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Republic of Mozambique: 2005 article IV consultation, second review under the three-year arrangement under the poverty reduction and growth facility, request for waiver of performance criteria, and modification of performance criteria

Staff Report; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Mozambique

International Monetary Fund (IMF)

IMF Country Report No. 05/318

September 2005

SARPN acknowledges the IMF website as the source of this document - www.imf.org
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Executive Summary

  • The performance under the program supported by the Poverty Reduction and Growth Facility (PRGF) was mixed during October 2004–March 2005. All end-December 2004 quantitative performance criteria, except the one pertaining to the fiscal deficit, were met. One out of two structural performance criteria was breached, and only three out of eight structural benchmarks were met. These slippages primarily reflected a weakening of tax collections and delays in the implementation of the reform agenda caused by the political transition. The authorities are requesting waivers for nonobservance based on corrective actions, including four prior actions.


  • After Mozambique’s impressive performance over the past decade, it needs a second wave of reforms to deepen and accelerate structural changes to sustain high and broadbased growth, with stepped-up efforts to reach the Millennium Development Goals (MDGs). Reforms should focus on increasing tax revenues, strengthening public sector operations, reducing the costs of doing business, promoting labor-intensive sectors, and implementing a rural development strategy.
  • In 2004, real GDP growth decelerated to 7.2 percent and inflation declined to 9.1 percent. The external position further improved, owing to strong export growth and higher-thanprojected private capital inflows and foreign assistance. International reserves grew faster than envisaged, and the exchange rate appreciated significantly in real effective terms. The fiscal consolidation envisaged in the program for 2004 was not achieved. This mainly reflected a 1.1 percent of GDP revenue shortfall, only partially offset by some restraint in expenditure that negatively affected its composition. Broad money growth slowed down significantly, reflecting, in part, the impact of the appreciation of the metical on the foreign currency deposits.


  • Prospects for 2005 remain favorable, including for strong growth, a further deceleration in inflation, and maintenance of a sustainable external position. The program envisages a 1 percent of GDP reduction in the domestic primary deficit through increasing revenue mobilization, containing nonpriority current expenditure growth, and strengthening public expenditure management. The authorities stressed their commitment to introduce contingency measures in 2005 to offset any revenue shortfall. The monetary program is consistent with a further reduction of inflation in the context of a managed floating exchange rate system. The authorities remain committed to completing a feasibility study on the government’s divestment in the banking system and to strengthening the balance sheet of the Bank of Mozambique. To foster private sector development, the authorities will continue to implement measures to reduce the cost of doing business and improve governance. The authorities are also determined to revive public sector reform.


  • The risks to the program include a continued weak revenue performance, a slowdown in implementing the structural reform agenda, and a shortfall in foreign aid, which could jeopardize macroeconomic stability over the medium term and imply significant delays in the achievement of the MDGs.




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