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Mozambique: Fourth review under the three-year arrangement under the poverty reduction and growth facility, financing assurances review, and request for modification of performance criteria

IMF Country Report No. 06/254

International Monetary Fund (IMF)

July 2006

SARPN acknowledges the International Monetary Fund (IMF) as a source of this document.
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Executive Summary

  • Macroeconomic performance has remained strong in 2005. Despite a drought that affected parts of the country and the spike in global oil prices, real GDP growth is expected to have remained at around 7Ѕ percent while headline inflation moderated, albeit with a rise in the last few months of the year. As expected, the external current account deficit, excluding grants, widened due to a rise in cereal and oil imports, but international reserves remained comfortable, reflecting an increase in donor inflows.

  • Performance under the program was satisfactory in 2005. All quantitative performance criteria were met through end-December, although the structural benchmark for end-December 2005 was missed. The two structural benchmarks for end-March 2006 were implemented with a slight delay. Preliminary data show that all indicative quantitative targets for end-March have been met except for reserve money.

  • The stabilization effort was underpinned by a better-than-programmed fiscal consolidation. The domestic primary deficit narrowed by nearly 2 percent of GDP in 2005 (nearly 1 percent of GDP better than programmed) compared to 2004, explained by 1Ѕ percent of GDP rise in domestic revenue and expenditure restraint. Importantly, the share of priority expenditure remained above the PARPA target.

  • The consolidation of macroeconomic stability and sustaining broad-based growth through prudent macroeconomic policies is a key pillar of PARPA II. Central to this strategy will be a gradual strengthening of the fiscal position underpinned by an average increase in revenue of 0.5 percent of GDP per annum, and public expenditure management reforms targeted at “priority” sectors to secure better value for money including MDRI resources. Monetary control will anchor inflationary expectations in the context of a flexible exchange rate regime that helps cushion against exogenous shocks and maintain a comfortable level of international reserves.

  • The outlook for 2006 is favorable, albeit with downside risks related to oil prices. Real GDP growth is expected to increase to nearly 8 percent while the monetary program aims to control inflationary pressures stemming from exogenous shocks. A continued rise in domestic petroleum prices constitutes a downside risk to the inflation target and trade deficit. The fiscal framework for 2006 includes additional “priority” expenditure identified in the budget that was contingent on the implementation of the MDRI. The external current account deficit is likely to narrow thanks to a scaling-up of official transfers while international reserves remain at comfortable levels.

  • The PARPA II includes the launching of a “second wave of reforms” to sustain broad-based growth and help achieve the Millennium Development Goals (MDGs). In the fiscal area, reforms will focus on establishing the Central Revenue Authority (ATM), the rollout of e-SISTAFE (Financial Administration System) to all tiers of government, and reinvigorating the public sector reform program. The structural program also aims at improving governance and reducing the costs of doing business as well as strengthening the transparency of natural resource management and megaprojects.

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