed a number of key preparatory reforms. In particular, it has: (i) issued regulations for the Financial Management law; (ii) initiated the introduction of a new and more-detailed functional classifier into the budget; (iii) started to formulate the budget in current prices; (iv) introduced restrictions on banks accounts held by public institutions; (v) started to incorporate off-budget—or “consigned”—revenues (i.e. revenues collected at the level of the Government’s different spending authorities) as well as donor-funded expenditures into the budget; (vi) reduced the so-called “complementary period” after the end of the fiscal year (during which payments may be made for commitments made during the financial year) from three to two months; (vii) initiated training for budget staff in double-entry accounting; and (viii) established a consolidated electronic treasury account, which will help to improve control of treasury operations and cash management.
80. Much remains to be done to improve cash management, accounting and internal control before SISTAFE can be fully and successfully implemented. While the Government was originally expected to shift from a duodécimo replenishment system to modified accrual accounting in anticipation of SISTAFE, it has become clear through implementation experience to date that this shift is too ambitious at present. With the implementation of SISTAFE, a modified cash basis of accounting will be applied through the introduction of a budget credit system against which commitments will be registered and accounted for when a transaction is incurred; the credit releases will serve as virtual cash allocations and will determine and control the spending ceiling for each budget item. The run-up to implementing SISTAFE will require the introduction of double-entry accounting, under a cash basis, and should include as well the introduction of monthly and annual cash plans into spending agencies to enable a more rational use of resources. To enable MPF to obtain accurate real-time accounting information, “globalizing accounts” have been created to facilitate movement to a single interlinked account arrangement, but not all accounts have yet been inventoried or interlinked, so it remains impossible for the MPF to read off the cash balance of the Government in real time. The April 2004 Joint Review agreed that, in mid 2004, the top priorities are: further development of SISTAFE and e-CUTfísica (an electronic system of control over the Government’s accounts) as well as their integration; testing the system to avoid future breakdown and user disappointment; establishing and testing a recovery and backup plan; and strengthening the management of the Technical Unit of the Financial Management Reform Program (UTRAFE) through planned international recruitments.5 It was also agreed that the Government should continue to target a rollout to MPF by June 2004 and testing in MINED by end 2004, before the rollout proceeds to other ministries, to enable the IT systems to be tested in a full-production environment. Provided that these targets are met, the Joint Review found that for 2005 it was possible to complete a rollout to ministries covering 60% of the budget and for 2006 a rollout to all remaining ministries, though the rollout to municipalities and other autonomous spending authorities would probably not be possible before 2007.
5 A second advisor from the IMF was recently recruited.
38 81. The Joint Review also found a continuing need to improve execution of the audit function in Mozambique. The Review proposed that in the 2005 PES and PAF matrix, there should be measurable targets for (i) implementing an action plan for strengthening internal audit functions, at the sectoral, provincial and, in due course, municipal levels; (ii) improving the timeliness, quality and coverage of external auditing; and (iii) more completely implementing the recommendations of the audit reports in 2004 and earlier years. The Government is expected to finalize a proposal for the institutional role and the functioning of the external audit by the end of 2004, with a focus on strengthening parliamentary control and follow-up measures, including legal, disciplinary and other responses to instances of mismanagement and corruption. The PRSC is benchmarking Government actions intended to help achieve these goals. To this end, the internal audit department (IGF) is expected to hire additional staff, and the Administrative Tribunal, which has already seen its budget increase by 10% in real terms over 2001-03, is expected to make more effective use of partnerships with private auditing firms. By 2005, the Government is expected to have progressed significantly towards its goal of auditing state accounts within 12 months of the close of the financial year (it now takes more than 24 months).
82. Other actions are also needed and contemplated, including improving the role of the MTFF and integrating the Government’s various planning and budgeting instruments more fully. Making the MTFF an operational instrument and integrating it fully with the PARPA and the PES will improve budgeting and execution in the PARPA priority sectors; doing so will also help to strengthen the Government’s M&E systems, which are critically important to assessing its performance in implementing the PARPA. At present the lack of a medium-term perspective results in incremental budgeting (i.e. budget adjustments are made across lines and institutions without taking into account previous performance or emerging needs), which means that the Government is not making informed, strategic, and contestable choices on inter- and intrasectoral resource allocations. To help address this lacuna, the Government and the donors have agreed that the PAF matrix will be updated annually and fully reflected in the MTFF and in the annual statutorily-required management instruments of the Government, namely, the PES and the budget. In addition, the BdPES will be further improved as a monitoring instrument, and a more comprehensible format will be developed for the Quarterly Budget Execution Reports (QBERs). In the context of the April 2004 Joint Review, it was agreed that, in 2005, the QBERs will be published on the internet; the BdPES will be harmonized with them and any differences explained; and the MTFF will be made a public document.
83. The PRSC series will support continued work in implementing the complex reforms that are designed to improve public financial management. In particular, each PRSC will ensure that budget formulation provides allocations to the PARPA’s priority sectors as agreed in the annual reviews and that budget execution is consistent with these allocations. The PRSC will support continued work to expand budget coverage by including consigned revenues and donor- funded expenditures: in the remainder of 2004, work will be done to establish the legal basis for capturing these funds, with a particular focus on MINED and the Ministry of the Interior (Migration). A study will also be done to examine how to include off-budgets in the budget as well as the effect of this inclusion on recorded revenues and expenditures. Through supporting the SISTAFE roll-out, the PRSC will help to improve the reliability of budget transactions (as measured, for example, by a budget deviation index that expresses the sum of all shortfalls and overruns as a percentage of the total budget); introduce a functional classification system that meets U.N. standards;6 and enable the clear and detailed identification of poverty-reducing 6 The system will include functional, territorial, organic and source-of-funds classifiers.
39 expenditures. Progress in these areas is expected to help the Government to meet as many as ten of the 15 HIPC expenditure-tracking indicators by 2007 (as compared to five met today).
84. To support specific reforms in the budget process and monitor their implementation, the Government and the Bank have also agreed to annualize the PER process and integrate it into the Government’s budget cycle. This will be achieved through opening the budget process with- in the executive and to stakeholders beyond the executive, integrating donor financing within the budget, and providing required technical support. These reforms are expected to improve the timing of the budget framework exercise; address capacity constraints on sector and intersectoral budget analysis; improve the linkages between the budget and other integrative processes, such as the PES and the PARPA; clarify the respective roles of the executive, the legislature and other stakeholders, including the donors; and minimize the impact of prior agreements with donors outside the budget process. By providing TA on an ongoing basis to build (in addition to the traditional focus on expenditure controls) a focus on defining and reporting budget outputs and outcomes and feeding this information back into the design of the next budget, these reforms are expected to result in a stronger performance orientation of budget discussions. This will enable budget discussions between the MPF and other spending authorities to involve an exchange of proposals and counterproposals backed by properly-developed arguments justifying the proposals by linking resource-allocation with goal-setting and performance reviews. It will also enable the Council of Ministers to make more informed, strategic and contestable choices on resource allocations. To help address the demands of continued coordination of the process, the high transaction costs of consultation, and rising expectations and technical standards on budget formulation and performance reporting, the Bank and other donors have agreed to provide TA to assist the Government in these activities. Throughout, the effort will be to ensure that new demands on public financial management are realistic and met as far as possible by incremental adjustments in existing processes and that resident advisers can continue to provide effective advice to the MPF while also developing opportunities for value-adding external review. Hence the outcome of these annual PERs will not consist in a report but in support to a developing process that rationalizes the budget process and clarifies its link to policy coordination.
Improving governance:
85. Improving governance remains a key priority of the PARPA. Many Government structures and processes in Mozambique remain inefficient, including in areas important to business, and incentives to civil servants to perform their duties are limited. The Government is proceeding with the decentralization of authority, including for planning and financing, but capacities at the local level remain very weak. The legal framework is in many places outdated and in addition enforcement is weak and often subject to such long delays that it is rendered almost meaningless. Moreover, corruption is widely believed to be growing, and recently approved anti-corruption legislation is taking time to be fully enforced. To diagnose the current situation more exactly, the Technical Unit for Public Sector Reform (UTRESP) has launched a governance diagnostic assessment with TA from the Bank. The assessment will provide data and initial benchmark indicators on key governance dimensions using information about actual experiences (as opposed to perceptions) gathered from citizens, business people and public officials. The results of the governance assessment will also serve as an input for the revision and finalization of the National Governance Strategy that UTRESP is preparing.
40 86. The Government’s overall governance program aims to reduce bureaucracy, deconcentrate and decentralize service delivery, reform public institutions to make them more responsive to citizens’ needs, and improve the capacity and efficiency to the justice system. The main instrument for operationalizing this governance program is the Government’s Public Sector Reform Program for 2001-11 (PSR), which has five components: rationalizing and decentralizing the structures and processes of service delivery; improving policy formulation and monitoring processes; professionalizing human resources in the public sector; improving financial management and accountability; and fighting corruption. At present, the major task being implemented under the PSR involves completing functional analyses of all Government ministries in preparation for restructuring their functions and human resources to improve program formulation, management and monitoring. This process is being coordinated with cross-cutting work on decentralization, pay reform, and budget formulation and execution. At present, MPF, MAE, MINED, MADER, MIC and MISAU are nearing completion of their functional analyses: MIC has presented its analysis to the Interministerial Commission for Public Sector Reform (CIRESP), the last step, while MAE, MADER, MINED, and MPF have presented theirs to UTRESP, which reviews them and issues written recommendations for improvement (UTRESP reports to CIRESP). UTRESP’s quality review of February 2004 shows that ministries are using participatory approaches that include critical thinking about what each ministry does and how it does it; amassing significant amounts of data, information and analysis that help to clarify the strengths and weaknesses of the ministry; and incorporating the decentralization policy and the Local State Organisms Law (LOLE) 8/2003. Most ministries have also included restructuring strategies in their functional analyses, including base estimates of the financial and human resource needs.
87. The PRSC is benchmarking efforts to restructure Government ministries and also providing complementary TA through the Public Sector Reform investment project. As UTRESP’s report indicates, much work remains to be done to strengthen line ministry capacity in planning, budgeting and financial management. UTRESP has found that ministries’ reports tend to be weak in: assessing the policy challenges facing each ministry; linking policy challenges to goals and outcomes; eliminating non-core functions to focus on a core mission; assessing resource implications and in particular respecting budget ceilings; and fully incorporating the implications of the Local State Organs Law (LOLE 8/2003), in part because the corresponding regulations are not yet approved. Experience also shows that the teams undertaking the functional analyses, to be effective, need to include individuals with sufficient authority, public sector reform experience, and substantive knowledge of the affected sector; that general ToRs need to be tailored to the specific ministry being analyzed; that a communications strategy must be developed and deployed for each ministry to ensure broad involvement and ownership; and that mission statements for each ministry should be allowed to go beyond the legal mandate of the ministry to ensure flexibility and responsiveness to future challenges. The Bank will play a key advisory role in helping the Government to implement the restructuring plans that emerge from the functional analyses of the ministries, with a view to improving the policy reform design, implementation, and impact. Through the PRSC and the PSR project, it will also support the implementation of several high-visibility results of the PSR, which in 2003 included accelerating land registration and enabling visas to be obtained at the border (these were prior actions for PRSC1), and in 2004 is expected to include simplifying public sector recruitment, improving the pension payments process, and simplifying and accelerating hospital administration and patient registration.
41 88. The PRSC will benchmark progress in implementing the civil service pay reform initiative. The pay reform initiative is expected to revise civil servants’ incentives and relate them to performance. This is expected to permit a further increase in permanent employment in some priority areas while also reducing the wage bill from 7.5% of GDP in 2003 to 7.3% in 2004. To this end the Government is expected to limit the average wage increase for civil servants to projected inflation and to exercise stricter control over temporary employment in some provinces. It is also expected to initiate a process of verification and rationalization of pension beneficiaries. To enhance professionalism in the public sector, it was agreed during that April 2004 Joint Review that personnel databases will be harmonized and the career remuneration system (SCR) revised during 2004. In addition, a Medium Term Pay Policy (MTPP) will be considered by CIRESP; a pension review initiated; and the first phase of change management orientation training will be delivered to senior staff in 2004. The Joint Review also found that, beyond 2004, agreement is needed on strategies to mainstream gender and take better account of the impact of HIV/AIDS on the public sector.
89. The PRSC will also benchmark progress in implementing the Government’s decentralization program, which is expected to help build the capacity of local authorities in planning, budgeting and financial management. The National Assembly recently approved a new law on decentralization, the LOLE (this was a prior action under PRSC1). Based on a model of “integrated administration” which strengthens the territorial dimension of public sector management vis-à-vis the currently-predominant sectoral management model, the LOLE reform gives greater powers to district authorities and also provides the legal basis for treating a district authority as a budget entity for the first time in Mozambique’s history. In this context, the Government has identified decentralized participatory planning as a key element of its strategy for public sector reform and rural development at the district level and developed a National Strategy for Decentralized Planning and Finance, which is being funded in large part by an IDA investment project and which aims to develop the capacity of local authorities to identify, appraise and implement small-scale infrastructure projects using grant resources to “learn by doing”. In a complementary fashion, the PRSC will benchmark Government action to further this work, including approval of the regulations for LOLE and implementation progress as indicated by an increasing number of districts that have participatory planning processes in place. The LOLE regulations, which will help to ensure consistency in the approach of line ministries to decentralization, are ready for approval for piloting in 30 districts. Participatory planning is now being rolled out to an initial 37 districts and in addition the Government is expected to start preparing an overall decentralization strategy that clearly distinguishes the roles of decentralization and deconcentration and reconciles relevant legislation. In this context, a functional analysis is planned for completion in Maputo in 2004, and improvements are planned to monitor financial performance of municipalities and districts. Regulations under the municipal tax code are also under preparation.
90. The PRSC will also benchmark continuing Government efforts to reduce corruption by removing opportunities and effectively exposing and sanctioning corrupt acts. While Mozambique compares well with low-income and other African countries in political stability, government effectiveness, and rule of law, it compares poorly in controlling corruption, where relative performance has declined since 1996. The Government is committed to minimizing corruption. Its anti-corruption strategy involves setting ethical standards, reorganizing institutions to minimize opportunity for corruption, and strengthening investigatory and prosecutory agencies. The Government is currently establishing a working committee to update
42 the October 2001 anti-corruption strategy in light of a national corruption survey that it is undertaking with DFID and WBI assistance. It is also promoting policy and administrative reforms in known corruption-prone areas such as the judiciary, the police, public financial management, public procurement, privatisation, customs, and tax administration. In particular, the Ministry of Justice (MoJ), Administrative Court, Supreme Court, and Attorney General’s Office have finalized an overall reform plan, to be implemented through 2006; the MoJ has established an Anti-Corruption Unit; and the National Assembly unanimously passed a new anti- corruption law in May 2004 (a prior action for PRSC1), thus legally establishing a specialized anti-corruption prosecutorial unit.7 There is now an urgent need to supply this unit with adequate staff and financial resources (operations to date have been marginal, as the unit has had no permanent staff and no dedicated budget) as well as to strengthen the capacity of the Attorney General’s Office. Following-up on these developments, the PRSC series will benchmark the Government’s anti-corruption efforts by supporting the completion of corruption surveys (to households, business people and public officials) using a reputable and independent firm to establish baseline data and monitor trends; the revision of the Governance and Anti-Corruption Strategy; and the establishment an anti-corruption agency within the Attorney’s General Office.
91. The PRSC will also support ongoing efforts to improve the efficiency of Mozambique’s courts and legal system, which are inefficient and which significantly increase the risk and uncertainty of doing business. Courts take a long time to render decisions in Mozambique, and executing judgments is even more problematic. Consequently, businesses avoid using them to settle disputes as much as possible. In the Bank’s Doing Business database, Mozambique ranks 79 out of 84 countries on how long it takes to resolve a business dispute from the time a suit is filed until a judgment is enforced (see also Table 13). Recently, some stakeholders have reported that the courts are improving; and some bankers suggested that if they use a skilled lawyer and carefully prepare documents, they are able to obtain quicker judgments. Even so, for the vast majority of Mozambique’s businesspeople, the judicial system is not seen as a viable option to resolve disputes. Recently an alternative dispute resolution system of arbitration was established, but of 193 firms sampled in the ICA survey in 2003, none reported using it. It is clear that civil case disposition, particularly relating to property rights and contract enforcement, is essential to enhance the business climate for national and foreign investments. Within the court system, productivity (case resolved per judge) and efficiency (length of time for case resolution) must be improved, and in particular the trendline in the caseload backlog, which was still rising in 2004, needs to begin to decline. The April 2004 Joint Review found that budget resources to the sector need to be increased and, to help ensure an efficient use of resources, all sector institutions must be involved in approving the budget and budget execution (which is not the case at present). Efforts are also required to prevent, detect and penalize corruption in the sector through procedural simplification and the Table 13: Days taken to resolve a business implementation of performance evaluation, dispute in the court system Country Number of days inspection, and disciplinary procedures. A study on Botswana 77 how corruption in the sector manifests will begin in South Africa 84 2004 and will emphasize concrete actions in its Malaysia 90 recommendations. Continued progress in high- Uganda 99 profile cases, including the BCM fraud cases India 106 Malawi 108 7 China The National Assembly approved an180 earlier version of the anti-corruption bill in October 2003, but President ZimbabweChissano requested changes to ensure197 its constitutionality before he would sign it into law. After appropriate Kenyachanges were drafted into the bill, it255 was re-presented to the National Assembly, which approved it unanimously on May 13. President Chissano signed the bill and sent it for publication on May 31. Mozambique 540 Source: World Bank Doing Business database. 43 underway in mid-2004, is essential to demonstrate the effectiveness of the justice apparatus as well as the supremacy of the rule of law. An integrated statistical monitoring system should be put in place in 2004 to assess performance of the sector, and the sector should also complete the preparation of guidelines for the restructuring and reform program of the justice system. To date, Government efforts to improve the sector’s outcomes have been focused on updating several of the basic legal codes—the Commercial Code, the Code of Civil Procedure (which includes most of Mozambique’s bankruptcy law), the Civil Registry and Notary Code—and implementing the reform plans prepared by the four branches of the legal and judicial sector— the Ministry of Justice, the Attorney General’s Office, the Administrative Tribunal, and the Supreme Court—but progress has been disappointing. To help ensure promulgation of a new Commercial Code, discussion of the new Code in the National Assembly is a trigger for PRSC2 (see para. 115).
92. With the support of the PRSC, the Government will also implement actions intended to introduce clarity, transparency, and efficiency into procurement practices, with a view to minimizing procurement problems and lowering procurement costs. At present, Mozambique has a weak legal framework for procurement as well as poor enforcement mechanisms. Recently, the MPF completed its review of a Bank-prepared CPAR and agreed with its principal findings and recommendations. On this basis, it is preparing a new procurement decree that will follow international practice, for submission to the National Assembly later this year, after consultations with the main interested stakeholders are completed. In addition, new national standard bidding documents are being drafted; capacity-building programs in procurement are being initiated for staff in key ministries; and a new Central Policy Directorate is being established. The new procurement processes are also being integrated into SISTAFE. All of these activities are being benchmarked in the PRSC. As indicated in the PAF matrix annexed to the April 2004 Joint Review Aide Mémoire, some “quick wins” may be available: a draft of the new procurement decree could be presented for discussion by mid-2004; selected procurement audits could be done in several ministries and their top recommendations implemented; and to speed up the reform, a National Commission for Procurement Reform could be established, to operate until such time as the new regulatory body comes into being. Looking forward to 2005, the independent appeal function for bidder complaints within the Tribunal Administrativo could be strengthened and audits of procurement in the five major ministries, on a random sample basis, could be completed.
93. Work should also be done, on an urgent basis, to remove the bottleneck that has been created by the Tribunal Administrativo exercising its legal obligation to complete a fiscalização prévia (pre-review) of all state contracts, regardless of size. During the Joint Review, it was agreed that a review of the legislation and the function of the Tribunal will be completed in 2004 to indicate how the reviewing responsibility of the TA may be shifted to a randomly selective post-review regime; at the same time the Government has been urged to evaluate the possibility of establishing minimum threshold amounts for contracts due for submission to the Tribunal, for possible application in 2005. In addition, a review of pertinent legislation and functions of the Tribunal should aim at strengthening its ability to handle bidder complaints and ex-post random audits of public sector procurement. In this context, the Government is expected to prepare an action plan, for execution in 2005 and 2006, to improve the procurement process and its review and audit procedures
44 94. In conclusion, under the component focused on building public-sector capacity and accountability, PRSC1 expects to achieve the following results:
The PARPA, and in particular its macroeconomic and structural reform program, will have been implemented, which in turn should help to maintain a stable economy and investment climate that maintains economic growth at more than 7% per annum and brings inflation to about 6% to 8% per annum. This overall result will help to reduce the poverty headcount to 50% by 2006-07—on target to reach the associated MDG; An allocation of 65% or more of budget expenditures (excluding interest payments) will have been made to the PARPA’s priority sectors, and a two-month credit limit ceiling applied to the key service delivery agencies in January, with the result that social sector spending and outcomes will continue to improve, though not at a fast enough rate to achieve the associated MDGs; SISTAFE regulations will have been issued and the roll-out completed for the MPF and MINED, which will result in enhanced, more transparent, and more timely management of the budget as well as quarterly budget execution reports making use of more detailed functional classifications—both with a view to improving transparency and accountability in public financial management and equipping political decision-makers to make informed choices about the policy options that they have before them; Budget coverage will have been expanded, through the continued inclusion of donor- funded expenditures and off-budget revenues captured by government agencies, with a view to ensuring that budgetary systems capture all government expenditures; The National Assembly will have approved a bill to create a Central Revenue Authority, and the MPF will have completed an appropriate action plan for implementing it; Tax revenues will have reached about 14.6% of GDP, thereby helping Mozambique to continue a fiscal adjustment needed to reduce its high level of aid dependency; The Administrative Tribunal’s role in contract pre-reviews will have been rationalized to improve the efficiency of public procurement; The MPF will have completed a review of the CPAR and indicated agreement with its principal findings and recommendations, with a view to drafting new procurement legislation for submission to the National Assembly; Several ministries will have completed functional analyses, with a view to restructuring their operations and human resources to achieve their missions more efficiently; The National Assembly will have approved a new law on decentralization; and The National Assembly will have approved a new anti-corruption law, and the new prosecutorial anti-corruption unit will be strengthened.
D. Improving the Investment Climate
95. The second component of the PRSC will support Government efforts to improve the investment climate, particularly for small- and medium-sized businesses. To reduce poverty, Mozambique needs rapid growth sourced in agriculture and labor-intensive manufacturing and services. Improving agricultural productivity will require using yield-improving inputs and technologies and rehabilitating essential rural infrastructure. Expanding manufacturing and services will require easing key business constraints, which entrepreneurs consistently identify as lack of access to and high cost of credit, high regulatory and administrative barriers, and inefficiencies in key infrastructure. PRSC1 will help to alleviate some of these constraints
45 through supporting efforts to: (i) strengthen the financial sector; (ii) improve the regulatory environment; and (iii) improve infrastructure services.
Strengthening the financial sector:
96. A lack of affordable finance continues to be one of the fundamental business problems in Mozambique. Very few firms are using external credit. In the sample included in the Bank’s 2002 ICA, it was found that enterprises relied on their own funds for 90% of working capital requirements and almost two-thirds of their investment needs. According to the survey, 12% of respondents had bank overdrafts, while 29% reported having bank loans. Almost all respondents declared that collateral was a requirement for their most recent overdraft or bank loan, and the amount required averaged 140% of the credit amount. Firms also stated that high interest rates impeded the use of bank financing: the nominal interest rate for bank credit reported by the sampled firms averaged 28%, implying real interest rates of around 13–18%. These high rates result from weaknesses in the lending environment, the large provisioning requirements experienced at several of the larger banks, high bank overheads, and (at least for smaller well-run banks) high profit margins. One of the principal aims of this PRSC series is to support Government efforts to make the banking sector more efficient and credit easier to obtain. This involves continued implementation of a comprehensive financial sector reform program that has experienced some setbacks over the past few years.
97. Strengthening transparency in the financial sector through introducing International Accounting Standards (IAS) and divesting the Government’s remaining ownership stakes will confirm the Government’s commitment to good governance, anti-corruption, and fiscal transparency and responsibility, thereby encouraging intermediation of credit to the private sector as well as private direct investment and capital inflows. The need for the Government, as a minority shareholder, to contribute to the recapitalization of BAu and BCM/BIM over 2001-03 created enormous pressures on public expenditures, with successive contributions totaling about 4% of GDP. BAu, which today accounts for about 20% of loans and deposits in Mozambique, came into being as a result of the partial privatization of a Government-owned bank in the mid- 1990s. The bank’s financial position deteriorated significantly in the following years and by 2000 it was insolvent. The private majority shareholder refused to recapitalize the bank and abandoned its investment in 2001. The central bank intervened in the same year and offered the bank for re-sale. In December 2001, Amalgamated Bank of South Africa (ABSA) purchased 80% of the bank’s outstanding shares (the remaining 20% is held by the employees of the bank). BCM, which was the largest commercial bank in Mozambique in the 1990s, with 35% of loans and deposits, experienced a similar history. It was created in 1992 by incorporating the commercial activities of the central bank and partly privatized in 1996 by selling a 51% stake to a consortium led by the Mello Group of Portugal. By 1999 BCM was reporting large losses and in late 2000 and early 2001 it was recapitalized, with the Government as holder of a 49% stake paying about half of the new capital. At the beginning of 2000 the Mello Group was acquired by Banco Commercial Portugues (BCP), a Portuguese bank that already owned BIM. To rationalize its Mozambican operations, BCP merged BIM with BCM in 2001, and the merged bank, which retained the name of BIM, became the largest commercial bank in Mozambique, with more than 50% of loans and deposits. Despite two previous recapitalizations, the new entity continued to have a capital shortfall and was recapitalized a third time in early 2002. In the context of the Bank’s EMPSO operation, the Government in 2003 committed itself to not using any further public resources for bank recapitalizations.
46 98. BAu and BIM are performing at a more satisfactory level since they have been placed under new ownership. ABSA has restructured BAu, closing unprofitable branches, strengthening internal controls and information systems and shedding workers. Since end-2002, BIM has embarked on a restructuring process that will involve branch closures, employee retrenchments, and a gradual modernization of processes. Although the bank has just initiated this operational restructuring, its loan portfolio is now adequately provisioned and the bank is in compliance with prudential regulations.
99. The recent history of these banks has shown the peril, to the Government, of weak banking supervision combined with minority Government shareholdings. First, the Government’s presence may encourage risky behavior on the part of the banks’ private management, which may harbor expectations that the Government will practice forbearance when the banks that it partly owns encounter financial difficulties. Second, it has also shown that banking supervision in Mozambique requires strengthening and that domestic accounting standards are below the standard required to ensure financial health and stability within the system. In fact, the supervision of non-banking financial institutions (such as insurers and pension funds) is also weak and may generate problems in the future; in particular the public social security system may already represent a sizeable contingent fiscal liability, as the accounting, reporting and management systems used by INSS are reported to be weak. Recognizing these weaknesses, the Government is implementing a multifaceted program to improve the financial sector. In particular, it is improving the management of monetary policy and the use of monetary instruments, with a view to controlling inflation and reducing interest rates and their volatility; undertaking a diagnostic review of three of the largest banks (in addition to the one bank review already completed); revising the charter of accounts; improving the supervision capacities of the central bank; requiring all financial institutions in Mozambique to operate under IAS; and assessing the impact of IAS implementation on tax administration in the financial sector. The Government is also committed to preparing the privatization of the remaining Government stakes in the banking sector so that these stakes can be brought to the point of sale. Action in several of these areas has already been initiated under the Bank’s EMPSO operation.
100. Under EMPSO, the Government agreed to report on the compliance of all commercial banks with IAS and to ensure that non-compliant banks undertook appropriate corrective measures; dialogue around the PRSC will continue to monitor performance in this area. Using local Mozambican accounting standards, which fall materially short of IAS8, the Government is now furnishing quarterly, and in some cases monthly, data on prudential ratios for each of the twelve commercial banks in the country. For every period, these data show which banks are in and out of compliance with prudential ratios using domestic accounting standards, enabling the Government to issue corrective guidelines to non-compliant banks and monitor their observance. The Government is implementing an action plan to bring all commercial banks in Mozambique into compliance with IAS. Of the twelve commercial banks, two of the larger ones (BAu and the Standard Bank of Mozambique (SBM)), which are both subsidiaries of South
8 IAS are more demanding than domestic accounting standards regarding (inter alia) disclosure, the treatment of deferrals, and the provisioning of loan losses and therefore give a more accurate statement of a bank’s financial situation, but they are not yet observed in Mozambique. Inter alia, IAS requires applying provisioning rules to the total amount of a non-performing loan, not just its past-due component, as well as switching from pure performance- based evaluation to a forward-looking-based evaluation.
47 African-owned banks, submit accounts according to South African standards, which approximate IAS—hence the transition to IAS for these banks is not expected to be onerous. In addition, the other larger Mozambican banks that are owned by Portuguese banks (BIM and Banco Commercial e de Investimentos (BCI), which recently merged with Banco de Fomento) will be transitioning to IAS along with their parent banks, which are expected under Portuguese law to adopt IAS fully by the time they submit their annual accounts for 2005. Currently, the target date for transition to IAS for all banks in Mozambique is for the accounting reports for the year 2006, which is compatible with the planned transition in Portugal and also allows sufficient time for small banks to complete the transition.9
101. In keeping with previous commitments to the Board, the PRSC is benchmarking Government action to ensure that timely progress is made in transitioning to IAS. With support from the EMPSO operation and other technical assistance from the Bank, the central bank in 2002 issued a decree to make IAS obligatory for all banks and also developed and started to implement an action plan for bringing all banks into compliance. In March 2004, the authorities completed a diagnostic review of the largest non-IAS compliant commercial bank, BIM, to analyze its financial situation in accordance with IAS. The central bank has defined terms of reference and arranged the financing to conduct an IAS compliance review of the three larger remaining banks (BAu, BCI and SBM) in the system and training for the banking supervision department to support the central bank’s transition to IAS. The reviews for the remaining larger banks are expected to be completed by end-2004. If necessary, a remedial action plan will be prepared and implemented by each bank as its financial situation becomes known. The outstanding agenda relates to: (i) analyzing the tax implications of transition to IAS; (ii) identifying the transition challenges facing the smaller banks and supporting their IAS transition; (iii) providing programs to support the training of banking, accounting and auditing professionals so as to ensure that they are conversant with the new accounting practices; and (iv) designing the new chart of accounts and supervisory regulations as well as a detailed transition plan for adoption of the new standards. Provided that all parties make a dedicated effort, it is possible for the system as a whole, including the central bank, to complete training for and implementing the transition to IAS in 2006. As the introduction of new accounting standards is a complex task involving multiple actors, the authorities have agreed to establish a high-level task force including all involved parties (the banks, accounting and auditing professionals as well as the central bank) to prepare the transition process, identify training needs, and advise on transition timetable and implementation issues.
102. The PRSC will support the privatization of the Government’s remaining stakes in BIM and BAu according to a carefully planned process. The privatization of the Government’s remaining ownership stakes in the banks raises complex issues, including the Government’s obligations to the employees, the shareholders’ agreements between the Government and the majority shareholders of the banks, and the distribution of the costs and revenues of various divestiture options as between the Government and the employees. The process of preparing for the privatizations may be supported through the Bank’s proposed Financial Sector Technical Assistance project (FSTAP) by financing: (i) a resident expert on banking supervision to assist the central bank in actively monitoring and supervising the condition of the banks; (ii) an investment bank to advise on how to proceed with due diligence, choice of sales method, and
9 The process of transitioning to IAS may prove to be particularly burdensome for some of the small banks because the technical demands as well as the costs associated, for example, with changing accounting information technology (IT) can be high.
48 conducting the sale; and (iii) the preparation of documents describing the method of divestiture, information on the banks’ financial situation, and the intended sale procedure. Proceeding according to this program will enable the Government to launch tenders in 2005; once the tenders are received, the winners can be selected and the transactions can proceed to closure within the following twelve months.
103. Within the context of the PRSC, the Government is working closely with the Bank to ensure that the diagnostic reviews and action plans for transition to IAS are duly completed and that the process of preparing for the divestiture of the Government’s remaining stakes in the banking system is progressing according to plan. A Project Preparation Facility (PPF) advance for the FSTAP project has already been made available for this purpose. This advance is supporting the implementation of initial reforms in the financial sector, including some of the diagnostic work required to initiate the transition to IAS. The technical assistance under FSTAP will help the Government to finance the capacity-building required to undertake the reforms of the financial sector envisaged under the PRSC. The PRSC will also support financial sector reform more generally and provide complementary support to help the Government to:
· Revise the Financial Institutions law, to give the central bank responsibility for issuing and revoking licenses for financial institutions, provide automatic application of penalties for noncompliance with prudential regulations, and make managers of financial institutions liable for gross violations of banking regulations (approval of this law by the National Assembly is a trigger for PRSC2); · Submit a new bank bankruptcy law to the National Assembly; · Divest completely from the financial sector and, in particular, bring all banking sector assets to the point of sale; · Complete an actuarial study of the social security system and design a strategy and action plan to modernize it and ensure that it is fully funded and properly supervised; and finally · Prepare an action plan to make the insurance industry compliant with IAS and adequately supervised.
104. While these reforms are not guaranteed to reduce interest rates or the cost of credit, together with reforms to improve the lending environment and the judiciary (which the Bank is supporting through the FSTAP) they will address the structural problems that appear to contribute to these high rates. Restructuring the dominant banks in the system should help them to increase their operational efficiency and reduce the share of nonperforming loans in their portfolios, and this in turn should put downward pressure on the profit margins of the smaller, healthier, banks. Other things being equal, this should help to lower credit costs and improve access to finance. That said, it is also clear that these reforms will not in themselves eliminate all of the factors that create a poor lending environment in Mozambique, including (for example) high corporate leverage, a low number of bankable projects, a weak repayment culture, and various legal and institutional impediments to credit selection and recovery, so the impact is likely to be limited until these factors are also addressed.
Improving the regulatory environment:
105. Another area of critical importance is the regulatory framework for commercial enterprises. The Government has created a more business-friendly environment in recent years.
49 For example, Public Administration Decree 30/2001 of 15 October 2001 requires government agencies to respond to requests for decisions within a fixed time; in addition, there are now provisions for export processing zones (called Industrial Free Zones (IFZ) in Mozambique) as well as several investment and export incentives. The Government has also introduced new customs procedures and transformed the tax system, including through the introduction of a VAT. The highest level of import duties was reduced from 30% to 25% for 2004—a prior action under PRSC1—and it is expected to be lowered further, to 20%, in 2006. The business community has welcomed these changes, but they have not yet had the expected impact. In the ICA survey, it was found that business managers believe government officials retain too much discretion in implementing new laws and regulations, with the effect that the laws are often rendered ineffective—because officials obstruct implementation of new policies by delaying or ignoring decrees and in some cases because local officials are still ignorant of the legislated changes. As a result of this discretion, businesses experience regional differences in the application of law and therefore greater levels of government-related uncertainty. In addition, a number of key constraints to business have not yet been addressed. As noted in the Bank’s October 2003 CAS, the Bank intends to focus attention during the next few years on several policy and institutional reforms that fall into this category. The CAS results framework includes three specific targets to be achieved over the CAS period.
106. The first target involves bringing down to international norms the cost (now 97% of GNI per capita) and time (now 153 days) involved in registering a business. Open economies, where firms can easily enter and exit, have higher growth rates than less open ones; the competition fostered by new entrants forces existing firms to raise their productivity and improve their competitiveness or be driven from the market. High barriers to entry allow low- productivity firms to survive and make it costly to reallocate resources to the most efficient uses; they also discourage foreign investment, which has proven to be one of the most effective ways of transferring technology and raising productivity. At present, entry into the Mozambican market involves time-consuming and expensive procedures for firm licensing and registration. As few entrepreneurs are willing to endure the process, much economic activity remains unregistered. Those firms that do attempt to register are typically forced to hire a consultant who specializes in registering firms and (for fees ranging from $1,000 to $1,500, which are added to the government fees) can complete the process in three to five months, depending on the nature of the business, how politically connected the firm is, and how much the firm is willing to pay. But even after a firm has registered, it cannot yet begin operations: it must then register with the tax department, and if a foreign firm it must apply to open a bank account and begin applications for residence, work, and import permits. These tasks can easily add another three or four months to the wait. There is anecdotal evidence that these bureaucratic burdens persuade some companies to abandon thoughts of investing in Mozambique. One of the key objectives of the PRSC is to reduce these barriers to entry. This goal will be pursued in the context of a larger effort—included in the Bank’s country dialogue—to reduce significantly the burdens created by the Government’s regulations requiring notarial services.
50 Figure 7: Percentage of firms in Mozambique ranking issues as problems Source: Mozambique Industrial Performance and Investment Climate 2002
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Credit (average) Cost of financing Access to domestic credit Access to foreign credit Government (average) P olicy uncertainty (average) Corruption Macroeconomic instability Anti-competit ive practices Econom ic policy uncertainty T rade rates Crime, theft and disorder Administrative barriers (average) Skills and education of workers T ax administration Custom s and trade regulations Labor regulat ions Business licences Access to land Infrastruct ure (average) Electricity T ransportation T elecomm unicat ions
Large problem Moderat e problem No or minor problem
107. To reduce the cost and time involved in registering a new business, the Government under the PRSC is considering computerizing the registration process; integrating the operations of the three institutions involved in this process; and outsourcing some functions to the private sector. A “one-stop” shop for business registration is already being established in Maputo and Bank staff are closely monitoring Government efforts to reduce the time and cost involved in registering a business and will continue to do so. In parallel, new regulations concerning the licensing of industrial and commercial activities will be produced to expedite entry and exit and to reduce the cumbersome process of inspections that need to be done during the production process.
108. The second target involves obtaining a more flexible labor market. To be internationally competitive, firms must retain the flexibility correctly to size their work force, while also respecting the rights and protections of their workers. This is particularly important for labor-intensive manufacturing firms, which depend on customer orders to keep their workers employed. Mozambican firms that wish to retrench workers when business slows down or when they adopt labor-saving technology can do so only at a high cost. Article 69 of the Labor Law of 20 July 1998 requires that a retrenched worker receive up to three months pay for every two years of service. As a result, many firms (37% of respondents in the ICA survey) retain more workers than they consider optimal; on average these firms would prefer to retain only 63% of
51 their current work force, with the results that they are spending on average about 20% of annual sales to pay unneeded workers. This is a particularly big burden for privatized firms, which were required to take on all current workers and then retrench them paying the normal severance. The high cost of retrenchment also discourages firms from expanding production or entering new markets. Firms also need to be able to hire skilled labor, but this is difficult in Mozambique, as the workforce lacks sufficient skilled labor. The 2003 ICA shows that firms in Mozambique, on average, have very low labor productivity compared to other countries in sub-Sahara Africa. In a comparison with Cameroon, Côte d’Ivoire, Ghana, Kenya, Tanzania, Zambia, and Zimbabwe, Mozambique was the lowest for value-added per worker, and this more than offsets the low wages10 that Mozambique offers and that would have given the country a competitive edge on the wage-productivity ratio, if productivity were higher. In this context, it is important for firms to be able to enhance productivity through improved access to skilled foreign laborers and the training opportunities that they provide. In fact, the Bank’s Enterprise Development project shows that firms that hire foreign experts to help them are able significantly to increase sales, productivity and profitability. But it is difficult for firms in Mozambique to obtain permits for expatriate workers. In the ICA survey, firms reported that on average it took 90 days and almost $400 to obtain a work permit; some firms took as long as two years and nearly $1,250 to do so. Firms deal with these issues in different, inefficient ways—all of which drive up the cost of business. Some bring in experts on tourist visas and force them to leave the country every 30–90 days to renew their visas; others have expatriates begin work before obtaining legal authority; and others chose not to invest in new technologies because of the difficulty in hiring experts. Interviews suggest that restrictions on employing expatriates are a significant reason why some investors stay away Table 14: Firms’ perceptions of specific labor regulatory requirements (% firms) from Mozambique: Procedure Perception of problem No Small Large almost 48% of the Hiring of expatriate workers 26 23 50 firms with foreign Layoff and cost of retrenchment 28 34 37 ownership in the Limits on temporary hiring 42 42 16 ICA sample said that Minimum wage laws 32 52 16 hiring expatriates Hiring procedures 47 43 10 was a major problem Inflexibility of skilled worker salary scale 41 51 8 for their business. Source: CTA/RPED Survey 2002, as reported in ICA 2003. 109. With support from the PRSC, further flexibility will by introduced into the labor law by permitting remuneration through piece rates, simpler and cheaper foreign hires (a prior action under PRSC1), and lower severance payments. Following protracted negotiations between the Ministry of Labor, the Ministry of Industry and Trade, and representatives of the private sector businesses, Decree 57/2003 was revised to allow firms to hire expatriates without obtaining explicit Government approval to do so (a hire is legally permitted to proceed if the Government does not object to it within 15 days of receiving notification of the intention to hire). This is expected to constitute a major improvement, and to help to raise skills-transfer levels and shift the balance away from capital-intensive and towards labor-intensive enterprises. Bank staff
10 In fact, the minimum wage in Mozambique, by developing world standards, is not so low, at about $47 per month compared to (say) $30 per month in China. $47 per month in Mozambique totals about a $564 per annum, which is almost twice Mozambique’s GDP per capita. At present, Mozambique cannot sustain such a high minimum wage. Taking into account the higher education and productivity levels prevailing in China (and in many other countries), Mozambique’s relatively high minimum wage and low labor productivity plainly impede competitiveness. If in addition administrative barriers to productivity increases (such as the hiring of expatriate labor) and high cost short- term hiring are factored into the matter, labor market conditions emerge as a key issue for the sustainability of growth and employment.
52 are closely monitoring the impact of the new decree as well as the expected articulation of a new comprehensive labor law, expected in 2005.
110. The third target involves lowering customs clearance times, with a focus on the center and the north of the country, where the delays are longest, and on ground shipments from South Africa border. Since 1998, it has become easier to obtain import licenses; inspections are more efficient; and recently the pre-declaration system, which required firms to pay a deposit of 15% of duties owing before they were permitted to import, was abolished. But there are still long delays in clearing goods. The ICA found that, in 2002, the median time that it took to clear goods after they arrived at the port of entry was seven days; the average time almost twelve days; and there was wide variation. Clearing trucks from South Africa required seven days on average, negating the advantage of proximity to South African markets, which are only a few hours away by road, and encouraging smuggling. Firms also reported that they could reduce their inventories by 21% on average, and free up significant capital for investment, if container clearance times were reduced to 24 hours—as some Asian countries have done. Exporting from Mozambique is also difficult, with exporting firms reporting that, in 2002, it took an average of 17 days to clear a shipment—even if the firm was shipping goods by sea to another port within Mozambique. In a world where turnaround times and guaranteed delivery are critical, no enterprise can hope to be internationally competitive given these delays and uncertainties. Knowing that importing and exporting is difficult and uncertain, most companies adjust their business plans, keep large stocks of raw materials, and do not enter contracts that require strict deadlines—with the result that potentially profitable business opportunities are foregone.
111. Further work will be done to determine the bottlenecks in customs clearance and remove them. Specific targets will be benchmarked: in particular, the average number of days for clearing exports will target seven days or less and for clearing imports at Ressano Garcia will target five days or less. This will help firms to obtain critical inputs in a timely manner, meet strict delivery deadlines, compete better in export markets, tie-up fewer resources in inventories, and be more responsive to their customers.
112. In addition, the PRSC will support revision of the Commercial Code, which dates from the late 1800s and is completely outdated. Virtually all stakeholders agree that the Commercial Code needs an overhaul, but there is still widespread disagreement about what form that over- haul should take. A new Commercial Code has been drafted and presented to the National As- sembly, where it has languished for about a year, mired in controversy. It appears that some members of parliament believe that the new draft has serious deficiencies: for example, some fi- nancing methods (such as leasing) that are already in use in Mozambique are not mentioned in the proposed Code. In addition, the private sector has complained that the drafters of the docu- ment did not consult sufficiently (although there were public consultations) and in addition that some of the comments that they offered were not taken into account. Finally, there are differ- ences between MIC—which prepared the new draft—and MoJ about the form and content of the draft Code. To ensure that Mozambican businesses have the benefit of a sound commercial code within a reasonable timeframe, the PRSC benchmarks progress in revising the draft and obtain- ing parliamentary approval. Written comments have been solicited from both parliament and the private sector so that their concerns can be analyzed and addressed. With support from the Bank’s Enterprise Development project (PoDE), MIC is reviewing comments and revising the draft Code, both in form and in substance. Technical assistance for reviewing the comments and
53 drafting appropriate revisions will be provided, as needed. Discussion of a new Commercial Code by the National Assembly is a trigger for PRSC2.
113. Country dialogue around the PRSC will also focus on several issues of importance to private investors where appropriate action has not yet been agreed, including Government payment of VAT refunds. A key issue for many Mozambican businesses is the Government’s failure to pay VAT refunds in a timely manner. In the ICA survey of 193 firms, 24 reported be- ing owed government refunds on products that they had exported or on VAT-exempt products that they had imported, and the average amount was more than 13% of their annual sales. Those companies that received refunds reported having to pay bribes and waiting an average of 99 days to receive their refunds (the median time was 30 days). Some companies spoke of having to wait years because they were unwilling to pay up to 10% in unofficial fees to the officials involved. Similar experiences were reported with respect to other investment incentives, such as duty drawbacks. No firms reported receiving refunds in a timely manner. These delayed refunds seri- ously affect the firms’ ability to manage cash flow and, in a country with high real interest rates, impose an enormous cost on some firms. Investment incentives are useful only if they are credi- ble and firms believe that they will actually receive what has been promised. Mozambique has appropriate incentives, but it is in danger of developing a reputation, especially among foreign investors, as a country unable to deliver on its promises. As part of the PRSC dialogue on the in- vestment climate, the Bank will bring this issue to prominence. The Government has stated that delayed VAT refunds result from delayed donor disbursements as well as various technical prob- lems. Even so, Bank staff in policy dialogue will urge the Government to undertake to meet rea- sonable standards (e.g. repayment within 30 days) and pay market rates of interest on late repay- ments or, alternatively, to implement a system that allows exporters access to imported raw ma- terials and intermediate goods at international prices, eliminating the need to pay the VAT and then await refunds. In the context of the April 2004 Joint Review, the Government agreed to es- tablish a task force to look into this important issue in 2004.
114. Another issue of importance to many Mozambican businesses is the number of Gov- ernment inspections per annum, which many businesses consider to be excessive. The ICA in- dicates that Government inspections (health, labor, etc.), particularly in the center of the country, now average six in number per annum (with local officials responsible for the higher administra- tive costs incurred), constituting a very high administrative burden on businesses. Labor regula- tions and inspections are an irritant for some firms, and there appears to have been little improve- ment since 1998, when 37% of surveyed firms said that dealing with the Inspectorate of Labor was a problem. The 2002 interviews cited a similar share of the overall sample, with almost 50% of firms with more than 200 workers reported that the Inspectorate of Labor was a problem compared to only 32% of smaller firms. Labor regulations and inspections impose a cost on all firms, but they are particularly burdensome for foreign-owned firms and large firms, further dis- couraging them from increasing their size or formally registering. This issue too will be investi- gated and discussed in the context of the PRSC-supported dialogue on the investment climate. In particular, work will be done to help the Government to review its inspections regime, rationalize it and limit the discretion of government officials to interpret it.
115. Improving the security and transferability of urban land use rights is also expected to be an important objective of the dialogue supported by the PRSC. After independence in 1975, land in Mozambique became the property of the state. Although urban land use rights can be acquired through a legal procedure of plot assignment, the procedures required exceed the
54 competence of municipal authorities and are complex, time-consuming and expensive (in Maputo, 103 steps and a total of about $50 in fees and stamps are required to register an ordinary plot for residential purposes). In general, land assignments are poorly documented and rarely registered; poor records and lack of criteria for assignment allow discretionary behavior and corruption; and plots are sometimes allocated without any overall land use plan, or inconsistently with existing plans. The result is that a large proportion of the urban real estate market involves illegal trade in plots. This lack of an urban land management system that can provide security of tenure, facilitate the transfer of land use rights, avoid duplication of allocations and support enforcement of established rights creates serious obstacles to urban planning, efficient and transparent land use administration, and a well-developed housing finance market. It also discourages local and foreign investment. A new legal framework addressing land regulation needs to be introduced; this should include introducing and/or updating the cadastral systems; reducing the bureaucracy for land assignment and assigning clear responsibilities for planning, assignment and development to central and local levels of administration. While changes in urban land management laws and regulations could facilitate the transition to private leasehold tenure, staff recognize that this is currently unlikely to happen. The Interministerial Commission on Land established to produce proposals for improving urban land use regulations did not consider the possibility of creating freehold tenure and facilitating development of a free market, and it appears that the political will to pursue this route does not currently exist in Mozambique. Nonetheless, work is currently underway within the Government to improve the regulation of urban land use.
Improving infrastructure services:
116. Improving infrastructure services is also critically important to private-sector-led growth. The provision of reliable and affordable cross-cutting infrastructure to businesses is at the core of Mozambique’s growth strategy. The key areas of concern to Mozambique’s businesses are electrical energy and transportation (whether by road, rail, or air). Recent reforms in telecommunications have considerably improved the outlook in that sector, though smaller businesses continue to experience high costs and limited fixed lines imply that internet usage remains very limited. Of these sectors, the PRSC will support policy and institutional reforms in electrical energy and telecommunications, while the transportation sector will continue to receive investment project support.
117. Nearly 64% of ICA-surveyed manufacturers stated that unreliable electricity is a major or severe infrastructure problem for the sector, and the Government is implementing an energy sector reform program to address these problems. Electricity is an important sector for the country, not only for providing domestic enterprises with their energy needs—including energy-intensive industries such as Mozal—but also for potentially lucrative exports into the southern Africa power pool. The key challenges today are to decrease power losses from the grid, increase reliability, and reduce connection and distribution costs. Almost one in four firms own generators (which is less than in the 1998 survey (34%) and also less than in China (30%) and India (69%)) and they generate, on average, about 22% of their own power needs, though the median value (8%) indicates that most firms are able to rely on the power grid most of the time. The ICA survey found that the median firm in the sample suffered power interruptions about five
55 times a month in 2002, and the median loss to production from power outages was 2% of sales. Because most firms are operating well below full capacity, they can delay production to times when power is available, but as capacity utilization increases and manufacturing moves to processes requiring continuous power, unreliable electricity provision will become an increasingly severe constraint. The difficulties faced by the firms sampled stem from the inadequate performance of the state-owned vertically-integrated power company Electricidade de Moçambique (EdM) and the lack of periodic tariff adjustments. At present, only about 220,000 (or 6%) of all households have access to electricity, and the pace of expansion is slow: only 31,000 new customers were added between 1996 and 2000, and less than 50,000 are targeted for the next four years (compared to the 100,000 new households that will be established). Moreover, even where customers have access, supply reliability is very low. EdM’s energy losses exceed 20%; sales per employee are only about 5 MWh per year; the ratio of payroll to operating expenses has increased from 18% to 24%; and the level of receivables has deteriorated from 123 days to 147 days. While some of these problems may be partly attributable to the floods of 2000 and 2001, EdM could do more to improve performance, including better financial management (e.g., better recurrent expenditure control and capital expenditure planning), improved operational management, and more timely tariff adjustments.
118. To improve efficiency in the energy sector, the Government is implementing an energy sector reform program that aims to achieve immediate efficiency improvements, unbundle generation and distribution, restructure all non-essential activities, improve financial viability, and finance expansion of access. The PRSC is benchmarking progress in this sector, which (as the April 2004 Joint Review noted) is not explicitly benchmarked in the PAF matrix. In 2003, the Council of Ministers approved the separation of EdM accounts for generation, transmission and distribution and also issued ToR for a transaction advisor for bringing private participation into EdM distribution business. In 2004, it is expected to initiate the legal operational unbundling of the generation, transmission and distribution functions into separate entities (Genco, Transco and Distco); to retain a capacity-building advisor for Transco; and also to retain the transaction advisor for bringing private participation into Distco. In addition, the Council of Ministers is expected to approve a privatization option for Distco. In 2005, the Government is expected to complete the unbundling and invite bids for private participation in Distco. With TA, advisory and financial support from the Bank’s Energy Reform and Access Project, an independent regulator will also be established, and investments will take place to build a short medium-voltage and low-voltage distribution line to expand the consumer base where the grid- based and isolated-grid transmission systems are already in place.
119. Telecommunications was reported to be the least significant infrastructure problem in firms surveyed in the ICA, though the low uptake of internet services11 and the low availability of any kind of telecommunications service beyond the main urban centers are indications that further reforms in the sector are needed. Costs in the sector remain high (both for connections and for continuing service) and reliability limited. In most industrial areas, there is reliable telephone service, due primarily to the introduction of cellular telephone service in 1998–1999, yet poor communications services continue to be a significant constraint for many small businesses, government agencies, and the general public, especially in the rural areas. To address these problems, the Government is implementing a wide-ranging and ambitious telecommunication reform, which is already helping to improve access as well as the quality of
11 More than 80% of the sample stated that they regularly use cell phones. One in five has a website, but only one in three uses electronic mail.
56 efficient and affordable communication services. These results are being achieved through creating a more competitive environment and introducing private-sector participation in both fixed and mobile telephone operations. Thus far, the reform has led to the establishment of an independent telecommunication and postal services regulator, the Instituto Nacional das Comunicações de Moçambique (INCM). A pro-competition telecommunications law conducive to a multi-operator environment was approved in 2004, and key regulatory decrees on interconnection, licensing and INCM organization have been enacted. In addition, a strategy to divest the state-owned fixed-line operator Telecomunicações de Moçambique (TdM) is being prepared: in this context, the two state-owned phone companies (the fixed-line telecom, TdM, and the mobile phone operator, mCel) are being physically and financially separated, which should improve accountability and help clarify associated costs and possible cross-subsidies. The entry in late 2003 of a second mobile phone operator, Vodacom, is already enhancing competitiveness and bringing rates down while also improving the quality of services. The PRSC is benchmarking the key milestones in these reforms, including in particular the launch of a process to award a third mobile phone license. As noted in the Aide Mémoire of the April 2004 Joint Review, this important sector is not benchmarked in the PAF matrix, though it is stressed in the PARPA.
Promoting growth in the agriculture sector:
120. With over 70% of the population dependent on agriculture, in the next ten years agricultural growth will be key to continued economic growth with poverty reduction. Post- conflict performance has been strong, principally due to the expansion of area under cultivation. Overall agriculture growth has been around 8% per annum. Recent data from the agriculture survey show strong growth since 1996 in the cash crop sector and maize, especially in Tete and Niassa provinces, based on a strong demand-pull from neighboring countries. Crop income contributes substantially to overall household income among the rural poor. Nonetheless, there are variations by provinces, with households in the southern provinces attributing about 50% to off-farm income sources. To improve agriculture performance further, much remains to be done to increase the use of yield-improving inputs; encourage the adoption of improved farming systems and technologies; set agricultural standards and improve key agribusiness supply chains; and facilitate trade through rehabilitating essential rural infrastructure.
121. Government policy in the agriculture sector is primarily to provide an enabling environment for growth in the sector; and the PRSC series will support the further articulation, development and implementation of this policy. In general, the Government’s agriculture strategy is oriented around seven elements: (i) establishing and maintaining policy and institutional frameworks geared toward market-based agricultural development; (ii) improving farmers’ access to input and output markets through investments in rural transportation and communications infrastructure; (iii) improving the effectiveness of agricultural support services through decentralization and outsourcing together with the promotion of farmers’ associations, (iv) establishing a legal and regulatory environment conducive to the development of efficient agricultural markets while at the same time ensuring the rights of smallholders and communities; (v) ensuring sustainability and social equity in the exploitation of natural resources; (vi) maintaining a stable macroeconomic environment and taking measures to institutionalize “good governance” and rationalize public expenditure in public agricultural programs and institutions; and (vii) establishing the policy framework and incentives to encourage the private sector activity in rural/micro-finance. The Government has
57 made substantial progress in providing an enabling environment for implementation of the strategy. In the policy arena, agricultural markets for inputs and outputs have been liberalized and most distortionary policies have been reduced or eliminated, except for tariffs protecting the sugar industry and an export surtax to protect local cashew processing. Extension services (both funds and functions) have been decentralized to the provincial level, and the private sector and NGOs are also providing such services, especially for cash crops and livestock services. The processing of land use requests has also been substantially simplified. In terms of the legal and regulatory environment, significant steps have been taken in several areas such as land and natural resource management regulations. There are still prevailing constraints to rural finance, but these are currently being addressed through several rural finance studies and projects and through new legislation to be passed within the context of overall financial sector reform.
122. To improve the performance of the agriculture sector, the Government is taking steps on a number of fronts. It is formulating a rural development strategy, which will be supported through PROAGRI 2. Within PROAGRI, annual work plans are being designed with specific actions, outputs and outcomes, as well as financing needs, and these will be approved by the Government and the international partners. The Government is also decentralizing the delivery of agriculture services by strengthening provincial governments and district administrations and fostering the role of farmer associations in providing agriculture services. In addition, it is improving public expenditure management by ensuring that all expenditures under MADER are within the budget (recently 50% were off-budget); restructuring research stations to promote partnerships with farmer groups, NGOs and the private sector; and improving tenure security to the smallholder by facilitating the provision of titles. When IDA closes its active sector investment project in June 2005, further support will consist in policy dialogue and analytical work provided to MADER through the Bank’s PRSC missions, with financing provided through the PRSC itself, and therefore through the MPF instead of through a dedicated investment project controlled by MADER; in this way, the multi-year transition in the agriculture sector from discrete IDA investment projects towards full programmatic support will be completed.
123. To help MADER to make this transition, the Bank is helping to strengthen the management information and evaluation systems within the ministry as well as to establish a unified agricultural research institute; these actions are benchmarked in the PRSC2. A key activity of MADER is to conduct the agriculture surveys, which were completed in 1996, 2002, and 2003. The monitoring of many of the current PAF indicators is dependent on these surveys, which in turn depend on sample surveys. MADER’s priorities include establishing an operating management information system (SIG) at the provincial and national levels. Work on operationalizing SIG has started and is expected to be completed by December 2004. At the same time, MADER is proceeding with restructuring its agriculture research system. Slow progress in reforming the research system—a public good—has constrained technological development and adoption within the sector. Nonetheless, informal collaboration involving the public research system, NGOs, farmers associations, universities, processors and input suppliers has been successful in promoting food crops production, and this success has provided an impetus to professionalizing the research system. This restructuring, which is already underway, will involve: (i) establishing Zonal Research Centers in Nampula, Lichinga, Sussundenga and Chokwé; (ii) establishing an Agricultural Research Council composed of major stakeholders, including farmers and NGO representatives, and responsible for policy formulation, broad priority-setting, evaluation and donor coordination; (c) establishing and/or strengthening institutions and programs organized around agro-climatic regions and; (iv) creating a competitive
58 grant system to foster public-private partnership. These planned reforms in the research system have gone through a long process of preparation and important supporting documentation has already been prepared. The Council of Ministers is expected to approve the proposed reforms in 2004 and both the International Service for National Agriculture Research and the Agriculture Brazilian Research Corporation have prepared plans to support that reform.
124. Finally, as a natural-resource based economy, Mozambique needs to ensure that its environmental regulatory framework is appropriate and adequately enforced, so that its natural resource base is not exploited in unsustainable ways. Environmental matters were fully treated in the 2001 PARPA, but they have not received sustained attention in subsequent Government planning documents and the PAF matrix includes no explicit environmental indicators. The April 2004 Joint Review nonetheless found that efforts to ensure the sustainable management of natural resources are bearing results. One in three forestry concessions now has a management plan (compared to one in seven in 2002), though quality and implementation remain a major concern; various regulations (on sustainable development and medical waste management) were prepared or revised; a national solid urban waste strategy was prepared; numerous site-specific urban or land-use plans were prepared; a new Land Planning law is being prepared; and some training and public notification activities were completed. The Joint Review also found that the integration of territorial planning into the PES and at the district level requires further work. Against this background, it was agreed between the Government and the G15 that the Government over 2004 would complete the following actions: (1) MICOA would coordinate annual reports on the integration of environment issues in seven key economic sectors; (ii) a territorial planning law would be adopted; and (iii) territorial planning would be integrated into decentralized economic district planning (for this purpose it was also agreed that the appropriate indicator would be the number of districts per year). It is also expected that the South East African tourism investment program will be prepared over the coming period.
125. In conclusion, under the component focused on improving the investment climate, PRSC1 expects to achieve the following results:
The ToRs and financing will have been arranged for the diagnostic reviews of BIM, BAu, SBM, and BCI/MF to define action plans for transitioning to IAS, and the BIM review will have been initiated; The highest level of import duties will have been reduced from 30% to 25%; A preliminary assessment of the time and cost involved in clearing customs will have been completed to establish baseline indicators; A survey of the time and cost involved in registering a business will have been completed to indicate progress towards achieving international norms (against a 2002 baseline); A tripartite body, including representatives of the Government, the private sector and labor unions, will have discussed proposed revisions to labor market regulations and restrictions on hiring expatriate labor will have been significantly reduced; TdM and mCel will have been made into separate corporate entities; A new (mobile) telecommunications provider will have entered the market; The Council of Ministers will have approved the separation of EdM accounts for generation, transmission and distribution and also approved ToR for restructuring EdM;
59 MADER will initiate work to reform its research institutions and also to establish its strategic and operational monitoring systems in all of its central and provincial institutions.
E. Expanding Service Delivery
126. Investing in human capital—by improving health and education outcomes and curtailing the spread of HIV/AIDS and malaria—are critical to Mozambique’s continued economic and social development. The PARPA identifies four priority areas for service delivery: (i) fighting HIV/AIDS; (ii) expanding basic health care; (iii) expanding education, especially for girls and women; and (iv) improving access to safe water and sanitation services. The PAF matrix includes a number of benchmarks in each of these areas. PRSC1 does not provide direct support to any of these sectors, but PRSC2 will begin to provide support to agriculture and the health sector and PRSC3 to the education sector as well as rural water supply.
Expanding health services:
127. Provision of health services has improved over recent years, with assistance from IDA. When the civil war ended in 1992, Mozambique found itself with a weak health care infrastructure and poor human capital. Provision of health services was urban-biased, as a result of both the colonial system and war-related destruction in the rural areas. The health status of the population was among the worst in the world, with an infant mortality rate (IMR) of 162 per 1,000 and a maternal mortality rate (MMR) of 1,800 per 100,000 live births in 1995. The spread of HIV infection was still limited, but accelerating. Moreover, Government spending on health had reached a low of 1.5% of GDP in 1994, although this was complemented by financing from 15 donors that contributed more than 40% of total public spending on health. At the time, the sector priorities were clearly to: (i) increase health spending; (ii) expand the health network; (iii) strengthen the capacity of doctors and nurses; and (iv) improve donor coordination so as to reduce transaction costs for the Ministry of Health (MoH). In this context, the Bank in 1995 approved the Health Sector Recovery Program (HSRP), which supported the rehabilitation of the health network and helped improve the capacity of providers so as to increase coverage. The project was designed to finance a time-slice of the government’s program, thus laying the basis for development of a SWAp. During program implementation, IMR fell to 126 in 2000 and intra-hospital MMR from 230 in 1993 to 160 in 2002. Between 1993 and 2000, the overall output of the government health system rose by 59% and disparities between the northern region and the rest of the country were somewhat reduced. In 1999, Mozambique benefited from the Enhanced HIPC Initiative and social sectors were the major beneficiaries. In addition, economic growth was strong and this allowed the Government to increase the MoH budget from $16 million in 1995 to $30 million in 2003 (the year in which the Bank also approved the HIV/AIDS project). In 2001, the Government finalized the PARPA, and the Bank and other donors began to consider providing assistance in the form of budget support. Because the health sector is largely financed through the government budget, health is an important component of the PARPA and thus a natural sector to be part of a series of PRSC operations.
128. Despite progress to date, significant challenges remain to improve health outcomes and reach the MDGs. Infant and maternal mortality have improved, but remain high. In addition to diarrhea and acute respiratory infection, malaria remains a major cause of morbidity and mortality. HIV/AIDS prevalence has increased to about 14%, placing Mozambique among
60 the ten most affected countries in the world. The current situation is likely to worsen unless efforts are scaled up and the response is better coordinated. The main sector issues are as follows:
Human resources are limited. Mozambique has one doctor per 44,000 inhabitants, compared to one for 22,000 in Sub-Saharan Africa. Physician salaries are low compared to Lesotho, Botswana, and Zimbabwe, and incentives to work in the provinces are limited. As a result, human resources are very unevenly distributed: fully 60% of higher-qualified staff are concentrated in Maputo City. There is uneven geographic access to health services, with a strong bias in service delivery in favor of the southern provinces. The northern provinces are significantly underserved compared to the rest of the country, thus limiting the potential impact on health outcomes. In addition, services remain very much facilities-based: mobile teams and community health services are underdeveloped. Quality remains poor. While the volume of drugs and materials and their distribution has improved, problems persist. There are inequalities of supply between provinces and the 2003 Expenditure Tracking and Service Delivery Survey (ETSDS) found that 58% of facilities had run out of at least one essential drug during the previous six months.12 There is also unevenness in the quality of diagnosis and treatment, and the supervision of workers remains weak. Irregular application of user charges is a disincentive to seeking care. The user fee system is not consistently applied and enforced, making way for negotiations over the price or improper charging of patients. The ETSDS found that in 2002, although consultations are supposed to be free, 35% of children were required to pay. More analysis of this issue is required, but it is clear that the lack of transparency and uneven application of exemptions may negatively affect the use of services. Budget execution is low. For reasons that are still not fully understood, the health sector is one of the sectors with the lowest budget execution rates (about 70% in 2003). A number of factors appear to contribute: (i) there may be periods of liquidity problems at the central level; (ii) many provinces receive their budgetary transfer late in the year, resulting in low levels of execution; and (iii) delays in the processing of accounts by provinces that have accounting capacity limitations contribute to delays in the replenishment of their accounts by the MoH.
129. Government action aiming to improve health service delivery will focus on strengthening management and supervision and improving the coverage and skill levels of paramedical staff. To help improve efficiency in the use of resources, MISAU is planning to complete a constraint-focused health planning and costing exercise—an action that the PRSC benchmarks—that will help the Ministry to estimate the marginal costs of overcoming bottlenecks in expanding access, providing essential health care inputs, and improving the quality of coverage in three types of health sector services (clinical services, outreach services, 12 The ETSDS aimed to examine and improve accountability in the sector. The survey found that delays in budget execution and weak control systems provided scope for leakages and undue discretion in resource allocation, with a potentially negative impact on the quality and efficiency of service delivery. In particular, the survey found that record-keeping was very poor, so it was impossible to track funds between different levels; that the user charge system is inequitable, lacks transparency, and provides rent-seeking opportunities; that six in ten clinics ran out of at least one essential drug in the previous six months; and that only eight in ten staff were actually on the job at any given time. Expenditure tracking surveys are being undertaken in other sectors and are expected to be repeated in the health sector to monitor trends.
61 and family/community services). This will enable decision-makers to choose between different combinations of these services, which are tailored to different epidemiological problems and have very different cost structures, to increase coverage and improve the epidemiological impact of the overall service provided. On the basis of this and other work, the national health strategy (which is at present more a list of areas of strategic focus than an outcome-oriented strategy for the areas listed) will be revised, and a budgeting and cash flow program which attempts to link inputs with activities, outputs, and outcomes, will be prepared every year indicating quarterly financial needs that will funded by the MPF. Output and outcome performance will be monitored through the quarterly budget reports. Conditionality, including associated benchmarks, for PRSC3 will be identified during the upcoming Joint Reviews (in August/September 2004 and March/April 2005). As a result of this work, it is expected that Mozambique’s health budget would be more strategically designed so as to utilize funds for operations and investment in areas where they would have the strongest impact in achieving better health outcomes. The supply of good-quality cost-effective services would improve together with the demand for them, and the MDG health indicators (as well as the PAF matrix indicators) would improve over time.
Achieving universal primary school completion:
130. The Government is also committed to achieving universal primary school completion, which numerous studies have shown to be a significant factor contributing to high growth rates and substantial reductions in poverty. The ability of individuals to move into more remunerative off-farm employment, adopt riskier and more complex agricultural technology, and make a successful transition to an urban living are all closely linked to literacy and levels of education. An illiterate individual will find it difficult to learn about and adopt new technologies. Thus, to prepare Mozambicans for a better future, the Government is committed to increasing basic education opportunities for children and adults. To this end, the Government has raised total education spending substantially, from 3.9% of GDP to 5.8% between 1997 and 2001 (though Government funding, at 3.1% of GDP, remains below the international benchmark of 3.5% stipulated in the Education for All Fast-Track Initiative or the 4.0% average for sub- Saharan Africa). As a result, significant gains have been made, for example, in raising gross enrolment and reducing repetition rates, but challenges remain. Completion rates have risen, but they are still very low (24% of girls admitted to grade 1 complete grade 5 and only 10% complete grade 7), indicating continuing inefficiency in the system; enrolment in EP2 (higher primary school, grades 6 and 7) is only about 28% of the corresponding age group, severely limiting prospects for reaching the education MDG of universal primary education by 2015; and the pupil-teacher ratio, at 64:1, is far above the international norm of 40:1, indicating an acute shortage of adequately-qualified teachers.
131. The Government has been taking action to expand access and improve quality. To achieve these dual objectives, the Government is revising the education sector strategic program (ESSP2) to ensure expansion of access to education and tackle critical issues related to gender, HIV/AIDS and decentralized (district- and community-based) school construction programs. It is developing a teacher education strategy which will foster a rapid increase in the number of teachers meeting at least minimal qualifications, including revising the teacher and trainer profiles, type of training, deployment and compensation guidelines. It is introducing a new primary school curriculum that is relevant to today’s circumstances as well as a lower-cost community-based school-construction model which will enable the country to build more
62 facilities (3,800 additional classrooms are needed each year until 2015—compared to 2,000 a year being built—to reach the education MDG, and unit costs in Mozambique vary by as much as 400% for similar buildings and on average are substantially higher than in neighboring countries). It is also decentralizing sector management and financing. To this end, in 2003 it initiated a Direct Support to Schools (DSS) program, through which all 8,000 primary schools nationwide receive small cash grants (about $300 per school every six months) that are jointly administered at the local level by the school headmaster, a local official, and an elected representative of the community, thus enabling schools to finance locally-identified needs, from a positive list, on a timely basis.13 This program, which is supported under the PRSC, is expected to enable schools to obtain books and other teaching materials, thus addressing one of the issues that has been a major source of dissatisfaction for those attending school. As noted in the Aide Mémoire of the April 2004 Joint Review, the key Government actions to be completed in the coming 18-24 months include: (i) improving sector planning and performance mechanisms through the definition of the policy and investment framework for the education system; (ii) increasing the completion rate in primary education (EP1 and EP2) through, among other things, introducing the new curriculum and implementing the pre- and in-service teacher education programs; (iii) ensuring that funds allocated to the sector are fully disbursed, in a timely manner, and that efficiency of resource utilization is improved through, among other things, continuing the DSS program and implementing the pilot phase for the low-cost school construction program; and (iv) improving the efficiency and effectiveness of post-primary education through ensuring that interventions in ESSP2 are included and costed.
132. This first PRSC series will not explicitly support education sector reform until PRSC3, but preparatory work will be completed in the meantime. Further work needs to be done to analyze the causes for Mozambique’s high drop-out and low completion rates: the contribution of demand-side factors (poverty, direct costs, and opportunity costs) or supply-side factors (incomplete schools, distance to school, language of instruction, quality of instruction, teacher gender, school calendar and hours of instruction) are unknown. Understanding these causes is critically important, as high drop-out and repetition rates make the system exceedingly inefficient: it takes 18 years of resource inputs, or $613, to graduate one student through grade 7 (compared to 10 years in Zambia, or a planned cost of $232). A PSIA on the impact of school fees, which is believed to be an important cause, will help to close this gap in understanding. Expenditure trends in the sector indicate potential, as well as a need, for reallocation. Recurrent costs in Mozambique are high compared to international standards, especially for the upper primary and secondary levels, and the pay differential between teachers at different education levels is excessive, with upper primary and secondary school teacher salaries well above regional averages: in fact, secondary school teacher salaries are double the regional average as a multiple of GDP per capita, unsustainably high, and a significant impediment to expanding secondary education. Moreover, there appear to be unexploited opportunities for cost recovery in higher education and for more rational use of limited resources at the primary level (e.g. by merging the EP1 and EP2 cycles into a single primary education cycle to permit a substantial rationalization
13 The availability of these resources is publicly advertised (newspaper advertisements indicate how much money went to which schools, and when). The DSS follows the Government’s operational procedures, which are very simple and have been codified. Each school has an account at the district level, in the school’s name, and to move resources signatures are required from three individuals: the school headmaster, the district education officer, and the elected representative of the community (this can be, for example, the chief or the head of the local Parents- Teachers Association). The DSS fits well with the Africa region’s increasing focus on community-driven development as well as the World Development Report on incentives, because if the schools manage the resources well, they get more.
63 of teacher and classroom resources across the two cycles). According to projections made under the Education for All Fast-Track Initiative, achieving universal primary school completion will require sharp efficiency improvements to reduce unit costs as well as a significant increase in external assistance—but even then a financing gap is likely to remain. In line with the targets identified during the April 2004 Joint Review, triggers for PRSC3 will be identified in forthcoming Joint Reviews and are expected to focus on the implementation of ESSP2 as a whole or of national priority programs such as the in-service teacher education program (CRESCER), the DSS, or the pilot program on low-cost school construction.
Improving access to safe water:
133. The Government recognizes the key importance of the water sector towards improving the health status of the nation and reducing poverty. Mozambique is on track to achieve its 2005 target of increasing access to safe water to 45% nationally. In the urban water sector, the Government has been implementing a plan to bring the water supply systems in Mozambique’s five largest cities under private management. In this context, the private urban water supply operator, Aguas de Moçambique (AdM), has increased access by 20% in Beira and 40% in Nampula; in addition 90% of water samples now comply with Government requirements while the tariff has increased steadily from $0.18 in 1995 to $0.40 in 2002, helping the operator to approach financial viability. In the meantime, AdM has also accelerated delegated construction works and visibly improved the conditions of offices, stores, plant and equipment, while the water supply regulator (FIPAG) has substantially improved its financial management systems. Significant progress has also been made in improving water supply in rural areas over the past decade. Between 1992 and 2002, rural water supply coverage increased from about 10% to 25%, and the Government adopted a sound policy and more efficient institutional arrangements which enabled it to leverage public expenditures through greater participation of communities, users and the private sector in ways that will also improve sustainability. In particular, the Rural Water Supply and Sanitation (RWSS) Transition Plan has been piloted successfully in a few provinces and districts, and the policy on tariffs and management models for small piped systems is now being formulated, with pilot implementation in several communities. The challenge now is to nationalize this successful pilot program and build the capacity of relevant institutions to manage the different programs, especially at the provincial level. While lack of funding has been identified as a major impediment to further increases in the supply of water, it is likely that the amount of funding required can be reduced with improved M&E systems and increased private-sector and community involvement.
134. This PRSC series, under PRSC3, will support reforms intended to improve access to and the sustainability of safe water and sanitation services in rural areas. This will be achieved through expanding implementation of the RWSS Transition Plan to additional provinces, adopting and implementing the policy for tariffs and management models for small- piped systems, improving M&E systems, and developing an action plan to facilitate increased involvement of the private sector in rural water supply and sanitation to improve efficiency and bring down both investment and recurrent costs. Sanitation and hygiene promotion will be carried out at the community level in conjunction with improving water supply. In accordance with the findings of the April 2004 Joint Review, priority in 2004 should be given to the implementation of the rural water transition plan, in particular to the supply chains, the privatization of EPARs, the management models for small systems, and experimentation with new technologies, while in 2005 and 2006, the focus should be on continuing to decentralize and
64 deconcentrate rural water supply and sanitation programs as well as building capacities at the provincial level and initiating the privatization of the EPARs. As in other sectors to be supported by the PRSC series, key measures will be identified and benchmarked during subsequent Joint Reviews and drawing on their conclusions. This PRSC series will not support urban water supply and sanitation: on the “utility” model adopted in Mozambique, recurrent expenditures and small works, such as extensions to distribution systems, are intended to be supported by the utilities’ own cash flow and not the Government. Needed larger infrastructure investments, such as a $20 million investment required to expand Maputo’s treatment capacity, will instead continue to be funded by the Bank’s sector investment loans,14 the IFC (if cash flow is robust enough to handle debt service), and perhaps partial risk guarantees.
135. Government actions to expand service delivery will not be supported until PRSC2 (in the case of health care) or PRSC3 (in the case of education and rural water supply); accordingly, PRSC1 does not expect to achieve the results under this component.
F. Reform Measures and Actions Taken Prior to Board
136. The list of prior actions that the Government completed prior to PRSC1 are noted below:
Public Sector Capacity and Accountability · The Government maintained an adequate macroeconomic policy framework. Although the IMF’s previous PRGF arrangement ended in June 2003, Fund staff in early 2003 reached an understanding with the Government on quarterly indicative targets to monitor performance during the remainder of 2003, and these targets were met. · The Government formulated its 2004 budget with agreed allocations to PARPA priority sectors and executed its 2003 budget consistent with agreed allocations; in particular, it spent 64.9% of its 2003 budget (excluding interest payments and expenditures related to the municipal elections in November 2003) on the PARPA priority sectors. · The Government adopted regulations for implementing SISTAFE. · To reduce aid dependency, revenue-raising measures were deployed, including a 60% fuel tariff adjustment and application of a withholding tax on the income of public sector employees. · Three key measures included in the public sector reform program were achieved: (i) the land registration process was reduced to 90 days, once all documentation was prepared; (ii) the process of industrial registration was simplified and expedited; and (iii) visitor visas are now being issued at Mozambique’s borders. · The National Assembly passed a new law on decentralization, the Lei dos Orgãos Locais do Estado. · The National Assembly passed a new anti-corruption law.
Investment climate · The highest level of import duties was reduced from 30% to 25%.
14 National Water Development 1 and National Water Development 2 (see Table 13).
65 137. The credit amount of PRSC2, which is expected to be appraised and negotiated in March-April 2005, will be a function of the outcomes of the following actions, which the Government expects to complete by December 31, 2004:
Public Sector Capacity and Accountability · The Government will maintain an adequate macroeconomic policy framework. · The Government will formulate its 2005 budget with agreed allocations to PARPA priority sectors and execute its 2004 budget consistent with agreed allocations; in particular, it will spend 65% of its 2004 budget (excluding interest payments and expenditures related to the general elections scheduled for December 2004) on the PARPA priority sectors. · The MPF will implement SISTAFE in the ministry and its provincial directorates. · The Council of Ministers will approve a new procurement decree that brings public procurement processes into line with international practice.
Investment climate · The Government will present a new Financial Institutions law to the National Assembly. · Decree 57/03 on hiring foreign labor will be revised to relax some of the rigidities in the labor market. · The Government will present a new Commercial Code to the National Assembly.
Monitoring and Evaluation (M&E)
138. The Government and its external financing partners need to make a major effort to improve the quality of M&E for Mozambique’s overall development program. The informational aims of the PARPA have not yet been met. A 2001 review of the policy process found that the mechanisms of data collection and dissemination within Government are insufficient, and the 2003 PER found that even the sector-wide programs in education, health, roads or agriculture do not automatically provide data linking expenditures, outputs and outcomes. While most sectors produce a lot of data, the key elements for public expenditures and for results-based decision-making are often absent. Specialized efforts are required to obtain basic expenditure data (especially for donor-funded expenditures), data on consigned revenues (receitas próprias)—though as noted above the situation is improving steadily—or breakdowns of spending by level (e.g. hospitals vs. health posts), location (capital, town, rural) or vertical program (e.g. malaria).
139. The secretariat of the Poverty Observatory is the key agency developing an M&E system for implementation of the PARPA, but no real M&E system exists at present. During 2003 the Government initiated a series of Poverty Observatories at which the key documents— including the PARPA and the Annual Progress Report on the PARPA—were discussed with the sectoral ministries and with key stakeholders outside the Government; the most recent meeting took place on May 18, 2004 and was attended by the President, the Prime Minister and several other ministers. Early experience indicates that much work remains to be done to make these observatories results-oriented. The secretariat of the Poverty Observatory is currently undertaking a diagnostic assessment of M&E practices within all ministries and provinces, but it is already clear that M&E focused on the PARPA tends to be ad hoc and unsystematized. Instead, each spending authority that has responsibility for implementing (some) PARPA and
66 PES initiatives employs (as an institutional requirement) a simple and compartmentalized monitoring and reporting system that feeds into the annual PARPA/PES reporting cycle. These systems typically use a traditional input-activities-output format as well as an outdated descriptive reporting style that does not lend itself to meaningful utilization for policy formulation and decision-making. The data collected are not integrated or results-focused and are rarely used to inform strategic program or project planning and management. The only Government attempt to set up a structured and integrated monitoring system is the National Statistics Institute, which focuses almost exclusively on macroeconomic and household surveys; while this survey work is useful and starting to yield good longitudinal performance data, it does not appear to be systematically linked to the PARPA or the PES and little effort appears to be made to undertake evaluative reviews of the monitored data. In fact, the PARPA and PES, though meant to be strategic performance documents, are not well integrated and do not make good use of the data that is being collected in Mozambique.
140. The PARPA and PES contain cross-cutting issues, but these are not clearly integrated across sectors and across spending authorities, even though they are being taken into account individually. There is now growing concern that the PARPA and the PES need to be streamlined if a more cohesive, structured and cost-effective development program is to be implemented. The Poverty Observatory is an important feedback mechanism for PARPA implementation and can serve as a powerful consultative body to orient all key stakeholders towards implementing the PARPA in a more efficient and effective manner, but it is still relatively untried and its own efficacy will depend strongly on the effectiveness of the PARPA M&E system that it creates. The PARPA, including the biennially agreed PAF matrix, provides a good starting point as it identifies the results that the Government hopes to achieve as well as some of the key performance indicators (KPIs). These are supposed to be translated into the annual planning document, the PES, but the PES does not yet provide a clear road-map of the strategies and actions that are needed to achieve PARPA targets in the medium and long term. As a result, overall planning remains somewhat superficial, and (by and large) national problems are being addressed by discrete, poorly linked, non-national programs that, even when successful, produce limited and fragmented pockets of success. For example, there are M&E efforts linked to projects and other initiatives in the ministries of Agriculture, Health, and Education as well as in connection with the Public Sector Reform Program and the decentralization work initiated by UNCDF. But this is both inadequate and inefficient. The PARPA M&E system should take these independent efforts into account and draw on them, but it also needs to integrate them into a single system that focuses on improving results-based management. To this end, there is an urgent need to provide key stakeholders with adequate exposure to modern planning and management tools.
141. The PRSC will help the Government to improve the policy process by using the PARPA to prioritize and expand its leadership and undertake more effective M&E. The Government has already started this process by initiating work on more precisely defining the targets of the PARPA through the PAF matrix and bringing the “priority ministries” closer to the process of pursuing these goals. To support this process, the following will be added:
· An element of public expenditure analysis and review will progressively be integrated into the cycle of financial management, through annualizing the PER exercise. This may entail analyzing a handful of sectors per year, and may incorporate the hiring-in of required skills. In time, such a review would become a constitutive element of the budget
67 cycle, although this is likely to require considerably more capacity than is available at present. The 2001 review of the policy process recommended the creation of a cadre of public policy analysts. In the context of the 2003 PER, MPF has been seeking to create such in-house capacity, but much remains to be done. · The action plan of the 2001 PER should be completed, creating mechanisms for reporting information on donors’ contributions. · Civil service reform is needed, linking compensation to performance, and providing appropriate levels of compensation. The present environment of inadequate compen- sation creates undue incentives at the ministerial and sub-ministerial level for seeking donor-funded projects as these usually provide some benefits to the operating units. This in turn becomes the driver of project selection, in place of an overall perspective that makes portfolio decisions in light of the PARPA’s overall goals and outcomes. At the same time as civil service reform there should be a general tightening up of the conditions for ministerial own receipts; for if there is proper compensation there is no need for extra-budgetary transfers to support hiring and staff retention.
142. An M&E assessment included in the October 2003 CAS indicated that there is substantial Government commitment to monitoring for results as well as reasonable statistical capacity, and the Bank will work with the Government through the PRSC to build adequate M&E systems for the PARPA and the PRSC. Commitment to monitoring PARPA implementation comes from the highest level of Government, including the President, the Prime Minister, and several line ministries. Through the PRSC as well as work on updating the PAF matrix, the Bank will help the Government and its partners to develop an adequate M&E system for each of the indicators linked to the major PARPA outcomes, including the outcomes that are explicitly identified as conditions for the PRSC. In essence, this implies that Bank staff will help: to conceptualize the linkages between the PARPA’s long-term objectives and the medium- term outcomes that are expected to contribute to achieving those objectives; to identify appropriate indicators for those outcomes; to identify an appropriate data source (donor, or survey, or administrative agency) for each indicator and obtain baseline data (or establish a process to obtain a first measurement to serve as a baseline); and also to determine the quality and reliability of the indicator as well as the frequency and costs of data collection and reporting. New measurements against these indicators will then be obtained during future updates of the PARPA matrix; trends and their causes will be analyzed; and recommendations will be made to reorient Government action in light of these findings.
G. Credit Administration
143. The Credit will follow IDA’s simplified disbursement procedures for adjustment operations. Accordingly, Credit proceeds will be disbursed in compliance with the stipulated release conditions. Disbursement will not be linked to any specific purchases and no procure- ment requirements will be needed. Once the Credit is approved by the Board, the Borrower will open and maintain a dedicated deposit account in US Dollars for the Borrower’s use. As the single tranche is released on Credit effectiveness, IDA will disburse the proceeds of the Credit into the deposit account. IDA reserves the right to require an audit of the deposit account.
H. Environmental Assessment and Rating
68 144. The project has been designated to be a Structural Adjustment Credit (SAC); hence no formal environment impact assessment (EIA) is required. Nonetheless, environmental work is planned to take place during the implementation of PRSC1 and before Board presentation of PRSC2, as PRSC2 will include support to the agriculture and health sectors and so is expected to be designated a Sectoral Adjustment Credit. In particular, it is expected that the Government will undertake an EIA with the objective of identifying linkages between key macroeconomic and structural reforms policies and the environment in an effort to mainstream the environmental sustainability dimension into the PRSC process. This analysis will develop a set of measures at both the national and local government levels that can be taken to reduce poverty and enhance environmental sustainability of policy reforms. The underlying premise of the analysis is that environment and poverty are linked in three major ways: (i) poverty reduction programs should not damage the resource base and the environment on which poor people depend for their livelihoods; (ii) improving environmental conditions can help to reduce poverty and promote sustainable pro-poor growth; and (iii) mitigating measures, as needed, should be identified as part of policy dialogue. In working with the Government and other development partners, this analysis should help to identify strategic entry points for mainstreaming key issues of the poverty-environment nexus in Mozambique into the PRSC process and ongoing policy reforms. In this regard, the PRSC2 and PRSC3 reform agenda has specified actions to be implemented by the Government. In addition, environmental work is planned for each of the sectors that will be supported in PRSC2 (agriculture and health) and PRSC3 (education and rural water supply).
VI. BENEFITS AND RISKS
145. This first PRSC series for Mozambique involves a number of benefits and risks. Benefits, risks and risk-mitigation measures are detailed in the following paragraphs.
146. The major benefits of the PRSC relate to the change in the instrument of aid delivery. In the short term, the PRSC series is expected to empower the Government of Mozambique in its relations with the donors, by giving it greater control over externally-funded activities and resources; strengthening the MPF, Council of Ministers and National Assembly as drivers of public resource allocation; and promoting more coordinated donor behavior around the PARPA and the partnership agenda. It will also strengthen the MPF in its relations with other spending authorities in Mozambique. These objectives are fully consistent with recent international agreements on aid modalities. In the medium term, the PRSC series is expected to transform the quality of governance and enhance the Government’s capacity to reduce poverty, by reducing transaction costs, increasing the allocative efficiency of public spending, improving the predictability of external resource flows, increasing the effectiveness of public administration, and strengthening the structures and processes of democratic accountability. It will also help to reorient financial modalities, promote new forms of dialogue situated in national institutional contexts, and refocus TA and capacity-building on mainstream government functions. In the long term, of course, the PRSCs are expected to help reduce poverty.
147. One set of risks concerns the capacity of the Government to implement the measures supported by the PRSC and achieve the gains expected. There may be a gap between the PARPA, which lacks specificity but (or perhaps therefore) has broad commitment, and the PRSC program matrix, which is specific but may have less broad commitment, with the result that measures identified in the PRSC matrix do not have adequate ownership and are not completed.
69 This risk is being mitigated through the national institutional process being built around the PAF matrix, which is seen as updating and operationalizing the PARPA while also attracting broad commitment; PRSC prior actions and triggers are explicitly a subset of the actions included in the PAF matrix. There is a risk that the MPF will not be able to adhere strictly to the financial calendar for releasing budgetary allocations to spending agencies—discipline that is needed to make the PRSC work; this risk will be mitigated by helping the Government to strengthen the MTFF and maintain a sound financial calendar from the beginning. Another risk involves weaknesses in public financial management, or rivalry between the MPF and one or more sectoral ministries, which may result in stakeholder pressure (notionally or really) to earmark budget support for specific sectors and/or activities, with the result that the MPF and the Government will be effectively disempowered. This risk is being mitigated through an upfront focus on improving the fiduciary framework, including mechanisms used to control the flow of funds. Finally, there is a short-term risk that transaction costs will increase, with the result that some Government stakeholders may wish to abandon this approach before a long-term downward trend has time to establish itself. This risk is being mitigated by discussing expectations with all stakeholders and ensuring realism to the greatest extent possible.
148. Another set of risks concerns the ability of Mozambique’s financing partners, including the Bank, to stay with the PRSC/budget support process long enough to realize its potential. Gains in allocative efficiency, whether in principle or in practice, may be difficult to demonstrate. Liquidity constraints—partly due to donors’ unpredictable disbursements—may hamper the timely allocation of treasury resources. The Bank and other donors are mitigating this risk through institutionalizing processes to make budget support more predictable, and will monitor budget process gains as a reasonable proxy for improving allocative efficiency. There is also a risk that greater predictability in external resource flows will not materialize, as donors make different assessments of the situation on the ground, experience constraints on their ability to make financial commitments, harbor different expectations about what greater predictability implies, and take different approaches to using the leverage which higher levels of general budget support make possible (some donors have indicated reluctance to cede this leverage). This risk is being mitigated through an open and extensive discussion of donor aid modalities, with a view to understanding each donor’s systems, expectations, and scope for movement and confirming them in an agreed MoU. There is also a risk that donors (including at times the Bank) will want to introduce externally-generated conditionality into the PRSC and PAF processes: in particular several (bilateral) donors appear increasingly inclined to introduce political conditionality into their thinking and actions. This may cause tension between the donors and the Government and, in the extreme case, an unwillingness (on one side or the other) to proceed with increased levels of programmatic lending. This risk is being mitigated by helping all donors representatives to recognize that increasing budget support implies support for an agenda that they cannot fully specify and by helping the Government to recognize that the donors supporting such an agenda have a reasonable expectation to consultation and influence.
149. Finally, there are some external risks that may impact the Government’s ability to implement the reform program that the PRSC supports. National elections will take place in late 2004. Uncertainty over their outcome could lead the Government to lose focus and fail to implement needed reforms; contention about the reported results may also lead to a period of instability, possibly marred by violence. Whatever party wins, the new Government will also need time to learn to govern, and there is always the risk that it will initiate an inappropriate shift in policy direction. The Government’s commitment to free and fair elections (achieved in all
70 previous elections) as well as its efforts to engage society in articulating a national vision through the Agenda 2025 exercise and monitoring PARPA implementation through the Poverty Observatory will help to mitigate some of these risks. In addition, the Bank will try to mitigate them by actively engaging the key political parties prior to elections on the main development challenges facing Mozambique and by preparing a CEM in FY06 on the challenge of sustainable broad-based growth. Another set of risks involves external factors such as an extended global slowdown, commodity price fluctuations, international agricultural trade barriers, regional political and economic developments (particularly in South Africa and Zimbabwe), and exchange rate and foreign capital flow fluctuations, which could each impede growth and make it difficult for the Government to remain engaged in reform. To help mitigate these risks, the Bank will work closely with the Fund and like-minded donors to help the Government to maintain macroeconomic stability; it will also address some of the larger geopolitical issues throughout its policy dialogue at senior levels within the institution.
VII. CONCLUSION
150. Mozambique is a poor country which has real potential for growth as well as a Government that has demonstrated commitment to poverty reduction, manifested by a sound reform program and its recent PARPA Progress Report. Recent household survey data indicate that the country’s potential, coupled with its commitment and programs, are yielding encouraging results. Yet there are many challenges that need to be fully and adequately confronted if Mozambique’s full potential is to be realized. Selecting the right development constraints to address at the right time, in an environment of significant commitment but limited capacity, has been an important contributor to the success of the Government and of the World Bank Group in Mozambique. This PRSC aims to help the Government to focus its development efforts on the matters which are country priorities right now. Building public-sector capacity and accountability, improving the investment climate, and expanding service delivery are all part of the long-term development agenda in Mozambique and over time they are likely to help bring growing prosperity to all of its citizens, including especially the poor.
71 ANNEX 1: PROGRAM MATRIX Prior actions for PRSC1 and triggers fro PRSC2 are indicated in bold type; other measures are benchmarks. Issue PRSC1 PRSC2 PRSC3 OUTCOME COMPONENT 1: BUILDING PUBLIC SECTOR CAPACITY AND ACCOUNTABILITY Sub-component 1A: Maintaining a Sound Macroeconomic Policy Framework Macroeconomic GoM maintained an GoM will maintain GoM will maintain an framework: adequate an adequate adequate macroeconomic macroeconomic macroeconomic policy framework policy framework policy framework Sub-component 1B: Improving Public Financial Management Budget formulation, execution, reporting: Budgetary allocations GoM formulated 2004 GoM will formulate GoM will formulate Direct poverty- and actual poverty budget with agreed 2005 budget with 2006 budget with reducing expenditures spending not yet allocations to PARPA agreed allocations to agreed allocations to as a share of actual consistent with priority sectors PARPA priority PARPA priority expenditures remains PARPA priorities sectors. sectors at or near 65%
GoM executed 2003 GoM will execute GoM will execute budget consistent 2004 budget 2005 budget with agreed consistent with agreed consistent with agreed allocations; in allocations; in allocations; in particular, it spent particular, it will particular, it will 64.9% of its 2003 spend 65% of its 2004 spend 65% of its 2005 budget (excl. interest, budget (excl. interest, budget (excl. interest) elections) on PARPA elections) on PARPA on PARPA priority priority sectors priority sectors sectors
Budget not complete Donor-funded Tax incentives and Public sector fiscal Improved budget and public sector expenditures, contingent liabilities data (central coverage and fiscal data not receitas próprias will be included in government budget, transparency consolidated included in budget budget municipalities, state and actual receipts in enterprises) will be budget execution consolidated reports GoM human and SISTAFE will be SISTAFE will be GoM better able to institutional capacity SISTAFE implemented in MPF implemented in manage public for public financial regulations adopted; (incl. provincial ministries covering expenditures management limited, conta única de directorates) and 60% of the budget, and the fiduciary tesouro fisica MINED, with and possibly payroll environment established and functional and asset management classified as high risk government cheques classifications (títulos) abolished Accounting and Double-entry State accounts for Improved internal auditing functions Budgetary allocation accounting will be 2004 will be audited control and auditing; poorly executed for Administrative initiated; internal within 12 months of improved Tribunal (TA) audit department their closure Parliamentary increased by 10% (IGF) will receive oversight of over 2001 own budget line, hire expenditure process additional staff; TA will be enabled to set own salary scale Aid dependency: Ministerial decree and Bill to create CRA CRA will be created Higher revenues, GoM has MPF action plan for submitted to NA; enabling fiscal unsustainably high aid the creation of a National Directorate adjustment and lower dependency, and a Central Revenue of Taxes will be aid dependency over gradual fiscal Authority (CRA) strengthened to time adjustment (founded approved prepare for merger partly on higher with Customs in new domestic revenues) is CRA needed
72 ANNEX 1: PROGRAM MATRIX Prior actions for PRSC1 and triggers fro PRSC2 are indicated in bold type; other measures are benchmarks. Issue PRSC1 PRSC2 PRSC3 OUTCOME Revenue-raising Indirect taxation measures deployed, system will be incl. automatic fuel consolidated; tariff adjustments municipal tax system and withholding tax will be created; on GoM employee documento único for incomes collection of all taxes will be introduced
Tax revenues 14.1% Tax revenues 14.6% Tax revenues 15.0% M&E: Lack of attention to GoM completed Second national PSIA on health fees Stronger M&E and coordination in second national household survey will will be completed; capability in GoM M&E, particularly household survey be reported, including first Governance focused on planning regarding how trend data drawn from assessment will be and budgeting for poverty responds to first survey completed service delivery GoM action PSIA on education fees will be completed
GoM has agreed MTFF, PES and QBERs published on updated and PARPA will be internet; BdPES prioritized PAF harmonized, and the harmonized with matrix of actions and MPF’s annual report QBERs, with indicators with donors on PES implement- differences explained; ation (BdPES) will MTFF made a public report on PARPA document implementation
Sub-component 1C: Improving Governance Procurement: Weak legal MPF/GoM completed Council of Ministers New procurement Clear, transparent framework for and review of CPAR and will approve new practices will be procurement practices poor enforcement of agreed with findings, procurement decree integrated into introduced, leading to procurement rules and including the key in line with SISTAFE; new few procurement regulations recommendations of international Central Policy problems and draft Action Plan practice, after Directorate will be therefore lower consultations with established; oversight procurement costs main stakeholders; role of Tribunal national standard Administrativo bidding documents reviewed and will be drafted; streamlined capacity-building programs in procurement will be undertaken for staff in key ministries Public sector reform: GoM structures and MISAU, MINED, MISAU, MINED, MISAU, MINED, Line ministry capacity processes inefficient; MADER, MAE and MADER, MAE and MADER, MAE, MIC in planning, budgeting limited incentive for MIC completed MIC will have restructuring plans and financial civil servants to functional analyses prepared restructuring will be implemented management perform their duties plans. MPF and and restructuring strengthened, so GoM MINT will have plans for MPF and actions responsive to completed functional MINT will be needs of citizens and analyses prepared businesses
Salary structure not competitive and Council of Ministers First phase of salary inconsistent with will have approved reform implemented
73 ANNEX 1: PROGRAM MATRIX Prior actions for PRSC1 and triggers fro PRSC2 are indicated in bold type; other measures are benchmarks. Issue PRSC1 PRSC2 PRSC3 OUTCOME sustainable capacity salary reform building and performance
Three key public Three key public sector reform sector reform measures achieved measures will have (land registration in been achieved (public 90 days; industrial sector recruitment registration simplified; pension expedited; visas payments process issued at borders) improved; hospital administration simplified) Decentralization: Limited participation National Assembly National Assembly Decentralization law Local authority of local authorities in approved law on will have approved will be implemented capacity in planning, project planning and decentralization (Lei regulations to budgeting, financial management; and dos Orgãos Locais implement law management built to hence limited do Estado) manage decentralized accountability infrastructure service 21 districts have 37 districts will have 53 districts will have delivery; 8 participatory planning participatory planning participatory planning municipalities and up processes processes processes to 49 districts “learning by doing” by 2007 Anti-corruption: Corrupt acts not National Assembly Anti-corruption National Assembly Higher GoM capacity effectively exposed or approved anti- prosecutorial unit will will approve anti- to identify corruption sanctioned corruption law; first be staffed and corruption action plan issues and develop anti-corruption survey budgeted; action plan and implementation plans to address them initiated with updated in light of will begin; second more aggressively reputable consulting findings of anti- survey will be firm corruption survey; initiated governance and anti- corruption survey completed and baseline indicators established Legal reform: Key legal codes Commercial Code National Assembly Implemention of new Legal framework for outdated, impeding revised will approve new Commercial Code business strengthened business; Commercial Code; will begin limited human and Penal, Civil institutional capacity Procedure, and Civil in legal sector; Registry and Notary commercial dispute Codes will be revised resolution exceedingly slow Integrated strategic Planning, budgeting Dedicated judicial Time required for plan for legal sector and monitoring sections will be judicial resolution of reform completed system will be created for business disputed introduced to give commercial dispute reduced (currently priority to delivery of resolution in Nampula 540 days pass judicial services; between filing suit dedicated judicial and enforcing sections for judgment) commercial dispute resolution will be established in Maputo and Sofala
74 ANNEX 1: PROGRAM MATRIX Prior actions for PRSC1 and triggers fro PRSC2 are indicated in bold type; other measures are benchmarks. Issue PRSC1 PRSC2 PRSC3 OUTCOME
COMPONENT 2: IMPROVING THE INVESTMENT CLIMATE Sub-component 2A: Strengthening the Financial Sector Banking sector: Banks not yet New Financial National Assembly More effective compliant with IAS; Institutions Law, will approve new supervision of banking supervision which strengthens Financial banking and non- weak; high interest independence of Institutions law; banking financial rate spreads (19%), Banco de remedial powers of institutions; more which (in a 193 firm Moçambique (BM), BM strengthened efficient and sample) force self- submitted to profitable banks, financing for 90% of Parliament leading over time to working capital and lower credit costs; 60% of investment ToRs and financing Diagnostic reviews of All commercial banks complete GoM arranged for all banks will be will be brought into divestiture from diagnostic reviews of completed; action compliance with IAS banking sector, BIM, BAu, SBM, and plans will be prepared reducing moral hazard BCI/BF to define IAS to bring each bank transition plans, and into compliance with BIM review initiated IAS
GoM will divest of GoM interest in BIM shares held in trust for will be brought to BAu employees point of sale Insurance sector: Insurers not compliant Action plan for Insurance industry Modernized insurance with IAS making insurers IAS will be brought into industry compliant will be compliance with IAS implemented Sub-component 2B: Improving the Regulatory Environment Trade: Trade barriers are Highest level of Highest level of Mozambican firms detrimental to import duties import duties reduced maintain a lower level competitiveness, and reduced from 30% from 25% to 20% of inventory; and need to be lowered to 25% more Mozambican further, in line with enterprises entering SADC agreements Assessment of time Assessment of Average number of contracts, which and cost to clear constraints to days for clearing require meeting strict customs completed to improving customs exports will be delivery deadline establish baseline clearance time will be decreased to 7 days or indicators completed and action less; number of days plan will be adopted required for clearing to remove these imports at Ressano constraints Garcia will be decreased to 5 days or less Regulatory framework: Survey of time and Cost and time Cost and time Lower business costs Cost and time cost to start up a required to register a required to register a and inventories, required to register a business completed to business will be business will be resulting in higher business much higher establish baseline lowered from 97% to lowered from 65% to levels of economic than global average, indicators 65% GNI per capita 45% of GNI per activity; and investors discouraging formal or less and from 153 capita and from 105 to with less cash-flow business to 105 days or less 60 days or less strain
GoM payment of GoM payment of GoM payment of VAT refunds slow VAT refunds will be VAT refunds will be reduced to no longer reduced to 30 days than 60 days
75 ANNEX 1: PROGRAM MATRIX Prior actions for PRSC1 and triggers fro PRSC2 are indicated in bold type; other measures are benchmarks. Issue PRSC1 PRSC2 PRSC3 OUTCOME
Labor market is A tripartite body, Decree 57/03 on New draft labor law, An efficient and inefficient, and including the hiring foreign labor revising hiring of flexible labor law, inflexible; obligations representatives of the will be revised to expatriates, allowing Mozambican to workers hiring Government, private ease restrictions on simplifying short-term businesses to impede business sector and labor firms hiring hiring, and reducing restructure, increase restructuring, stop unions, is established expatriate employees time and cost hiring, and profit from knowledge transfer to discuss labor associated with knowledge transfers, from foreign experts market legislation retrenching excess thereby becoming revisions labor will be more competitive submitted to National Assembly
Decree will be issued to regularize property rights in urban areas and enhance transfer- ability Sub-component 2C: Improving Infrastructure Services Communications: Communication costs TdM and mCel are National Assembly Announcement of the Lower telecoms costs, are high; access to made separate will approve new offer for sale of TdM higher access, services is limited, corporate entities; a telecoms legislation, will be published; including for particularly in rural new implemented through process to award a businesses, and areas; and quality of telecommunications issuing subsidiary third mobile phone improved quality; communications provider entered legislation on inter- license will be teledensity raised to services is low market connection, licensing, launched 4% overall and 0.5% competition, universal in rural areas services, radio- communications, and tariffs; INCM, INAC boards will be operational Electricity: Costs are high, access Council of Ministers Legal operational Unbundling will be Electricity more is limited, and approves separation of unbundling of Genco, completed; bids will reliable (grid losses reliability is low EdM accounts for Transco, and Distco be invited for private <15%; grid extended generation, will be initiated; participation in EdM to 30,000 households, transmission and Council of Ministers distribution 300 clinics, schools; distribution; ToR for will approve option connection costs transaction advisor for for private <$900; losses of private participation participation in production time due in EdM distribution Distco; EdM Transco to power outages less issued capacity building than 2%) advisor will be retained Environmental regulations: Framework and 12 communities have 20 communities will 35 communities will More efficient and enforcement are both adopted natural have adopted natural have adopted natural sustainable land weak resource management resource management resource management management; env. for plan plan; SEATIP will be plan private-sector-led established tourism improved
Sub-component 2D: Expanding Agricultural Productivity Agriculture: Low productivity and MADER will Farmers use new poor crop quality, as establish its strategic technologies to smallholders do not and operational increase productivity;
76 ANNEX 1: PROGRAM MATRIX Prior actions for PRSC1 and triggers fro PRSC2 are indicated in bold type; other measures are benchmarks. Issue PRSC1 PRSC2 PRSC3 OUTCOME use yield-enhancing monitoring system in average yield of inputs or technologies all its provincial and maize raised from 0.9 central institutions to 1.0mt/ha, and rice from 1.1 to 1.2mt/ha Council of Ministers between 2002-03 and will pass a decree 2006-07; more establishing the efficient land use, Unified National with incentives to Agriculture Institute improve land
77 COMPONENT 3: EXPANDING SERVICE DELIVERY Health care: Limited supply of MISAU will conduct Improved sector health services; poorly constraint-focused management and trained staff, poor health planning and better outcomes; staff incentives and costing exercise; intrahospital MMR little deployment to priority health reduced to 0.15 by rural areas; poor services package will 2006; BCG coverage management and be defined 98%; DPT, hepatitis supervision of health and polio coverage services 95% Education: Slow progress Direct Support to Direct Support to Direct Support to More efficient and building Schools program will Schools program will Schools program will higher quality implementation continue continue continue education system; capacity for education gross EP1 admission services; failure to New curricula will be rate reaches 128% by adopt community introduced nationally 2005; EP1 completion school construction in grades 2, 4, and 7 rate reaches 47% by model, scale-up 2005 (from 40% in teacher training, and In-service training 2003); girls constitute decentralize resps; will cover 60% of 46% of all EP donor failure to shift EP1/2 teachers students by 2005 aid to program support Rural water supply: Lack of funding for 1,300 additional rural Sustainable increases water supply; capacity water points will be in rural access to safe constraints, esp. in completed water and sanitation provinces; failure to services adopt management 43% of population models needed for with access to safe ongoing water supply water; 37% to maintenance adequate sanitation
78 Annex 2 Reduced PAF Matrix of Priority Actions and Indicators (as of April 7, 2004)
Area Sub-area Objective Action Indicator Target 2004 2005 2006 Education Primary Universal education: Implement 2004-08 EP1 net enrolment rate (total, %) 72 76 80 education increase access, re- Strategic Plan EP1 net enrolment rate (girls, %) 69 74 78 tention; raise quality; EP1 completion rate (total, %) 43 48 58 lower gender disparity EP1 completion rate (girls, %) 36 41 52 Health Mother Maternal mortality Increase offer of obstetric Proportion of institutional 47 49 51 and child reduced care deliveries among expected births Infant mortality Increase coverage of ex- Coverage r>1 year DPT3 and 95 95 95 reduced tended vaccination program HepB (3-23 months, %) Expand access to Expand access to quality Utilization rate (consultations per 0.91 0.93 0.94 basic services treatment for diseases inhabitant per year) HIV/AIDS CNCS Infection and mortality Start implementation of HIV/AIDS prevalence rate in 14.9 15.6 16.1 rates reduced PNCS2 adults (%) Reduce vertical transmission HIV+ pregnant women, neonates 8,000 15,000 20,000 receiving PMTCT prophylaxis Increase antiretroviral use PLWHA on antiretrovirals 4,000 10,000 29,000 Infra- Roads Improve national Rehab. national network; Road rehabilitation (km) 813 1,160 705 structure network improve procurement, Periodic road maintenance (km) 1,392 2,062 2,001 execution of works, services Routine road maintenance (km) 13,578 14,343 15,247 Water Increase access Open well, make new Population with access to 41 43.4 45.8 connections potable water (%) Sanitation Increase access Improved latrines, septic Population with access to 35 37 39 tanks sanitation services (%) Agricul- Agriculture Promotion of Increase coverage of Farms assisted by the rural 20 21 22 ture and services agricultural agricultural outreach outreach services, animal farm- rural production services ing during previous 12 months develop- Facilitate access to funding Micro-credit clients 80,000 90,000 100,000 ment Stimulate market Crop production marketed for 54.5 57 59.5 mechanisms selected crops (%) Manage- Access to land Simplify mechanisms for Processes authorized within 90 2,500 3,000 3,200 ment of obtaining land tenure rights days (%) natural Promotion of Promote sustainable use of Small and medium farms using 11.5 12 12.5 resources sustainable irrigation techniques irrigation techniques (%) exploration Stimulate sustainable Concessions approved with 22 30 40 commercial management of application plans (%) natural resources
79 Area Sub-area Objective Action Indicator Target 2004 2005 2006 Education Universal primary Implement 2004-08 Implement CRESCER, ADE and Evaluate Evaluate Evaluate education: increase Strategic Plan: implement pilot low-cost construction impl. impl. impl. access and retention; low-cost classroom program improve quality construction, teacher Strategic Plan approved, Approve Impl and Evaluate training implemented, evaluated evaluate Ad hoc legal reforms [Improve the Publish Decree 57/03 in 2004 and amend Labor Law and Decree Law regulatory framework submit to National Assembly (NA) in 2005 for investors] Submit revised commercial code to NA X Approve regulations on licensing commercial, industrial activities X Approve inspection regulations for comm., industrial activities X Macro- Financial Strengthen account- Conduct forensic audit of BAu commissioned through PGR Initiate Finalize economic system ability in banking Implement IAS in financial sector (including tax harmonization) Strategy Impl. Impl. and sector Strengthen institutional capacity of central bank and other Law to Regula- Impl. financial regulatory authorities by submitting Financial Institutions NA tions policies Improve financial law to NA and preparing regulations intermediation, incl. Initiate divestiture of GoM shares in BAu in 2004; implement BAu BIM, Impl. for micro, small and strategies for (i) divesting GoM shares in BIM and (ii) GoM public medium enterprises shares in public enterprises in 2005 and beyond entities and unbanked Reform insurance sector by preparing chart of accounts in 2004 households and revising pension fund law in 2005 Reform Upgrade efficiency Spending in PARPA priority sectors at least 65% of total 65% 65% PARPA2 state and effectiveness of spending, excl. interest; of the 65%, at least half in ed., health indication financial management of state Implement budgeting through programs, starting in five sectors, Choose Prepare Execute 5 admini- funds incl. ed., health sectors budget sectors stration Implement SISTAFE DPPFs, 60% of 100% of system MPF, budget in budget in MINED SISTAFE SISTAFE Tax Simpler, broader, Create central revenue authority (CRA) by 2006 Law to Law Establish reform fairer tax system NA approved CRA Increase budget revenue collection (% of GDP) 14.7 15.0 15.3 Procure- Create transparent Approve new procurement decree based on internationally X ment efficient system recognized principles regarding regulation of contracts for public works, commodities, services and concessions Audit Improve coverage Review functions of internal and external audit institutions Review Start impl. and function of inter- nal and external audit
Note: Bolded actions constitute triggers for PRSC2.
80 Area Sub-area Objective Action Indicator Target 2004 2005 2006 Planning Harmonize medium Ensure integration among PES, PARPA and MTFF X and -and long-term Adopt the BdPES as the primary instrument for PARPA X X X monitoring instruments monitoring Deconcentration/ Deconcentration Gover- Public decentralization Introduce district planning (number of districts) 37 53 67 nance, sector Approve regulations for Law of Local State Organs and impl. Impl. Impl. Impl. legality, reform Decentralization justice Prepare policy and strategy for decentralization Prepare Approve Agree restructuring plans and start implementation for MINED, Agree Impl. MISAU, MADER, MAE, MIC and MPF plans Rationalize structures GoM approves medium-term pay policy and initiates impl. Approve Impl. Combat corruption Pass anti-corruption bill into law Pass Undertake study of governance, corruption and provision of Under- Approve Impl. services, and develop, implement anti-corruption strategy take study strategy Survey corruption in justice Survey completed and results Complete Publish system and implement published recommendations Follow-up study X Anti-corruption action plan approved and implemented X Increased GoM resources (esp. staffing) for anti-corruption units X X X Justice Improve efficiency in Increase number of judicial Increase percentage submitted 20 20 20 sector provision of services sentences by the judiciary reform in justice sector Reduce number of prisoners Maximum percentage of prison 65 57 50 awaiting accusation, trial population awaiting trial Simplify, accelerate Present longterm reform pro- Submit plan to Council of X processing of judicial gram incl. system of planning, Ministers cases and legal budgeting and monitoring that legislation prioritizes service delivery Review legislation, incl. civil Submit revised legislation to X procedures code; law of NA judicial organization (incl. legal basis for introducing commer- cial sections); penal code; penal procedure; notary and civil registration; prison legislation
81 Annex 3 Public Financial Management
1. Over the past few years, the Bank has worked with the Government and other donors to complete an extensive review of Mozambique’s public financial management accountability arrangements, covering its public expenditure, procurement and financial management systems. A Country Financial Accountability Assessment (CFAA) was completed in December 2001; a Country Procurement Assessment Report (CPAR) in late 2003; and Public Expenditure Reviews in December 2001 and September 2003. The results of this work, and the status of the action plans derived from them, is detailed in this Annex.
2. Public Expenditure Review of December 2001: The 2001 PER found serious deficiencies in the fiscal management system, particularly in public accounting, cash management and auditing. In particular, public accounting covered only a quarter of Government spending, ignoring both ministerial own receipts (receitas próprias) and donor-funded expenditures; cash management was inefficient and lacking in transparency because there were large numbers of Government accounts which were not being tracked; and internal auditing was ineffectual due to a lack of capacity and funding. The Government moved boldly to modernize the system in 2001 by passing a new law, the Lei da Administração Financeira do Estado, which in principle modernizes the entire fiscal management system. This step was taken to correct a set of difficult legacies from the past: single-entry accounting; a multiplicity of government accounts rendering cash management extremely difficult; and limited budget coverage in that receitas próprias (ministerial own receipts) were tolerated and donor-funded expenditures not recorded. The key reform of the new law was to provide for an integrated financial management information system, entitled the Sistema Integrado de Administração Financeira do Estado (SISTAFE). In order to prepare the way for the SISTAFE, a three-phase program of actions was agreed upon with the authorities: “pressing actions” (reproduced in Table 1 below) to be done during the course of the preparatory work of the PEMR, “priority actions” (Table 2) to be done during 2002, and medium term actions for the period 2003-2005 (Table 3).
3. Most of the short term “pressing actions” have been executed (Table 1). A new, more detailed functional classifier was introduced into the budget, consistent with United Nations (U.N.) guidelines, with a view to tracking poverty-related expenditures more accurately, but its implementation has been incomplete, as only the broad categories were used. The detailed classifier, which will permit tracking of poverty-related expenditures, will be implemented with the introduction of SISTAFE in 2004. The budget, which had previously been done in real terms, owing to the high rates of inflation of the early 1990s, is now being done in nominal terms. The regulations of the new financial management law were completed, and restrictions were introduced on banks accounts held by public institutions (such accounts have to be authorized by the Direcção Nacional do Tesouro (DNT) as a co-holder and they have to be closed three months after the budget year to which they applied).
4. Progress with the “priority actions” for 2002 was good but is incomplete. As Table 2 shows, a significant share of receitas próprias (off-budget revenues, or
82 “consigned revenues” as they are now identified by the budget) were included in the 2003 Government budget. The 2003 budget forecasts a collection of consigned revenues on the amount of Mt 106 billion—equivalent to about $4.4 million. The 2003 first semester budget report states that collections of these revenues amounted to about Mt 86.7 billion. Moreover, and as a result of work done by the MPF, an additional Mt 4.3 billion were also collected but were not included in the first semester budget report. The total amount of consigned revenues raised in the period January-June 2003 add up to Mt 91 billion, or the equivalent of $3.8 million. It is likely that the total amount of these revenues to be registered along 2003 will exceed $7 million (studies done in the past had estimated that these revenues could potentially generate about $7.5 million per year). These revenues are expected to grow as the Government implements reforms such as the introduction of SISTAFE and the revision of the planning and budget systems. Eleven items in health and public works, as well as the education, agriculture and other ministries, are still excluded15.
Table 1: Summary of Pressing Actions Area Recommendations Timing Status Budget formulation Submit 2002 budget using new budget functional End-2001 Partly done classification. Formulate the budget in current prices, starting with Done the 2002 budget. Legal framework Draft implementation regulations of new Public March Done Finance Management Law (PFML). 2002 Cash and asset Instructions on bank accounts of public institutions End-2001 Done management authorized by DNT, DNT a co-holder, closed by DNT on March 31 of next year Public accounting 2002 budget execution consistent with the new budget 2001 Partly done functional classification.
5. Budget execution reporting has improved, but most donor-funded expenditures are still excluded. The quarterly budget execution reports now present all actual expenditures using the new budget functional classification, but only in broad categories; the detailed classifier has not yet been implemented, and the revised appropriation of November 2002 was not reported in the budget execution report of the first quarter of 2003. A major step forward was made in the budget execution report of the first half of 2002, when for the first time tables were presented reporting donor-funded expenditures on the investment account. Yet as of late 2002 the reported executed expenditures were only 8% of the budget plan.
15 Some progress was made in that the receitas consignadas in the Budget increased from Mt 48.3 billion in 2001 to Mt 67.6 billion in 2003 (in real 1998 Mt), viz. an increase of 40%. This amount ($6 million) would be increased by another $3 million by adding in the identified receitas próprias in the Ministries of Health and Public Works. Of a list of 11 receitas próprias in these ministries, turned up by a Government-sponsored study, none had been included in the 2003 budget. They are: (i) HCM Serviço de clínica especial; (ii) HCM Serviço de atendimento especial; (iii) Direcção Nacional da Saúde: Venda de medicamentos pelo Serviço Nacional de Saúde; (iv) Centro Regional de Desenvolvimento Sanitário: Alojamento e habitação pagos pelos estudantes; (v) Produção de material didáctico; (vi) Comissão Central de Avaliação e Alienação de Imóveis de habitação do estado; (vii) Laboratório de Engenharia de Maputo: Venda de ensaios laboratoriais; (viii)Fundo de Fomento de Habitação (FFH): Percentagem na venda de imóveis do Estado; (ix) FFH: Juros; (x) FFH: Venda de casas construídas com crédito; and (xi) ARA-Sul Laboratório de Engenharia de Moçambique: Venda de águas brutas. The other ministries are believed to account for another $3 million.
83 6. Double-entry accounting needs to be introduced. The so-called “complementary period” after the end of the fiscal year, during which payments may be made for commitments during the financial year, was reduced from three months to two. Some training in double-entry accounting was done, but double-entry has not yet been introduced throughout the system. The proposed shift from the duodécimo system of replenishment to modified accrual accounting is probably too ambitious for the time being. Until such time as the SISTAFE system is implemented, it would be more prudent to improve the replenishment system, through appropriate training, and make it more flexible. A modified cash basis of accounting will be applied with the implementation of SISTAFE through the introduction of a budget credit system against which commitments will be registered and accounted for when a transaction is incurred. The release of credits will serve as virtual cash allocations and will determine and control the ceiling of spending per budget line item. In the meantime, while the SISTAFE system is being implemented, the replenishment (“duodécimo”) system needs to be made more flexible and training should be given to enable the lowest level units to operate within it efficiently.
7. Much remains to be done in cash management. The multiplicity of Government accounts with the central bank and the commercial banks needs to be inventoried. Although “globalizing accounts” have been created with a view to moving to a single interlinked account arrangement, this has little meaning until such time as all the accounts are interlinked and the MPF is able to read off in real time the amount of cash held.
8. Much remains to be done in internal control and auditing. The internal audit department (IGF) was to have its own budget line, but this was not done. It was also to be strengthened with new hiring but this is still under consideration. The budgetary allocation for the Administrative Tribunal was increased by 10% in real terms between 2001 and 2003. It was proposed that the Administrative Tribunal set up partnerships with private auditing firms and twinning arrangements with foreign supreme audit institutions, but as of 2003 such arrangements as had been made have had only a low level of impact.
9. The medium term program of fiscal management reform needs to be completed. The actions included in the medium term reform program of the PER 2001, reproduced in Table 2, remain important and will continue to be addressed while SISTAFE is being implemented. Among the major elements here are: (i) the enhancement of the role of the Medium Term Financial Framework (MTFF).16 Making the MTFF into an operational instrument will aid budgeting and execution in the PARPA priority sectors (currently, the lack of a medium-term perspective results in purely incremental budgeting (that is, spending authorities receive a fixed percentage increase over the previous year’s budget) with no real link with activities or outputs or outcomes); (ii) the introduction of double-entry accounting, under the cash basis17; (iii) cash planning and budgeting are among the corner stones of the conceptual business model underlying SISTAFE and an integral part of the design of
16 Note that the Direcção Nacional do Plano e Orçamento issued a study, “A experiência com o Cenário Fiscal do Médio Prazo e opções para seu futuro desenvolvimento” (2003).
84 the system; introducing monthly and annual cash plans will enable more rational use of resources, resulting in considerable savings because it will be possible to hold less (non-interest-earning) cash overall and to resort less frequently to using treasury bills; (iv) reports on domestic and external debt, lending, cash flows, and tax expenditures alongside the Conta Geral do Estado will enable a comprehensive view of state finances which is one of the ultimate objectives of the new Financial Management Law18; (v) auditing the state accounts (Conta Geral do Estado) within 12 months of the close of the financial year will enable Parliament to exercise closer control of the expenditure process (at present long delays19 in issuance of the documents render the documents irrelevant).
Table 2: Summary of Priority Actions Area Recommendation Timing Status in 2003 1. Budget coverage Receitas próprias: Ensure that a significant share of 2002 Partly done consigned revenues currently outside the budget are included in the 2003 budget. Include in the budget documents submitted annually to Not done the National Assembly information on tax expenditures starting with the 2003 budget. 2. Reporting Quarterly budget execution reports should present (i) 2002 (i) not done, the initial budget allocation, (ii) the revised (ii) not done, appropriation (if any), and (iii) all actual expenditures (iii) partly according to the new budget functional classification. done Include an annex to the budget execution reports with Some partial information on donor-funded actual expenditures reporting according to the action plan prepared by the MPF started 3. Legal framework Implement the new Public Finance Management Law 2002 Action plan, through the approval and implementation of the regulations regulations and according to a time-bound action plan. done and being implemented 4. Public accounting Issue instructions to spending units reducing the Before Done complementary period for FY02 by one month. Oct. 2002 Launch a training program on double-entry accounting April Some training and modified accrual accounting 2002 done 5. Cash and asset Inventory all bank accounts of public institutions in the Mar 2002 Underway, but management Banco de Moçambique (BM) and in commercial banks. not completed Close all bank accounts not related to the FY02. Jun 2002 Done Create globalizing bank accounts for revenue and 2002 Underway, but expenditures in BM. not completed Create task force composed of MPF and BM staff to Jan 2002 Done monitor the introduction of the treasury single account and the new payments system. 6. Internal control Introduce specific budget lines for Internal Audit 2002 Not done
17 A modified cash basis of accounting will be applied with the implementation of SISTAFE through the introduction of a budget credit system against which commitments will be registered and accounted for when a transaction is incurred. The release of credits will serve as virtual cash allocations and will determine and control the ceiling of spending per budget line item. In the meantime, while the SISTAFE system is being implemented, the replenishment (“duodécimo”) system needs to be made more flexible and training should be given to enable the lowest level units to operate within it efficiently. 18 Note that under the cash basis of accounting, as defined by the Public Sector Committee of the International Federation of Accountants (IFAC), it is standard to include information about accruals, as memorandum items, not ledger entries. The following are normally reported: financial assets receivable, long term debt, contingent liabilities and guarantees, and other liabilities. 19 The Conta Geral do Estado for 2001 became available to the public in early 2003.
85 and auditing Department (IGF) in 2003 budget and allocate an appropriate level of resources. Continue to implement reforms to raise IGF’s capacity. Increase budgetary allocation in favor of the Done (10% in Administrative Tribunal (TA) real terms) Grant TA the ability to set its own salary scale. Not done Administrative Tribunal should establish partnership Done, but not agreements with private audit firms, and a twinning effectively arrangement with a foreign Supreme Audit Institution.
10. An ambitious timetable has been set for the installation of the SISTAFE. During 2001 and 2002, the technical unit for reform of State Financial Management (Unidade Técnica para a Reforma da Administração Financeira do Estado, UTRAFE) was set up and the regulations for the new law were prepared. At the same time planning was done for the installation of the information management system, SISTAFE. A budget of $27 million was developed, and funding for the bulk of it was secured from donors including the World Bank. The timetable anticipates procurement (viz. determination of the information technology architecture and account component package) in the second half of 2003, roll-out of the system in the Ministries of Finance and Education in the last quarter of 2003, and extension to the remaining sector ministries in 2004. The focus will initially be on the introduction of a single treasury account in 2003 for all line ministries and the improvement of accounting. After 2004 the focus will shift to internal control, auditing, accounting for state property (Patrimônio) and debt management.
Table 3: Summary of Actions for the Medium Term Area Recommendation Timing Status in 2003 Budget formulation Reinforce the MTFF by (i) integrating it in the decree for 2003 Not yet done the revised regulations of the SISTAFE and (ii) making it a public document. Eliminate the Three-Year Investment Plan (PTIP) as a Not yet done stand-alone document and treat investment expenditures within the normal budget formulation process. Develop the Economic and Social Plan (PES) as the key Underway instrument to monitor and program the implementation of the PARPA. Public accounting Launch the introduction of double-entry accounting. 2004 Expected in ‘04 Free the accounting department (DNCP) of all activities 2003- Not yet done not related to accounting and reporting. 2004 Reporting Develop, and make available on a regular basis, financial 2003- Now envisaged reports in addition to the Conta Geral do Estado, starting 2004 for a later phase with (i) a report on short and medium-term external and of the domestic debt, (ii) a report on lending and on-lending, SISTAFE. (iii) reports on cash flows, and (iv) a report on tax expenditures. Cash and asset Introduce a treasury single account simultaneously with Sept. management SISTAFE. 2003 Improve financial planning with the introduction of 2004 Expected in annual cash plans, budget implementation plans and 2004 monthly cash plans. Extend the current mechanism of VAT collection through Not yet done the banking system to other taxes after assessing its feasibility by banks operating in Mozambique. Introduce, whenever possible, a single document
86 (Documento Único) for the collection of all taxes. Internal control and Ensure that the state accounts (Conta Geral do Estado, 2004- To be done in auditing CGE) are audited within 12 months after the end of the 2005 2004 fiscal year, starting with the 2003 CGE. Launch budget evaluation function.
11. Country Financial Accountability Assessment (CFAA): The CFAA sought to enhance knowledge of financial accountability arrangements in the public sector in Mozambique and was a joint undertaking of the government, Bank, and other donors. It found that, until the public financial management system is strengthened, the risk of waste, diversion and misuse of funds in Mozambique was high. The CFAA also found that material receipts and payments were excluded from the budget and from Government accounting and reporting systems; accounting systems and standards were outdated; internal auditing, external auditing, and parliamentary oversight remained weak; and so financial management continued to involve a high fiduciary risk. To strengthen institutional capacities and reduce these risks, the Government has been pursuing a public sector reform program aiming to establish a new public financial management system; improve the legal, judicial and court system; reform the Government pay scale and reduce the number of “ghost” workers (estimated at 15% of all civil servants); gradually decentralize civil services to more local authorities; and implement a broad training program for the public sector to enable governance to face future challenges. In addition, consistent with PARPA priorities, the Government has undertaken a number of important initiatives to enhance efficiency, transparency and accountability in the public sector:
· MPF has published quarterly budget execution reports since May 2000 and developed procedures for obtaining data on donor disbursements, to be annexed to these reports; · A financial management information system (SISTAFE) has been designed, together with a detailed plan for introducing it into spending authorities, and the system will also introduce detailed functional and program classifiers into the budget; · Public Expenditure Reviews (PERs) were completed in 2001 and 2003 jointly by the Government and donors, and a series of annual PERs is planned for the coming years; · A new Public Finance Management Law was approved in November 2001 and regulations were passed in 2002; · Treasury accounts at the central and commercial banks are being rationalized; and · A Country Procurement Assessment Report (CPAR) has been completed.
12. To improve Mozambique’s public financial management system, a number of prioritized recommendations were highlighted in the CFAA Development Action Plan. Table 4 reproduces this action plan and summarizes progress to date. The Bank and DfID are working with the Government to complete a new fiduciary assessment to fill in existing knowledge gaps.
13. Country Procurement Assessment Review (CPAR): Completed in FY03, the CPAR reviewed the Government’s procurement system against the generally accepted international principles of sound procurement management, i.e. transparency, economy and efficiency necessary for an optimal use of scarce public funds. The report provided: (i) an analysis of the country’s public sector procurement, including the legislative framework, organizational
87 responsibilities and capabilities, present procedures and practices, and how well these work; (ii) a general assessment of the institutional and organizational risks associated with the procurement process; and (iii) a detailed action plan for improvements. The CPAR recommendations were coordinated with other donors that are also engaged in procurement reform initiatives with the Government.
88 Table 4: CFAA Development Action Plan: Progress since December 2001 Action Status Implement Public Finance Management Law · Enact PFML; prepare action plan and · Enacted in November 2001; supporting promulgate supporting rules and regulations regulations in 2003 · Adapt chart of accounts to new budget · Implemented at aggregate level; 140-odd functional classification detailed level to follow through SISTAFE · Implement PFML, rules and regulations · Partly done · Provide training, incl. double-entry accounting · Initiated Strengthen public sector auditing capacity: Administrative Tribunal (AT) · Enhance independence of AT by increasing Partly done; budget allocation increased 10% in budget and liberating staff salaries real terms; staff salaries not liberated · Seek funding to implement TA dev. plan Initiated · Review structure, service conditions Initiated · Provide training Partly done · Retain int. auditing firm to improve quality Done, but not effectively · Audit state accounts within 12 months · Not done Strengthen public sector auditing capacity: Internal Audit Department (IGF) · Review structure, service conditions In progress, with support PSR program · Recruit qualified staff Recruitment initiated in 2004 · Provide training Training in progress · Recruit experienced internal audit managers Not done Strengthen financial management (FM) in local government: provinces and districts · Produce regulations to improve internal control · Regulations formulated, following passage of and implement them Local State Organs law, and under MPF review · Determine FM capacity requirements · Done for districts · Recruit qualified staff to meet requirements and · Initiated; done for 13 initial districts in DPFP’s provide training four provinces; other 36 districts by 2008 Strengthen financial management (FM) in local government: municipalities · Introduce Municipal Law regulations · Not done · Produce updated fin. procedure manuals · Partly done; expected in 2005 · Determine FM staff requirements · Partly done, through IDA/donor assessments · Review grades, determine vacancies · Partly done, through overall HR review, but needs to be done by each municipality as well · Recruit qualified staff to meet requirements · Initiated; done for 8 municipalities under MDP · Provide training · Partly done, through IDA/donor programs Develop accountancy profession · Appoint representative committee to create Accountancy profession/accountancy body to Moz. Association of Accountants (MAA) be established with support from PSR; Strategic · Obtain financial support for committee Development Plan to be prepared by · Prepare strategic dev. plan for profession international consultant expected to start in · Draft MAA constitution, regulations Sept. 2004. · Obtain Govt approval of constitution, regs. Strengthen accountancy programs at tertiary education institutions · Prepare implementation plan to guide future International consultant to be hired under the direction of accountancy education PSR by Sept. 2004 to prepare implementation · Determine courses to offer, institutions to do so plan, determine courses to offer, and support · Support course provision by qualified qualified institutions. institutions
89 14. The CPAR found that standard criteria (i.e. comprehensive and transparent legal framework, modernized procurement procedures, proficient staff, independent control mechanism, anti-corruption measures) are partially satisfied in Mozambique, and that improvements are necessary in a number of areas, either by starting reform initiatives suggested in the report or by completing reforms already underway under the procurement component of the Government’s Civil Service Reform Program (CSRP). Other new reform initiatives, such as the procurement code, the establishment of an adequate procurement body and the training of staff, are being supported by IDA’s Public Sector Reform project. The CPAR recommended implementation of a set of priority actions, including enhancing the capacity of the Task Force for procurement reform; preparing comprehensive procurement legislation based on the existing legal framework already present, to meet internationally acceptable standards; preparing standard and comprehensive bidding documents and procedures manuals; strengthening the MPF’s Procurement Department to assume the functions of a Procurement Policy and Monitoring Directorate; promoting dissemination and use of ethics code in the context of the CRSP; launching a sustained procurement capacity-building program; and involving the private sector and civil society as a whole in procurement reform. The risks resulting from resistance to change that could hamper a successful implementation of the proposed reforms are considered to be low because these reforms are fully compatible with the general aim of the Government to modernize procurement regulations and practices and with the Government’s decentralization policy.
15. As seen above, the recommendations of the CFAA, CPAR and PERs were considered by the Government and donors and consolidated into action plans. Among the key outcomes of these plans are: improved predictability of resource allocation and resource flows at the central and provincial levels; improved quality and transparency of fiscal data; enhanced integrity of public sector institutions and an increased supply of critical skills. Activities to achieve these outcomes are being addressed through Government initiatives and programs including the Public Sector Reform Program. Moreover, there is significant donor involvement and coordination in initiatives to strengthen fiduciary management as well as harmonization around assessing and managing fiduciary risks when providing budget support.
90 Table 5: PER 2003 Action Plan: Progress since September 2003 Action Status Improve fiscal management · Disseminate PER 2003 Done · Integrate PERs into budget cycle by: identify- Done ing monitoring targets, strengthening statistical capacity, and developing reporting systems · Clean up GoM accounts by completing invent- Initiated, to be completed in 2004-2005 tory and closing accounts not linked to this FY · Alleviate underspending through training No longer planned; SISTAFE changes needs · Improve internal auditing Ongoing · Introduce SISTAFE Underway, to be completed during 2004-2005 Initiate civil service reform · Implement Public Sector Reform Program by: Report on Pay Reform being completed; GoM (i) restructuring, (ii) linking pay to requested specific recommendations on options performance; and (iii) reviewing pay scales to be finalized by the end of June. · Investigate/eliminate “ghost” employees PM requested assessment by end-2004 · Study AIDS implications for GoM spending Coordinated with UNDP Improve education outcomes · Raise EP1 completion from 30% to 60% by: New curriculum implemented in grades 1, 3, 6 curriculum reform; near-automatic promotion; in Jan. 2004; school fees study expected mid- reduction in fees; increase in female teachers 2004; gender strategy in Dec. 2003, but limited action to increase number of female teachers. · Eliminate “ghost” teachers Not done · Merge EP1 and EP2 into one cycle Not done; GoM agreement recently reached · Expand teacher training Teacher supply increased, but quality lags · Decentralize school construction Preparatory AAA done for EP1 schools Improve health outcomes · Consolidate health strategy and policy Underway; Bank support through Marginal documents into single planning system Budgeting for Bottlenecks exercise · Review and rationalize user fee system Not done; focus of PRSC and policy dialogue · Reflect user fees, other funds, on budget Not done; MoH budget includes user fees, other funds, but not registered in MPF budget Expand road network · Separate Road Fund from ANE · Done · Restore fuel tax to real 1997 level · Done, albeit with delays · Fully fund routine, periodic maintenance and · Routine maintenance fully funded; prov. not subject all to competitive bidding fully funded; all subject to competitive bidding · Privatize parastatal maintenance companies · Partly done Improve access to safe water · Raise urban household connections per year No improvement while management contracts from 2,500 to 22,000 by 2015; apply full cost being renegotiated; civil works underway tariffs by 2008; improve standpipe service quality; scrap rules against water resale · Raise rural waterpoint development per year 1,200 boreholes constructed or rehabilitated in from 900-1,300 to 1,400; reduce percentage of 2003; non-functioning water points reported to non-functioning waterpoints (from 35% now) be 27%, but reporting system not accurate
91 Annex 4 Letter of Development Policy
92 95 Annex 5
Mozambique at a glance 6/3/04
Sub- POVERTY and SOCIAL Saharan Low- Mozambique Africa income Development diamond* 2003 Population, mid-year (millions) 18.8 688 2,495 Life expectancy GNI per capita (Atlas method, US$) 210 450 430 GNI (Atlas method, US$ billions) 3.9 306 1,072 Average annual growth, 1997-03 Population (%) 2.0 2.4 1.9 Labor force (%) 2.1 2.5 2.3 GNI Gross per primary Most recent estimate (latest year available, 1997-03) capita enrollment Poverty (% of population below national poverty line) 54 .. .. Urban population (% of total population) 34 33 30 Life expectancy at birth (years) 41 46 59 Infant mortality (per 1,000 live births) 101 105 81 Child malnutrition (% of children under 5) 24 .. .. Access to improved water source Access to an improved water source (% of population) 57 58 76 Illiteracy (% of population age 15+) 60 37 37 Gross primary enrollment (% of school-age population) 106 86 95 Mozambique Male 107 92 103 Low-income group Female 95 80 87
KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983 1993 2002 2003 Economic ratios* GDP (US$ billions) 3.2 2.1 3.6 4.3 Gross domestic investment/GDP 11.6 12.7 30.3 27.9 Trade Exports of goods and services/GDP 6.1 13.2 23.5 22.8 Gross domestic savings/GDP -5.0 -22.4 15.6 11.3 Gross national savings/GDP -3.9 -16.0 15.8 12.8 Current account balance/GDP -15.6 -39.2 -24.3 -18.6 Domestic Interest payments/GDP 0.0 3.6 4.9 3.8 Investment savings Total debt/GDP 1/ 13.0 214.6 75.4 66.0 Total debt service/exports 1/ 0.0 19.0 5.1 4.0 Present value of debt/GDP1/2/ .. .. 24.8 23.2 Present value of debt/exports 1/2/3/ .. .. 96.0 91.2 Indebtedness 1983-93 1993-03 2002 2003 2003-07 (average annual growth) GDP 3.6 8.1 7.4 7.1 7.6 Mozambique GDP per capita 2.6 5.7 5.3 5.1 5.8 Low-income group Exports of goods and services 5.0 17.6 14.1 16.2 17.0
STRUCTURE of the ECONOMY 1983 1993 2002 2003 Growth of investment and GDP (%) (% of GDP) 80 Agriculture and fishery 37.6 29.5 26.6 27.1 60 Industry 27.5 20.7 31.2 33.5 40 Manufacturing .. 7.3 14.9 15.5 20 Services 34.9 49.8 42.2 39.4 0 Private consumption 101.0 110.7 73.4 77.3 -20 98 99 00 01 02 03 General government consumption 16.6 11.7 11.0 11.5 GDI GDP Imports of goods and services 22.8 48.4 38.2 39.4
1983-93 1993-03 2002 2003 Growth of exports and imports (%) (average annual growth) Agriculture and fishery 2.9 6.1 7.2 8.0 80 Industry -3.5 18.2 14.0 7.2 60 Manufacturing .. 18.1 4.0 12.8 40 Services 7.7 2.6 -1.5 5.3 20 Private consumption 2.8 2.0 2.0 13.9 0 98 99 00 01 02 03 General government consumption 1.7 6.2 5.8 8.6 -20 Gross domestic investment -0.3 14.8 18.9 -14.6 Exports Imports Imports of goods and services 0.0 4.0 13.9 5.8
Note: 2003 data are preliminary estimates. Group data are through 2002. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 1/ Public and Publicly Guaranteed debt. Excludes private non-guaranteed debt. 2/ Data include impact of total debt relief under the enhanced HIPC initiative, additional bilateral assistance, and new borrowing. 3/ As percent of 3-year moving average of exports of goods and non-factor services.
96 Mozambique
PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Inflation (%) Domestic prices (% change) 20 Consumer prices 28.2 42.3 16.8 13.5 15 Implicit GDP deflator 13.0 51.4 11.5 12.6 10 Government finance 5 (% of GDP, includes current grants) 0 Current revenue incl. current grants 18.0 18.5 18.0 18.4 98 99 00 01 02 03 Current budget balance -2.1 3.6 2.2 2.5 GDP deflator CPI Overall surplus/deficit after current grants -17.8 -11.0 -15.8 -11.4 Overall surplus/deficit after all grants -16.0 -3.6 -7.9 -4.9
TRADE 1983 1993 2002 2003 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 132 132 679 880 2,000 Cashew nuts and raw cashew 16 20 17 17 1,500 Prawn 31 69 64 64 1,000 Aluminum .. .. 361 519 Manufactures .. 7 13 15 500 Total imports (cif) .. 830 1,351 1,445 0 97 98 99 00 01 02 03 Export price index (1995=100) 96 90 74 78 Import price index (1995=100) 99 89 82 83 Exports Imports Terms of trade (1995=100) 1/ 97 101 90 94
BALANCE of PAYMENTS 1983 1993 2002 2003 Current account balance to GDP (%) (US$ millions) Exports of goods and services 222 312 1,058 1,230 0 97 98 99 00 01 02 03 Imports of goods and services 694 958 1,745 1,820 -5 Resource balance -472 -646 -687 -590 -10
Net income -33 -179 -189 -213 -15 Net current transfers 0 0 0 0 -20
Current account balance before grants -505 -825 -876 -803 -25 Financing items (net) 462 778 970 975 -30 Changes in net reserves 43 46 -94 -172 -35 Memo: Reserves including gold (US$ millions) 15 187 825 1,007 Conversion rate (DEC, local/US$) 40.2 3,723 23,667 23,782
EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2001 2002 (US$ millions) Composition of 2002 debt (US$ mill.) Total debt outstanding and disbursed 2/ 422 4,514 2,402 2,716 IBRD 0 0 0 0 IDA 0 512 777 985 B: 985 Total debt service 2/ 0 71 49 56 IBRD 0 0 0 - F: 1,516 IDA 0 3 7 12 C: 200 Composition of net resource flows 2/ Official grants 90 503 469 428 Official creditors 202 134 103 223 Private creditors 0 0 0 0 D: 502 Foreign direct investment 0 32 255 372 E: 1,029 World Bank program Commitments 0 123 229 180 A - IBRD E - Bilateral Disbursements 0 93 52 149 B - IDA D - Other multilateral F - Private Principal repayments 0 0 3 6 C - IMF G - Short-term Net flows 0 93 49 143 Interest payments 0 3 4 6 Net transfers 0 90 44 137
Development Economics 6/3/04 1/ Includes aluminum price. 2/ Public and Publicly Guaranteed. Data for 2001 includes implementation of November 2001 Paris Club under the Enhanced HIPC Initiative. Data for 2002 includes all signed agreements under the Enhanced HIPC Initiative signed by end 2002. Excludes private non-guaranteed debt estimated at US$ 1.6 billion in 2001 and 2002.
97
Annex 6
Mozambique Social Indicators
Latest single year Same region/income group
Sub- Saharan Low- 1970-75 1980-85 1996-2003 Africa income POPULATION Total population, mid-year (millions) 10.5 13.5 18.8 688.9 2,494.6 Growth rate (% annual average for period) 2.2 2.3 2.0 2.4 1.9 Urban population (% of population) 8.7 16.8 34.3 33.1 30.6 Total fertility rate (births per woman) 6.5 6.4 5.0 5.1 3.5 POVERTY (% of population) National headcount index .. .. 54.1 .. .. INCOME GNI per capita (US$) .. 260 210 450 430 Consumer price index (1995=100) .. 1 259 .. .. INCOME/CONSUMPTION DISTRIBUTION Gini index .. .. 39.6 .. .. Lowest quintile (% of income or consumption) .. .. 6.5 .. .. Highest quintile (% of income or consumption) .. .. 46.5 .. .. SOCIAL INDICATORS Public expenditure Health (% of GDP) .. .. 4.1 2.5 1.1 Education (% of GDP) .. 2.3 2.6 3.4 3.1 Net primary school enrollment rate (% of age group) Total .. 51 60 .. 80 Male .. 56 63 .. 85 Female .. 47 56 .. 74 Access to an improved water source (% of population) Total .. .. 57 58 76 Urban .. .. 81 83 90 Rural .. .. 41 46 70 Immunization rate (% of children ages 12-23 months) Measles .. 39 58 58 65 DPT .. 29 60 54 65 Child malnutrition (% under 5 years) .. .. 24 .. 42 Life expectancy at birth (years) Total 43 44 41 46 59 Male 42 42 40 45 58 Female 45 45 42 47 60 Mortality Infant (per 1,000 live births) 163 140 101 103 79 Under 5 (per 1,000 live births) 278 233 153 174 121 Adult (15-59) Male (per 1,000 population) 498 468 674 519 310 Female (per 1,000 population) 382 361 612 461 259 Maternal (modeled, per 100,000 live births) .. .. 980 .. .. Births attended by skilled health staff (%) .. .. 48 .. ..
Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age. 2004 World Development Indicators CD-ROM, World Bank; Mozambique Household Survey,02/03 and Mozambique Health Survey, 2003.
98 Annex 7
Mozambique - Key Economic Indicators
Estimate Projected Indicator 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 National accounts (as % of GDP) Gross domestic producta 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 37.2 32.9 30.9 26.8 26.7 26.6 27.1 25.5 25.6 25.4 Industry 18.9 23.4 24.5 26.6 27.6 31.2 33.5 37.0 37.8 38.5 Services 43.9 43.6 44.7 46.5 45.7 42.2 39.4 37.4 36.7 36.1
Total Consumption 98.9 93.2 91.0 89.4 81.7 84.4 88.7 85.1 83.9 77.5 Gross domestic fixed investment 20.6 24.2 36.7 36.6 32.0 30.3 27.9 23.3 27.7 28.1 Government investment 12.1 9.8 11.6 10.6 16.6 14.3 13.0 12.0 11.6 11.1 Private investment 8.5 14.5 25.1 25.9 15.4 16.0 14.9 11.3 16.1 17.0
Exports (GNFS)b 11.3 10.5 10.1 12.9 21.8 23.5 22.8 24.8 23.5 22.3 Imports (GNFS) 30.8 27.9 37.8 38.9 35.4 38.2 39.4 33.2 35.1 27.9 Gross domestic savings 1.1 6.8 9.0 10.6 18.3 15.6 11.3 14.9 16.1 22.5 Gross national savingsc 1.0 5.9 10.0 14.4 15.6 15.8 12.8 11.3 12.1 18.5 Memorandum items Gross domestic product 3448.9 3958.7 4091.0 3627.7 3435.3 3600.2 4320.6 5212.8 5726.5 6187.1 (US$ million at current prices) GNP per capita (US$, Atlas method) 180.0 210.0 220.0 220.0 210.0 200.0 210.0 230.0 260.0 290.0
Real annual growth rates (%, calculated from 1995 prices) Gross domestic product at market prices 11.1 12.6 7.5 1.5 13.0 7.4 7.1 8.4 6.8 6.5 Gross Domestic Income 11.2 12.8 8.2 -2.3 9.6 6.6 2.2 4.3 7.4 13.2
Real annual per capita growth rates (%, calculated from 1995 prices) Gross domestic product at market prices 8.4 10.4 5.5 -0.7 10.6 5.3 5.1 6.5 5.0 4.7 Total consumption 5.3 5.5 6.2 -5.2 1.9 -2.0 5.0 0.4 3.3 3.3 Balance of Payments (US$ millions) Exports (GNFS)b 508.7 530.8 601.3 732.3 1004.1 1058.0 1229.5 1617.1 1682.4 1723.5 Merchandise FOB 230.0 244.6 283.7 364.0 703.1 679.3 880.2 1257.3 1310.8 1340.8 Imports (GNFS)b 937.5 1063.5 1539.8 1546.2 1665.2 1744.8 1819.8 1800.8 2108.0 2180.1 Merchandise FOB 760.0 817.3 1199.8 1162.3 1063.4 1350.8 1445.4 1446.0 1711.8 1777.5 Resource balance -428.8 -532.7 -938.5 -813.9 -661.1 -686.7 -590.3 -183.8 -425.6 -456.6 Current account balance before grants -610.7 -748.4 -1152.1 -1041.6 -966.6 -876.1 -803.4 -646.0 -887.1 -938.5 Current account balance after grants -297.8 -435.8 -718.0 -477.7 -497.2 -456.2 -267.3 -95.2 -384.9 -436.4
Net private foreign direct investment 64.4 212.7 381.7 139.1 255.4 379.8 341.7 109.0 212.7 204.8 Long-term loans (net) 116.1 50.1 231.7 139.8 -220.2 631.1 193.7 86.1 257.2 231.6 Other capital (net, incl. debt relief, short term and errors & ommissions) 4154.2 234.8 172.9 392.5 455.9 -460.9 -96.2 -100.0 -85.0 0.0 Change in reservesd -114.6 -61.8 -68.3 -193.7 6.1 -93.9 -172.0 0.0 0.0 0.0
Memorandum items Resource balance (% of GDP) -12.4 -13.5 -22.9 -22.4 -19.2 -19.1 -13.7 -3.5 -7.4 -7.4 Real annual growth rates ( YR95 prices) Merchandise exports (FOB) -0.5 32.9 34.6 23.3 105.9 -10.9 22.5 41.4 -1.2 -2.5 Merchandise imports (CIF) 4.3 15.5 47.2 -5.3 -4.0 27.3 5.7 -0.5 17.1 3.0
(Continued)
99 Mozambique - Key Economic Indicators (Continued) Page 2 of 2
Estimate Projected Indicator 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Public finance (as % of GDP at market prices)e Current revenues 11.3 11.4 12.0 13.2 13.3 14.2 14.3 14.6 15.0 15.2 Current expenditures 10.7 11.2 12.2 13.5 14.5 15.8 15.9 15.6 15.1 14.8 Current account surplus (+) or deficit (-) 0.6 0.2 -0.2 -0.3 -1.2 -1.6 -1.6 -1.0 -0.1 0.4 Capital expenditure 11.9 9.8 11.6 10.6 16.6 14.3 13.0 12.0 11.6 11.1 Overall balance before all grants -11.7 -10.5 -13.2 -14.0 -21.4 -19.7 -15.5 -13.1 -11.6 -10.6 Foreign financing incl. grants 14.8 12.8 13.5 12.3 19.4 18.7 15.4 13.5 12.0 11.1
Monetary indicators M2/GDP 18.6 18.6 22.7 29.5 30.6 31.9 31.4 29.5 29.3 29.4 Growth of M2 (%) 24.4 17.6 35.1 42.4 29.7 24.8 18.7 15.0 14.5 14.5 Private sector credit growth / 359.7 972.8 100.2 84.6 74.5 48.7 151.7 114.5 126.7 120.3 total credit growth (%)
Price indices( YR95 =100) Merchandise export price index 82.1 65.7 56.6 58.9 55.3 59.9 63.4 64.0 67.6 70.9 Merchandise import price index 119.8 111.5 111.2 113.7 108.3 108.1 109.4 110.0 111.2 112.1 Merchandise terms of trade index 68.5 58.9 50.9 51.9 51.0 55.4 57.9 58.2 60.8 63.2 Real exchange rate (US$/LCU)f 62.7 56.6 57.8 55.6 50.4 46.9 45.5 ......
Consumer price index (% change) 6.4 0.6 2.9 12.7 9.0 16.8 13.5 12.9 7.8 7.3 GDP deflator (% change) 9.5 4.6 2.9 8.0 10.6 11.5 12.6 12.9 7.8 7.3
a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.
100 Annex 8
Operations Portfolio (IBRD/IDA and Grants) As of June 3, 2004 Closed Projects 27
IBRD/IDA * Total Disbursed (Active) 323.60 of which has been repaid 0.00 Total Disbursed (Closed) 1,869.86 of which has been repaid 714.01 Total Disbursed (Active + Closed) 2,052,292,277.15 of which has been repaid 714,007,185.33 Total Undisbursed (Active) 607.00 Total Undisbursed (Closed) 8.83 Total Undisbursed (Active + Closed) 691,917,345.42
Active Projects Difference Between Last PSR Expected and Actual Supervision Rating Original Amount in US$ Millions Disbursements a/ Development Implementati Frm Project ID Project Name Fiscal Year IBRD IDA GRANT Cancel. Undisb. Orig. Objectives on Progress Rev'd P001799 Agric Sector (PROAGRI) S U 1999 30 18.96826 18.40116569 P070305 Coastal Management S S 2000 5.6 4.988514 4.87864538 P049874 Enterprise Development S S 2000 26 17.05258 13.21580731 P001786 Education Sector S S 1999 71 56.36956 51.39544199 P069824 Higher Education S HS 2002 60 60.41772 -3.53484735 P073479 Communication Sector Reform S S 2002 14.9 14.28327 0.08575282 P001806 Municipal Development S S 2002 33.6 31.34867 4.48246549 P001785 Roads and Bridges S S 2002 162 171.8583 37.49609242 P001808 Mineral Resources S S 2001 18 16.79385 2.06466098 P039015 National Water I S S 1998 36 23.70587 20.46065858 P052240 National Water II S S 1999 90 67.02284 32.28942047 P042039 Railway & Port Restructuring S S 2000 100 70.85431 45.5304378 -1.446 P078053 HIV/AIDS U S 2003 55 55 P072080 Public Sector Reform S S 2003 25.6 25.5 P06183 Energy Reform and Access S S 2004 40 40 P01807 Decentralized Planning and FinanceS S 2004 42 42 P081715 Southern Africa Gas Pipeline S S 2004 30 30 Overall Result 30 687.1 80.6 5.122651 746.1638 272.5193172 22.258
101 Annex 9 Relations with the IMF
Public Information Notice (PIN) No. 03/148 International Monetary Fund 700 19th Street, NW December 22, 2003 Washington, D.C. 20431 USA
IMF Concludes 2003 Article IV Consultation with the Republic of Mozambique
1. On December, 10, 2003, the Executive Board of the International Monetary Fund (IMF) con- cluded the Article IV consultation with the Republic of Mozambique.1
Background
2. Mozambique's performance under the authorities' program during the first three quarters of 2003 continued to be satisfactory. Manufacturing output, construction, and services performed strongly during the first half of 2003, and the target of real GDP growth of 7 percent for the year as a whole appears achievable. After peaking in May 2003 owing to the impact of drought on food prices and the appreciation of the South African rand against the metical, the 12-month rate of inflation declined to 13.6 percent in November (under the program, end-year inflation was tar- geted at 10.8 percent). Average commercial bank lending rates have declined from 37 percent to 30 percent since end-2002, with interest rate spreads remaining high at 19 percent.
3. The government's fiscal program for 2003 seeks to contain the domestic primary deficit at 3.7 percent of GDP, with tax revenue strengthening as a result of the implementation of the new code for the personal and corporate income taxes approved in 2002, the full-year effect of a new and more transparent fiscal incentives code, and a significant increase in the specific taxes on do- mestic petroleum products implemented in May 2003. Available information for the period through September 2003 indicates that the government's deficit was lower than programmed, re- flecting a lower level of locally financed capital outlays owing to delays in project execution as- sociated in part with shortfalls in external assistance.
4. External developments during the first half of 2003 continued to be influenced by exogenous shocks and large scale foreign investment projects. For the year as a whole, the external current account deficit after grants is expected to widen to 15 percent of GDP (12 percent in 2002), re- flecting an increase in investment in the mega projects during the second half of the year.
5. The consultation discussions focused on the macroeconomic policies for 2004-06 and the government's plans to address pending structural reforms to broaden and sustain growth and fur- ther reduce poverty. Real GDP growth is projected to increase to over 8 percent in 2004 largely because of the coming on stream of MOZAL II (the expansion of the aluminum smelter) and the gas pipeline, and end-year inflation is targeted to fall to 9 percent. The government's domestic primary deficit is projected to decline to 3.4 percent of GDP in 2004, owing to a further strength- ening of revenue and steps to start addressing the significant increase in the government's wage
102 bill that has taken place in recent years. The overall deficit after grants, however, would be somewhat higher than in 2003. 6. Discussions on structural issues concentrated on the authorities' plans to remove a number of obstacles to private sector development. Particular attention was paid to (i) reducing red tape and simplifying the regulatory framework; (ii) addressing labor rigidities that hinder competitiveness; (iii) improving basic infrastructure; (iv) reforming the judicial system; and (v) moving ahead with reforms to increase efficiency in the public sector. In addition, the staff discussed with the authorities several recommendations to address remaining vulnerabilities in the financial system made by a joint team from the Fund and the World Bank in the context of the Financial Sector Assessment program (FSAP).
Executive Board Assessment
7. Executive Directors welcomed the opportunity to review, under the new guidelines on as- sessments of countries with a longer-term program engagement, the experience with the four Fund-supported programs since 1987. Directors commended the Mozambican authorities for their pursuit of sound macroeconomic policies and wide-ranging structural reforms over the past fifteen years. The authorities' efforts have led to the strong growth of the economy, a strengthen- ing of the international reserves position, substantial debt relief, and a steady decline in poverty rates in a context of political stability. Notwithstanding the considerable progress that has been made, Mozambique remains a very poor country with significant weaknesses and vulnerabilities, including institutional capacity constraints and the negative impact of HIV/AIDS. Directors therefore urged the authorities to persevere in their efforts to consolidate macroeconomic stabili- ty and accelerate and deepen structural reforms with a view to sustaining economic growth, en- couraging employment creation, and further reducing poverty.
8. Directors commended the authorities for the satisfactory implementation of their economic program, which was manifested in Mozambique's continued favorable economic performance during 2002 and 2003. Output growth has remained strong, the international reserves position has been strengthened, and significant progress has been made in implementing structural re- forms, including by taking important steps to mobilize additional revenue. Directors also noted the advances made toward achieving Mozambique's poverty reduction strategy (PARPA) objec- tives, especially in the areas of health and education. In particular, they were encouraged by the preliminary information from the recent National Household Survey that the proportion of the population living below the poverty line in 2002 fell below the PARPA's 2005 target of 60 per- cent.
9. Directors welcomed the government's economic program for 2004, which seeks to maintain macroeconomic stability and addresses an important agenda of unfinished reforms. They empha- sized that achieving the program's fiscal targets will require a further strengthening of govern- ment revenue and a close monitoring of current expenditure. Crucial specific steps in this regard will be improvements in tax administration, early introduction of an automatic mechanism of ad- justment for the specific fuel taxes, and prompt implementation of the withholding of the income tax on the salaries of government employees. Directors also underscored the importance of limit- ing the wage increase for government employees to projected inflation and exercising strict con- trol over the payroll in order to contain the recent sizable increases in the wage bill. Key priori- ties going forward will be to evaluate and address the challenges posed by HIV/AIDS while making progress toward the achievement of the Millennium Development Goals. Directors wel-
103 comed the authorities' intention to integrate the monitoring of the PARPA and the budget execu- tion into a single document, which could be the basis for the next review of the PRSP in early 2004.
10. Directors urged the authorities to press ahead with ongoing efforts to improve public expen- diture management and fiscal transparency by adhering to the revised timetable for introducing the new financial management system (SISTAFE) and by bringing all extrabudgetary activities within the budget framework, especially in view of the likely expenditure pressures associated with next year's elections. They encouraged the authorities to move forward vigorously on public sector reform, with the support of the World Bank, including by reducing employment redundan- cies in some sectors.
11. Directors called on the authorities to closely monitor monetary developments, particularly in light of the resurgence of inflation in 2003 and the volatility of broad money growth. The author- ities should tighten liquidity conditions as needed, and limit interventions in the foreign ex- change market to cushioning the impact of temporary shocks and achieving the program's re- serves targets.
12. Directors called on the authorities to implement promptly the recommendations resulting from the FSAP exercise. Strengthened monetary and exchange rate management will be essential in Mozambique, particularly in view of the high degree of dollarization. This will include steps to enhance the consistency between the central bank's sales of foreign exchange and the pace of expenditure financed with external support, to improve the use of indirect monetary instruments, to better coordinate the actions of the central bank and the Ministry of Finance, and to strengthen the balance sheet of the central bank. Directors welcomed the comprehensive program of techni- cal assistance being developed by Fund and World Bank staff, in close coordination with the au- thorities, to support the implementation of the FSAP recommendations.
13. Directors emphasized that the authorities should give priority to addressing the remaining vulnerabilities in the financial sector. They urged the authorities to monitor developments in the financial system very closely and to strengthen bank supervision in line with internationally-ac- cepted practices. In addition, the diagnostic reviews of the main banks will help identify appro- priate remedial actions and enable a gradual move toward international accounting standards (IAS). It will be important to lower the wide bank spreads and expand access to credit by foster- ing competition in the financial system, improving loan recovery procedures, and reviewing land tenure regulations to facilitate the use of land as collateral. In addition, the regulatory framework for microfinance activities should be reviewed to facilitate access to financial services by the poor.
14. Directors stressed the need to broaden growth and stimulate employment in the manufactur- ing, services, and rural family sectors by enhancing human capital and removing obstacles to pri- vate sector development. They encouraged the authorities to reduce red tape; improve basic in- frastructure; reduce labor rigidities by simplifying procedures for hiring expatriates and lowering retrenchment costs; and press ahead with the reform of the judicial system to speed up the ad- ministration of justice and strengthen the enforcement of contracts. Directors called for the prompt approval of the regulations for the anti-money laundering law passed in 2002, and for the development of legislation on the combating of the financing of terrorism. Several Directors un- derscored the importance of improving market access for Mozambique's exports.
104 15. Directors encouraged the authorities to redouble their efforts to complete the bilateral agree- ments with remaining Paris Club creditors, and they urged the non-Paris club creditors who have not yet done so to provide debt relief on HIPC Initiative-comparable terms.
16. Directors welcomed Mozambique's participation in the Fund's General Data Dissemination System. They underscored the need for a determined effort to address remaining weaknesses in the statistical system, based on the recommendations made in the context of the recent data Re- ports on the Observance of Standards and Codes exercise.
17. Looking forward, most Directors expressed readiness to consider a successor low-access PRGF arrangement based on a strong program, which would help the authorities address the re- maining challenges. A few other Directors encouraged consideration of other possible forms of engagement outside of a formal Fund arrangement.
Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.
105 Mozambique: Selected Economic and Financial Indicators, 2000-03
2000 2001 2002 2003 Actual Actual Prel. Proj
(Annual percentage change, unless otherwise specified) National income and prices Nominal GDP (in billions of U.S. dollars) 3.6 3.4 3.6 4.3 Real GDP growth 1.5 13.0 7.7 7.0 Consumer price index (end of period) 11.4 21.9 9.1 10.8
External sector Merchandise exports 28.3 93.2 -3.0 31.5 Merchandise imports -3.1 -8.6 18.8 26.8 Terms of trade -2.8 5.7 0.6 1.4 Real effective exchange rate (end of period) 1/ -3.7 -9.3 -6.4 ...
(Annual change in percent of beginning-period broad money, unless otherwise specified) Money and credit Net domestic assets 11.6 9.1 0.2 10.8 Of which: net credit to the government 4.1 5.3 3.3 -0.5 Broad money (M2) 42.4 29.7 20.1 13.5 Interest rate for 90-day treasury bills/TAMs (in percent; end of period) 21.8 31.7 18.5 ...
(In percent of GDP) Government budget Total revenue 13.2 13.3 14.2 14.4 Total expenditure and net lending (incl. 27.3 34.7 33.8 28.0 residual) Overall balance, after grants -6.0 -6.6 -7.9 -3.2 Domestic primary balance (excluding bank -5.1 -6.3 -3.6 -3.7 restructuring) (In percent of exports of goods and nonfactor services) Net present value of total public external debt 194.4 109.8 91.7 85.4 outstanding 2/ External debt service (nonfinancial public sector) Scheduled, after original HIPC Initiative 5.5 5.8 8.2 7.2 assistance Scheduled, after enhanced HIPC Initiative assistance and additional bilateral assistance ... 3.5 4.3 3.8
(In millions of U.S. dollars, unless otherwise specified) External current account, after grants -478 -497 -421 -644
106 Overall balance of payments -352 -421 94 31 Net international reserves (end of period) 526 531 625 656 Gross international reserves (end of period) 746 727 810 832 In months of imports of goods and nonfactor 6.3 5.8 5.9 5.0 services
Sources: Mozambican authorities; and IMF staff estimates and projections 1/ A minus sign indicates depreciation. 2/ Public and publicly guaranteed, in percent of the three-year average of exports. The data for 1999 2000 include the impact of total debt relief under the original HIPC Initiative. Data for 2001-03 include the impact of total debt relief under enhanced HIPC initiative, additional bilateral assistance, and new borrowing.
107