US embassy cable - 04MAPUTO1653

UNCLAS SECTION 01 OF 04 MAPUTO 001653 
 
SIPDIS 
DEPT FOR AF/S, AF/EPS, EB/IFD, AND EB/CBA 
DEPT PLS PASS AID FOR /AFR/SA AND EGAD 
TREASURY FOR OASIA - E BARBER, USED/IMF, AND USED/IBRD 
USDOC FOR 3131/ITA/ANESA/KBRENNAN/JMATHESON 
USDOC FOR 4510/ITA/MAC/OA/JDIEMOND 
PASS USAID FOR AA/AFR AND AFR/SA 
SENSITIVE 
E.O. 12958: N/A 
TAGS: ECON, EAID, MZ, World Bank, IMF 
SUBJECT: IMF AND MOZAMBIQUE AGREE ON 2005 PROGRAM 
UNDER PRGF 
 
 
(U) Sensitive but unclassified - not for Internet 
Posting - protect accordingly. 
 
1. (SBU) Summary: An IMF Mission visited Mozambique 
from 8-24 September 2004 to review progress under the 
PRGF and to advise the GRM regarding the 2005 budget. 
Agreement was reached ad referendum on a Letter of 
Intent (LOI) for 2005. However, the GRM then changed 
the 2005 budget methodology, including so-called own 
revenues (e.g. hospital fees) in the budget, 
necessitating a rework of the 2005 program. 
Subsequent to this change, the GRM concluded the 
concessioning of the Moatize coal fields, 
necessitating a further revision. The GRM and the IMF 
now appear ready to finalize the LOI, and the GRM is 
ready to submit the budget to Parliament. The IMF 
came away generally quite satisfied with macro 
developments and structural conditions but noted some 
slippage in completing structural benchmark actions. 
GDP growth will be 7.8 percent in 2004, and 7 to 7.5 
percent in 2005. Inflation is being brought down to 
11 percent in 2004, and in 2005 will be further 
reduced to 8.5 percent. Exports are up and forex 
reserves cover nearly six months of imports. Interest 
rates have declined. The private sector enabling 
environment, the legal and judicial sector, and 
HIV/AIDS are the areas of most concern for the Fund. 
The IMF commended GRM management of the economy in the 
run-up to the 1-2 December national elections. The 
Fund encouraged donors to give more in order that the 
Millennium Development Goals might be achieved. A 
study of land as collateral for bank loans, the 
creation of a Central Revenue Authority, VAT refund 
delays, SISTAFE launch problems, and better 
harmonization between the IMF and the Budget Support 
donors rounded out the discussion. End summary. 
 
2. (SBU) Background: This message concerns the IMF's 
first review of progress under the Poverty Reduction 
and Growth Facility (PRGF) for Mozambique which was 
approved on 9 July 2004. A Fund Mission visited Maputo 
from 8-24 September 2004, and returned to Washington 
thinking that it had essentially completed the review 
ad referendum. However the draft 2005 budget which 
was the basis of the 2005 macroeconomic program was 
subsequently revised quite substantially to include 
considerable amounts of revenue and expenditure which 
had been "off budget," often referred to as "own 
receipts." While this broadening of the coverage of 
the budget was welcomed, it meant that the 
macroeconomic program had to be reworked. Then the 
GRM concessioned the Moatize coal field to the 
Brazilian conglomerate CVRD for USD 123 million which 
led to a further reworking of the program. In early 
December, the GRM was pushing to get Fund agreement so 
that the 2005 budget and the annual economic and 
social plan could be finalized and sent to parliament. 
The IMF would then finalize the PRGF consultation 
paper with a 2004 date on it, but the Board review 
target date of 19 January 2005 is likely to slip to 
February. While some of the 2005 and out year numbers 
will be changed, we understand that 2004 performance 
continues on track, and the overall concept of the 
2005 program is essentially the same as described in 
the debriefing reported below. The PRGF is a small 
program (USD 16.6 million over three years) designed 
to support the authorities' reform program along with 
minimal balance-of-payments support. The Fund 
Mission, headed by Mr. Juan Carlos Di Tata, was timed 
to provide counsel to the GRM as their 2005 budget was 
being shaped. The IMF visit coincided with the Mid 
Year Review (MYR) of progress in economic and social 
development activities of the GRM. The MYR is 
conducted jointly by the 15 Program Assistance 
Partners (a.k.a. the G-15) and the GRM. The Fund team 
met with the donors several times during the mission 
in an effort to coordinate with the MYR. 
 
3. (SBU) Macro performance 2004 is on track with the 
program. Real Gross Domestic Product is on a path to 
7.8 percent growth in 2004. Prices, as measured by 
the Maputo index, have risen 12 percent from a year 
ago, and the 11 percent target for 2004 is still 
expected to be obtained. There is a shortfall in 
customs revenue which has been compensated for by 
expenditure cuts. Monetary growth has exceeded its 
target due to an accumulation of reserves, and a 
broadening of application of bank reserve requirements 
in June has served to slow somewhat the growth of M2 
money supply. Exports are up strongly as Mozal's 
stage II aluminum refinery is now on stream, and 
natural gas exports to South Africa via the SASOL 
pipeline have begun. Interest rates on loans continue 
to decline; from a 37 percent annual rate at the end 
of 2002, bank loan rates are now down to 24 percent. 
Deposit rates are now in the 11 percent range, so 
there is now a zero real rate being paid on deposits 
rather than the negative real rate in the recent past, 
as inflation has dropped. The mega projects (Mozal 
and the Sasol gas pipeline) have had a major impact on 
the balance of payments; Mozal II has boosted exports 
some 60 percent and imports of raw materials 
(especially alumina) have also risen dramatically. 
 
4. (SBU) Structural conditions and benchmarks for 2004 
are reported to be generally positive with some 
shortfalls. The conditions regarding submission of 
the draft general tax law to parliament, the 
strengthening of the Bank of Mozambique's balance 
sheet by shifting IRS external debt to the Treasury, 
and close monitoring of the performance of the 
country's largest bank, Banco Internacional de 
Mozambique (BIM) have been met. Indeed, BIM was 
described as both profitable and prudential. However, 
benchmarks performance was described as mixed. 
Specifically, submission to the parliament of the law 
to create the Central Revenue Authority (CRA) was two 
weeks late, budget reporting using the computerized 
government accounting system "SISTAFE" is delayed, and 
the strategy for resolving difficulties with two small 
banks is only half complete. However, regulations to 
implement the new financial law have been drafted, the 
micro-finance regulations are being prepared, and the 
feasibility study to divest GRM holdings in BIM should 
be ready by year's end. 
 
5. (SBU) For 2005, the Fund projects generally 
favorable performance. Real GDP will grow in the 7 to 
7.5 percent range while price inflation will slow to 
8.5 percent. Aid flows will continue rising, reaching 
USD 820 million, up from USD 740 million in 2004. 
Fiscal policy will hold steady, with the domestic 
primary deficit unchanged at 3.3 percent of GDP. The 
government's wage bill, a point of contention in the 
review a year ago, will appear to go up as a 
percentage of GDP because of a change in 
classification of expenditures. Moreover, government 
proposes to add 10,000 new employees in priority 
sectors, 5000 of which in education alone, so the Fund 
expects that nominal wages and salaries for the public 
service will increase less than inflation. 
 
6. (SBU) Structural developments expected in 2005 
include approval of the CRA law by the parliament, and 
the issuance of implementing regulations. Delays in 
the implementation of SISTAFE mean the first budget 
execution report generated by the new system will be 
for the first quarter of 2005. The Fund will provide 
technical assistance in monetary and exchange rate 
management and in bank supervision management. 
Reviews of the largest four banks leading to their 
transition to international accounting standards (IAS) 
will be completed by end 2004, paving the way to IAS 
adoption in early 2005. A draft law clarifying and 
improving the foreign exchange regime will be 
submitted to parliament in the second half of 2005. 
The GRM will strengthen the balance sheet of the 
central bank over the three year period 2005-2007 by 
issuing securities to the central bank. 
 
7. (SBU) Private sector problems were given 
considerable emphasis in Mr. Di Tata's presentation. 
He deplored the high cost of doing business in 
Mozambique and welcomed the issuance of new business 
license regulations during the IMF's visit. He called 
attention to delays with customs clearances, both 
import and export. He is counting on the 
establishment of a "dry port" at Ressano Garcia, on 
the border with the Republic of South Africa and the 
principal entrepot for overland commercial traffic. 
He noted that the private sector believed that the 
decree of December (2003) liberalizing the use of ex- 
pat labor in Mozambique was working well, but he 
called for further labor sector reforms, particularly 
in severance compensation and work regulations, in a 
new draft law to be presented to parliament by the end 
of 2005. Di Tata is also expecting continued progress 
in privatizing the state airline LAM, the telephone 
company TDM and its cell phone spin-off MCel, as well 
as water supply companies and the ports and railways 
conglomerate CFM. 
 
8. (SBU) Public sector reform is of vital importance 
and implementation is seen as a long term program of 
the World Bank. The Fund is concerned with the 
linkage of wages to productivity in the public sector. 
The Fund is also following closely the development of 
a new decree regulating public sector procurement 
under the SISTAFE law. 
 
9. (SBU) Land tenure regulations came up near the end 
of Mr. Di Tata's presentation. In the GRM's letter of 
intent to the Fund for the new PRGF, Government 
announced plans to issue a decree to regularize 
property rights in urban areas before end-July 2004. 
The draft decree was taken up in the Council of 
Ministers, and it was decided that further studies 
were needed and that the final decision would be put 
off until after the December 2004 election. Mr. Di 
Tata also called attention to the letter of intent's 
commitment to undertake a Poverty and Social Impact 
Analysis (PSIA) to study land tenure issues with a 
view to facilitating the use of land as collateral to 
access bank credit. Earlier Mr. Di Tata had asked 
bilateral donors to finance the PSIA, and several, 
including Ireland, the Netherlands, Germany, and USAID 
have expressed willingness to do so. 
 
10. (SBU) Short takes: Limited progress was reported 
for reform of the judicial sector. Statistics for the 
real sector of the economy will be improved. The 
National Statistics Institute will undertake a labor 
force survey in September 2005. The GRM will prepare 
a new PRSP (PARPA in Portuguese) for February 2006. 
 
11. (SBU) The following points were offered during 
the Q and A: 
-- the drop in customs revenue is not very large; 
-- the flow of budget funds to the provinces will 
catch up in the second half of the year; 
-- SISTAFE has been delayed but by the end of 2005, 
60 percent of the budget will be covered by the new 
system; 
-- the Fund had no time to examine the discrepancies 
between the Budget Execution Report and the mid-year 
report to the parliament on implementation of the 2004 
Economic and Social Plan; 
-- as a follow up to the Safeguards Mission of the 
IMF, a Statistics Mission is working with the central 
bank to reconcile monetary statistics; 
-- donor timing of budget support disbursements is 
better in 2004 than in 2003, and the amount is holding 
steady at 13.5 percent of GDP; 
-- to achieve the Millennium Development Goals, the 
Fund is encouraging donors to provide more assistance 
into sound activities commensurate with GRM's 
absorptive capacity, and the Fund is not concerned 
with reducing aid dependency in the short- and medium- 
term as long as macroeconomic stability is not 
affected in a negative way; 
-- GRM management of the economy in the run-up to 
elections has been very good in terms of stability, 
maintenance of the program, structural reforms, and 
macro management-- Di Tata said "good job"; 
-- there has been some appreciation of the real 
effective exchange rate as a result of forex reserve 
accumulation and the corresponding issuance of 
government paper (T-bills) and the Fund is encouraging 
greater use of forex reserves instead -- the 
accumulated appreciation in 2004 now is at about 6.5 
percent. [According to the Standard Bank of South 
Africa's branch in Maputo, the appreciation has been 
10.7 percent against the USD, 2.0 percent against the 
ZAR, and 7.2 percent against the EURO for the 12 
months ending September, 2004]. 
-- The appreciation of the metical does not bode well 
for Mozambique's traditional exporters. 
-- VAT refund delays are a problem and arise to some 
extent from the undertakings to waive VAT for flood 
reconstruction projects but the Fund is not getting 
too involved. Di Tata remarked that some refund 
claims were not justified. In give and take on this 
point it was opined that the system of refunds is too 
complicated and that the VAT authorities can always 
find a fault with any refund application. Concern was 
expressed that the GRM "budget" for refunds was too 
low compared with legitimate refund obligations. The 
IBRD's Peter Moll, attached to the IMF Mission, 
believes that the GRM can meet the 60 day refund 
target and perhaps lower it. The tripartite VAT 
Refund Task Force, agreed to in the GRM/G-15 Joint 
Review in March-April 2004, is still to be convoked. 
-- the Fund does not consider Mozambique's external 
or internal debt position to be a problem at present; 
-- the Fund agrees that there is some validity to the 
need to simplify and perhaps reduce income tax rates, 
and a Fund Fiscal Affairs Department Mission was 
examining this question while the PRGF Mission was in 
Maputo. However, there is no consideration being 
given to reducing the VAT rate of 17 percent; 
-- trade issues are being led by the World Bank, the 
top tariff rate will come down to 20 percent (from 25 
percent) in 2006, and there will be no major changes 
in trade policy in 2005; 
-- the Swiss Ambassador and chair of the G-15 budget 
support donors (USAID is an observer) looked for 
increased harmonization of the IMF with the G-15, 
commented that the G-15 concerns were not with macro 
performance but with [1] the private sector, [2] the 
judicial sector, and [3] the banking system and bank 
supervision. Mr. Di Tata agreed with [1] and [2], did 
not fully agree with [3], and added [4] HIV/AIDS; 
-- the head of French Cooperation challenged the IMF 
to 'harmonize' more closely with the work of the G-15 
budget support donors. Di Tata threw up his hands and 
asked what the Fund should do differently. The G-15 
wants earlier and better budget projections and better 
leadership from the Ministry of Plan and Finance 
(MPF). The Mid Year Review and the IMF Mission were 
plagued by last minute and inadequate presentations by 
the GRM. The IBRD member of the Mission said the MPF 
doesn't have the sector expertise necessary for the 
job. 
 
12. (SBU) Comment: The IMF team was clearly pleased 
with performance to date but noted some reluctance on 
the part of the authorities to commit for the new 
administration that is expected to take office in 
January 2005. The Fund noted that it was the GRM's 
purpose in seeking the new PRGF to commit the new 
administration to follow on with the reform process. 
We are pleased with the IMF's concern about the needs 
of the private sector and will work closely with the 
Resident Representative to pursue the achievement of 
the liberalization agenda that we share. End comment. 
DUDLEY