International Bank for Reconstruction and Development FOR OFFICIALUSE ONLY
CG 96-32
FROM: Vice President and Secretary
Public Disclosure Authorized June 13, 1996
CONSULTATIVE GROUP FOR MOZAMBIQUE
Paris, April 17-18,1996
CHAIRMAN'S REPORT OF PROCEEDINGS
Attached is the Chairman's Report of Proceedings of the Meeting of the Consultative Group for Mozambique held in Paris, April 17-18, 1996.
Distribution For Information
Public Disclosure Authorized Executive Directors for: Australia Germany Russia European Office Austria Ireland Spain Tokyo Office Belgium Italy Sweden Resident Representative, Mozambique Brazil Japan Switzerland Canada Mozambique United Kingdom Denmark The Netherlands United States Finland Norway France Portugal
African Development Bank Public Disclosure Authorized Arab Bank for Economic Development in Africa European Union European Investment Bank Food and Agriculture Organization International Finance Corporation International Fund for Agricultural Development International Monetary Fund Kuwait Fund for Arab Economic Development Nordic Development Bank Organization for Economic Cooperation and Development United Nations Children's Fund United Nations Development Programme
Public Disclosure Authorized United Nations High Commissioner for Refugees World Food Programme World Health Organization
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.
1ITTU~~r TABLE OF CONTENTS
Page No.
Chairman's Report ......
Annex I Agenda ...... 9
ArnnexII List of Participants...... 0
Annex III Chair's OpeningStatement ...... 22 Ms. KatherineMarshall, AFI Director,World Bank
Annex IV Statementby the MozambicanDelegation ...... 27 HE Pascoal Mocumbi,Prime Minister Annex V Statementby the IMF ...... 35
Annex VI UNDP Statement ...... 39 Mr. SolomonAkpata, UNDP Representative
Annex VII Steps TowardsEconomic and Social Development 46 Statementby HE Tomaz Salomao Ministerof Financeand Planning
AnnexVIII Statementon FinancingRequirements 55 HE Adriano Maleiane,Governor, Bank of Mozambique Annex IX Statementon FinancingRequirements 63 Ms. Rocio Castro,Economist, World Bank Annex X Chair's Closing Statement .66
Annex XI Press Release .72
11 1 __ CONSULTATIVE GROUP FOR MOZAMBIQUE
Paris, April 17-18, 1996
Chairman's Report of Proceedings
Backgouund 1. The ConsultativeGroup for Mozambique(CG) held its ninth meetingat the World Bank's EuropeanOffice in Paris on April 17 and 18, 1996. The meetingwas Chairedby KatherineMarshall, Director of the SouthernAfrica Department of the World Bank. The WorldBank's AlternateExecutive Director for the group of countriesthat includesMozambique also attended. The Mozambicandelegation was led by HE the Prime MinisterPascoal Mocumbi, and includedHE Tomaz Salomao,Minister of Planningand Finance, HE OldemiroBaloi, Ministerof Commerce,Industry and Tourism, HE AlfredoGamito, Minister of State Administration,HE Paulo Muxanga,Minister of Transportand Communications,HE Luisa Diogo, Vice-Ministerof Planningand Finance,and HE AdrianoMaleiane, Governor of the Bank of Mozambique. The Mozambiquedelegation also includedsenior Governmentofficials. The meeting was attendedby delegationsfrom Australia,Austria, Brazil, Canada,Denmark, Finland, France,Germany, Ireland, Italy, Japan,the Netherlands,Norway, Portugal, Spain, Sweden,the United Kingdomand the United States. Also representedwere the African DeveiopmentBank, the Arab Bank for EconomicDevelopment in Africa, the European Comnmission,the EuropeanInvestment Bank, the Food and AgricultureOrganization, the InternationalFinance Corporation, the InternationalMonetary Fund, the KuwaitFund for Arab EconomicDevelopment, the Organizationfor EconomicCooperation and Development,the UnitedNations Children's Fund, the United Nations Development Programme,the World Food Programmeand the WorldHealth Organization. Representativesfrom Russia attendedas observers.
2. The followingdocuments were distributedfor the meeting: MozambiqueGovernment: * "Steps TowardsEconomic and SocialDevelopment"
The WorldBank: * "MozambiqueCountry Assistance Strategy"
OpeningStatement by the Chair
3. In her openingstatement (Annex II), Ms. Marshallhighlighted Mozambique's achievementstowards sustainabledevelopment since the last CG meeting. She noted that the two previous CG meetingshad been held at criticaltimes for Mozambique. In 2
December 1993 the central challenge had been to complete the peace process, while in March 1995 the first democratic elections had just taken place and the goals for the future were being mapped out. In 1996, peace is well established and democracy is putting down roots, and the CG meeting is a timely opportunity to take stock of progress along the road to laying the foundation for a successful future for Mozambique. In particular, the CG as a group could focus more directly on the urgent task of improving the welfare of Mozambique's poor.
4. Ms. Marshall noted that in 1995 the group had traced an ambitious agenda for Mozambique, and that the Government had gone a long way towards meeting the goals that had been set. There is evidence that the living standards of the poor are improving, particularly in rural areas. Millions of farmers have resettled in the countryside and are growing food for their families, and the Government's efforts to support this process by promoting the development of markets, notably with the cashew marketing reform of 1996, have contributed to an increase in production and to improved incomes for farmers. Peace and democracy are being consolidated: a National Assembly meets regularly and consults with civil society and with opposition parties; the process of preparing for local elections, and for decentralization, is under way; the reform of the judicial system and the police is also in process; and there has been a real increase in spending in the social sectors, even in the face of a decline in overall public spending. In addition, inflation has been reduced, albeit to a level well short of the target; fiscal imbalances have declined considerably; and the enivironmentfor the private sector has greatly improved resulting in a real growth in output.
5. Turning to the future, Ms. Marshall noted that the agenda in Mozambique has shifted from the challenging one of securing the peace to the equally challenging one of generating growth. She suggested three areas for priority attention. The first is the urgent imperative to reduce inflation. Inflation affects poor people directly by eroding their purchasing power, and has a negative impact on investment and growth. Second, there are several key sectors with important potential for generating poverty-reducing growth. The first of these is agriculture, and it is central to the Government's strategy for both growth and poverty reduction. In addition to agriculture, Ms. Marshall noted that transport is kev to Mozambique's growth, given the country's important international transit corridors. A special side session would be held during the CG meeting on this subject. Third, improving the efficiency of public investment is an essential goal for the Government.
6. To conclude, Ms. Marshall noted that the challenges facing Mozambique in this post-war era are tremendous. She emphasized that Mozambique will need to orchestrate important structural changes and accelerate the rhythm of reforms, and will continue to count on the combined support of its ensemble of partners. 3
Statement by th- Mozambique Delegation
7. In his opening statement (Annex IV) the Prime Minister, HE Pascoal Mocumbi welcomed the representatives of the donor community and thanked them for their continued support. He declared that peace prevails in Mozambique, that the Government is making every effort to consolidate and strengthen the democratic process, and that the conditions for the country's economic and social development are being put into place.
8. On the issue of consolidating democracy, the Prime Minister highlighted the growing importance of the Assembly of the Republic; the rising activities of political parties within the Assembly; the participation of civil society in the political process; and the particular attention the Government has paid to eradicating corruption. He also noted the Government's progress towards decentralization and towards holding local elections. On the economic front, the Prime Minister reported that the Government was giving particular prioiity to the agricultural sector, particularly smallholder farmers. He went on to note the encouraging improvements he saw during his recent visit to a number of provinces, suggesting that the private sector is reacting flexibly to the reforms.
9. The PrinmeMinster concluded by stating that the Government's priorities in 1996 will continue to be those defined in 1995, namely, to continue with the economic reform program; to strengthen governance; to assist agriculture, especially smallholder farmers; and to improve health and education services, especially in rural areas. He encouraged the international community to maintain its support for the consolidation of democracy and the creation of conditions needed for Mozambique's economic and social development.
Statement by the IMF
10. Mr. Leite of the IMF (Annex V) noted that during the 1987-95 period growth averaged 6.7 percent, helped by large foreign aid inflows, structural reforms, and economic liberalization. He added that few countries could boast of such a strong economic recovery. However, Mozambique remains vulnerable to a number of factors: exceptionally high levels of foreign aid that may not continue in the future; high inflation, at around 50 percent; exports far below the country's potential; and an external debt burden unsustainable under current concessional debt rescheduling arrangements. He reported that during the discussions in February and March 1996, the Government reached understandings with the Fund staff on an economic strategy for the period April 1, 1996 to March 31, 1999, in support of which the IMF Executive Board is expected to consider a request for a new three-year ESAF arrangement.
11. Mr. Leite went on to note that Mozambique will be faced over the medium term with a significanLreduction in its capacity to import, as foreign assistance levels off and scheduled debt obligations increase, underscoring the need to increase domestic savings and the efficiency of investment. Public sector savings will be raised mostly through improvements in the tax and custom administration, while reducing inflation will create an enabling environment for private investment. Increased education and health
11'~~~ r I 4
expendituresare also expectedto raise labor productivityand investmentefficiency in the medium-to long-term. The main focus of reforms over the next three year period will be the rapid privatizationof the remainingpublic sector enterprises,particularly the two state-ownedcommercial banks. In addition,the mediumterm programwill focus on increasingagricultural growth through liberalizationof markets;investment in rural infrastructure,extension services and seeds for rural poor; eliminationof minimum prices; fosteringof private sectormarketing; and reviewof the land tenure systemto ensure adequateaccess for the rural poor while encouragingmodem agriculture. 12. Mr. Leite concludedby indicatingthat the key objectivesof Mozambique's programfor 1996are a sharp reductionin the inflationrate, to 22 percent,enhanced support for educationand health, and a reductionin the country's dependenceon foreign assistance. The target for growth in 1996is 4 percent. To implementthe medium-term policies effectively,and meet the targets for the 1996program, Mr. Leite emphasizedthat the efforts of the authoritieswill need to be supportedwith concessionalexternal financialassistance and an exceptionaltreatment of its external debt in order for Mozambiqueto achievea sustainableexternal position. MinisterSalomlo's Presentation
13. MinisterSalomao presented the main Governmentdocument "Steps Towards Economicand Social Development"(Annex VII). He beganby acknowledgingthe donor community's continuingsupport for the democraticprocess and the country's economic and socialdevelopment. He noted that when the CG met in 1995,the Governmenthad committeditself to pursuingreforms which would lay the foundationsfor economicand social development. Althoughonly the first steps have been taken, these serve to demonstratethe Government'sstrong commitmentto persevere with the necessary reforms.
14. The Ministerthen summarizedthe Government'sachievements in 1995.Peace and democracyare being consolidated;inflation has been reduced, albeit to a level well short of the target; fiscal imbalanceshave declinedconsiderably; and the environmentfor tbe privatesector has greatlyimproved resulting in a real growth in output. The Minister went on to emphasizethe Government'scontinued commitment to the three central tenets agreed to during the last CG: further structuralreform; a focus on fosteringgrowth in the agriculturalsector, especially among smallholderfarmers; and an increasingshift of budgetaryresources towards social expenditures. Plena Discussion
15. Thieimperative of achievingrapid economicgrowth and loweringaid dependency were recurringthemes throughoutthe discussions. There was a lively debate throughout on the possible negativeimpact on growth of stabilizationmeasures aimed at reducing inflation. Althoughthere were differingpoints of view, many of Mozambique'said partners underscoredthe point that the current inflationrate of 50% is too high and will stifle growth,ana welcomedthe Government'splans to reduce inflation,increase
11~~ I- ~ ~_ _ I_ - -_ _ __ _ 5
also applauded the new Policy revenues, and improve expenditure management. They Bank and the International Monetary Framework Paper recently agreed to with the World including the privatization of the Fund. They noted that several reforms now under way, a privatization and restructuring two state-owned banks, a customs reform program, and important to greater economic program for state-owned enterprises, are particularly while they praised the solid stability and an improved business climate. However, the Government to accelerate achievements already made on these fronts, they urged shift in the allocation in budget actions in the fiuture. Delegates also urged a further Finally, participants noted the resources away from defense towards social spending. and lauded efforts in this importance of improving statistical information in Mozambique, area. heavy external debt and growing 16. Delegates expressed concern that Mozambique's ability to invest in the human debt service requirements limited the Government's and poverty reduction prospects. resource development so vital to the nation's growth an externally-financed debt relief The Government appealed for support in establishing service to be directed to increasing fund which would allow resources allocated to debt the need for continued health and education services. Other participants emphasized monitoring and accounting improvements and increased transparency in the management, programs for key sectors, of external aid. Sector policy frameworks and investment few years, will enable donors to which are to be prepared and launched over the next funds to be used more effectively. provide funds in a more flexible manner, and for those efforts to turn the budget into a In addition, participants welcomed the Government's effort will include integrating aid- useful management tool for resource allocation. This under the Fiscal Management financed expenditures into the budget process as intended Review recently launched by the Government. year were highlighted. Participants 17. A number of other challenges for the coming and Non-Govermnental called for continued partnership with the private sector encouraged the Government to Organizations in development efforts. Participants a sector investment program that increase its efforts to establish agricultural policies and several participants emphasized would promote smallholder agriculture. In that context, preparation contained provisions the need to ensure that the new land law currently under including the safeguarding of for adequate land tenure security for smallholder farmers, which, after agriculture, customary rights. In addition, on the subject of transport, the Government presented provides the best opportunities for growth in Mozambique, informal session held after the CG participants with its strategy for the sector during an intention to increase private sector meeting. Participants welcomed the Government's and aviation during the coming year. participation in railways, ports and coastal shipping, to pursue a series of actions-- Finally, participants supported the Government's intentions and deregulation--that would including further trade liberalization, tax and tariff reform, foster private sector development throughout the economy. issues of governance, where many 18. Of greatest concern among participants were as on economic issues. They delegates felt that progress had not been as exemplary
… - - ~ .- 6
encouraged the Government to increase its efforts to strengthen democratic institutions and combat corruption. The Government announced its intention to continue to press forward with its plans for local government reform and decentralization, and renewed its commitment to update the Code of Conduct for civil servants and to establish a High Authority to combat corruption. Delegates emphasized the importance of holding local elections not later that 1997 to further consolidate democracy in Mozambique. On these matters, as well as others, the international aid partners and the Government agreed to continue the successful dialogue taking place in the budget and governance working groups based in Maiuto.
Special Sessions
19. Special Sessions were held to discuss the Mozambican delegation's proposal for establishing an externally-financed debt relief fund, presented by HE Adriano Maleiane, and to discuss the World Bank's presentation "Growth and Poverty Reduction in Mozambique: Issues and Options", presented by Ms. Phyllis Pomerantz from the Bank.
20. In his presentation, the Governor recalled the unsustainable debt burden that hinders Mozambique's development efforts, and proposed a Fund for Debt Reduction. The proposed funa would receive donor contributions for non-Paris Club and multilateral debt, while counterpart funds in local currency would be allocated to the Government budget to be used in the health and education sectors. In her presentation, Ms. Pomerantz summarized the challenges facing Mozambique, and the proposed strategy for addressing them, includinigcontinuing macroeconomic reform, increased sector investments, and promoting high potential growth sectors, particularly small-scale agriculture.
External Financing ReQuirements
21. Ms. Castro, who made the statement on external financing (Annex IX), noted that in 1996, the external financing requirement, excluding possible debt relief, was estimated at $557 million. She went on to note that the composition of external financing has changed, reflecting Mozambique's changing reconstruction needs, with less food aid and emergency financing. At the end of the meeting, the Chair indicated that the external financing requirements had been met with donor pledges of about US $871 million, of which 35% was for debt relief. The non-debt relief component of about US$ 567 million committed during the meeting included investments (34%), import support (21%), food aid (6%), and other programs (4%).
Closing Remarks
22. In his closing statement the Prime Minster noted that the meeting had been characterized by a singular convergence of points-of-view around solutions to Mozambique's development challenges. He reaffirmed that in his view the private sector remains the corner-stone to economic and social development in the country, and that the Government will continue to pursue strategies to improve the climate for private sector- led growth in Mozambique. He also reaffirmed the central priority of agriculture, 7
Government's strategy particularly among smallholders, and of the social sectors, in the thanked all the for both poverty reduction and economic growth. The Prime Minister advice. participating delegations for their support, cooperation and valuable expressed thanks to the 23. In the Chair's closing statement (Annex X), Ms. Marshall as well their Prime Minister and his team for their open and constructive contributions, that all had gained willingness to listen and respond directly and thoughtfully. She added Mozambique. She a better appreciation of the challenges and the opportunities facing year's Consultative noted that the most widely held view at the meeting was that last was one of Group Meeting was a meeting of good intentions, whereas this year's Mozambique's aid accountability. The consensus at the meeting, she felt, was that meeting the partners recognized that the Government had gone a long way towards some had still fallen ambitious set of goals for the past year, even though progress on and combating short of expectations, notably in the areas of promoting decentralization discussion at the corruption and inflation. She then reviewed the main themes of meeting: economic issues, poverty reduction, and governance. for growth and 24. On the economic front, the Chair emphasized the importance steps for the poverty reduction of reducing inflation. She noted the next important banks; completing the Government, namely completing the privatization of the two state for private sector planned customs reform; furthering the improvement of the climate state-owned railways activity; privatizing or increasing private sector involvement in the (Petromoc) as (CFM), the airlines (LAM), and the petroleum distribution company of public sector rapidly as possible: and, at the same time, increasing the effectiveness the Consultative investment. On the question of debt, Ms Marshall observed that, while several participants Group meetings were not a forum for seeking definitive solutions, welcomed new had noted that Mozambique's debt position was unsustainable and the Chair noted that initiatives to tackle the pioblem. On the issues of poverty reduction, agriculture in the the group was in full agreement with the central role of smaliholder importance of land World Bank's country assistance strategy (CAS). She indicated the and growth, and tenure laws for poverty reduction as well as to promote private initiative of a Land noted that many participants had emphasized the need for rapid promulgation land rights. She also Law based on wide ranging consensus and which recognizes local in this context underscored the importance of liberalizing prices in the sector, and On the social sectors, applauded the recent decisions related to cashew marketing reform. expenditures in the Chair reiterated the group's satisfaction with the increases in public targets established in the education and health, but noted that these were still short of the the two main concerns budget. Finally, on the subject of governance, the Chair addressed She expressed by the group: corruption and the postponement of local elections. at the meeting, applauded the Government's commitment to combat corruption, affirmed critical for developing and reiterated the consensus among donors that local elections are an effective participatory Government. met the bulk of the 25. After expressing satisfaction that the donor community had the meeting closed. financing requirement for Mozambique in 1996, the Chair declared
r~~~~ r - El~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~fi~~~~~~~~~~~~~~~~
i~~~~~~~~~~~~~~~~
;00 Ct 9 ANNEX I
Agenda Mozambique: Ninth Consultative Group Meeting April 17-18, 1996
Wednesday April 17 08:00-09:00 Registration 09:00-10:30 Opening Statements Chairman's Opening Statement Government Statement IMF Statement UJNDPStatement 10:30-10:45 Coffee Break 10:45-12:30 government Presentation General Discussion the Paris Office 12:30-14:00 Buffet Luncheon for all participants at 14:00-15:30 Continuation of Discussion 15:30-15:45 Coffee Break Reduction in Mozambique: Issues and 15:45-17:15 Special Session: "Growth and Poverty Options" Overall presentation by the Bank Short presentations on selected issues by Bank and Government General Discussion 17:15-18:00 External Financing Requirements Government Statement Bank Statement for participants at Paris Office Close of Cocktail Reception hosted by Government Session
Thursday April 18 8:30-10:30 Participants Statements 10:30-11:30 Coffee Break/Working Discussions 11:30-11:45 Consideration of Press Release 11:45-12:30 Closing Statements Statement by Government of Mozambique Statement by Chairman 12:30 Meeting adjourns 10 ANNEX I
Apr 18 9:30 FOR MEETING OF THE CONSULTATIVE GROUP MOZAMBIQUE
Paris, April 17-18, 1996
Chair Ms. Katherine Marshall Director,Southern Africa Department(AFI)
List of ParticiDants
AUSTRALIA Head of Delegation Mr. Angus Macdonald Counsellor (Development) Australian Permanent Mission to the United Nations Geneva
Mr. Waltraud Schut Coordinator Ministry of Cooperation
AUSTRIA Head of Delegation Dr. Marielies Rehor Head of Section Mnistry for Foreign Affairs
Dr. Konstantin Huber Ministry for Foreign Affairs
Mrs. Waltraud Schiitz
BRAZIL Head of Deleption Mr. Denis Fontes de Souza Pinto Conseiller aux AffairesFinancieres et de D6veloppement Ambassade du Bresil, Paris
Ms. Silvia Hazan Menasce Adjointe au ConseillerEconomique Ambassade du Brcsil, Paris
______I - I MozambiqueCG 11 April 17-18.1996
CANADA
Mr. John A. Copland Head of Delegation Counsellor CanadianHigh Commission,Harare
Mr. Arthur M. Saper DirectorGeneral SouthernAfrica Division CanadianInternational Development Agency (CIDA)
DENMARK
Mr. Bo Jensen Head of Delegation Head of Section Ministryof ForeignAffairs
H.E. Ole BlicherOlsen Ambassador The RoyalDanish Embassy, Maputo
Ms. SanneOlsen Head of Section SouthernAfrica Division Ministryof ForeignAffairs
FINLAND
Mr. JuhaniToivonen Head of Delegation Director,Department for DevelopmentCooperation Unitfor Sub-SaharanAfrica Ministryfor ForeignAffairs
Mr. Keijo Ruokoranta ProgrammeOfficer, Department for DevelopmentCooperation Ministryfor ForeignAffairs
Mr. Matti Kairiainen Charg6d'Affaires Embassyof Finland,Maputo
Mr. HeikkiHaili Chief EconomicAdvisor Ministryfor ForeignAffairs
zI r |~--F Mozambique CG 13 April 17-18, 1996
Germany (cont'd)
Mr. Wolfgang Voss Division Chief Kreditanstalt fur Wiederaufbau (KfW)
[RELAND
Mr. Barry Murphy Desk Officer for Mozambique Development Cooperation Section Ministry of Foreign Affairs
ITALY
Minister AlessioCarissimo Head of Delegation Coordinator Africa Division Directorate General for Development Cooperation Ministry of Foreign Affairs
Couns. Gianluca Cortese Head of Southern African Countries' Desk Directorate General for Development Cooperation Ministry of Foreign Affairs
Ms. Rosa Gallo Adviser Department of International Affairs Ministry of Treasury
Mrs. Donatella Procesi Expert, Mozambique Desk Southern Africa Department
Mrs. Fiametta Milesi Ferretti First Counsellor PermanentDelegation to the OECD
iF~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Mozambique CG 12 April 17-18. 1996
FRANCE of Delegation Mr. Fran;ois Farabolini Head Adjoint au Chef du Bureau Afrique et Ocean Indien Direction du Tresor Ministere de l'Economie et des Finances
Mr. Jerome Chastenet Chef du Poste d'Expansion Economique a Maputo Direction des Relations Economiques Exterieures (DREE) Ministere de l'Economie et des Finances
Mr. Frederique Laurent Charge de Mission Ministere des AffairesEtrangeres
Mr. Harold Valentin Redacteur Ministere des Affaires Etrangeres
M4rs.Danielle Robin Charg6 de Mission Ministere de la Cooperation
Mr. Philippe Lecrinier rharge de Mission Geographique Caisse Fran;aise de Developpement
GERMANY Delegation Mrs. Dr. Elin Horn-Vornschlag Head of FederalMinistry of Economic Cooperation and Development(BMZ)
Mr. JitrgerKurzhals Desk Officer SouthernAfrica Department BMZ
Mrs. AnnemarieKonecke ProjectOfficer SouthernAfrica Department GermanAgency for Technical Cooperation(GTZ) 14 MozambiqueCG April 17-18, 1996
JAPAN Head of Delegation Mr. Hironobu Yasumura Counsellor Embassy of Japan, Zimbabwe
Mr. DaisukeYabuki SpecialAssistant Embassy of Japan, Paris
THE NETHERLANDS Head of Delegation Mr. Arie ,an der Wiel Ministryof ForeignAffairs
H.E.Mr. Roeland van de Geer Ambassadorto Mozambique
Mrs. Eric Schouten Desk Officer,Mozambique Desk SouthernAfrica/Development Cooperation Ministryof ForeignAffairs
NORWAY Head of Delegation Mr. Kare Stormark DeputyDirector General RoyalMinistry of ForeignAffairs
Mrs. Eldbj0rgHaug SeniorExecutive Officer RoyalMinistry of ForeignAffairs
Mr. Gunnar Boe Chargi d'Affaires Embassyof Norway,Maputo
Mrs.Agnete Eriksen RoyalMinistry of ForeignAffairs
____r__--___ Mozambique CG 15 April 17-18, 1996
PORTUGAL
Mr. Jose Toscano Head of Delegation Deputy Director General Department of Treasury Ministry of Finance
Mr. Antonio AlmeidaLima Minister Counsellor Embassy of Portugal, Maputo
Mr. Fredenco Santos Assessor Instituto da Cooperacao Portuguese Department of Treasury
Ms. Carolina Stroia ICP
RUSSIA
Mr. Alexander Gorban Head of Delegation Department of Economic Cooperation Ministry of Foreign Affairs
Mr. Eugeniy Lyamin Department of Foreign Credits and External Debt M.linistryof Finance
Mrs. Larisa E. Safronova Counsellor Monetary, Pricing and Credit Administration Ministryfor ForeignEconomic Relations of Russia
Mr. SergueiVolkovski Embassyof Russia,Paris
SPAIN
Ms. MonicaJunquera Headof Delegation ProgamnneDirector Ministryof Economyand Finance
Ms. Maria-PazRamos DeputyDirector General Mnistry of Commerceand Tourism 16 Mozambique CG April 17-18, 1996
Spain (cont'd)
Ms Vega Bouthelier Martinez TechnicalAdvisor Southern African Sub-Direction Ministry of Foreign Affairs
Ms. Teresa Corella Rodrigo Technical Advisor Ministry of Foreign Affairs
SWEDEN Head of Delegation Mr. Jan Bjerninger AssistantDirector General Swedish InternationalDevelopment Cooperation Agency (SIDA)
Ms. AnnStodberg Counsellor (Development Cooperation) Embassy of Sweden, Maputo
Ms. Karin Andersson Desk Officer Regional Department for Southern Africa SIDA
Ms. Eva Cassel SpecialAdvisor Departmentfor InternationalDevelopment Cooperation Mlinistryfor ForeignAffairs
SWMERLAND Headof Delegation Mrs. UrsulaFunk ProgramOfficer, East Africa Section SwissDevelopment Cooperation FederalDepartment of ForeignAffairs
Mr. OlivierBiOrki Economist,Program Officer SwissDevelopment Cooperation FederalDepartment of ForeignAffairs
NI - _ _-- r- _ _ Mozambique CG 17 April i-IS. 1996
Switzerland (cont'd)
Mr. Felix Fischer Desk Officer, Development Policy Division Federal Office of Foreign Economic Affairs Federal Department of Public Economy
UNITED KINGDOM
Mr. Alan Coverdale Head of Delegation Head, British Development Division Overseas Development Administration(ODA)
Mr. David Keeling ODA
UNITED STATES
Ms. Caroi Peasley Head of Delegation Deputy AP;istant Admninistrator U.S. Agency for International Development (USAID)
Mr. James T. Smith Acting Director USAID, Mozambique
H.E. Mr. Dennis Jett Ambassador to Mozambique
AFRICAN DEVELOPMENT BANK (AfDB)
Dr. Alice Hamer Head of Delegation Chief, Human Resources Division Count:y Department South Region
Mr. Victor Wahba PrincipalEconomist CountryProgrammes
ARAB BANK FOR ECONOMIC DEVELOPMENT IN AFRICA (BADEA)
Mr. Abdel Dani Benkhalef Senior Financial Analyst Projects of Programmes Department
'F- 18 MozambiqueCG April 17-18,1996
EUROPEANCOMMISSION
Mr. GiovanniLivi Head of Delegation Director for Eastem and Southem Africa
Mr. Jose Leandro Economist Structural AdjustmentSupport
Mr. Paul Malin Desk Officerfor Mozambique Directorate-Generalfor Development
Mr. Daniel Contel Administrator Food Security Unit
Mr. SvenKuhn von Burgsdorff EconomicAdviser, Maputo
Mr. Jeremy Stickings Social DevelopmentExpert DevelopmentPolicy Department
EUROPEANINVESTMENT BANK (EIB)
Mr. Justin Loasby Head of Delegation Head of Division Southern Africa and Indian Ocean Region
Mr.Manuel Fontes Loan Officer Southern Africa Division
FOODAND AGRICULTURE ORGANIZATION (FAO)
Mr. GuyBuperet Econornist PolicyAssistance Division Departmentof Cooperation
INTERNATIONALFINANCE CORPORATION (IFC)
Mr. TakuroKimura InvestmentOfficer, Sub-sahran Africa Department
11'I' Mozanibique CG 19 April 17-18. 1996
INTERNA'TIONAL MONETARY FUND (IMF)
Mr. Sergio Pereira Leite Division Chief
KUWAIT FUND FOR ECONOMIC DEVELOPMENT
Mr. Jbrahim R. Al-Fulaij Head, East, South and Central African Division
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD)
Ms. Elisabeth Thioleron Administrator in the Aid Management Division
UN CHILDREN' S FUND (UNICEF)
Mr. Shob Jhie Representative
UNITED NATIONS DEVELOPMENT PROGRAMME (UNDP)
Mr. Solomon Akpata Head of Delegation Chief Southern Africa Division Regional Bureau for Africa
Mr. Erik de Mul Resident Representative, Maputo
Mr. Carlos Horta Senior Field Economist Division for Southem Africa Regional Bureau for Africa
WORLD FOOD PROGRAMME (WFP)
Philip J. Clarke Head of Delegation Country Director, Maputo
Ms. Georgia Shaver Chief Desk Officer Eastem Africa Bureau
T ---- _ _ ir- ______20 Mozambique CG April 17-18, 1996
WORLD IEALTHORGANIZATION (WHO)
Dr. NkamanyKabamba Headof Delegation WHORepresentative, Maputo
Dr. M.H. Mathey-Boo Chief,Interagency Resource Mobilisation
Dr. Nick Dragger WHOIntensified Cooperation with Countries ICO/HQ
MOZAMBIQUE
H.E. PascoalMocumbi Head of Delegation PrimeMinister
H.E. TomazSalomao Ministerof Planning& Finance
H.E. AdrianoMaleiane Govemor,Banco de Mocambique
H.E. OldermiroBaloi Ministerof Commerce,Industry & Tourism
H.E. AlfredoGamito Ministerof State Administration
H.E. Paulo Muxanga Ministerof Transport& Communications
H.E. Luisa Diogo Vice Ministerof Planning& Finance
Mr. AntonioAbreu GeneralManager, Banco de Mocambique
Ms. EsmeraldaFernandes Director,Banco de Mocambique
Mr.Manueul Chang NationalDirector of MP&F
Mr. AmadeAziza NationalDirector, M&F
I. I, _ MozamnbiqueCG 21 April 17-18, 1996
Mozambique (cont'd)
Ms. Yolanda Fortes 'NationalDirector, MP&F
Mr. GamilielMugambe National Director of MFA & Cooperation
Mr. Silvestre Secheme Director at Prime Minister's Office
Mr. Daniel Tembe Adviser Ministry of Planning and Finance
EXECUTIVE DIRECTOR
Mr. Joaquin Carvalho Alternate Executive Director
WORLD BANK
Ms. Katherine Marshall Chair Ms. PhyllisPomerantz Mr. Roberto Chavez Mr. Gene Tidrick Mr. Simon Bell Ms. Rocio Castro Mr. Jehan Arulprgasam Mr. Yash Pal Kedia Mr. Luis de Azcarate Mr. Jocelyn Mdason
n l 22 ANNEX III
MOZAMBIQUE Consultative Group Meeting Paris, France, April 17-18, 1996
Chairman's OpeningStatement KatherineMarshall Director Southern AfricaDepartment World Bank
Ladies and Gentlemen:
Welcome to the 1996 ConsultativeGroup Meeting for Mozambique! This marks the ninth formal meeting of this partnership, which we see as an unusually important and active one on the internationalscene. I would like particularlyto extend a warm welcome to the distinguishedGovernment delegation, led by His Excellency, Prime Minister Mocumbi of Mozambique.
We are all deeply aware of the specialhistory and the extraordinarychallenges that Mozambiquepresents, and of the unique importance of externalsupport and its harmonizationfor Mozambique,as its Governmentand people strive to lay the foundation fco a successfulfuture. Even in the year since we met last here in Paris we have witnessed often the dynamismof both Mozambiqueand its partners in this group as we have responded to the challengesand opportunitiesthat are before us. The chance to meet together and to look forward towards Mozambique'smedium term development is thus particularlytimely. Our central objective here, therefore, is to take stock of where we are, as a group of partners dedicated to the development of Mozambique, and to define our work in partnershipfor the next year.
In 1993 this group met for the first time after the end of the war. In 1995 we met after Mozambique's inauguralelection. We have also seen, over the past three years, a fundamnentaltransformation in the regional environmentin Southern Africa that has brought new hope, but also new challenges. And we have continued to see a transformation in the environmentwithin which we, as aid partners, operate, with new questions asked and new expectations on us all from our constituents.
As we meet here today, we can see the direct significanceof these changes for Mozambiqueand for our partnership. Above all, peace is well establishedand democracy is putting down roots. This meansthat we can focus more directly on the urgent task of improvingthe welfare of Mozambique'spoor. Mozambique's rich potential emerges more clearly today, even as the immensechallenges ahead to develop its human capital stand in sharpjuxtaposition. Our work has onlyjust begun; the nF I - 23
challengesMozambicans face are enormous; and the course we have embarked on is long.
Last year, we traced the ambitiousagenda facing the Mozambique Govermnent. Looking back, it is clear that much effort has gone to advance with the commitmentsmade. Despite delays in implementationof some measures, we see important progress. We have been most encouragedto see initialsigns that the living conditions of the poor are improving,particularly in rural areas. Millions of farmers have resettled in the countryside and are growing food for their families. The Government's efforts to support this process by promotingthe development of markets --evident this year, for example, with cashewmarketing reform -- have contributed to an increase in production and to improvedincomes for farmers. Real expendituresin each of the social sectors increasedsignificantly in 1995, while expendituresfor defense were reduced. Schoolsand health centers are availableto more people and, equallyimportant, clear benchmarksfor progress are being defined, and monitored. Recent informationindicates that there was a 5 percent increase in the volume of health services provided to the population,with most of the increase taking place in rural areas. Increases in primary school enrollmentwere also significantand were also concentrated in rural areas. I note, however,that this is still an area of challenge for the Government: budgetary expendituresfor health and education have not yet reached the proportion of the overallbudget that had been targeted.
Progress has also been made in consolidatingthe democraticprocess. Over the past year, we have witnessedthe birth and growth of important democratic institutions. The Assemblyof the Republicmeets regularlyand consultswith civil society and with opposition parties. Debates held at the Assemblyof the Republic on decentralization and on the National Budget are examplesof how this process is shaping up in concrete terms. This is all the more encouragingwhen we consider that Mozambique's democracy is little over a year old.
We are all aware, nonetheless, that Mozambique'spartners remain concerned about the range of governanceissues in Mozambique. The Government's challenge is to move forward with the actions outlined at the last CG meeting. These includethe introduction of a code of ethics, the establishmentof a Higher Authority to combat corruption, and customs reform. In addition, increasedtransparency, through further fiscal reform aiid deregulation,should help to improve accountabilityand to reduce the scope for discretionarydecision making. Judicialreform continues as a critical area. Finally, the role to be played by civic organizationsin a post-emergency setting, above all in helping to build communityorganizations and ensure broad participation in development, bears specialnote. We look forward to hearing the Government'sviews and suggestions on how governance issues will be addressedin the remainder of 1996.
Perhaps the most important structural items on the Government's agenda for economic reform over the past year have been customs reform and the privatizationof Banco Comercialde Mocambique,the largest state-owned bank. Not unexpectedly, there has been a host of complexitiesinvolved in implementingthese programs, and the timetables announced at the last CG meetinghave turned out to be too ambitious. Nonetheless, the Government is taking the necessary steps on both fronts. Customs reform is now moving ahead: a restructuring unit has been establishedat the Ministry 24
of Planning and Finance;a new pre-shipmentinspection company has been contracted; and a private firmnto managecustoms should be in placeby June this year. Tighter customs controls have already resulted in a 40 percent increasein duty collections last year. With respect to the sale of BCM, privatizationis now planned for June 1996, as foreseen in the timetableagreed with the World Bank in May last year. A Sales Prospectus has been completed, some initialmarketing has taken place, and several foreign banks have expressedan interest in the purchase. A program of actions to privatize the other state bank, the Banco Popular de Desenvolvimento,by December 1996, is under way and a Sales Adviserto privatize the Bank shouldbe appointed by June. The Government's efforts in these areas deserve our recognition.
As we turn to focus on the future, it is clear that the agenda in Mozambique has shifted from the challengingone of securing peace to the equallychallenging one of generating growth. Only growth will increase per capita consumptionfrom the abysmal levels of the past decade; only growth can ensure a better life for the citizens of Mozambique; and only growth can ensure Mozambique'slong-term external viability. The Governmenthas before it a formidabletask: how to generate this growth; how to ensure that this growth works to reduce poverty; and how to sustain this growth over a number of years. As the Governmentfaces these challenges,I would like to suggest three area for priority attention.
The first is the urgent imperativeto reduce inflationin Mozambique. The persistence of high inflationcontinues to limit growth and threatens future sustainability. High inflationaffects poor people directlyby eroding their purchasing power. High inflationalso has a negative impact on investmentand growth. In Mozambique, this link between inflationand stifledgrowth is borne out by constrained investment and by the lack of long term finance. Strong monetary and fiscal measures to control inflation,therefore, remain of highest priority in Mozambique. This underscores the importance of the Government's effortsto privatizethe banks quickly, as well as the need to strengthen, urgently, the CentralBank, specificallyin monetary control and banking supervision.
Second, there are several key sectors with importantpotential for generating poverty-reducinggrowth. The first and foremost is agriculture,and the Government has made this sector central to its strategy for both growth and poverty reduction. Fostering the developmentof rural markets;increasing the impact of public investments;and securingaccess to land by smallholderfarmers are all central to promoting agriculturalgrowth. Rural markets are being fostered through road rehabilitation and further trade liberalization.An integrated sector program, now under preparation, can increasethe efficiencyof publicinvestment in agriculture. The Government should be commendedfor the NationalLand Policy announced last August, and particularlyfor the fact that this policyrecognizes customary rights and community participationin land titling. It is importantthat both the new land law and its implementationcontinue to reflect these very important principles.
In addition to agriculture, transport is key to Mozambique'sgrowth. Given its important internationaltransit corridors, Mozambiquecan capitalizeon transport revenues for foreign exchange. Moreover, efficiencyin transport is imperativeto lowering marketing costs and improvingdomestic and internationaltrade. The v -- 1 r--F 25
significanceof this goes well beyond Mozambique'sborders. In recognition of the vital importance of transport matters for Mozambiqueand its neighbors, we are planninga special side session tomorrow afternoon after the formal conclusion of this meeting, which will be dedicated to these issues.
In additionto reducing inflationand promotinghigh-potential growth sectors, improvingthe efficiencyof public investmentis an essentialgoal for the Government. Mozambique. With scarce resources, every meticalmust be spent wisely and with the central objective of poverty reduction in mind. The high levels of support from aid partners can be expected to decline over time, while debt service payments are currently projected to absorb an increasingshare of the national budget. These circumstancescall upon us to maximizethe developmentimpact of our joint efforts. The Government's initiativesto improvethe efficiencyand impact of public spending through integrated sector programs warrant our full support. Sector programs have been elaborated and launched in the healthand roads sectors and are currentlybeing prepared by the Government for the agricultureand education sectors. In addition, good fiscal managementwill be essentialto improvingthe impact of publicspending on growth and poverty reduction. To this end, the Government has begun a fiscal managementreview process aimed specificallyat turning the budget into an effective managementtool for resource allocation. Here again, Mozambique and its partners will need to collaborateclosely to achieve a fullyintegrated budget covering both external and domestic resources.
Two other topics emerged in our discussionslast year and we will hear during our meeting about progress made: private sector development, and the role of external debt We all recognize the vital importanceof the private sector: indeed it is a dominanttheme in the Government's strategy. We will look forward to hearing about progress made in the essentialtask of enhancingthe environmentfor investment,from Mozambique and from abroad. On externaldebt, an issue prominentlyin international discussionat this moment, we hope that, as we had agreed last year, the issues for Mozambiqueare now more sharply defined. We will hope to advance in our discussionsof impact and options grounded on a clear analysisof the position and projections for the future.
To summarize,the challengesfacing Mozambique in this post-war era are tremendous. Mozambiquewill need to orchestrate important structural changes and accelerate the rhythm of reforms. It will continueto count on the combinedsupport of its ensembleof partners. In closing the CG meeting last year, we made reference to a symphony: an opus which required the timely participationof different players. I trust we will once again strike a harmnoniouschord, startingwith this meeting over the next two days, and continuing throughout this year.
Let me now turn briefly to the practicalissues of the agenda for the meeting and logistical arrangements:
* We will begin the discussionwith a statement from His Excellencythe Prime Minister. This will be followedby a statement on the economic situation by Mr. Leite of the IMF and a statement by the UNDP. 26
Financeand a coffeebreak, His Excellency,the Ministerof Following on the Plauning,Minister Salomao, will give us a presentation We will then open the Government'seconomic and developmentstrategy. for a plenary discussion. meeting this room, then like to inviteyou to an informallunch, outside * We would some tables for at 12:30. As in past years,we planto designate beginning Tentatively,we discussionof topics of particularinterest to participants. issues andfiscal plan to have tables for agriculture, social sector private sector development management issues, governance issues, and Please let membersof the Bank delegationknow, and privatization. As always, duringthe coffeebreak, if you have additionalsuggestions. some tables willbe reservedfor generaldiscussion. of "Growth and lunchwe willturn to a presentationby the Bank * After This will be Reductionin Mozambique:Issues and Options". Poverty poverty by a presentationby the Governmenton debt and followed taking a coffee reduction. This will be followedby plenarydiscussion, break at an appropriatemoment. requirements,opening with a X At about 5:15 p.m., we will turn to financing followedby Ms. Rocio statementfrom His ExcellencyGovernor Maleiane, Castro of the World Bank. Governmenthas kindly * I would like to confirmthat the Mozambican Bank premises,beginning invitedus to a cocktailreception tonight on the at the close of this session. we willconvene at 8:30, moving 3 Tomorrow morning(Thursday), by participants. After immediatelyto statementson externalfinancing position and to the draft coffee,we will turn to a summaryof the financing we will conclude the main of our press statement. After closingremarks, Bank will hold a press meeting at 12:30p.m. The Governmentand the p.m. conferenceon these premisesstarting at 1:00 3:00 p.m. to 5:00 p.m., we * Last, but not least, tomorrow afternoon,from sector matters in will hold a specialinformal session on transport Mozambique.
we launchthe meeting If these arrangementsare satisfactoryto you, I propose by callingon the PrimeMinister for his statement.
April 17. 19 8:45AM 27 ANNEX IV
C)peoning 3t.emeat by i* exsellency Dr. I'A3C4AL H4PCIUHl
]PRIME MINISTER OIF TCHE R]EPUBLIC O]F MOZAMBIQU]E
4.&d 17. 1996
n~ ~ ~~- X T_ 28
MRS CHAIRPERSON, ILLUSTRIOUS REPRESENTATIVES OF THE DONOR COMMUNITY LADIES AND GENTLEMEN
On behalf of my Government,the delegation which accompaniesme, and on my own behalf I would like to begin by welcomingyou to this important meeting. I Would also like to express the appreciationand gratitude of the People and Governnent of Mozambique for the assistance we have received from the governmentsand organisations which you represent.
When we met here at the last Consultative Group meeting, we were all pleased with the results achieved in the implementation of the General Peace Agreement, which had culminated with the swearing in of the new Governmentresulting from the first general multiparty elections. The country was emerging from a destructive war, its economydevastated and its social fabric I N TATTERSThis was why we declared at the time, that the Government's priority task was to "preservepeace and consolidate national unity, getting the country's life back to normal and creating the foundations for economic and social development".
One year after that meeting we can affirm, and confidently,that the spirit of peace prevails among Mozambicansand that every effort is being made to consolidate and strengthen the democratic process in our countiy. Peace is the prerequisitewithout which any development effort is doomed. For us it is thus one of the greatest victories achieved to date by the Mozambicanpeople. LADIES AND GENTLEMEN
The strengthening and consolidation of democracy is still an important condition for the implementation of the Govemment Programme. In this process, I Would highlight the growing role of
-~ - -- _ __ 29
the Assembly of the Republic in the Country's political and socio- economic life.
It must be stressed that the efforts made to ensure the normal fanctioning of the Assembly of the Republic have only been possible at the expense of sacrifices in some areas.
The political parties are also strengthening and consolidating the democratic process, respecting plurality of ideas, expressing their points of view on the Country's reality trough a variety of fora.
Another important aspect for strengthening and consolidating democracy is the national reconciliation issue. It is important that reconciliation between Mozambicans be based on mutual respect and dialogue between the various political forces and representatives of civil society. This requires that social groups and all citizens be involved in the Country's socio-economic and political process.
Through their participation in associations and non governmental organisations of an economic, religious or other nature, citizens have contributed towards enriching the social dimension of the current reforms. Here, the Government has promoted dialogue and social reconciliation as a method of work.
Its efforts to promote national reconciliation also include measures aimed at the politico-administrative unification of the country, to remove any focal points for division and tension.
LADES AND GENTLEMEN
The implementation of the Government's Programme requires the practice of good governance predicated on energetic action to prevent and fight corruption, on continuing the decentralisation process in tandem with the organisation of local elections, and on reform of the judicial system.
My government has paid particular attention to the problem of
LHf --- r-- 30
corruption, given its implications and costs in the political and social fields.
In order to heighten awareness and to define mechanisms for identifying and fighting this evil, with assistance from World Bank the Government has held two seminars on the subject, attended by members of the Assembly of the Republic, members of the Govermment, religious leaders, leaders of political parties with or without seats in Parliament, the media and other personalities from civil society.
The Council of Ministers discussed recently the mechanisms being established to ensure ethical conduct by leaders in public office and the establishment of a Supreme Authority against Corruption.
The fight against corruption is not unrelated to the creation of mechanisms for transparency in Public Administration acts. The Public Administration reforms includes the simplification of admninistrative procedures in order to instil more dynamism into governance, the updating of the General Statutes for Civil Servants and the efficient management of human resources, all of which are vital elements for achieving greater transparency in the administrative process. A seminar on the current reform process and its impact on the country's political, administrative and economic systems is programmed for the end of the first semester this year.
Another aspect related to good governance is the decentralisation process and the holding of local elections. The Local Authority reform programme is being launched now and draft legislation to complement law 3/94 has been prepared, as follows: . Electoral Law; . Election Registration Law; . Law on the National Election Commission; . Decree on the legal system for the administrative supervision of municipal bodies; and . Decree on the status of office holders in municipal bodies. n- --- -r---- __ 31
As regards the timetable for the local elections, an Ad Hoc Parliamentary Commission has been established to prepare the necessary recommendationsfor achievingthis important objectiveof the democraticprocess. Meanwhile, the Government is continuing the preparation of technical aspects concerning the organisation of local elections in accordance with the law, and of the componentsdealing with local finance, infrastructuresand the creation of the necessary conditions for the decentralisationprogramme, includingthe deconcentrationof human resourcesmanagement to provincialgovernments. It should be stressed that the Public Administration reform process has required due considerationof the local setting and guaranteed in depth knowledge of the economic, social, political, cultural and historical aspects of local institutions and reality. Finally, last but not least, is the question of reform of the judicial system, which includes the domains of the Police, Courts, Attomey General's Officeand Justice. We are aware that refomiing this system is a necessity for consolidating the State of Law and establishing a market economy. This was made quite clear in the recent meeting between the Head of State and representatives of the sector. Achieving this objective implies allocating additional material and financial resources to the sector, and the simultaneous training and preparation of the administratorsof the judicial machinery. LADIES AND GENTLEMEN Of the various objectivesof an economicnature, activities within the rural development context are of particular importance - the rehabilitation of economicand social infrastructure,the reintegration of the demobilisedsoldiers to ensure their resettlement and human capital development.
n X~~~~~ F 32
In the rural development field, the Government has given priority to assisting the family sector in order to improve crop yields, speeding up the distribution of land.
Other important activities were the approval of the agrarian Policy and the National land Policy. The Land Law is being revised and it is anticipated that the new law will be approved by the end of the year.
In the field of infrastructure rehabilitation, of particular note was the rehabilitation programme for primary and secondary roads. In order to guarantee water supply for rural areas, the Government has given priority to rehabilitating wells and bore holes and opening new ones.
In this respect, I would like to express my admiration for what I saw during my recent visit to some provinces. This has given me a much more positive and enthusiastic view of Mozambique's reality:
. With the establishment of peace and the positive performance of the special resettlement programmes, the family sector has clearly been revitalised, both agriculture and animal production are on the increase in the rural areas, regional links have been re-established and goods and people are circulating;
The rise in small scale artisan production and small private investment initiatives is also clearly visible;
The privatisation process has led to increased production and better quality products.
This reality only serves to prove that the private sector is reacting flexibly and positively to the economic incentives we have been introducing. These results lead us to be optimistic about resolving the social problems created by unemployment in the large cities.
At the same time the Government has emphasised human resource development, with priority for education and health through real increases in the budget allocations for these sectors and through the
___- -r- --- r 33 rehabilitation and construction of new schools and health posts, particularly in rural areas.
We are well aware of the need for even larger increases in he budget of these sectors, especially when compared with the budget for defence and public order. However, we must not lose site of the fact that the police force requires the minimum of equipment given the need to ensure public safety and tranquillity. Otherwise, all our efforts run the risk of being cancelled out by criminal activity.
As the result of all these measures the economy has been growing, mainly due to the positive impact of peace and population resettlement in the rural areas, as I have already mentioned.
Despite this progress, the external debt is still a serious impediment to economic development in Mozambique.
How to deal with that problem requires special attention from our creditors. For the Governments part we have been giving priority to contracting new credits on highly concessional terms, resorting more to grant fanding and undertaking operation which convert debt into investment. Despite considerable efforts to find alternatives for greater debt relief, these measures have been insufficient.
Channelling resources to pay debt service or reduce the stock of debt could make it possible to reallocate budget resources to the social sectors and to reduce poverty in Mozambique.
LADIES AND GENTLEMEN
The results obtained in 1995 encourage us to face this year with optimism. Above all we must bear in mind that Mozambique is a country which have just emerged from a devastating war, and which is thus passing through a process of transition and of the management of change. For this reason the Government's efforts have been directed towards creating an enabling environment for private investment and restarting productive activity which has been
r -- r----- 34
paralysed for many years.
Mozambicans in the rural areas are gradually getting their lives back together again concurrently with the process of resettlement and infrastructure rehabilitation.
Complementing the Government's efforts, regional co-operation will continue to play an important role as an instrument for promoting the development of our countries. The implementation of projects in agriculture, transport and energy is a palpable example of this process.
The Government's priority in 1996 will continue to be those defined in 1995. These are essentially to continue to consolidate the refornms began in all sectors of the country's political and economic life, namely strengthening governance, assistance to agriculture, the family sector in particular, and budgetary priority for the social sectors and areas where the productivity of investment is greatest.
In our opinion, these objectives and priorities will reinforce our activities to date aimed at developing the country economically and reducing poverty.
With this strategy, the Government reiterates its position as a facilitator and regulator of how the economy works. In the current climate of peace, Mozambique is undoubtedly a country in which the private sector has an important role in economic growth and social development.
We hope that the support manifested by the international community will continue for the consolidation of democracy and the creation of conditions needed for Mozambique's economic and social development.
Thank you very much
Maputo, 17 de April de 1996
if _ I_ 35
ANNEX V
Statement of the Staff Representative of the InternationalMonetary Fund at the Mozambique ConsultativeGroup Meeting Paris, April 17-18. 1996
Mozambique launched its structural adjustment program in 1987--the Economic RehabilitationProgram (ERP)--whichwas supported by a SAF arrangement from 1987-90. Subsequent programs have been supported by ESAF arrangementssince then. During 1987-95, the rate of growth averaged 6.7 percent, helped by large foreign aid inflows, structural reforms, and economic liberalization. Few countries can boast of such a strong economic recovery, particularly in the face of civil war, deterioratingterms of trade, and natural disasters. The liberalizationof the exchange rate, prices, interest rates, and trade policies is now almost complete; progress toward enterprise and financial sector reforms was also significant, although more remains to be done in these areas. Moreover, since the signing of the 1992 peace accords, Mozambique has made good strides in normalizing its political system. Internationallysupervised elections have been held, millions of refugees and displaced persons have been resettled, and about 80,000 troops have been demobilized.
Yet, Mozambique's future performanceremains vulnerable to a number of factors. First, the country has benefited from exceptionallyhigh levels of foreign aid that may not continue in the future. Second, inflation remains high, fluctuatingnear 50 percent. Third, foreign direct investmenthas been modest so far. Fourth, exports have been well below the country's potential. Finally, even though Mozambique has benefited from a series of concessionaldebt reschedulings,its external debt burden remains unsustainable. During the discussions in February/March1996, the Government reached understandingswith the Fund staff on an economic strategy for the period April 1, 1996 to March 31, 1999, in support of which the IMF Executive Board of the Fund is expected to consider a request for a new three-year ESAF arrangement in May 1996.
The Government that took power in December 1994 has sought to consolidate the economic recovery by creating the conditions for sustainable growth and poverty alleviation. Preliminary estimates for 1995 suggest that real GDP growth was about 3 percent, with vigorous expansion in the productive sectors being partly offset by a sharp contraction in government services on account of the eliminationof the special programs associated with demobilization,resettlement, and elections. The inflation rate remained high--at 55 percent--eventhough this represented a decline from 70 percent in 1994.
Fiscal policy was tightened considerablyin 1995, with the overall budget deficit before grants falling to 20 percent of GDP from 30 percent in 1994, largely on account of a reduction in expenditures,particularly current expenditurerelated to special programs. Underlying defense and security expenditure (excluding special programs) fell by 2 percentage a. .. F 36
points of GDP. Revenue increased by only 0.2 percent of GDP, owing in part to lower-than-expectedcustoms collections. Net government repayments to banks reached 1.2 percent of GDP, an improvementover 1994.
Monetary policy was tight in the first half of 1995. By midyear the liquidity situation of the state-owned banks began deterioratingmarkedly, resulting in frequent recourse to overdraft positions with the Bank of Mozambique (BM). This trend seemed to reflect an increase in nonperforming loans, as well as aggressive efforts by the CommercialBank of Mozambique (BCM) to cover its open position in foreign currency. Late in 1995, the BM encouraged the state banks to actively pursue loan collections and to improve liquidity management, and established a schedule for the elimination of unplanned central bank advances to them. By end-1995, most financial aggregates had been brought into conformity with the revised targets agreed with the Fund staff in October 1995. The sharp rise in net foreign assets as the year closed brought their 1995 expansion to some US$75 million, or about US$34 million above the program target. As a result of these factors, the stock of broad money increased by 56 percent.
The balance of payments position strengthenedin 1995. The value of merchandise exports grew by 13 percent in 1995 to US$169 million, reflecting favorable internationalprices. Imports declined in response to lower foreign aid levels. The current account deficit before grants narrowed by US$210 million, to US$686 million (145h percent of exports of goods and services).
Looking ahead, Mozambique will be faced over the medium term with a significant reduction in its capacity to import, as foreign assistance is expected to level off, while scheduled debt service obligations will increase. To ensure investment levels consistentwith the 5 percent real growth of nonenergy GDP envisaged under Mozambique'smedium-term strategy, the Government will need to increase domestic savings--inparticular, public savings--and the efficiency of investment. Public sector savings will be raised mostly through steps to improve tax and customs administration, allowing revenues to grow as a result of an expansion of the tax base. A concerted effort will be made to bring inflation down sharply, so as to create an enabling environment for private investment. The efficiency of investment will be enhanced by fostering private sector development, as well as by improving the selection of public investment projects. Increased education and health expendituresare expected to help raise labor productivity and investment efficiency in the medium to long term.
Public enterprise and financial sector reforms will be accelerated in the next three-year period. The main focus will be on the rapid privatization of the remaining public enterprises,with particular emphasis on those that are the largest borrowers from the banking system. The decision to privatize the two state-owned commercial banks in 1996 is a major step forward in advancing the financial sector reforms and improving the performance of the banking system.
___ _ II ______37
The cornerstone of the poverty alleviation strategy will be the developmentof the agriculturalsector through market incentives. The key elements of this strategy are efforts to increase agriculturalgrowth through liberalized markets, investment in rural infrastructure(feeder roads, sanitation, and safe water projects), extension services and seeds for the rural poor, eliminationof minimum prices, fostering of private sector marketing, and review of the land tenure system to ensure adequate access for the rural poor while encouragingmodern agriculture.
A public administrationreform needs to be carried out within the next three years to improve the efficiencyof the Governmentby decentralizing public administration,rationalizing public functions,and making the civil service more accountable. A civil service reform component will include a review of the size of the work force, its salary scale, and productivity incentives.
The key objectivesof Mozambique'sprogram for 1996 are a sharp reduction in the inflationrate, enhanced support for education and health, and a reduction in the country's dependence on foreign assistance. The 1996 targets for inflation and growth are 22 percent and 4 percent, respectively. The program entails a further reduction in the overall government deficit before grants; closer monitoring of foreign aid flows and counterpart funds generation; a tight monetary policy stance; a market-determinedexchange rate policy; and a strengtheningof the net foreign asset position. Greater transparencyand accountabilityin public matters will remain a priority.
The deficit in the current account (excludinggrants) plus scheduled amortization is expected to decline by about US$120 million in 1996, a step toward reducing Mozambique'sfinancing needs. However, the Government will continue to need generous assistance from its bilateral and multilateral supporters. The total amount of official transfers and concessional loans assumed under the 1996 program is similar to the level obtained in 1995. For 1996, the remaining financing gap could be covered with debt relief from a new flow reschedulingagreement on Naples terms with Paris Club creditors, and by comparable debt relief from non-Paris Club bilateral creditors.
An analysis of debt mustainabilityindicators shows that, even after possible debt relief under existing Paris Club mechanisms, and comparable treatmentby other bilateral creditors, it appears that Mozambique would not be able to achieve a sustainabledebt situation within a reasonable period of time. The net present value of debt and the debt-serviceratios after assumed debt relief would remain above 250 percent and 25 percent of exports, respectively,for more than five years. These indicators could turn out to be even weaker if adverse external shocks were to develop.
In conclusion, Mozambique faces major economic and financial challenges in the period ahead. The effective implementationof the policies envisaged under its medium-term strategy will be critical to address these challenges. Even so, the efforts of the authoritieswill need to be supported with 38
concessionalexternal financial assistance and an exceptional treatment of its external debt in order for Mozambique position. to achieve a sustainable external
l1'-~~ ~ ~ ~~~~------.. ------I 39 ANNEX VI
FOR MOZAMBIQUE CONSULTATIVE GROUP MEETING Paris, 17-18 April 1996 STATEMENT
by Solomon Akpata Chief, Division II Regional Bureau for Africa Programme United Nations Development
of Distinguished Members Honourable Ministers, Madam Chairperson, Gentlemen. It is a great Delegation, Ladies and the the Mozambican Ellen Johnson Sirleaf, me to represent Mrs. pleasure for for Africa in this Consultative of the Regional Bureau Erick de Director I have here with me, Mr. Group Meeting for Mozambique. Resident Coordinator Representative and U.N. the Mul, the UNDP Resident on the spot, he will take Naturally, as the man session. in Mozambique. that follow the statement lead role in the discussions opportunity to highlight Chairperson, to seize this and Allow me, Madam of Mozambique's economy, views on some crucial aspects stage of UNDP's requirements of the present what we believe are some Mozambique's development.
The Challenges of Peace Group Meeting, the since the last Consultative Madam Chairperson, in Mozambique has shown and economic situation peace political to stability and normality: signs of a return was strengthened encouraging of the young democracy gained roots; the vitality between government, free and lively interface as illustrated by the climate remained calm. media. Overall the social were legislature and and reintegration important, resettlement further Equally and economic reform made consolidated; reconstruction progress. political and stable and predictable It is undeniable that for restoring environments are prerequisites the macroeconomic and for generally providing attracting investment Nonetheless, production, growth and development. for much needed economic the basis of peace and national reconciliation, despite the consolidation and the challenges facing situation remains fragile like to socio-economic In this context, I would country are still daunting. themes: the on three key and inter-related briefly focus my remarks and sustainable human development; * growth pattern capacity constraints; resource and institutional * human and democratization. * governance, empowerment
- r 1 40
Growth Pattern and Sustainable Human Development Madam Chairperson, since the adoption of the structural adjustment programme in 1987 Mozambique has made visible strides towards establishing a market-based economy. However, bulk due to the war, the of the stabilization and structural adjustment recently has policies until been confined to the public sector and essentially urban, the formal, economy. The cornerstones of the adjustment programme have been tight fiscal and monetary policies, aimed at containing aggregate demand and "disinflating" exchange the economy; price, rate and trade liberalization; financial and privatization. sector reform;
After the strong, but exceptional, recovery experienced the first post-war in 1993, year, in which GDP rose by an impressive per cent, GDP growth slowed 19.2 considerably down to 5 per cent in 1994 and an estimated 3 per cent in 1995. In 1996 4 per growth is projected at cent. Given that Mozambique takes off from economic base an extremely low and after factoring in population increases, recent trend of lackluster the growth performance would translate into GDP per capita increases too modest to to, make a tangible contribution and sustain, the goals of poverty reduction, development, reconstruction, social sector and restoration of external viability. It seems that in order to ensure equitable, a pattern of more rapid, sustained and environmentally sound economic much greater emphasis growth, will have to be put on policies to aggregate supply response stimulate relative to policies to restrain demand and reduce inflation. It has been argued inflation that attempting to curb solely on the basis of demand management rather ineffective policies may be in Mozambique, given the structural shortfalls of domestic supply and the sizable segments of the economy, such as the informal sector, that are likely influence to be largely immune to the of the fiscal and monetary variables controllable finance and monetary by the authorities. Some donors are stressing, correctly, the need for "stabilization with importantly, growth", because more economic growth is an absolutely necessary, sufficient, condition albeit not for reducing widespread structural poverty. Madam Chairperson, in our judgment, Government, which is shared by the other donors, and I am sure the World long-term development Bank too, that a vision and strategy is needed. We that such strategy would suggest essentially be based on two growth vectors that must be made mutually reinforcing overcome in order to gradually the persistence of a dualist economy the traditional and thus integrate and more modern sectors of the economy: (i) on one hand, since more than 70 per cent of the population lives in the rural areas and relies extensively for its subsistence on family-farm agriculture predominate - where women - it is apparent that a major, if not source of potential dominant, growth lies in rural development grounded 41
by targeted public on peasant agriculture, to be supported incentives aimed at increasing investments and selective and and promoting rural private investment productivity of rural As we are aware, the revitalization marketing. of social production and trade coupled with the development are key for bettering rural and economic local networks the generating employment and income for livelihoods and being of population and demobilized soldiers, thus resettled stability. fundamental importance for preserving social its massive aid the other hand, for the country to lessen (ii) On about 72 percent of dependency (which in 1994 amounted to huge debt stock (standing at nearly 4 times GDP), service the export- and ultimately regain external viability, GDP), the current account oriented growth is vital as well. Until close significantly, there will be no real deficit begins to in Mozambique does have a large export potential adjustment. natural gas, cash crops, fisheries, agro-industry, mining, services and tourism. Nevertheless, in power, port-railroad balance-of- the unsustainable debt burden, future view of debt forgiveness payments viability hinges also on substantial and relief. and rural markets should and can be linked Developing agriculture solid basis growth. Such approach could provide a more to export competitive import- for domestic economic integration and through agro-industry, while also substitution, for instance aside to the increase in domestic savings. However, contributing fiscal, technological from calling for important public investment, reforms, this strategy requires very strong and institutional reallocation of commitment because it implies significant political capital accumulation and resources and changes in the pattern of The role of the Government would be crucial, income distribution. health, in the provision of basic education, particularly agriculture services vocational training, sanitation, water supply, as well as in the rehabilitation and and credit facilities as feeder of vital economic infrastructure (such construction the emergence of to bolster economic efficiency and support roads) areas made up of family a dynamic private sector in the rural farmers, traders, and micro and small industry. strategy cannot ignore the fact Obviously, a long-term development of is in the Southern Africa region and member that Mozambique regardless of the SADC. Yet, engaging in sub-regional integration in socio-economic structures and prevailing sharp disparities on, and risks heightening structural dependence development stages feasible to South Africa. In our view, it is not dominance by, economies that balanced integration and convergence between achieve where, as in Mozambique's exhibit wide disparities amongst them or is markedly dualist and disintegrated. case, the domestic economy which periods are normally required during Long transition capitalize on their structural gaps gradually narrow, countries 42
comparative advantages, and some degree occurs - as for instance of sectoral integration where with respect to the transportation Mozambique can play an sector, context. important role in the sub-regional In the framework of its support to Building the Economic Management Capacity Programme, UNDP stands ready articulate a to assist the Government long-term development vision development and for sustainable human formulate a strategic development together in a coherent fashion plan, bringing human stabilization, structural resource development policies. change and
Human Resource and Institutional Capacity Constraints Madam Chairperson, the magnitude and diversity for managing the complex of the requirements reconstruction changes implied by Mozambique's and development process Government's overstretched contrast sharply with the capacity. and management and implementation The difficulties are exacerbated rooted structural by a situation of deep- problems that can only be run. In particular, there overcome in the long is an acute shortage of management skills in all sectors technological and resource and at all levels. The thin base may well represent the human growth and development. major bottleneck to sustained Tied to this factor, private sector is the modern domestic embryonic and indigenous entrepreneurial is scarce, lacking capital capacity combination and managerial expertise. of a limited supply of The weak capacity skilled labour with an apparent has given rise to massive assistance, accounting inflows of technical for an average of 25 official development aid. per cent of total
A country's development potential its skilled depends primarily on the human resources. It can size of still at a relatively be said that Mozambique early stage of accumulation is human capital. Hence, of knowledge and human capital formation must an integral part of the previously of necessity be advocated long-term strategy. We welcome the Government's in priority to increase budgetary real terms in the social sectors spending and primary - particularly basic education health care - which are and higher productivity. central to human development In spite of very the Government has tight fiscal constraints, managed to boost the shares health in total recurrent of education and sustainability expenditures. But to of these efforts Mozambique ensure future budget support. will probably require
Governance. EmRoverment and Democratization Madam Chairperson, on several the Government occasions it has been advocated ought to be "in the driver's that seat", promote self- 43
reliance, and have local communities empowered through a process of democratic decentralization. But if Mozambique is to successfully effect a smooth transition to a full market economy, decentralized state, and democratic society, it clearly needs a strong Government, albeit redefined and streamlined. It is, therefore, of special concern to witness the slow progress made by the Government to manage the multiple and far-reaching economic, public sector, decentralization and local government reforms it intends to carry out. We must assist the Government in the search for innovative modalities to support civil service and organizational development reforms that aim at arresting the "brain drain" from the public sector and at improving its efficiency and managerial capacity. This will imply a review of current aid priorities, a rationalization of technical cooperation, greater public investment efficiency, and especially a concerted effort to reallocate more of the technical and capital assistance to human resource and management development at the central and local levels. In this regard, we urge the Government and donor community to reexamine the recommendations made in the joint issues paper by the World Bank and UNDP, "Technical Cooperation and the Labor Market in Mozambique", which was discussed at a special session of the 1993 CG devoted to improving the effectiveness of aid as well as later in a local seminar, but did not benefit from any decisive follow- up. UNDP is available to assist the Government and the donor community in pursuing the policy dialogue on civil service reform, capacity development, and ways to increase aid effectiveness. In this regard, a wider use of the programme approach or sector-based assistance, while enhancing Government ownership of donor-funded support and its ability to develop homegrown policies, would contribute to improving aid coordination, including technical cooperation management. It would also help Mozambique build capacity, improve public investment efficiency and generally allocate resources more effectively to the achievement of national development objectives. Because the approach requires joint programming with donors, it would also imply reinforcing or setting up coordination mechanisms such as the Government-donor working groups.
Madam Chairperson, it is precisely because of the narrow management capacity of the public sector, lack of institutional capital and severe resource constraints that representatives of the local donor community have been insisting on the need to focus the extensive reform agenda on a limited and critical policy measures and investment programmes that can realistically be implemented and hopefully trigger quicker supply response and growth. Apart from advocating the reallocation of public expenditure from defense spending to education and health as well as greater Budget transparency and accountability, local donors have strongly 44
encouraged the Government and the international institutions to concentrate financing on the following core economic reforms: * streamlining the tax system and reform of administrations, the tax and customs which are essential for a much needed improvement of budget revenue performance; * financial sector reform, mainly by privatizing the two owned commercial banks; state-
* private sector development by emphasizing: the business (i) deregulation of environment through simplification or removal legal, tax and bureaucratic of impediments in order to lower the transaction costs of doing business, curb facilitate rent-seeking, and investment and micro- and small-enterprise operations; and (ii) deregulation of transport facilities and services, including privatization of ownership. state management or
While acknowledging the validity of these economic reform, shorter-term goals for UNDP believes that a comprehensive and longer-term strategy consistent along the lines outlined earlier is required. Local donor representatives are also underscoring the need to give priority to the following good governance issues: and democratization
* establishment of an independent authority and of clear legal procedures to prevent and combat corruption; * deepening of the democratization process within a frame and with emphasis known time on decentralization, local elections and reform of the judicial system. Madam Chairperson, in the broad area of governance as well as in such crucial programmes as those dealing reintegration with mine-clearance and of demobilized military, UNDP the stimulus very much appreciates and support received from the donor community Government while performing and its donor coordination role. UNDP continue to strive for will managing aid coordination through the local Aid-For-Democracy Group of donors, its specialized the Government-Donor sub-groups, and Working Group on Governance. These groupings, we recall, focus on democratization, public sector reform, decentralization, and good governance. coordination One of the major aims of has been to develop and implement concerted frameworks or programmes donor of assistance to democratic institution- building, strengthening of the rule protection, of law and human rights covering in particular the Civil media, organization Police, Parliament, of local elections, and the Judiciary.
1F- - - I 45
Closing Remark Finally, Madam Chairperson: in order to pursue national reconstruction, which will lead to sustainable growth and human development path, and develop national capacity, Mozambique for many years will still need significant inflows of official development assistance and private capital. We all realize, however, that faced with a probable scenario of stagnating or declining aid, Mozambique must allocate and make use of the resources from external assistance to areas likely to yield the highest social and economic returns. This, in turn, will require improved aid coordination machinery and a higher degree of Government-donor cooperation and programming. The UNDP, as usual, stands prepared to be part of this process. I thank you.
\96CJ-STA.2\O9.O4.96
!~ ~~~ _____ 46 ANNEX VII
NINTH MEETING CONSULTATIVE GROUP FOR MOZAMBIQUE
STEPS TOWARDS ECONOMIC AND SOCIAL DEVELOPMENT
SPEECH BY HIS EXCELLENCY DR. TOMAS SALOMAO |MNISTER FOR PLANNING AND FINANCE
PARIS,APRIL 1996 47
STEPS TOW'ARDS ECONOMIC AND SOCIAL DEVELOPMENT
MR. CHAIRMAN,
ILLUSTRICOUS REPRESENTATIVFS OF TiE DONOR COMMUNITy LADIES AND GENTLEMEN,
1 would like to begii by welcoming you all and expressing the Mozambican gratitude for the international community's people's continuing support for the democratic process and the country's economic and social development.
Wheni we met in this forum a year ago, I stated that the government was pursu ing reforrns w hich would committed to lay the foundations for economic and social Tod.ay, I would likc to development, give you a sumnmary of the most important activities and the results achieved. undertaken
The document presented by the Government to this Consultative Group has been entitled "Steps Tonwards Economic and Social Developsnent" precisely because we are aware that despite our progress, much still remains to be done given that our starting point is that of une of the poorest countries in the world. Our activities in 1995, whilc only a modest contribution development, to the rcal requirements of nevertheless have the virtuc of demonstrating comnmitrTient the Government's strong to persevere with the necessary reforms. I would like to recall that one of the main poinits on the Government's to con1solidaLedemocracy agenda in 1995 was and ensure that democratic institutions were The State budget was working properly. one of the instruments for achieving this objective. (O)neyear later, the Assembly of the Republic is functioning normally as a legislative and an organ of national sovereignty, body bringing together the democratically elected representatives of different party forces. Political thcir parties are operating freely, expressing opiniions through all methods and meatis for salutary the public transmission of ideas. In the exercise of democracy, on various occasions the Assrmbly the Government has been called to of the Republic to explain its policy options. 1 would draw your attention to the difference between this situation and w-hen rthe first steps towards that in 1992, the peace agreements were being taken. Despite the cuts in expenditure which had to be made, the Budget observed allocation of funds both for rigorously the the Assembly of the Republic and thc political were nor affected by these reductions. parties, which
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ensuring soldicrs continues to he a key elemcnltin The social reintegration of demobilised under the peace stability. In 1995, the subsidies programnmed thle country's social more than ten years servicc in paid, and 16,300 demobilisedsoldiers with aigreementswere pensions. This was accompanied by forces and war disabled were awarded state the armed of tools for about 7,500demobilised soldiers. technical training courses and the distribution the climate of legality, by objective in 1995 was to strenigthen Another Government the safety of citizens and their property, reinforcin- the judicial system and improving improving the operation others, we have taken a first step towards In thic field, as in many chatthey can carry out their thcm with more resources so 0 of these institutions, providing system grew 6 %/ain real Budgetary allocations for the judicial duties more effectively. result of thcsc options has becn increase for the police was 100.. 'lThepalpable rerms. The to the south of the country, with people climate of security from the north to ail improved increasedallocation also made it possible goodwable to circulace in tranquility. The for the and the districts, an cssential prerequisite expand the judicial apparatus in dcconceniration of central authority. were surpassed, owing to the made concerning military expenditure The conmrnitments was only 8.3%9/of the programmed amount, of budget funds. Actual expenditure in total shortage to 1993.The weight of this expenditure redi-rItion in real terms of 50% in relation a in 1993 to 2.4°t. in 1995. currcnt expcnditure has fallen from 3.6°K% administration activities, made at the 1995 of increasedtransparency in public its The promise regularly provided informiation on both CG, has been kept. Last year the CGovernment community ouLtcome.Coordination with the international policy options and the economic and donor Budget and through regular meetings of the Government was achieved on the status of the measuresimplemented Governance groups and bi-monthlymeetings and the results achieved. improved. The two isolated cascs of the over the collection of countervalue.salso the Control thic year were hantdledtransparently by of exLernalassistance during achieved. misapplication detract from the management advances Government and are not sufficient to future is investment in the Government is staking the country's One of the areas where education in the allocation of undertook to give priority to health and hurnan capital. We of 19% in the total current rcsources resources. This we did, ensuring real growth public of cuts in expenditure. assigned to these two sectors, in a context schools rose by 11% In the education sector the number of The results arc encouraging. The school attendancerate of pupils in general education rose by 9%. and the total number 103 health units werc concluded, in relation to 1991.In the health sector grew considerably thc current imbalance in relation to which in rural areas, thus helping to reduce most of attendance units, the indicator for assessing areas. In addition, the total number of urban was 4%}higher than in the previous year. qutantirarivegrowth in health services, can only be achievcd through increased country's economic and social development priority to The foreign. The Government thus gives private investment, both national and
I T 49
providfinlg a favourable climate for business, curbing inflation whether through econonic or through indirect measures policies aimed at aimed at facilitating investment. Covernmneit activities gave particular emphasis to jtisr the mosr significant this objective in 1995. The Lneasures in this field: following are the proesss of privatising the and two State banks was decided should be concluded in 1996; and implenmented, a start was made on simplifying the bureaucratic a business, iand procedures for starting access to the facilities granted up became automatic; under the Investment Law
the privarisation of large companies continued and new companies; and has to date re-sulted in 4S
a substantial part of public investment has been reconscruction of infrastructures, directed towards the roads in particular. The promction of exporE oriented goods and part of lhe Government. services warranted particular Exporters were attention on the foreign evrhange given the possibility of retaining resulting from Lheir exports. some of the a start -was made of accessing credit in on liberalising cashew exports. foreign exchange and pursued, with a view In addition, some major undertakings to generating substantial balance were rhese include the reconstruction of payments revenue in the of of energy supply lines future. lines to Zimbabwe and Malawi, to South Africa, the construction and negotiations on tram;por of natural gas from the investigation, production the Pandc and 'remane deposir. and Under rhe stahilisation programme, a shortfall as described in dcrail in the in the collection of the programmed Government document, had to revenue and countervalues be made in both current mcant that cuts t.o meer and inve.stment expenditurc. some of the targets set under Fven so, it was not possible progress, the programme. The final s.nce the budger deficit before result represents subst:antial in relation grants fell by about to 1994. 12 percentage points of GDP We w-ould like to stress that our commitment evasion- on with regard to measures imports was honoured. Thc to reduce fi.scal shiprment inspection planned aativities werc implemented and customs management for both pre- this will be reflected and capacity building. It in increased revenue in 1996. is expected that In the moT1netary policy field, the programnre Government concentrated targets. This task its attention on meeting undergoing was hampered in particular the privatisation did not by the fact that the banks Ncverlheless, observe the limits set for following the introduction their Net Domestic Assets. was a sharp decline of additional measures, in in the Net Domestic Assets. the last quarter there All the srructural measures under the progranmme inMtitutions were agreed with the essemti2lly implemented according Bretton Woods to the established timetable. 1 VX __- 50
The results of the cfforts I have described were clearly visible in the growth of privare economir :tivity. It is estimated that production excluding services grew about 7%, in 1995.
Agriculture in particular contributed to this result, especially the family sector where maikered output rose 1 8 %.
In 1995 Governmce,u suLpport for this sector included some fundamental decisions aimed at guaranteeing stability in thc use of land. In patticular, it approved EhcNational Land Policy andi a start was made on revising the Land Law, as part of a process which is still at the srage of discussiotns with the main partners. Other important decisions include the negotlarions started with the South African authorities on authorising farmers from tlhat countiy t) use land in Mozambique. They could make a positive contnrbution to development, not just through incrcased food production but also througli the diffusion of modern agricultrural techniiques.
Industrial production grew for the first time in six years, and should reach about 5%. To a large extent, this growth is the positive ouLconmeof privatisacion, particularly in the food, drink, and cement sectors.
In the transport field, the beneficial effects of road rehabilitation are being felt, with a forecast of real growth of some 13%. Work continued oll the restructuring of Mozambique Railwayb to improvc its management, as did the process of awarding private management contracts for terminals, for example the container, sugar and coal terminals. In 1995, with technical assistance collaboration the Governmcnt worked on a srudy containing the main recommenclations for the restructuring of rail-port activities and private sector participacion. Thcse recommendations will be disseminatcd next month in a seminar on the development of the Maputo corridor, clcarly demonstrating the importance attached by Governm;lit to the role of private operators in the secttor. Twelve cost centres in the rail- port branch, including terminials, are now under private management.
T he privatisation process in the maritime branch saw the launching of tenders for two companies and pre-privatisation studies for two others. In the air transport field, the restrrtrtitring of Mozambique Airlines continued and a tender was opened for the privatisation of TTA.
Beforc closing nmy presentation on 1995, I would also like to mention that the country managed to take a substantial step towards reducing its external dependence. The tradc balanre deficit, measured in dollars, fell by about 29% in rclation to thc previous year, and that for current transactions fell by 20%. These results reflect both 19% growth in the export of goods and services, and a 15% fall in imports, excluding interest on foreign debt.
MR. CHAIRMAN,
LADIES AND CENTLEMEN
n~~ ~ ~- - F-~-___--- ___ 51
Thiis sumrnm.risesthe Government's efforts in 1995 and the main results achieved. We a-ware that in many areas we have only are taken the first steps in the needed refrnms. Ho-wever, we are grarified that wc have made progress in the fundamental areas where mIde c-mrinnitent.s hefore the internationall we community, doing our utmost with technical capacity availablc in the country, the You will r(call thar in the docunient prescnred Covernmenr to thc 1995 Consultative group, the ser out its main guidclines for governmencal for the period action, not just for one year but of its mandate. Consequently, both the work for 1996. f.al done in 1995 and that planned wiEhin the franie-work of these major options. This y ear r e shall therefore continue with the lines of work already laid down, deepcning and consolidating the reforms wc have begun. In this context, one fundamental objective is to continue to promote economic growth anti development while and social progressively correcting the external inmbalance. Finding rhe harmonious balance between demand inflation reduction policies aimed at curbing and policies which stimulate increased supply, and chat is a focus of Government attention of the econiomic agents operating in the country.
We are axware thaE without vigorous growth in the ecotonmy, curb intlation will the short term sacrifices to not be sustainable in the mediunm term. Onc Government's agend.s important point on the is thus to study policy mCasures which can slupport proriuction growth be implemented to without jeopardising the stabilisation programme. Consequenrly, in 1996 the heart of economic policy will continue to be rcsrricrive fiscal and monetary policies extrcmely aisned at slowing down the rate of inflation. Thc second imbalance targcted by economic policy reduced. is the external deficit, which must be Export growth has a fundamcntal role here, rclared policics. as well aiSthe implementation of
In this context, budgetary policy has been designed to achieve the following objectives: a reduction in the deficit before grants, by about 3 percentage GDP; points of
a larger pcrcentage of total expenditure to bc financed by budget revenue; the establishment of savings in the banking system equivalent budger revenue. to 12% of
On thus monetary policy side, the objectives are also extremely restrictive, with a 6% reduction in Net Donestic Assets a target of compared co 1995. In addition, Net International Reserves should reach about 70 million dollars. 52
In order to prevenr thcse restrictive policies fronmprovoking a reduction in the level of activity, thy scarce rcsources available must be allocated in such a way that they promote optimal ec-;nomic developmnct.
Budget policy for 1996 pays particular attention to this principle, giving pnrority to activiLies which contribute to the development of human capital by raising the quantity and quflity of the services provided by the State in education and health. Consequently, the resources aIlocated to these sectors will rise in real terms.
The central objectivc in health is to continue to increase the availability of primary care, with priority for health assistance for the poorer sectors of the population, the rural areas and groups at greatest risk. l'hc reconstruction programnmefor health posts in rural areas and the rehabilitation of hospitals will also be conitinued.
In educacion, work on the rehabilitation of schools will continue, in order to ensure a 28%/ rise in the number of primary school pupils. The expansion of primary school coverage, particularly in rural areas, and improvcments in the quality of teaching will continue to be the main orientations for thc sector's activities.
In 1996, the National Poverty Reduction Strategy will begin implementation and efforts will be directed at defining the profile of poverty, as a funidamcntalinstrument for assessing the impact of this policy. Poverty alleviation programmes will bc revised so as to improve their efficiency.
One of the Governmenti's concerns is to guarantee social peace and stability. A fundamcntal aspecTof this is the social reintegration of demobilisedsoldiers. Consequcntly, professional training courses will be organised for about 3,200demobilised soldiers and 140 disabled. In addition, mic:ro-projectswill be financed, to create job opportunities for about 6,240 soltdiers demnobilised from both Government and Renamno forces. Retirement procedures for more than 15,300 demobilised are under way, and will be concluded in 1996.
Strengtheninglegality will continue to be a priority of the Government, with additional budget allocations in 1996 for the judicial system and the police.
These public expenditure priorities follow the same guidelines as those defined in 1995, with specialattention being given to key areas of social development and capacity building in the most important public services.
This same orientation also guides investment expenditure, where most of the resources will be absorbed by health, education, roads, water and agriculture, in the latter case assisting the family sector.
As regards capacity building in the fiscal revenue field, work will continue on improving customs control. More rigorous forms of pre-shipment inspection began in January this year, and the company which wins the customs management tender will June. start work in
-. I 53
The cuscoms tax structUre is also being revised, in order to simplify it and becttr adapt ro the obje'nives of economic it development. It is anticipated that in the future there only be ihree will tax levels, applicd according to the rclcvanice of the imported domesti.- e.onnmic item) for .irtivity. Simultaneously, all ctustoms exemptions will be incorporated into the ciitonms code system, and thcse will be defined on thc basis of their impact on eronomicr growth. A furrher underlying concern bchind the revision of the customs code is to try and encourage economllic agents to fulfill their fiscal obligations, widening of tax coverage to thc basis a larger volumc of imports, and thus making it possible ta.x appliei. to reduce thc
Another aspect of tax collection are the necessary studies currently underway for the introduction of the Vahle Added Tax. In addition, wc shall proceed with activities which make investment in Mozambique attractive, creating favourable conditions for a business climnate. Of particular are the following: significance
conclusion of the privatisation of the State banks in 1996, opening of the financial system to new national and foreign entities; strengthening norms and improving the central bank's role in the supervision of the financial system, in order to ensurc that it furnctions properly;
continuation of the privatisation of companics; and the signing of programme contracts with various companies providing utility services, public aimed at improving their economic productivity and raLionilalisig the policy of State support for thcse sectors. It is clear from the above that in 1996 the Government will continue activities stitmiulating private aimed at initiative, rcscrving for the State the role of regulator of economic
Fxrporr promotion will be pursued through actions which can be summarised as follows: support for the development of export projects, including in the fields electricity, of; gas, mineral resources, timber, agricultural products and tourism; the restructuring of public companies producing transport services, so uc to increasc their efficiency;
support for the development of border trade with neighbouring countries; a rise in the percentage of foreign exchange export earnings retaincd by the exporter;
|[ , _FI _ _ 54
strengi hening public services which assist the exporter. particular at three levels of In short, the Government's comrmitment is directed in interven rio n- intended to the continuing implementation of macro-cconomic policies reduce inflation; which can best the improved allocation of resources to those sectors promote economic and social development; environiment activities which foment the establishment of a good business and which can create the conditions for greater private investment;
strengthening national statistics. of activities to be Given the country's fragile institutional capacity, the nmultitude the Government. We hope that undercaken will require a tremendouA effort on the pant of support and stimulation needed the incernational community will continue to provide the to pursue this arduous task. In order to ensure its future The foreign debt is another major concern of the Govcrnment. field. 'he extemal debt can external viahility, Mozambiquc clearly needs assistance in this alleviating its budgetary bc used as an instrument to promote the country's development, be redirected to the priority expenditure on debt service and allowing these resources to d.lvelopment sectors.
iMR CHAI R MAN,
LADIES AND GEN1'LEMEN, Governmcnt is aware that the 1 would not like to conclude without mentioning that the involve fundamcntal options activities it proposes to undertake are far from easy. They efforts on a daily basis. and, given the country's limited institutional capacity, enormous this endcavour and that it will Thus, in conclusion, we hope that you will all comprehend continue to receive support from the international community.
Thank you 55 ANNEX VIII
NITH MEETING
CONSULTATIVE GROUP FOR MOZAMBIQUE
FINANCING REQUIREMENTS
SPEECHBY H.E.THE GOVERNOR OF THE BANKOF MOZAMBIQUE
PARIS,APRIL 1996 56
MADAME CHAIRPERSON, DISTINGUISHEDMEMBERS OF THE DONOR COMMUNITY LADIESAND GENTLEMEN
I am honoredto be able to address this important Ninth Meeting of the ConsultativeGroup for Mozambique.
I would like to greet in particular the distinguished participants, in acknowledgment of the international community's constructive involvement in the reform process currently under way in Mozambique.
It is significant that, since the beginning of Mozambique's structural adjustment in 1987, we have been able to count on the support and active presenceof the internationalcommunity at each stage of not only the economic but also the political and social transformations in the countIy.
At the Eighth Meeting of the Consultative Group for Mozambique the Govenmmentcommitted itself to pursuing the structural adjustment process, in particular by implementinga macro-economicstabilization programme aimed at reducing our economy's intemal and extemal imbalances.
Despite the uncertaintieswe have had to face along this road, there are noteworthy and encouraging signs of a definite and progressive stabilization of the Mozambican economy, due essentially to the monetaryand fiscal policies adopted.
Net domestic assets, a monetarypolicy instrument the controlof which has repercussions for both budgetary policy and the extemal sector, were drasticallyreduced, falling from an expansion of 74% in 1993to
r-- X 57 a mere 20% in 1995,when comparedwith the stock of broad money at the beginning of each year.
The results of these policies are equally encouraging.From a worying fall in net foreignassets of some 54 million dollars in 1993, we rose by 70.3 million dollars in 1995, which made a significant contributionto improving the level of our import coverage. In turn, the fiscal deficit before grants as a percentage of GDP was reduced considerably,and the volume of financial resources which the state passed on to the economythrough the banking system increased.
We are continuing to reform the financial system, with emphasis on restructuring the State commercial banks with a view to privatizing them as planned this year.
Our initial aim of privatising the CommercialBank of Mozambique, the institution with the largest share of the credit market and of international commercialoperations, in 1995, had to be postponed to June 1996. This was because the strategy of selling shares initially adopted by the Government was replaced, on the advice of our partners, by the sale of assets. Given the complexityof this operation the timetable had to be reformnulated,with the involvement of the internationalcommunity represented in Maputo, within the framework of the Govemment'songoing consultationswith its partners in national socio-economicdevelopment.
In 1995 the reform of the financial system also continued, with the modemization of the payments system, involving all the banks operating in Mozambique,as well as through the introductionof a new regime of mandatory reserves adjusted to the current reality of the banking sector. The Bank of Mozambique has devoted particular attention to the fimctioning of an efficient, modem and credible paymentssystem.
r~ ~ ~~- 58
Within the spirit of opening up the financial sector to national and foreign private initiative, and of diversifyingthe products and services provided to the economy, a new commercial bank began operations in 1995, the banking network of existing private banks was expanded, a leasing company started up, and the number of foreign exchange operatorsand their respectivenetwork increased. In Mozambique, the functioning of the foreign exchange market is closely linked to the availability, absorption and utilisation of external financial aid and the way in which it is channeled to the economy. It will be recalled that over a long period of our adjustment process the assistance made available to Mozambique was essentiallytied. At the end of 1994 and in early 1995, Swiss Cooperation granted 12 million Swiss francs, allocated according to a model that was significantly different from the other mechanisms for channeling extemal assistance to the Mozambican economy. Its main features were as follows:
* the funds are made available directly in a currentaccount of the Bank of Mozambique;
i they are sold directly to the commercial banks within the frameworkof import support, on the basis that the first to present a purchasing proposal is the first to buy,at the market exchangerate;
* auditing is done directly in the banks using the funds.
At the same time that the Swiss model was launched, for external transaction with a maximum value of USD 5,000 the Bank of Mozambique eliminated exchange restrictions on foreign currency purchases by residents. The combinedeffect of these measures resulted in a considerable reduction in the spread between the US dollar exchangerate on the officialand parallel markets, to under 10%.
1F~ _ 59
The Governmentof Mozambique welcomed the Swiss initiative and informed the other donors of its advantages. Other proposals on making extemal assistance available in a more flexible manner began to be presented by our partners, reflectingan increaseddesire to make assistance as untiedas possible.
Consequently,in an attempt to synthesizethe various donor initiatives and ensure the harmonization of banking procedures, within the framework of the increased institutional coordination in the management of extemal assistance achieved in 1995, the Bank of Mozambique proposed a basic model for the allocation of extemal resources. This proposal covers procedures for disbursement, registration and sale to the conmmercialbanks; the generation of countervaluesand their channeling to the State Budget; procurement rules; the principle of registering transactions balance of payments purposes;reporting; and auditing and supervision.
The model benefitedfrom various suggestions and improvementsfrom the import support group, the management and supervision coordinatingunit on the use of extemal assistance comprisingthe Bank of Mozambique,the Ministiy of Planning and Finance and the donors. This has resulted in the adherence of other donors such as the United Kingdom and Sweden. I hope that the number of donors and the amount of assistance using this channelingmechanism will increase in 1996.
The advantages of this method are obvious, and in 1995 the results were in fact extremelypositive, with countervaluesfor the State Budget being generated more rapidly, more transparent management of extemal assistance, stimulation of the exchange market - with significantprivate sector participation - as well as the discouragement of the parallel market and improvements in foreign exchange management.
If 60
The strategy of the financial programme, the bases of which were agreed with the International Monetary Fund, envisages the reduction of inflation, the rapid privatisation of the State commercial banks," stronger control of prudential ratios and the imposition of greater discipline in the credit institutions' observance of net domestic assets limits and existing norms, including through fines and other financial penalties.
Available central bank indicators up to the end of March and the first week of April show that base money is being tightly controlled, thus ensuring that net credit to the Government and net foreignassets are in line with the programme. There has been a notable fall in the State banks' overdrafts with the Bank of Mozambique, and the interbank clearing sessions have been functioning normally, with no sign of any future decline in confidencein the payments system.
The timetable for privatising the State commercial banks is being followed rigorously, and we believe that the Commercial Bank of Mozambique process will be concluded as planned in June this year. With regard to the People's Development Bank, a sale adviser will be contracted in the near future and it is intended to complete the marketing process by September.The subsequent stages can then take place without any difficulty so that the process is concluded in December.
We are already in an advanced stage of introducing an interbank foreign exchangemarket, open not only to the banking system but also to the exchange houses. With this market we aim to strengthen exchange management by the operators, facilitating more fluidity in channelingextemal resources to the economythrough this market, and a more realistic and flexible exchange rate.
In this regard, I would like to emphasize the need for greater donor participation in the provision of untied assistance, since resources of this nature will enable the interbank market to operatemore efficiently.
1 0 I - _ - - _ -__ 61
In 1996we will strengthen and modernize our intemal management of liquidity,and undertakemore active weekly monitoringof base money, in close collaboration with the Treasury. The aim is to prepare ourselves for the subsequent introduction of central bak and Treasury bill operations and in the medium term the operation of an interbank money market.
MADAME CHAIRPERSON LADIES AND GENTLEMEN
In 1995 we referred to the problem of Mozambique's foreign debt, which is a serious constraint on the success of the Govemment's macro-economicstabilisation initiatives and an obstacle to continuous and sustainableeconomic growth.
Our country continues to face serious balance of paymentsimbalances. The solution lies in increased private investment in production accompanied by debt relief measures, including cancellation and reschedulingon more concessionalconditions. As a complementto the economicrehabilitation actions under way, the Governmentstill needs support from the international conmunuityin order to ensure that the structural adjustment process takes place in as stable a political and social environmentas possible.
For the 1996 economic programme, balance of payments financing needs total some 850 million dollars, 315 mnillionof which are the year's external debt expenditure componentfor which the Government would like to obtain debt relief. The remainder, totaling USD 535 million, is essentially destined to financing current operations and investment.
The Government hopes to conclude a new debt re-scheduling agreementwith the Paris Club creditors by June. At the same time, it will attempt to obtain relief on arrears with creditors who are not 62
members of the Club - totaling USD 1.18 thousand million in 1996 - on conditions comparableto those of the Paris Club.
In conclusion, I would like to affirm Mozambique'shope of continuing to deserve the support of all our partners, and repeat my sincere thanks to the international community for its continued collaboration in our process of adjustmentand economicreconstruction.
My thanks go in particular to the Bretton Woods institutions for their valuable contributiontowards organising this ConsultativeMeeting for Mozambique, and their support for our Economic and Social RehabilitationProgramme.
Thank you very much.
Jr .1~ 63 ANNEX IX
MOZAMBIQUECONSULTATIVE GROUP MEETING
PARIS, APRIL 17-18 1996
STATEMENTON FINANCING REQUIREMENTS
BY
THE WORLD BANK
Ladies and Gentlemen
The Mozambicaneconomy continued to grow last year, as a result of many positive factors. Improvedweather and the preservationof peace clearly played an importantrole in sustaining economy recovery. These favorableconditions were accompaniedby further economicreforms and continued external assistance.
In 1996, strong growth is expected to continue. Increased exports will stimulate GDP growth and with increased production of food and basic essentials,imports will decline. As a result, the trade balance will narrow by about $ 74 million relative to last year. Although external financing requirementsare expectedto decrease in line with a gradual decline in external imbalances,Mozambique will neverthelesscontinue to need substantiallevels of external aid to finance imports, meet external debt service obligations, and reach the growth target for 1996.
Last year, disbursementsfrom donor funds amountedto $574 million. This amount was well below programmed levels. In particular, balance of paymentssupport from grants were much lower than originally anticipated, partly because of delays in the signing of new agreementsand also because of complex disbursementprocedures. Faced with the associated shortfall in counterpartfunds, the Governmentwas forced to adjust overall expenditures,including aid-financedinvestment projects both from grants
1W I _ _ 64
and credits. In 1996, external financingrequirements, excluding possible debt relief, are estimated at $557 million. Of this total, $527 million will come from existing commitments, including $59 million in food aid, $168 million in balance of payments support, and $280 million in investment financing. Assuming new grant commitmentsof $ 30 million, this level of assistance will be similar to that obtained in 1995. I shouldnote that the compositionof external financing has changed in the last two years, reflecting Mozambique's reconstructionneeds post-war in the period. There is now less need for food aid and emergency financing. This has resulted in a reduced share of grants relative to credits. However, the need for a more balanced investment and balance of support payments remains very important, especially for the budget. Mozambique's public investmentprogram is largely financedby donor funds. counterpart In addition, funds are an important source of financing for the recurrent budget, with direct implicationsto the execution of the investment Increasingly, program. the execution of programmedinvestment has been constrained by the availabilityof recurrent funds.
The international aid partners, have a critical role to play in improving the efficiency and sustainabilityof investment projects. First, concerted efforts must be made to rationalizepublic investment, according to govemment priorities. In this regard, the Government has begun to sector programs adopt in priority sectors and has recently launched a fiscal managementreview to fully integrate aid-financedexpenditures into the budget. Second, a steady flow of balance of payments support from grants is required to generate counterpart funds for the budget. The adoption of more flexible disbursement mechanisms,such as the Swiss Model, will help to meet this objective. We are also pleased to announce that the World Bank has greatly simplified disbursement procedures for balance of payment funds, which will be applicable to current and future credits. Under the new procedures, disbursementswill no longer require import documentation. Third, given tight domesticresources and the need to sustain expenditures in priority sectors, donors, particularly through sector programs, may want to consider directly financingthe recurrent budget within a medium-term expenditure framework. Finally, further external debt relief over and above what is availabletoday would permit resources to be released for the Government's poverty reduction program. 65
Over the next year the World Bank is committed to working with the Government and other donors to address these issues.
Thank you.
-- -- 66 ANNEX X
MOZAMBIQUE CONSULTATIVEGROUP MEETING Paris, April 17-18,1996
CHAIR'S CLOSING STATEMENT MS. KATHERINE MARSHALL DIRECTOR, SOUTHERN AFRICADEPARTMENT
We have had stimulatingand productivediscussions over the past two days. BeforeI try to summarizethe main themes I would liketo expresssincere thankson behalf of all participantsto PrimeMinister Mocumbi and his entireteam for their open and constructive contributions.The willingnessof the Mozambicandelegation to listenand to respond forthrightlyand thoughtfullyto the issues and questionsraised has contributedimportantly to the successof our discussions. We have all gaineda better appreciationof the challenges and the opportunitiesfacing Mozambique.
Someof you referredyesterday to the musicalreferences in my final statementof last year. Permitme to again pick up on thattheme. The soundsI have heard overthe last two days,though still harmonious,seem to havecome from a differentcomposer this year. This was not Mozartor Beethoven. There was possiblyless emotioninvolved. But as one of you remarked,this is not modernjazz either, perhapssomething more subduedsuch as Baroquestyle music. Harmonious,yes! Serious,yes! Elegant,yes! But also rather slow and certainlyrepetitive, with some clear and recurringrefrains.
Perhapsthe mostwidely held view was the sensethat last year's ConsultativeGroup meeting,as put very aptlyby the Americanand Dutch delegations, was a meetingof good intentionswhereas this year is one of accountability.The constantreferences to last year are encouraging,as they suggestthat Mozambique'said partnersare beginningto developan institutionalmemory.
Under the three headingsthat we mentionedlast year "Nurturingthe Democratic Process","Accelerating Economic Reforms" andAtrengthening the Aid Partnership"-- it wouldappear that the consensusis that there has been good progresson many issues,but nothing is yet finished. This depends on whetheryou view the glassas half full or half empty. Many thingshave been done -- the glassis indeedhalf full. On the other hand,the glass is not full -- it is only half full. Alternativelywe can say that last year's intentionswere over ambitiousor that the objectiveshave been under-achieved.
However,although a few centralthemes were taken up by virtually every delegation, there was a broadconsensus on most issuesand a very large consensuson most others. Let me sumup the issuesthat were discussedunder three broadheadings: economic issues, povertyreduction, and governance.Perhaps the clearesttheme is the deep sense of satisfactionat the peacewhich prevails in Mozambiqueand the deepeningof democratic processes. The strongfocus on human capital developmentand poverty reductionwas also applauded.
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ECONOMICISSUES
Growth, Stabilization and Poverty Reduction Nexus Severalparticipants raisedan issue whichhas not featuredprominently consultativegroup meetings, in previous that is the issue of possibletradeoffs between growthand achievinggreater stability. achievinghigher The strategy issueturns aroundthe growth, stabilization,poverty reductionnexus. The underlyingpremise is that short-term stabilizationmay reduce growth. Several participantstook the view expressedby Mr. Carrissimospeaking for the EuropeanUnion take who said "Rapid EconomicRecovery should precedenceover drastic disinflation". Similar and views were also echoedby the Swedish the UNDPrepresentatives, amongst others.
The question was not fully debated and not really settledhere, and I see an important need to pursue the issueactively. I do, however, not want to give my own view. In sum, believethat such a trade off exists at present we do referred in Mozambique. The FinanceMinister to the view of JeffreySachs, and I would record also liketo quote Prof. Sachs who is on as saying "While moderate or low inflation growth, is an important ingredientfor long term reconstruction and rapid growth in Mozambique rapid disinflation. should take precedence over a Mozambique can safely aimfor inflation for 1996-97." targets of 20-35 percent peryear My understandingis that the averageinflation establishedunder targetfor 1996is 40 percentas the Policy FrameworkPaper, coming down of the year -- well to around22 percentby the end withinthe range stipulatedby Prof. Sachs. Recentresearch workby MichaelBruno, no evidence Chief Economistat the WorldBank, of any consistentrelationship between found was below growth and inflationas longas inflation 40 percent. Above 40 percent,growth falls stronglyafter sharply,but recoverssurprisingly inflationfalls. The findings"do not support inflationcarries the view that reductionof high heavy shortto mediumrun output costs".
To come back to the trade-off questionitself, a very we shouldunderscore that it wouldtake sizabletrade-off indeed for the poor to benefit accompanied from highergrowth, if this is by inflationof 50 percent or more, because fromthe redistributive the poor are those who suffer most effects of high inflation. Inflation all. is aptlylabelled the cruelesttax of
Anotherkey factor, in my view, is researchthat showsthat of controllinginflation once few countriesare capable it is above 40 percent. Mozamnbiquenotably of effectivemonetary control. lacks instruments In this regard, bothMr. Jensen fromDenmark, Coverdalefrom the UnitedKingdom, and Mr. emphasizedthe importanceof privatizing strengtheningcentral bankingfunctions, BCM and to improvemonetary control. Strengthening monetarycontrol would also help reduce excessivereliance on fiscal adjustment. None of this is meantto suggest that monetaryand fiscal policycan never tight, but as Minister Salamaosaid "The be too issue is findingthe right balancebetween reduce demandand measuresto stimulate policiesto supply". We think currenttargets have appropriatebalance in Mozamnbique,but struckthe these will obviouslyneed to be kept under light of performanceand economicconditions. review in 68
Financial and Fiscal Reform
The privatization of the two state banks, is one of the major areas of unfinished business. Almost every participant emphasized the importance of quickly privatizing Banco Comercial de Mocambique. We note the excellent progress that the Government has already made. It will be important for the Govemment to follow through on the agreed agenda completing of action by June this year for BCM and December for BPD. Another piece of unfinished business -- which was also frequently mentioned -- pertains to customs reform. Because this important process involved radical changes therefore and institutionalresistance ( we knowwhat that is at the WorldBank!), the Government was unableto present this as an accomplishmentto the participantsat this CG meeting. We trust that the June target in this area will be achievednonetheless.
However,we are pleasedto note thatthe very importantprocess of Management the Fiscal Reviewhas begunwhich, as the ViceMinster of Financehas indicated, study is not a but a mediumterm processwith three clearlydefined stages over the course We all of 1996. look forwardto reviewingthe workof this on-goingexercise throughout the 1996. courseof
Environment for Investment
Private Sector Development. Improving the environment for private national investors -- as well as foreign-- is still clearlya concern. Participantsnoted withsatisfaction that manyimportant stepswhich bear directlyupon the businessclimate, have been taken -- includinga revisionof the role of CPI, customsreform, a simplificationof investment procedures, andthe processof dialogueestablished under the systemof annual Conferences. PrivateSector In addition,there is the verysuccessful track recordof privatizationswhich have alreadytaken place,including the increasingnumber of largerscale industrial enterprises.
However,we note that there is stilla lot of outstandingbusiness from the First PrivateSector Conference,most notablythe issuesof bureaucracyand red tape, and the variousnuisance taxes which exist alsoneed to be addressedas a matterof urgency, preferably in advanceof the PrivateSector Conference this comingJune. An atmosphere must be createdwhich actively encourages and promotesthe entry of privatesector This players. wouldhelp addressthe concernsof someof the participantsthat foreigninvestment remains at unacceptablylow levels. Indeedforeign investment is the necessarycorollary the expected to anddesirable reduction of officialextemal assistance over the longterm, theme a notedby manyparticipants. I wouldnote here the importantlinks that we see countries in many betweenstability, including macroeconomic stability, and investmentlevels.
Numerousparticipants stressed the importanceof privatizingthe three large parastatals-- the railways(CFM), the airlines(LAM), and the Government's importation petroleum anddistribution company (Petromoc) -- as expeditiouslyas possibly.The to promote aim is competitionand improveefficiency. It is clearly important,as Ms. Peasley stressed, that the Governmentdoes not replacepublic monopolies with privatemonopolies. Public Sector Investment. Whilethe importanceof an enablingenvironment of private entrepreneurs has been mentioned repeatedly, the conditions for effective public investmenthas been referredto in all but narne. A very importantdimension to this is the
1 -- r- ~ T~1 69
need to supportthe Government'sefforts to turn the budgetinto a useful managementtool for resourceallocation. This means supportingefforts to integrateaid-financed expenditures into the budget processas intendedunder the Fiscal ManagementReview recently launched by the Government. Anotherdimension is the effectivenessof aid by more appropriate coordinationbetween donors. Several participantssupported the rationalefor integrated sector programs. As the Dutch representativesaid, "ProjectAid can overwhelmlimited capacitiesand can lead to islandsof success in a sea of failure". Integratedsector programs wouldalso help reduceand rationalizetechnical assistance which, as Mr. Akapta? and others emphasized,is overwhelmingand threatensto underminedevelopment of local capacity.
An importantnew directionfor official assistancehas been mentioned,notably by the Swedishrepresentative, namely so-called "direct budgetsupport". Aid geared directlyto budgetaryneeds, in terms of amounts,modalities and timing, (whilestill beinga form of balanceof paymentssupport) isjustified in principlein the circumstancesof Mozambique. However,there is still a requirementfor more transparent,comprehensive and timely budget process. Again, this is the objectiveof the FMR that is underway. Debt
The issue of debt has been widely discussedover the past several days. This is not the forum to.seek definitivesolutions to this problem. Nonetheless,several participantshave noted that the debt positionof Mozambiqueis unsustainable.Participants welcomed the debt proposalswhich are underdiscussion at the WorldBank and the IMF, but recognizedthat untilthese becomeeffective, Mozambique will continueto face debt servicingdifficulties. Meanwhile,an interiminitiative to service multilateraldebt was proposedby Denmarkand joined by the Netherlands. The Group has also been presentedwith a thought-provoking proposalby GovernorMaleiane of the centralbank of Mozambique.
Speakingof half finishedbusiness on the WorldBank side,I have to admitthat we have not fully compliedwith our commitments undertakenlast year. We promisedmore than we could deliver. However,we have not been idle. Togetherwith the Fund,we have analyzeddebt sustainabilityin Mozambiqueas part of the PFPand the joint Bank-Fund studyon debt amonghighly-indebted countries. The WorldBank standsready to assist Mozambiquein the area of debt managementand in the analysisof debt optionsunder current mechanismswhile alternativeoptions are exploredin globaldebt fora. We look forwardto workingclosely with the partnershipon this issue. POVERTY REDUCTION
Growthand PovertyReduction
It is universallyrecognized, and there participantsrepresented here agree, that povertyreduction will only be achievedwith strong,sustained growth. We have suggestedin our statementof proposedcountry assistancestrategy (the CAS)that a sustained5 percent per annum growth rate is needed. We note in our CAS that smallscale agriculturewas the center piece of any povertyreduction strategy. The group has also noted that this is exactly in linewith Governmentthinking and this did not give rise to much debate. However,areas of debatedo arise with respectto howto promote the rural familysector. 70
RuralDevelopment
Peace and re-settlementof refugeesand soldiersis one of the most dramatic,and indeed indispensable,achievements for rural development. This has now essentiallybeen achieved. An equally importantissue is access and user rights of smallholderfarmers to their traditionalland. As our Finnishcolleague indicated, land tenure laws are requiredto addressedissues of povertyreduction as well as to promote privateinitiative and growth. For this reason,many participantsemphasized the need for the rapid promulgationof a Land Law, basedupon wide rangingconsensus, which recognizes local land rights.
To achieve sustainedrural development,there is a need to provideappropriate incentivesthrough improved pricing policies. In this regard, the recent decisionsrelated to cashewnut taxes are to be applauded-- and latest reports on productionappear to have vindicatedthe Governmentin its implementationof this policy. However,there is still furtherneed to liberalizeprices and to ensurethe developmentof competitivemarketing structures-- as noted by some participants.
Naturallywe recognizethat fast growthwill not come fromsmallholder agriculture alone,even thoughthis has the largestpoverty reduction impact, hence the importanceof the other highgrowth potentialsectors such as transportand energy.
SocialSectors
The other main componentof a povertyreduction strategy, as noted by many participants,is expenditureon humanresource development -- particularlyhealth and education. In this respect,the groupnoted with satisfactionthat 1995public expenditures in these two sectors increasedsignificantly in real terms -- albeit shortof the target established in the budget. The Germandelegate and othersalso noted that militaryspending was still very high and that this underminedsupport from tax payers in donor countries. The Swiss also pointedout the fact that expenditureson securitywere significantlyhigher (2.3 times) than the healthbudget. Developingappropriate balances -- with particularemphasis on ensuringgrowing expenditures on healthand education,are integralcomponents of an overallpoverty reduction strategy.
GOVERNANCE
In my closing statementlast year I talkedabout "NurturingDemocracy". I am happyto note that this group has universallyapplauded the Government'sefforts in maintainingpeace, establishing a NationalAssembly, establishing other democratic institutions,and a more open style of Government.All of these developmentsare very satisfactory.
Many issuespertaining to governancewere raised in this meeting. The one issue whichwas raised by more representativesthan any other single issue was the issueof corruption. This is a serious developmentalissue because corruptionundermines Governmentrevenue; it createsnegative protection for local industry;and it weakens Governmentcredibility. As the Britishrepresentative said, "good government"is the yardstickby which aid constituenciesmeasure Government performance. And as the Swiss representativeindicated, the costsof corruptionare often disproportionatelyborne by the poor.
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MinisterGamito responded that the Govemmentis, to quote,on the same wave lengthas Mozambique's partnerson this issue. The Ministerindicated some of the steps the Govemment that is takinga numberof steps to combatcorruption through civil service reform, the creation of inspectorsin each Governmentdepartment, and establishinga Code of Conductand a HighAuthority on Corruption.
The other,very frequentlymentioned issue relates to the postponementof government local elections. The concern among donors is that decentralizationis seen as an extension of democracyand as a way of managingdevelopment more appropriately level. at a local Local electionsare criticalfor developingan effectivedecentralized Government. OTHERISSUES
Other issues werediscussed, and I do not want to diminishtheir importanceby not alluding to them in this closingstatement. Four, of a diverse naturebut each importantin itself,are: capacity building,the problemof HlV/AIDs,regionalism and links with SouthAfrica, cutting and -- across many other issues -- the lack of reliablestatistical information. This probably calls, within limits,for someflexibility among otherthings in the use of performnance benchmarks. Effortsto improvethe situationare underway,supported among others Bank by the and by the Swedishgovernment, but we recognizethe need to intensifyefforts.
No doubt,we shall have other opportunitiesto discussthese questionsin future. the near Which leads me directlyto acknowledgethe proposalmade by several delegations regarding possibleforns of "CG" activityin the field. I do not wantto decideat this do want to point. I reiterate,however, that in our view the CG is not just this meeting,or even principally this meeting.It is rather a continuingprocess of partnershipamong ourselves, with the Government of course, in an effort to maximizethe effectivenessof our joint efforts toward the developmentof Mozambique.We are thereforeopen to all forms of collaboration, particularly in the field. The workinggroups in Mozambiqueshould be a model for consultativegroups in other countries. We also welcomeproposals to broadenthe debateto other groupsin Mozambique.
CONCLUSION
As last year, this year again the aid communityhas found that progress broad made on a front by the MozambicanAuthorities and their programfor the near term justified financing the requirementspresented by the Government. Shortcomingsin performance some and areas of seriousdisappointment have been discussed. The fact that we have to discuss been able these problemsso candidlyand so openly is in itself a collectiveachievement!
In closinglet me express our appreciationto the supportteam, includingthe interpreters,for facilitatingthe smoothadministration of our meeting. I wouldalso liketo thank all participants for their contributionsto the exceptionallyproductive discussions of the past two days.
Safejourney and farewell!
-11' II 72 ANNEX XI
The World Bank European Office: 66, avenue d'Iena, 75116 Paris, France
PEACE BRINGS NEW CHALLENGES AS AID PARTNERS RENEW SUPPORT FOR MOZAMBIOUE
on April 17 and PARIS, April 18, 1996. The Consultative Group for Mozambique held its ninth meeting of 18, under the chairmanship of Ms. Katherine Marshall, Director of the Southern Africa Department Mocumbi, the the World Bank. The ilozambican Delegation was led by His Excellency Dr. Pascoal to discuss Prime Minister. The CG Meeting brought together over 30 bilateral and multilateral agencies Mozambique's challenges. poverty With peace well established and democracy taking root, Mozambique can now focus on reducing followed the through actions leading to sustainable and equitable growth. At the last CG meeting, which development first multiparty elections in 1994, the new Government committed itself to a far-reaching in program. Mozambique's aid partners recognized that the Government has made good progress and carrying out the initial steps of that program, while emphasizing that sound economic management the good governance, including combating corruption, will ultimately determine the success of Government's efforts.
Participants Urge Rapid Economic Growth for the Progress in the transition from war to peace and democracy has made Mozambique "an example Government's continent" in the words of one delegate. On the economic front, participants noted the the actions to achieve a greater degree of macroeconomic stability over the past year. They supported an Government's plans to further reduce inflation in the coming year. Participants recognized that Bank and ambitious medium-term economic policy framework had recently been agreed with the World contribute the International Monetary Fund. They noted that several reforms already in progress would privatization to greater economic stability and improve the business climate. These reforms include the program of the two state-owned banks, a customs reform program, and a privatization and restructuring in budget for state-owned enterprises. Participants also applauded the important shift in the allocation from 3.9% of resources from defense to social spending: expenditures on defense and security declined GDP in 1993 to 3.6% in 1995, while current expenditures in health and education rose by 19%. spending and Participants noted the Government's intention to proceed with further reductions in defense increases in social spending. themes The imperative of achieving rapid economic growth and lowering aid dependency were recurring four in the discussions. Participants expressed concern that Mozambique's heavy external debt (almost ability to times GDP in nominal terms) and growing debt service requirements limited the Government's invest in the human resource development so vital to the nation's growth and poverty reduction aid prospects. A number of measures and proposals to reduce the external debt burden, lessen dependency and increase efficiency in the use of external resources were aired during the meeting. debt relief These included an appeal by the Government for the establishment of an externally-financed increasing fund to allow resources which would have been allocated to debt service to be directed to and health and education ser ices. Otlherparticipants emphasized the need for continued improvements 73 incr,ased transparency in the management,monitoring and accounting of external aid. Togetherwith preparationof sector the policy frameworksand consolidatedinvestment programs for key sectcrs, these measures would enable donors to provide funds in a more flexible manner and for those funds more effectively. to be used Participantsalso agreed on the importanceof continued strengtheningof local monitoringand coordinationmechanisms.
Challenges Remain for the Coming Year
A number of other challengesfor the coming year were highlighted. Participantscalled for continued partnership with the private sector and Non-GovernmentalOrganizations in developmentefforts. Given the continued need to stabilize the economy, participantswelcomed the Government's inflation, plans to reduce increase revenues,and improve expendituremanagement. Participants agreed reforms that further in key sectors were also central to acceleratingpoverty reducing growth. Participants encouragedthe Government to establish agriculturalpolicies and a sector investment programthat promote smallholder would agriculture. In that context,several participants emphasizedthe need to ensure the new land law that currentlyunder preparation containedprovisions for adequate land tenure security small farmers, for includingthe safeguardingof customaryrights. In the transport sector, participants welcomedthe Government's intention to increaseprivate sector participation in railways, ports, coastal shipping and aviation. Participantsalso urgedthe Governmentto eliminate monopoliesand stimulate competitionwithin these sectors. Finally, a series of actions -- including further trade liberalization,tax and tariff reform, and deregulation -- would foster privatesector developmentthroughout the economy . In the area of governance, participantsencouraged the Governmentto increase its efforts to strengthen democratic institutionsand combatcorruption. The Governmentannounced its intentionto continueto press forward with its plans for local governmentreform and decentralization,to update the Code of Conduct for civil servants,and to establish a HighAuthority to combat corruption. Participants emphasized the importanceof holding local electionsnot later than 1997in order to further democracy consolidate in Mozambique. On these matters, as well as others, the internationalaid partners Government and the agreed to continuethe successfuldialogue taking place in the budget and governance working groups based in Maputo.
Mozambique's FinancingNeeds Met
The full amountof external financingfor credits and grants of about US$ 871 million was sought for calendar year 1996. The non-debtrelief componentof US$ 567 million committed during the meeting includedinvestments (52%), import support(32%), food aid (10%), and other programs(6%). The Governmentexpressed its gratitude for the continuedsupport by the internationalcommunity for its efforts to attain the consolidation of democracy,sustainable social and economic development,and a lastingpeace.
NMembers of the ConsuitativeGroup attending the meetingwere Australia, Austria, Brazil, Germany. Canada,Denmark, Finland, France, Ireland,Italy, Japan, theNetherlands, Norway, Portugal, Spain, Sweden, Switzerland, UnitedStates. the UnitedKingdom and the Also representedwere the African DevelopmentBank, the Arab Bank for Economic European Developmentin Africa,the Commission,the EuropeanInvestment Bank, the Foodand AgricultureOrganization, Corporation, the InternationalFinance the InternationalMonetary Fund, the KuwaitFund for Arab EconomicDevelopment, EconomicCo-operation the Organisationfor and Development,the UnitedNations Children's Fund, the United Nations the World Food DevelopmentProgramme, Programmeand the WorldHealth Organization.Russia attended as an observer.
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