Mozambique - Agricultural Rehabilitation and Development Project

z ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4* el Document of The World Bank FOR OMCLAL USE ONLY Repwt N.. P-5279-?OZ MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 11.9 MILLION TO THE PEOPLE'S REPUBLIC OF MOZAMBIQUE FOR AN AGRICULTURAL REHABILITATION AND DEVELOPMENT PROJECT AUGUST 14, 1990 Tbis document bas a restrictd distribution snd may be used by recipients oy In Om perforawe of *#ek oflhial dudes. Its cnents may not otherwise bR disclosed wkfowt World Ebank asShorbdon  CVRRENCY EQUIVALENTS (July 1990) Currency Unit = Mozambican Metical (MT) USD 1.00 - MT 935 MT i,000 = USD 1.07 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AfDB - African Development Bank BM - Bank of Mozambique cm - State Cashewnut Enterprise -(Caju de Mocambique) EEC - European Economic Community ERP - Economic Rehabilitation Program, 1987-1989 PAO - Food and Agriculture Organization GDP - Gross Domestic Product GOM - Government of Mozambique IFAD - Tnternational Fund for Agricultural Development NGO - Non-Government Organization PFI - Participating Financial Institution PFP - Policy Framework Paper SEC - State Secretariat for Cashew UNDP - United Nations Development Program FISCAL YEARs Government of Mozambiques January 1 - December 31  FOR OFFICIAL USE ONLY MOZUMBIQUE AGRICULTURAL RRHABILITATION AND DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower People's Republic of Mozambique Beneficiaries Ministry of Agriculture, participating banks, small- scale family and commercial farmers, traders and truckers, cashewnut processing enterprises, and agricultural enterprises. Amount SDR 11.9 mill4.on (USD 15.4 million equivalent) Terms Standard IDA terms, with 40 years maturity Onlendina Terms From the IDA funds of USD 15.4 million equivalent, the Bank of Mozambique (BM), acting as executing agent, would make available approximately USD 3.5 mill on to the participating financial institutions (PFIs), for onlending on the basis of actual loan approvals and agreed eligibility criteria. The PFIs would onlend the credit proceeds in local currency to beneficiaries at adjustable interest rates based on the structure of rates prevailing in Mozambique. The onlending credit risk would be borne by the PFIs who would receive a spread as determined within the banking system. The foreign exchange risk would be borne by the Ministry of Finance on behalf of the Government, and would be covered by the interest yield on funds onlent, net of the service charge on the IDA credit, the administration costs, and the spreads of the PFIs on onlending. Subloans *nder the Credit would have a maturity of 3 to 12 years with 2 to 4 years grace. The onlending terms and conditions are to be reviewed annually. Financing Plasr (USD million) IDA 15.4 Participating Banks 0.7 Credit Beneficiaries 0.5 Government 1.2 Total 17.8 Rate of Return Not Applicable Staff Avnraisal Report Report No. 8467-MOZ Mal) IBRD No. 21984 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  t2lOIANDUK AND 9ESOHKDSTIOII OF TEM PRESIDENT OF THE DINRRATIONAL DEVENT ASSOCIATION TO TUE EXECUTIm DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF )OZUMBIQUE FOR AN AGRICULTURAL RERABILITATIOW AND LOPENT PROJECT The following memorandum and recommendation on a proposed development Credit to Mozambique for SDR 11.9 million (USP 15.4 million equivalent) is submitted for approval. Part I of the document discusses Mo-ambique's development problems and prospects, the key priorities of the economic reform program at the macroeconomic and sector levels, and the Bank Group's assistance strategy. It draws upon the fourth Policy Framework Paper covering the period 1990 to 1992, which was considered by the Comittee of the 'Whole on May 22, 1990. Part II of the document describes the proposed Credit. I. Country Policies and Bank Group Assistance Strateaw Background 1.01 The economic and social development of Mozambique will be one of the most significant challenges for the Batk in Sub-Saharan Africa. Despite good economic potential in agriculture, transport services, fisheries, energy and minerals, Mozambique is one of the poorest countries in the world, with an annual per capita income of around USD 100. Infant mortality rates and life expectancy are among the worst in sub-Saharan Africa. About 402 of the population is displaced or affected by the ongoing war, and the country is almost totally dependent on food aid to meet its foodgrain requirements. Many of Mozambique's economic problems can be attributed to structural weaknesses left by colonial rule, and to the instability within the country and in the Southern Africa region. In particular, the lack of security in the countryside led to serious disruptions in production and marketing, and widespread destruction of essential social and economic infrastructure. Inappropriate government policies also contributed to Mozambique's poor economic performance since Independence in 1975. Direct controls on prices and marxieting, combined with a concentration of resources on the state sector, severely constrained agricultural and industrial production. The state also became heavily involved in external trade and in the administrative allocation of foreign exchange, while maintaining the exchange rate at a level which greatly undervalued foreign resources. The increasing role of central planning, together with the extreme scarcity of skilled manpower, led to much inefficiency in the use of resources. By 1985, real GDP had fallen to around two-thirds of the pre-Independence level, which represented a 50 percent decline in per capita terms. 1.02 In early 1987 the Government of Mozambique (GOM) launched an Economic Rehabilitation Program (ERP) consisting of a comprehensive set of reforms to deal with the structural problems and widespread distortions in the economy. The main objectives were to reverse the decline in production, reduce domestic and external financial Imbalances, enhance efficiency and establish the conditions for a return to higher economic growth. Since 1986, the Bank, together with the IMF, has carried out an intensive policy dialogue with the Government on the design and implementation of the ERP. The specific policy measures and strategies were first set out in a Policy  - 2 - Framework Paper (PFP) for 1987-89, and have been reaffirmed in Second. Third and Fourth PFPs which, in turn, have received the support of the Bank through adjustment and investment credits, and the IMF through SARs and the ESAF. The Adiustment Process 1.03 Economic Rehabilitation Program. 1987-1989. A major objective of the ERP was to reverse the decline in production through restoration of financial incentives for producers. To this end, the metical was devalued substantially - from Mt. 39 per US dollar at the beginning of 1987 to Mt. 830 per US dollar by end-1989. Exchange rate adjustment was accompanied by major reforms in pricing and marketirg policy, aimed at diminishing the degree of administrative control over economic activity and creating a more market-based economy. By end 1989 products subject to fixed prices accounted for less than 30 percent of GDP, compared to about 70 percent in 1987. The Government also opened up domestic trade, permitting private enterprises to participate in most trading activities previously reserved to public corporations. A second key objective of the ERP was to reduce the existing financial imbalances. Therefore, tax reforms and improvements in tax administration were introduced to strengthen revenues, recurrent expenditure was contained and steps were initiated to improve the financial discipline of public enterprises. Monetary and credit aggregates were kept within strictly programmed ranges, and interest rates were raised sharply, although they remained negative in real terms. Despite the continuing security problems in the countryside, these measures had a significant impact on the economy in 1987-89. The 1982-85 decline in GDP was reversed, with GDP increasing by 4.4 percent p.a. on average from 1987 to 1989. As a result of the exchange rate adjustments and price reform, consumer prices increased by over 160 percent in 1987. Thereafter, however, the rate of inflation decelerated considerably, to 55 percent in 1988 and 42 percent in 1989. Budgetary revenues rose from 13 percent of GDP in 1987 to 24 percent in 1989, while the current budget deficit fell from 12 percent of GDP in 1986 to around 1 percent of GDP in 1989. 1.04 Notwithstanding the significant progress made since 1987, Mozambique continues to face a number of structural problems and constraints to growth. Agricultural production remains far below the level achieved in 1682, due to the continued rural dislocation and insecurity and remaining pricing rigidities. Massive rural migration is threatening the f-^lwood, soil and water resources as the population resettles in the limited secure, areas in densities beyond their carrying capacity. Industrial facilities and basic infrastructure need rehabilitation and financial restructuring, and enterprise operations suffer from shortage of managerial and technical skills. Shortages of freely available foreign exchange, in conjunction with the growing demand for imports, are leading to continuous pressures on the exchange rate. These factors, together with the security situation, mean that the economy continues to exhibit serious macro-economic distortions, manifested in an extremely high dependence on foreign aid. Between 1987 and 1989 imports of capital and consumer goods (which are essential to the success of the ERP) rose substantially, and, despite some recovery in exports, the current account deteriorated sharply. By 1989, imports represented over 70 percent of GDP, while the current account deficit (before grants) was equivalent to almost 60Z of GDP. This extraordinarily high resource deficit was only possible due to impressive progress in mobilizing external assistance. Aggregate grants and loan inflows on highly concessional terms totalled USD 671 million in 1989 - an increase of 35  -3- percent over 1986. These increased aid flows made possible an increase in both per capita consumption and in investment which reached over 302 of GDP in 1989, despite domestic savings at minus 24Z of GDP. 1.05 Economic and Social Rehabilitation Program, 1990-92. The main elements for the adjustment program over the next three years are set out in the fourth Policy Framework Paper. The program continues to aim at reducing financial imbalances and establishing the basis for sustained growth, with priority given to broad-based rural development and increased focus on poverty alleviation. In recognition of the importance of poverty alleviation, the Government has indicated that the program would be renamed the Economic and Social Rehabilitation Program (ESRP). On the macroeconomic management side, the Government recognizes that continuing devaluation of the metical will be central to restoring adequate economic incentives and strengthening the external accounts. In addition to active management of the exchange rate, the Government is gradually reducing the degree of administrative control in the allocation of foreign exchange. In October 1989, a program called SNAAD was initiated to allow specific inputs in a number of key industries to be imported without administrative restriction, and it is anticipated that the value of eligible products will be doubled during 1990. Furthermore, in early 1991 tLe Government plans to introduce a secondary market for foreign exchange at a market-determined exchange rate. Throughout the 1990-92 period, the Government will continue to adopt stringent monetary and credit policies. On the fiscal side, measures will concentrate on reducing the growth rate of expenditures below that of GDP and prioritizing expenditures. Key measures to improve public expenditure management include the preparation of a three-year investment program and financial plan, taking into account all available resources md proposed expenditures. 1.06 In order to lay the basis for efficient and equitable rural development, the Government has begun to shift its strategy and priorities for both the agricultural and transport sectors. In the agricultural sector, the main focus of Government activities will be on increasing production and yields in the smallholder sector, through continued price reform to increase producer incentives, together with provision o! improved support services and rural infrastructure. As the bulk of the population derives its livelihood from small family farms (many of which are headed by women), increasing their productivity should contribute directly to poverty alleviation and improvements in household food security. The Government has also begun to implement its strategy for restructuring unprofitable state farms in order to make them commercially viable, including formation of joint ventures with private foreign investors, and redistribution or sale of land and other assets to family and private farmers. The Government is also developing a program for resettlement of the displaced rural population who are currently placing severe stress on the environment in the over-populated nsecuren areas. In the transport sector, the Government's strategy includes continued rehabilitation of the rail/port corridors, which have received considerable resources in the past. In order to eliminate transport bottlenecks that limit agricultural production and exports, rural feeder roads, road maintenance and coastal shipping will receive increased emphasis. The Government is also encouraging increased private sector participation in road transport through a number of measures including reform of the transport tariff structure. 1.07 In addressing the specific concerns of the two-thirds of the population which are estimated to live in absolute poverty, the Government  -4- has identified three priorities for poverty reduction: (a) creating employment opportunities for the poorest, through a combination of assistance to labor-intensive micro-enterprises in the private sector, training programr for the unemployed, and public employment programs focused on development of basic economic and social infrastructure; (b) providing a 'safety net' of direct and indirect income -transfers (suIh as self-targeting consumer subsidies on inferior foods) for those poor households which remain beyond the scope of strategies designed to stimulate growth; and (c) establishing a comprehensive and prioritized expenditure program which would integrate all poverty reduction programs. In both the education and health sectors, given the very tight budgetary situation, the Governmunt has recognized that improvements in the efficiency of resource allocation and more efficient mobilization of counterpart funds generated by external aid, complemented by some degree of cost recovery through user charges, are essential to support expansion of coverage of basic social services and improvements in their quality. 1.08 The prospectiv impact of the reform program on economic growth is difficult to predict give. Mozambique's special circumstance of continuing widespread insecur!ty. In the projections prepared for the Fourth PFP, GDP growth is expected to average around 5.9 percent per annum in 1990-92, with a strong production response coming from those agricultural areas where the security problems zre minor. The principal effect of the ERP will be seen in the reactivation of the rural economy, where substantial increases in income are anticipatad as production increases and as the agricultural terms of trade improve. The balance of payments projr tions reflect a substantial recovery of exports, but only to levels that the end of 1992 will still be well below those of the early 1980s. Iv rticular, cashew, copra and seafood exports are assumed to increase sl. .cantly, while tea and sugar will remain at very low levels because of secarity problems. Overall, the dollar value of exports is projected to grow rapidly, averaging around 14 percent p.a. over the 1990-92 period (but, af course, starting from an extremely low base). The growth in the dollar value of imports, by an average of 7.7 percent p.a. over the 1990-92 period, is considered to be the minimum necessary to support economic recovery by providing consumer goods as incentives for agricultural production, by meeting the emergency food requirements, and by facilitating the required rehabilitation expenditures. Although import values are assumed to grow at only about half the rate for exports, the trade deficit in absolute dollar terms will grow throughout the period. 1.09 Although the Government is carrying out the reform program in a thorough and timely way, the difficult security situation, together with the magnitude of existing distortions, mean that the current account deficit before grants is forecast to decline only gradually over the next decade, falling from about 59 percent of GDP in 1989 to around 26 percent by 2000. Consequently, Mozambique will continue to rely heavily on foreign assistance for a number of years to come. The Consultative Group held in Paris in November 1989 provided broad support for the ERP program, and pledges suggested that the required external resource inflows for 1990 would be met. Furthermore, in view of the country's exceptional circumstances, several of Mozambique's creditors have either cancelled part of the debt owed by Mozambique or are providing grants to cover debt service payments. In June 1990, the Government reached agreement with the Paris Club to reschedule its debt and is seeking to reach agreement on a commercial debt buyback with the London Club. Taking these into account, Mozambique's external financing requirements, including debt relief for the elimination of arrears, would  amount to USD 1.8 billion in 1990 and decline to around USD 1.2 billion per annum in 1991 and 1992. Bank GrouP Operations 1.10 The Bank has played and will continue to play an important role in the design and implementation of Mozambique's economic reform program and in the mobilization of the needed financial resources to support the program. The Policy Framework Paper, prepared annually by the Government, the Bank, and the IMF establishes an appropriate policy umbrella for Bank adjustment and investment operations. The Bank's basic strategy has been to support the objectives of the ERP by: (a) carrying out analyses of key components of the ERP through economic and sector work (ESW); (b) designing and implementing a lending program which can deliver substantial financing for the ERP through both adjustment operations and investment lending to increase economic growth and efficiency and strengthen the performance of the social sectors; (c) initiating the development of a longer term strategy for capacity building and poverty alleviation; (d) improving aid coordination to ensure adequate overall funding of the ERP; and (e) improving the delivery of technical assistance to key institutions. 1.11 Composition of Lending Operations through end FY90. Since Mozambique Joined the World Bank in 1984, 12 projects involving IDA Credits of USD 511.6 million have been approved (see Table 1). About 44X of Bank assist.uce has been provided in support of the economic reform program through three quick disbursing adjustment operations which provide finance for the balance of payments. This relatively high percentage of assistance in the form of adjustment lending reflects both the rapid pace of economic reform and critical need for imports in Mozambique, and also the difficulties of implementing investment operations in a situation of war. The scope and location of investment projects have necessarily been constrained by the uncertain security situation in the countryside. The main focus of the initial investment projects has been on rehabilitation of essential economic and social infrastructure, predominantly in urban areas. Operations in support of the energy sector account for around USD 42 million (82). in the urban and transportation sectors for about USD 100 million (20Z) and in the social sectors for around USD 43 million (8Z). More recently, assistance totalling about USD 82.1 million (162) has been approved to assist in the restructuring of the industrial enterprise sector and USD 21 million (4X) for strengthening public sector management. Direct investments in the agricultural sector (albeit a sector with enormous potential for economic growth, export generation and poverty alleviation) have so far not been possible because of the difficult security situation in the countryside, although the sector has benefitted indirectly from imports financed by the adjustment operations. However, it is anticipated that, over the next few years, Bank assistance to the agricultural sector in safe areas of high agricultural potential will increase, although the scope and location of investments will necessarily be more limited than would be the case if peace were restored.  -6- Table 1: Mozambique - Distribution of Lending FY8S-90 Sector Date of Board Credit Amount Approval (USD million) Adjustment operations First Import Rehabilitation 06/85 45.0 Second Import Rehabilitation 08187 88.6 Third Import Rehabilitation 05189 90.0 Energy Energy Rehabilitation and TA 05/87 20.0 Urban Household Energy 06/89 22.0 Urban Urban Rehabilitation 08/88 60.0 Social Sector Education 05188 15.9 Health and Nutrition 03/89 27.0 Transport Beira Corridor Transport 09/89 40.0 Industry and Finance Industrial Enterprise Restructuring 12/89 50.1 Small & Medium Scale Enterprise Dev 12/89 32.0 Public Sector Management Economic & Financial Management TA 10/89 21.0 TOTAL 511.6 1.12 Future Country Lending OPerations. The overall level and pace of Bank assistance for Hozambique will take into account the progress made in the implementation of the ERP as well as the feasibility of specific operations in light of the security situation. The planned volume of lending for the FY91-95 period will remain at around the level of the FY86-90 period, with about two new lending operations programmed per year. The primary goal of the Bank's country assistance strategy is to broaden the economic recovery initiated over the past three years, through: (a) deepening the process of economic reform, in particular in the exchange and trade system and public expenditure management; (b) rehabilitation of social and economic infrastructure, especially in rural areas; (c) reducing poverty, especially through expansion of employment, investment in human resources, and targeted assistance to the most vulnerable population groups; and (d) developing Mozambican management capacity to gradually reduce reliance on foreign technical assistance and to increase the efficiency of the private and public sector. 1.13 During the FY91-95 period, the lending program will gradually shift towards a greater reliance on investment operations. However, fast- disbursing adjustment operations will likely constitute about 25Z of total lending volume for Mozambique in view of the neec .o maintain an appropriate level of resource transfer in support of policy %e trm and growth. A planned Economic Adjustment Credit would provide suppor- f;r essential imports based  - 7 - upon the continued satisfactory implementation of the raform program. Criteria by which performance would be judged include further progress in the foreign exchange and trade system (expansion of SNAAD), and improved public expenditure management, including issues of investment composition and adequacy of recurrent expenditure, civil service pay and employment reform, and restructuring/privatization of state enterprises. While maintaining support for general economic adjustment, lending work will increasingly be focussed on infrastructure rehabilitation linked to :estoration of rural production and trade, and on human resource development. Poverty reduction and greater participation by the private sector will be important objectives for all proposed investment operations. Ensuring adequate implementation capacity and sufficient provision fcr future recurrent expenditures will also be critical considerations in the design of all projects. 1.14 Specific issues in sectoral management will be addressed through the orientation of Bank lending. In the agricultural sector, proposed investment operations aim to support increased and more efficient agricultural production, especially by the family sector, through provision of improved agricultural services such as extension, research, credit, land management and titling, and basic rural infrastructure, particularly marketing facilities and water supply. Lending would also support the Government's efforts in the agricultural sector to decentrali2e investment decision-making and budget allocation and control to the provincial and district levels. The proposed project would support rehabilitation of the cashew sub-sector, which is a key export and the principal source of cash income for the family sector, thereby strengthening tha trade balance as well as directly reducing poverty and improving food security at the household level. It would also provide technical assistance to support the Government's strategy for restructuring of agricultural state enterprises, including privatization and formation of joint ventures with direct private foreign investors. 1.15 In the transport sector, Bank assistance aims to lower transportation cost and reduce bottlenecks to agricultural trade by improving basic ru. al infrastructure, with special emphasis on the development of the rural feeder road network and the rehabilitation of small coastal ports. The development of feeder roads in particular is expected to generate substantial employment due to its labor intensive characteristics and therefore contribute directly to poverty reduction. Operations will also focus on developing the human resources and institutional capacity necessary for maintaining the road and cabotage network. Lending in the urban sector would support rehabilitation of essential urban infrastructure in smaller urban centers, including provincial capitals, other secondary cities and market towns, and in addition would support the institutional decentralization required to finance and implement local rural development programs. Given the extremely high rate of illiteracy and infant mortality, social sector lending will be geared towards rehabilitating, improving quality and eventually expanding the coverage of basic health and education services. Given the strict limits on the recurrent budget under the ERP, improving the efficiency with which scarce resources are utilized -including reallocation of resources within the sector - and developing alternative financing mechanisms are major issues to be addressed. The other main focus of lending in the human resources area will be on building local management capacity of the private and public sector, through assistance to improve the quality of vocational technical education, upgrade the effectiveness of higher education and strengthen the management and financing of non-formal training activities.  -8. 1.16 Provision of technical assistance is an important element of the Bank's program in Mozambique. In general, technical assistance support would first be sought from grant sources, mainly bilateral agencies. However, technical assistance for economic and financial management would also be provided by separate credits designed to support key policy-making entities of the Government, including the Ministry of Finance, Bank of Mozambique and the National Planning Commission. The first such operation - the Economir and Financial Management Technical Assistance Credit - was approved in October 1989. In addition, a wide range of technical assistance and training activities is being supported by sector operations which also serve as a vehicle for coordination of other donors' activities. Finally, a debt reduction operation for Mozambique was recently initiated, which would be among the first to be assisted by IDA's Debt Reduction Facility, and technical assistance is being provided to the Government in the preparation of proposals and negotiations with commercial banks. 1.17 Economic and Sector Work. A key objective of ESW is to support the policy dialogue with the Government on the reforms that would lay the basis for financially viable and equitable growth. ESW also provides the basis for Bank lending operations, and facilitates aid coordination by providing a framework for other donors. On the macro-economic side, in 1989 a Public Expenditure Review (PER) was carried out which assessed the size and compo'sition of investment and other expenditures in four principal sectors, and recommended improvements in the planning, budgeting, and monitoring of public expenditures. A Country Economic Memorandum (CEM) initiated in FY89 will be completed in Fall 1990. The CEM reviews the accomplishments of the ERP, examines the constraints to further development and provides an agenda for subsequent years. Over the last few years a series of sector reports have been prepared - in ggriculture, food security, population, health and nutrition, industry and transport. The objectives of these reports are, first, to consolidate existing information and provide reference documents for Bank staff and others working in the sector, and second, to identify the principal constraints and outline a broad strategy for development, including a policy framework and priority areas for future Bank lending. Finally, a Poverty Framework Paper which is being prepared will set out a strategy for poverty reduction and indicates how the various ongoing programs are contributing to that goal. 1.18 Over the coming years ESW will be carried out in those areas where policy and institutional reform will be part of the growth process. In particular, institutional deficiencies have constrained implementation of the ERP and affected the Government's capacity to der;.ve maximum benefits from Mozambique's large external resource inflows. Therefore, a major focus of future ESW is capacity building to strengthen policy analysis, economic management and project implementation in Mozambique. Specific attention will be devoted to the size and composition of employment and the level and structure of earnings in the public sector, given the need to attract and retain skilled personnel and the constraints on the public sector wage bill. Another important issue for analysis concerns ways to decentralize decision making from central to provincial and district levels, while strengthening expenditure control and revenue mobilization at the local level. Work also will address ways to expand Mozambique's limited pool of trained manpower and strengthen economic management skills, including analyzing a nsaber of issues in higher education such as the high unit cost per graduate, deficiencies in the mechanisms linking training with labor market needs and the merits of alternative financing mechanisms. A second area of focus for ESW will be  - 9 - public expenditure management. As a result of the improved data base following the first PER, it will be possible to deepen the dialogue on expenditure priorities, including the composition and phasing of the overall investment budget, the balance between recurrent and investment expenditure and the impact on poverty reduction. In addition, the performance of publiz enterprises ,'il1 be reviewed in order to develop a strategy for privatization. A final area for analysis will aim at developing the policies, regulations, and institutional capacity to deal with the nation's environmental issues. 1.19 Cooperation with the 1MFP. The Bank has worked closely with the IMF in the design avd monitoring of the Economic Rehabilitation Program. Since 1987, the Bank and IMF have carried out joint missions annually to develop with the Government the three year Policy Framework Papers. There has also been frequent cross-mission support. e.g. Bank staff participated in the 1989 IMF Article IV Consultation mission and Fund staff recently joined the Public Expenditure Review mission and the supervision mission for the Third Rehabilitation Credit. 1.20 Aid Coordination and Co-Financing. The Bank has been very active in aid coordination in Mozambique over the last few years, with efforts directed at helping ensure that both the amount and composition of donor assistance are appropriate to Mozambique's circumstances. In particular, annual Consultative Group meetings have become an effective mechanism for donor coordination and consultation, as well as for aid mobilization to fill the financing gap. The third Consultative Group meeting, which took place in November 1989, was successful not only in mobilizing needed external resources but also in discussing key issues related to poverty alleviation, food security, and the management of public expenditure. In addition, the need to integrate emergency assistance with the Government's regular progiam, specifically within the budget and balance of payments, was widely endorsed. Finally, agreement was reached by a number of major donors as the harmonization of procurement procedures. Specific issues for discussion at the fourth Consultative Group meeting (tcheduled for early December 1990) include external debt, donor support for expansion of the system for the non-administrative allocation of foreign exchange (SNAAD), and development of common donor procedures with respect to the valuation, payment, accounting and utilization of counterpart funds resulting from sale of food aid. 1.21 Bank lending operations, especially the fast disbursing Rehabilitation Credits, have attracted a large volume of co-financing and this trend is expected to continue. Sector operations in education, urban rehabilitation and the Beira Corridor, in particular, have been effective in coordinating the efforts of various donors active in those sectors. In addition, the various sector studies in agriculture, food security, energy, transport, industry and population/health/nutrition, together with the Public Expenditure Review, have facilitated improved aid coordination by providing a policv framework and sector strategy which can be drawn on by other donors. Indeed, there has been active participation by specific multi-lateral and bilateral agencies in carrying out several of these studies and it is anticipated that this type of cooperation will continue to occur in the future. 1.22 Summary Assessment. Hozambique is in a period of rapid economic, social and political evolution. The main elements of change are: first, the restructuring of the economy through the ERP; second, a peace  - 10 - initiative designed to bring the war with REMAMO to an end; and third, a procass of constitutional reform which is underway. Given the uncertainties associated with these changes, together with the recent emergence of institutional and management bottlenecks constraining timely project implementation, a period of consolidation seems warranted. Therefore, Bank strategy for the next few years emphasizes portfolio management, with particular attention devoted to supervision of ongoing operations, and to training local staff in a number of basic project implementation areas such as disbursements, procurement, accounting and auditing. In addition, significant resources will be devoted to ESW in the areas of capacity building and public expenditure management, as well as continuing to deepen the policy dialogue at the sectoral level. New lending ope.ations are planned at cne relatively modest level of two per year However, if the peace negotiations and constitutional reform and elections proceed as planned during 1990 and 1991, and the security situation improves significantly, an increase in the volume and scope of Bank lending could then be considered. Of course, continued or expanded Bank lending presupposes continued progress by the Government in implementing the economic adjustment program. To date, progress by the Government in carrying out the comprehensive set of macroeconomic and sectoral reforms set out in the Policy Framework Papers has been satisfactory. Nevertheless, it must be recognized that, given the magnitude of existing imbalances and the current very low levels of production in Mozambique, adjustment will be a long term process. For the next decade at least the country will continue to depend heavily on external assistance to finance imports that are essential for restoring the capital structure and providing consumer goods that are necessary complements to the reform of financial incentives. I1. The Proposed Credit 2.01 The proposed credit would be issued on standard IDA terms with 40 years maturity and would help to finance an Agricultural Rehabilitation and Development Project. The principal implementing agencies would be the Ministry of Agriculture, the Bank of Mozambique, the Participating Financial Institutions, antd project beneficiaries. 2.02 BackRround. Agriculture is the most important sector of the Mozambican economy, providing about 40-502 of GDP and 80 of both employment and export earnings. Since Independence and until 1987, the agricultural sector performed poorly. Between 1981 and 1986 overall agricultural production fell by about 30? and exports by nearly 75X. The poor performance of the agricultural sector can be attributed to inadequate pricing, marketing, and resource allocation policies, natural calamities, the ongoing war which has impeded agricultural production and marketing, and the lack of long-term strategies and experienced government staff. Donors such as UNDP, FA0, IFAD, AfDB, EEC and bilaterals including the Nordic countries, Italy, the United States, and many others, and NGOs provide assistance to the agricultural sector in Mozambique. However, their support needs to be better coordinated and focused, and ba^ed on long term strategies. 2.03 Production of the main export crop, cashewnuts, began to fall gradually in the early seventies, and fell sharply in 1982 and 1983. Cashew production has since recovered somewhat and in 1988 reached about 40,000 tons, 25? of its 1970 level of about 160,000 tons. This subsector suffers from a lack of suitable planting material and poor husbandry, aging trees, weak agricultural services (extension, research and marketing), and  - 11 - inadequate technical and managerial capacity. Investment credit for cashewnut production, marketing and processing is scarce and the cashew processing industry needs rehabilitation. Most of the existing agricultural enterprises, which include state farms, private commercial farms and small- and medium-scale agricultural processing plants, were surveyed by the Ministry of Agriculture. A large part of these enterprises were found to lack trained managers and to be inefficient and unprofitable. Surface water resources provide the possibility of irrigation and some two million ha offer suitable irrigation potential. However, until recently, the development of the irrigation subsector consisted of making substantial investments in the initiation of large irrigation schemes and little effort was devoted to the rehabilitation of existing irrigation infrastructure and to on-farm development. 2.04 Reforms introduced under the ERP are gradually restoring macroeconomic and fiscal stability and appropriate growth incentives. In the agricultural sector, pricing and marketing reforms were introduced to reverse the decline in agricultural production. Recently a Program for Training in Economic Management (PROFORGE) was set up to assist in the training of agricultural enterprise personnel. Efforts also were initiated to strengthen agricultural services, to plan the rehabilitation of key agricultural subsectors such as cashew, irrigation and cotton, to support family farms, and to revitalize the private sector. Significant progress in reforming agricultural policies has been made. The Government accepted the principle of border pricing and put in place mechanisms to set and periodically review minimum prices for a number of crops produced by the family sector, including cashewnuts. Marketing is being liberalized and state enterprises are becoming more financially accountable and managerially autonomous. As a result, agricultural GDP per capita has grown by 6.42 p.a. between 1987 and 1989. 2.05 The Government's present strategy in the agricultural sector draws on a series of IDA-financed subsector studies, an Agricultural Sector Survey, and a Food Security Study. The strategy aims to direct the country's limited resources to: (a) better focusing assistance to the family subsector in order to increase production and rural incomes; (b) rehabilitating key subsectors such as cashew, irrigation and cotton, by providing assistance to projects and enterprises where returns are likely to be high and immediate instead of initiating new investment projects; and (c) supporting agricultural development in secure and accessible areas with high agricultural potential. In the financial sector, the GOM's strategy also includes rationalization of interest rate structure, curtailment of lending for enterprise deficit and expanding lending to the private sector. 2.06 The GOM has decided tot (a) rehabilitate the cashew subsector, its main export crop; (b) use the proposed project as the main avenue for assisting the small-scale family producer, which is heavily involved in cashewnut production; and (c) expand lending to the private sector. In this context existing cashew areas will be rehabilitated and some new ones would be planted, agricultural services will be strengthened, investment credit will be provided, a long-term farm and factory gate pricing system will be developed, resulting in incremental income from exports of cashewnuts. Key units in the State Secretariat for Cashew (SEC) and the State Cashewraut Enterprise (CM) will be strengthened in order to facilitate these efforts. In addition, the cashew processing capacity will be gradually rehabilitated and CM's performance will be evaluated. To enable the subsector to again make a substantial contribution to export earnings, a National Cashew  - 12 - Development Master Plan will be prepared. G0O also has decided to make agricultu.ral enterprises more efficient and profitable through individual restructlring and rehabilitation, introduction of appropriate management and accounting systems, training of personnel, and privatization. Those enterprises which continue to have large deficits will be closed and their assets turned over to more efficient producers. As for irrigation, investments in large-scale, capital-intensive irrigation schemes will be evaluated carefully and compared tco small-scale irrigation schemes and rainfed alternatives. A National Irrigation Development Master Plan therefore also will be prepared to assess alternative options for medium- term development of irrigation. 2.07 Rationale for IDA Support. In the context of the ERP, the PEP, and the agricultural sector work, IDA has assisted the GOM in reforming agricultural and financial policies and in formulating strategies to stimulate the economy. The proposed project is consistent with these strategies. IDA involvement would ensure that the policy environment needed to help sustain the ongoing economic upturn is continued, that donor assistance to the agricultural sector is better coordinated and focussed, and that direct investment support is provided to the private sector and to subsectors providing key foreign exchange earnings such as the cashew subsector. 2.08 Proiect Obiectives. The project supports GOM's efforts to: Ca) reverse the decline in production and marketing of cashewnuts and in the medium term, restore exports to their levels of the seventies; (b) make small and medium-scale state and commercial agricultural enterprises more efficient and profitable; and (c) strengthen local capacity to formulate and implement long-term growth strategies for the irrigation and cashew subsectors once the security situation and other constraints have eased. 2.09 Project Description. The project components includet (a) rehabilitation and development of the cashew subsector; (b) assistance to state and commercial agricultural enterprises; and (c) specific subsectoral studies and surveys. Under the first component, financing would be provided for: (a) equipment, incremental costs and technical assistance to agricultural extension, research, and cashewnut nurseries; (b) investment credit (equipment and materials) to commercial farmers and traders and for the rehabilitation of three cashew processing factories; and (c) technical assistance, equipment and incremental costs to the State Secretariat for Cashew and the State Cashewnut Enterprise. Because women play a dominant role in agriculture in general and cashew marketing in particular, an evaluative survey would be carried out to assess factors determining the agricultural productivity of women and measures to be taken to enhance benefits accruing to them. Under the second component, financing for technical assistance, incremental costs, and equipment would be provided in order to develop a capacity within MOA to address the rehabilitation needs of state and private agricultural enterprises and provide them with managerial and planning assistance and training. Under the third component, complementary studies and surveys such as a National Irrigation Development Master Plan, a National Cashew Tree Population Survey and a National Cashew Development Master Plan including new areas would be financed. Total project costs are estimated at USD 17.8 million. 2.10 Agreements Reached. IDA received commitments from GOM on the following main actions: (a) selection of a Senior Pricing Policy Analysis Officer to be posted in the SEC; and a Marketing Economist and an Economist  - 13 - to be posted in the Sales and Trade Unit in CM by December 31, 1990; b) completion of a National Irrigation Development Master Plan not later than July 31, 1991, and a National Cashew Tree Population Survey by not later than December 31, 1991; (c) initiation of an evaluation of CM's performance which would spell out its long-term goals and duties by October 31, 1991; and (d) initiation of a National Cashew Development Master Plan not later than July 31, 1992. Signing of the contract to prepare the National Irrigation Development Master Plan would be a Condition for Credit Effectiveness and receipt of satisfactory Subsidiary Administration Agreement; Participation Agreements; and a model of Subloan Agreement would be Conditions for disbursement of the line of credit component. 2.11 Benefits. The project would directly benefit some 50,000 cashewnut producers in terms of increased production of intercalated food crops and cashewnuts (about 10,000 tons). This incremental production will increase the country's potential earnings from import substitution and foreign exchange by about USD 12.0 million a year. The project also is expected to offer some 2,600 new jobs, of which about 602 to women. Strengthening existing institutions is expected to enhance services to farmers. Restructuring of agricultural enterprises would make them more efficient and profitable. Moreover, integrated pest management and farm management practices to be introduced would help safeguard the environment. Lastly, specific measures, to be determined early in the life of the project, would be taken to enhance project benefits for women. 2.12 Risks. The main risks include the unpredictable security situation, borrower inexperience, and possible inadequate and untimely funding of project activities. To minimize these riskes (a) the project would be restricted to relatively secure areas; (b) multi-disciplinary technical assistance to train and help local staff carry out the rehabilitation process would be provided; and (c) assurances were obtained that GOM budgetary provisions, which are consistent with the Public Expenditure Review recommendations, would be made on time and would cover planned incremental costs. 2.13 I am satisfied that the proposed Credit complies with the Articles of the Association and recommend that the Executive Directors approve the proposed Credit. Barber B. Conable President by Ibrahim F.I. Shihata Attacbments Washington, DC August 14, 1990  SUIE - CMIlC (IOICAYWAn IonSPer Copita m nusS: 100 A. wum of Gr=m Doueala Pro&m S.& amuU htus( w =1) (fie cuvrret Priam dte) (ft. =iSta*I wiU et) loss 1978 O 1 19I7 1 ow3 153 195.31786 1mI.s m &rMs Doal*ti Progi '.0. 1.0108.0 100.0 10-0.0 10,0.0 1080 . . -2.7 5.6 3.2 Not Indirect Tass.. . 12.5 10.0 12.2 14.5 A r~iwe. . 47.1 87.6 57.2 5.. ..1* . ii.ty . .. 28.9 19.2 16.5 18. .. .. 4.2 5.0 s.s Sinrvles.. . 16.5 123g 1 11 11I.6.. . -7.0 -1.2 6.3 RssOrM Sslwm 4.. -1.4 .13.5 -47.0 -57.3 .. . Egwrte of OS5.. . 16.8 11.6 18.1 16.2 . ..-13.1 76 19. lmowt of Wfs.. . 34.9 45.8 63.1 73.5 . .. -2.1 6.0 14.6 Total EmUidtWur . 113.4 133.5 147.1 157.1 4... .1 5.5 5.6 Tatel Cawmitlan .. . 9.5 106.7 118.5 128.9 . .. -0.0 2.5 6.4 Private Cinuwtl Ion. 78.2 86.5 99.4 S60. . 0.1 0.6 3.7 Omursi aGeonwit.. . 26.8 21.2 22.1 2.0.. . -4.1 110.31 16.7 Grow Ginstic hwuntut . .. 13.1 23.6 83.5 83.5 . .. -1.6 19.7 2.6 Fixed lnivom~t . .. 16.9 23.6 325.5 5 4... -.6 19.7 2.6 OIrgo In Stud . . . . . . . . Orass Dostlo Savlfr g 0.5 49.7 -18.5 -23.0L. .. lbt DST" Traufws 1.0 ~0.0 4.1 L.1 G=a ftbtlami Ssvlrq . -1I.0 -23.61 .10.4 ... . In bill law of Wmb 1ion 197 199 199 13 1 (at owstut 196 Orions)- - - - - - Grawl) ~mlo ros . . 10 * 67.. -2. 5.6 3.2 Cupmoty to luat .. . 0 0 46 M3.. . -10.5 -1.1 5.4 Tomfof TrafMjAdAmnt . .25- a @ -4 -;It. . Oross Doninet mun 4111. #3 446 M6 -. . 4. 4.5 1.5 GrassMiami Proust .. .. ~~~514 26 VI . . . -4.6 1.1 GrMs NatIonl mfotmi 4. 3. US .... . 49 -0.1 *100)-u---- - aflstlan RetCtw P.a.)- C. Price Ifidlol I1i oi i I53 It im.is ws.u in3 Mt it Caiuw.Priam (IFS 64j. .. . . . . * .. . impicbit OW beflator 15.~ 36.0 40.7 10.0 146.0 3U U. . .4 46.0 39.6 toi olflt Dodiursen Doti. 1is] 6.0 3.5 100.0 INS. 25. . . 32.2 61.0 45.3 0. 00w IndIcatwos: 1I3.1 19134 199.6 Gram thRtwss(2p.): 2. 2. PopulationLs Ls L LwForce. . Gram Nati. tuu .sp.. . . 44 lwart ElastIitly: larghrul v0 Pates or= l tl SavNU .. . 4.9 SuIM of Totali 199 1M1 I99 la 19M Labor ford Inl: - DqlIuitws 67.4 a.6 64.5 5.5 6.5 7.4 ud.mtry 7.1 7.7 8.1 Total 100.0 100.0 IL 100.0 10:0 10  MWUM E - ECOIC i40iCAT08$ Annex PAIl 2 f 3 Vohl Inde Vaiu at Orrmnt Pricm (lilam us) E. W r dl w 1980 19E5" 1937 1980 1988 1989 191 1985 199 1w 1988 1983 X.fOOO.X 261.8 52.1 52.1 100.0 11.7 105.0 0 12 lt 31 27 20.5 X.FOm.FISSI 12M7 110.9 110.9 100.0 101.4 112.8 32 33 38 40 47 30.2 X. aEV.TEA 44.8 20.9 217.4 100.0 204.3 208.7 29 2 1 0 0 0 Roatd8) 537.8 105C9 85.5 1000. 112.9 134:4 155 30 23 2 29 41.4 Total Eorta FOO 325.7 92.2 85.0 100.0 107.8 105.5 281 77 79 97 103 101.1 F. No"rtiiss l1ot Food 50.0 71.9 90.0 100.0 71.8 73.7 108 121 149 168 171.9 177.7 Fuel aztwwgy 178.7 68.0 93.5 100.0 78.7 82.0 ZO 7S 54 72 61.1 68 0f. con r * 173.6 85.6 132.8 110.0 89.8 98.2 95 45 82 68 94.5 101.7 ousr Interod pooF 105.0 78.8 98.9 I0.0 104.4 111.8 .. 134 Capital gooa 159.5 53.1 81.0 100.0 150.8 1t81.6 la a 8 1 137. 144.8 Total lWats Cif 113.8 71.8 95.5 10.0 94.7 100.7 800 424 54 620 716 775.1 G. IlrdwdisTs Tenm of Tram 1980 1985 195 18B7 195 198 ftrdh. Eworts Prio Inr 89.4 88.2 96.5 100.0 9.1 90.9 Irh. Imwrts Price Irn 112.8 94.4 90.9 100.0 108.7 112.8 Mbrt. TerM of Tram 79.4 91.3 108.2 110.0 91.2 80.5 US sIlllrm (at wrmt Prim): M. BBiu of Pa)ts 1 1N 198t 19w 198 19goe -DorWs of Oa a NS 39 148 14 178 110l 187 ibrd"iu (FM) 281 77 79 97 104 101 MWActor ervic 118 8 80 7M aS as iuartfsGods & IFS M4 48 M9 6M 77 84 Mmr_wlis (FM) 7M 485 5M a 6 Nn-Factor Servic 124 100 104 119 143 151 Rws Satbg" 4-4 4 39 444 -0 -U90 -612 Not Factor In1 47 -77 -178 -170 -9 -155 (intest tsr R1S) 0 20 31 14 15 19 Not DA-font Traufffs -5 -2S a a 55 a5 (wa:rilrs tt) .. .. .. ..t.. . Curr A/C hi befr Off. Trtf -28 440 -M -6 4V -7 Not Official Trw s 56 18 213 304 3s4 33 Ourr AC al ater Off. Trf W -301 40 -2 -M -M2 Lo.T.m Capital t nSifo 384 14 42 - 91 -148 -17 Direct l_wsgtwvt 0 0 0 0 0 0 Not LI tLoan (WS t) O 9 21 401 148 2M OUur LT Intlow (1t1) 84 -2 -21 -Q -293 -247 TotAl Otr it_ (rot) -10 1V 484 544 480 42 Not Swrt Tm Cwital 0 10 0 0 0 47 Capital Flo IN.E.I. 0 0 0 0 0 0 Errorsl | bi1seimX D-I -13 484 544 49 32 0J. InMt Rmu 32 21n -24 -4 0 -41 N Credit from IW 0 0 0 -15 -2S -18 Otuwr hurv @" 32 21 -24 -73 4- -24 As S1 of GO: PReme Bele -18.4 -10.0 -10.7 -4.4 -4.0 -57.3 Intst Pa)Nt 0.0 0.6 0.7 1.0 1.2 1.0 rrmt fwmt bl111 -17.5 -13.0 -14.9 -4.0 -9.9 -6.1 ftirwm 1tI. _n:1 Gldcl. US8 . .. . . . . Riur Iru. Said (311.118) .. . . . . . Official X LOWW1) 32.40 48.18 40.48 210.73 524.6 745.A0 U (e III a= of ofrest 11) 24i4 3391 4173 1471 1257 1154  MOAi - EClC INtCATn Annex PAW 3 QW 3 ~~. ,.~~~~ ~~ I Sure~VW of G rMMf PAtOS 1. adpt (unify 11) 1910 l91S I9191# 1949 1908 im I= l" o i8 I1 im TotAl RhVeMu 19.6 12.8 13.2 16.0 19.8 23.8 .. 15.7 210.4 90.5 Orent E twur 18.1 16.2 23.4 24.7 22.8 25.2 .. 28.9 149.1 42. . Ormnt it S1ale t.5 4.4 -12.2 8.7 -3.0 -1.4 .. 46.4 24.3 -28.3 CZilta Etitur III 4. 5.: T8s3 21:2 22:. .. 388 256.8 56 . ~IO t lt _:9i -7.i -17.8 -27 6 -24 i -23: 446 251i S2 52:i Off olal CwltaI Grent 2. 2.0 2.3 14.9 13.9 16.8 30.0 1530.0 44.3