MozambiqueвЂ™s performance in 2004 relative to the main macroeconomic objectives of the PRGF-supported program was satisfactory. Real GDP growth is estimated to have remained strong at close to 8 percent, and inflation declined from 13.8 percent during 2003 to 9.1 percent in 2004, which is below the programвЂ™s end-year target of 11 percent. All the quantitative performance criteria for end-June 2004, as well as the structural performance criteria linked to the second disbursement under the arrangement, were observed. Performance relative to the programвЂ™s structural benchmarks, however, has been mixed, owing in part to capacity constraints and the political transition to a new administration.
The fiscal performance through September 2004 was adversely affected by a significant revenue shortfall. The governmentвЂ™s domestic primary deficit is now projected at 3.6 percent of GDP in 2004 (3.3 percent in the program), as the revenue shortfall would be partially offset by lower spending, which might affect some priority sectors. Broad money growth declined from 19 percent in 2003 to 12 percent in September 2004. The still high level of lending rates (interest spreads have narrowed somewhat but still remain at 13-14 percent) has contributed to a slower than envisaged growth of credit to the private sector. The adoption of a more flexible exchange rate policy led to a nominal appreciation of the metical against the U.S. dollar of 20.8 percent during 2004.
The program for 2005 envisages slower growth of 7.3 percent and a further decline in inflation to 8.5 percent by yearвЂ™s end. The fiscal program seeks to increase revenue through improvements in tax administration and the expiration of some tax benefits, and to reduce the domestic primary deficit to 3.3 percent of GDP, with the view of providing appropriate room for credit to the private sector. The overall deficit after grants is projected to widen in 2005, owing to a substantial increase in capital outlays financed with concessional project loans and part of the proceeds from a signing fee paid by a Brazilian company for coal prospecting and exploration. Several steps are envisaged toward establishing a Central Revenue Authority by the end of the year and strengthening public expenditure management and fiscal transparency.
The program includes additional measures to improve liquidity sterilization, including through the introduction of foreign exchange auctions by end-February 2005. Further steps will also be taken to strengthen the balance sheet of the Bank of Mozambique, improve bank supervision, and move toward IFRS in the banking system. The current supervisory regime for the largest bank will be kept in place until approval of the bankвЂ™s financial statements for 2004, and a full feasibility study on the divestment of the governmentвЂ™s participation in the bank will be completed by end-June 2005.
Other structural measures include the submission to the assembly during the second half of 2005 of a new labor law aimed at increasing labor market flexibility and a new foreign exchange law to clarify existing regulations and practices. In addition, a PSIA study on land tenure regulations and their implications for accessing bank financing will be conducted
during 2005 with donor support.