News Brief No. 02/48

News Brief: IMF Completes Fourth Review Under Mozambique's PRGF Arrangement and Approves US$11 million Disbursement

June 17, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Mozambique's performance under an economic program supported by a Poverty Reduction and Growth (PRGF) arrangement and approved the disbursement of SDR 8.4 million (about US$11 million).

Mozambique's economic program was originally supported by a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF) approved on June 28, 1999 (see Press Release 99/25, for SDR 58.8 million (about US$76 million). In March 2000, the commitment under the arrangement was increased to SDR 87.2 million (about US$113 million). So far, Mozambique has drawn SDR 62.00 million (about US$80 million) under the arrangement.

The PRGF, which is the IMF's concessional facility for low-income countries, is the successor arrangement to the ESAF. It is intended that PRGF-supported programs will in time all be based, as is the case of Mozambique, on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty.

PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.

After the Executive Board's discussion of Mozambique, Shigemitsu Sugisaki, Deputy Managing Director, and Acting Chairman, stated:

"Following the devastating effects of the floods in 2000, Mozambique has resumed the rapid rates of economic growth that are essential to the sustained implementation of the country's ambitious poverty reduction strategy. Performance under the PRGF-supported program for 2001 extended Mozambique's successful track record of financial stabilization and structural reform over the last decade. All of the program's end-2001 quantitative and structural targets were met except for the benchmark on reserve money.

"The sharp increase in inflation in 2001 has been a cause for concern. However, the subsequent tightening of monetary policy initiated in mid-2001 has reinforced the normal easing in prices in the opening months of the year, and inflationary pressures have declined considerably. The government's program appropriately calls for continued monetary restraint aimed at bringing the inflation rate down to single digits during 2002. At the same time, fiscal policy is suitably geared to meeting priority spending consistent with the government poverty reduction strategy, while lowering the primary fiscal deficit and avoiding recourse to domestic borrowing.

"The authorities have also faced difficult challenges in the banking system, including capital shortfalls in two of Mozambique's largest banks. Steps taken to resolve these difficulties, including the sale of one of these banks, have been complex and costly. The government is committed to a rigorous and transparent process to recover nonperforming loans and to strengthening accountability for these problems. At the same time, in an effort to avoid the recurrence of these problems, the government's program includes tightening of banking regulations and strengthening of banking supervision.

"The macroeconomic framework set out in Mozambique's poverty reduction strategy paper (PARPA) appropriately calls for fiscal adjustment over the medium term to safeguard fiscal and external sustainability while reducing the country's current high dependence on external aid. This will require concerted efforts to mobilize domestic resources and enhance the efficiency of government spending. In line with these objectives, the government's structural reform program in 2002 focuses on the implementation of a new income tax law and of the new public financial management law, which aims at improving public expenditure management.

"Despite adverse developments in the world economy since Mozambique reached its completion point under the enhanced HIPC Initiative, there has been no deterioration in debt indicators. The country appears well placed to maintain external sustainability," Mr. Sugisaki said.