Document of The World Bank ------ FOR OFFICIAL USE ONLY Re,ort No. 8370-MOZ , 146914-MOZ ... . MOZAMBIQUE COUNTRY ECONOMIC MEMORANDUM MARCH 14, 1990 VOLUME I I MAIN REPORT . I Southern Africa Department Country Operations Dlvlilon· ' - nis docwllt llu a rnaictN 4111trtlNlltoll UNI ••Y be 111N IIJ their offldal 4•des. Its coatHtl••1 red,._.. oaly ia die perfonaaace of IIOC odlerwi• be 4ilclelN widlollt Worltl Baak ••dllorizatioa. CURRENCY EQUIVALENTS Meticais/US$ 1975 22.55 . 1980 32.40 1981 35.35 1982 37. 77 1983 40.18 1984 42.44 1985 43.18 1986 40.43 1987 (average) 281.50 1988 (average) 528.60 1989 (average) 747.10 SOURCE; People's Republic of Mozambique. I • PREFACE • - The report presents the findings of two missions which visited Mozambique during April and September 1989. The missions were comprised of - Andrew Goudie (Mission Leader and Principal Author, World Bank); Jorge Rebelo (Senior Transport Planner, World Bank); Daniela Qreasani (Econo~ist, World Bank); Althea Hill (Demographer, World Bank); Rene Bonnel (Economist, World Bank); Maria Teresa Benito (Research Assistant, World Bank); Baudouin Duvieusart (Education Sector, Consultant); Norman Ras~ (Agricultural Credit, Consultant); Tom Kennedy (Transport Sector, Consultant). Major contribution were also made by Roger Grawe, David Phillips and Jacomina de Regt. Staff from the Banco de Mocambique, the Banco Popular de Desenvolvimento, the Ministries of Education, Finance, Trade and Transport, and AGRICOM worked particularly closely with the mission and made major contributions to the report. • . , MOZAMBIQUE COUNTRY ECONOMIC MEMORANDUM VOLUME I CONTENTS . MAJ'OR ISSUES AND OPTIONS i • SUMMARY OF THE MAIN REPORT • • • • • • • • • • xv • Part 1 Introduction • ... • • xv Macroeconomic Policy and Performance under the Economic Rehabilitation Program ••••••• xvii Evolution of Real Economy. . . • • • • . • • • xvii Evolution of Macroeconomic Adjustment • • • • • • . xviii Evolution of Economic Structure • • • . • . • • • . • . xxii Evolution of External Assistance and the External Account • • • • • • • • . . . . xxviii External Dependence of the Economy xxix Part 2 The Development of the Economic and Social Infrastructure . • xxxi The Development of the Transportation Infrastructure xxxiv . The Development of the Financial Infrastructure . . . xxxvii The Development of the Marketing Infrastructure xli The . . . . Implications of Future Demographic Trends xliii ,. The Development of Human Resou-rces . ......... xlvii Part 3 ti The Development of Economic Policy. • • • . • . • • . . • • • . . 1 -· Volume II Contents MAIN REPORT Contents Tables and Figures Abbreviations Part 1 .. CHAPTER. I . . . .• . .......... 1 INTRODUCTION 1 • CHAPTER II 4 MACROECONOMIC POLICY AND PERFORMANCE UNDER THE ERP, 1987-89 4 A. The Objectives and Strategy for Development 5 B. The Evolution of the Real Economy • . • • 7 c. The Evolution of Macroeconomic Adjustment 12 D. The Evolution of the Economic Structure 28 - The Incentive Framework • • • • • 28 - The Allocation of Resources • • • • • 36 E. The Evolution of External Assistance and the External Account 45 F. The External Dependence of the Economy. 49 CHAPTER III. 56 THE IMPACT OF THE INSECURITY PROBLEM ON ECONOMIC DEVELOPMENT 56 Part 2 CHAPTER IV 62 • THE DEVELOPMENT OF THE ECONOMIC AND SOCIAL INFRASTRUCTURE. 62 ... A. Introduction 62 . B. Indicators of Infrastructural Decline • • • • • • • . • • • • 63 c. Basic Issues of Infrastructural Development 64 D. The Macroeconomic Significance of Infrastructural Development 66 CHAPTER V . . . . ........... ..... 69 THE DEVELOPMENT OF THE TRANSPORTATION INFRASTRUCTURE • • • • . • • • • . 69 A. Introduction • • • • • • •.• 69 B. The Objectives of Transport Sector Policy. 73 ·c. The Framework for the Transport Sector Strategy • • • • • • . . • . 75 The Framework • • • • • • • • • • • • • • • • • • . . . 75 Underlying Assumptions • • • • • . • • 76 The Principal Policy Issues • • • • • • • • • • • • • • 77 D. The Development of the Road Sub-sector. • • • • • • • . . • • . . 78 The Development of the Road Infrastructure. . • . 78 The Structure, Ownership and Utilization and of the Fleet • • • • • • • • • • • • • • • . • • • • • 82 The Need for New Capacity • • • • • • • • • • • 89 The Allocation of Trucking Capacity •.•. 90 The Tariff Structure • • • • • . • • . . 92 E. The Development of the Coastal Shipping Sub-sector. • . . • . • . 94 CHAPTER VI 98 THE DEVELOPMENT OF THE FINANCIAL INFRASTRUCTURE • . 98 A. Reforms and Dev~lop_m~nta in the Credit Sector under the ERP. 98 The Structure of the Banking Sector. . • . • • 98 The Operations of the Banking System • • • • • • . 100 Relations between the Public Sector and the Banking System . . . . . . . . . . . . . . . 103 The Stimulation of the Agricultural Sector. 104 SUDIDl&ry • • • • • • • • • • • • • • • • • 107 B. Policy Issues • • • . .. . . . ... . . .. .. . .. . 108 The Development of Prudential Regulations and Instruments for Credit Management. . . • • • . . • • . . . . 109 The Access to the Banking System. . . 110 The Availability of Long Term Credit • • • • • • 112 The Mobilization of Domestic Savings • . • . 113 The Role of Subsidized Credit 114 • • The Problem of Targeting Agricultural Credit • 115 • The Prospects of the CCADR . • . . . . 117 C. Credit Needs of the Family Sector 118 CHAPTER VII . . . ... . .. .. . .... 120 THE DEVELOPMENT OF THE MARKETING INFRASTRUCTURE . 120 . A. B. Introduction . • • . . . • . . • . • • . • • • The Major Issues of Recent Marketing Studies • .. . 120 120 C. The Prospective Role of AGRICOM • • • • • • • • 125 D. The Storage Infrastructure. . • • . . • • • • .. . 128 E. The Determination of Marketing Margins . . 133 CHAPTER VIII . ... .... ...... .. • • 136 THE IMPLICATIONS OF FUTURE DEMOGRAPHIC TRENDS • • • • 136 A. National Population Issues in the Long Term: Rapid Population Growth • • • • • • • • • • • • 136 Demographic Patterns and Trends •••• 136 .. Future Demographic Trends • • • • 137 Implications of Future Demographic Trends • • 140 Population Policies and Programs for the Long Term. • • 144 • B. Population Issues in the Short to Medium Term: Displacement and Resettlement • • • • • • • • • • 145 Current Patterns .• 145 Current Issues • • • • • ••• 149 • Future Trends • • • • • • • • 150 Future Issues • • • • • 152 • Population Distribution Policy for the Short, Medium, and Long Term • • • • • • • • • • • • • • • 154 CHAPTER IX 157 THE DEVELOPMENT OF HUMAN RESOURCES • 157 A. Current State of the Sector . 157 General Overview • • • • 157 Sector Organization and Structure • 159 General Education System • • • • . • . • • • . • • . 159 Adult Education • • • • • • • . • • . • . 161 Vocational and Technical Training • • • • • • 163 University Training . • • • . • . • • • • 164 Public Expend! tures • • • • • • • . • . • 165 • B. The Role of the Education System ... .. • 167 Occupational Structure • 167 Contribution of Education and Training 168 c. Sectoral Response and Issues • , . • • • • • . • . 170 Managerial Reasons for the Inadequacy of the Sectoral Response • • • • • • . • • • 170 .. MINED's Long Term Development Plan • . • 171 Adult Education • • • . • • ·• • • • 174 Vocational and Technical Training. 175 University Plan to 2000 • • • . • 175 Investment Policy • • • • • • • • • 176 Balance between Expenditures and Resources 178 The Impact of Improved Security ••••. 178 D. Conclusions • • • • • 179 Part 3 CHAPTER X .. . .. ............. ... . ..... • 181 THE DEVELOPMENT OF ECONOMIC POLICY • • 181 A. The Economic and Social Rehabilitation Program 181 B. The Development of Macroeconomic Policy. • • • • • • • • • • • 183 The Macroeconomic Framework • . • . • • . • • 183 Exchange Rate Policy • • • • • • • • 186 ... Fiscal Policy • • • • • • ••• ••.• 188 Monetary Policy • • • • • • • • 190 Debt Policy • . •• • 192 c. The Development of Structural Policy • • 196 The Price Incentive Framework 196 The Structure of Fiscal Revenues and Expenditures . 199 The Trade System •••••• • 203 The Provision of Rural Support Services ••••• • 205 Industrial Policy • • • • • • • • • • • • • • • • • 206 The Alleviation and Reduction of Poverty. • ••• • 209 D. The Policy Alternatives • 213 The Central Scenario • • • • • • • • • • • • • • 214 The Impact of Improved Security • • • • . 216 The Decline of Real External Aid • • • • • • • • 217 Summary • . • . • • • • • • 219 E. Conclusions • • • • • • • 220 BIBLIOGRA.PHY • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 222 • VOLUME I I I - CONTENTS A. Statistical Appendix B. Annexes to Volume II (i) Annex Tables to Chapter VIz The Financial Sector. . (ii) Annex Tables to Chapter VIII: Demographic Analysis. (iii) Annex Tables to Chapter IX: The Education Sector. MOZAMBIQUE COUNTRY ECONOMIC MEMORANDUM TABLES AND FIGURES USED IN TEXT Chapter 1I Table 1 The Evolution of Real Growth, 1974-88 • • • • • 8 Table 2 Evolution of Production and Export Volumes .••• 9 Table 3 The Evolution of Commodity Exports, 1980-1988 • . • • • . . . 10 Table 4 Macroeconomic Adjustment: Targets and Outturns,. 1987-89 15 Table 5 The Evolution of the Macroeconomic Balances, 1980-89 , 18 Table 6 The Evolution of the Exchange Rate, 1980-89 . • 19 • Table 7 Government Revenues, 1986-89 • • • • • , • . • 20 Table 8 Consumer and Enterprise Subsidies, and Enterprise Credit, 1986-89 • • • . • • • • 22 Table 9 Degree of Subsidy given through the Ration System . • 23 Table 10 Evolution of Wages and Prices 1986-90 • • • • • . . • . . 25 Table 11 The Ration Systems Volumes and Prices 1986-89 26 Table 12 The Evolution of Producer Prices • • . • • • • .. 30 Table 13 The Evolution of the External Terms of Trade • . • . • • • • 35 Table 14 The Evolution of Imports and External Assistance 45 Table 15 The Evolution of the Debt Burden , , • • . • . • • • • • 47 Table 16 The Evolution of the External Accounts • . • . • • • • • • • 49 Table 17 Selected Indicators for Sub-Saharan African Countries - 1988. 50 Table 18 Estimated Aggregate Import and Grant Flows, including the Emergency Program. . • • • . • • • . • • 52 Table 19 The Cash Flow Problem. • • • • • • • • • • . • . • • . . 54 Chapter III • Table l Impact of Insecurity of Population Distribution. . 56 Table 2 The Evolution of Railway Transportation . . . . . 58 Chapter VI Table 1 Evolution of Credit by Banlt and Economic Usage . . • . 101 Table 2 CCADR - Credit by Borrower, 1988 . , • . • ••. . 106 . Chapter VII Table 1 Conmercial Network for Agricultural Marketing • • • • • • • 126 Table 2 ACRICOM Marketing Share of Aggregate Agricultural Production (1988) •••••••••••••••••• 126 Table 3 AGRICOM Storage Capacity by Province as of May 1988 • • • • 130 Table 4 AGRICOM Storage Capacity and Marketable Surplus by District, in Province of Caho Delgado, Jan.-Sep. 1988 • • • • • • • 131 Table 5 Estimated Present and Future Storage Capacity for AGRICOM 132 Chapter VIII Table 1 Projected Size and Growth of the Mozambican Population, 1990-2020 • • • • • 138 Table 2 Projected Population Stru~ture of the Mozambique · Population, 1990-2020. • • • • • • • • • • • • 139 Table 3 Projected Working-Age Population of Mozambicans, 1990-2020 • 140 Table 4 Projected Numbers of School-Age Children and MCH Clients, 1990-2000. • • • • • • • • • • • • • 142 Table 5 Estimated Number of Internal Refugees and War-Affected Persons in Mozambique, 1989 • • • • • • • • • • • • • • • 147 Table 6 Projected Mid-year P9pulation of Internal and External Refugees • • • • • • • • • • • • • • • • • • • • 152 Table 7 Projected Costs of Refugee Resettlement, 1995 onwards with Given Percent of Internal Refugees Remaining in Peri-urban Areas . . . . . . . . . . . . . . . . . 153 Chapter IX Figure 1 Internal Efficiency, Primary Education • • • • • • • • • 162 Figure 2 Internal Efficiency, Secondary Education ••••• 162 Figure 3 Investment Needs • • • • • • • • . • • • • • • . . . . . 177 Table 1 Offer and Demand for Graduates from Technical Training 164 Table 2 Budgetary Expenditure in Education • • • • • • • • • • 165 Table 3 Budgetary Expenditure by levels and types of Education (1985; %) • . • . . . • • . . . . . 165 Chapter X r Table 1 Financial Impact of Debt Service Cancellation compared to Debt Rescheduling, 1990-2000 • 194 Table 2 Composition of Budgetary Investment, 1975-90 • • • • 202 . Table 3 Key Macroeconomic Indicators (Scenario 1) • • • • • 215 Table 4 Key Macroeconomic Indicators (Scenario 2) • • • • • 217 Table 5 Key Macroeconomic Indicators (Scenario 3) 218 MOZAMBIQUE COUNTRY ECONOMIC MEMORANDUM ABBREVIATIONS IN TEXT AGRICOM - State Enterprise for Agricultural Marketing AIDS - Acquired Immune Deficiency Syndrome BM - Bank of Mozambique BPD - Banco Popular de Desenvolvimento (People's Development Bank) BSTM - Banco Standard Totta de Mozambique BTN - Brussels Trade Nomenclature • CCADR Caixa de Credito Agraria para Desenvolvimento Rural (Fund for Agricultural Credit) CENE - National Executive CoDmlittee for the Emergency CFM - Mozambique Railways CNSP - National CoDmlission for Salaries and Prices CPI - Consumer Price Index DIMAC - State-owned Enterprise for·-Distribution of Construction Materials DNTR - National Directorate of Road Transport DNEP - National Directorate of Roads and Bridges DNPCF - National Directorate of Ports and Railways DPCCN - Departamento de Prevencao e Combate das Calamidades Naturais (Department for the Prevention and Control of Natural Calamities) ECMEP - Provincial Road and Bridge Construction and Maintenance Enterprises EDM - Mozambique Electric Company EEC - European Economic CoDmlunity EMOSE - State-owned Insurance Enterprise EP - Emergency Program ERP - Economic Rehabilitation Program ERS - Export Retention Scheme ESRP - Economic and Social Rehabilitation Program FAO - Food and Agricultural Organization FP Family Planning GDP - Gross Domestic Product GSP - Global Social Product GWH - Gigawatt hours IDA - International Development Association IMBEC - State-owned Enterprise to Import Consumer Goods IMF - International Monetary Fund " PFP - Policy Framework Paper MCH - Maternal and Child Health MF - Market Fund MINED - Ministry of Education MTL - Medium and Long Term Loans MNR - Mozambique National Resistance MUV - Manufacturing Unit Value NAVIQUE - State-owned Coastal Shipping Enterprise NORAD - Norwegian Aid Development Agency RENAMO - Mozambique National Resistance PDP - Priority Districts Program PER - Public Expenditure Review SDA - Social Dimensions of Adjustment SIDA - Swedish International Development Agency SMEF - Small and Medium Enterprise Fund SNAAD System for the Non-Administrative Allocation of Foreign Exchange . TFR - Total Fertllity Rate TIRS - Truck •insurance-Replacement• Scheme UCPI - Unit to Coordinate Import Progranmes UNFPA - United Nations Fund for Population Activities UNDP/ILO - United Nations Development Program/International Labor Organization UNHCR - United National High.commission for Refugees USAID - United States Agency for International Development WFP - World Food Progranme J CHAPTER I INTRODUCTION 1. The attainment of an acceptable standard of living in Mozambique remains a fundamental but distant objective of economic policy. Prior to the collapse of domestic production in the first half of the 1980s, the ,, previous peak level of real per capita GDP was estimated in 1980 at around $180. At the present rate of growth of real GDP of 4% per annum, and with a population growth rate of 2.6% per annum, it would take another 25 years to recover this earlier, albeit grossly inadequate, peak • • 2. This perspective illustrates the magnitude of the economic problem in Mozambique. While a major reversal of the earlier economic decline has been realized and replaced by significant growth, the recovery to acceptable levels of real income will be painfully slow. Indeed, this is • unsurprising since Mozambique is exceptional in the depth and comprehensiveness of the current crisis, ~ven in the context of Africa. This is starkly reflected in many of the available indicators. Firstly, it is now estimated that at least 60% of the population in 1990 are living in "absolute poverty", defined as having an inadequate nutritional standard even when spending in excess of 60% of total income on food. Moreover, the average annual per capita income in 1989 is estimated at between US$80-100. Secondly, gross production in 1989 was only around 75% of the peak production level of 1981: with maize, cashew and cotton production at only 50% of the level in the early 1980s; rice and ~opra at around 75%; sugar at only 10%; and tea and sisal almost eliminated. Thirdly, the prevailing degree of macroeconomic imbalance is extreme. External savings in 1989 were 60% of GDP, and national dissavings were around 25% of GDP. Fourthly, the massive import dependence is reflected in the trade account, with imports being more than eight times the value of exports in 1989, and around 60% of GDP, and with aid-financed grain imports being between 85-90% of the aggregate marketed grain supply. Fifthly, the debt problem is one of the most serious in Africa, with a debt stock to GDP ratio in 1988 of 363.9%, and a debt stock to export ratio of 1773.7%. The 1989 debt service ratio before debt relief was almost 200%. Moreover, external aid continues to be in excess of 80% of the aggregate foreign exchange inflow. Finally, the cost of the rural insecurity has been massive: 50% of the stock of primary schools have been destroyed during the 1980s; one third of the health units have been d~stroyed; foreign exchange revenues from rail transportation fell by 1989 to 25% of the 1980 levels; and 35-40% of the entire population has been seriously affected or displaced. . 3. Given these extraordinary indicators, the nature of ~he recovery task facing Mozambique is clearly immense. At present, the principal determinant of growth in Mozambique is the perceived danger and risk induced by the insecurity problem. Rural production and distribution are comprehensively affected by the cumulative impact of the destruction on all aspects of the economic and social infrastructure, and by the continuing threat and reality of personal attack. In this context, economic activity is fragile and highly volatile, and a stable and consistent pattern of recovery will be difficult to attain. - 2 - 4. While economic policy will necessarily be circumscribed and constrained by the security situation, it is a basic premise of Government policy and of this report that the establishment of an appropriate economic policy framework is a prerequisite for development. Although the economic response to reform will be seriously impeded by the insecurity, both the initiation of the recovery and the preparation of the economy for the time when the insecurity is less pervasive and less intrusive on economic • activity depend on such reform. Indeed, the first three years of the Economic Rehabilitation Program substantiate this assumption, as annual GDP growth has improved by 11 percentage points on average. Moreover, the • restoration of growth is itself likely to be an important factor in determining the course of the insecurity problem. Reform, however, can not be conducted in isolation and without regard to the prevailing disturbance. Defining the constraints to reform and the needs of a quasi-war economy will remain integral to the difficult task of recovery. s. Irrespective of the security situation, economic policy reform is by no means a sufficient condition for economic recovery. It is a central tenet of this report that in the absence of complementary measures to stimulate and support production and trade, policy reform will be relatively ineff~c..t:J.y~ 3 ~and potenti~lly counter-productive. Consequently, the provision and maintenance of an adequate economic infrastructure is given a high priority, especially in the fields of transportation, finance and credit, and marketing. Moreover, the provision of the necessary social infrastructure in the form of education and manpower development programs, and of population and health programs must play a central role if longer- term constraints are to be effectively surmounted. Furthermore, the supply of adequate incentive prodoc~s 1r,1 the rehabilitation of capital is seen as an integral element of the overall economic program. 6. Despite the serious constraints under which the economy currently operates, a coherent and comprehensive program was deemed necessary to overcome the dramatic economic collapse of the early 1980s. The Economic Rehabilitation Program was consequently initiated in January 1987, and has since been consistently pursued by the Government. Indeed, the Government has displayed an impressive coumitment to the program with the fourth ~ rolling three-year program, covering 1990-92, being finalized in early 1990. The ERP has already given considerable emphasis to two elements of the program: ·• (a) the reform of the economic policy environment, which has appropriately been the priority concern given the nature of the prevailing distortions in 1986. (b) the mobilization of considerable external and internal resources to finance the capital investment and rehabilitation program, and to finance the required flow of consumer incentive goods to complement the policy reform. * * * * * * - 3 - 7. This report discusses the evolution and continuing importance of these elements, but has an additional objective of seeking to establish the significance and complementarity of a third key element of the ERP: namely, the basic economic infrastructural support services. 1/ Consequently, the report devotes considerable attention to identifying the means by- which the i~frastructure can be developed to facilitate and provide an incentive to both the productive and distributive sectors. 8. The general objective of this report is to analyze the course of economic development over the first three years of the ERP, 1987-89, with a view to identifying the principal opportunities for future growth and to defining a more directed program for the medium term. The report has four major components: - (a) the review and analysis of economic development under the Economic Rehabilitation Program, 1986-89 (chapters II to III); (b) the analysis of the development constraints in three key areas of _ the economic infrastructure - transportation, financial, and marketing infrastructure (chapters V to VII); Cc) the analysis of the development constraints in two key areas crucial to longer term development - issues of demographic and human resource development (chapters VIII to IX); Cd) the medium term policy and prospects for growth (chapter X) • .. 1/ Sonie inveet...nt project• have had an lapact on the eupport eervice•, but there ha• been Tittle eyetelllatic progra.. ing of the priority neede. - 4 - CBAPTD. II MACROECONOMIC POLICY AND PERFORMANCE UNDER. THE ECONOMIC REHABILITATION PROGRAM (ERP). 1987-89 1. Background. The numerous factors that led to the introduction of the Economic Rehabilitation Program (ERP) have been reviewed and analyzed in detail elsewhere.!/ Here, we briefly summarize the causes of the economic collapse of the first half of the 1980s, and the factors that led to the introduction of the ERP. In addition, in later sections of this report, comparisons are drawn with the earlier period wherever this facilitates the economic analysis of the ERP period. 2. The extraordinary and extreme nature of Mozambique's current crisis is attributable to the coincidence of a series of adverse forces, both economic and non-economic. One set of determinants of the economic collapse was exogenous: the successive years of severe climatic disruption, with alternating drought and flood; the intensification of the regional insecurity problem in the early 1980s; the expulsion of many Mozambican workers from South Africa; and the serious weaknesses inherited from the colonial era, together with the disruption and destruction of the Independence period itself. The second set of determinants was endogenous, comprising the many aspects of economic policy that were inadvisedly pursued: including the reliance on a highly centralized and controlled system of economic planning, under which direct physical controls over production and allocation were maintained it; the gradual erosion of the market structures and the economic' incentive framework, especially the isolation of both production and distribution from the international competitive environment; and the decline in financial and budgetary control and discipline. This policy stance was, moreover, instrumental in provoking a sharp decline in external assistance, which further exacerbated the emerging crisis. The specific nature of the economic crisis is elaborated below. 3. Although the importance of economic reform was apparent at the Fourth Party Congress in 1984, it was not until 1986 that the pressure for a ... comprehensive and far-reaching program gained momentum. 11 At this time, it was clear that the more marginal reforms of the Economic Action Program i/ were failing to reverse the economic collapse, and urgent steps were .. !/ Refer •wozaabique: An Introductory Survey•, June 8, 1986, World Bank. ~ Although this was, In part, a necessary response to the ••rioua lo•• of akilled ..npower and the desertion of enterpri••• at Independence. 8/ In July 1988, the Covern..nt produced an outline of the prograa, •Econoaic Rehabilitation ,.rogr.. , 1987-98•, which foraed the be•I• of th• later strategy paper•. ~ The Econoaic Action Progr•• wa• introduced in 1984 following the Fourth Party Congr..•, with the goal of decontrolling some area• of the econoay and giving greater ..ph••I• to private co111111ercl1I end family sector interests. (refer •Mozambique: An Introductory Survey•, June 8, 1986, World Bank). - 5 - necessary. In response, the Government introduced the Economic Rehabilitation Program in early 1987. 1/ 4. The objective of the chapter is to present an analytical evaluation of the reform program to provide a foundation for the formulation of future economic policy. Four elements of the ERP over the 1987-89 period are highlighted: the broad objectives and strategy for development; the - evolution of the real economy: the evolution of economic policy, including both the macroeconomic adjustment program and the process of economic restructu~ing: and the evolution of external assistance. Chapter X then • summarizes the conclusions of both chapters II and III, and addresses the questions of whether the ERP is achieving its objectives, what are the outstanding weaknesses and problems that are emerging; and, most importantly, what direction should the program now take. The fundamental objectives, strategy and policies of the Economic Rehabilitation Program have been presented in detail elsewhere ~/. In this chapter, only selected aspects are discussed in detail insofar as they relate to the major issues identified • • A. The Objectives and Strategy·for Development 5. The global objectives of the Economic Rehabilitation Program have remained unchanged since the inception of the program in January 1987. They are: (a) to reverse the decline in production, and restore a minunum level of consumption and income for all the population, particular]J in the rural areas: (b) to reduce substantially the domestic financial imbalances and strengthen the external accounts and reserves: (c) to enhance efficiency and establish the conditions for a return to higher levels of economic growth once the security situation and other exogenous constraints have eased; Cd) to reintegrate official and parallel markets; and (e) to .restore orderly financial relationships with trading partners and creditors. 6. The broad strategy of the ERP. The Government has adopted an integrated and comprehensive program despite the impelling problems of insecurity and limited administrative and absorptive capacity. As the objectives !/ The initial pha•• of refona wa• iapl ...nted prior to any prograa being fo,...lized with either the IMF or World Bank. '1/ In particular, refer to the papers •Economic Policy Framework, 1987-89•, (dated May&, 1987), •Econoalc Policy Fra...ork, 1988-98•, (dated March 3, 1988), and •Econoaic Polley Fra....ork, 1989-91•, (dated February 21, 1989). Th••• papers were all prepared Jointly by the Covern..nt, th• World Bank and th• International Monetary Fund. - 6 - indicate, the Economic Rehabilitation Program is not a narrowly defined rehabilitation program. On the contrary, it embodies two primary components. The first is focussed on economic policy reform, and comprises two key elements: the macroeconomic adjustment of the economy, and the establishment of an economic structure that is better suited to the attainment of the objectives. II The second is concerned with the mobilization of adequate resources to support the policy reform through the financing of capital rehabilitation, essential consumer incentive products, and productive inputs. An even broader interpretation of the ERP would encapsulate the Emergency Program as a third component.!/ Although this program has the principal objective of sustaining life in the most hard-hit areas of the country, it also embraces wider concerns related to the incentive structure and ~he logistical requirements of the distribution system. 7. This integrated strategy is seeking to implement _.. major reorientation of the economy, and create an economic structure that differs fundamentally from that which had prevailed since Independence, and, indeed, prior to Independence. Thus, while the global objectives of paragraph 5 are unexceptional, the intermediate objectives for the economic structure and operation of the economy mark a discrete break with the historical character of the system. Even though the basic· nature of the·· prospective medium-term structure is described here only in general terms, it contrasts strikingly with the pre-ERP economic structure (paragraph 2) . The structure may be characterized as follows: (a) it is based primarily on the development of the agricultural and agro-industrial sectors of the economy . The historical dominance of these sectors!/ is indisputable, and this provides prima facie support for the appropriateness of this strategy. The detailed strategy, however, differs markedly from the earlier period of development, with the focus on the family and private sectors displacing the previous emphasis on the state sector. The development of the industrial sector is accorded an important secondary role, given its complementary significance to agricultural recovery, and, particularly, to the enhancement of agricultural production incentives; .. ]./ The Identification of th••• two el ...nt• certainly Involve• a degr.. of artificiality, ~ot leaet becau•• of their lnterrelatlonehlpe. For lnetance, the aacroeconomic adjuetaent • prograa la a pre-requlelte for ..ny of the chang•• that are being effected In the Incentive etructure. Equally, the pollcl•• deeigned to bring financial etablllty to the aacro economy are leading to the initiation and operation of n.. aechani ..• and criteria for econoalc ..nag...nt, which are th..eelvee etructural in nature. !/ The Emergency Progra• wae initiated In 1986, and ha• eubeequently taken the fof'II of annual appeal• to the donor co..unity prl .. rlly for grain•, but aore recently with an lncreaeed ..phaei• on the logietlcal eupport. The Progra• le analyeed further In chapter• II (eection F) and III. 9/ During the ERP, the agricultural sector ha• accounted for 41-611 of CDP, and for around ill of ..ploy..nt; the agricultural and agro-lnduetrlal ...ctor accounted for 981 of aggregate exports. - 7 - (b) it aims to diminish the degree of administrative control over economic activity and create a more market-based economy, in which the international and domestic market mechanisms provide the principal signals to economic agents. This structure would provide the incentive to both public and private entities to increase production and productivity. Moreover, it redefines the role of the State Plan and the central administration of the economy, with the direct control of physical quantities and prices in production and distribution being displaced by a reliance on indirect levers of control through the market mechanism; (C) it seeks to enhance the role of the private sector in the mixed economy while retaining the public sector's role in strategic areas of the economy. Continued state control over some areas of both production and distribution would, in part, be determined by the prevailing emergency circumstances, but not exclusively so. Three areas of continuing state participation can be identified irrespective of the development of the emergency situation. Firstly, Government policy is to retain a monopoly in the ownership of several fields of activity, including the public utilities, and the provision of health and education._ se.rvices. Secondly, the state sector-will continue to participate in selected areas of agricultural and industrial production and distribution alongside the private sector, subject to the state enterprises being able to compete efficiently. Thirdly, state participation will be maintained in selected areas even if it entails loss-making activities, when such activities have been designated as essential for non-economic reasons, notably on equity grounds. In particular, AGRICOM will continue acting as buyer of last resort, and, in some circumstances and regions of the country, this may entail uneconomic activity. B. The Evolution of the Real Economy 10/ 8. Background. The most striking feature of Mozambique's economic development in the post-Independence era has been the dramatic collapse of production in the 1982-85 period. Over these years, real GDP fell at an .. annual average rate of around 7%, and real per capita consumption declined at a similar rate. Investment also collapsed at almost 30% per annum over the 1982-85 period, reflecting the fall in external assistance, although it is estimated to have jumped by 50% in 1986 as external capital inflows increased markedly. At the sectoral level, the data for gross social product suggest that the most substantiaf declines occurred in the ~ The data liaitation• are particularly ••riou• in the field of national account• with no ~vern11ent ••timat•• of CDP being ••de froa production. Th• ab••nc• of value added data preclude• the accurate analy•i• of ••ctoral growth, and the exi•tlng Global S0cl1I Product (CSP) data can only be used••• rough indicator. Data in thl• ••ction need therefor• to be handled with extreme care, and with the appropriate qualification•. - 8 - industrial and transportation sectors, with agricultural sector experiencing a more modest, albeit sustained, decline. 11/ Table 1. Th• Evolution of Real Qrowth 1 1974-89. Annual av••••• Gr"OWth raw(II) 1974-71 1977-81 1982-85 1988 1987 1988 1989 Aaa••a•w a>P -9.a 2.1 -1.0 0.9 4.4 a.a a.2 2.a -t.1 1.4 a.2 a.a a.4 Aaar...w CSP "··· 2.1 -2.5 -0.2 a.1 1 .0 2.0 Aaricul11ur• Indueilry "··· "··· a.a -15.9 -a.a 7.1 7.2 1.9 Conet.ruct.lon n.a. a.1 0.1 45.1 -18.7 -0.1 0.0 a.1 -27.8 2.0 -9.9 2.9 4.1 Tranaporil Qt.her "··· n.a. 0.5 2.1 -11.4 ••• -a.o a.1 -4.a 4.a a.o 2.7 a.1 c:o..-..,t.ion Con-t.ion per ca11iu n.a. n.a. "··· "··· -7.1 1.7 0.4 0.1 1.1 Cr.... in. . .t.aent. n.a. n.a. -28.4 aa.a 12.0 20.0 a.1 Ellport. -4• vol u - x...ort. _... volu- n.a. "··· ..... "··· -82.1 -11., ·-- -7.8 mz.9 17.9 a.1 1.1 4.9 -2.0 a.2 Not.ea: It. ehoul,I lie not..41 \hail the nat.ional ac-,,ilina 41au le aaneral ly inadequaile. Con-enilly, only dat.e for Croee Social l"ro41uc11 ie reporw,1 here at. the . .ciloral level. The •aar...118 . ., ; - - for QDI" are lla-4 on H11endi1lure dat.e, lluil •• yet. no value a,lde,I ,lat.a Hi et.a t.o at 1- analyeie of QDI" frca the pNNlucilion aide t.o lie un,lert.ekeft. 9. At the disaggregate lev-el,....,the ,gross :.f&l&rke.ted .productiJ)n. a.£ the principal agricultural crops showed the same trend (Table 2). At the extreme, cotton and sugar production collapsed to 9% and 14% respectively of their 1980 levels by 1985, but the general impact of the crisis was little better. The other key export crops of tea and cashew, which contributed one third of total exports in 1980, fell to around 30% of the 1980 production levels. The contrast with the production levels of the immediate pre-Independence years is even more sta~k . Mark~ted food production followed a highly volatile trend through the 1980s, but by 1986, maize and rice production had fallen to 33% and 44% respectively of their 1980 levels. In the early 1970s, domestic marketed production of maize and rice had ranged between 150,000 and 230,000 tons a year: over the 1985-88 period, this had dropped to between 40,000 and 75,000 tons per annum. The absence of data on domestic food production in the family sector makes any assessment of trends in subsistence agriculture highly problematic. However, the deterioration of the security situation and the climatic problems have led to significant numbers of displaced and affected persons (chapter III), and in these circumstances it is almost inevitable that .. 11/ There Is considerable uncertainty surrounding•~• agrlcultural estl ..tes, not least because the Insecurity has seriously haapered the data collectlon process. In contrast to the official data presented in table 1, ••ti ..tes ..de In the context of the •Agrlcultural Sector Survey• (World Bank, 1988) sugg..t a greater decline in agriculture over the 1981-88 period. For example, betw..n 1981 and 1988, th• total gross agrlcultural output valued at 1981 official producer prices is estimated to have fallen by about one third, with agricultural CDP estl ..ted to have fallen by 261 over the sa.. period. Th••• data suggest a far gr..ter decline of around 61 per annua over the 1981-88 period. In particular, the trend in agricultural subsistence production is unknown, but it would be presuaed that the Impact of substantial rural dislocation would be a significant decline in this component, and hence in aggregate production given th• weight of subsistence production. - 9 - subsistence production has declined significantly. !1./ Estimates suggest that between 1980-86 the per capita production of the family sector of cassava, maize, rice and sorghum fell respectively by 25%, 45% , 25% and 40%. }:11 These trends are reflected in the role assumed by the Emergency Program. In 1980, external aid and connnercial imports accounted for around 20% and 55% respectively of the aggregate cereal supply, with domestic marketed production accounting for the residual. By 1983-85, external aid accounted for 65-70% of the aggregate supply, connnercial imports for around 13%, and domestic marketed production for barely 20%. Table 2. Evolution of Production and Export Volullle9. 1980 • 100 1973 1975 1978 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 Marketed Production Volu... ca.i.- 223.7 182.11 102.7 100.0 102.9 115.1 20.7 28.9 S4.7 4S.7 42.8 47.0 n.a Cotton 221.9 80.1 111.11 100.0 113.11 93.5 38.1 80.4 8.8 111.11 42.1 51.4 n.a Copra 183.a 135.8 1111.7 100.0 1411.11 98.7 82.7 1111.8 114. 7 n.1 118. 7 72.8 n.a Citrua 107.1 91.1 103.4 100.0 98.3 102.0 89.7 115.9 84.4 21.a 31.9 211.2 n.a TH 115.11 75.0 100.0 110.0 121.7 511. 7 1111.a 27.7 7.1 2.0 0.0 n.a Sugar 100.0 104.4 73.9 43.3 23.1 14.7 9.9 11.4 8.8 n.a s; .. 1 114.1 125.8 100.0 78.5 411.9 41.1 4S.8 211.4 7.5 1.4 1.5 n.a Maize 184.11 1411.2 107.7 100.0 120.5 137.2 85.8 127.1 90.2 33.1 42.0 411.2 n.a Rice 275.2 215.11 100.9 100.0 1111.a 95.2 39.7 48.8 41.1 43.11 72.5 79.7 n.a Export Volu... Prawn 48.0 84.0 88.0 100.0 152.0 100.0 911.0 88.0 108.0 108.0 95.7 97.4 92.5 ca.i.ew 189.7 135.9 117.9 100.0 78.2 107.1 37.2 28.3 19.9 19.9 38.5 48.8 39.9 Cotton 857.9 312.3 224.11 100.0 2113.2 240.4 231.11 103.5 82.5 14.0 114.4 75.4 80.7 Copra 248.5 157.2 in.a 100.0 112.9 112.9 80.9 21.11 115.5 so.a 711.2 70.7 29.8 Citrua 150.0 100.7 84.3 100.0 117.9 82.9 57.1 78.11 74.3 59.3 55.0 411. 7 83.3 TH 58.3 38.7 45.0 100.0 53.3 83.7 44.3 25.7 5.0 5.0 2.a o.o o.s Sugar 280.4 79.5 38.11 100.0 98.9 44.7 39.2 25.7 211.a 80.11 111.S 18.2 19.2 Source: Infor-cao Eatatiatica, -veral iaauea. 1989 data are proviaional . 10. Industrial production displayed a similar collapse between 1980 and 1986, with both the indices of gross industrial production and of manufacturing output falling by around 50-60%. Most notably, electric power generation fell from 11.3 GWH in 1980 to 0.4 GWH in 1986 due to the sabotage of the transmission lines; petroleum refining was halted in 1985; and cement production in 1986 fell to barely 30% of the 1980 level. In consequence, capacity utilization fell sharply to less than 30% in 1986 in many industries. 14/ .. 11. The broad evolution of domestic production is predictably mirrored in the evolution of export volumes, which collapsed at an estimated average annual rate of around 32% between 1982-85, before falling by nearly 8% in 12/ •Affected• pereon• are defined to be tho•• who•• traditional communiti•• and who•• traditional production activiti•• have b..n dierupted by the ineecurity probl .. , but who have not fled frOII their ho... lande. Thi• dieruption •ay take th• for11 of localized dieplac...nt, with the local population effectively living in the area eurrounding their village• in order to miniaize the pereonal danger, and only returning in daylight hour• to undertake the traditional production activitl••· It will aleo include tho•• who•• local econ011ic and eocial lnfraetructure ha• been deetroyed by attack•, but who remain in the village•. 'llf Refer •Agricultural Sector Survey•, (World Bank, 1988). 14/ At the extreme, capacity utilization fell to 61 In eugar, and 101 In caehew procees l ng, oTle and eoape. Th••• induetrial ieeuee are enlarged In the •euein••• Environ... nt Study' (dated June 20, 1989; . No. 7706-MOZ). - 10 - 1986. Only prawn export volumes were sustained, being impervious to both the climatic and security problems of the period. Tea and sisal exports were almost eliminated. Cashew exports reflected the trend in production, falling to around 20% of the 1980 level in 1985. On the other hand, cotton exports displayed a surprising resilience to the production trend, and increased for much of the period, although they fell back in 1985 to around 80% of the 1980 level. The 1980-86 period therefore saw a considerable change in the composition of exports (see Table 3). In the early 1980s, no export product accounted for more than 20% of total revenue, although cashew and prawn together accounted for around 35%. By 1986, however, 70% of total revenue was attributable to these two products, with no other t product accounting for more than. 5% except sugar. Moreover, by 1985, exports were totally dominated by agricultural products. In 1980, non- agricultural exports (principally petroleum products, tantalum, timber and coal) had accounted for over 35% of revenue, but, by 1986, these exports had been -almost eliminated with the exception of timber. 15/ Table 3. The Evolutlon of CoaaodltX Ex~rt• 1 1989-1989. Perc..,t,a. . ahar- (curr.,.t. US,,) 1980 1981 1982 1983 1984 19815 1988 1987 1988 1989 Prawn 11 . a 2S,1 18.7 19.0 11.8 19.0 2S.7 29.5 11.0 ..... 15.1 48.4 21,1 S9.I 42.9 25.7 40.7 Caah- 12.2 11.1 22.1 Cot.ton 2.9 1.9 7.5 12.9 1.4 7.0 0.7 5 .1 4.7 5.2 Copra Cit.rue a.a 0.9 1.7 1.7 1.a 1.2 1.1 1.5 1.9 1.4 ••• 4.0 2,1 2.1 1.4 2.1 4.4 1. 1 2.2 1.7 Suoar Tea I.I 10.a 1,9 5,1 a.1 11.2 ••• 11.2 1.0 11.a 8.9 S.1 10.2 1.1 4.5 0.4 4.5 o.o 5.7 o.o Woo,il 2.1 2,1 1.4 o.a 1.a 1. 1 1, 2 1.2 0.7 0.8 Coel 1.a a.a 1.1 0.4 0.1 0.4 o.a 0.1 0.4 o.a L.aloat.ar 0.0 0.0 o.o 0.0 0.0 o.o 0.0 2.4 2.1 1.1 Pet.rot product.a 22.1 1:?.I 11.4 £I.Ii 5.7 5.1 5.1 Othar [1] 11.a 9.1 11.4 12.2 15,2 4.0 5.4 8.5 12.1 17.7 TOTAL EXPORTS I 100.0 100.0 100.0 100.0 [1] Other ••1M>rt.a inclu<le: unulua, c - t . , t.lr-, alNI, 100.0 -ra 100.0 oil, 100.0 100.0 100.0 100.0 clinker an<I other ........ ; for 1987, it. alao inclu<lea ,et.roleua. [2] Fr- 1917, othar H1tort.a inch1<I- ,et.rol ,roc1uct.a. [3] 1989 <lat.a are ,.....,iaional . 12. The Economic Rehabilitation Program, 1987-89. In the first three years of the ERP the economic collapse that dominated the first half of the 1980s was arrested. The rate of recovery of GDP averaged around 4-5% per annum, and per capita consumption averaged over 3% per annum. Relative to the earlier decline, this reversal was a major achievement, but, given the .. depth to which real incomes and production had fallen, this growth rate represents only a modest upturn. Real GDP in 1986 was about 73% of its 1980 level, and, in consequence, at a 4% growth rate, it would take until the mid-1990s to regain the 1980 real GDP level, and it would take over 20 years to regain the 1980 real per capita GDP level. 16/ The upturn in real GDP, coupled with the major inflows of consumer goods, facilitated a '!!/ An ind1cat1on of the potential for growth 1a givenby• coapariaon w1th the level• of earlier year•, For ••••Pl•, caahew export volu..a 1n 1985 were only 181 of the 1971 level and 16S of their 1976 level. Cotton export volu... atood at only 181 of their 1973 level 1n 1986, and 26S of their 1976 level . ~ Aaauaing • conatant populat1on growth rate of 2.81 per annua. - 11 - critical reversal of the collapse of per capita consumption. Over the 1982-85 period, per capita consumption fell at around 7% per annum, and, although only a modest growth of 0.5-1.0% has been attained over the 1987- 89 period, the collapse has been halted. 17/ Real investment has followed a highly erratic course, and having declined at an average annual rate of almost 30% between 1982-85, it jumped in 1986 by over 50%, and has since continued to grow strongly in real terms. This again reflects the rapid growth of external resource flows since 1985. At the sectoral level, gross agricultural production responded ·strongly, growing at over 6% in 1987 and 1988, although it fell back in 1989 to only 2%. 13. Underlying the recovery of the agricultural sector in aggregate, however, has been a more unstable and volatile experience at the disaggregate level (Table 2). Domestic food crops grew rapidly, with maize and rice production increasing by 27% and 66% respectively in 1987, and both increasing by 10% in 1988. Nonetheless, aid still contributed between 85-90% of the total grain supply in 1987 and 1988, with commercial imports, , . of grain being almost entirely displaced by the emergency imports. 18i In-- -~~- aggregate, the grain supply has risen significantly, and the declining share of domestic marketed production has masked the modest improvements made under the ERP. On.. the other hand, tea and sisal production have- almost ceased, while sugar remains at only 10% of its- 1980-p.roduct.i.on \ level. Of the export crops, cotton has responded vigorously and tripled its production over the 1986-88 period. On the other hand, cashew, copra and citrus have moved erratically, and of these only cashew had achieved a greater production level by 1988 compared to 1986. One indicator of the fragility of the agricultural recovery is provided by the gross marketed output data for specific crops, recorded on a provincial basis. The 1988 data revealed a mean growth of around 4%, but with a massive variance, indicative of an highly unstable and, as yet, unsustained recovery path. 14. Industrial growth was also fragile. Production remains highly sensitive to the flow of industrial inputs and ultimately to the availability of external finance. However, despite the difficulties encountered with donor funding in 1987 and in the first half of 1988, gross industrial production followed a stable path, growing at a steady 7% over the 1987-89 period. The available data suggest an erratic recovery of the other sectors of the economy. Construction increased sharply in 1987, .. ll/ Th• following GDP and GNP per capita data reflects th••• trends: ~ 1980 1981 1982 1983 1984 1985 19&a 1987 1988 1989 Cl)P Curr. f;t bni 78.2 80.7 92.7 91.9 107.7 1411.11 1118.9 428.1 1159.9 952.3 CDP Curr. IUS • 2413.11 2282.9 2454.3 2287.0 2537.5 3395.0 4128.1 1520.8 1248.4 1274.7 Population [•] 12.29 12.111 12.94 13.28 13.113 13.99 14.36 14.74 15.13 15.5 CDP per capita [Current USI.] ------------------------------ At official ••change rate 198.4 181.0 189.8 172.2 1aa.1 242.7 287.5 103.2 82.5 82.0 3 year aoving ave. ~rate 179.4 181.5 203.11 183.2 198.8 249.9 278.8 238.8 153.9 118.1 World Bank Atlae • od[l] n.a n.a 203.3 182.8 175.0 193.9 190.7 179.4 95.5 ao.o [1] CH' per capita !!/ C011111ercial food i•porte over the ERP period have included eugar, cooking oil, dairy products, and other product• that are not available through the Emergency Progra•. - 12 - before falling back in 1988 and then stagnating. Transport, on the other hand, declined in 1987, but has since grown steadily. 15. The recovery of the export sector reflects this extremely fragile recovery of production. Thus, export volumes have moved erratically, and have failed to establish a stable growth path. In 1987, the volume of goods exports grew rapidly at 18%, albeit reflecting the extremely low base to which both production and exports had dropped. In 1988, growth continued at 7.7%, but then fell by 2% in 1989. As Table 2 reflects, cashew exports increased by more than 100% between 1986-88, while cotton increased by almost 440%. In 1989, however, cashew and cotton export volumes fell by 8.5% and 7% respectively. Other products have followed an equally volatile path. Most importantly, prawn export volumes, which oscillated about the 1982 level for several years, have declined by 14% over the 1986-89 period. Copra fell heavily in 1989 after recovering from the trough of 1984, while the decline in citrus since 1981 continued unabated until 1989 when exports rose sharply. The plantation crops of tea and sugar also continued their slump, with tea exports being eliminated and sugar falling over the 1987-89 period to less than 20% of the 1980 level. 16. These trends ara · reflected in the composition of exports (Table 3). Prawn dominated exports in 1986, accounting for almost 50% of foreign exchange revenues. Since then, this share has dropped to 41% in 1989, with cashew first increasing to around a 30% share, and then falling to 22% in 1989. Nonetheless, these two products still accounted for 63% of export revenues in 1989. With tea and sugar failing to regain their earlier importance, no other product in 1989 accounted for more than 6% of revenue. Aggregate non-agricultural exports remain at less than 5% of the total, although there have been instances of individual industrial products establishing a stronger, albeit still very small, export base. c. The Evolution of the Macroeconomic Adjustment 17. The defined framework for macroeconomic adjustment embodies a substantial degree of disequilibrium for many years, but it is this disequilibrium that has been identified as necessary to the restoration of growth and macroeconomic balance in the medium to long term. However, the likely success of such a macroeconomic strategy rests on several central questions. These are, firstly, whether the extraordinary degree of imbalance in the internal and external accounts is an appropriate and necessary element of the development strategy; secondly, whether this strategy is adequate to elicit the expected supply response in a situation of constrained ·demand; thirdly, whether a strategy that will be dependent on such imbalances for the medium term is sustainable; and, fourthly, whether the imbalances are being appropriately managed to preclude potential adverse repercussions. 18. The Framework for Adjustment. Macroeconomic policy has three principal objectives in the short to medium term: the promotion of production; the creation of a sustainable financial environment; and the mobilization and management of increased external resources. - 13 - Ci) the primary objective is the reactivation of agricultural production and marketing. This depends most fundamentally on the re-establishment of economic incentives, and particularly of price incentives. In turn, this necessitates the reintegration of the domestic economy within the international economy and a significant reduction in the price differential between the official controlled price structure and the uncontrolled price structure (including both the unofficial parallel markets and the uncontrolled official markets); (ii) the second objective is the reduction of both internal and external financial imbalances. As will be expanded in detail later, this is a longer term objective in many respects given the nature of the ·existing imbalance. The utilization of only non- inflationary fiscal finance and the control of credit extended to the non-Government sector-a-re- ·the- basis of the internal strategy. On the external side, the objective is three-folds firstly, to effect a major realignment of the exchange rate to lay the foundation for the restoration of domestic incentives and, thereby, production; secondly, to negotiate appropriate agreements with external creditors that embody a serviceable debt burden; thirdly, to finance the external imbalances that the economic strategy implies by contracting additional debt only on conces~ional terms; (iii) thirdly, the strategy aims both to minimize the reduction in existing living standards and stimulate the recovery through the deployment of significant external resources. The appropriate flow of real goods to restore the capital structure and to provide the necessary incentive goods are critical to complement and support the policy program. In view of the limitations in meeting this need from domestic production, imports, financed by external assistance, are accorded a fundamental role in ensuring the coherence of the overall strategy. 19. It is in this context and with these objectives that the Government strategy under the ERP defines a program of macroeconomic adjustment. Alternative strategies will be further discussed in chapter X, ,• but it can be noted i.mmediate'ly that the principal constraint is the exceptionally low level of per capita consumption, which effectively precludes additional reductions in aggregate consumption if the strategy is to be sustainable. 20. The combination of the existing degree of macroeconomic imbalance and the recovery strategy being pursued imply that adjustment will be a protracted process. It will also be far from 11niform in its impact on the substantial macroeconomic imbalances that characterized the economy in 1986. In particular, the Government strategy necessitates the persistence of major macroeconomic imbalances in some sectors of the economy for the medium term, together with a redistribution of the savings imbalance from the Government to the non-Government sector. Continued imbalance is therefore particularly apparent in the degree of non-Government dissaving - 14 - and foreign saving. On a sectoral basis, the following adjustment paths are planned: (i) in the central Government accounts, major progress in the restoration of balance is possible, on the one hand, with Government dissaving being rapidly diminished and domestic bank financing of the budget being vigorously curtailed. On the other hand, Government investment is progrSD1Ded to remain a substantial proportion of GDP, and this will be financed directly through foreign saving. (ii) in the non-Government sector, macroeconomic adjustment will be considerably protracted. The substantial increases in the effective demand for consumption and, to a leaser degree, investment products are heavily financed by the non-Government sector, and, especially, the enterprise sector. · As a consequence o£'£he limited domestic resources of this sector, the consumption component will necessitate significant diaaaving within the sector, and the investment component will be predominantly financed by foreign savings. (iii) in the external sector, substantial savings will continue to be required to finance the Government investment program, . and to finance both the consumption and investment needs of the non- Government sector. From a different perspective, the massive external saving may be seen as the necessary counterpart of the the critical foreign exchange constraint and the domestic expenditure strategy. 21. The persistence of this pattern of financial imbalance is therefore anticipated, with balance only being slowly restored as domestic production responds to the ERP. The Evolution of the Adjustment 22. In this section, the adjustment process is reviewed, and an analysis of the principal policy developments over the course of the ERP is presented. A more detailed description of the policy program is documented '• elsewhere (refer footnote 6). 23. The Macroeconomic Adjustment·. The period imnediately pre.ceding the ERP saw major changes in the macroeconomic 'balances. In the early 1980s, national savings were insignificant, and investment, which averaged around 20% of GDP, was financed almost exactly through foreign saving. At this time, there were in fact small savings being made on the Government current account, which were roughly offset by the dissaving of the non- Government sector. In the years imnediately preceding the ERP, Government - 15 - dissaving 19/ increased sharply to exceed 10% of GDP, and only severe reductions in Government capital expenditure from 16% of GDP in 1984 to 5% in 1985-86 prevented the Government financing requirement from increasing rapidly. This collapse in investment was reflected in the drastic fall in imports and in the consequent decline in foreign savings, both of which fell to barely 50% of their 1982 levels by 1985. In 1986, there was a modest reversal of the downward trend in investment and foreign savings, but Government savings continued to deteriorate. Table -4. Macroecono•ic Adjustlllent: Targets and Outturns 1 1987-98. 1988 1987 1988 1989 (prcw.) 1990 (proj .) Ac:1>ual Target, Out.turn Target, Ou111>um Target, Out.turn Old'••••· Target. Ne•'•••• Target. Flec:al Policy: l:urr... t."deflc:iil ~· c:ur. Hp) S2.0 25.0 24.a 22.1 12.2 • of of QDP) 12.1 8.2 5.2 4.7 2.7 4.7 2.7 a.5 3.8 Revenue (I of QDP) 1a.a 19.9 11.1 11.1 19.8 21.9 22.5 22.3 22.3 Enterpri . . aubaidiea tt, bn) 14,2 14.0 9.0 12.0 11.1 12.0 12.0 12.0 12.0 I of a>Pi 8.5 a.a 2.1 1.8 1.7 1.5 1.5 1.0 1.0 Conau-r auba1diea ~Ht,.bn) 0.5 1.8 5.9 3.5 7.2 3.5 8.4 9.9 9.9 I of CDP) o.a 1.1 1.4 0.5 1.1 0.4 0.9 0.8 0.8 Inveet.aent. (S of a>P) 5.1 19,4 11.0 22.4 21.2 21.5 22.5 25.9 34.1 Overal I deflc:it, ~pre-grant.a; S of ag.exp) 11.0 58.0 58.7 poat.-grant.el S of CDP) 15.a 9.9 11.8 12.5 10.0 10.2 8.4 4.1 13.2 Credit. t.o Covern ..nt, 20.1 25.0 14.4 20.0 3.2 15.0 9.0 a.o 3.0 I of bcJ,..) ~Ht.. 12.0 5.9 3.4 3.2 0.5 1.8 0.9 0.2 0.2 Honet.ary Pol ic:y: Credit. to Non-CO..ern..nt, (Ht.. bn) 4.7 15.0 19.1 54.0 58.7 53.0 59.0 75.0 75.0 Tot.el credit eapanaion ~Mt.. bn~ 24.8 40.0 33.5 74.0 59.9 88.0 88.0 78.0 78.0 S of roe~ '"""ey at.oc:k) 19,1 17.1 43.0 35.8 29.0 23.1 22.8 22.8 Honey auppl~ groet.h c•c:hanga 15.4 44.7 47.a 43.4 48.2 29.5 21.7 21.2 21,2 [1] 1981 overall deficit (pre-grant.a, aa S of tot.el expendi1>ure) aubaequenilly c:orrec:t.ed t.o 57 . 11 of tot.al expenditure; and 1985 current. deficit. ( aa S of current. expenditure) c:orrect.ed t.o 47.IS. [2] Enterpriae finance in 1988 waa .. t t.hrough t.he banking ayat.ea. The adjuat.aent. t.o t.he fiec:al and ..,..et.ary account.a are therefore eati~•t•• for coaparative purpoaea. [Sl Credit. ia defined here t.o be do..at.ically-aourc:ed c:redlil. [4 In 1990, •ajor chang.. in coverage, eapecially oft.he inv..ilaent. budget., occurred: t.he dat.a ia t.herefore preaent.ed on both then .. and old baaia for coaparative ~urpoeea. •• 24. Since the initiation of the ERP, the Government has designed economic policy to adjust progressively the distribution and magnitude of the macroeconomic imbalances, and has succeeded in adhering closely to the original macroeconomic framework. The most striking feature is the rate at which fiscal and monetary adjustment has been achieved and the degree to l!/ Enterprises lo•••• were financed through the banking system until 1987, when the Qovern11ent assumed responsibility for such finance. The budgetary data for the 1982-88 period has, however, been adjusted to Include the finance received by enterprises to finance lo•••• to allow comparabillty with the later period. It is noteworthy that th••• subsidies rose fro• 2" of GDP in 1982 to reach 8.61 of GDP by 1988, and this was a aajor coaponent In the increase of Qovern11ent dlssaving over this period. Furtheraore, transfers to enterpri••• are treated here as coaponents of Government expenditure and as contributors to Government dissaving, rather than as enterprise dissavlng in order to avoid double-counting. - 16 - which the Government has accelerated the process in some areas and exceeded the annual targets. 20/ 25. On the fiscal side, five aspects require highlighting: Ci) aggregate revenues as a proportion of GDP were increased from 13.3% in 1986 to 22.5% in 1989 and 1990. Despite a shortfall in 1987 relative to the target, revenues subsequently exceeded the target by a substantial amount; Z:J_/ (ii) subsidies to enterprises as a proportion of GDP were decreased from 8.5% in 1986 to 1.5% in 1989 and are targeted at 1.0% in 1990; (iii) the current deficit declined from 12% of GDP in 1986 to 2.7% in 1989. This refl~cta the combined impact of the rapid increase in revenues and lhe tight containment of recurrent expenttitures; (iv) the overall deficit after grants as a proportion of GDP has been contracted from_ 15.3% in 1986 to a targeted 4.6% in 1990, if a consistent basis is adopted; £4,/ (v) domestic bank financing of the Government budget has diminished from 12% of GDP in 1986 to 0.9% in 1989 and a targeted 0.2% in 1990. The rate of adjustment in this respect far exceeded the objectives, particularly in 1988. The principal determinant of this trend has been the substantial decline in Government dissavings, combined with the external financing of t~e investment programme. 26. In summary, while a degree of deviation from target would be anticipated due to the impact of exogenous disturbances during the year, the data in Table 4 reflects no significant departure from the planned evolution of fiscal policy. 28/ The.. targets are in general ••tat the end of the year preceding th• year to which they •• relate. 21/ The revenue ehortfall in 1987 was of little aacroeconomlc laportanc• since lt was entirely coapensated for by the substantial undershooting of the expenditure on enterprl•• eubsldles. Equally, although it wae nec..eary for coneuaption eubsldi•• in 1988-89 to exceeded the objectives, the buoyancy of revenu.. again laplled • alnor net aacroeconoaic iapact. gg/ Note the reservation• ln the text to the appropriaten••• of this Indicator ln ....urlng the adJuetaent to••rde flnanclal balance. The other deviation of lnter..t le that of the overall deficit in 1988. While the extent to which the target wee exceeded i• of little consequence, lt is• good exaaple of the difficulty of defining ..aningful target variables for the aggregate fiscal account In Moza•bique, While the overall deficit after grant• define• the addition to th• etock of external debt that auet be contracted if doaeatic bank finance ie to be avoided, targeting thle variable dlecri•lnatee againet conc..eional debt with a high grant el ...nt (lncludln9 IDA), The prob! .. of defining aggregate flecal target• ls reflected In the inconsistency with which they have been set: a target was initially ..t for the overall deficit in 1987, then left uneet ln 1988, and again ••t for 1989, - 17 - 27. The measurement of the trends in the macroeconomic imbalances is complicated by the immense distortions of the period up to 1986. Traditional indicators which measure financial balances as a ratio of GDP are grossly misleading when the implicit price deflators in the numerator and denominator diverge very substantially. Here, the cumulative devaluation over the 1986-89 period was almost 1750% in local currency terms, and this is instrumental in causing the ratios to GDP to record a dramatic deterioration over this period (Table 5). In consequence, a more accurate understanding of the dynamics of the evolution of the real degree of macroeconomic imbalance is given by the evolution of the real economy. Nonetheless, in view of the considerable progress that has been made towards the elimination of the previous distortions, particularly in the exchange rate, the data for 1989 in Table 5 do more accurately reflect the current degree of imbalance. 23/ 28. With respect to the adjustment of the aggregate macroeconomic imbalanc~. t~e principal adjustment has been seen in the fiscal accounts, as observed above. In consequence, a major reduction in Government dissaving from 12% of GDP in 1986 to under 3% in 1988 and 1989 has been effected. On the other hand, Government investment has been significantly increased in real terms over. the. 1987 to 1989 period, and accounted for around 22% of GDP in 1989. The Central Government financing requirement has consequently increased to 25% of GDP. Equally, the increased availability of consumer and rehabilitation goods to the non-Government sector has encouraged considerable dissaving of around 23% of GDP in 1989. 24/ With non-Government investment growing to almost 11% of GDP, the residual financing requirement of the non-Government sector has attained almost 34% of GDP. The external counterpart of these trends is apparent in the imbalance in the trade account, and in the very high level of foreign savings, which attained 60% of GDP in 1989. Once more, the observed trend requires a major qualification (see previous paragraph), but the degree of imbalance in 1989 alone is an accurate reflection of the extreme situation that prevails. 29. Thus, as was envisaged in the macroeconomic framework, considerable progress has been made in eradicating the fiscal current imbalance, while the imbalances in the overall Government fiscal stance, and in the non-Government and external balances remain extremely large. 30. The level of capital investment ls probably overstated both in the Government and non-Government sectors. In many cases it records the value of projects financed directly from external assistance which are known to incorporate significant allocations for conventional recurrent expenditure, including technical assistance, rehabilitation and spares. The Government capital account, in particular, is more accurately considered as a 23/ To the extent that the remaining distortions are progressively re110ved, the Tiiibalancea as reflected in th••• ratios to GDP will continue to deteriorate(•.. chapter X). ~ The sources of finance for the non-Covern..nt sector are not fully known, but It would appear that aOllle diversion of bank credit is occurring to finance enterprise current account lo••••, and that there .. y still be SOiie reserves of excess llquldlty that the sector la able to draw upon and finance the current expenditures. - 18 - development budget for this reason. Not only does this have implications for the fiscal indicators, but it has the further implications that national investment is overstated, national saving is overstated, and consumption is understated. The final column of Table 5 illustrates the potential impact of the existing misclassification of recurrent expenditures as capital expenditures in the Government budget. In 1989, for instance, if one third of Government investment were misclassified, its ratio to GDP would fall by 7.5 percentage points and would be compensated for by a similar rise in Government dissaving. In consequence, national dissavings would be higher, and national investment lower, by the same amount. Table 5. The Evolution of the Mecroec:onoalc Belenc... 1989-89; ---·---- Una<IJ<I. AdJuawtl • of (l)P 1980 1981 1982 1988 1984 1981 1981 19117 1988 19119 1989 - ·-·- Foreign S.•in. . Current. Ace Deficit. 17.58 20.35 23.441 ZZ.07 18.77 12.91 la.07 44.82 50.99 59.01 59.01 Non-CO.ern..,.t. Sector c:...... o-. ln•e•-nt. Net.ional S.•inea·~··- Sevin. . - Inveat.aen- 7.87 -0.21 -7.94 ..... 5.45 -2.87. .... 2.59 -10.96 -1.U -e.58 -2.05 -5.00 -2.119 2.12 2.39 ll.M 0.96 - 4, 11-· 1.74 2.13 7.89 -15.58 -23.441 11.29 -15.78 -27.07 10.95 -ZZ.81 -aa.81 10.95 -22.16 -llll.81 Cent.rel Oo•ern..,.t. Sect.. e r - Doll. ln•M-t. 11. lll 14.75 18.72 11 • .ca ia.59 4.50 5.IO 11.00 21.17 ZZ.50 15.00 Nat.ional S.vinp 1.51 2.73 4.21 -a.59 -5.29 -9.41 -12.10 -11.11 -2.74 -2.70 -10.20 S.v i nga - lnvMt.aent. -9.59 -12.CXl -12.51 -20.CXl -20.81 -lll.91 -17.70 -21.11 -21.91 -2&.20 -2& . 20 Aetr... Nat.Iona I ~ C:roaa Doll. ln•M-nt. 18.80 20.20 19.31 9.90 10.58 1.89 9.71 23.89 32,441 18.441 25.95 Nat. i onal Savine• 4..21 -0.1£ -<I.J.I -12.17 -8.18 -1.07 -5.37 -20.74 -18.58 -25.51 -83.0I Savi np - InvMt.aent. -17.U -20.u -28.441 -ZZ.07 -18.77 -12.91 -ia.07 -44.82 -50.99 -59.01 -59. 01 fl] The t.ao . .u of tlat.a pr-i>etl repr-t. (i) t.he 1 unatljuawtl 1 tlat.a froa t.he Oovern..,.t. account.a, an<I (ii) t.he •a<ljuai>e<I" clat.a, where an intlicat.iv• aa.as oft.he Oovern....t. invMt.aent. bu<lget. ia recla. . iflell •• recurrent. Hpenlllt.ure. 31. Despite the potentially destabilizing impact of these imbalances, Government policy has adhered closely to the original strategy in attempting to minimize this problem, particularly with regard to the implementation of monetary policy. On the monetary side, three observations may be made from Table 4: (i) aggregate credit expansion has remained within the targeted limits throughout the period, and, indeed, has more than fulfilled the .. goals in the 1987-88 period; (ii) credit to Government declined rapidly and fell well below the specified objectives, as· noted above, allowing credit to the non- ~overnment sector to exceed the targets by a small amount and, nonetheless, permitting the aggregate objectives to be maintained; (iii) monetary growth in 1987 and 1988 exceeded the target due to the unexpected temporary accumulation of external reserves, but was nonetheless well within the acceptable range given the annual growth in consumer prices. - 19 - 32. Thus, despite the substantial financial imbalances in the non- Government sector, credit expansion to this sector was maintained broadly in line with the target, and sufficiently to ensure the attainment of the aggregate monetary objectives. Moreover, while there is little prima facie support for the view that the central Government crowded out the non- Government sector prior to the ERP, the trend over the 1987-89 period clearly reflects a marked decline in the share of aggregate credit extended to the Government. The Government share fell from 43% in 1987 to 13% in 1989. There is, however, an outstanding issue regarding the crowding out of the private sector by the public sector inclusive of the public enterprises and state farms. ~-~~-~~-33. External Adjustment. Macroeconomic adjustment on the exte tnail side has focussed on the realignment of the exchange rate. The misalignment in 1986 was clearly demonstrated by the official rate being around 2.5% of the parallel market rate, and by the fact that- the -real effective rate had risen from an index of 100 in 1980 to 293 in 1986 (Table 6). 25/ By the end of 1989, the cumulative depreciation of the metical since 1986 stood at 95% in foreign currency terms (1942% in local currency terms), and the real effective rate had fallen well below the 1980 level: the effective rate at the end of 1989 was 70. 0 [1980•100]. ·By the end of 1987, the cumulative adjustments had reduced the official rate to about 50% of the parallel rate, and this relationship was roughly maintained throughout 1988. In 1989, the policy objective of small, frequent declines in the real effective rate was pursued through monthly adjustments of the nominal rate vis-a-vis the dollar. The parallel rate, however, depreciated more rapidly, leaving the official rate at around 45% of the parallel rate at the end of 1989. 26/ Table 8. The Evolution of the Exchan&• rate 1 1981/J-89. 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 1989 Dec. Noai na I Hchange rat.. (Ht./1) 32.4 85.4 37.8 40.2 42.4 43.2 40.4 281.5 528.8 747.1 825.0 [1980a100] 100.0 109.1 118.8 124.0 131.0 133.3 124.8 888.7 11123.5 2805.9 2550.0 Noainal effec~iYe rate 100.0 105.3 114.3 117.9 130.7 147.3 140.5 28.0 10.3 7.8 11.8 [1980a100] Raal affac\iva ratie 100.0 97.0 111.0 133.2 175.8 238.5 293.0 121.0 75.9 75.1 70.0 (19S0.100) •• Notie: [1] Effact.ive ratiea ba .. d upon t.rade weight.a for Hozaabiqua via-a-via \he princi,al t.rading part.nera. Source : IMF ~/ It is not Hlf-evldent that the 1981/J exchange rate WH ltHlf appropriate since It w:is a year In which the current account deficit stood at 17.61 of GDP. The heavy rel lance on external aid .. kes any assessment of the appropriate rate highly problematic. ~ The Government has noted that this divergence of the official and parallel rates was due 1n part to transitory factors, such as the delay in starting the non-adlllnistered eyetea for the allocation of foreign exchange (SNAAD); and the Importation of i•porte through unofficial channels (financed through dollar purcha••• in Mozambique, which were then converted at a pr.. ium to rand in South Africa, and used to purchase Imports). Th••• parallel market development• have also raised concerns regarding the appropriaten••• of the credit expansion In 1989. - 20 - 34. Fiscal Adjustment. The aggregate fiscal adjustment considered above indicates the progress towards meeting two of the principal fiscal objectives, namely the reduction of the level of Government dissaving, and the elimination of domestic bank financing of the budget by 1992. Underlying this adjustment there have been major changes in the patterns of revenue and expenditure. Indeed, the emphasis of the fiscal program has been on the specific revenue and expenditure policies that should be implemented, 11./ rather than giving an exaggerated importance to aggregate fiscal targets in a highly fluid and volatile environment, where the desirable relationship of the fiscal aggregates to GDP is only imperfectly known. Table 7. Covern..nt revenu.. , 1989-91. 1981 19117 1988 1989 1990 Ac\ual Tar. ., lk,t\ur11 Tar.., Out\ur11 Tar. ., Outi\ur11 Targeti All a • of Clll' Ag9re9at.. tas revenue Aggregate r•••nue - 9.4 1a.a 13. 8 19.9 13.8 18.1 14.4 18.1 18.7 19.8 19.4 21.9 18.4 22.S 18.4 22.3 All a S of - rlret.e<I Clll' Aggregatie tax r••enue 14.4 21.0 21.0 211.2 29. 3 29.8 30. 1 28.4 All a S of a11r. tax r••enu• Corporate taaatiOII 18.0 12, 7 20.8 13.4 17.S 12.1 Per-,al .....,;OIi 11.8 4 .0 1.2 a.a 1.7 4.4 Turno¥er tax 13.4 35. 2 23.9 24.8 28.1 29.8 Coneu..,tii011 tax 38.2 35.9 22.7 30.9 22,8 22.1 z-rt fluti- 9.8 22.0 18.9 20.a 18.8 28.8 22.0 211.1 All• S of i-..orte I..,ort fluti- 8,9 7.3 ••• 5.8 a . a••• 4.9 8.7 8.7 7,4 Ta• rat.ea: Corporate taaatiOII Per-,al ta•at.ion Tu r"°"•r tax Coneu... tiOII tax I..,ort fluti- Heao (Hti, ltn,) : (Ill' 188.9 4211.2 428 .2 811.4 859.9 8111 . 9 952.3 1254. 9 Ha rlret.e<I ODP 108.5 277,0 277,0 400.0 429.0 531.0 119.0 815,7 laporta 21 .9 175.9 171.9 401.7 377.9 128.1 572,3 113.8 •• Nota : 1' ia aaau-,1 ~at around 8511 of ODP ia •rlret.e<I onr ~i• iterlofl (S.nlr at.ff Mti•ta) , 35. The impact of the revenue measures has been very substantial, with aggregate tax revenues increasing from only 9% of GDP in 1986 to over 18% in 1989 J table 7). This reflects the increase in tax rates, the impact of the exchange rate adjustments, and the efforts to improve the administrative and collection procedures. It is difficult to isolate the 'Jl/ The PFP ha• explicitly identified (l) laprovlng the buoyancy and efficiency of the revenue •tructur•, (ii) r••toring financial di•clplin• and profltablllty to publlc enterpri ... , (Ill) containing th• growth of current expenditure•, (Iv) prioritizing capital outlay•, and (v) iaprovlng the coordination and utilization of external a••l•tance. - 21 - economic impact of these tax increases on either inflation or incentives. However, the rate of increase of the tax-take as a proportion of marketed GDP has been rapid, giving grounds for a prima facie concern that the tax burden is high: the ratio rose from around 14% in 1986 to exceed 30% in 1989. Over this three year period, substantial changes have occurred in the composition of the tax-take. Firstly, the exchange rate effects are seen clearly in the growth of import duties, which constituted 22% of total tax revenue in 1989, compared to less than 10% in 1986, but still only account for less than 7% of total import values. 28/ Secondly, the .. emphasis of tax policy on promoting indirect taxation rather than direct taxation is a key factor in the compositional changes, with direct taxes accounting for 21% of aggregate revenue in 1989, compared to 28% in 1986. Thirdly, the rapidly increasing importance of the turnover tax is also apparent, with revenue rising from 13% of aggregate revenue in 1986 to almost 30% in 1989, both on account of price affects and rate increases. Finally, in contrast, the consumption tax W4R displaced as the dominant revenue source, but nonetheless remained a significant contributor. In 1986, it contributed 40% of the total revenue, and fell to only 22% in 1989. 36. Government expenditure h~s .foll.Dwe~ ~~r~atic path over the 1980s. In 1984, aggregate expenditure stood at 42% 0£ GDP, before falling to 31% in 1986, and rising to almost 48% in 1989. In part, this reflects the distortionary impact of exchange rate policy (paragraph 27), but it also reveals the volatility of both recurrent and· investment expenditures. Government investment has been predominantly determined by the availability of external funding, and, while there. has been a restriction on the finance terms that are acceptable, together with an emerging concern to improve the efficiency of investment spending, the short-term financial implications have been minimal. The economic efficiency aspects of the Government expenditure program are further considered later (paragraph 83). At the aggregate level, however, real investment has shown both great volatility and considerable growth over the ERP period. On the other hand, policy measures have sought to restrain recurrent expenditure to facilitate the attainment of the basic fiscal objectives. Defense expenditures have been the major component of expenditure, accounting for 30% of aggregate expenditure in 1986, and around 40% in the 1987-89 period. This increase occurred despite the growth of interest payments, which increased from only 2% of current expenditure in 1986 to 13% in 1989, as interest liabilities •• were increasingly honored and as the interest rate was adjusted upwards. On the other hand, there was considerable success in curtailing the more discretionary expenditures. The two components that were the prime focus 28/ Thi• low average effective rate of import taxation wa• highlighted by the IMF Fi•cal iiT••lon in 1988 (•Meaorandua on the Tax Sy•tea of Mozaablque•, March 4, 1988, IMF), which noted that the effective import tax rate in Sub-Saharan Africa typically Ii•• within a range of 171 to 241. The prevalence of ..Jor ex..ptlon• and concessionary rates were identified•• .. jor determinants of the low tax-take, together with weakn••••• In the tax and ad•lnlstratlve structures. A major el ...nt of tax policy in 1989 and 1998 ls focussed on increasing the revenues froa this source. - 22 - of policy were subsidies, which accounted for 35% of current expenditure in 1986 29/, and salaries and wages which accounted for 20%. 37. The first concern was the reduction of both enterprise and consumer subsidies (Table 8). In 1987, the central Government assumed responsibility for financing the operating losses of state enterprises, leading to a step deterioration of the fiscal current account as enterprise subsidies equivalent to over 3.3% of GDP were incorporated. Enterprise subsidies were equivalent to between 1% and 2% of GDP in 1988-89, and have fallen from an estimated 34% of current expenditure in 1986 to 5% in 1989. .. Consumer subsidies increased significantly in 1987 as a result of the price adjustments following the devaluations that took place during the year. Government policy was initially directed at both reducing· the implicit taxation of producers, and at cushioning the impact of this policy on consumption by increasing the consumer subsidy. Consequently, the subsidy increased to 7.5% of current expenditure in 1987 , In 1988, however, the . direction of .policy shifted, and a vigorous effort was made to reduce both the implicit producer tax burden and the consumer subsidies, through substantial consumer price increases in April 1988 and May 1989. Thus, consumer subsidies have since risen only marginally in nominal terms, and were less thaff" 1.0% of GDP in- 1989. Aggregate subsidies in 1990 are projected to fall to less than 2% of GDP. Table 8. Consu..r and Enterprise subsidl ... and Enterprise credit. 1988-91. . 19N 1997 1988 1989 1990 Actual . Target. Out.turn Target. Out.turn Target. Out.turn Target. eon--r Maicliaa: S of CDP o.a 1,11 1.4 o.a 1.1 0.4 0,9 0.8 S of current. Hllencliture 1.3 1.a 11.a 2.2 4.8 1.11 a.a 3.0 Ent.arpriaa -"•icliaa: S of CDP a.a a.a 2.1 1.a 1.7 1.a 1,5 1.0 S of current. Hpencllture 33.5 ia.a 9.9 7.11 7.5 5.5 a.o 3.7 .... Ent.ar11ri . . creclit.: S of CDP 2.8 e.o e.o 11.0 a.11 e.a 1.2 ,.o S of •11rept.e creclit. 19.0 37.5 57.0 73.0 94.7 77.9 911.2 ,.._, [Mt. ...n. • cur . 11rice] Cyrrent ••pen~iture En~erpriaa -baicllea 42.4 14.2 90,11 14.0 90.11 9.0 157.3 12.0 148.8 11.1 217.11 12.0 240.0 12.0 327.9 12.0 .. Conau-r -baicliaa Enterpri . . credi• 0.5 18.9 ••• 34.2 5.9 19.1 a.a 11.a 7.2 N.7 3.5 63.0 8.4 59.0 9.9 75.0 A11r•1•t.a creclit. 24.8 48.11 as.a 73.1 59.9 118,0 118.0 78.0 CDP 111.9 421.:Z 421.2 111a.4 159.9 8111.9 952.3 12a4.9 Not.a: [1) The 19N ent.erpriaa -baiclll' ia an aat.i•t.ecl equivalent., ai1u:e ent.erprl . . 1-e• were coverecl ..,, Ule banking ayat.ea unt.il 1987. Ent.erpriaa creclit. ia aclclit.ionally acljuat.ecl appropriat.ely. (2) Creclit. ia clefinecl t.o be .._t.ic--rcecl creclit. Clftly. 38. Table 9 provides estimates of the consumer subsidies for the major ration products, and incorporates indicative exchange rates to more closely reflect the exchange rates that would have been sustainable over this ~ This figure again includes the ..ti ..ted enterprt .. subsidies, based on the banking sector support of operational los..s. - 23 - period. 30/ The explicit subsidy measures the budgetary cost per unit that was actually incurred by supplying the product through the subsidized ration system, while the implicit subsidy shows the additional subsidy that benefitted the consumer due to the undervaluation of the exchange rate. The economic subsidy is the aggregate of the explicit and implicit subsidies. In 1987, the explicit budgetary subsidy was approaching 50% of the economic consumer price, 31/ as was the implicit subsidy, implying that the subsidized price was less than 10% of the economic price in many instances. By 1988, and largely as a result of the substantial price ... adjustments in April 1988, the explicit subsidy was cut almost to zero -on rice, and very heavily on the other commodities. The residual budgetary subsidy in 1989 was concentrated on maize and maize flour, with the remaining products being virtually unsubsidized. Similarly, the exchange rate realignment and the adjustment of prices have significantly cut the implicit subsidy over the period, with only the price of beans being ~eriou~~1 out nf line with hiternational prices (paragraph 52). Table 9. Degr.. of Subsidy given through the Ration Syste.. 1987 1988 1989 Subai4i,- •• ,r...,ortl- 1.,.1 icit Subal4y H p.....,r1'1- I11PI icit Subal,ly aa ,.....,rti- I11Pl lcl1' of econaaic price taa on of econoaic price tea on of econoaic price t•• on ~ ~ ~ ~ i ~ ~ ~ ~ ~ ~ ~ - 1producer 1~-------lproducer 1~ ~ ~ ~ ~ ~ ~ - producer Pro4uct Exp Ii cit Econoooi c Expl icit Econoooic Expli cit Econoooic 1.,licit I.,lici t X..,llci t Mal &a 0.4 0.5 0.9 0.1 0.2 0.4 0.5 0.4 o.a 0.2 0.4 --- 0.2 Mai&• flour 0.5 0.4 0.9 o.a o.a 0.1 o.a 0.1 0.4 Rica 0.4 0.5 0.9 0.1 0.0 0.4 0.4 0.5 0.0 0.1 0.1 0.1 Ileana Cooking ol I Sugar -0.1 0.1 0.5 0.1 0.1 I 0.7 ('.0 0.1 0.5 0.2 0.4 0.1 0.0 0.4 0.4 -0.1 o.a 0.4 Sorghu• 0.2 0.4 0.7 ~ 0.1 0.4 0.5 0.5 0.1 0.1 o.a 0.2 O.flnltl-.: a. Eaplici1' Subai4y • Conau .. r price (inclu4ing act.ual pro4ucar price an4 coata to . . rkat) - Actual ra~ion .. 1•• price . ~. lapJicit Subaidr • eon..,..,. price at int.ernationaf pric•• and et indic:ativ• ••change rate - Conau. . r price (inclu4ing act.ual pro4ucer price and coata to . . rkat). c. EcOftOllic Subaidr • Coneu .. r price at international price• and at indicative exchange rat. - Actual ration .. lea price . 4. Iaplicit pro4ucar 1111• rate• 1.0 - ( actual pro4ucar price/ pro4ucer price at ln4icati•• ••change rate and a4juate4 for tranaportatiOfl an,1 proceaaing coata). [1) All pro4ucta are ••ti .. ted on a per kilogra• baaia, ••capt cooking oil, •hich ia per litre. 39. Wage and employment policy has been the second major component of •• current expenditure to be subject to tight control. Public sector employment in 1987 was cut by around 10%, and budgetary expenditure on wages and salaries was targeted to increase by around 120%. This increase was projected to permit an approximate constant average real earning level, using the CPI as the relevant index of consumer prices. In the event, expenditure rose by- less than 90%, and, with the CPI rising by 163%, the real wage bill probably fell by almost 25%. After allowing for redundancies, Government real per capita earnings would have fallen by around 20%. In 1988, the real wage bill rose substantially to more than !!/ The exchange rates employed here are merely Indicative of a 1DOre reallstlc, sust.alnable rate. They are based upon the experience in the parallel aarket at the tt ... !!/ That is, the consumer price derived using the international price and the indicative exchange rate. - 24 - offset the price adjustment, allowing real earnings to increase steadily, albeit to a figure still around 15% below the 1986 level 11,/. The numbers employed in the Government sector are only imperfectly known, but it is understood that employment remained static at around 87,000 until 1989, when the number of health workers was increased by around 7000. In addition, the education sector wage bill increased sharply, although this increase was largely attributable to the move towards double-shift working, and did not represent increased numbers employed. 40. The Impact on Prices. The evolution of the estimated official_ consumer price deflater (CPI) and GDP deflater is shown in Table 10. These suggest that while there have been major adjustments in all prices both in --- response to the massive realignment of the currency, and in response to the move to realign prices to reflect the underlying economic parameters, there is little evidence of incipient· inflation. Moreover, throughout most of the ERP (with the except:i~n beiug the first half of 1989), the .uncontrolled prices in the economy (including both the unofficial p,~allel market prices and uncontrolled official market prices) have shown no tendency to rise. Within the conditioned price structure,~/ the price has become de facto a non-binding ceiling price, as prices have tended to be set below the ceiling as demand pressures have declined. Equally ,__ the anecdotal evidence from the parallel markets suggests that these prices also remained stable or drifted downwards, except in the first half of 1989. 41. The Problem of Assessing the Impact on Living Standards. Making inferences about the evolution of living standards from price and income data is extraordinarily hazardous. In particular, the reliability of these recorded data is extremely uncertain, and the ignorance surrounding the other sources of either cash or imputed income is a serious obstacle. The degree of urban and peri-urban self-support has certainly increased since the inception of the ERP, and the -magnitude of rural-urban flows of goods and the repatriation of earnings are likely to be significantly underestimated. Thus, inferring the trend in nutritional standards from the reported data is impossible with any degree of precision. 34/ 42. The choice of price index is the primary problem in analyzing real incomes. Not only is the selection of the appropriate index for any given population group of major importance, but the unreliability of the basic data makes the estimates highly problematic. In this section, the development of various indicators of real incomes are discussed utilizing different estimated price indices. Any analysis of real earnings, however, ~ All the calculation• In thi• paragraph are baaed on the Govern..nt'• publlehed con•u.. r price index. The dl•cueelon In the next eub-•ectlon le partlcularly pertinent here, •inc• the accuracy of th••• trend• i• lntl ..tely related to the accuracy of th• deflate-re. ~/ The •conditioned' price leglelatlon cover• products for which the price le controlled through the atlpulation of a pre-deter11lned .. rk-up over coats. Orlglnally, any change In coats could only be pa••ed through into th• flnal price with the ex ante agr....nt of the minietry concerned; aor• recently, only the ex poet coneent of the appropriate ainietry ha• been required for the pa•• through of change• In coat•, for ••••pie, due to the l•pact on devaluation. 34/ A coneiderably aore coapreheneive dlecueelon of th..• proble111• ..y be found In the "Gr..n• Report (Feb. 1989), and the Food Security Report (World Bank, 1989). - 25 - must be handled with caution. since the results are highly sensitive to, firstly, the choice of deflater; secondly, the period of time chosen for the analysis; and, thirdly, the relative weights assigned to the goods in the consumer basket, and to the parallel market-official market composition. In particular, the published CPI data is derived from a Laspeyres methodology with 1984 weights, 35/ and, given the massive structural change since that time, the appropriateness of this approach is dubious. Table 1111. Evolution of Wea•• and Prtc... 1988-9111. Annual averagee: 1988 1987 1988 1989 Jan 1990 Wa- (M\.) Minia,a HP (-thly): AQricult..oral 1425 9000 15750 197:zO Non-a9ricult..oral 2704 129117 21125 211100 Techn,ciana/adainiat. 2100 12083 20125 24~ ,•r-nel Wagee (1981a100) Minia,a HP (-thly): Aericult..oral 100 5M 9119 1214 Non-aerlcult..oral 100 480 781 985 Technlciana/a4alniat. 100 575 968 1188 ,ar-,nel Pric.. (I chanoee) : eon....,. price inGle11 38. 7 1118.3 50.1 30.0 24.5 (l)P 4eflaM>r 12.1 146.8 4t.1 39.8 24.8 Pric.. (1986-100) : eon.,..,. pri c - 100 2113 395 514 1140 (l)P 4eflaM>r 100 248 359 502 827 R.al Wag. . (1986-100)[1] : Mlnia,a HP (-,111,ly) 1 Agrlcult..oral 100 85 140 189 190 Non-a9ricult..oral 100 85 121 152 151 Techn,ciane/adalnlat. 100 98 14t 187 188 1t•reonnel [1] Deflating by the CPI. 43. Utilizing the CPI as was done in the earlier section on wage and employment policy, indicates that average real per capita Government earnings rose by January 1990 to around 95% of their 1986 level, and to around 18% above the floor level of 1987. In addition. the Government •• determined minimum wage structure has followed a similar pattern. The agricultural and industrial minima were both reduced relative to the CPI by about 16% in 1987, before increasing rapidly in 1988 and 1989, especially in the case of the agricultural minimum in 1989 which was established at almost 90% above the 1986 level. · The minimum wage for technicians and administrative personnel was little changed in real terms in 1987, but then rose sharply to be almost 87% higher in 1989. In relative terms, the industrial minimum in 1989 was substantially below its 1986 position vis-a- vis the other two categories, although in nominal terms it is still the highest: there has therefore been a convergence of rates despite the nominal agricultural rate still lagging considerably behind. In January 1990, the minimum wages were adjusted to maintain the real levels of 1989. ~ Th• new hou••hold expenditure •urvey is not expected to be co•pleted until 1991. - 26 - It should be reiterated that these conclusions are derived using the CPI as the relevant price index. Table 11. The Ration Syatea volu..• and price•, 198S-89. 1987 1988 1989 1988 1987 1988 1989 Hnn ..olu- (lr1) ...an annual pric. ., per ap it.a per - " ' : n/k1 [1] Rice 2.25 1.aa 1.&0 18.5 51.8 211.8 818.5 Maise 2.!0 2.25 2.&0 9 .0 21.0 91.1 121.9 ... iae flour 9.5 28.9 118.1 1511.8 S..1ar 1~ 1.00 1.00 18. 0 94.5 251.8 871.5 Cookin1 oi I O.&O O.&O O.&O 58.5 210.0 495.0 SS2.8 Ileana 1.00 27.0 Ull.O 248.8 294.0 Soap 0.17 O.&O O.&O 48.5 91.9 81511.0 511.8 Sa,- O.!O o.aa o.aa 1.0 17.5 152.2 84 .8 Fiah (1rade 2) O.!O 200. 0 Ma\c:h- 1.00 eo.o 1111\wri . . 4.00 ao.o -- - -·- . ...... "°'-er~ per - " ' p.c • aNa) : Hean annual prlc. .: 19Na100 Rica o.c:i 0.29 0.24 100.0 231.8 1579.1 2359.8 Mai&a o.aa o.u 0.39 100.0 :zaa.5 1012.5 1354.2 Maiu flour 100.0 804.4 1248.4 1171.1 S..gar 0.14 0.11 0.11 100.0 525.0 1391.1 2091.8 Cookin1 oil 0.(11 o.oa o.oa 100.0 859.0 -848.2. 1081.I a..ne 100.0 170.4 902.8 1088.9 Soap 0.02 o.oa 0.08 100.0 199.7 738.1 1055.2 Sal\ 0.07 O.Ol5 O.Ol5 100.0 287.5 870.0 1418.8 Weighted price ind•• [4] 100.0 287.2 1192. I 11N.7 Coneu..r Price Ind•• 100.0 aa.5 895.2 518.8 l Source : CovernMnt. of Ho,r,aabique l Except. cooking : •t./1 it.re 2 Maize and - i ze ... ~ cor.ibinc:'. 3 Eat.i ..t.ed b1 11ro..in11 up available lnforee\lon. 4 a..... on an ••t.i .. t.ed Paaeche price lndea, uain1 W.e .. 1ae price Ind•• for Ule c.,....ined .. 1ae/.. iae flour ra\ion1 and ueing onl1 t.he • i• c-.lit.i- t.ha\ have.,_ coneia'9n\ll' ra\lon..i W.roughou\ t.hia period aa weigh\a in \he price ind••· 44. The importance of the choice of price index is clearly demonstrated by an analysis of the repercussions of fiscal policy on the prices of the ration products (Table 11), The precise impact of the reduction of consumer subsidies is not captured accurately by the CPI or. at least. it badly misrepresents the experience of an important segment of the population. Most serious is the aggregate weight of the products being made available through the ration system in 1989. According to the 1984 weighting structure it is 21%. whereas recent estimates 36/ suggest that .. for low income households. which constitute around 50% of the population. at least 40% of expenditure is on ration products. On the assumption that non-ration consumption was all conducted at stable prices. this would imply that. for this 50% of the population. prices rose by around 626% (see Table 11) between 1986 and 1989. compared to the CPI estimate that is at least 30% lower at 413%. 3S/ Refer •Eatudo SDA: Social Oi ..nsion• of AdJuataent•, Reginald ar..n (February 1989): the Tcr..n• Report. - 27 - 45. Moreover, it is highly improbable that the prices for all other consumption 37/ were constant. In fact, over the December 1987 to December 1988 period, the prices of fuelwood (which has a 1984 weight of 8.8% and a 1989 estimate of 15%) rose by 20%, and the prices for urban transport (which has a 1984 weight of 2.1%, and a 1989 estimated weight of 15%) rose by 11%. 38/ Using these price growth figures in addition to the ration data, and assuming additionally that the remainder of the basket did not change in price, the increase in prices for 1987-88 is estima~ed at 131%, compared to the CPI estimate of 50%. For this period, the estimate would be 126% on the basis of all non-ration good prices remaining .. unchanged • 46. Conclusions on the trends in living standards. Four different analyses have been reported here, with the following conclusions: (i) minimum wages have increased substantially -in-- ~...~~terms relative to the CPI over the ERP period, despite their initial decline, to be between 50-90% higher in 1989 than 1986; (ii) the index based on the basket of ration goods, together with constant prices for the remaining basket, indicated that the percentage increase in prices for the 50% of lowest-income households was 50% more tthan the general CPI over 1986-89. This would have significantly reduced the real gains in minimum wages, compared to the estimate in (i), but would not have eliminated the • gain. It may be presumed that the minimum wage is relevant to the lowest 50% of household earners; (iii) the index based on the basket of ration goods, together with increasing prices for the remaining basket, indicated that the percentage increase in prices for the 50% of lowest-income households was more than 2.5 times that for the general CPI over 1987-88 period. In this case, the change in the minimum wage for agricultural workers would have been positive, but much reduced; but, for the other groups, there would have been a real decline in the minimum wage; (iv) an highly tentative indication was given of the trend in average Government per capita earnings, relative to the CPI. This suggested that following a substantive decline in 1987 by more than 20%, there has been a steady increase. By January 1990, however, it appears that real earnings per capita are still somewhat below the 1986 levels, but, nonetheless, considerably above the ·floor level of 1987. Employing one of the alternative 37/ The •ar..n• report ..tlmate• that, In the 1989 expenditure ba•k•t, other food account• for 281, fuelwood account• for 161, urban tran•port for 161, and textll•• and •ho.. for the r••idual 181. 38/ Th..• ••tlmate• are froa the Minl•try of Finance (Dec..ber 1988), and reflect both ol°ficial and parallel tran•action•. It •hould be noted, of cour••, that the 1984 weight• are ..tlaated for the econOliy a• a whole, wherea• th• •ar..n• data I• for th• low-Income hou•ehold•. - 28 - price indices developed here would suggest that 1989 real incomes were still significantly below the 1986 level. 47. These findings are not conclusive due to the data weaknesses, and to the extreme sensitivity to the choice of deflater. They suggest, however, that those on minimum wages approximately maintained their real income levels. On the other hand, those on average incomes suffered a substantial decline in 1987, and have since benefitted from significant real increases. It appears, however, that their real incomes in 1989 were still well below those of 1986. D~ The Evolution of the Economic Structure 48. In addition to the program of macroeconomic adjustment, policy reform is focussed on generating an economic environment that will be significantly different in structure from that prevailing prior to the ERP . In this section, two aspects are analyzed: the establishment of a more appropriate incentive framework, and the efforts to enhance the allocation of resources. The Incentive Framework 49. The Objectives of Policy. The restoration of an appropriate incentive framework is the principal mechanism by which the Government is seeking to initiate the recovery of production and trade. The · macroeconomic adjustments and, in particular, the realignment of the currency, are key ins~ruments in facilitating this change from the pricing perspective. As with most small countries, Mozambique has relatively little ability to influence its external terms of trade, but, through depreciation and the differential impact on the traded and non-traded goods markets, the ERP seeks to precipitate a major transformation in the internal terms of trade. Moreover, prior to the ERP, extensive distortions had developed in the price structure in addition to those directly attributable to the exchange rate misalignment. By initiating the removal of these distortions, the ERP is reinforcing the terms of trade effect of the depreciation. 50. The Domestic Price Structure. To attain these objectives, pricing policy under the ERP has focussed on three issues: firstly, the progressive elimination of price controls for selected products: secondly, for those products still subject to fixed price controls,· the realignment of prices towards those prevailing on international markets, followed by regular adjustments to reflect major trends in international prices (including, in particular, adjustments to reflect exchange rate changes): and, finally, the relaxation of price controls for those products where some degree of control is deemed necessary. - 29 - 51. In 1986, there were 46 product groups in the agriculture, industry, service and energy sectors with fixed prices. 39/ The remaining agricultural prices were then free of control, while the remaining industrial products were subject to the conditioned price legislation. In the course of 1987 and 1989, the number of product groups with fixed prices was reduced in four steps to 17 groups, with the agricultural products being freed from all control or being moved to the minimum price system, and the industrial products being moved to the conditioned price list. The minimum price system was initiated in January 1989, when six product groups were included within the system, and in September 1989, the list was .. enlarged to include nine product groups. In 1989, it was therefore estimated that the products subject to . the fixed price legislation accounted for less than 30% of GDP: a substantial decline from the pre-ERP period. 40/ Further decontrol would have been problematic. Tnose products still controlled in 1989 largely fell into. four groups: those which were supplied in substantial quantities throug~ the Emergency Program (chapter III); those supplied through the =ation system; those making a major contribution to tax revenue; and energy products marketed by state enterprises. 41/ Price decontrol has therefore made significant progress, and those products remaining subject to controls may be regarded as a core for which controls will be required for some time (chapter X). 52. For those agricultural products that have-~-0ntinued to be subject to fixed pricing the move towards international prices has been substantial, albeit partial. Prior to the ERP, domestic producer prices were seriously misaligned with international prices. As Table 12 indicates, at the prevailing exchange rate, the price for most products exceeded the international price by a considerable margin, in part in an attempt to offset the exchange rate distortion. At a more realistic exchange rate, 42/ the domestic prices were clearly out of line. In 1986, the table shows that in no case did the price of a product exceed 20% of the international price. Over the course of the ERP, considerable progress has been made to restore the domestic price incentive, with all the domestic food crops being priced at nearer 80% of the international price in 1989. Due to the initial over-valuation at the prevailing exchange rate, the percentage price increases of the food crops were, in all cases, significantly less that the percentage depreciation (table 12). It is, nonetheless, still apparent that the export products (cashew, cotton, 39/ The grouping• are narrowly defined ae ehown in Table 4. a.i. in Appendix A of Volume III, wliich aleo provide• the full lleting of product groups, end the evolution of decontrol over the 1987-89 period. There were eddltionally fixed teriffe on the traneportation ..ctor, which currently are etill in place. ~ The proportion of gro•• output In agriculture and lnduetry for which fixed prlc•• r4N!lllin 1n 1989 wae eeti•ated at approxl•ately 361 and 38J reepectlvely. In agriculture, In addition, the product• covered by the •ini•u• price eyete. account for about 181 of gro•• output. ~/ Refer Table 4.a.i. of Appendix A (Volu.. III). In 1989, rent• were additionally controlled,•• were eoy1, eorghu• ind eo.. type• of ..,t, The r1tion1le for the control of the litter thr.. agricultural products i• unclear. ~ The exchenge retee employed her• ere purely lndlcetlve of a 110re reelietlc, euetelneble rete. They are beeed upon the experience in the parallel .. rket et the ti ... - 30 - copra) are considerably undervalued at around 50% of the international price, despite being the products to have experienced the largest cumulative increases, which in all cases exceeded the percentage depreciation. This is attributable to the extremely low price of the export products in 1986. At that time, cotton prices were only 50% of the international price at the prevailing exchange rate, and cashew prices were only 30% in excess. 53. These conclusions, however, require qualification since the introduction of the minimum price system for six products (cashew, cotton~ copra, sunflower, mafurra and groundnuts) in early 1989. For these crops, ..- Table 12 reports the minimum price in 1989, and this is therefore not strictly comparable with the preceding years. Indeed, there would be no expectation that the minimum price would be set equal to the international price. As yet, no work has been undertaken to determine whether the· prevailing minima are appropriately set to take account of both int.e rnational prices and the necessary differential that the operation Of'. a minimum price system entails. It should be noted, however, that only cashew operates a strict minimum price system, and that the other crops additionally had the factory gate price fixed in 1989. Consequently, the latter price is the key concern since it effectively determines the unconstrained producer price and its relationship-to the international price. Teble 12. The Evolutlon of Producer Prlc... C..-lat.i•• !tat.lo of act.ual ""°"'ucar Rat.io of act.ua 1 ""°"'ucar Relat.l•a p"""ucer ,rica price price t.o a<liuet.N [1] price t.o alljuat.N [1] atruct.u r e increaM int.ernat.iona prica at. lnt.ernat.ional 1trica at. [ •i.r.• • 100] (1t•rcent.a11•) official ••chan. . rat.a hypot.het.lcal ••change rat.a O.c 198e t.o June 1989 1981 1988 1989 [2] 1981 1988 1989 [2] Official pric• International pric•• Ht. 40.4 Ht. 528 Ht. 747 Ht. IOO Ht. 880 Ht. 9IO 1981 June 1989 June 1989 Maize 841 . 2 2.11 0.9 1.1 0.2 0 .11 0.8 100.0 100.0 100.0 Rice 906.3 3.2 0.8 1.1 0.2 0 .5 0 .9 123.1 131. 8 124.1 Bean• 978.7 1.3 0.7 o.8 0.1 0 .4 0 . 11 180.8 209.1 297.0 Sorghu• 791.7 3.0 0.8 1.1 0.2 0.5 o.8 92. 3 811 . 4 85.7 Croundnut.e 1275.0 1.5 0.9 1.0 0.1 0.1 0.8 153.8 231.8 248.11 Sunf lower 81111.7 1.7 o.e 0 .7 0.1 0.1 0 . 11 1115. 4 118.2 1711.7 c...... Copra Cot.ton 11150.0 1818.2 29111. 7 1.a 1.0 0.5 o.e 0.15 0.15 0.15 0.5 o., 0 .0 0.1 0.0 0 .3 0.3 o.a 0.4 0 .4 0 . 15 711 . 9 42 .3 46.2 150. 0 90 .9 159.1 309.3 184.11 2715.8 .. Not.a : ( 1J Adjuat.N for d-t.ic ,,..n-,ort.at.ion anti proc-ing coet.e. 2 1989 price• are •iniaua pric. . in the c•- of caahn, cotton, copra, aunflower, and roundnuU. 3 The Dece.i.er 19811-Jun• 1989 cu-,lat.i•• depreciation on local currency t.er. . •a• 11:.I. 4 Oat.a rounded : not.a ea,eciai 11 in t.he c... of rat.I- of 0 .0 • .. 54. There are some important qualifications to be made to the analysis here to take account of the practical problems of enforcing official producer prices, due to the serious weaknesses in the marketing structure and the lack of competition. These issues are discussed extensively in Chapter VII. 55. The evolution of the relative price structure reflects the improved price incentives that have accrued over the ERP to the export producers, and the increased relative discrimination that these changes have implied for domestic food producers. While the strategy of the ERP seeks in general terms to enhance production incentives, there is no - 31 - explicit intention to favor export production, and this impact is a direct repercussion of the earlier price distortions. It is nonetheless the case that, compared to the immediate pre-ERP period, incentives for export production have received a relative boost. The relative price data also highlights the divergence from the prevailing international relative price structure. 56. Nominal industrial prices also experienced rapid increases over the 1987-89 period. Fixed prices were adjusted to reflect the exchange rate changes and in accord with subsidy policy in the case of the ration .. products (see paragraph 44). The remaining products, which were all subject to the conditioned price legislation, were adjusted regularly and with little Government constraint. \Jhile the basic legislation was unchanged, the system was made more flexible from the onset of the ERP with price changes no longer being subject to prior approval. Instead, changes required only the ex post review of the appropriate ministry, and enterprises therefore had the freedom to pass through the costs of depreciation without delay. Little systematic data are available to estimate the adjustments that have been made, but estimates that were compiled for the Business Environment Study 43/ for a sample of products suggested that official industrial prices moved c·losely _in line with the exchange rate eaanges. Between December 1986 and December 1988, the sample showed prices to have increased by about 1570%, compared with the depreciation of 1450%. The sample included both imports and domestically produced products. In general, the price of imported products moved in line with the currency adjustments f!!i/, and this was reflected in both intermediate and final product prices. 57. The Internal Terms or Trade. The evolution of the internal terms of trade is the critical element in the ERP. Pricing reforms to provide greater incentives are essential, albeit not sufficient, for a sustained supply response. For the improved incentives to materialize, the relative price of the non-traded component in domestic expenditure, and particularly consumption, must fall. Since the initiation of the ERP, it is this issue that has caused most concern. It was noted in paragraph 52 that the prices of agricultural exports have been increased broadly in line with the , depreciation, but that there have been some marked variations in the experience of specific crops. There has, in particular, been a significant divergence in the price adjustments of the domestic and export crops. •• Generalizations are therefore limited in their validity. Most importantly, the failure to fully realign domestic agricultural producer prices with international prices at a sustainable exchange rate (Table 12), has left the agricultural terms of trade at a less favorable level than could have f!/ Business Environment Study (dated June 20, 1989; No. 7706-MOZ). 44/ It should be noted that import prices bear a relatively weak relatlonahlp to Tnternational market prices in some instances, since a large proportion of th••• products are financed through external donor aid. In the ca•• of tied assistance, the prices are donor determined and are often considerably In excess of market prices. - 32 - been attained, especially in the case of the export crops. 45/ Moreover, data problems make the composition of an appropriate price index for a representative consumer basket for rural areas very difficult. The official CPI is largely Maputo based, and therefore provides only an approximate guide in this context both on account of the urban weighting structure and the product prices that are employed. 58. Analysis of the official price data in the previous table suggests that ~ver teh 1986-89 period the agricultural terms of trade improved for export crop producers (cashew, cotton, and copra producers!,!/), and may have deteriorated for domestic food crop producers (maize, rice, beans, sorghum, groundnuts and sunflower). Using the rate of depreciation as an .- outer bound on the growth of the consumption basket price index, the terms of trade for domestic food producers fell to under 50% of its 1986 level for all except groundnut producers, for whom the reduction was 25%. Export producers, on the other__ hand, benefitted from increases of up to 67% (cotton;.... or m.lna.c declines of :>i (cashew). This "t"Alysis understates the benefits accruing from the policy reform, since it effectively excludes domestically produced products that were sold in rural areas. If, by way of illustration, the_Maputo CPI were adjusted by two-thirds to allow for the rural factor, then all the producer price increases would have been adequate to elicit an iminuvemen~· -itl---tAe agricu.ltural terms of trade for all crop producers. On the other hand, the internal terms of trade have not in general improved to the degree that would have been desirable to elicit a more rapid supply response. This is largely attributable to the weight of the traded component in expenditure remaining at a very substantial level, and, in general, this component more fully reflects the devaluation (especially in the case of imports). The danger of the price of the non-traded components being iner.::aaod tou 1apidly in line with the depreciation does not appear to have been realized. 47/ 59. As is evidenced by the relative growth rate for imports and GDP, the economy has becoming increasingly dependent on imports. This general issue is pursued further in sections E and F below. Its importance here is that it increases the weight of the traded goods in expenditure, and thereby diminishes the beneficial impact on incentives. Inefficient import substitution is not in the immediate or longer term interest of development, but the revitalization of the efficient domestic consumer good industries is essential if the terms of trade effect is to be maximized. However, to the extent that increasing the supply of goods is urgent, the •• role of imports is reinforced, given the constraints t~ a quick response ~ In addition, an laportant con•equence of the producer price• for the doae•tlc food crop• exceeding the adJu•t.ed International price (at the prevailing exchange rate) In 1988 i• that the cuaulatlve producer price chanw.. over the ERP period have been ... 11er than the depreciation in local currency ter... Again, thi• tended to dlainl•h the gain to the agricultural teras of trade, when con•u..r products were adju•t.ed by the full extent of the depreciation (paragraph 66). ~ The other export product•, notably tee and sugar, are purely plantation based, and produced by the •tat. sector. !!./ In particular, ... paragraph 39 on the developaent of wages and salaries. - 33 - from domestic industry, and this thereby reduces the rural incentive. Moreover, in view of the high import content of domestic final good production, even this source of supply will be highly sensitive to the evolution of traded good prices. 60. An analysis of the internal terms of trade based solely on official price data may, however, be grossly misleading. Prior to the ERP, and especially in 1985 and 1986, the economy was characterized by the rapid expansion of parallel markets in both foreign exchange and coDDDodities, where transactions more closely reflected the international price levels. 48( In consequence, the impact of the reform program on incentives has been diminished, as large segments of the economy had already adjusted to a quasi-free market structure. Indeed, to the extent that agricultural production was diverted to the official market as official prices increased, this would have tended to cause a deterioration in the terms of trade, since official prices still remained below parallel prices. Only producers who had previously traded in the official markets received the full benefit of the price reforms. More importantly, however, is the evolution of the rural consumer good market in this period. In 1985-86, the supply of consumer goods to many rural areas was almost eliminated, and, if available, only at exceedingly high prices. This trend was accompanied by the rapid demonetization of the rural areas, and by the growth of barter. As noted elsewhere, this absence of consumer goods was a key factor in the collapse of the rural surplus. Conversely, as the flow of consumer goods was greatly expanded in the early period of the ERP, the prevalence of barter declined rapidly, and, in 1989, the remonetization of the economy appeared to have made major progress. At the same time, consumer good prices had been established at much lower levels, albeit still high relative to rural incomes. 61. An analysis incorporating the experience of both the official and unofficial markets therefore suggests that a substantial improvement in the terms of trade for rural producers has been attained, although this is arguably more the result of the consumer good distribution policy than the price policy itself. It is, of course, impossible to evaluate the extent , to which the risk of trading illegally in the parallel market was a disincentive to production, and the extent to which this was removed by 1989. 62. The security situation has also played an important role in the evolution of price incentives. The serious disruptions to the provision of transportation services and to the maintenance of an adequate transport network (chapter V), that are attributable to the insecurity, have tended to inflate transportation costs both for distribution to and from the rural areas. Crop purchase prices have therefore, ceteris paribus, been depressed to the extent that they are set in relation to the international price after due allowance for domestic transport costs, while consumer good 48/ In late 1988, for example, It was crudely estiaated that around 601 of transactions by volu.. , and around 761 by value, were conducted In the parallel .. rket. - 34 - prices have tended upwards. The consequent impact of this factor on the rural terms of trade has therefore been adverse. 63. Finally, the realignment of the internal terms of trade is designed to fulfill another important role in the Government's strategy: namely, to influence population distribution in the country. In particular, the relative price changes are viewed as a key instrument in deterring and, if possible, reversing the urban drift that has resulted from the emergency and the repatriation of miners from South Africa 49/. As was implied elsewhere (paragraph 44), the urban terms of trade have deteriorated faster as a result of the rapid reduction in consumer price subsidies to Maputo and Beira, than would have resulted from the producer price changes alone. Whether the terms of trade are the dominant factor in determining labor mobility is, however, problematic in the current circumstances of widespread insecurity. Nonetheless, to the extent that it encourages some reverse flows and stimulates agriculture in the peri-urban areas and green zu~es cf the provincial and district capitals where security is less of a concern, this aspect of the policy could be partially effective. 64. The external terms of trade. The evolution of the external terms of trade is not a major determinant of the massive imbalance in the external account. The trends in the volumes of exports, transportation receipts, and imports dwarf any export price effects. Nonetheless, the movement of world prices is relevant to the potential improvement in incentives that the realignment of domestic prices could generate. For the principal agricultural export crops, there are two elements that are reflected in the tr~nJ in the external terms of trade: firstly, the evolution of the world conmodity price in constant dollars (i.e. adjusted by the manufacturing unit value index for illustrative purposes) 50/; and, secondly, the evolution of the Mozambique export price relative to the world price. The latter relationship is itself affected firstly by the tendency for the Mozambican export composite product to change in quality relative to the quality of the world composite product, and, secondly, by the bargaining power of Mozambique in the world market. 65. In the first of these respects, Table 13 shows clearly for the 1980s the decline in the real price of three of the principal export crops, with the notable and important exception of prawn, which accounted for almost 45% of total exports by value in 1989. Real prawn prices rose sharply between 1981-83, before falling by a third up to 1987, when they !i/ It is ..timated that the number of ainers working In South Africa fell froa over 118,188 Tn li76, to betw..n 48,188 and 46,188 over the 1977-98 period. The nuaber then rose to around 66,188 In 1986, before falling again as a r..ult of the increaaed regional tension. ~I/ There is no direct data available on laport pric.. , and analysis of the external ter.. GT trade is therefor• restricted to using world price ••rl .. , such as the ..nufacturlng unit value (auv) index. It is laportant to note, however, that a significant proportion of imports is financed by donor• under specific contracts, and the prlc. . . .Y bear little relation to the world price. Nonethel ..•, as an Indicator of a I••• donor reliant situation, the muv deflator I• an Indicator. - 35 - stood at roughly the same level as 1981. Subsequently, in 1989, the real price has fallen further. Prawn, however, is not a major focus of the ERP. For those products that are central to the economic strategy, such as cashew and cotton, the decline in the real prices is significant for incentives, if not for the short term stability of the balance of payments. Cashew and cotton real prices have fallen by 45% and almost 30% respectively over the periods shown. Sugar has traditionally been a plantation crop produced by the state sector, but, although it is not a prime focus of the ERP, it, nonetheless, has historically played a significant role in production and export earnings, and is a ~jor consumer of state enterprise subsidies. Between 1980-88, the real sugar price fell by 60%. Table 13. The Evolution of the External Tems of Trade. Ind.. (1980 or 1981 • 100) 1980 1981 1982 1988 1984 1985 1988, l4l87 ·19~ 1-~ "' Caahew: World price (cur. USI) 100.0 77.0 83.8 78.0 78.3 101.7 102.8 915.4 73.15 Hozaaltique ••por• price 100.0 159.8 83.4 815.2 815.0 123.4 1115.1 89.2 715.3 Ho&aaltique/World price 100.0 77.4 99.7 112.1 108.5 121.4 112.2 93.5 102.5 World price (con. USI) 100.0 78.0 88.1 80.15 82.1 90.8 83.8 72.4 58.0 Prawn: World price (cur. USI) 100.0 134.1 1315.3 120.3 107.5 132.1 117.2 127.5 118.9 Hozaabique ••port price 100.0 94.7 94.3 93.2 89.7 101.3 114.4 129.4 118.4 Ho&aaltique/World price 100.0 89.8 89.7 77.5 83.4 78.7 97.8 101.15 97.9 World price (con. USI) 100.0 131.0 140,8 127.4 112,8 118,0 915.5 98.8 90.8 Cot.ton: World price (cur. USI) 100.0 90.2 78.0 90.2 87.3 84.4 51.7 80.5 88.3 82.4 Mozaaltique ••port price 100.0 115.1 87.4 89.4 94.4 78.8 48.2 103.0 78.2 70.1 Ho&aaltiquefWorld price 100.0 127.8 112.0 99.1 108.1 122.3 89.4 128.0 111.8 815.0 World price (con. USI) 100.0 89.8 79.1 93.9 91.8 87.3 45.9 85.3 51.& 82.8 Sugar: World price (cur, USI) 100.0 59.2 29.4 18.9 18.2 14.2 21.0 23.8 35.8 44.9 Moaallli:tique export price 100.0 103.2 79.9 89.4 91.0 105.3 107.8 110.0 104.3 112.8 Ho&aaltique/WOrld price 100.0 174.5 271.8 528.2 500.1 739.8 1511.4 488.4 292.8 250.15 World price (con. USI) 100.0 58.9 29.7 30.5 19.1 14.9 18.8 19.1 28.9 34.0 Heao: Hanufact.ur i ng unit value in4ea 100.0 100.5 99.1 98,8 94.9 95.9 112.5 123.4 132.4 131.9 Source: C.ahN world pricea: Cill and Dufua, Edible Nut. Report.a, quoted cif Europe, whole 320; and World S.nk C-.lit.iea Dlviaion. Other conat.ant..and current. world price• are froa World bank C-.lit.i .. Diviaion (October, 1989) . ,I Price• are in dollar• per kilograa. Ho&a .. iqua ••port. unit. value ia fob Ho&a•bique. .. 66. If the divergence between the international price and the Mozambique export price is due to quality differences, then the evolution of the export to international price ratio need not influence incentives, since the price incentive to improve quality is unaffected by this trend 51/. The available data does not, however, permit one to conclude whether this is the dominant reason for the divergence, or whether market power differentials are present, since the factors are not separable. In general, the Mozambique export prices for cashew and prawn fared well vis- a-vis the international price (Table 13), although prawn displays some !!/ Whether the do11estic price systea does in fact tran .. it this incentive to laprove the quality of the produce fro• the international aarket to the do..stic producer is a separate issue. In Mozambique, the prevalence of unifor11 fixed producer prices did not provide such an incentive, but this disincentive has been eliainated for many crops (paragraph 61), - 36 - deterioration over the 1982-84 pe~iod. Cotton has a volatile but favorable trend, while the sugar trend is totally dominated by the quota agreements with the USA and the EEC. For this reason, the role of sugar is better judged in the light of the trend of the real world price. 67. If this sharp decline in real prices continues, there will be an important impact on the ERP strategy. As the previous section noted, the substantial weight of imports in domestic consumption has greatly dampened the internal terms of trade impact. If, in addition, the external terms of trade continue to move adversely, then the producer price incentives will be further constrained. .- The Allocation of Resources 68. In addition to the policy that has been oriented at enhancing the price incentt~~ framework, a second element of the structural progranme has focussed on the allocative efficiency of the economy and the utilization of resources. In this respect, there have been two principal aspects, firstly, the relaxation of centralized administrative controls and placement of- gr~ater emphas.is on the role of the market; and, secondly, in those instances where administrative controls are necessary or desirable..._ the improvement of the allocation process through the refinement of existing mechanisms or the adoption of new mechanisms. This broad policy target has been implemented in several diverse areas of economic activity, and these are briefly reviewed here. 52/ 69. Foreign exchange allocation. The administrative allocation of foreign exchange has necessarily dominated the trade structure during the first three years of the ERP. In 1987, two factors made this inevitable: firstly, the severe distortion of the exchange rate; and, secondly, the huge dependence on external assistance. The magnitude of the exchange rate misalignment and the subsequent realignment were highlighted in paragraph 33. Having achieved a more appropriate rate, albeit one that i i 1till unsustainable over the medium term, Government policy in 1989 t urned towards initiating the relaxation of controls over foreign trade. This process will, however, necessarily be protracted, with the nature of the external aid contracts being one significant constraint, and the absence of any existing mechanisms or experience in the operation of a less controlled trade regime being important additional factors. •• 70. Until the introduction of the System for the Non-Administrative Allocation of Foreign Exchange (SNAAD) in October 1989, the only source of non-administered exchange had been the export retention scheme which was initiated in 1984. 53/ Otherwise, all allocations were centrally ' §!/Pricing policy wae coneidered in the context of the incentive fra...ork (paragraph• 49 onward). !!/ The export retention ach... gave exporter• the right to retain a pre-deterained proportion of their foreign exchange earning•, for •ub•equent u•• In the cour•• of their operation•. Since 1986, exporter• have had the right to tran•f•r th••• right. to their •uppller• at the official exchange rate, but there ha• been no fr. . . . rket in th... exchange rlghte. - 37 - determined • . Latterly, in 1988 and 1989, various procedures were introduced in order to enhance the efficiency of the administrative processes, including the use of more transparent qualitative criteria, and some experimentation with quantitative indicators. 54/ Furthermore, institutional developments sought to improve the matching of donor funds with the priority needs identified under the ERP, with the establishment of the Unit to Coordinate Import Programmes (UCPI) and the CRRE in 1988 being the most recent steps in this regard. 55/ 71. None of these developments represented any major change in the -. allocative mechanism. Despite the substantial realignment of the exchange rate, which reduced the degree of excess demand, the price mechanism still played a secondary role. The major allocative decisions were still administratively resolved within the planning process. lnte-r-enterprtse allocation continued to be determined by the historical pattern of allocation, and the inter-product- allocation by an assessment of the priority needs of the ERP. Determining enterprise efficiency, however, proved an intractable problem (see paragraph 78) and this imposed a serious limitation on the e·fforts to enhance administrative allocation. Moreover, defining priority needs raised inevitable trade-off issues. In particular, determining the allocation of exchange between raw material inputs for domestic consumer good indus~ries and ~final-consumer--goods·was a major dilemma. Providing adequate goods at the appropriate time of the production cycle has been a paramount concern of the ERP, but so too has been the maximization of the beneficial impact on the internal terms of trade and the fostering of efficient industrial development. 72. The restructuring of the trade regime, in general, and of the foreign exchange system, in particular, has been one of the areas requiring most care with respect to the sequencing of reform. In 1987 and 1988, the pre-requisites for reform were not in place in three key respects: the exchange rate was substantially out of line; the domestic price controls were too rigid; and exchange control was exercised through quantitative restrictions with no role being accorded to the tariff structure. A more open system therefore had to await developments in these fields. A particular concern was that, after years of suppressed demand and given the , extreme scarcity of foreign exchange, massive excess demand might be a serious threat to the stability of any uncontrolled system, and thereby endanger the reform process itself. As noted elsewhere in this report, •• considerable progress had been made by mid-1989 in these three respects, and the inception of the SNAAD marked a major departure from the principles that had previously governed the trade regime. 73. Other inevitable concerns have perpetuated exchange controls. Foremost has been the concern that broadening the number of importers would ~ These attempted to take into account in a relatively crude •anner the do..stic resource costs of the enterprises that •applied for exchange. The indicators have, however, encountered operational problems which have li•lted their use. 66/ In 1988, various other schemes, including the Market Fund and Small and Medlu• lnterprise Fund were instituted, in order to facilitate greater flexibility In allocation. They were, however, still adllinistered schemes, dependent on the ad•lnlstratlve .. 1ectlon of recipient enterprises and with the price of exchange playing no allocative role. - 38 - lead to a loss of exchange through increased and uncontrollable over- invoicing, and through the provision of exchange to enterprises with no experience in international trade and without the capacity to negotiate fair trading deals. In addition, the potential impact on domestic inflation of a rapid adjustment towards a market-clearing exchange rate, particularly given the pent-up demand that prevails in the system, has led the Government to move with caution. 74. The SNAAD is the first significant step in the relaxation of trade controls. For those products selected for inclusion under the system, enterprises are now accorded automatic access to foreign exchange and to an .. import license, subject only to the adherence to basic conditions of registration. 56/ Regulation of the system is being conducted thro.ugh the price mechanism, with all quantitative controls being removed for these products and only the effective price being employed as the instrument of control. 57/ In this context, the appropriateaeas -of--the exchange ·rate and tariff structure are critical. The anticipated volume of exchange passing through the system is necessarily indeterminate ex ante, but the range of products has initially been restricted to allow the adequacy of the prevailing price to be assessed without the risk of destabilizing the system. Consequently, in the first year of operation it is expected that the system will handle approximately US$25-30 million, equivalent to a modest 3% of aggregate imports. 58/ 75. The second factor noted earlier that constrains the establishment of a freer trade structure is the nature of external assistance, and, most importantly, the tying of external assistance to specific exporters, importers, products and procedures. Indeed, the small proportion of exchange assigned to the SNAAD in its first year is itself a direct reflection of this factor. While the proliferation of specially-designated foreign exchange funds might theoretically be consistent with the relaxation of the allocation mechanism, such a relaxation is in practice impossible in practice given Mozambique's administrative limitations. Indeed, once the other pre-requisites for trade decontrol are more firmly established, the rate of administrative relaxation will be directly related to the progress towards untying aid. 76. Chapter X considers the future development of the foreign exchange allocation s1.stem in more detail. .. §!/ The selected products in 1989 Include inputs and spare parts for the transportation sector, and Inputs for the ga,...nt and shoe Industries. The eligibility condtttona for enterprises stipulate only that they auat be registered to produce the goods to which the selected products relate, and be current in fulfilling the national taxation and accounting requir...nta. !J./ In the first year of operation, due to the uncertainty surrounding the appropriate exchange rate and tariff, safeguard• are operating which unlforaly liait the total allocation to ..ch applicant. Th..• are to be subsequently reaoved. 68/ It should be recalled, however, that, tn 1987, tt was ..ttaated that le•• than 161 of iTI exchange sources were •free• tn the sen.. of being available for non-adatn1atered allocation. Thia figure excluded finance that was tied to specific contracts, and for which the use was pre-deteratned, and also finance that had been pr...pted by Covern..nt-deatgnated priority uses. - 39 - 77. Enterprise Sector. Improving the efficiency and productivity of the enterprise sector has been a major policy goal of the ERP. This policy has been motivated by several considerations, including the need to reestablish the enterprises on a sustainable financial footing in view of the heavy burden they have placed on the Government budget and on the availability of credit; the need to regenerate the agro-industrial processing sector to facilitate exports; and the need to regenerate urban production and raise productivity to improve the sector's international competitiveness. Of the macroeconomic policy already addressed in other .. context - notably in relation to credit and subsidy policy - a substantial part has had a direct and immediate impact on enterprise behavior. In general, however, the development of industrial policy has made slow progress, with little capacity existing until recently 59/ within the Ministry of Industry and Energy to evaluate industrial performance and assist in the formulation of policy. This issue is further considered in chapter X. In this section, progress is reviewed, especially in the field of enterprise restructuring in both the state farm and industrial sectors. 78. There are two principal problems in formulating enterprise policy: firstly, the rate of adjustment that can be demanded .in the present circumstances; and, secondly, the selection of enterprises that should receive preferential treatment given that the limited available resources necessitate a well-directed program of rehabilitation. The crux of .these problems is the extreme difficulty of determining enterprise efficiency. In 1987, operating conditions were so constrained that any economic analysis on the basis of present performance was only of marginal relevance. The sector was characterized by physical and pricing controls; extensive excess capacity; an obsolete capital stock; severe shortage of foreign exchange for either inputs, replacement parts or new capital; and inflated costs due to the insecurity. More immediate, however, was the scarcity and unreliability of the basic accounting data, which precluded any systematic analysis. In addition, with a substantial accumulation of arrears to the banking system, many enterprises were technically insolvent (chapter VI). .. 79. Despite these factors, Government policy has placed great pressure on the sector, including the state enterprises and the state farms, to operate under commercial conditions. In general, there has been a trend •• towards increasing the managerial autonomy of both state and private enterprise, but within a tightly managed financial environment in which indirect controls are exercised. Finance for operating losses is now obtainable only through the highly constrained fiscal subsidy; finance for investment is to be granted only by the banking system on commercial terms and subject to commercial criteria; and the re-establishment of competitive markets i s constraining price-setting behavior. In view of the entrenched behavior of the post-Independence period, a sudden reversion to commercial practices would seem unlikely, but with the existing program, enterprises appear to have little alternative but to adjust rapidly. One of the few 69/ In aid-1989, a special policy unit was established within the newly 111erged Ministry of Industry and Energy to advise the Minister on industrial policy. - 40 - remaining sources of finance is inter-enterprise debt, and, although there are no data in this respect, there is anecdotal evidence that this has increased. A further source of funds may have been generated by the diversion of conmercial bank credit from investment purposes into operational activities, though this is again impossible to quantify. Of the small and decreasing values of credit and subsidy made available for enterprises under the ERP, it is clear that these have become highly concentrated, and that general financial support is very small §.9_/. Of the remaining Government subsidies to enterprises, it is estimated that in 1988 around 50% were directly related to compensating operations for the •• effects of the insecurity. Furthermore, three enterprises (EDM, Navique, and the sugar industry) accounted for 53% of the total subsidy. In respect of credit, the sugar and cotton industries and CFM accounted for 78% of enterprise credit in 1988. 80. The expec'"fAd role of the State in the enterprise sector was broadly outlined in paragraph 7, and significant cnanges have occurred in the first three years of the ERP. Prior to the ERP, the grossly distorted official price system necessitated the participation of the state in agricultural production ~n order to ensure the availability of foo~ f~r the security forces. Food ~rocur.ement through the official marketing channels fell to extremely low levels, and the state farms were one mechanism for guaranteeing supply • . The emphasis on the state sector was not motivated by this factor alone, but, until price adjustments were effected and private supplies were made available to the official system, the only other alternative was for the State to purchase at unofficial prices. This was in any case the course pursued by many state entities. 81. The realignment of agricultural prices and the firm establishment of the policy of enterprise financial independence has enabled the Government to rethink its stance towards the enterprise sector. In agriculture, the number of state farms has been reduced from seventy in 1986 to around 16 in 1989, with the assets either being broken up and redistributed to the family sector, or transferred into private couunercial ownership. This reduction has resulted in a fall in the land managed by state farms from around 150,000 hectares to around 90,000 hectares, with future planned reductions expected to reduce the area to around 30-40,000 hectares. In general, it is planned that the remaining state farms should principally be concerned with seed production. These trends are necessarily reflected in the compositional output of the sector. Historically, the state farms have been one of the prime consumers of credit, and there are s~ill indications that the remaining farms are far from · self-financing. In particular, the resources of the Caixa de Credito Agraria para Desenvolvimento Rural (CCADR) now appears to have been channeled heavily towards the state farms (refer chapter VI). §!/ The relevant chapter of the Public Expenditure Review (World Bank, April e, 1989) expands upon th• role of budgetary support to the enterprise sector. On• disturbing developaent in 1989 was the extension of subsidized credit (at around 81 in aid-1989) by the Ministry of Finance to soae state enterpri ..s to cover their operating los.... This finance was provided fro• the counterpart funds accruing to the Qovern..nt frOII the donor progra... It Is not known how th..• flows are accounted for In the budgetary and aonetary accounts. - 41 - 82. With regard to the restructuring of industrial enterprises, the Government has pursued a mixture of policies, including rehabilitation and divestiture. Under the guidance of the newly-established Enterprise Technical Unit in the Ministry of Finance, a program of rehabilitation of the larger and most important enterprises has been initiated, and, as more external funding becomes available, it is intended to broaden this program. The selection of enterprises as recipients of the assistance has necessarily been ad hoc, but has been based on a prima facie judgement of industrial comparative advantage, and historic contribution to growth. The first two phases of the program were completed in January and July of 1989, with pre-feasibility studies and the detailed rehabilitation plans being finalized for the first five enterprises, 61/ and the pre-feasibility studies being completed for an additional ten enterprises. 62/ Financing for this program was made available in mid-1989, and the rehabilitation should couunence in 1990. Moreover, the Government has begun to regularize the legal status of intervened enterprises, with the intention of at tracting foreign and domestic investors. This should pave the way not only for essential inputs of foreign capital but also of foreign management capacity. Foreign investment has been further encouraged by the Foreign Investment Code that was introduced in August 1984 under the Economic Action Program. In_the case of mineral resources, for example, this empowered foreign enterprises to repatriate lOOt of post-tax profits; and made them exempt from dividend withholding tax, from import duties on equipment, and from export duties, as well as accelerated depreciation on mining investments. Taxes on profits were fixed at 50%, and royalties on gross revenues were set between 3-10% according to the mineral produced. 83. Public Expenditure Policy. One of the key concerns of the ERP strategy has been whether the mobilization of very substantial external resources has been justified. Despite the concessional or grant nature of these resources, two questions have arisen: firstly, whether the accumulation of further debt is warranted, and, secondly, whether the resources are being allocated and deployed efficiently. Elsewhere in this report, the first issue is addressed, and concludes that there is a legitimate need for external resources. The second issue was the focus of the Public Expenditure Review (PER) conducted in 1988, which addressed these concerns from a budgetary perspective. 63/ Moreover, it broadened the issue to consider the effectiveness with which both internally and externally generated funds were utilized, and included an analysis of both the capital and the recurrent expenditure issues. 81/ This first group Included Caju de Moza•bique, Madeira• de Cabo Delgado, Citrino• de Manic•, Celaoqu•, and Metal Box. 82/ Th••• include Medal Group, FASOL, Compagnhia Industria de Matola, Caraoc, IMA, ECOME, i5ROSUL, VAN LEER, FACOBOL, and Cimentos de Mozaabique. Under the IDA Industrial Enterprise Restructuring Project, which was presented to th• Board in Nov.. ber 1989, finance is now assured for the first stage of the prograa. 83/ Th••• issues are discussed in detail in the document •Mozambique: Public Expenditure Review• (dated April 8, 1989; World Bank, No. 7816-MOZ), - 42 - 84. Over the ten year period 1977 to 1987, development priorities underwent a fundamental change, which has been documented elsewhere.§!!./ By the time of the Fourth Party Congress of 1983, the Government was already emphasizing the importance in both agriculture and industry of improving the utilization of existing resources, on rehabilitating the existing capital stock, and on the completion of on-going projects rather than on the expansion of the capital stock. New investment was to be permitted only if the projects met three criteriaa they met acceptable technical, economic and financial viability standards; they brought a positive contribution to the balance of payments; and they were assured of having the necessary real, financial and manpower resources. These basic principles guiding capital expenditures were reiterated in the ERP, in which priority was once again accorded to the completion of the most productive ongoing projects, rehabilitation and maintenance expenditures, and to projects capable of quickly yielding or saving foreign exchange and showing a high rate of economic return. 85. Without exception, the PER restated and endorsed these objectives. It did, however, note that the current investment program only partially reflected the implementation of these criteria. In particular, the 1988-89 investment program contained several large and complex projects, notably concerned with the construction of dams and irrigation schemes, for which donor finance had been secured, but which were questionable on economic grounds, and appeared to stretch the limited implementation and operational or maintenance capacity. In part this merely reflected the existence of on-going projects that had been initiated prior to the redirection of policy, but a major concern was expressed that the program was too greatly determined by the •vailability of finance, with too little regard being given to the other critical criteria. In general, acceptance of projects has not been conditional on compliance with all the criteria. In addition, adhering to the adopted criteria to maximize the efficiency of the resource utilization is made more problematic by the paucity of adequate data. The monitoring and recording of project expenditures has been extremely poor, and therefore the assessment of projects is rendered highly subjective. Nonetheless, it was apparent that many projects suffered from severe implementation problems due to material, manpower or planning inadequacies, which precluded the maintenance of the expected efficiency levels. 86. Institutional strengthening was therefore the dominant theme of the PER, with the reconmendations being directed, in part i cular, at ensuring, firstly, a closer adherence to the specified cri teria for new investment in the planning stage; and, secondly, a more rigorous control and monitoring system. In addition, the report concluded that the Government and the donor coJ1111unity had a joint responsibility to ensure that these recommendations were fulfilled in the utilization of the available funding. Detailed reconmendations in both these areas are presented in the report itself. ~ In particular, ... •uozaabique: An Introductory Econoaic Survey• (dated June e, 1981; World Bank, No. 6811-MOZ). - 43 - 87. The principal cross-sectoral recommendations of the PER are swmnarized below, and an indication is provided of the extent to which they have been implemented by early 1990: A. Expenditure Planning (•) inveat..nt project• to be evaluated and prioritized with respect to thr.. criteria: 1. economic justification; 11. capacity for i•pl ...ntation, .. tntenanc• and operation; 111. availability of finance. · [stricter adherence to criteria being i•pl ...nted] (b) prepare three-year tnveat..nt progr... [final draft to be coapleted In •ld-1998] (c) prepare three-year financial plan. [final draft to be coapleted In ald-1998] (d) prepare overall and sectoral expenditure atrateg1ea 1 with explicit consideration of priorities and trade-offs. [initiated In aoae sectors] B. Institutional (•) strengthen budgetary departments of the Ministry of Finance. [initiated] (~ strengthen inveat..nt and project appraisal capacity and coordination betw..n the Ministry of Finance and the Planning COINlllaalon. [initiated] (c) strengthen sectoral Ministries planning, budgeting, project appraisal and •onitoring capacities. [initiated] (d) prepare .. npower plan for development of public resource .. nag...nt. [no progr•••l (•) establish database on on-going projects for aonitortna and ~nt.ro f... purposes. [initiated] - (f) establish database for investment projects under evaluation. [in1ttated] (g) l•prove external debt database. (h) introduce progr•• budgeting to encourage perforaanc• oriented budgeting. [background work tr preparation; long tera objective] C. Public Enterprise Finances (a) institute automatic price/tariff adjuatllleht to reflect~oat changes. [operative] (b) l•prove enterprise accounting practices. [initiated; long tera objective] (c) adopt ..aaurea to enhance enterprl .. operating efficiency. [Initiated; long tera objective] (d) develop strategy to handle insecurity-related lo••••, particularly of capital equipment. [not yet systematized] (•) develop strategy to encourage private participation in public enterprises. [not yet ayate..tized] 88. The principal sectoral rec ommendations of the PER are summarized below, with specific attention being given to those that were directed at enhancing resource allocation. An indication is again provided of the degree of implementation by early 1990. A. Agriculture (a) prioritize the prov1a1on of agricultural support services. [i•plemented] (b) develop Irrigation Master Plan, revise existing plans for irrigation development, explore options for amall-acal• low-coat ..thoda, reallocate resources to rehabilitation, operation and ••intenanc• of existing irrigation capacity. [to be co•pleted by •id 1991] (c) r..xa•in• new and rehabilitation capital-intensive projects to ensure econoaic justification. [initiated] (d) restore reaponaiblllty for the budgets of new agricultural funds to th• Ministry of Agriculture to ensure sector priorities are ..t. - 44 - B. Transport (a) develop an overall atrategy for the aector, with due account for the security, ..nag...nt and financial conatrainta being taken . [Initiated] (b) prepare• three-year rolllng lnv..taent plan on the baala of the aector atrategy, and on th• detailed evaluatl on of proJecta. [not yet Initiated] (c) devote gr..ter reaourc•• to road .. 1ntenanc•, -lected n" roads, and coaatal ah l pplng aubaectora. [ini tiated] (d) prepare a rehabllltatlon progr•• for airport teralnal• and runwaya. [not yet Initiated] (e) prepare a ..npoNr developaent plan for al I aodea. [initiated for ral lwaya] (f) strengthen enterprla•'• flnanclal poaltlon through the laprov...,.t of accounting and financial ..na~t, and u- of coat-baaed tarlffa. [not yn Initiated] .. C. Health (a) aoblllz• donor funding for recurrent expenditure• to ...t the ahortfalla froa doaeatlc r..ourc... [Initiated] (b) r.. llocate peraonnel froa adalnlatratlon to -rvlce provlalon, and further revi .. reallocation of expendltur.. froa aalarl .. to other recurrent expen•••· [to be undertaken In 1991] (c) laprove the efficiency with which hoapltal pharuceutlcal ••rvlc•• are provided. [plan under preparation] (d) prepare training plan. [to be undertaken In 1991] (e) reorganize and strengthen Mtnlatry of Health to reduce overlapplng of function•, laprove expenditure progra.. lng and control, iaprove ..n a ~ t capacity, and introduce financial information .. nageaent ayatea, [initiated] (f) revi .. operation and poaalble adv•r- repercuaaiona of coat recovery ach.... [completed] D. Educet I on (a) planning, budgeting and financing: ( I) prepare ten yNr eduction sector developaent plan . [coapleted] (ii) draft three-y.. r inv..taent prograa, reflecting aector priorltl••· [largely COllplned] (11 i) develop projection model for vocational and technlcal education, [to be coapleted by 1993] (iv) prepare ten year plan for higher eduction. [to be c011pleted by 1992] (v) revi" allocation of recurrent expenditure•, Including aalary and Incentive structure; and revt .. operation and poaalble adver•• repercuaalona of coat recovery ach.... [Initiated] (vi) coordinate donor support for the priorities of the develop1119nt plan and mobilize recurrent expenditure and rehabilitation flnance.[lnltlated] (vii) establish aechani .. for control and monitoring of expendltur... [proposal under preparation] (b) ••rvice del Ivery: ( I) (11) revi" claaarooa equipaent need• and ava l lability. [not yet Initiated] revl .. training needs, and laprove coordination aaong training .. sch..... [Initiated] (11 i) initiate ach...a to explore and evaluate alternative ..thoda of providing aervicea. [not yet initiated] (iv) revi" ..nag...nt structure and role for decentralization . [propoaala prepared] (v) revl" poaaibility of aoving froa three-ahift to two-ahift ayatea. [revi ..ed; I ahift to be aaintained for now] (vi) ..tabliah student achlev...nt teatl ng ..chanl... [teat to be conducted in 1998] (vi I) iaprove coordination be~..n aubaectoral planning unit.a and with Emergency Progr... [latter initiated] - 45 - E. The Evolution of External Assistance and the External Account 89. The third principal component of the ERP focusses on the mobilization of external resources to complement the policy reform. In this section, the evolution of external assistance is reviewed, and the impact on the external account is analyzed. In the subsequent section, the degree of external dependence is further considered. 90 - . The Evolution of Imports. The basic strategy of the ERP has .. necessitated an adequate flow of incentive goods, primarily to the rural areas of the country, and a comprehensive program of capital equipment and infrastructural rehabilitation. Given the weak productive-base of the economy, the availability of adequate external real resources and external financial assistance has been a pre-requisite for this aspect of the ERP strategy. It is apparent ·from Table 14 ·that the implementation of this policy pre--dates the major reforms of. 1987 ,- since the rapid growth of imports and the associated growth of external capital flows was clearly initiated in 1986. Table U. The Evolution of Import• and External Aseistance, - - . Actual Actual p....., . 1980 1981 1982 1983 1984 1985 19841 1987 1988 1989 I1111ort.a ~current.) 800.2 801.l 835.9 1341.4 589.7 423.7 542.8 825.0 7111.0 7H.O I1111ort.a conat.ant.) 100.0 100.l 112.l 87.8 78.4 13.2 84.0 81.3 92.1 95.5 HLT loan plua grant. inff..., 569.0 na.8 804.0 428.9 432.8 317.8 497.0 . 806.3 1198.7 556.0 I1111ort.a (I fin. b~ HLT plua 89.9 98.8 98.2 17.~ 80.1 BG.II 91.8 98.8 83.5 85.5 grant infl..., ) . Ea,ort.a. I I1111ort.a (I) 311.1 311.1 27.4 20.7 17.7 18.1 14.11 15.5 14.4 12.0 Aeer... t.e external capital a.. iatance (U&lbn) [1] 0.569 o.n8 0.804 0.714 0.851 0.714 0.979 1.089 0.91H 1.053 Co111Poait.ion of ao9reoat.e foreign e•chano• ,nfl..., CS) : 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 HLT p I u• gran\ 1111.3 82.8 88.7 42.4 40.8 41.0 42.2 411.8 47.8 50.4 Deb\ relief 0.0 0.0 0.0 o.o 20.0 21.5 o.o 31.8 31. 7 0.0 Arr"ea,.a o.o o.o o.o 28.2 19.3 17.0 41.0 o.o o.o 30.8 Export.a 27.8 22.7 19.0 13.0 9.0 8.11 8.7 7.3 8.2 7.1 Service recei,ta 18.9 14.11 14.2 18.4 11.1 11.9 10.1 10.4 12.11 12.0 .. Coapoa i t. ion of i 11POrt.a (I) : Food Non-food con..,_r oood• 100.0 13.11 11.9 100.0 14.3 8.0 100.0 13.8 8.3 100.0 20.8 7.3 100.0 25.0 8.7 100.1 28.8 10.8 100.0 27.11 100.0 28.8 98.7 25.8 98.2 23.9 15.1 10.8 11.4 18.7 Pl"'i-ry -M.riale 4a.4 411.8 45.3 ae.4 311.8 38.3 28.9 28.8 25.1 25.3 Spare part.a . 7.1 13.0 12.9 18.8 13.2 11.0 12.5 14.7 14.8 11.9 Capil>atl equip...,\ 19.1 18.9 21.7 19.1 17.3 11.11 11.l 18.9 21.0 18.4 [1] · Eat.ernel capital a. . iatance I• defin ... to be the infl..., of grant.a, HLT loen• and debt. relief. It alao inclu~ .. arreara) • .. 91. The 1980-82 period saw a modest improvement in external capital flows and this facilitated a comparable growth in imports. Over the 1983- 85 period, however, there was a dramatic collapse in both capital and real external inflows, which mirrored the collapse of the domestic real economy. Medium and long t~rm capital inflows fell to 32% of the 1982 peak level, and, despite the continued growth of official grants throughout this period, the aggregate inflow from these sources more than halved. Moreover, net MLT inflows turned negative in 1984. Consequently, import values fell to only 51% of the 1982 peak level by 1985, which represented a decline of almost 45% in real terms. At the disaggregate level over the - 46 - same period, capital imports fell to only 27% of their earlier level, and spare parts and raw materials to only 44%. Non-food consumer good imports had already been halved over the 1980-82 period, and thereafter fell more modestly. 65/ 92. Impressive progress has been made since 1985 in mobilizing external assistance. Aggregate grant and loan inflows in 1989 totalled US$0.66 billion, representing an increase of 78% over the 1985 figure, and _ exceeding the annual average for 1980-82 of US$0.71 billion. MLT loans and grants therefore accounted for over 50% of the aggregate foreign exchange inflow in 1989, compared to an average of about 40% for the 1983-86 period. .- It was, nonetheless, still well below the average 60% of the 1980-82 period. On the other hand, grant finance grew more rapidly than MLT loans, thereby leading to a more favorable composition of external finance. Grant flows accounted in 1989 for 58% of total inflows compared to 38% in 1985, and 10% in 1982. Imports have followed a parallel tr,nd t~_;hat of aggregate capital flows, increasing by 80% in value terms in the 1985-89 period, and by an annual average in real terms of 10%. Underlying this rapid import growth has been a concerted implementation of the ERP strategy. Non-food consumer good imports have be,n increased by over 200% in value terms between 1985-88, 66/ and ~~pital equip~ent and spare parts have jointly increased by over 140%. On the other hand, the values of raw material imports has increased by less than 20%. This highlights one of the fundamental dilemmas of the ERP in a situation of administered foreign exchange allocation: whether to meet the urgent demand for incentive goods through imports at the cost of reducing the beneficial impact on the internal terms of trade and of hampering the recovery of efficient domestic production, or whether to maximize the impact on the tenqs of trade and on domestic industry at the cost of hampering the response of the agricultural sector to the policy reform. There is a further critical issue facing the Government in that the import reliance of the economy is now extreme, with imports standing at around 90% of GDP. This issue is considered in more detail below. 93. The Evolution of the Debt Burden. Prior to the initiation of the ERP, debt was still being contracted on non-concessional terms and this contributed appreciably to the growing debt service burden over the 1980-86 period. §1./ Between 1980-82 new MLT loans of almost US$2 billion were contracted, and this was instrumental in the quadrupling of the debt service ratio (pre-arrears and pre-debt relief) from 32% in 1980 to almost 130% in 1983. The 1984 Paris and London Club agreements responded to the huge arrears that accumulated in 1983, equal to 75% of the debt service liability of that year. These agreements were inadequate to avert continued service defaults, and, in 1984-85, despite debt relief equivalent §j_/ Food iaport• changed little over th• 1982-86 period, but, with the oneet of the Eiergency Prograa, th••• official data are aleleading. Covern..nt balance of payaente data exclude in principle the iaport• under the Eaergency Progr... !!f Th• lat.at available data are for 1988 for th• coapoeitlon of laporte. §1/ Further non-conc•••ional debt ha• been contracted •Inc• 1987, bu~ It haa been aeverely r..tricted to 1... than US1&8 ailllon over a rolling thr.. y.. r period. - 47 - to 48% of the total liability, arrears were incurred equivalent to 43% of the liability. The pre-relief debt service ratio continued to rise and peaked at 248% in 1986, when 98% of the debt service obligations went into arrears. In December 1986, the aggregate debt stock stood at US$3.2 billion, having increased from US$1.83 billion at the end of 1983. Of the total stock, US$0.7 billion was in arrears. Table 1&. The Evolutton of the Debt Burden. US I ailli- [current] . Actual 1980 1981 1982 1988 1984 1985 19INI 1987 1988 1989 Schedulecl deltt . . rvice 145. 0 345.1 389.1 184.7 418.7 395.9 490.2 532.2 494.9 450.5 r.· Stock of deltt ltniJi. of l "··· n.a. "··· n.a. "··· "··· 1.83 80.2 2 . 39 94 . 1 2.79 82.3 3.11 71.5 4.00 283.0 4 . 20 335.4 4.57 351.4 A.• of acheduled . . rvice: 0.1,t . . rvice pay•nta 100 .0 100.0 100.0 25.8 o.o 12.7 1.1 9.2 19 . 8 11.7 O.ltt relief o.o 0.0 0.0 0.0 50.9 48.7 o.o 90.8 80.2 0.0 Af"rear• 0.0 o.o o.o 74.2 49 . 1 38.1 98.4 0.0 o.o 88.3 Deltt . . rvlc• ja• • of >CCS), pr- elt1' relief) . 32.1 75.1 97.3 129 . 4 195.9 215.5 247.5 227.4 190 . 1 181.7 O.ltt. . .rvice (aa • of XCS), poet.-deb1' relief) . 32.1-· 75.1 97.3 129.4 91 . 2 110 . 5 247 .5 20.8 37 . 8 181 . 7 Cranta •• • of HL.T loan• plua grant. 10.0 7.4 9.9 20.9 38.8 37 .8 42.9 50.3 11 . 0 68.0 Av. t.er• of n- HLT loan• 94. In the first three years of the ERP, Mozambique has contracted almost US$0. 8 billion in new MLT loans. This, however, was virtually all on concessional terms. Nonetheless, the accumulated burden necessitated a further rescheduling, which was agreed in principle with the Paris and London Clubs in 1987. In consequence, a further US$1.3 billion was received in debt relief, reducing the original three year aggregate liability for 1987-89 from US$1.5 to only US$0 . 2 billion in payments effected. This debt relief amounted to about one third of the aggregate foreign exchange available to the economy in each year. It is apparent, however, that despite the restriction of new debt to that available only on ,. concessional terms and despite the rescheduling agreements, the debt burden continues to be a significant and growing problem. By the end of 1989, the stock of accumulated debt already stood at US$4.7 billion, equal to 366% of •• GDP. Moreover, while the pre-relief debt service ratio has fallen steadily since 1986 from 247% to 182% in 1989, the post-debt relief ratio already displayed a strong adverse trend. Between 1987 and 1988, it jumped from 21% to 38%, and the projected trend continues to be upward, albeit at a declining rate (see chapter X). Moreover, this assumes a relatively buoyant recovery of both visible and invisible exports over the same period. 95. Other Components of the External Accounts. For most of the 1980s, the external account has been dominated by two major aspects: the evolution of imports, and the evolution of i~terest and capital flows. The striking omission is the contribution of exports. In the 1980-82 period, export values only averaged around 32% of import values, but in the ERP period of 1987-89 exports have averaged barely 13%, having averaged 16% in ·the 1984- - 48 - 86 period. In the short to medium term, it is clear that exports will not be a major contributor to the restoration of external stability. This will depend on the continued flow of concessional capital, and on the receipt of improved debt rescheduling terms or debt reduction. Nonetheless, for the longer term, exports are critical, and the development of exports and their obvious relationship to the restoration of the productive base is considered below. 96. The pre-Independence characterization of the external account was of a significant surplus on the service account, especially from transport •• receipts, offsetting the imbalance on the trade account. Even in 1980, this was no longer true, with a net non-interest service surplus of around US$100 million .and a trade imbalance of over US$500 million. With the rapid deterioration of the security situation, transport revenues declined to be only 37% of the 1980 level by 1984, and were roughly stable until 1987 at this low lPvel. Furthennn~A , the deepening of regional tensions over the 1985-87 period led to the South African Government's refusal to renew the work permits of Mozambican miners, and, although the measure ceased to be enforced in 1988, there was nonetheless a serious decline in workers• remittances. Consequently, the non-interest service accDunt showed a marked decline, ancl..f.ell into deficit in 1985 for the first time. Since 1987, a modest surplus has been~ecorded as workers• remittances have recovered to regain the previous peak level of 1983, and as the rehabilitation and defense of the Beira Corridor has facilitated an increased traffic flow. 97. The Evolution of Aggregate External Accounts. As the foregoing discussion implies, the trade balance ha: ~~en dominated by the trend in imports. Consequently, the imbalance declined sharply between 1982-85, and has since increased rapidly, almost doubling over the 1985 to 1989 period. Such is the divergence in the absolute values of exports and imports that reducing nominal trade imbalance now necessitates a substantially higher growth in export values vis-a-vis import values.~/ With exports at only 12% of import values, the need for external finance will be protracted. From one perspective, there is a degree of automaticity about financing the trade imbalance, since, in the absence of pre-arranged external aid, imports would fall pari passu and the imbalance would be reduced accordingly. In this case, the crucial requirement for a sustainable economic recovery is the maintenance of aid levels, since alternative sources of finance are minimal. With the non-interest service surplus .. being eliminated by 1985, and with interest payments growing progressively from a negligible level in 1980 to US$150 million in 1986, the improvements to the trade account were largely offset. Consequently, the current account changed little between 1980 and 1985. Thereafter, in the ERP period, import finance was rapidly mobilized, the interest burden remained high, and the non-interest service account remained almost in balance. The current account therefore showed a marked nominal deterioration, with the deficit increasing by over 70% in nominal terms between 1985 and 1989 , ~ In 1989, expo~ and iaporte were valued at USl121 allllon and USl861 bllllon rNpectlvely. For ~e trade balance to r... ln con.tent in noainal teraa would require export value• to grow at aore than aeven ti . .• the 1aport value growth rate. - 49 - More importantly, given the basic ERP strategy, was the trend in the overall deficit. After escalating alarmingly between 1980 and 1986 from about US$30 million to about US$490 million, it fell below US$400 million on average in the 1987-89 period, as external finance was more consistently secured. Table 18. The Evolution of the Exter'nal Accounts. US I ailli- [CUf'f'ent] , Actual ... 1980 1981 1982 1988 1984 19811 1988 1987 1988 1989 T,..,la llalaftce -519.4 -ao.a -IOl.7 -!504.8 -444,0 -M7. 1 -418.5 -ua.o -e12.o -174.0 Net ,,__ i nte,._t lta I anc• 102.5 91.7 91.1 88.1 48.7 24.4 -4.0 0.4 aa.5 15,5 Int.f'eat account -e.1 -U.9 -so.a -88.2 -80.9 -117 .4 -154.7 -148.1 -111.7 -158. 7 eu ....... t tleficit -428 -4&4.5 -575.9 -!504.9 -471.2 -440.1 -IZZ.2 -175.7 -181.5 -752.2 Capital infl-• 420.1 411.4 474.7 132.4 94,1 119.a 111.5 ZZ1.2 211.5 au.2 Other' net infl-• -29,I -70.1 -42.a 9.2 25.1 -12.7 -27.2 29.8 45.5 -15.4 o•• ,.al I tleficit -82.5 -u.2 -148.5 -au.a -855.8 -ua.4 -487.9 -425.2 -872.5 -404.4 F. The External Dependence of the Economy 98. Two key questions were raised in paragraph 17 regarding the appropriateness and need for the substantial external and internal imbalances that are entailed by the current strategy, and whether a strategy that depended to such a great extent on external assistance was sustainable. The justification and evolution of the macrobalances was considered above: the second issue is considered here. It is clear that even in 1980 and 1981, which were the peak years in post-Independence economic activity, the economy was heavily reliant on external support. In 1981, around 63% of the foreign exchange available was attributable to external grants and loans, and grant and MLT loan flows were equivalent to almost 97% of imports (Table 14). In addition, export revenues were then barely a third of import revenues, and, unlike the pre-Independence era, , net transportation receipts financed only 12% of the trade deficit. Moreover, the debt service ratio already stood at 32%. . 99. As the foregoing sections have noted the degree of dependence has increased markedly since the early 1980s in two respects: firstly, in the servicing of the debt burden; and, secondly, in the flow of emergency resources. The extreme dependence on donor finance for imports tnat was exhibited in the early 1980s has not shown any major change. Having fallen marginally in the 1983-85 period, it rose to exceed 95% again in 1987. Similarly, as was noted above (paragraph 92), the share of grants and MLT loans in aggregate exchange inflows dipped in the 1983-85 period, but increased again in 1987-89, although it still stood below the levels of 1980-82. The trend to increasing dependency is clearly indicated by the increasing resort to debt relief and arrears to finance the debt service burden; and by the increased dependence on external emergency assistance to supply the required food need. The capacity of the Government to diminish the degree of external reliance rests on the rate of recovery of domestic production. With the ERP strategy defining the required resource flow, an - 50 - improving external account hinges on the progressive restoration of exports and on the bolstering of the import competing industries. In the short- term, the contribution to the external account of export revenues will continue to be marginal, and the key determinant of the rate at which imbalance is diminished will be the level and growth of imports. Table 17. Selected Indicator• for Sub-Saharan African Countrl .. - 1988. HIIZNIIIQUE toFS/ QDf' [1) 75.5 Sch..,u,.., -rvice/ [2) 221.3 delt\ xa& o., Stock/ CDP [3) 3418.9 - ON\ allOCk/ [4] 1778.7 82.0 .~ Zi••.,.. 25.5 aa.3 47.8 172.9 13.5 Halewl ao.e 47.4 99.9 461.3 u.a Tanzania 48.0 71.7 158.2 NI.I 51.9 31.0 51.8 171.1 535.5 Chene 25.5 113.2 11.2 332.9 S-lia 32.4 141.1 204.9 2521.5 70.1 Kenye 25.8 41.7 73.9 335. 7 25.9 Note: I""'orta of _.ia and non-factor -rvic- ea a ra\lo of COi". Debt . .rvice •••ratio of eapor~ of aood• an~ . .rvic... Deb\ out.etanding and diabur. .d aa e ratio of CIDP, m Debt out.etanding and diaburaed ea a ratio of e1porta of _.ia and -rvlc... Oran\, HLT loan infloa and deb\ relief•• a ra\lo of aggregate forel., ••change infloa. 100. The role of imports. Although imports have explicitly been accorded a central role in the economic strategy, there is a major question concerning the import dependence of the economy. The trend in the ratio of imports to GDP during the 1980s is grossly misleading due to the underlying evolution of the official exchange rate. 69/ Nonetheless, with the 1988-89 official exchange rate reflecting a more sustainable market rate, the 1989 ratio is a reasonable indication of the import dependency of the economy. Moreover, while the official exchange rate greatly exaggerates the trend, the basic profile of declining dependence over the 1982-85 period, followed by a sharp increase during the ERP period, is broadly accurate. 'While this ... trend demonstrates the success in mobilizing external support, the comparative data of Table 17 shows the extreme nature of Mozambique's reliance on imports, and, indeed, on external assistance in general. 70/ .. The sample of countries in the table has an average import ratio of about 30%, with Mozambique having a ratio between two and three times greater. 101. The balance of payments data, from which the Mozambique import ratio is derived, is an underestimate of aggregate imports since it excludes the external resources made available under the Emergency Program. Significant quantities of food aid were imported immediately following 89/ At the official exchange rate, the ratio fell fro• an annual average of 361 In 1981-82 to 141 in 1985-86, and has sine• risen to alaost 611 in 1987 and an anticipated 881 In 1989. ~ The data her• are only indicative, since they suffer fro• obvious problems of coaparabllity; notably, as for Mozaabique, the appropriateness of the official exchange rate• is probl ...tic ln several instancea. - 51 - Independence in 1975, and grain assistance averaged almost 100,000 tons per annum over the 1975-80 period. Since the intensification of the regional insecurity problem and the sequence of climatic disasters, food aid has grown rapidly to average 200,000 tons between 1981-86, and reached over 500,000 tons in 1988. In addition, non-food aid has formed an integral and growing component of the Emergency Program, providing logistical support for the food distribution process, and meeting urgent needs in the -·- provision of social services. J.l./ Determining a valuation f~r-the- assistance is extremely difficult, and this explains the exclusion- of aid from the official accounts. The following table gives a broad indication •• of the magnitude of the aid inflows since 1980. The methodological assumptions are inevitably crude given the paucity of the data, -1!/- but it suggests the approximate scale of Mozambique's aggregate imports including the emergency aid. In particular, the emergency import estimate is based upon international prices rather than the donor-supplied valuations, in order to reflect the approximate cost to the e~omy were the ..importation to have been undertaken through normal commercial channels. 73/ • 102. These indicative estimates suggest that emergency imports have grown from between 5-10% of aggregate importa in.the early 1980s to between 15-20% in the 1985-88 period, and in 1988 added between US$150-200 million to the balance of payments total imports of ·U5-$-r15 million .~· Th.is ·is equivalent to adjusting the share of imports in GDP in 1988 from 60% to around 75%. 103. Chapter X pursues the likely course of these macroeconomic aggregates in greater detail, but it is an explicit conclusion of this analysis that there will continue to be a very heavy reliance on external aid if the basic strategy is to be continued, irrespective of the evolueion of the Emergency Program. Indeed, it is argued later {chapter X) that the Emergency Program is structural in nature and therefore requires integrating within the ERP. The sustainability of the current levels of support and, particularly, their augmentation is necessarily uncertain. In recent years, there is strong evidence of support, as evidenced by the consistent and rapid increase in external grant and gross loan inflows. The continued commitment of the donor community is a pre-requisite for the .. 71/ In the UN-•ponaored appeal of April 1988, th• total requ••t for 1988 wa• for USl332.8 iiiilllon. Of thi•, 661 wa• for food aid, 261 for logi•tical •upport, 71 for agricultural need•, 41 for health need•, with the re•idual 91 •plit betw••n relief and •urvival, water, education, r..ettlement, and in•titutlonal requirement•. "!:ii The ••timate• w•re built-up froa th• principal component•. Gov•rnment data for the volume• of emergency grain ( Minl•try of Con11erce; ... al•o Food S•curity Study, 1989) were valued at the prevailing international pric•, and converted to an e•timated aggr•gate food inflow u•ing the 1988 •hare of grain• in aggregate food. The 1988 value of non-food •••iatance wa• ••timated for ••ch component fro• th• Government data of th• proportion of the Initial requirement that had been met In the firat ten month• of the •emergency year•. The Initial requlr...nt• wer• •tat.ct in the UN 'Emergency Situation In Mozambique, 1988-89'; and the proportion• 11et w•r• atated in the UN 'Emergency Situation in Mozambique, 1989-98'. For thereat of the period, food aid and non-food aid were •••uaed to maintain conatant ahar•• of aggregate aid. Thia would tend to overatate the aid in the early 1988•, when non-food aid played a le•• central role. 7-_j_/ The adjuated balance of payment. to Incorporate the Emergency Progra• would alao Tncorporate th• financing flow: na.. ly, an offaetting grant flow. - 52 - strategy to be effective, and, in view of the strong support for the ERP voiced in the Consultative Group Meetings of 1987, 1988 and 1989, J..!/ the Government has determined that the funding of the program is sustainable, albeit subject to an inevitable degree of uncertainty. 104. In the event that the existing levels of external assistance were unsustainable, the Government commitment to the policy components of the ERP strategy would probably be retained, although it might be anticipated that the rate of implementation would decelerate. The most serious impact would be on the prospective response to the policy program. Quantification of this repercussion is hazardous, but the qualitative impact is clear. ... The rate of recovery would certainly be drastically reduced, and, if the supply of incentive products became too erratic or were very small, and were available only at exorbitant prices as in the 1985-86 period, it is doubtful if the policy reform would be sustainable. The outcome would hinge on the responsiveness of the domestic industrial sector and i~e ability to rapidly supply the rural areas, but existing capacity constraints suggest that this will be a protracted process. In the meantime, the adjustment program would impose costs on the urban populatii>D, with the prospect of only a lengthy transitional period until rural incomes have revived sufficiently to generate a growing surplus. This scenario is pursued further in chapter X. Table 18. E•tl ..ted aaar•aate l•port and arant flow•, Including the Emeraency Proara•. 1980 1981 1982 1983 1984 1985 19841 1987 1988 1989 Aeoreeate adj uat..cl i ..,ort.a 840.2 845.1 907.9 770.4 879.7 514.7 826.t 738.0 892.0 Eaeroenc, Prooraa i -r• 40.0 14.0 72.0 134.0 140.0 91.0 84.0 113. 0 177.0 Nan-Eaeroenc7 Proa i ..,orte 800.2 801.l 835.9 a:sa.4 539.7 423.7 542.t 825.0 715.0 788.0 Food 108.0 114.4 1115.7 130. 9 134.7 121.0 149.l 187.8 187.2 188.8 Nan-food canau-r eoocl• 915.4 a .9 52.8 48.8 47.2 415. l 82.1 87.7 82.5 148.0 Pri-r)' -teriala 387.4 387.1 378.4 231.7 193.2 182.3 158.8 179.7 185.4 197.3 St,are pert.a 58.7 104.4 107.15 105.15 71.0 48.8 87. 7 91.9 107.15 92.5 c:.,1u1 -1,-,11 152.15 151 . 3 181.8 121.7 93.15 48.7 87.2 118.1 152.4 143.15 Ae a propOf"t.lon of •aar•e•t.. atlj-t.acl i-rt.a: Eaeroenc, I _rt.a Nan--roenc, i -rt.a 4.8 915.2 7 .4 92. 8 7.9 92.1 17.4 82.8 20.8 79.4 17.7 82.3 13.4 N.8 15.3 84.7 19.8 80.2 ... Aooreeatoe acljuate,1 orant.a plua HLT infl-• Aeoregate acljuatecl grant.a 599.0 95.9 839.8 121.4 878.0 1151.4 1582.9 223.8 1572.8 307.8 4158.8 230.0 581.0 297. 0 718.3 417.2 773.7 541.2 .. Eaeroenc7 Proara• orant.a 40.0 84.0 72.0 134.0 140.0 91.0 84.0 113.0 177.0 Nan-EaeroencJ' Proo grantoe 55.9 57.4 79. 4 89.8 187.8 139.0 213.0 304.2 384.2 380.0 Aa a proporti- of aggreoate atljuat.atl HI.T/orant inflow: Eaerganc7 Proor•• orante 8.7 7.8 8.2 23.8 I 24.4 19.8 14.5 15.7 22.9 Nan-Eaeroenc, Proa grant.a 9.3 8.8 9.1 15.9 29 .3 30.3 38.7 42.3 47. l ----------------------------- [l] The elate for 1989 are proviai-al , ~ Th• conclusion• of the 1987, 1988, and 1989 ...ting• are contained In thr.. docu..nt•, ..ting for Moza•blque; Chairman'• Report of Proceeding••, (dated Feb. 'l'con•ultatlv• Group w 1988, Feb. 1989, and Mar 1998), Th..• report• reflect the strong •upport for the objective• and •trategy of the ERP. - 53 - 104. The Cash Flow Problem. There is an additional dimension to the external financing problem that is not inmediately apparent form the balance of payments discussion so far; namely, the cash flow problem. While the ex post cash gap ].1/ must by definition be zero, the ex ante projections that have been made throughout the ERP period have consistently indicated a cash shortfall. This raises the following considerations: .. through what mechanisms has this gap been financed ex post, and with what implications; and through what mechanisms should the cash gap be closed in future. -. 105. In Table 19, an indicative cash flow projection for the 1987-2000 period is shown. The projection is necessarily sensitive to the underlying a.ssumptions, and these are discussed further in chapter X (scenario 1). The first issue raised in the preceding paragraph is demonstrated by the experience of 1989. It was initially anticipated 76/ that there would be a cash gap of US$41 -million in 1989, with the expected cash sources contributing only 80% of the total expected cash needs. The attainment of the ex post cash -balance was clearly due to a major change in the debt service payments, which fell US$90 million below the projection. This change, in turn, reflected an downward revision of US$65 million .j.n !~~ debt service liabilities, but. was largely attributable to the arrears of US$397 million, which exceeded the expected debt relief by US$25 million. This additionally compensated for the US$30 million fall in exports relative to expectations, and the increase in cash imports. 111 Thus, in 1989, the ex ante cash gap was filled through arrears. 106. The lower section of Table 19 presents the full finance gap, inclusive of both the cash gap and import finance gap. This assumes that the sources of finance identified in the top half of the table are allocated in priority to the financing of the cash gap, allowing the import finance gap can be estimated as shown. In 1989, it was originally estimated that there would be no import gap, and an overall financing gap of US$41 million. Ex post, there was a shortfall in donor funding and consequently in aggregate imports. The import gap was necessarily zero, with the residual adjustment appearing in the error and omissions. , ~ The caah gap la defined to be the dlacrepancy betw..n the aggregate aourc.. and . aggrega~• u..• of •caah• foreign exchange. Caah lnflowa are defined to be all aourc•• of exchange other than tho•• contributed by ex~rnal donor•, and for which a prede~n1lned uae and al location procedure ia defined. They therefore Include export and net aervlc• receipt•-, and IMF financing: that ia the financing for which the Covernment atill retain• direct control over lta utlllzation. Caah outflow• Include the build-up of reaervea, the payaent of debt aervlc•, and caah l•porta: that la, tho•• u..a which •u•t be financed by the Covern. .nt froa lta own reaourcea. Thia definition lnvolv•• aoae ambiguity(•. . ~xt). ~ Baaed on the projection 11ade for the Conaultatlve Croup ..tlng w In June 1987. '!J../ The diatribution of caah l•porta waa ••ti•ated for 1988 aa fol Iowa: Foo<I Other ca,a eood• [1] Petrol..,• Electriciti, Raw •terlala S,,araa E'quip..,,t TOTAL 1988 projactlOft 1 .0 11,2 20.5 10.5 15.7 1.0 2.1 73.5 USI ai 1110ft 1988-90 pr!!Jacted ahar. . C•> 1.9 11.2 21.5 1'6.8 22.• 9.1 a.a 100.0 [1] Thi• ir,cludaa ...ilclr,aa, ir,far,t formula cor,eu-r good ftNda of \he ai I I tar.,, ar,d otlher _,,,1.1 ar,d ur9et11'1.I' r,eeded gcioila. - 54 - Teble 19. Th• Ceeh Flow Prob! ... Project. Actual l'roj•ct. Acilual Project. Actual l'rojecw.l 1987 1988 1989 1990 1991 1992 1"3 1994 1996 Mean 1991-2000 Sourc.. : Export.a of -4• U.7 97.0 99.9 10S.O 121.1 92.0 107.2 117.1 181.8 148.9 188.7 182.2 250.9 N.t. . .r.lce rect..[1) aa.5 U.1 81.4 59.0 49.5 54.I aa.o N.9 11.1 ea., 7'0.3 74.8 87.7 IMF infl- TOTAL U...: 14.5 15.4 188.7 111.5 9.1 21.0 141.1 1N.O 10.9 181.5 118.0 11.4 S8.2 se.2 S8.2 -a.1 .... 2 -11.4 191.4 210.7 229.1 209.8 225.9 245.2 -24.5 314.2 .. C:.ah i -rt.a (2) 71.7 45.4 73.5 89.1 74.8 100.5 47.4 lll.1 57.4 88.1 19.4 11.8 102.5 R•..rv• incr••- 18.7 73.4 22.1 li0.4 5.o 9.1 27.2 S8.2 10.0 15.0 15.0 15.0 20.0 0-t. ..r •. inc relief 91.1 41.7 122.0 91.0 148.8 18.7 127.5 181.2 1N.1 111.4 111.1 17'0.8 219.4 TOTAL 181.5 117.5 218.3 1811.0 222.1 118.0 202.1 219.5 228.5 289.5 248.0 212.1 341.9 CASH Cl# 52.8 o.o 77.2 o.o 40.1 o.o 5.7 8.8 -5.1 30.2 20.1 17.0 27.7 . ~ laport. finance gap:(3] Total I-rt.a lliO.O 825.0 714.5 715.0 815().0 711.0 888.1 181.9 951.o 101a.8 1oea.8 1154.9 1898.0 c:.eh I _rt.a (2) 71.7 45.4 73.5 89.1 74.3 100.5 47.4 52.1 57.4 88.1 19.4 11.8 102.5 578.8 579.1 191.0 175.4 775.7 IU.5 7U.7 188.8 898.1 952.7 1015.9 1078.5 1295.5 1::°.:~a19?i'!:!:: Ext. flnanc• a•ailable 571.3 aao.1 142.3 129.9 775.7 III0.9 781.7 824.8 118.4 914.1 912.1 1012.7 1182.9 for i-rt.a (4) Error•/-1 . .ion• o.o 29.0 0.0 45.5 o.o -15.4 o.o o.o 0.0 o.o o.o 0.0 0.0 IMPORT FINANCE CAP 2.0 0.0 41.7 o.o 0.0 o.o -0.1 12.0 25.2 31.1 aa.a ea.a 112.8 TOTAL FINANCE CAP 54.8 0.0 125.9 0.0 40.1 o.o 5.1 20.9 19.1 18.8 73.9 82.8 140.3 Ho,ao: O.bt. . .r•lca liability 503.9 532.5 416.9 494.9 515.4 450.5 aaa.a 483.9 "54.9 420.3 407.1 898.0 444.9 O.bt. r•lief/arrear• No'-: 407.8 483.5 333.9 391.9 I 372.1 397.8 408.3 352.7 298.8 2U.9 245.5 227.2 2115.1 [1] N.t. .. r• i ce receipt. eaclud• in•..taent. . .r•lcea, which are financad froa eat.arnal HLT IC111na, and alao eaclude i nt.reat pay. .nt.. (2) Caah iaport.a are defined t.o be th.,.. which are not. financed by donor• uaing HLT IC111na or Trant.a, but. are financed froa ot.her aourcea of foreign ••change. Acilual c:aah i-rt.a are ..t.l•t.ed a• • r .. idua , el•- t.ha •• pC111t. caah gap of aero. C.ah iaport.a ara aaau-d t.o er- at. 10I O¥er t.ha 1991-2000 period. (3) Thia i a baaed on the aaauapt.ion that. the aourc.. of finance idant.ifled in the caah 11ap a.ct.Ion are al locat.ad in priority to financing the caah gap. (4) Thia ie defined t.o be the t.otal grant. and HL.T IC111n infl- plua the net. curr-t. t.ranaf•r• 1... the finance applied to inveat.aent aervicea . (5) The project.ion• for 1987 ••r• .. de in March 1987, end the project.ion• for 1988 and 1989 ••r• .. d• in June 1987(Go••rn..nt. docu..nt. pr•••nt.ad Conaultat.i•• Qroup in July 1987), and O.ceoober 1988 PFP (89-91) reapact.i•ely . The project.ion• for 1990-2000 are takan fr.. the acenario 1 praaent.ad in chapt.er X. (5) Th• final row indicat.•• debt. relief in all year• aacept. 1989, when it. i a the figure for tha incr.... in arreara. [7] It. ahould be not.ed t.hat. ••_.. the . . t.arnal finance anilabl• for iaport.a ahould b• , ... t.han t.he I-rt.a requiring ••t.ernal finance in the t.able, aince ••t.ernal finance ia nece... rily dial,ur..d a9ainat. i-rt.a. Ea ~t.. aa in 1989, iaport.a . .Y be under-recorded and t.hie ralat.ion ..y not hold. 107. With regard to the second consideration raised in paragraph 105, .. Table 19 again gives an indication of the magnitude of the problem over the 1990-2000 period. It is apparent that in this scenario the cash gap grows somewhat from the 1990 level, but is well below the gaps of the 1987-89 period. There are several possible alternatives for the resolution of this growing problem, excluding an augmentation of the three sources identified in the table, which, for these purposes are taken &J exogenous. 78/ Firstly, there could be a further reduction in the cash import requirements from the annual average of around US$60 million over the 1987-89 period. 'While the scope for reductions in the aggregate import of these essential 78/ Continued IMF finencial auppo~, for lnetance, for th• prograa efter 1992 could .Tiainate th• gap, ceterle parlbue. - 55 - products may be limited, the estimated cash import component of these products could be reduced if the products were to be externally funded. In many instances, increasing donor funding does not diminish the cash gap, since, with the exception of the IMF, external funds are not provided in cash but only for the finance of imported goods and services. However, obtaining funding directly for essential cash imports, or redirecting donor's general import support to pay for these goods, will effectively cut the gap. The reduction of donor funds is currently, however, limited in some cases by the established procurement and financing procedures, and by .... other contractual restrictions. For example, some donors are not prepared to finance basic consumer goods for the military, 79/ or electricity, or they have procedures that preclude the Government from undertaking unanticipated importation of urgently required products on a timely basis. In addition, ' the delays and interruption of donor flows is a further factor .- leading to cash importation. Clearly, the cash gap projection here is sensiti ve t o the cash import assumption. Secondly, the gap could be reduced through improved terms for debt relief and debt reduction. This is considered in further detail later in chapter X. A third possible solution, though unsatisfactory, would be the partial default in debt service payments. On the other hand, reduced exports or service receipts would push the gap higher. 108. Resolving the cash gap problem by redirecting existing external support to finance the essential cash imports would not alleviate the overall finance problem: it would merely substitute an import finance problem for a cash gap problem. While maximizing the fungibility of the external support can largely resolve the cash problem, there is nonetheless an imp~r~ant. res idual import finance gap. Moreover, additional project finance will only add to the import requirement: resolving this gap therefore necessitates further general import support • . 79/ Th••• are defined•• goods 1 c0llla0n to normal civil life', such•• clothes, basic food and medicines. - 56 - CHAPTEll 111 THE IMPACT OF THE INSECURITY PROBLEM ON DEVELOPMENT. 1. In view of the dominance of the insecurity problem,!/ this section provides a summary of the major areas of economic activity upon which the problems impinge. It does not replicate the detail of all the circumstances noted in chapter 11 in which security is relevant. .. 2. As is evident from chapter II, the striking feature of the insecurity problem in Mozambique is its comprehensive and profound impact on almost all aspects of so~ial and economic life. One critical feature of the insecurit~ has-- been its volatility and unpredictability, with no regiens of the country being consistently identifiab!o as secure.~/ For example, while in 1985, the Zambezia, Nampula, Hanica and Sofala provinces were the main targets for the insurgency, in 1988-89 the insurgency was very active in Inhambane, Gaza and Maputo provinces. Even those regions that have not been suffering from the full intensity of the conflict have rarely escaped from all disturbance. Consequently, a situation of general rural disruption has evolved, with the threat and reality ot personal attack dominating all activity. Land communications have been severely restricted, with a heavy reliance placed on the support of military convoys. Even the convoys, however, have had serious problems, regularly being the target of attack. Table 1. Iapact o: Ir. ...~urlty on Population Di•tributlon. 1989 Sept. 1988 Provine• PoPulatl- [1] Perc.,.tage Total percentage Total percentage (•i 11 i-•> <lli .. lacetl p:;;::::e di .. laced 6 affectad di .. laced 6 affected Hapu~ 1.850 9.37 12.11 21.48 115.48 Caza 1.200 3.21 54.82 158.08 29. 38 Inha••n• 1.310 14. 34 32.44 46 . 79 34 . M Sofa la 1.242 10.08 15. 70 25.71 48.57 Mani ca 0.714 12.19 19.31 31.49 24.18 Tete 1.010 9.SO 12.38 21.98 47.89 Z.•eaia 3.078 17.51 11.81 29.31 29.40 Na..ula 2.948 1.81 18.21 25.02 "··· Ni- C.k 0.lpdo 0.1135 1.134 31.39 3.21 18.79 1.00 50.17 10.21 73.72 "··· .. Total Ul.111 11.14 18.95 30.10 24.57 Source I Miniotr7 of C-rce and Uni"te<II Nati-• (Th• Eaorgenc7 Sltuatl-, March 1989 and Priorit7 Eaorgenc7 Aooiotence Requ lre...,to, 14 Mar,:h 1987) . · Note : [1] BaMd - aid-1989 Mtiut.eo. [2] In addlti-, tl,ere were an eoti .. ted 250,000 refu9eeo in Nolawi, Za•ia and Zial,a~we In S.pt.eal,er 1981; in 1989 tl,io figure wao eoti ..t.ed at around 1 allll-. 1/ The ter•• 1 lneecurity 1 or '••curity 1 •ituatlon are u•ed in Mozaabique to de•crlbe the iituation in which araed attack• are frequently and widely perpetrated throughout the rural area• of Mozambique by •upporter• of th• Mozaablque National Re•l•tance (MNR or RENAMO). Th• tel'tl •affected' i• defined in footnote 12 of Chapter II. !/ So.. corridor•, auch a• the Beira-Machlpanda highway, known aa the Belra Corridor, appear to be attacked only aporadlcally becau•• of the protection provided by the Zlababwean and Moza•blcan Aral•• to the railway line. - 57 - 3. The Human Cost. The most devastating impact of the security problem has been the human cost in terms of death, injury and mutilation, with incalculable damage being inflicted on a generation of children. 1/ The continual fear of personal violence and destruction that now pervades much of rural Mozambique has been instrumental in the massive displacement of the population. In mid-1989, it was estimated that of the total population of 15.2 million, around 1 million (7%) were refugees in neighboring countries; around 1.7 million (11%) were displaced within Mozambique, and were heavily concentrated around the provincial and district capitals, where security was substantially improved, and free food distribution was available; and a further 2.9 million (19%) were affected by the insecurity. In total, about 35-40% of the population is seriously affected in some manner. 4. The Economic Cost. The economic costs of the insecurity are impossible to quantify precisely. The collapse of production in the first half of the 1980s resulted from a combination of factors and isolating the specific role of any one is infeasible. Thus, while the security problem was clearly a major determinant of both the economic collapse and of the responsiveness ~o the ERP, its precise quantitative impact can not be estimated. In three instances, the cumulative impact and destruction are easier to identify: that is, in the case of the education and health service infrastructure, and in the case of the transportation infrastructure. 5. In the transportation sector, the impact on the infrastructure has been far-reaching in all sub-sectors. Chapter V provides greater detail in this respect, particularly for the road and.coastal shipping sub-sectors. In this paragraph, the impact on the railway network is analyzed to illustrate the costs of insecurity. (see Table 2). In general, it is difficult to isolate the general decline in the infrastructure that occurred from the lack of maintenance from the destruction caused by the insecurity. Moreover, the insecurity was itself a major factor in the lack of maintenance. Freight volumes transported on the railway corridors have, however, fallen dramatically since 1980-82. The volume of freight handled on the Maputo line accounted for 74% of the aggregate freight handled by rail in 1980, and. by 1988, this trade had fallen to 38% of the 1980 level. This decline was largely attributable to the collapse of the international transportation due to both the insecurity within Mozambique and the regional conflict that led to the boycott of Maputo port by the South Africans. Renovation of the Maputo line was initiated in 1987, but has been hampered by the on-going insecurity. In addition, trade on the Beira line collapsed to less that a third of its 1980-82 levels, when it accounted for around 20% of the aggregate rail haulage by volume. In this instance, there are signs of recovery as the rehabilitation of the line was largely completed by 1989, and the line continues to be heavily guarded by national and international forces. Consequently, the volume of I/ Quantification of the violence is virtually lapoeelble. The Cereony Report, •su..ar1 of 'iiozaablcan Refug.. Accounts of Prlncipall1 Conflict-Related Experience In Mozaablque•,(Aprll 1988), conservatively ..ti•ated that upto Dec..ber 1987, 111,eet clvlllane had been kllled, and that there had been .. n, thousand Instance• of personal abuse. - 58 - international trade in Beira has recovered from its low in 1984 (at one third of its 1980 level) to be nearly 80% of the 1980 level in 1988. Domestic traffic remains depressed at less that 10% of its level of the early 1980s. The decline of the Nacala line is even more dramatic. In 1980, only 7% of the aggregate tonnage was attributable to this line, but by 1985, the international trade that was of immense importance to Malawi had been decimated i/, and was less that 1% of its former level. Table 2. The Evolutlon of Ra 11 w•i -Tran•e!rtat 1on. ----- ---- 1980 1981 1982 1981 1984 1985 1988 19117 1988 Freiah11 (t.lna. .) carri..i _, 1980 • 100 ltei ra rail line 100.0 120.5 92.4 82.1 19.1 20.3 24.4 31.9 82.4 -4-11lc 100.0 1215.3 88.1 22.3 11.0 1.3 1.4 1.3 9.2 -in11e-....,.1 100.0 110.7 100.0 51.8 37.0 48.4 N.4 79.3 79.0 Nacala rail lln• 100.0 911.1 92.8 81.8 41.1 10.8 7.2 11.1 12.2 -4-11ic 100.0 94.1 101.3 71.0 38.4 21.0 13.1 22.1 21.8 - inurna111-al 100.0 98.1 84.1 102.2 54.1 0.9 1.4 1.5 2.8 Maputo rai I 11 ... 100.0 911.5 88.0 12.5 IS7 .2 45.4 45.8 42.1 38.2 _,._11ic 100.0 122.1 125.0 118.7 141.7 75.5 73.0 117.1 112.0 - inurna11illftal 100.0 94.9 82.4 54.0 44.5 40.9 41.8 ao.1 27.1 Foreign ••cha,... .....,;nga: Toul [IJ 95.1 112.3 81.0 48.5 28.5 21.a 18.1 23.0 ltei ra rail I In• Nacala rail I lne ( c•iJ 20.8 11.8 23.1 15.0 21.5 9.1 8.8 7 .5 5.7 3.9 I.I 1.0 5.1 0.1 7.9 o.3 Map111lo rel I I In• I 12.9 74.0 u.3 12.a 18.9 14.0 12.1 14.9 ~ 1 1 i v - a11ock 200 220 222 222 249 214 178 172 Nu.a.er of vehlcl- c1-11ro7ecl 1985-811 1 381 lorri- w111h an averao• walue of 118,000. 1llll. 11- wi 11h an averao• value of 190,000. 6. These trends are mirrored in the foreign exchange revenues from the transport sector. For example, the revenue from the three principal railway lines fell in 1986 to less than 20% of the 1980 revenue level, although it has since increased modestly. The trend reflects both a volume and a price effect. This is clearly apparent on the Maputo line where the foreign exchange revenues fell in 1988 to only 22% of the mean 1980-81 level, while the international freight volume fell to 28% of the mean 1980- .. 81 level. 7. In the education sector. over 50% of the 1981 ·s tock of primary schools .. were destroyed by early 1989, a total in excess of 3200 schools. Similarly, in the secondary school sector, around 15% of the 1981 total were closed over this same period. In both cases, the largest number of losses were incurred in the rural areas. Moreover, the impact on the teaching staff was comparable, with 6750 teachers in the primary sector ~ In 1981, 711 of Malawi'• international trade was handled through Belra, and 251 through Nacala, with the residual passing through Durban. By 1986, the trade through Mozaablque had been virtually elialnated, with 961 passing through Durban and the r....alnder through Dar-ea- Salaaa. In consequence, Malawian transport coete are ..ti ..tec:t to have increased aarkedly, with the tranaport coaponent of the elf l•port price incr..eln9 froa 261 in the .. rly 1981• to 411 by 1986. With aggregate cif i•porta of US1698 ail I Ion In 1989, the potential saving to Malawi of the re-opening of the rall corridors would be about US176 all I Ion per annua on th• iaport aid• alone. - 59 - being affected during the 1981-87 period (the 1986 stock of teachers was 20,750), and over 200 teachers in the secondary system being affected (the 1986 stock was around 2450). 8. In the health sector, the experience parallels that of the education sector. Over the 1975-85 period, the number of primary health care units increased rapidly, with the number of health care posts rising from 326 to 1191, and the number of health centers from 120 to 251. There was, however, substantial damage inflicted on this infrastructure by the -...- - insecurity, with an estimated 196 of these units being destroyed and -an--~- -~~~ additional 288 being looted and forced to close by 1985. This represented around 25% of the network. By 1989. the aggregate number of units destroyed had increased to 274, with a further 550 being closed. 9. In each of these sectors, the short term implications for the standard of living of the rural population are profound~ The devastation of the transport and communication networks have left the economy fragmented, with ~ many areas isolated for substantial periods of time. Consequently, not only is the basis for commercial activity severely affected, but the provision of basic services is rendered highly erratic and totally inadequate, particularly when the local infrastructure has been destroyed. The understanding of national income distribution patterns is extremely poor due to the obvious data deficiencies, but the qualitative conclusion is that rural incomes and service provision have declined markedly on account of the insecurity. In view of the deterioration of the rural • infrastruc.ture, which is the focus of part 2 of this report, the recovery of rural living standards will not be dramatic. Even in a more stable and secure environment, the restoration of the economic and social infrastructure will be protracted, implying that rural incomes will take many years to recover their former levels. As is discussed elsewhere in this report, these constraints to the response to economic policy reform therefore preclude rapid improvement. 10. The Impact on Economic Policy. The impact of the security problem on the development of economic policy under the ERP has already been outlined in chapter II, and are further discussed in later chapters. Here, .. the principal points at which the problem has a major impact are noted: . (a) the design of the bas!~ strategy with its focus on the agricultural sector; and the general rate of macroeconomic adjustment; (b} the extent and rate of deregulation and the reduction of centralized administrative controls in the areas of pricing, distribution, production, and foreign exchange allocation; (c) the magnitude of the necessary budgetary appropriations for the prosecution of the war effort; (d) the design of public expenditure policy, especially with respect to investment in the transportation infrastructure and in the social services; and the need, in par~icular, to finance support - 60 - programs that alleviate the extreme poverty which stems in part from the insecurity. 11. The inmediate dileDIII& in designing the basic strategy to achieve the objectives of the ERP is the apparent incongruity of a rural, agricultural-based strategy in a period of extensive and intense rural insecurity. 12. The Impact of the Emergency Program. In addition to th1..____ _ ______ considerations raised above. the magnitude of the external resources r flowing into the economy under the Emergency Program have other major repercussions for the evolution of the economic structure. The fundamental concern is whether the emergency support programs are leading to the creation of a separate economic infrastructure that is independent from the existing and medium-term infrastructural needs of the economy. Moreover, there is a greater concern that, in some key respects, the emergeney program may actually lead to the displacement of the market-based structures and exacerbate the emergency problem over the medium term. In particular, there is evidence that the operation of programs to distribute free food and primary implements to the displaced and affected people is disrupting the normal economic behavior of the population. To the extent that the population receiving free aid can be segmented and segregated from the remainder of the population. the potential adverse impact may be minimal. The available evidence suggests, however, that this is not being achieved, and that the availability of free goods in some regions is undermining the market based systems, which are themselves very fragile at this stage of the recovery. 13. The reestablishment, and then preservation, of domestic production incentives is currently the paramount policy concern, particularly until food aid can be diminished. In this respect, three factors are critical: (i) to maintain price levels that reflect international prices; (ii) to preserve AGRICOM's role as buyer of last resort at the stated fixed price and at the minimum price; and (iii) to maintain AGRICOM's payments to producers on a timely and on a cash basis. .. These issues are further considered in chapters VII and X. A further aspect of the dual system is seen in the creation of the necessary logistical support for the distribution network of the emergency agencies. This is pursued further _in chapter V. _ 14. The Integration of the EP and ERP. The recent appeals made to the donor community under the Emergency Program have clearly indicated that the emergency is no longer a simple short-term humanitarian program. It certainly has a critical humanitarian purpose, but it also attempts to address major structural weaknesses in the economy. Moreover, the need is not transitory. Even were the security situation to improve dramatically, there would be a need for many years for the external support currently provided under the Emergency Program. - 61 - 15. There is therefore a strong case for integrating the EP within the medium term ERP. There are many elements that integration must embrace: ( i) an increased focus on the implications of the humanitarian assistance for the incentive framework. Notable, with respect to the impact on producer incentives, to the impact on the parallel market if resources continue to be diverted in this way, and to impact on domestic industrial producers who are competing with the .. emergency flows • (ii) a greater degree of coordination in the investment programmes envisaged under the EP and ERP. It should be a fundamental concern that the country has, for example, an integrated transportation infrastructure (chapter V), and not a dual • structure. Moreover, Yithout such "integration, the task of prioritizing investment need is rendered considerably more difficult, since the trade-offs are more difficult to specify and evaluate. (iii) the comprehensive and ays.tematic integration within the standard accounting framework of the emergency flows. With respect to the budgetary accounts, it is clear. that there has to be a more systematic accounting for the food aid inflows and for the associated counterpart funds. With regard to the national accounts and external accounts, there are clearly issues of integration that need to be addressed. This integration is essential if the macroeconomic implications of the emergency are to be effectively analyses; (iv) the mechanisms by which the aggregate aid flows for the EP and ERP from the donor coumunity can be maintained, and indeed increased if necessary, when a single unified appeal to the donors is made, will need to be carefully appraised • .. .. • CHAPTER IV THE DEVELOPMENT OP THE ECONOMIC AND SOCIAL INFRASTRUCTURE. A. Introduction 1. The economic problem in the 1990s is fundamentally one of production. Macroeconomic adjustment and the restoration of macroeconomic balance will depend foremost on the recovery of the productive base of the economy, rather than on further ;eductions in expenditures and living -. standards, and the speed with which these macroeconomic changes can be achieved will be directly related to the rate at which production is regenerated. Hence, the focus of the ERP and ESRP will continue to be on agricultural production and on the establishment of a policy environment in which appropriate incentives are given to agricultural producers, in general, and to family sector producers, in particular. 2. One of the objectives of this report is to focus on the other pre-requisites for the recovery of production, in addition to the necessary macroeconomic policy reforms. It is a primary conclusion of Part 2 of this report that policy reform alone will .be insufficient to restore sustained growth, and that the complementary provision of a supportive economic infrastructure is essential. Indeed, it has been argued that an adequate supply of incentive products to the rural areas is a further pre-requisite for recovery.!/ To date, great emphasis has been placed on the policy reform elements, and, given the magnitude of the distortions, this priority was appropriate. Moreover, as the earlier chapters have concluded, the progress towards macroeconomic stability and towards the reestablishment of the incentive str11c ture has ·been substantial. 3. The focus of this part of the report on the economic and social infrastructure - and, particularly, on the infrastructure supporting the recovery of agricultural production - does not imply a reduced importance for the continuing policy reform program, but rather it seeks to reaffirm the complementarity of the process of infrastructural restoration. Rural trade is directly affected by the physical infrastructure and by the .- economic and institutional policy of the transport, financial and marketing sectors, but it is equally dependent on the provision of services to sustain rural communities: namely, the provision of basic education, health . and water services. Moreover, both the short and long term demographic trends will be major factors in determining specific local needs and the -adequacy with which they can be supplied. Concern for agricultural development should therefore embrace the activities of many sectors if a sustainable rural trading system is to be developed. For this reason, this report undertakes a relatively broad analysis of the problem, with the premise that, despite the obvious limitations to development attributable to both financial, manpower and security constraints, an integrated programme of rural development is fundamentally required. The ultimate problem is the design of a program that is cohesive and comprehensive, but is phased to accommodate the realities of implementation. !/ Thi• el ...nt, however, l• not the focu• of the next five chapters. 63 B. Indicators of the Decline of the Sectoral Infrastructure 4. The development of the economic and social infrastructure should be both supportive and responsive to the recovery of production. There is, however, a prima facie case for believing that both the short term productive response and the longer term economic development of the country are likely to be significantly constrained unless major development in these fields is undertaken. Thia concern stems both from the marked decline in the physical infrastructure and the provision of services over the 1980s, and from the lack of capacity to respond rapidly in the 1990s. s. In the transportation sector, following the deterioration of the 1980s, barely half of the paved network is estimated to be in good condition in 1990, and, of the gravel and earth roads, an estimated 0% and 15%,· respectively, are classified as in good condition. Thia decay of the physical infrastructure is paralleled in the age of the transport fleet, especially in the private se~tor . vhP.re the average age in 1990 is set at around 20 years. Other indicators suggest an urgent need to reevaluate economic policy in the sector: for instance, the load factors of the private sector average around 80% compared to those of AGRICOM and DPCCN of around 50%, and the availability rate of the private sector fleet is around 75% compared to the 45% of the Ministry of Tranaport's principal trucking enterprise, and, yet, the private- fleet accounts for only 20% of the aggregate trucking stock. To a large extent, the explanations of these trends are rooted in the security situation, and its impact on sectoral behavior, put there are additionally substantive questions of policy that might increase the efficiency and utilization rates of the sector, and these are addressed in chapter V. 6. 1983-87 period In the financial sector, the regression over the _ into a quasi-barter rural economy presented a serious challenge to the implementability of an economic incentive program. The declining level of monetization was evidenced by the fall in the level of the demand and time deposits of the banking system from over 50% of GDP in the early 1980s to only 30% in 1987, and by the fall in the claims of the banking sector on the economy from as high as 90% of GDP in 1983 to below 40% in 1987. Moreover, meeting the financial needs of both the urban and rural populations is an integral element for recovery to be effective, and the contraction of the bank branch networks runs counter to the basic need to provide adequate access to the formal system. Thia trend is exemplified by the decline in the Banco Standard Totta de Mozambique network from 44 branches at the time of Independence to only 7 branches at the end of the 1980s. There are consequently important issues regarding the degree to which agricultural devel9pment, and family sector development in particular, is constrained by a weak financial infrastructure, and how this development is most appropriately promoted. • 7. The indicators of the deterioration of the marketing infrastructure are equally alarming. Between 1982 and 1988, the number of private shops declined by 40%, and the number of AGRICOM fixed buying posts fell by almost 75%. In addition, AGRICOM storage capacity dropped by around 40% in the 1985-89 period. Again, the causes of these trend can be traced in large measure to the serious decline in rural security, but~ 64 irrespective of the cause, the infrastructural weakness raises major questions of the ability to support agricultural growth over a sustained period. Moreover, it raises fundamental issues with respect to the appropriate formulation of economic policy for the stimuiation of incentives. For example, the weakness of the efficiency and competitiveness of the market structures is a critical consideration for designing pricing policy and for determining the necessary role of the Government sector. 8. Many of the sectoral problems identified above have serious consequences both for short term recovery and for the longer term development of the economy. The deficiencies in the social infrastructure are less evidently constraints in the short term, but are indisputably fundamental to the long term prospects for growth. The decline in the physical infrastructure in the health and education sectors and the decline in the provision of services are therefore major problems, especially given the extreme weaknesses in managerial capacity and skilled manpower that already exist. Despite impressive progress in the .immediate post- Independence period, the 1980s saw a regression in many respects: again insecurity played a major role. Between 1982-1989, for instance, about 3200 primary schools, equivalent to over 50% of the stock, were destroyed •. In 1990, almost 40% of the school-age population stilJ have no access at all to any schooling, another 40% will leave primary education prior to the fourth grade with little or no prospect therefore of either reading or writing, and only 20% will complete primary schooling. The short and long term demographic trends are also posing serious development problems. With a population growth rate of around 2.7% per annum, the strain on the provision of social services will become increasingly apparent. Already the impact of the protracted insecurity has severely disrupted the traditional pattern and distribution of population settlement, and meeting the emerging needs of a rapidly growing population in a time of fundamental distributional upheaval will be a major development challenge. C. The Basic Issues of Infrastructural Development 9. While the detailed causes of sectoral decline are varied, it is possible to make several broad generalizations. Foremost is the impact of the insecurity, either directly on account of the destruction to both the . physical infrastructure and to the established networks providing services, or indirectly through the prevention of maintenance and investment in the rural areas. To the extent that security continues, neither the Government nor the private sector will be able to restore infrastructure or services. However, in those areas where a recovery of production is possible, the opportuniti~s for the recovery of the support services will equally reappear. Consequently, there is a need to develop district-level contingency plans that may be rapidly implemented, and to secure the necessary financial support to facilitate these programs. 10. It is, however, inappropriate to identify the insecurity problem as the sole cause of the sectoral difficulties. There is no doubt that economic policy-making has been seriously constrained by the emergency, and this will remain so, but there are policy areas that should be reassessed. 6S Sectoral-specific issues and recoDlllendations are provided in the analysis of chapters V to IX: here, some broad issues are defined: Ci) the roles of the private and public sectors in the economy. The emergency necessitates the maintaining of an active Government sector to preserve the operation of economic markets and the transmission of economic incentives in situations where the private sector is unwilling to operate, or where the humanitarian needs of the emergency dictate. There are, however, major issues regarding the steps that might be taken to increase private sector participation, and the extent to which existing resource allocation systems, for example, are effectively barriers to increased private activity; (ii) the cohesiveness and compatibility of sectoral strategy with the overall strategy of the ESRP. Diverse examples in this respect are considered in the following chapters. The evolution of the transportation system provides one example, since the agricultural response is crucially dependent on the availability of adequate services and trade routes. The recent emphasis on the rail And major port infrastructure has been consistent with the d'.rerall transport sector strategy, but the value of the progress in these areas has been severely limited by, for instance, the inadequacy of feeder roads. This has impacted directly on the movement of crops and other products to and from the primary surplus areas. In this respect, a more balanced and cohesive strategy is essential. A further example is provided by the importance of defining educational curriculum across all sub-sectors that embody courses that orientate people and provide the necessary skills to fulfill the roles expected of them under the ESRP and, moreover, presumed to be available in the overall strategy; (iii) the tailoring of policy to the realities of the economic structure. This is particularly relevant to the design of pricing and marketing policy, given the varied degree of competition in the rural markets. It relates also to the issues regarding the role of the Government in a broader institutional sense; (iv) the development of strategy to meet both the emergency and commercial requirements of the economy. The coordination of both activities in order to raise short term efficiency and support the longer term objectives of development is essential. Again, this theme is cross-sectoral, impinging on transport policy (with respect to fleet utilization policy, especially the role of DPCCN, and road rehabilitation policy), marketing policy (with respect to the potential for swap and purchasing arrangements between AGRICOM and DPCCN), and educational policy (with respect to the need to cater for the special educational needs of traumatized people in addition to the standard educational requirements). 66 D. The Macroeconomic Significance of Infrastructural Development 11. It is a fundamental assumption of the macroeconomic framework that the provision of economic and social services can respond in parallel with the productive response, and pose no serious constraint to growth. This assumption must hold both over the short to medium term recovery period, and for the long term if sustained growth is to be attainable. Indeed, the credibility of the entire Economic and Rehabilitation Program rests on the likelihood that this underlying assumption is valid. Moreover, the assumption must be generally upheld, since one sectoral bottleneck has the potential to seriously disrupt the development of the production and trading structure. 12. Infrastructural development should not, however, be regarded as only a potential constraint to growth: it should more importantly be viewed as a determinant of growth. In fact, the provision of infrastructure is itself an element of incentive policy for both the producer and trader. It is in this respect that a distinction may be drawn between the motivations and capacities of the private and public sectors, for, while the private sector may be seen as responding to incentives and to favourable expectations, the public sector may need tp play the key _r~le in reestablishing the basic infrastructural framework in the initial stages of the production recovery. Even when sustained growth is reestablished, the public sector will need to play a key role in the development of the physical infrastructure, but it would be anticipated that the private sector would then be more dominant in the provision of economic services. 13. The key role of infrastructural development in the restoration of macroeconomic stability therefore centers on the support to production. Without the recovery of the productive base, attaining both internal and external balance will be impossible. Specifically, domestic savings should be seen as a function of production and incomes, and highly interest inelastic. Thus, the primary means of diminishing the role of external savings in the short to medium term will be through economic growth. Consequently, both the rehabilitation and new investment in physical infrastructure, and the broader sectoral policy-making, should focus on both promoting and responding to the needs of the trading system, and thereby support and foster production. 14, On the other hand, infrastructural development will necessarily have costs associated with it in the form of high external savings to finance the investment, and protracted macroeconomic imbalance both in the external accounts and in. the overall fiscal balance. This detrimental impact on the imbalances is, however, essential to lay the foundation for growth, and thereby the elimination of the imbalances themselves. The fiscal imbalance results from the fact that a large proportion of the investment will be in projects supported by the Government, given the nature and size of the projects, and the required implementation and financing capacity. Over the medium term, it should be noted, however, that once again the mechanism by which fiscal balance will be achieved will be through the increased revenues generated by economic growth, which would progressively displace the external budgetary support. 67 15. In the transportation sector, the recovery strategy necessitates the development of an internal transportation capability to facilitate the rural-urban interchange of conmodities and the direct flows of conmodities between the rural and international markets. The basic requirement of a reliable system in which flows are predictable and dependable, and in which conmodities are transported at a reasonable cost, is unexceptional. While these needs are central to any economy, they remain particularly fundamental in Mozambique. In the absence of the reliable collection of agricultural produce and a timely flow of consumer goods to the rural areas, the incentive to production will be decreased whatever the price ,- structure. Moreover, in this period of gross insecurity, the maintenance of rural stocks entails an extreme risk, reinforcing the general argument here. 16. The importance of the market structures for macroeconomic policy has two elements: firstly, the direct contribution of the physic.al infrastructure towards enhancing trade flows, and, secondly, the role that the structures should play in shaping appropriate pricing and incentive policy. In addition, the analysis of the prevailing market structures highlights the substantive role that the public sector should-undertake, particularly in the presence of continuing insecurity, in order for the macroeconomic strategy and policy program to be implementable ac· the microeconomic level. 17. Three areas of financial policy may be· identified as being critical to macroeconomic development: firstly, the management of the monetary and credit aggregates, secondly, the basic questions of the capital structure and autonomy of the financial institutions: and, finally, the operations of the credit system, and the mobilization of domestic savings. The first set of issues concern the ability and efficiency of the sector to implement the macroeconomic financial policy and attain the macroeconomic aggregate targets. The second concerns the medium term objective of establishing a coumercial banking structure in which the banks are financially solvent and viable. This, in turn, requires the regularization of the debt and arrears that dominate the balance sheets of the conunercial banks, in order that recapitalization may be effected. This would then facilitate greater autonomy and competitiveness ~ithin the sector, both of which are important conditions for the restoration of commercial criteria within the operations of the economic system, and, h particularly, in the allocation of credit. While these issues are all of major concern, they are largely outside the scope of this report, and will be further considered elsewhere. 18. On the other hand, the third set of issues is of central importance here. At the sectoral level, the ability of the credit structure to respond to the emerging needs of agricultural and industrial producers, especially at the level of the family and small private . producers, is necessary if production is not to be stifled. Determining the needs of the various producing sub-sectors and how best to foster and promote their activities are major questions to be addressed. Moreover, in the industrial sector, the efficiency of the credit system in a period of important. Rehabilitation and widespread current deficits is clearly _ 68 recovery require a considerable degree of front-end loading of expenditure, given the depth of the preceding collapse, and, without the availability of bank finance, this regeneration of fixed and working capital would not be possible. Moreover, given the aggregate constraint on credit, the efficiency of allocation becomes a dominant factor. 19. The macroeconomic analysis vividly demonstrated the magnitude of the existing financial imbalances, and, over the longer term, the restoration of a more normal financial structure hinges on~ firstly, the ability to reduce the degree of dependence on both external goods and .. foreign savings, and, secondly, the ability to mobilize savings internally • The inunediate prospect of increased domestic saving is small in view of the modest surpluses being generated. Indeed, it can be argued that the financial sector has only a minor rqle to play in the short term in securing an improved macroeconomic balance, given that savings are predominantly a function of production and incomes, with savings being highly interest inelastic and little affected by the institutional weaknesses of the sector. It is, nonetheless, clear that longer term stability depends on developing the appropriate sectoral capacity to capture the available surplus, and, moreover, to play a more active role in stimulating the formation of savings. * * * * * * 20. These issues are now developed in the subsequent chapters on a sectoral basis: transport (Chapter V), finance (Chapter VI), marketing (Ghapter VII), demographic (Chapter VIII) , and human resources (Chapter IX), - 69 - CHAPTER V THE DEVELOPMENT OF THE TRANSPORTATION INFRASTRUCTURE A. Introduction 1. The transport sector plays a central role in the development of the Mozambique economy.!/ It accounts for over 10% of national social product, and is one of the key determinants of agricultural sector development and the growth of the coumercialized surplus. Moreover, it is an important earner of foreign exchange and generator of employment. In the pre-Independence period, the net service receipts of the balance of payments typically matched the trade deficit, with the transport sector accounting for around 90 % of the service ourplus. l / Since that time, however, activity in the sector has declined markedly for all modes except aviation, with ports and railways showing the largest fall from handling 20 million tons in 1973 to around 2.7 million tons in 1987. This trend is reflected in the external accounts, where there · was a service account surplus in 1989 of o~ly US$16 million if interest payments are excluded, as compared t~ the trade deficit of US$674 million. 2. The causes of this decline and the role that Gove·rnment policy can play in the recovery of the sector are the subject of this chapter. 1/ For reasons that are developed in detail below, the focus here is primarily on the road and coastal shipping sub-sectors from two perspectives: the adequacy of the physical infrastructure and capacity, and the contribution of sectoral policy towards the efficiency of the sectoral operations. 3. Both the physical infrastructure and the transportation capacity of the road sub-sector have deteriorated markedly over many years. Several factors have interacted to cause this decline including, most importantly, the lack of financial resources and the on-going security problem. Insecurity has been a prime factor in two respects: it has directly led to the destruction of roads and bridges, and it has indirectly prevented the appropriate maintenance an development of the road system. On the other hand, not all the inadequacies of the road infrastructure may be attributed • 1/ The infraetructure and ••rvlc•• were originally planned to aerve the thr.. port• of Maputo, Beira, and Nacala. Thr.. ••parate railway eyete.a, totalling over 3S00ka. were conatructed to link th• port• to th• aurrounding countri•• and fora diatinct export and tranait corridora. The highway network comprise• around 6000km of primary (asphalt) road, 600km of aecondary (gravel) road, and around 21600km of tertiary feeder (earth) road. A number of smaller port• alao exist to li hk up with he main ports, although the stock of cabotage vessels is very small. The national airline links six of th• provincial capitals, and a state controlled air-taxi company provides service In addition. ?/ In 1973, for example, the trade deficit was US111& ml Ilion, and the service surplue waa US1122 ml Ilion. Of this surplus, the tranaport sector accounted for US1102 ailllon or 901. ~ Reference ahould also be made to the report 1 Mozamblque: Tranaport Sector Revt .. •, (World fank, 1989), which provide• ext.naive coverage of the hiatorical evolution of the aector, of th• current atate of all aub-aector•, further analy•i• of the current probt ..a, and detailed sub-sectoral reco111111endations. - 70 - to the insecurity problem. The general economic problems of the economy have led to declining resources being devoted to the sub-sector, and this in turn has precipitated the decline of the system. For both reasons, the physical infrastructure has deteriorated rapidly. In consequence, and also due to the continuing danger posed by the insecurity, transportation services are extremely weak, and very costly. Services have been affected in terms of the types of business accepted, the routes operated, the frequency of service, and the increment to operating costs due to increased travel times, delayed travel, and accomnodation of the military in the convoys . Moreover, these factors have played a key role in determining the •· structure of the industry, and especially the balance between the operations of the private nd public sectors, and between the operations of the own-account and the for-hire fleets. In addition, the trucking capacity has deteriorated as the foreign exchange constraint has grown increasingly tight, curbing the inflow of both spare parts and new equipment_, 4. The situation may therefore be characterized as one in which transportation on rural highways is restricted to operate in military convoys, which are slow, infrequent and necessarily confined to daylight hours. Moreover, especially in the north of the country where there is a lack of military vehicles, the military use coumercial vehicles, thereby reducing even further the already limited transport capacity. Typically, journey distances have doubled because truckers must find alternative routes and because the infrastructure has deteriorated!/. In addition, few private transporters operate in areas of high risk due, mainly, to the inability of replacing their equipment were it to be destroyed. They prefer instead to operate around and in the main urban centers where the demsr,d h high and official tariffs are time-based rather than distance-based 5/. s. Throughout this period, transport policy has been severely circumscribed by the security problem and by the associated emergency programs. The response of the private sector to the emergency, the humanitarian demands of the crisis, and the extreme scarcity of foreign exchange have all been major determinants limiting the range of Government policy options. Nonetheless, in some instances, policy decisions have inadvertently exacerbated the prevailing difficulties, and led to further inefficiencies and underutilization. At present, the primary constraint to development continues to be the insecurity problem. The availability of - adequate financial and manpower resources are additionally of central concern. One prime objective of this chapter, therefore, is to offer suggestions of policy steps that may better counter these serious ~ Under the present clrcu..tanc•• the 1""8 k• return trip betw..n Maputo and Inhaabane tak•• & day•, while, prior to the ..curlty difficult!••, 2-3 round trip• could be ..ct. In one w..k. The uae of alternatlve routing• alao can lead to additional foreign currency expen••• when operation• through neighbouring countrl•• are required. &/ Two ..Jor private tranaportera, In th• Maputo Province operate under convoy condition• for coaaerclal coapani•• auch aa CaJu de Mo~aablque and Petroaoc, but they either charge a rlak pr..lua which I• Juatified to cover the aubalatence co•t• of the allltary ..cort or they charge part of the official tariff per ton/k• for the ..pty return over and above the official tariff, - 71 - constraints in the short term, and lay the foundations for significant medium term efficiency gains. 6. The principal cause of the weak development of the coastal shipping sub-sector since Independence has been the inadequacy of the finance available for capital development across the breadth of the sub- sector. Despite being largely insulated from the security problems, the condition of the small ports and the lack of sufficient and appropriate vessels has seriously hampered development. 7. Improvements, however, are beginning to be made. The slow recovery of the ports and railway sectors, with concerted efforts from the - donor community, is now well underway. The implementation of the Beira Corridor Project is progressing on schedule and the growth in transit traffic suggests that shippers have recognized the improvements in the rail and port infrastructure and management. The rehabilitation of the port of Nacala is almost completed although the rail link to Malawi is still interrupted by the insecurity situation. The rehabilitation of the Limpopo corridor is also progressing despite the constant attacks which have destroyed bridges and delayed the reintroduction of services. The main disadvantage of thi~ awesome effort to rehabilitate simultaneously the three rail corridors is that the other transport modes have not received the same level of attention and funding, despite their crucial importance for the success of the ERP. Donors have not been as enthusiastic with the road, coastal shipping and aviation subsectors as they have with the rail and port rehabilitation. f/ a~ The Govermnent should now focus its attention on widening the rehabilitation programme of the transport sector particularly to embrace the road and coastal shipping sectors. Top priority should be given to the design of a short and medium term strategy for these sectors and the preparation of an investment plan to be presented to donors and multilateral organizations. The importance of the road and coastal shipping sectors cannot be overemphasized and further delays in correcting the lack of coherent policy in both subsectors and in restoring the level state and donor funding may seriously hamper the recovery experienced under the ERP. Given this serious situation, the Government must consider the following general strategy for recovery: Ci) concentrate future efforts on the rehabilitation and maintenance of the basic network: (ii) increase resource allocation to sectors other than rail and port, especially roads and coastal shipping: (iii) improve the utilization of existing assets through enhancing their management and operations; and (iv) adjust the institutional structure so that it can be responsive to the required rehabilitation, maintenance and operations programmes. This implies that (v) maintenance allocation for roads, which has fallen far short of requirements in the past, will need to be given top priority in the future; (vi) foreign exchange allocation for road maintenance as well as recurrent 8/ Thi• might be explained by the lack of conci•• •hort and aedlua tena •trategi•• for the cJ.velopaent of tho•• •ub•ector•, the Covernment inability to date In providing donor• with a package of Integrated project• de•lgned to overcome the bottleneck• ..ntioned above and the fact that the govern.. nt ha• not been able to •how •lgnificant laprovements In the securlt1 •ituation, which ha• a direct bearing In the rehabilitation of road lnfra•tructure. - 72 - operational requirements of the trucking, cabotage, railways and aviation sectors will need to be secured (albeit to the extent possible given the current shortage of foreign exchange); (vii) systematic effort must be made to improve operational efficiency of the sector; (viii) manpower development and training programnes should be stepped up; and (ix) financial performance and cost recovery must also be improved throughout the sector. The transport sector strategy for recovery summarized below is • the action progranme necessary to implement effectively the policy goals described above. 9. An analysis of the degree of fragmentation of the economy provides one important perspective of the sectoral problem. Even prior to Independence, Mozambique was an exceptionally fragmented country. Both the geographical characteristics of the country and the course of its economic development under colonial rule had done little to create an integrated economy with adeq,!~te in~e!nsl c~!!!!l?unir~~ions. With the intensification of the insecurity problems, this fragmentation has grown increasingly pronounced, with rural transportation and coumunications being severely restricted. II 10. There are four respects in which the fragmentation of the transport sector is now most pronounced: (a) the geographical partitioning that has resulted from the pervasiveness of the insecurity and has reinforced the earlier focus on the routes to the sea rather than the north-south linkages; (b) the dichotomization that results from administering the Emergency Program alongside the ERP; (c) the increased operation of own-account transport fleets at the expense of professional fleets; (d) and the division of the transportation capacity between the private and public sectors. 11. Fragmentation has led to the evolution of serious inefficiencies in the _ system, due largely to the resultant under-utilization of capacity. From the geographical perspective, it is · clear that transportation capacity is necessarily highly localized, and the possibilities of transferring capacity to alternative regions of the country to meet alternative or seasonal demand patterns are very few, both on account of the insecurity and the deficiencies in the infrastructure. Consequently, the number of vehicles required is higher, their utilization is low and their cost- ZJ Currentl1 (1989), it ie not poeeibl• to trev•I by road betw..n Maputo end Belre; the .. in road betw..n Maputo end Xet-Xat w•• cut in eerl11989 by the collapse of• ..Jor bridge; the roads betw..n Belr• end Merroaeu, Quell~•n• end Ne•pula are not safe; and the only way to ace••• NI•••• le vie Malawi. On the other hand, the Belra Corridor to Machlpanda and the road to Tete •r• being ueed without .ajor dleruptlone; and traffic betw..n Naapule and Necala aov.. ceutlousl1. - 73 - efficiency quite low when compared to acceptable standards in a peace time situation. 12. Fragmentation has also resulted from the response to the serious exogenous pressure on the sector, with both enterprise and Government policy often working to reinforce the segmentation of the sector. The formulation of the transport strategy and of the policy to implement the strategy are fundamentally directed at reducing this fragmentation to the extent permitted by the prevailing conditions, and at increasing operational efficiency. B. The Objectives of Transport Sector Policy 13. The introduction of a coherent policy for the development of the • transport sector in Mozambique is a top priority. The present situation has been largely brought about by ad-hoc measures in -risponse to the powerful influence of many major exogenous forces. These include the sudden decrease of transport capacity at Independence; the lack of managerial and skilled manpower; the natural calamities which have affected the country throughout the 1980s; the regional security problem, especially since 1982/3; and the available financial resources "'for investment, particularly those from external sources. 14. In view of the ex~raordinary circumstances, it was perhaps inevitable that short-term emergency measures would take precedence over long term development policies. It is, however, necessary to shift the emphasis of policy toward the development of a more flexible transport industry, capable of satisfying the objectives of both the ERP and the emergency situation. Security problems complicate the development of the industry but do not necessarily alter the policies required. The role of the transport sector strategy in facilitating the objectives of the macroeconomic framework has already been reviewed in chapter III. 15. This section gives a broad outline of the principal policy , objectives, which, at the aggregate level, are: (a) to satisfy the objectives of both the Economic Rehabilitation Program and the Emergency Program through an integrated program that avoids the establishment of a dual infrastructure: Cb) to provide an adequate level of transportation services to meet the current and anticipated demand for all modes of transport; Cc) to foster the participation of both private individuals and private enterprises; (d) to reduce the degree of administrative allocation in the allocation of trucks, ships, and spare parts by enhancing the role played by market forces; - 74 - (e) to redress the balance in Government expenditure, that has recently given considerable weight to the rail and port sectors, and place an increased emphasis on the road and coastal shipping modalities. (f) to promote the use of cost recovery policies through adequate pricing to guarantee long term sustainability and financial viability; _ 16. In the road sub-sector, the objectives for both short-distance and - long-distance transport are: (a) to coordinate the emergency and commercial road transport fleets; (b) to shift the balance of the industry toward the professional sector and reduce the inefficient use of own-account transport; (c) to develop a more homogeneous vehicle fleet; (d) to attract external assistance for road and bridge rehabilitation and maintenance, and create the funding mechanisms to guarantee that routine road maintenance will be undertaken regularly on the basic network; (e) to establish truck allocation, and spare parts and vehicle repair policies, which are transparent and conducive to the increased participation of the private sector; Cf) to provide the necessary tariff autonomy and flexibility to facilitate long term financial viability and sustainability of the industry. 17. In the coastal shipping sub-sector, the broad policy objectives are as follows: (a) to provide adequate capacity, through the provision of appropriate ships; (b) to attract bilateral and multilateral support to the rehabilitation of small ports; (c) to strengthen the management of the small ports through technical assistance and training of local counterparts; (d) to limit regulatory policies to the minimum required to guarantee that the market is not monopolized and that safety regulations are respected. 18. Despite the integral role of the rail sub-sector in the transport strategy, this section confines itself to the road and coastal shipping sub-sectors. This is because rail policies have already been the topic of - 75 - several comprehensive studies.!/ Moreover, one of the key conclusions of these studies has been that a greater focus on the road and coastal shipping sub-sectors is now required. This is supported by the proportion of Government public expenditure in the transport sector that has been devoted to the development of the rail corridors over the recent past. 2/ C. The Framework for the Transport Sector Strategy .. ..19. The Framework. The proposed Transport Sector Strategy Framework has three major elements: firstly, the infrastructural and equipment investment element, including the development of the transpor·t ation routes to the sea, and the development of the coastal shipping capacity; secondly, the policy elements; and, thirdly, the contingency plan which could be implemented if the insecurity were to be eliminated or drastically reduced • • This fundamental program is a short to medium-"te"rm ~trategy that is premised on a series of assumptions (paragraph 20). A summary description of the major elements of the proposed strategy is given below: (a) The first element is the central pill•r of the strategy, and is directed at enhancing the commodity flows along the corridors to the sea, and improving the utilization of the coastal shipping network. There are several components in this respect including the development of feeder roads leading to the railway system; the rehabilitation and maintenance of roads to the small and major ports; and the development of the appropriate capacity to transport commodities by road, rail and sea. In addition, it includes the rehabilitation of small ports to complement the work already carried out on the three major ports, and the development of the coastal shipping capacity to enhance the communications between both the small and major ports, and between the major ports. For the imnediate future, only modest programs will be possible, but they will form a valuable basis for the longer term developments; (b) The second element focusses on policies and mechanisms to create a more efficient transport system. These include the policies to encourage the participation of the private sector; to improve the .. utilization and allocative efficiency of both the available real resources (including capital equipment, spares, fuel) and of foreign exchange; to improve the pricing of the transport services provided; to improve the role played by the state enterprises and !/ Refer •eeir• Tr•naport Corridor Project, St•ff Appreia•I Report•, July 18,1989, Report No.7789-MOZ, World Benk: end •wozembique, Public Expenditure Review•, April 8,1989, Report No.7816-MOZ, World Bank. !/ Air tranaport policies are elao laportant, not le•at bec•uae there ia at pr..ent no elr transport atretegy, end becaua• In the current clrcumatenc.. thla aode la the only reliebl• paa..nger link betw..n th• provincial cepitala. Thia topic la, however, beyond the acope of this report but ia dlacuaaec:I In detail In the Trenaport Sector Revl ... The provlalon of urben tr•n•port la• further er.. of concern, but la •gein beyond th• .. 1n focua of thia report. The iaauea with respect to th• balance of public expenditure •r• aor• fully developed in the •Public Expenditure Rev1 .. •, (World Bank, 1989), - 76 - increase their absorptive capacity and their chances for long term sustainability and financial viability; (C) The third element should provide the framework for a rapid development of the transportation structure when conditions permit. Contingency plans should be formulated on a district- level basis in accordance with the medium to long term objectives, which may be rapidly implemented when the local security conditions permit. The Priority District Program (PDP}, which is being developed in 1990 should form the basis for this analysis. .. It should be a rolling program that is updated regularly, and which takes account of the likely constraints· in investment finance and in manpower and adsorptive capacity. The basic components of this contingency plan would include the rehabilitation of the major north-south roads, especially the center-northeast highway; the development of river transport in Zambezia province; and the rehabilitation of small runways throughout the country to facilitate access for official, medical and tourist purposes. 20. Underlying Assumptions. This strategy framework is_nece.ssArily premised on a series of underlying assumptions, which reflect an assessment in mid-1989 of the most probable environment in which the transport industry is anticipated to operate in the short and medium term. Some of the characteristics of that scenario are likely to be, (a) lack of security outside the main cities will continue to disrupt land transport operations and communications and to prevent proper maintenance of the main road links. Truck convoys will need to be escorted by the military. However, it is assumed that coastal shipping remains unaffected. With respect to the long term or contingency aspects of the strategy, the prime assumption is that the security situation will gradually improve; (b) agricultural production of both food and cash crops will recover as the policy reform program continues to be implemented. Consequently, the demand for transportation services in the mid- l990s will regain levels comparable with those of the early 1980s prior to the intensification of the insecurity problem. In addition, the location of the agricultural surplus is assumed to - be broadly the same as prior to 1980; (c) rehabilitation of some of the agro-industrial processing facilities, such as the cashew factories in Angoche and Nacala, will take place. The mainpoints of export will continue to be Beira, Nacala and Maputo; (d) external support for the rehabilitation of the railway corridors will continue given the regional significance of these routes. Investment in new transport facilities and equipment in the road and shipping subsectors will require new commitments of bilateral and multilateral aid; - 77 - (e) the emergency transport organization created to serve the large number of people affected by the lack of security will continue to operate and be supported by international aid organizations. (f) as the emergency situation recedes, there will be changes in the pattern of traffic flows, but the rail corridors are assumed to continue to be the principal penetration axes to the ports. The proposed strategy gives the highest priority to the rehabilitation of the feeder and secondary roads. In general, this is consistent .. . both with the iumediate need wherever long haul movements to the ports are required as a result of inoperative rail corridors, and with the longer term objective of utilizing the railway axes. In these circumstances, it is expected that, in the catchment areas of the rail corridors (50-100 km radius), truck transport will consist of short haul movements on feeder roads. ·21. It was noted above that transport sector strategy over the recent past has lacked a clear focus, and policy making has been largely in the form of ad hoc responses to the compelling pressure of exogenous factors. In many respects, policy will need to remain responsive to these fac~o.rs, and will continu~ •..t.o. b~~ ~Qn~traine~ by the insecurity situation •eriou.al~~ in particular. Nonetheless, the objective -should be to take these urgent pragmatic decisions in the context of a more well defined framework, and to orientate the medium to long term policy decisions in conformity .with the long term objectives. There are four areas of policy in particular that might be further developed to facilitate the grater flexibility that is required: the relationship between the strategy under the ERP and that under the Emergency Program; the investment strategy; resource allocation policy; and the incentive policy to encourage private sector participation. 22. The Principal Policy Issues. The remainder of this chapter focusses on the principle areas of transport sector policy, which will determine the efficiency with which the scarce sectoral resources are utilized. There are three prime concerns: , (a) the limitations of the present infrastructure in providing the transport capacity required to support the present economic . . activity of the country and the expected growth • (b) the inadequate coordination and integration of the modal networks and capacities which serve the emergency and c0Dm1ercial distribution systems. (c) the inappropriate policy environment which hampers the efforts to overcome the two previous concerns. In each area, rec0Dm1endations are put forward for the further development of Government policy both for the short term with continuing insecurity, and for the medium to long term: in both cases, conformity with the long term objectives is a prime issue. - 78 - D. The Development of the Road Sub-sector The Development of the Road Infrastructure 23. The current state of the road infrastructure. In the years after Independence, priority was given to the construction of new road links, particularly those required to complete a North-South highway, and this significantly increased the .paved road network (from 3700 1Cm in 1973 to close to 5110 1Cm in 1983). Considerable progress was also achieved insofar as gravel road development was concerned (about 250 km between 1975 and 1983). On the other hand, despite a considerable backlog of maintenance and rehabilitation work accumulated from the pre-Independence period, this post-Independence focus on new construction led to the neglect of the maintenance of the existing network. With the worsening of the security situation and the lack of foreign exchange, both new construction and maintenance activities came to an halt in 1982/83. 10/ Moreover, the condition of rural roads has continued to deteriorate as a result of the insecurity, with the destruction of large numbers of road bridges and culverts. 24. In general, over the pos~-Insiep~ndence pe~io.d....~pe road sub-sector has not attracted as much donor attention as other sub~sectora as noted earlier (less than 2% of expenditure in the total transport and telecommunication sectors in 1989). In addition, the lack of a Road Fund, in a country where there are urgent priorities in almost all sectors of the economy, has significantly affected the earmarking of revenues for road maintenance and rehabilitation. Moreover, the Provincial Road and Bridge Construction and Maintenance Enterprises (ECMEP), which are the provincial counterpart of .the Roads and Bridges Department~/. have been given authority for the construction and maintenance of the provincial road network, but have not received the designated funding from the Provincial Governors. 25. The upshot is that the secondary network is slowly collapsing: in 1988 an estimated 60% of the network was in poor condition as compared to approximately 20% in 1973. The tertiary network, 12/ which was the responsibility of districts and counties and was often maintained by the farmers at the request of the authorities, is now crumbling (70% was estimated to be in poor condition in 1989) and only accessible to 4 wheel drive vehicles. The existing roads suffer from a variety of deficiencies; including severe depressions and potholes, surface corrugations, deep - erosion cuts on steeper sections, excessive quantities of loose sand on the !!/ The conetruction of new roeds and ••lntenence was helted In 1ga2/88 when the road crews working on the Centro-Nordeste road were attacked and kllled, and when one of the ••In contrectors (Ceta) lost part of their equipaent. The exception• were the Kuwait Fund financed Tete road, so. . . . intenance on the Beira-Machipanda roed, and eoae UNDP financed (ILO executed) labor intensive rehebilitation progra... !!/ Each ECMEP ha•• etaff of ebout 3"8-6"8 skilled and non-skilled workers '!l/ The gravel/.. rth roads conetitute around 88 percent of the network. - 79 - carriageway forming dangerous windrows, the lack of drainage facilities, and damaged or destroyed bridges and culverts. 26. The very poor quality of the road network has serious consequences for both commercial activity and emergency distribution in the rural areas, irrespective of the prevailing security situation: (a) access to rural areas is limited and primary marketing and distribution is disrupted • •• (b) private transporters, with old vehicles, are unwilling to risk their vehicles on the bad roads. (C) vehicle utilization is reduced by low speeds and long periods of vehicle maintenance and repair. This has a direct impact on the quality of the product and on inventory costs. In addition to the ...... reduced utilization attributable directly to the security situation, carrying capacities are reduced by the carrying of equipment to fix small bridges and remove fallen trees on the itinerary. In addition, food,- . water and fuel must frequently be carried fo.r_-,the return trips. (d) operating costs for vehicles are increased, and may almost triple in some cases. 27. Infrastructural development. In accord with the basic strategy framework outlined above, and in order to meet the constraints identified above ,. an urgent program of feeder and secondary road rehabilitation and maintenance should be given the highest priority. The emphasis should be on the secondary network, with attention also being given to small bridges and drainage, and the removal of fallen trees. 28. The primary concern of any road infrastructure improvement plan must be the fulfillment of the dual objectives of facilitating emergency distribution and serving the commercial objectives of the ERP. Since, in , the short term, surplus production areas are unlikely to be congruent with those experiencing a food deficit and in which food aid is needed, the design of an integrated strategy is extremely difficult. In view of the • emergency situation, the major determinants in the selection of roads for rehabilitation have focussed on the size and regional distribution of the affected population, the quantity of emergency relief and rehabilitation supplies they require, and potential reductions in the cost of airlifts. Road rehabilitation priorities have been established in consultation with Provincial authorities, using the above criteria. In general, where the emergency needs have not coincided with the commercial needs, DNEP has given priority to roads facilitating emergency flows. 29. In future, it is suggested that priority should be given to roads serving productive areas to facilitate export and surplus domestic food flows and the flow of basic inputs and consumer goods necessary for the recovery of agriculture. Roads which are needed to access areas affected by the insecurity and the drought should receive only the minimum - 80 - rehabilitation required to make them passable, unless they are located in areas of potential peace time surplus. 30. In April 1989, a proposed DNEP infrastructure rehabilitation program was presented to the UN-sponsored Emergency Meeting in New York, at which an appeal was also made for external financing. 13/ This program is both well-directed to meet the priority needs at this time, and is in accord with the current absorptive capabilities of the economy. Moreover, it satisfies the key objective, described at the start of this sub-section, in that it explicitly aims to serve both the Emergency and ERP's needs. .. This is being effected by giving priority to the roads that not only ·facilitate access to areas affected by the drought but also link existing productive areas . with the provincial capitals or ports. It has as its priority target, during 1989-91, the rehabilitation of 2100 kms of road located in the worst affected areas of Zambezia, Nampula, Niassa, Tete, Gaza and Inhembane pr~~!ncee . A ~v~h@r of bridges and culverts will also be rebuilt or repaired as part of the proposed program. The existing roads and tracks will be improved to all-weather earthen and gravel road standards, and the destroyed bridges will be replaced with metallic •Bailey Bridges•. At the Provincial level, DNEP proposes to execute this program through the Provinci&l Road and Bridge· Construction and Maintenance Enterprises (ECMEPs). In view of the existing limited resources and security situation, DNEP's program seems adequate and cost-efficient. 31. The rate at which road rehabilitation can in fact be accomplished is fundamentally determined by the insecurity problem. The existing nature of the problem (see chapter II) - particularly, its comprehensive impact on the rural areas - implies that an!y r 1:--:• p~ogress can currently be made with a high probability of disruption and delay. Nonetheless, providing adequate security can be maintained at least during the period of rehabilitation and maintenance, the benefits from preserving the existing network are obvious. The identification of the priority roads should be accompanied by a Government analysis of which areas of the country are most able to support an uninterrupted program, in order that the program may be finalized. This is the fundamental approach of the Priority District Program (PDP). 32. The method of rehabilitation. Most of the operations involved in road construction such as excavation, loading, hauling, unloading and spreading can be accomplished effectively by manual methods. The main - equipment required are agricultural tractor-trailers for hauling and rollers for compacting. The currently operational UNDO/ILO Project ("The Establishment of Labour-based Road Improvement and Maintenance Systems") in Gaza and Inhambane Provinces has . successfully demonstrated the technical feasibility and economic viability of labor intensive methods for both rehabilitating and maintaining secondary and tertiary rural roads. The project has also shown that an effective application of labor-intensive methods results in substantial savings in foreign exchange when compared to 13/ R•f•r •Th• Ea.rg•ncy Situation in Mozaablqu••, United Nations, March 1989, for• detailed d.scrlptlon of th• progr•• and Its r.qulred funding. No lnforaatlon Is curr•ntly avallabl• of th• funding r•c•ived as• r•sult of this •P~•I, or of th• proposed dat. for th• Initiation of th• work. - 81 - equipment-based rehabilitation. Furthermore, it generates employment in the catchment areas, and thereby benefits significant numbers of both the local and displaced population. The existing project is receiving food support from the World Food Programme 14/, and this incentive has been one of the important elements leading to the project's effective implementation. On the other hand, labor-intensive road rehabilitation methods, while effective, have two drawbacks: firstly, they are not appropriate to the rehabilitation of paved primary roads; and, secondly, they are time consuming, and many of the priority roads need to be made .. operational in the shortest possible time • 33. Therefore, DNEP proposes to utilize a blend of local resources and external assistance, in the form of new equipment, as well as food and other incentives, to increase the scope and rate of implementation of the programme. The existing resources available to ECMEPs, especially in terms of road construction equipment, are h~ghly inade~u~te, CQnsJ~tins of very old construction equipment, much of which is obsolete or non-operational. It is, therefore, necessary to augment their equipment resources through the procurement of bulldozers, graders, rollers and tractors as well as the essential, spare parts required for some of the existing equipment. With these additional inputs, it will be possible to execute the project by deploying equipment brigades and labor brigades on·a parallel and mutually supportive basis, thus making maximum use of all available resources. 34. Management capacity. At the central level, the project will be monitored by the National Directorate of Roads and Bridges (DNEP) in collaboration with CENE, DPCCN and the UNCSCERO. The DNEP will be responsible for the implementation .oft~ project in collaboration with the ECMEPs in each Province, and the provision of adequate skilled management capacity will be a key factor in the program, especially in the implementation of the labour-based program. It is estimated that technical assistance to DNEP will be required to undertake this program which could be executed by ILO given their worldwide experience in this type of activity. Security measures, such as military protection for areas where the works will be taking place must be arranged and agreed prior to mobilization. 35. Road maintenance funding. There are four respects in which the • funding of the road system should be strengthened: firstly, a Road Fund should be established; secondly, Provincial Governments should be required to spend their designated road allocations on roads; thirdly, farmers should be mobilized and be given the means to maintain the feeder roads which serve their conununities and facilitate the transportation of their 14/ It I• propo•ed that the approach u•ed in Caza and Inhamban• be extended to Tete, la•bezia and Naapula Provine••· The brigade• employed through thi• ..thod wlll be c011po•ed of both dl•placed and local people re•iding near the •r••• of work. The progr•• will require about 1200 ton• of food aid per yNr, Food requir..,.nt• have been worked out bHed on the •••umption that each worker will require food for• family of five. The project wlll •l•o introduce• •Y•t.111 of Incentive• •o •• to make the •Y•t.11 aore dyna•lc and productive. The incentive• could be in the for. of non-food item• •uch •• clothlng, galvanized Iron •h..t•, agricultural i•pl..,.nta, etc. The project will employ about 608 workers in each province. It i• expected to generate ..ploy..nt for about 1.76 million man day• during 1989-98. - 82 - crops: and, finally, donors' attention should now be redirected to the road sector, as suggested in the Public Expenditure Review. 36. Prior to Independence, a Road Fund provided the revenues required for routine road maintenance. 15/ Since this time, the pressure on Government expenditure and the absence of an earmarked fund have been major factors contributing to the neglect of the road infrastructure. It is therefore proposed that such a Fund be reinstated to ensure the continued maintenance of the system. Unlike the pre-Independence system, however, it should differentiate between operators, taking account of the weight of the vehicles and their circulation, the two main factors responsible for the wear and tear of roads. In addition, in order to guarantee an easy collection of taxes and their .immediate transfer to the Road Fund, it is reco111Dended that most of the taxation be done at source. DNEP has recently proposed some changes in road taxation, which will bring the Road Fund revenues closer to the levels of the 1970's. The impact of these increases on vebicf"e operating costs are estimated at 0.4% for a 15 tonne truck, which is not expected to have a major impact on the price of staples. With the Road Fund revenues, DNEP expects to obtain 70-80% of the funds required for routine maintenance of the basic network. The remaining 30% should be funded by_external sources. The Structure, Ownership and Utilization of the Fleet 37. The structure and ownership. Mozambique continues to lack an adequate professional transport fleet. In 1990, it is estimated that around 80% of the industry is accounted for by own-account transport fleets, that are primarily owned by Ministries, industrial companies and traders. 16/ The rapid growth of own-account fleets is largely explained by factors related to the insecurity and by the need to maintain both an effective emergency and co111Dercial distribution network. Since the deterioration of rural security, private truckers have been reluctant to provide services in affected areas on account of the personal danger and, in addition, in circumstances where the official tariff does not cover operating costs. Furthermore, the lack of a Government commitment to replace trucks damaged by the war, coupled with the unavailability of a war insurance scheme, has provided the private operators with no means of recovering capital lost due to the insecurity. Moreover, the insecurity therefore poses a threat to the operators' basic livelihood. Besides, the urban demand for transport services is sufficient to absorb the supply of - private capacity, and the present official tariff favors short trips over !!/ In pre-independence Moiaabique, the Road Fund derived its revenues froa the following taxee: a) tax on C.I.F. value of iaported vehicles; b) tax on C.I.F. value of fuel, tires and spare parts; c) consuaption tax on fuel, tires and spare parts; d) tax on oil and lubricants; •) compensation tax on die.. 1 powered vehicles; and f) the vehicle license. A percentage of the first five taxes were used for the aa1ntenanc• of roads outside the urban areas. The sixth was used In general for urban roads. l!/ In 1989, the total fl ..t of the M1nistr1 .. of Trade and Transport totalled around 1228 vehicl .. ; of which Trade accounted for 731 (including DPCCN with 381, and AQRICOM with 181) and Transport accounted for 271. - 83 - long distance trips. 17/ Consequently, the state enterprises have grown from about 40% of the total fleet before Independence to an estimated 80% in 1989, filling the vacuum left by the private operators, particularly in the case of DPCCN, which administers the emergency program 18/, and AGRICOM, which is the designated buyer of last resort for agricultural production throughout the country. 38. In v.iew of these problems, the for-hire fleet, that is .. predominantly operated by the private sector, mainly operates in and around the cities. Their load factors are high (7S%-8S%) despi~e their exceptional age, although the availability is low (7S%)f due to the-lack of spare parts. The private operators have, nonetheless, displayed inmense ingenuity and motivation despite the severe shortage of resources, and have maintained a fleet of a surprisingly high standard. On the other hand, the own-account fleets are inefficiently operated and under-uti_lized_•.. ..1.P.i:. example, Camionagem de Mozambique, the main trucking st-ate~e'iitarpr-. he of the Ministry of Transport, has availability factors of less than 45%, while the average availability for the Ministry of Trade fleet is around 75%. 39. It is difficult to make a precise estimate of the size of the fleet operated by private enterprises or person~ whose •main business is transport, but it is estimated to be very limited at around 600 vehicles. There are no precise numbers about the size of the overall (private & public) fleet, since provincial directorates do not report the number of vehicles registered or scrapped every year. 40. The most significant recent development in the road tF~ns.port sector has been the establishment of Transcarga in mid-1987, as an ~utonomous and commercial long haul transport company, owned by four state enterprises [CFM (with a 16.5% share), AGRICOM (27.5%), Camionagem de Mocambique (44%) and ACAUTO (12%)]. Its stated objectives are to improve the conditions for long haul road transport of food aid to the Tete and Niassa provinces and to strengthen the transport capacity of the Beira Corridor and the use of the Beira Port 19/. The Swedish Government contributed to the creation of the company with a three-year financial , support program related to the investment requirements (37 2S-ton trucks and tools), and in partial assistance to the operational cost, while the Mozambique Government provided the infrastructure and facilities required . to operate the company in Beira. The expatriate technical assistance includes a General Manager, a Traffic Manager, a Technical Manager and a Finance Manager. Exceptionally, Transcarga has been authorized to sign cooperation agreements with Zimbabwean and Malawian trucking companies which will allow Transcarga to operate between Blantyre and Harare, and, therefore, earn foreign exchange. Moreover, the National Road Transport 17/ The road tariff structure ls as follows: for Journey• of I••• than 31 k.. , the co•t ie calculated on an hourly ba•i•; for journeys of betw..n 31 and 211 kms, the co•t l• Mt.48 per ton-k•; and for journey• in exc••• of 211 km•, the cost i• Mt.34 per ton-k•. 18/ At pr•••nt, 981 of the tran•port requir.... nt• of the Eaergency Progr•• are handled by 5JSCCN. 19/ The ••in Tran•carga cl lent• are AGRICOM (211), DPCCN (171) and Comercio Geraldo NI•••• (131). - 84 - Directorate (DNTR) has apparently authorized Transcarga to charge a higher tariff (Mt65/tKm) than the official rate (Mt34/tkm). 20/ 41. The creation of Transcarga makes a major contribution towards attaining the Government objective of accelerating the professionalization of the road transport industry and the transfer of management and ~ technological skills to local Mozambicans. It does, however, raise several • fundamental questions with respect to the future structure of the industry. In particular, it is clear that, firstly, the enterprise has received considerable support from the Government and donor community in its •• establishment, and that, secondly, it currently operates in a more favourable environment than its existing and prospective competitors. Notably, it is authorized to operate a preferential tariff structur~; it is able to participate in the transportation of foreign cargo; it has relatively easy access to foreign exchange; and it has the benefit of an expert management team. A major question is therefore how th,se incentives may be applied more generally to incorporate additionally the private operators. 42. The problems of utilization. The growth of own-account fleets seriou•ly reduces the flexibility provided by a professioq~l ~t:_~nsport fleet. The consequences of this trend are that: (a) the utilization of available load capacity is reduced, as own- account operators do not generally carry backhauls for other • companies, nor do they utilize idle time by operating for others. Transport shortages have resulted in some increased flexibility, 21/ but only on a very restricted basis. Cb) managerial control of transport operations is reduced, with less detailed supervision and planning, largely due to the failure to treat transport as a specific cost center: transport is a minor element in total production. (c) less control over drivers and their activities. While this need not necessarily result from own-account operations it is a common occurrence. 43. The degree of cost control is a major factor in determining utilization levels. For own-account operators, and particularly for the public sector 22/, vehicle utilization receives a low priority due mainly to lax cost controls and the failure to treat transport as a cost 28/ Refer footnote 17. In practice, It appear• that, deeplte thle authorization, .. ny of Tranecarga'• cllente have been reluctant to pay the lncr.. eecf rates. ~ ACRICOM veh1cl•• have carried ... rgency euppli•• for OPCCN, and OPCCN truck• have Di"ckhaulecf caehew nute, but thl• le not done on• regular baele. ~ AQRICOM and OPCCN nor11ally operate at a 68'C load factor and con..quently at a high traneport coet. Private eector operator• operate at an average 761 becauee, unlike Covernaent etate enterprl•••, they have the aotlvatlon to a..k return load•. - 85 - center. 23/ Inadequate accounting systems are one important reason for this weakness, and, until recently, the absence of financial accountability in state enterprises was a further major factor. Public sector management have, in general, lacked commercial orientation and have not been motivated to improve cost-efficiency. Nonetheless, in the existing circumstances, the state enterprises (especially, DPCCN and AGRICOM) play an indispensable role in maintaining rural communications, and efforts are already underway to enhance their operational efficiency. 24/ ~ . - 44. While these problems may occur in large own-account transport companies, they are generally of minor importance to the small private professional operator. In such fleets, the owner, or members of his f~ly, normally control the activities of the fleet, take an intimate interest in the costs and revenues of the activities and ensure, as far as possible, that non-revenue earning activities are kept to a minimum. Drivers are compensated for this much tigbter control by higher salaries, and in some private fleets earn salaries between two and three times the level of the state-owned Camionagem de Mozambique. In particular, utilization is maintained at a higher level, because private transporters are usually more aggressive in looking for backhauls. 45. In sunmary, the present structure of the industry and the inefficient utilization of available capacity has led to the maintenance of larger fleets ceteris paribua that are operated less intensively, with a resultant higher level of unit operating costs than would occur with a larger professional transport fleet. 46. Increasing existing capa~ity through better utilization. The structure of the industry and the associated problems of utilization will continue to be affected by the emergency situation. There are, nonetheless, several key respects in which utilization can be enhanced, with consequential reductions both in the demand for additional capacity and in vehicle operating costs. With respect to the operations of state enterprises: , (a) they should be directed increasingly to hire services from the private sector. This would thereby reduce the existing under- . ~ M•ny Mlnlatri•• do not k..p good control of the nu•ber of truck• In ••ch of their par•atat•I•, •• evidenced by the dlfflculty the •iaalon h•d In obt•lnlng auch lnfor.. tlon. ¥,ii AQRICOM h•• atarted to •onltor lta fl ..t •nd ••t t•rgeta which •r• dlacuaaed regul•rly, 1n •n •ttenlpt to Iner•••• the efficiency of lta provincl•I branch••· Yet, the fl ..t aervlcea •r• atill not conaidered • profit center, ao there •r• no ••jor Incentive• to l•prove the utlliz•tlon. DPCCN auffera fro• the ••me problem•, •lthough aome control la now undertaken by ••P•trl•te• hired for that purpo••· Good •••mpl•• of own •ccount fl ..t utlllz•tlon •r• llluatr•ted by Hortofruticol•, • p•r••t•tal in ch•rge of the dlatribution •nd marketing In the M•puto •r•• of fruit• •nd vegetable•, mainly origln•ting In the Chokue •r••; •nd by DIMAC, • MCA p•r•atat•I in ch•rge of the .. rketing •nd dlatrlbutlon of conatructlon ..teri•la. In off-..••on or off-pe•k period• tho•• COllpanl•• ••II tr•naport .. rvlc.. •t the offici•I t•rlffa to incr•••• utiliz•tion of •n otherwi•• idle fl ..t. Yet, ainc• they de•I m•inly in loc•I currency, they h•v• h•d conaiderable probl ..a In obtaining the Import Ileen••, to renew their fl ..ta. - 86 - utilization in the state sector, and foster the professionalization and role of the for-hire operators. 25/ (b) they should increase utilization and backhaul capacity by providing for-hire services on their return trips, and during their down-times or off-peak periods. 1!/ Enterprises should appoint a •grouping agent• in each area served to promote their backhaul services. (C) Ministries should be made more accountable for the fleets of their ... state enterprises and should direct them to treat the transport fleets as cost/profit centers. (d) they should be instructed to set performance targets for their fleets which would be discussed with D~TR. If these targets are not achieved, and no ac~eptable e~ten~~ting ci~c~stances are evident, the state enterprises should not be allocated additional trucking capacity. £1./ (e) they should be required to prepare an inventory- of non-operational or unutilizad vehiclas.,,..a.wL.au~t •.on thaL--U ~he highe_r~t J~.! ~der. This step would increase the availability both ·of- operational vehicles and spare parts. ( f) a timeframe should be established for the transfer of Transcarga into private ownership, with a Mozambican management team. The creation of a joint venture with an existing domestic or foreign private enterprise, and supported by donor aid in the initial stage, would act to stimulate the private sector and avoid the long-term establishment of an additional state enterprise. (g) in the long term, when the security constraint is alleviated, own- account operators such as AGRICOM and DPCCN should be encouraged to phase out or significantly reduce their own fleets. 47. With respect to the exercise of Government controls over the market: (a) restrictive licensing should be eliminated to allow the own- .. account fleets of rural traders and state enterprises to be used for the transportation of goods and passengers . This measure would be . equivalent to the elimination of the distinction between own-account and for-hire transport and is already unofficially effective in some areas . 26/ DPCCN and ACRICOM are both already doing thi• to an extent with TRANSCARCA and are .TIiing to expand the hiring of private •ec:tor ..rvlc.. , paid at official tariff•. 28/ Thi• I• alr..dy being done by Hortofruticola and DIMAC. gJ_/ Thi• •y•t.ea ha• already been •tarted by AGRICOM, to control each of it• regional bi='"anche•. - 87 - (b) registration fees and vehicle licenses should be increased in order to improve the utilization of the vehicle stock, and should be uniformly applied to all owners, with the scale of charges being related to the power and size of the vehicle. This should provide the incentive to owners, and especially the state sector, to either use the vehicles efficiently or sell them, promoting therefore a used market for vehicles. Improved collection methods should also be developed • . {c) - private transporters should be accorded the same rights as state enterprises, and, in particular, Transcarga. (d) policy issues relating to the allocation of new vehicles and spare parts, and to the tariff structure, are considered elsewhere ~~a 7~graphs 58 and 63) • 48. The Divesting of State Enterprises. The historical context of manpower shortages, capital scarcities and lack of equipment, combined with the necessity of maintaining_adequate transportation services, provided the primary motivation for Government intervention in the post- 0 Independence period. The ERP-has since created a basis for improving the effectiveness of transport service provision by requiring both public and private enterprises to follow stricter commercial practices and financial targets, and by fostering increased competition and efficiency. The public sector should now focus on key strategic areas of the sector, on sub- sectors where divestiture is impractical due to monopolistic conditions, and on ~r~as w~ere the necessary resources are required on a large scale. Other activft!es should be progressively be moved into the private sector. In the long term, a more active participation of private entrepreneurs should result in cost-efficiency gains which will ultimately be passed on to the consumer. 49. The combination of improved public and private provision of for- hire services should then lead to a reduction in the number of own-account , fleets, with associated improvements in efficiency being possible. In some cases, the main constraint to divestiture has been the concern to retain foreign exchange revenues within the country, unlike prior to Independence, . when most services were in the hands of foreign based companies. The Government should therefore aim to control the flight of foreign exchange and yet benefit from encouraging private sector operations. 50. Present Government policy has concentrated on controlling the operating procedures of enterprises, which it is ill-equipped to do. Staffing problems have hampered technical and financial performance in the sector, and managers have had little autonomy in dealing with manpower issues • . In general, staffing levels have been too high, with few resources devoted to training, and with pay unrelated to job performance. On the other hand, the Government has been well qualified to address problems of access to finance, the availability of spare parts, the coordination of inter-modal activities, and the developing of specific policies to provide necessary capital. - 88 - 51. In view of the considerable burden placed on the Government in operating transport enterprises. it would appropriate for further study to be undertaken of the benefits that would accrue from the total or partial divestiture of some enterprises, and the eventual liquidation of others whose services can be provided in a more cost-efficient manner by the private sector. Amongst the enterprises that should be considered for divestiture are: NAVIQUE (the coastal shipping company), CAMIONAGEM DE MOZAMBIQUE (the trucking enterprise), TTA (the national air taxi company), and the Urban Bus Transport Companies (TPUs). In addition, several enterprises which perform shipping related services, such as ANFRENA, PERMAR, ADENA and MCCARGO which are under the jurisdiction of the Ministry of Trade, should be considered for return to the private sector. 52. Gradual divestiture of transport related state enterprises would allow both the Ministries of Trade and Transport to concentrate their scarce mansgerial ~esou~cee ~~ ~~licy matters, modal coordination, institutional reform and sector deregulation. The releasing of human and financial resources from matters of enterprise control would be particularly valuable for the implementation of the proposed transport policy reforms. 53. The role of war insurance. A truck •insurance-replacement• scheme (TIRS) to cover capacity destroyed as a result of the insecurity is one of the prerequisites for increasing private sector participation in the long haul intercity market. Without the creation of this insurance, it is doubtful that private transporters will return to the intercity long haul markets while the security situation persists. Currently, EMOSE, the national insurance compa~y. ~~fuc3 ~ to insure the trucks against insecurity-related risk, since the necessary premiums would be prohibitive in most cases. Moreover, unless the insurance could be managed in foreign currency, there would be no guarantee of vehicle replacement. 54. The establishment of a TIRS mechanism to insure and replace losses would therefore be a considerable incentive to greater participation in the sector, especially in the rural areas, and especially by the private sector. A detailed feasibility study would be required to establish the appropriate operations and premiums for the scheme. In principle, premiums would be paid in meticais into the TIRS, which would then purchase the necessary foreign exchange. The Government would need to guarantee the av~ilability of the exchange for the scheme to be viable. The TIRS could additionally be financed either through bilateral programs, or by imposing a tax on FOB costs of exports, particularly those utilizing long haul road transport. 28/ Furthermore, the study should develop adequate control mechanisms to determine the validity of the claimants and to ensure against the abuse of the scheme. ~ The tariffs approved by Covernaent •u•t eleo reflect an it.ea for war insurance, uni••• the Covern..nt was directly to aeeu.. the financing charge. - 89 - The Need for New Capacity 55. Any precise assessment of the current and prospective need for vehicles is rendered extremely difficult by the basic lack of information regarding the existing stock.• While anecdotal evidence abounds, this is not an adequate substitute for the Provincial Directorates producing accurate data on the vehicle fleet on a regular basis. Consequently, any conclusions are necessarily qualitative. Nonetheless, it appears that there are two principal areas of vehicle deficiency: at the pr~ry marketing level, where the stock of tractors is inadequate; and at the secondary level, where trucking capacity is insufficient. 56. The most pressing vehicle needs are felt at the primary marketing level in the transport of crops from the family producer to the retailer. The problem of rural access and mobility - notably attributable to the road conditions - has necessitated the use of tractors and special purpose vehicles, notably by AGRICOM and the Ministry of Agr~culturi. However, this form of marketing entails operating costs that are high and generally uneconomic, unless a variety of additional tasks is performed (including production-related tasks, feeder road maintenance and off-season tasks). 29/ Moreover, the present security situation, the maintenance organization and the pattern of rural development are major constraints to the full utilization of tractors. While at present the tractor is probably the best solution to evacuate produce at the primary level, the use of these vehicles for primary marketing should be carefully re,assessed in the . long run. 30/ The current need is, therefore, best fulfilled either by providing tractors or three tonne vehicles 31/. 57. The second most important hd'ed'" is fel ~ at the secondary marketing level, that is, in the transport of crops from the retailer to the wholesaler. Detailed analyses of the demand for trucks at this level are again rendered impossible due to the absence of accurate data on the existing vehicle fleet. Without these data, it is difficult to quantify the shortfall in the supply, although anecdotal evidence suggests that there is a deficit currently of around 20% in capacity. ~/ The use of tractors was well documented in the National Transport Study of 1978. 38/ The Government is atteapting to scr..n the make of tractor to ensure that the most appropriate types for the Mozambican envlron11ent and situation are i•ported, but they are often forced to accept the makes made available by the donors. !1/ Some bilateral progra•s, such as the USAID and Japan, already provide 3 tonne trucks and tractors to family producers. - 90 - 58. With respect to spare parts,~/ the Government should guarantee support for efficient operations by, firstly, maintaining the eligibility of spare parts under the SNAAD to allow the required import needs of all sectors to be met; secondly, encouraging the rehabilitation of existing vehicles whenever possible and desirable; thirdly, promoting the development of efficient and motivated networks of repair facilities; and, finally, subject to the donor-imposed constraints, attempting to standardize the fleet. The Allocation of Trucking Capacity 59. Current allocation procedures. As was discussed exteneiy~__lx _in __ Part 1, the severe shortage of foreign exchange and the constraints imposed on the Government by the donor co11111unity have led to a highly centralized admini,trative system for the alloc~tion of exchange, and in this respect, allocations for transport are no exception. In addition, the priority given to the strengthening of the emergency distribution system has led to a large proportion of the available resources being channelled to meet this demand. In consequence, prior to 1989, there was no possibility of implementing a more market-oriented allocation procedure. On the other hand, the adopted procedures have strongly favoured the state sector, which has received an estimated 80% of total vehicle imports, with private transporters receiving only small allocations from specific donor programs, despite having the local currency to finance the importation. 60. At present, domestic vehicle allocation is inextricably tied to the fo~eign exchange allocation process. At the planning stage, the Ministry of Trade has primary responsibility for preparing the import plan by sector of the economy and by category of import in conjunction with the other relevant ministries. This forms the basis for the administrative allocations that occur throughout the year . 33/ UCPI has developed a list of key criteria to allocate these funds to both the private and public sectors, which include: the degree of priority of the sector within the ERP; the relative importance of the applican t in the transport sector, and, particularly, in providing transport services for emergency and essential ... products, and for exports; and the technical and financial strength of the applicant . .. ~ At present, the Covernment has no spare part pol Icy, other than requiring that any truck imported in large quantlti .. be represented In the country by an agent capable of repairing th... Private operators have had a very restricted ace••• to spares, forcing th.. to obtain spare parts through the cannibalisation of Irreparable vehlclee, or through the purchase of spare parts in neighbouring countrl .. using foreign exchange obtained through the parallel aarket. The.. options were not always feasible and, therefore, the result was an overall low avallablllty rate for th• vehicle fl ..t C••tiaated at 861), due to high down-ti ... for aalntenanc• and repalre. Furtheraore, even when fund• were available to acquire spare parts, the age of th• privately owned vehicle• are such that procur...nt was haapered by the changing of th• coding nuabere of spare parts and by th• termination of the supply. 33/ All the funds provided by bilateral and multilateral organizations are adllllnlstered by tlie Unit for Coordination of Iaport Progra.. (UCPI), a departaent of the Mlnletry of Trade, with th• proposed allocation• being subject to scrutiny at the alnlaterlal level. - 91 - 61. There are, however, several disadvantages associated with these criteria for administrative allocation: (a) the state enterprises are better prepared to make their cases to the Ministry of Trade and UCPI for import licenses than small companies or individuals. Individuals who own small or medium truck companies are not capable of making their cases alone, because they have, in general, limited formal education. .. (b) the state enterprises overseen by the Ministry of Trade may have an undue advantage, because of greater ease -of-··acc-ess-·-ta-uePI-;--"----- - - - - (c) some ministries are better staffed than others to prepare the-tr-- - - ~ import requirements and submissions to UCPI. (d) they discriminate against enterprises which have had· i!tfle or no contact previously with the Ministry, and against potential entrants to the industry; (e) the price mechanism plays little or no role in the allocative process, with decisions · therefore being· subj~t . ~o considerable inefficiency. 62. The development of allocation procedures. Several aspects of the existing procedures for the allocation of foreign exchange for vehicle importation and the associated procedures for the domestic allocation of vehicle capacity were identified above as requiring review. ~s\ .~ot,bly, the appropriate development of the administrative allocation system arid"' the most suitable role of the price mechanism in the allocation process were isolated as areas of greatest concern. 63. The allocation of foreign exchange for vehicle importation provides an important example of the direction in which trade reform should be moving. The policy objective should be to incorporate all types of vehicles, employed in the productive and distributive sectors of the .. economy, within the System for the Non-administrative Allocation of Foreign Exchange (SNAAD). There would be two additional requirements in this case: firstly, only vehicle dealers certified by the Ministry of Transport as .. able to operate an adequate maintenance network would be eligible, and, secondly, dealers would have to comply with the Ministry's provincial quotas to ensure an equitable regional distribution. Utilizing the SNAAD wouid automat.i cally ensure that at the prevailing price the needs of the economy were being met, and that no subjective administrative process of allocation would be required. As with all products eligible under the SNAAD, access to foreign exchange would be automatic to all eligible applicants. The implication of adopting this recommendation would be that vehicles would be priced to reflect real resource costs, and that all demand at this price would be satisfied. Import licenses are automatically made available under the SNAAD once the allocation has been formally approved. Moreover, the existing discrimination in favor of the state sector, and in favor of certain elements of the state sector, would be - 92 - eliminated. 34/ The dealers would then sell the vehicles in local currency on a first-come first-served basis. 64. The major obstacle to the introduction of vehicles within the SNAAD is the existing specification of the donor assistance contracts. Most of the present supply of vehicles is subject to tied contracts, and this effectively precludes the establishment of vehicles within the SNAAD since the substantial and specific administrative requirements of donor aid are incompatible with a more market determined structure. Prematurely introducing these imports into the SNAAD entails two important dangers: firstly, the tied donor funding becomes immediately less attractive, since it is subject to more cumbersome and restrictive procedures, and because demand may be automatically satisfied through the SNAAD for the eligible vehicles; and, secondly, the Government needs to ensure that the SNAAD can be effectively financed without vastly distorting the compositl9~ of imports. Whlle in the medium term, a move to a less controlled tcade regime would be anticipated to lead to significant structural changes in the import composition, it is not desirable in the short term for a disproportionate amount of exchange be devoted to one group of products to the detriment of the other necessary imports. Consequently, ensuring that the effective price of the imports (as determined by the exchange -rate .and~~~ tariff structure} is approximately appropriate, and that the sources of vehicle finance are all channelled through the SNAAD is of paramount importance. In conclusion, the feasibility of improving the allocation process therefore rests both on the willingness of the donors to direct their funds into the SNAAD, and on the willingness of the Government to initiate the necessary steps to decontrol the process. 65. Such a program is not incompatible with the needs of the Emergency Program. Two possible methods exist for the satisfying of these needs: firstly, the emergency agencies should enlist the services of the for-hire operators wherever this is feasible; and, secondly, the role of the SNAAD would not be inconsistent with some direct vehicle importation being undertaken by DPCCN using a specific donor's finance. The Tariff Structure 66. The existing structure. The maintenance of a uniform official tariff structure throughout the country is a major obstacle to the participation of the private sector, especially in the provision of intercity services. The official tariff schedule for road transport does not reflect long run marginal costs, taking no account of capital replacement costs, capital finance costs, or the type of infrastructure in which the services are provided (paved, gravel or earth roads; secure or insecure regions}. Moreover, it does not compensate the truckers for the costs they incur in accouunodating the military 35/ and does not allow a ~ State enterprises would therefor• be accountable for their own acquisition• of vehicles, and, given th• current proc••• of r..stabliahlng co!Nllerclal practice within the sector, this should ensure the appropriateness of their purchasing decisions. !!/ Military personnel account for around 281 of the available capacity In a typical convoy. - 93 - premium for the extra time that trips take due to the security situation and the poor condition of the road infrastructure. In general, these costs are absorbed by the transporter and this decreases his net income. 36/ The intercity tariff structure operates on a ton-km basis, and does not take account of the additional time necessitated by many trips, during which they could often have recorded as many as three times the ton-kms in secure areas. Unofficially, tariffs much higher than the official rate are often paid, by paying empty backhauls or charging extra kilometres, although contracts with state enterprises are constrained to use official rates. In general, professional transporters who respect official tariffs cannot sustain their companies in the long run. 67. The development of tariff policy. The key question with respect to tariff policy is, given the present market for professional operators,. the security conditions and the poor state of the infrastructure, what type of pricing policy would be most appropriate for Mozambique. 68. With respect to the intercity market, the introduction of total deregulation would be premature since there are currently insufficient private transporters to guarantee competition. Equally, in the present circumstances, the establishment and enforcement of a complex tariff .struc~ure based on, economic cost of operating in this market is impractical due principally to the variable condition of the roads and the security situation. Another alternative, tried by a number of countries has been to set either maximum or minimum road tariffs, but, almost without exception, market conditions have prevailed. 69. In the event of continued tariff regulation, a fundamental principle should, however, be to set ~ariffs so that they are sufficient to cover the long run marginal costs of the operation plus a contribution for overhead and profit. In view of the operational constraints, an official revised tariff schedule should be published, reflecting not only the type of infrastructure (paved, graved, earth road), but also allowing time premiums for trips where the expected duration is far higher than for similar trip distances in or around the cities. In addition, to prevent abuses of such a system, a premium should be paid if the trip is done in less than an agreed time period. Premiums to reflect the additional risk of operating in rural areas could be built into this tariff structure. The tariffs should be updated regularly to reflect changes in the cost of fuel and currency devaluation, and should only require the ex-post approval of the CNSP. This measure will, at least, entice private transporters to do more work for state enterprises, who in turn will have the latitude to n~gotiate premiums to reflect the lack of security and the poor infrastructure. Additional .Government allowances to compensate transporters for the costs incurred in accoD1J1odating the military in convoys should also be considered. In the long run, when the number of transporters in each province in sufficient to guarantee adequate competition, intercity tariffs should be deregulated. ~ Due t.o th• security situation, trips take as much as thr.. ti ..• their noraal duration. - 94 - 70. Despite the official regulation of urban transport, the increased supply of trucking services relative to the existing demand has led to a de facto tariff deregulation, notably in the larger cities. At present, there appears to be no strong case for regularizing this position. E. The Development of the Coastal Shipping Sub-sector 71. Current State. The sector strategy ascribed an import•nt___rple to the coastal shipping sub-sector. Major progress has already been made in the restoration of the major ports of Maputo, Beira and Nacala, but the remainder of the sub-sector has been almost neglected, and this should be the focus of the medium term program. The small ports are an important constraint, creating considerable delays with a consequential adverse impact on product quality. The problem is generally twofold. Firstly, their entrance channels are silted and they cannot be visited by most vessels due to draft limitations, implying that port-ship transportation must be undertaken by barges and lighters. This operation is slow, inefficiently managed and there are insufficient barges in each of the small ports. Secondly, the loading, and unloading equipment is either not workin& or has been destroyed. 72. The neglect of small ports has been primarily attributable to the emphasis on other transport modes as noted earlier, but the lack of qualified management personnel also poses serious problems. Recent studies (Sogreah, Norad) suggest that those ports which are the responsibility of a private company (for instance, Hacuse, which is under Boror, the main copra exporter) tend to be maintained in a better condition because the users have the motivation to take the steps required to correct inefficiencies, provided the funding is available. This contrasts with the small ports which are under the direct jurisdiction of the National Directorate of Ports and Railways (DNPCF). In this instance, the lack of funding and skilled manpower has led to the neglect of the small ports, with the DNPCF focussing on the main ports for which external funding is generally available. 73. Available shipping capacity presents a further problem, with recent studies 1]_/ suggesting that, at present, the available capacity is 20-40% below the estimated level of demand.~/ One key factor in this regard is the shortage of vessels, with Navique only operating 16 vessels in 1989. A further serious constraint is, however, the inordinate time .. spent in port and required for maintenance, with estimates that the Navique fleet spends around 70% of the time in port. Consequently, the inability of the national cabotage state enterprise (Navique) to accommodate the freight may imply delays of 2 to 4 weeks. Measures to remedy this lack of capacity have been hampered by two factors. Firstly, there is as yet no clear strategy for cabotage, despite a very comprehensive study financed by the Caisse Centrale (CCCE); and, secondly, the lack of foreign exchange is 37/ Refer •Plan Direc:teur d.. Tran•ports Mar1t1 ..s au Moz••b1que•, Rapport de Synth... , !lrGREAH, Grenoble, France (Nov..ber 1988); and •coastal Transport Study•, NORAD (April 1989). llJ The flNt i• .. inly operated by th• state enterpriH Nav1que. - 95 - a major constraint to the purchase of ships even when a clear demand has been identified. 39/ 74. The Government is planning to create a small cabotage company based in Nacala, which would be owned by other state enterprises, but there is an urgent need to facilitate access to foreign exchange for the acquisition of •beacher• type vessels by companies which can justify such investment and maintain high utilization of the ships. In particular, Manica Freight Services, the major Mozambican freight forwarder, owned by South African and British interests has leased two small coastal vessels and is awaiting permission from Government to operate along the coast. Other private firms might be interested in this lucrative foreign exchange market for the transport of food aid for 'WFP and CARE. 75. The development of the shipping infrastructure. The key requirements in the coastal shipping sub-sector are: (a) An immediate rehabilitation of small ports such as Angoche, Pemba and Mocimboa da Praia, with the focus on channel dredging and loading/unloading equipment. In addition, the provision of technical assistance to run these ports is a high 0priority, if necessary through management contracts to their .main usera. (b) Preparation of a plan to increase coastal shipping capacity, either by making available foreign exchange for the purchase of additional vessels of the •beacher• type (between 250-500 DWT), or by licensing private companies to operate their vessels on those routes. 76. The priority concern in the coastal shipping sub-sector is the rehabilitation of the small ports, with Angoche, Pebane, Mocimboa da Praia, Inhambane, and Quelimane requiring precedence in the rehabilitation of their infrastructure and loading and unloading equipment. Dredging of entrance channels is also required, especially in Angoche. The details are beyond the scope of this report, but are provided in the recent studies of Sogreah and NORAD. 40/ These studies should now be translated into an , implementable and realistic program of renovation, with a specific timetable and with a precise estimation of the required external and domestic resource requirements. In addition, the Government should produce a plan for the strengthening of management of small ports. This may necessitate the contracting out of the management to the ports' main users who would be responsible for the overall operation of these infrastructures. 1j/ For example, the wood mills of Cabo Delgado, which export to the RA and to Maputo, are severely constrained by the lack of ships, and are prevented from making their own purchas... Furthennore, the copra producers, have decided to invest in a 688 DWT beacher, becau.. they believe they have enough traffic to Justify such purchase. ~ Refer footnote 37. - 96 - 77. The adequacy of shipping capacity. The proposed policy has two objectives, to increase the acquisition of ships; and to attempt to shift the balance of the industry from NAVIQUE either to newly formed private coastal shipping enterprises or to individual concerns. The first objective would be for the Government to facilitate access to foreign exchange for the acquisition of ships for exporters, including associations of private entrepreneurs (such as the wood mills of Cabo Delgado and the copra producers). These potential beneficiaries would be required to present an investment and revenue plan showing how they intend to utilize their ships for own-account and for for-hire purposes, and to produce ,~ maintenance plans showing how and where they intend to maintain their ships. The second objective could be met by permitting enterprises to operate their ships not only for the transportation of their own products, but also for for-hire services on certain routes. In addition, the Government could promote the creation of small coastal shipping companies in joint ventures with private entrepreneurs and attract seed money for the initial investment or ships. The Government should also commit itself to sell its share of such companies after the first five years. Moreover, these companias would, hopefully, be based either in Nacala or Beira rather than in Maputo. 78. In order to meet the immediate capacity constraints, the Government should consider the option of allowing private operators to operate services along the coast for an agreed number of years, and pay a royalty either in foreign exchange or in meticais, depending on the currency of their earnings. The operators should, in addition, provide other public carrier services identified by Government. Given the opportunities available, in the short run, to transport emergency aid for the WFP and other organizations which pay in foreign exchange, there will be several entrepreneurs ready to provide the required capacity. In the medium and long term, the Government should also attempt to tap the lucrativ~ markets earning foreign exchange, by formulating plans to foster joint ventures between foreign operators and local companies. Although this policy entails a risk that some foreign exchange revenues will leave the country, the Government should weigh this factor against the opportunity cost of not providing adequate capacity to transport cash crops, which also produce foreign exchange, and against the urgent need to deliver food aid. 79. Tariff policy should also be addressed. In particular, port charges should be adjusted to provide revenues for recurrent maintenance costs, and to reflect the type of ships and cargo. In addition, collection systems should be strengthened to reduce the degree of evasion. Moreover, with respect to coastal shipping, the Government should allow complete route deregulation and cost-based tariffs, with the adjustment of tariffs being subject only to ex post review. An important implication of improved port facilities and greater transport capacity, even with the establishment of more appropriate tariff policies, should be the significant reduction of transport costs for all commodities. 80. A major concern of the proposed strategy is to enhance the opportunity for the professional fleet operators to participate in the provision of transportation services, in order to improve the efficiency of •• . - 97 - the sector. To the extent that the insecurity continues to necessitate a public sector role due to the impact of high risk levels on private sector participation, the public sector will remain crucial. Nonetheless, the strategy proposes that greater encouragement be given to the private sector, especially through the provision of resources on a less discriminatory basis. Moreover, as the security problem diminishes, the strategy proposes considerable reductions in enterprise's own-account fleets. The proposed policies also emphasize the need for a stronger implementation of the existing policies to enhance the financial viability of the sector in order to assure long term sustainability. This requi~es major improvements in cost-efficiency and the adoption of cost based tariffs. , - 98 - CHAPTER VI THE DEVELOPMENT OF THE FINANCIAL INFRASTRUCTURE 1. The importance of the financial sector in the next phase of the ESRP has already been discussed in chapter IV. 1/ This chapter has two major objectives: firstly, to provide more detail of the financial reforms that have been implemented under the ERP; and, secondly, to identify the principal policy issues that require addressing in the short- to medium- term. The main policy concerns that are considered are: (a) the development of prudential regulations and instruments for credit management; (b) the access to the banking system; (c) the availability of long term credit; (d) the mobilization of domestic savings; (e) the role of subsidized credit. 2. One major element of financial sector reform - the recommercialization of the financial system - is not handled systematically here, although aspects of the problem do arise. A study of the pre- requisites for re-establishing a commercial, self-sustaining sector is beyond the scope of this report, II but it should include an analysis of the following concerns: the adequacy of the current structure of the sector and the means to enhance competition; the sustainability of the existing financial structure of the major operators in the sector, and the role for re-capitalization; and the definition of appropriate criteria to evaluate project viability; A. Reforms and Developments in the Credit Sector under the ERP 3. At the sectoral level, reform under the ERP has addressed the weaknesses of the banking sector in four major respects: (a) the structure of the banking sector; (b) the operations of the banking system; (c) relations between the public sector and the banking system; (d) the stimulation of the rural sector. 4. The Structure of the Banking Sector. The primary objective of structural reform has been the separation of the central banking and commercial banking functions of the Bank of Mozambique (BM), with a view to improving economic and financial management. Though the separation has not !/ Part 1 of this report discussed the macroeconomic aspects of financial sector policy over the ERP, and their role in supporting the strategy of macroeconomic adjustment. Chapter X consider the macroeconomic issues over the medium term. 2/ These issues are the focus of work being undertaken at present In the context of the Small and Medium Enterprise Develol)lllent Proj~t, and a financial sector study planned for 1991. - 99 - yet been completed, progress has been made in classifying operations and departments to the two functions. 1/ A new accounting system, to be adopted by all the banking sector, is now being introduced at BM to facilitate the separation of the accounts of the commercial branch from those of the central branch. i/ This will allow the evaluation of the assets and liabilities and, thus, viability of the commercial branch. It will also strengthen the autonomy of the Central Bank, the transparency of its operations and its ability to supervise the banking system, while reducing the scope for conflicts of interest. The creation of a new commercial BM will be effected in 1992, and will assume the newly separated commercial responsibilities from the central BM. 5. Until the separation of the accounts of the Bank of Mozambique is completed, the development of the policy instruments needed for a more effective management of the financial system will not be possible~ In 1975, the basic legal statute (the Lei Organica) granted BM, in its role of central bank, extensive powers to implement monetary policy and control the operations of the banking system. In particular, the Lei provided BM with the power to (a) establish guidelines for refinancing commercial banks and determine the discount rate, (b} establish guidelines regarding terms and volume of credit granted by commercial banks, (c) establish reserve requirements as a function of commercial banks' deposits and other liabilities, (d) monitor commercial banks' accounts and operations, and (e) sanction them in case of violation of the guidelines (although the type of sanction is to be determined by the Government}. The scope of these powers is comparable with that of central banks in most developed countries, and there appears to be no need for expanding the provisions of the Lei Organica in this respect. However, some instruments - notably reserve requirements - have not been introduced, and others have been used only in a very limited way. In particular, although BM established a discount window, it has been used only sporadically, because of excess liquidity in the banking system. 1/ Furthermore, while targets for each commercial bank's credit expansion were set and monitored in the context of the National Credit Plan, the credit limits were not binding. and therefore required no enforcement. This has continued to be the case even after the introduction in 1987 of aggregate credit ceilings, as they were binding neither in 1987 nor in 1988. BM's other principal role has been to set lending and deposit rates jointly with the Ministry of Finance. !/ In May 1987, BM introduced a new organization•! structure, comprising eight departments: two commercial b•nking departments (Foreign Operations and Lending Oper•tions), two centr•I banking departments (Planning and Economic Studies, and Banking Syst.111 and Inspection), thr.. support departments (Administration, Personnel, Legal Affairs), and the department of International Relations, which has an ambiguous role as it is mostly responsible for managing foreign loans to BM. ~ Th• system is already operational in the Banco Popular de Desenvolvimento (BPD). §/ Both BPD and Banco Standard Totta de Mozambique (BSTM) hold sizeable deposits at BM, which does not remunerate them. Furthermore, these deposits have been increasing sharply, as • share of their assets, since 1986 (cf. IMF Recent Economic Developeent, various years). The reason for this phenomenon appears to be lack of •lternative investments. - 100 - 6. The Operations of the Banking System. The principal developments under the ERP have focussed on the introduction of ceilings on the expansion of domestic-sourced credit, simplifications to the interest rate structure, and the movement towards positive real interest rates. Furthermore, some progress was made in strengthening banks' portfolios by transferring bad loans of public enterprises to the Government and by emphasizing financial viability and repayment prospects as criteria for the extension of new credit. 7. The introduction of ceilings restricting the expansion of domestic-.sourced credit to the Government and to the economy has so far had a very limited impact.£/ Prior to the ERP, the Central Bank used to set a target for total expansion of credit to the economy for each commercial bank, which in turn allocated a share of the target expansion to the branches. Discrepancies between the targets and the actual credit expansion were monitored, but not sanctioned. The Central Bank was also responsible for credit expansion to the Government, although BPD lent to the Government sporadically. II Since the introduction· of the credit ceilings in 1987, the Central Bank has administered them in the same manner as before the ERP. The allocation of the total permissible expansion of aggregate credit (i.e. domestic and foreign-sourced) to each commercial bank ·is decided on the basis of proposals formulated by the commercial banks, which forecast the anticipated credit demand for the year. Within the set target, the headquarters of each commercial bank allocate the share of each provincial branch ("filial") and a reserve. Each provincial branch then allocates its share between its own operations and those of the district branches ("agencias"). Indicative allocations by sector of activity and type of borrower are also given to the branches, but they are not binding. If a branch in the course of the year proposes to lend more than its allocation, its headquarters (or provincial branch, in the case of a aistrict branch) may redistribute the available funds either from the reserve, or from unconstrained branches. An increase in a commercial bank's total credit expansion beyond the assigned target requires explicit permission from the Central Bank. Every month, the expansion of domestic- sourced credit is then calculated as total credit granted minus the flow of foreign-backed credit, and the central bank verifies consistency in the aggregate ceilings. 8. Until the end of 1988, as mentioned above, the ceilings on domestic-sourced credit have not been binding. With respect to credit to the economy, several reasons seem to account for this. Firstly, the increase in lending rates in January 1987 encouraged enterprises to use up their cash reserves rather than borrow, thus depressing the demand for credit. This effect is likely to have been sizeable, particularly in 1987, in spite of negative ex-post real rates, if price expectations adjusted slowly to the new environment. Secondly, the most dynamic component of demand is imports, which are in part financed by foreign-sourced credit and ~/ This is discussed in detail in chapter II, especially in the context of Table•. !/ Commercial banks have not lent to the Government since 1988. - 101 - thus do not reflect on the expansion of domestic-sourced credit.~/ Thirdly, the level of economic activity has been lower than anticipated by policy-makers both in 1987 and in 1988, and the expectations of future aggregate demand by prospective borrowers are still likely to be low. ii At the moment, there is no evidence that other factors. such as faster turnover of loans, have contributed to keeping credit expansion within the ceilings. In fact, there is no information on the average term of loan repayment within the classification of the working capital credit (one year or less) and investment credit (above one year). 10/ T•ble 1. Evolution of Credit by B•nk •nd Economic Us•g•, Baf!k ____________________ O.ceuer 1987... ______ _______ D•c•ab•r _ 1988 ! -------1------- Jun•_ 1989___________ Mt.. bi 11 ion Working Inveet.. Tot.al Working In•••t.. Tot.al I workino Inveat. Tot.al I 133570 151839 172332 41355 213687 64000 265512 TOTAL EIM 105466 18269 14117 119583 136600 19442 156042 I 202512 154878 28365 183243 BPO 23323 ,1()11 27334 26878 14SIS3 41431 311191 16245 52438 BSTM 4781 141 4922 8385 922 9307 9595 1506 11101 CCAOR 0 0 0 469 6<438 6907 1848 l78lM 19732 I I Perc•n~g• ahar•• Working Inv eat. Tot.al I Working Inveat.. Tot.al Wot"k i ng Inv . .t.. Toh I I TOTAL 88.0 12.0 100.0 I I 80.6 19.4 l 100.0 I 76.0 24.0 100.0 I 87.5 12.5 84.5 15.5 BM BPD BSTM 88.2 85.3 97.1 11.8 14.7 2.9 100.0 100.0 100.0 I I 64.9 90.l 35.l 9.9 100.0 I 100.0 100.0 I 69.0 86.4 31.0 13.6 100.0 100.0 100.0 n~•~ n.a. 6.8 93.2 100.0 9.4 90.6 100.0 CCADR n.a. I I 9. The fact that the limits have not been binding yet has implied that commercial banks have not been faced with the necessity to turn down viable loan applications, and that the Central Bank has not been confronted with the need to sanction violations of the ceilings or to issue guidelines for directing scarce credit. 11/ Nonetheless, in the event of the ceilings binding in a future year, there are no existing procedures to regulate supply and to ration credit. !/ There is the •ddltion•I question, however, •s to whether the second-round •nd later effects of the foreign-sourced credit do in f•ct h•ve implic•tions for monetary policy that the initi•I foreign-sourced credit does not h•v•. 9/ The re•sons for the rel•tively 1110dest economic recovery h•v• been considered ••rller (ch•pter II). Growth w•s cert•inly •ffectecl prim•rily by th• security problem, •nd by the sc•rcity of foreign eKch•ng• •nd thus of imports. However, the limited •bsorption (•nd r••ction) cap•city of the productive sector - whether due to l•ck of m•npower or to risk- •dvers• attitudes by entrepreneurs - Is likely to h•v• been• further contributory f•ctor. In f•ct, th• relatively slow p•c• of disbursement of m•ny foreign lo•ns c•nnot be entirely •ccountecl for by cumbersome procedures •nd administrative del•y•. 10/ The •ssumption by the Government of th• responsibility for• proportion of the b•d debt outstanding to enterprises had import•nt repercussions, In p•rticul•r, Government rep•yments to the b•nking sector uneKpecteclly incre•sed •ggregate b•nk reimbursement. in 1988 •nd allowed• larger than •nticipatecl expansion of gross credit. Even t•king this f•ctor into •ccount, the credit ceilings were easily observed. 11/ This would probably be nece•••ry to •void• skewed distribution of credit tow•rda the most profitable sectors, i.e. those required to P•Y higher interest r•tes. - 102 - 10. The new emphasis on market forces in both commodity and financial markets is responsible in part for stimulating the entrepreneurship that has led to several innovations in the financial markets since the introduction of the ERP. For instance, BM has effectively increased some interest rates by requiring pre-payment of interest charges on certain loans (mostly short-term loans to traders to finance inventories). 12/ In addition, in April 1988, it introduced a new form of loan to allow wholesalers and retailers to finance their own extension of credit to buyers, under terms analogous to those of loans for working capital. BPD has made three major innovations: firstly, it has identified consumer credit for the purchase of durables (using both the durables and the borrower's wage as collateral) as a new profitable area for lending, following the increase of the relevant rates to 30-32 percent in January 1989; secondly, it has introduced a form of "guaranteed" checks (insured bearer documents, similar to travel checks) to facilitate payments in different parts of the country;· and, thirdly, following the Treasury bond issues that took place in early 1988, it initiated the establishment of a new financial institution (SOCIEF), which operates both as intermediary and principal in the secondary market. 13/ Finally, BSTM has stopped paying interest on demand deposits and has stopped accepting time deposits since 1987. 11. These innovations are too recent to evaluate their role and their prospective development, but they indicate that banks are responding quickly to the changes in the economic environment. It is not clear, however, whether this new emphasis on market forces has also stimulated a more widespread responsibility towards profitability and efficiency in banking operations. In fact, the segmentation of the credit market limits the scope for competition between banks and does not provide incentives to improve their efficiency. Furthermore, the current specialization of _branches between those allowed both to lend and collect deposits, and those allowed only to collect deposits, implies that headquarters are responsible for the overall profitability of the institution, not the branches, and this therefore dilutes the responsibility of the individual managers. 12. The change in interest rates that took place in January 1987 - and again, on a limited basis to lending rates, in January and in September 1989 - was a major step in the direction of strengthening market mechanisms. It enhanced the role of interest rates both in the allocation of credit and in the mobilization of savings, and it indicated that economic considerations should lead both the enterprise's decision to borrow and the bank's decision to lend. It also achieved one important goal in the Government strategy to encourage private sector participation: it ended the discrimination, in terms of lending rates, in favor of state 12/ In the ca•e of a 98-day loan to a whole•aler, the pre-payment of interest raise• the .Tfective interest rate from 26 to 27.8 percent, on an annual ba•i•, and to 36 percent on an annual compound basis, 13/ SOCIEF comprise• BPD and BSTM, a• well as public and private enterprise•, among it• sliareholder•. - 103 - enterprises and against private producers. 14/ Together with the measures taken to restore price incentives in the real economy, this realignment of interest rates for enterprises is thought to have contributed to making private producers the most dynamic component of the demand for credit in 1988. 13. The increase in interest rates appears to have had a very limited impact on deposits. Both demand and time deposits followed a very similar evolution in 1987 and 1988: their share in M2 increased, while their ratio to GDP declined sharply. The development of demand deposits is more likely to reflect the process of remonetization of the economy and the shift out of currency hoarding, rather than the rise in deposit rates. This, on the other hand, may have contributed to the increase in the share of time deposits in M2 in 1987, and also as a share in commercial banks' liabilities. These uevelopments are contrasted with the sharp decline of time deposits in real terms and as a ratio to GDP, particularly in 1988. These phenomena may be accounted for by the fact that inflation in 1987 was probably unanticipated, but that by 1988 depositors recognized that real interest rates were very negative. In addition, the level of income is so low for the vast majority of the population that neither an increase in income nor an increase in deposit rates appear to generate substantial additional savings. The failure of time deposits to recover to earlier levels has two important implications. Firstly, from the perspective of macroeconomic balance, the strengthening of domestic savings and the diminution of the reliance on external saving rest in part on the ability to increase time deposits; and, secondly, weak time deposits affect the amount of term transformation performed by the banking sector and the risk associated with it, and thereby limit the banking sector's ability to fund essential long term investment. This is particularly relevant as, since the introduction of the ERP, demand deposits have comprised over 90 percent of total deposits, and thereby limited the ability of the credit system to provide long-term loans. In fact, over 80 percent of total credit has a maturity of less or equal to one year. 15/ 14. Relations between the Public Sector and the Banking System. The two principal elements of reform in this regard were, firstly, the assumption by the Government of the responsibility for a large share of outstanding public enterprise bad debt, and, secondly, the termination of Government investment credit to public enterprises, with credit only being available through the banking sector. 15. The criteria of enterprise financial viability and loan repayment prospects in the extension of credit, though incorporated in the laws governing the banking sector (cf. Resolucao n.11/80), had been shunned in the first half of the 1980s. This was consistent with the Government 14/ Lower lending rate• for cooperative• and family producer• were however maintained. 16/ BPD, which has the largeat proportion of time deposits, not surprisingly grants the largest proportion of long term loans (cf. table V). - 104 - strategy to allow producers, and especially public enterprises, to remain in operation through the recession and the period of insecurity. Since the introduction of the ERP, the re-establishment of more normal commercial practices has been a key objective of the program, and, although no new regulations on loan evaluation have been issued, stricter compliance with the old ones is being required. 16. The effort to restructure the public enterprise sector is a pre- requisite for the attainment of a more commercial structure. The consolidation of the bad loans of public enterprises and their transfer from the bank_ing sector to the Government has been under negotiation since 1986. In 1987, the Government reached agreement with BM and BPD; no agreement has yet been reached with BSTM. According to the agreement with BM, the Government recognized Mt. 40.6 billion (34 percent of BM's portfolio) as bad loans of public enterprises, as of the end of 1987. Of these, Mt. 10.0 billion has been rescheduled and Mt. 8.8 billion actually reimbursed in 1988 by the Government to BM. According to the agreement with BPD, the Government took responsibility for Mt. 20.2 billion (78 percent of BPD's portfolio) as of the end of 1987, and of this amount Mt. 2.8 billion has already been reimbursed and Mt. 7.0 billion rescheduled in 1988. Both BM and BPD expect the reimbursements of the remaining amounts to take place in 1989. Although the modalities of these repayments are not entirely clear, they have been recorded in the banks' accounts as reimbursements of overdue loans by enterprises (mostly by the industry sector, in the case of BM, and mostly by the agricultural sector, in the case of BPD). As noted above, the repayments have thus effectively permitted greater than anticipated increases in gross credit extension to the economy for these two banks - without breaching the net credit expansion ceilings - without credit expansion to the Government being further restricted. 16/ 17. The Stimulation of the Agricultural Sector. Lending to ~riority sectors at extremely low interest rates to stimulate economic activity had been the theme of monetary policy in Mozambique between 1981 and the introduction of the ERP, and it continued to be a feature of the normal commercial credit system under the ERP. In particular, agricultural credit has attracted lower interest rates throughout the 1987-90 period. At the start of 1990, for example, agricultural credit rates for 90 day loans were 15% compared to the 20% and 28% for the industrial and commercial sectors respectively. A similar comparison can be drawn for longer term loans. 18. In addition to this subsidy for standard commercial agricultural credit, a major innovation directed at stimulating the rural sector was undertaken in May 1988 when the Caixa de Credito Agrario e de Desenvolvimento Rural (CCADR) was created. It was specifically established to provide privileged agricultural production and agricultural marketing borrowers with much cheaper and longer-term credit than was available through ordinary commercial channels. In addition, it responded to the need LO distribute credit that some donors had earmarked as subsidized and 16/ The planned transfers from the Government budget in 1990 to cover these repayments total Mt. 40.6 billion: it is not known how the remainder are accounted. - 105 - for specific groups of end-user, and to the need to finance the resettlement of veterans in civilian life in the productive sector (rather than through pensions). The CCADR is not a bank since it has no liabilities with the public. All its resources are appropriated by the Government or attributed by foreign donors. Two sets of regulations preside, respectively, over the principles and the operations of the CCADR, The Decreto that created it states that its objective is to finance investment in land improvement, agricultural marketing and rural transport; investment in agro-processing if undertaken by cooperatives or family producers; investment by veterans and individuals affected by natural caJamities; and consolidation of interests due to BM or BPD. It states, additionally, that interest rates are to be set, as for commercial banks, by the Ministry of Finance jointly with the Central Bank, and that repayment periods should be medium- to long-term, with a minimum of one year. No borrower is excluded from access, within the objectives stated in the Decreto. The Normas de Credito, which are the operational statute of the CCADR, define more precisely the eligibility criteria for access to CCADR credit. Eligibility is limited to private enterprises whose owner is a veteran, repatriated migrant worker, unemployed, starting a new activity or producing mainly cereals. The Normas also fixed the interest rate at 6 percent, independently of term, and specified the period of repayment according to the use of the loan between 2 and 10 years. Subsequently, the interest rate was increased to 10% in September 1989. The other conditions for eligibility are analogous to those applied by commercial banks, with the exception of a much weaker self-financing requirement (the "comparticipation• requirement), which is set at 1% instead of the normal bank credit requirement of 25%. 19. The operations of the CCADR are managed by BPD, despite the obvious pressure this places on its administrative and technical capacity. However, it has the merit of avoiding duplications in an area - the provision of credit to agriculture - which has traditionally been served by BPD. Moreover, it is a field in which BPD has extensive experience; where the CCADR is to some extent displacing the operations of BPD (e.g. in lending to agricultural cooperatives), and where the difficulty and the cost of setting up a new network of branches would not be sustainable. The appropriateness of this arrangement does not imply that the cost of managing the CCADR should be subsidized by BPD. 17/ 20. With regard to the source -0f funds, the Decreto stipulates that the Ministry of Finance may allocate "state funds" 18/ to the CCADR, as well as a proportion of BPD's profits. BPD may also allocate its own funds to the CCADR. Foreign donors may contribute directly to it, granting loans or reserving the use of counterpart funds for the CCADR, as IFAD currently does. With the exception of the eligibility criteria noted above, there are few designated allocation procedures. One important procedure, however, is the ex ante provincial allocation of the available funds to 17/ It is reported that the connission of 1.2 percent that BPO currently receives on the operations of the CCADR is too low to compensate for its administrative costs. '!!/ From the Covernment budget, or from counterpart funds whose use could be deter•ined by the Covernment. - 106 - ensure an equitable regional distribution, with the provision that this allocation may subsequently be revised to reflect the pattern of demand. In the event of excess demand, it is assumed that the provincial managers will exercise judgement based upon the subjective economic considerations of viability and priority, since no precise guidelines have been established. In the first year of operation, five provinces (Maputo, Gaza, Nampula, Zambezia and Manica), accounting for 83% of the credit allocated by the CCADR, experienced excess demand and were forced to employ selective administrative procedures. Table 2. CCADR - Credit by borrower, 1988. Ba I ancee, end of period I · Deceaber 1988 [1] June 1989 Short-ter• Inveataent I I TOTAL Sharea in aggregate Sharea in -ct.or Share• in aggregate Ht.cur bn Ht. cur bn I Ht. cur bn I I I Tot.al: by ••ct.or 373.3 2607.6 2980.9 100.0 100.0 Agriculture 348.1 1939.2 2287.3 76.7 76.7 Induat.ry 25.2 612.2 637.4 21.4 21.4 Tranaport 0.0 56.2 56.2 1.9 1.9 I Tot.al: by agent 373.3 2607.6 2980.9 100.0 100.0 100.0 Public enterpriaea 34.4 104.8 139.2 4.7 4.7 68.2 Cooperati vea 71.7 202.3 274.0 9.2 9.2 2.5 Private enterprise• 267.2 2278.3 2545.5 85.4 85.4 29.3 Farni ly producers 0.0 22.2 22.2 0.7 0.7 0.0 Public enterpriaea, t.ot.a 1 34,4 104.8 139.2 4.7 100.0 Agriculture 34.4 104.8 139.2 4.7 100.0 Induat.ry 0.0 0.0 0.0 0.0 0.0 Trana.port 0.0 0.0 0.0 0.0 0.0 Cooperati vea, t.ot.a 1 71.7 202.3 274.0 9.2 100.0 Agr i cu I ture 71. 7 202.0 273.7 9.2 99.9 Industry o.o 0.3 0.3 0.0 0.1 Transport 0.0 0.0 0.0 o.o 0.0 Private enterprises, t.ot.a I 267.2 2278.3 2545.5 85.4 100.0 Agriculture 242.0 1621.3 1863.3 62.5 73.2 Industry 25.2 600.8 626.0 21.0 24.6 Trana.port 0.0 56.2 56.2 1.9 2.2 Fa•i ly producers, t.ot.a I 0.0 22.2 22.2 0.7 100.0 Agriculture o.o 11.1 11.1 0.4 50.0 Industry 0.0 11.1 11.1 0.4 50.0 Transport 0.0 0.0 0.0 0.0 0.0 Source: CCAOR, 1989 [1] Tot.al for •hich distribution ia avai I able in 1988 is leaa than aggregate credit extended. 21. The agricultural emphasis of the CCADR corresponds to the overall emphasis of the ERP on the rural sector, although non-agricultural uses of its funds are allowed. Table 2 illustrates the main activities supported in its first eight months of operations (May-Dec 1988). For this period, the data on credit granted by the CCADR indicates that indeed agricultural producers were the largest borrowers, and that most of the loans were long- term. The poor data, 19/ however, makes it ~~remely difficult to evaluate whether the CCADR has accomplished its goa.-rof stimulating production and investment in the rural sector. Some worrying trends are, however, evident over the first full year of operation (Table 2). For example, in the first six months of operation, the private enterprise sector received over 70% of 19/ These data, however, represent approximately one-half of credit by the Caixa as reported in the aggregate credit accounts (cf. tables III and V), and less than 20 percent of available funds in its budget (while the mission was told that available funds had been totally exhausted in 1988). - 107 - the allocations made, with state enterprises and the cooperatives receiving 9% and 19% respectively. Family producers received virtually nothing. After one year of operation, provisional data show that the state enterprises accounted for almost 70% of the outstanding stock of CCADR credit, with the private enterprise sector and cooperatives respectively accounting for 29% and 3%. Again, the family sector is insignificant. Thus, it appears that not only has there been a major shift in allocations to the state sector, 20/ but little credit is reaching the family sector or the cooperative sector. This tends to substantiate the anecdotal reports that were frequently received (from entrepreneurs excluded from access to the CCADR) that CCADR credit had been extended mostly to urban borrowers rather than rural ones, and that it had financed mostly transportation and marketing equipment rather than long-term investment. 22. These trends are hardly consistent with the stated goals of the CCADR, and it would, in the first instance, be extremely important to understand what factors have determined this outcome. 21/ Secondly, while the 70% share of the state enterprises is itself disturbing in that it greatly reduces credit availability to the private and cooperative sectors, it represents, in addition, a major subsidy from a state-owned credit institution to state-owned enterprises. Thus, the transparency that had been achieved by the transfer to the Government budget of the financing of public enterprise losses, is seriously eroded. 22/ The Government has recognized the implications of a rapidly expanding CCADR, and, as is addressed further below, there are plans to curb this growth. 23. Sununary. In sununary, there are two aspects that dominate the foregoing analysis: the institutional structure and the operations of the banking system. With regard to the institutional structure, several conclusions may be drawn: (a) significant steps have been taken to bring monetary and credit aggregates under control, resulting in a more stable macroeconomic environment and lower inflation; (b) the management of interest rates has aimed at strengthening their allocative role in the credit market: the difference in lending rates according to type of borrower has been almost completely eliminated (although sectoral differences remain), and interest rates have been increased to levels that should be positive in real terms in the course of 1990: (c) the progress made in disti.r.guishing between the central and commercial banking fun.,..lons of BM has not yet yielded their 20/ Despite the substantial reductions In the number of state farms over the 1987 to 1989 period, but probably because of the severe restrictions on direct budgetary transfers. 21/ On the other hand, this utilization la not Inconsistent with the broader objectives of the ESRP. 22/ Table XIII also displays the regional distribution of CCAOR credit, and it Is apparent that there is a heavy concentration within the provinces of Maputo and Sofala, which account for 83% of the aggrega~. - 108 - separation, either in accounting or in management. This accounts for the failure of BM to develop more effective instruments for credit policy, which appear to be greatly needed. The creation of a conunercial BM is, however, expected in 1992, and this will facilitate the complete separation of functions; (d) progress has been made in introducing an adequate system of accounts common to all commercial banks, but the process is not completed yet, preventing in-depth analysis of their financial viability, and in particular of their capital structure. This may in turn have contributed to delaying the development of prudential regulations by the Central Bank; (e) the establishment of ttfunds" with the purpose of channeling subsidized credit to privileged sectors poses new questions concerning the efficiency of the mechanisms allocating credit and the role of interest rates. 24. With regard to the operations of the banking system: (a) conunercial banks have positively reacted to changes in the economic environment, both by introducing new lending instruments and by entering sectors in which they had not been active traditionally. These innovations may have different effects on the risk and return of their portfolios, and the Central Bank should monitor them closely; (b) the quality of BM and BPD's loan portfolios has been improved substantially, largely due to the assumption of enterprise bad loans by the Government; (c) no progress has been made on savings mobilization. On the one hand, the banks are reluctant to try to attract savings they cannot re-invest (because of the ceilings on domestic-sourced credit) but are mandated to remunerate; on the other hand, the highly negative real rates do not encourage depositors. B. Policy Issues 25. These findings therefore indicate that there are several issues of concern for policy-making that need to be addressed if the banking sector is to fully contribute to the recovery and to the establishment of the necessary conditions for more stable and lasting growth. The need to strengthen the financial sector is made even more urgent by the progressive liberalization of credit markets and of interest rates in particular.~/ 23/ Experiences in many middle-income countries that have liberalized their financial markets in the presence of serious macroeconomic disequilibria and weak financial institutions have in general led to extremely high rates for long periods of ti ... , with serious consequences for investment and for the ability of the Government to finance its deficit. Often, the stability of the banking system has also been undermined, because of losses caused by increased competition. - 109 - Among the areas that require attention and, at the same time, appear to be susceptible to improvement in the short-term, five seem to be crucial to the success of the ERP: (a) the development of prudential regulations and instruments for credit management; (b) the access to the banking system; (c) the availability of long term credit; (d) the mobilization of domestic savings; and (e) the role of subsidized credit. 26. The Development of Prudential Regulations and Instruments for Credit Management. The development of prudential regulations and improved instruments for credit management is made increasingly necessary by the financial developments that have occurred under the ERP. With respect to the introduction of prudential regulations, the various innovations in the modes of operating and in lending instruments indicate that commercial banks are already responding to the increasing role of market forces in the productive system. Moreover, the increased flexibility of borrowing and lending will lead to an environment that reacts more quickly to changes in economic conditions. In these circumstances, more frequent and comprehensive reporting by banks to the Central Bank. as well as more frequent and comprehensive auditing by the Central Bank, will be necessary. Furthermore, in view of the more enterprising practices of the banks and the assumption of increased risk, restoring and subsequently maintaining banks' portfolio quality should continue.to be a prime objective. 27. Secondly, the introduction of credit ceilings itself makes timely reporting and auditing increasingly important. Not only violations of the limits need to be monitored and sanctioned, but also reactions of local entities to the constraints need to be closely followed. In practice, the allocation of rationed credit may become highly distorted if banks choose to shift their lending towards the more profitable sectors. Currently, interest rates are controlled, and the sectors paying the highest rates are those receiving the lowest priority ranking by the economic policy makers. If interest rates were market-determined, the sectors paying the highest rates would be those characterized by the highest risk, and in these circumstances it would clearly be highly undesirable for banks to be over- exposed in such sectors. Similarly, long-term lending may be reduced if banks choose to reduce the term of loan repayment rather than the number of customers they serve. In addition to monitoring these developments, the Central Bank could issue guidelines on the allocation of rationed credit, in order to prevent a skewed distribution of credit. 28. The development or strengthening of instruments for indirect management of monetary and credit policy is also made increasingly necessary by the decentralization process under way, which is bound to make direct quantitative controls harder to implement and less effective. In the medium-term, the establishment of reserve requirements in particular - 110 - appears to be a necessary step. Reserves, in addition to playing a prudential role in relation to deposits, are an automatic mechanism that, for a given monetary base, limits the maximum expansion of credit. In the immediate future, however, any move to indirect controls, and specifically the introduction of reserve requirements, is precluded by the need to first complete the separation of the accounts of the commercial and central banking functions of BM. In fact, until the balance sheet of all commercial banks is known, it will be impossible both to evaluate what reserve coefficient is appropriate and to enforce the reserve requirements themselves. The separation of BM's accounts is also a prerequisite for the evaluation of the liquidity situation of the banking system. The large deposits - jointly, approximately 25 percent of their stock of liabilities - that BPD and BSTM keep at BM with no return indicate that these two banks have excess cash reserves. Moreover, the level of cash reserves of BM commercial are currently undetermined. These accounting and institutional developments are therefore crucial for further progress to be effected in the regulatory framework of the financial sector. 29. The establishment of reserve requirements will also enhance the role of the discount window and of the discount rate as instruments for the control of monetary aggregates: a role which in the past has been limited by the existence of excess liquidity in the system. The current reliance on direct credit controls makes these instruments less crucial. However, with the separation of the commercial and central banking functions of BM, the measurement of monetary and credit aggregates (such as monetary base) will be less ambiguous, and credit policy will be able to rely on instruments less direct, and more flexible, than ceilings on domestic- sourced credit. 30. The Access to the Banking System. In this regard, banks have already taken initiatives to address better the needs of borrowers : namely, through the introduction of loans to traders and retailers to finance the extension of credit to their buyers (by BM), and the re- introduction of consumer credit to finance the purchase of consumer durables (by BPD). Similar instruments could be introduced also to finance the start-up costs of production activities of small entrepreneurs. One instance should be the introduction of small loans to family producers in cities and green zones to start up production activities, using as a guarantee the wage of one other member of the household. These instruments could reach potential borrowers that currently have no access to the formal banking sector either for lack of collateral or "comparticipation capital•. 31. In rural areas not served by banks, traders should be allowed to ,.. oorrow to finance the extension of credit for production inputs to small agricultural producers, who sell their crops to, and often also purchase inputs and consumer goods from, large traders. Arrangements of this kind are already informally used in some areas, in particular in the form of delayed payment for inputs which are purchased from the same traders who buy the farmers' crops at harvest. Formalizing such arrangements would allow them to become more widespread in areas where formal bank branches are not in operation; furthermore, in areas where one trader is often the monopolistic seller of inputs and consumption goods and the monopsonistic buyer of crops, agreements involving the formal banking sector might help - 111 - to reduce the prevalence of unfair practices. The credit needs of the family sector are further considered in section C. 32. However, all these innovative instruments should be administered with caution. In the first place, instruments involving lending to finance the extension of credit by the initial borrower are riskier. The ability of the bank to collect such loans depends on the ability of the first stage borrower to identify creditworthy customers and to collect from them. The banks should thus accompany the introduction of such instruments with the necessary provisions to avoid their over-exposure (either setting aside reserves against these loans, or limiting their share in the portfolios). In the second place, while lending to traders that extend credit to their own customers is riskier, it is also cheaper, in terms of administrative costs, than direct consumer lending by banks. An alternative route to avoid both concerns could be represented by the newly introduced forms of association for production and borrowing purposes. In particular in those circumstances where larger production units (e.g. state farms) are broken up, it should be possible to preserve some form of association for activities such as storing, marketing, and borrowing. 33. More importantly, however, the introduction of innovative lending instruments should accompany, not substitute for, the enhancement of the banks' networks outside the cities. Given the apparent difficulties that banks already have at maintaining the existing network, it does not appear to be advisable at the moment to build more branches in remote areas. Consequently, the coverage of the formal system will remain grossly inadequate from the point of view of the rural areas, with the branch network only extending to the provincial capitals and major district capitals. 24/ One possibility, requiring no change in physical structure, would be to increase the degree of intermediation by equipping those branches that are not currently allowed to lend (delegacao and posto de captacao) with the ability to advise prospective borrowers on application procedures and requirements for eligibility, to collect loan applications and review them formally (i.e. for completeness of documentation), and to forward them to the supervising agencia for substantive evaluation. Although commercial banks face severe manpower constraints, this innovation could be limited to training of staff already in place, which is the least costly investment, would help overcome the manpower constraints, and would be productive beyond the contingencies imposed on bank's operations by the security problem. ~ _________________________________________________ The ne~work •• of March 1989 •••••follows: .... ______________________ BM BPO BSTM Total Provincial offic• 10 10 3 23 (filial) Diatrict of'f'ice 1/ 19 25 2 46 (ageneia) Dapoai t. of'f'i ce 10 49 0 S9 (d•l•o•cao~ Savings col lee:t1on poet. 2/ 6S 6S (poat.o de capt.acao da pcpanca) Total 39 149 s 193 1/ BM haa four agenciaa and BPO h1a one ag•nc:ia t••porari ty cloa.d. 2/ BPD haa fourteen agenelaa t••porari I)' claa.d. - 112 - 34. The Availability of Long Term Credit. Besides the existence of adequate lending instruments, another issue concerning the ability of the formal banking sector to provide the services necessary to sustain the recovery is the availability of long term credit. Over the medium term, rehabilitation and expansion of productive capacity is expected to generate a large demand for very long term credit. Over the 1987-89 period, the share of long term (i.e. investment) credit in total credit has increased from 12% to 19%, with two percentage points being due to CCADR alone. It is possible, moreover, that the increase in the share of long-term credit may have been limited by supply factors, such as the reluctance of banks to commit resources to long term lending, or by low demand by investors. 35. There are several factors that may be operating on the supply side. Firstly, the existence of credit ceilings may induce banks to shorten the period of repayment of loans, rather than reducing the number of customers they serve or the size of the individual loans. Secondly, expectations of rising interest rates, and general uncertainty about their future level, would also induce banks not to commit a large share of their portfolios to long term loans. However, in principle, the term of loans is officially determined according to their economic use, implying that the demand for long term loans has so far been accommodated. 36. On the demand side, investors facing an upward sloping term structure curve for interest rates would find it cheaper to borrow short term and roll over their loans. This would, however, be dangerous in the event that credit became tight and borrowers were not able to refinance credit. In addition, entrepreneurs may still have idle cash reserves. Finally, the demand for investment credit may be low due to low desired investment, either because of the existence of spare capacity, or due to the lack of demand prospects, or due to the rationed access to capital goods and foreign exchange. 37. Although there is no firm evidence on these phenomena, and, in particular, it cannot be concluded at this point whether it is limited availability or limited demand that explains the relatively slow the growth of investment credit, it is likely that they all contribute to it. Furthermore, most of the issues involved cannot be addressed in the context of the banking sector's operations, but rather require evaluation within the macroeconomic framework. Among the issues of relevance for the operations of the banking sectors, lending with repayment periods dissociated from the economic life of the investment project undermines the borrower's ability to repay, and, therefore, the lender's ability to collect. This practice, in fact, is not allowed by the legislation in place and should thus be easily sanctioned. Furthermore, the reluctance of both lenders and borrowers to commit themselves to long term contracts can be reduced, to the extent that such reluctance is related to interest rate uncertainty. Lending contracts should permit the renegotiation of loan conditions in the event of changes in the controlled interest rates, or, - 113 - preferably, provide for automatic rate adjustment in such circumstances. 25/ 38. In the longer term, two other issues that do not yet appear to be crucial may come to limit the growth of investment credit. The resources available to finance Mozambique's recovery are, and will continue to be for a considerable time, mainly foreign. At present, BM centralizes the management of foreign loans and bears the exchange rate risk associated with borrowing in foreign currency and lending in meticais. This arrangement does not seem appropriate even now, as it involves a non- transparent subsidy from BM to borrowers. In the event of BM separating its central and commercial operations, and of BPD and BSTM being allowed to borrow abroad, the issue of who bears the exchange rate risk will have implications for the supply and the demand for credit. In fact, exchange rate uncertainty would red~ce the willingness to assume long term commitments in the same way as interest rate uncertainty: reducing the demand for long term credit, or the supply, according to whether borrowers or lenders would be bearing the risk. Moreover, while in principle borrowers, not intermediaries, should bear the exchange rate risk, it would probably be advisable, in an environment as fragile as the Mozambican economy, not to have investment decisions hampered by the entrepreneur's fear of devaluation. The exchange rate risk should thus be borne by the Government, and treated in a transparent way by the budget, as a subsidy to (or tax on) investment. 39. Furthermore, in the longer run, an increasing share of domestic resources will be available to finance investment. If the term structure of the banks' liabilities remains as liquid as it is at the moment (approximately 94 percent of total deposits are demand deposits) while demand for long term credit increases, banks will be performing large term transformation. This consideration raises in turn the issue of how the banks can both stimulate savings and induce depositors to invest in less liquid assets. 40. The Mobilization of Domestic Savings. The mobilization of savings is extremely complex, since the economy is characterized both by a lack of incentive for banks to collect deposits, and by very low levels of household sector savings. The existence of ceilings limiting the expansion of domestic-sourced credit while banks are required to remunerate demand deposits, together with the large non-interest bearing deposits that BPD and BSTM keep at BM, make the collecting of deposits highly unattractive for banks. This situation has the potential for severely affecting the financial viability of BPD, which has the largest share of deposits in the economy and is now the only bank to pay interest on all of its deposits: BM is required to pay interest only on deposits in foreign currency, and ,,,,. BSTM has stopped paying interest of demand deposits and accepting time deposits (although it still pays interest on time deposits that were already established). !§:/ Another possibility, the indexation of interest rates, in addition to weakening the co111111itment of the monetary authority to the control of inflation, does not see111 a feasible alternative in Mozambique: at present there is no credible measurement of Inflation nor any short term market determined interest rate that could serve as anchor to longer term rates, - 114 - 41. Thus, the extreme weakness in the profitability of the banking sector suggests at present that attempting to stimulate savings through major increases in deposit interest rates might be imprudent. Furthermore, the prospects for using higher interest rates to mobilize savings are undermined also by the fact that they are unlikely to produce appreciable results: the size of the interest elasticity of savings in Mozambique is not known, but at the present income level it is unlikely to be large. 42. There are. however, indications (notably the success in 1988 of the issue of Treasury bills, which were reportedly purchased mostly by individuals) that there may still exist some excess liquidity in the household sector, and that it could be absorbed if more attractive financial instruments were available. Such instruments could be created again by the Government, which could issue bonds targeted towards attracting household savings, that is, ones with longer terms and denominated in national currency. 43. Finally, increasing the term structure of banks' deposits could be effected by increasing the differential between the rates on demand and time deposits by raising the rates on the latter. On the one hand, this measure is unlikely to have a very large impact on profitability, given the very limited share of time deposits in the banks' portfolios, and on the other hand it could provide a first indication of the response of the composition of wea.lth to changes in interest rate differentials, and thus on the need for term transformation by financial intermediaries. 44. In the longer term, the ability of the system to generate an adequate flow of domestic savings to support an increasing share of investment, and diminish the reliance on external savings. will depend on the ability to generate an adequate flow of income, and to generate it in the market sector of the economy. 26/ To maximize the flow of savings that the economy can generate, efforts should be directed not only at mobilizing savings through better financial intermediation, but also at attracting resources into the marketplace. The Role of Subsidized Credit 45. The final issue concerns the role of the banking sector in stimulating investment. Two major concerns need to be addressed: firstly, whether the agricultural sector deserves the priority accorded to it in general through the provision of highly subsidized interest rates vis-a-vis other sectors. and especially through the CCADR regulations: and, secondly, whether subsidized credit can be an appropriate and effective instrument to stimulate agricultural investment demand under the present conditions. It should be recalled that, under the existing structure, all agricultural credit rates are preferential vis-a-vis other sectors, and of these the rates applicable to the CCADR are the most serious concern. Thus, the 26/ It is in fact possible that the autoconsumption economy could generate large savings in tlie form of consumption-smoothing activities (i.e. storing food from one harvest"to the next), but these savings are not fungible within the economy since they are not monetized. - 115 - problems of subsidized credit apply equally to all agricultural credit, albeit to a lesser extent to the normal commercial credit sources. 46. The Problem of Targeting Agricultural Credit. Directed and subsidized agricultural credit systems have, in general, proved to be disappointing throughout Africa. These systems have been characterized by credit being made available to specific target groups or for selected uses at low interest rates that are commonly negative in real terms. Low interest rates have been instituted principally to encourage farmers to increase output by facilitating the use of new technology, and to compensate farmers for Government price and investment policies that damage their interests. 27/ Subsidized credit is not, however, essential to encourage investment and the use of new technology in the agricultural sector. In Mozambique, interest rate policy has systematically been increasing nominal rates in order to re-establish positive real rates by 1990, and allow interest rates to play a role in the allocation process. Despite the preferential terms accorded to standard commercial credit to the agricultural sector relative to other sectors, agricultural credit rates are broadly in line with this objective. The exception is the CCADR, which appears to contain many structural features that run counter to this broad policy objective, and undermine the efficient operation of the rural credit system, causing inefficiencies to develop in factor markets. 47. The reasons for the poor performance of subsidized credit systems are germane in analyzing the future role of subsidized agricultural credit in Mozambique: (a) The first is one of perception about the role of credit. Credit is often viewed as an input, leading to the conclusion that credit can be directed, like fertilizer, to specific uses and denied certain other uses. This notion ignores the fungibility property of financial instruments: additional credit can be used in any of a variety of production, investment, or consumption activities, and, if the directed use is not in the economic interest of the borrower, one use will be substituted for another. Even where credit is very specifically tied to a particular use, personal or other resources previously used in this activity can be diverted to new uses, often outside of agriculture. 28 / (b) The second is due to the assumption that investment decisions and the adoption of new productive technology are highly interest elastic. Research has shown, however, that credit availability, timeliness, and the level of transaction costs are often more 27/ The intention has been to increase agricultural output by allowing producers to acquire Tiiputs before sufficient producer capital has been saved and allow the payment for the inputs to be drawn from the increased income stream resulting from the use of the inputs. 28/ Discussions with merchants and BPD personnel indicated that a significant amount of ~AOR credit was used to purchase trucks, and, since new trucks were not available, the price of used trucks rose significantly. In this situation, the added value of the subsidized interest rate was quickly capitalized into the value of the trucks,_with the benefit from th• subsidy being transferred into higher rents for the original truck owners. - 116 - important than the interest rate level in determining ~redit use. Conversely, if a technology is not profitable, or production and marketing risks are unacceptably high, then subsidized interest rates will usually be insufficient to induce greater credit demand. (c) One objective of low cost credit is to help small and poor farmers gain access to new technology, but, instead, such systems generally result in the further concentration of credit resources among the larger, richer farmers. There are several reasons for this additional concentration. Firstly, subsidized credit invariably leads to excess demand, with the associated problems of allocation and rationing. In these circumstances, transaction costs are lower for large loans, and, in practice, these cost tend to be raised as a means of reducing the excess demand and assist the allocation process. Moreover, the allocation procedures tend to be more cumbersome, and place a greater marginal burden on a small borrower. Each of these factors, often combined with a lower bank operating margin on special loan funds, leads bankers to concentrate their resources with a few lower cost large loans. (d) Fourthly, there is often a negative impact on the financial institution through lower margins on low interest loans and through loan recovery problems resulting from excessive and marginal economic use of subsidized credit. (e) Finally, to the extent that the fungibility problem can be overridden and subsidized credit resources directed to determined uses, there is often a misallocation of productive resources where political decision is substituted for market allocation. Indeed, since the price mechanism plays no role, the subsidy element is almost certain to create an excess demand which must be handled either through a queueing or rationing mechanism, or through a subjective administrative allocation mechanism. It is unlikely that efficiency will be served. 48. Two considerations provide support for a fund administering subsidized credit at this time. Firstly, several donors have earmarked counterpart funds for allocation in the form of subsidized credit to specific borrowers. In the second place, Mozambique.has considerable access to international credit on concessional terms and it could be argued that it should be used to subsidize private investment rather than public investment or public consumption. ,,,,, 49. With respect to the CCADR, it is too early to assess the full impact of this source of credit, but some areas of concern emerge clearly from the analysis of its operations (paragraphs 17-21). Interest rates charged are so low, and the criteria for eligibility so broad, as not to provide any mechanism for self-selection of borrowers in relation to the expected return of their investment, or for selection by loan officers in relation to the requirements for eligibility. Therefore, administrative judgement and queueing mechanisms appear to be the primary means of - 117 - allocating lending. This, of course, provides no guarantee that, out of the pool of eligible projects, the most productive ones will be financed. 50. The Prospects of the CCADR. Two conclusions may be drawn from the foregoing analysis: firstly, with respect to the medium term, and, secondly, with regard to the inunediate outlook. 51. With respect to the medium term, both the theoretical and empirical support for the CCADR is extremely fragile. In the preceding paragraphs, the economic and conceptual weaknesses have been highlighted, and the inconsistency of the CCADR with the broader goals of monetary policy have been referred to. While it is indisputable that the agricultural sector is the prime sector in the Government strategy, it seems highly improbable that the CCADR is either achieving its stated objectives, or is the appropriate mechanism to be employed. In the medium term, the CCADR should therefore be phased out. 52. With respect to the short term, the Government is committed to the maintenance of the CCADR. The dismantling of subsidized credit programs is not contemplated, although substantial reductions have been made in the 1990 budgetary allocations. Moreover, the CCADR is seen as essential both to support the basic agricultural program and to channel donor finance to the contractually agreed uses. Given this reality, several adjustments to the existing operations are proposed. These are second-best solutions to the problems raised above. Firstly, new allocations of funds to the CCADR should be minimized and maintained only at the levels required by existing donor agreement. Secondly, the requirements for allocating subsidized credit should be made clearer and narrower, criteria to attach priorities to projects should be introduced, and sub-sectoral ceilings should be established to avoid skewed allocations resulting from different access to the CCADR. One possibility would be to require those branches of BPD that are actively involved in managing CCADR funds, at the time of the formulation of the National Credit Plan, to rank types of projects by relevance to the development of the area and rates of return, and to allocate lending accordingly. 53. Thirdly, with respect to the appropriateness of the interest rates currently charged by CCADR, the divergence from those charged on other bank credit is extremely large, and. the absolute level so low as to ,play no role in discriminating among projects. By definition, subsidized credit aims at making loans available to projects that otherwise, at the current rates, could not be financed. As progress is made in realigning the general interest rate structure, subsitized rates should gradually be raised to be at least positive in real_.-erms. Over the medium term, the CCADR should be absorbed into the normal agricultural commercial credit operations, with credit extended on the same terms as other agricultural credit. 54. With regard to the sources of funds available to finance subsidized credit, the Government and foreign donors are the most appropriate ones. Committing commercial banks to contribute (i.e. to lend at below average interest rates) to the CCADR, as is currently the case with BPD, amounts to levying a non-transparent tax on commercial banks, - 118 - which is possibly distorting and inadvisable, as the Government has more efficient and equitable means to tax banks' profits. With regard to management arrangements of the CCADR, it seems reasonable and efficient that BPD would manage it, given its experience in the field of ·agricultural lending, its already established network, and the fact that CCADR lending is directed to borrowers that would otherwise be served by BPD. However, as discussed above, BPD should be adequately compensated for its efforts. This issue will become even more relevant if, as proposed, eligibility conditions for access to CCADR credit were to be strengthened, requiring more resources being devoted to its administration. 55. Finally, it is apparent from the discussion below concerning the family sector -- especially with respect to its access to the formal banking sector, and its credit requirements -- that the CCADR program is unlikely to provide credit to the sector on a direct basis, and in the rural areas outside of the peri-urban green zones. However, the formal banking system could be developed to include borrowers who are currently excluded due to the lack of "comparticipation• capital or an inadequate loan size. C. The Credit Needs of the Family Sector 56. One major concern at present is whether the ERP is being hampered by the lack of access of the family sector to the formal financial system. Agriculture, in general, does not appear to have been constrained. 29/ However, the family sector is almost entirely outside of the formal credit system, recording only eight loans in 1988 among the estimated 2 to 2.5 million family farms. Moreover, these eight loans averaged more than Mt 2 million each, and it is therefore likely that they were advanced to atypical family farms since the market surplus from a typical family farm would be unable to support loans of this size. 57. The very low participation of the family sector in the formal credit system is attributable to several factors from the demand-side and supply-side perspectives. Firstly, there is generally little demand for production credit from this sector, since the need for purchased inputs on the typical family farm at current technology levels is minimal, other than for a hoe and for seed. Other purchased inputs, such as fertilizer, chemicals and improved varieties have not traditionally been utilized on family farms. In addition, with a mix of products marketed throughout the year, most consumption needs can be met without resorting to credit use. From a supply-side perspective, the credit demand that exists is, moreover, 29/ Over the 1986-88 period, the number of loans to production agricultural doubled and th• amount of credit loaned mor• than tripled in nominal terms. Within the far• sector, state farms in 1988 accounted for the largest share of BPO credit (671), although this was down sharply from the 891 in 1986, State sector credit is almost •Kclusively operating credit. Th• greatest growth in credit use wa, in the private farm sector which in 1988 accounted for 861 of the loans, up from 701 in 1986. The shar• of BPO loan volume to the private ••ctor increased from 71 in 1986 to 311 in 1988, with the largest growth in the investment credit category, where th• private sector is now the largest user at 861. Credit to cooperatives continues at a low level, down in number of loans in 1988 and about constant in r•al value of loan volume. Information on regional credit u•• by sector is not availabl•. - 119 - at such small levels as to be extremely costly if provided through a formal credit network. The present average land area cultivated by a family farm is around 1 to 1.5 hectares, and estimates made by the Ministry of Agriculture suggest that production units of 5 to 10 hectares may be needed to economically justify formal credit service to the family sector. In order to operate a farm of this magnitude, a family would need to hire additional labor or have access to machine or animal power for many of the land preparation, cultivating and harvesting functions. Simply hiring additional labor would not raise returns to labor and would not result in additional labor income, though the farmer hiring the labor may receive additional returns for management. Consequently, the evolution of technology is central both to demand-side and supply-side considerations of the role of the formal credit system. 58. The absence of a detailed understanding of the family sector is presently one of the principal weaknesses affecting policy making. Moreover, in the prevailing security situation, this deficiency is unlikely to be rapidly rectified. Consequently, there is an important lack of systematic information to judge adequately the conditions under which it would be feasible to extend commercial credit services to the family farm sector. It currently appears, nonetheless, that, both on account of the existing demand pattern and on account of the structural weaknesses of the formal banking system, formal credit will play a negligible role in the short to medium term in providing family sector credit. 59. In general, and despite the paucity of the available information. the following conclusions may be drawn from this sununary of the family sector: (a) the operations and traditional production technology of the typical family farm, and its associated credit needs, are too small to warrant the economic extension of the formal credit system. Moreover, family farms typically do not generate sufficient marketable surplus to justify or service commercial bank credit. (b) the credit demand of the family sector is best met through the trading system and by extending the use of informal credit. (c) the formal banking system should be encouraged to facilitate the extension of credit to retailers and purchasers of family sector output, and to look at ways of facilitating the on-lending of bank credit by these agents to the family producer. (d) the formal banking system should encourage the utilization of credit by cooperatives and by group borrowers such as farmers clubs and producers associations. In these situations, where individuals do not require sufficient credit to justify a commercial loan, bank services and risks would be transferred to the group~ CHAPTER VII THE DEVELOPMENT OF THE MARKETING INFRASTRUCTURE A. Introduction 1. This chapter is focussed on one of the elements of the distribution structure identified in chapter IV as central to the effective recovery of agricultural production and trade: namely, the development of the marketing infrastructure. 1/ Marketing may fundamentally be seen as dependent on two factors: firstly, the conduct of Government policy with respect to pricing, •. resource allocation. and Government intervention policy; and, secondly. the provision of the appropriate infrastructure. In this latter regard, the discussion here is confined to the marketing infrastructure. including the provision of adequate and appropriate storage facilities and of trading shops. 1/ 2. In the course of 1989, two major studies of the marketing structure in Mozambique were completed: "Market Intervention and Price Policies for Agricultural Marketing in Mozambique" (Stockholm Group for Development Studies, October 1989), and "Markets and Prices in the Rural Areas" (Centre for African Studies. August 1989). Both are major analyses of the marketing constraints and of the impact of the policy reform program at the disaggregate level of the economy. The coverage of district-specific and crop-specific issues is comprehensive and insightful. It is for this reason, that this chapter has a different format to the other chapters of this report. It does not seek to replicate the investigation and evaluation already conducted, but has two different objectives. The first is to summarize and evaluate the principal issues raised in these papers, particularly as they relate to the major themes of this report; and the second is to compliment this summary by providing additional analysis on issues that were not covered in detail in these papers or which should be emphasized more forcefully in the context of this report. These latter issues include the prospective role of AGRICOM, the development of the marketing storage capacity, and the problems of marketing margins. B. The Major Issues of Recent Marketing Studies 3. The analysis in this section focuses on the fundamental question of the efficiency of the marketing structure from three different perspectives: - firstly, how efficient are the existing markets and how serious is the lack of competition; secondly, what are the implications for pricing policy given the characteristics of the markets; and, thirdly, what role should the Government and its agencies play given the market structure (this is further developed in section C) The crucial issue is therefore how incentive policy over the short tff'medium term should be tailored to the realities of the market structure, given the constraints to market efficiency. The final issue looked 1/ These included the development of the transportation, financial and marketing Tnfrastructures; and the development of rural health, education, water and agricultural eKtenslon services. !f Earlier chapters have analyzed the transportation and financial asr,.cts. - 121 - at in this section is the integration of the emergency and coumercial distribution systems with respect to several specific marketing issues. 1/ 4. The Imperfections in the Rural Marketing Structure. The weakness of the rural marketing structure has resulted from many factors already noted in other context in this report. including in particular the exodus of Portuguese rural traders at Independence. the security problem, and the serious shortcomings in the transportation and financial infrastructure. While competition amongst traders is present at the district capital level and to a lesser extent in the surrounding rural zones, the more distant rural zones are frequently characterized by monopolistic and monopsonistic trading. Thus. at the producer level, crop purchase and consumer good sale are often conducted by a single trader. In consequence, producer prices can not, in reality, be guaranteed in the case of products covered by either the fixed or minimum price systems. and consumer prices may equally be set irrespective of centrally determined levels.!/ The exception to this conclusion is in the case of primary level purchasing by AGRICOM, through the mobile brigades or through the buying posts. where the price legislation can be enforced. However, with AGRICOM lacking the capacity to fulfill its role as buyer of last resort throughout the country on a consistent basis, actual prices below the official price have de facto been widespread. Price variability is also explained by the regional variation in marketing costs, which are not taken into account by the fixed or minimum price legislation, and, to this extent, the variability is economically justified. In practice, only the warehouse prices at the wholesaling level can be consistently enforced and controlled. 5. These conclusions have major implications for price-setting policy. for the role of AGRICOM and of Government intervention, and for the production incentive policy in a more general sense. The primary policy objective is therefore to foster the creation of more competitive markets in the rural areas. Free entry into the retail trade is a pre-requisite, and the licensing of retailers, largely for taxation purposes. should not be operated as a de facto barriers to entry. The principal determinants of the strength of the market have been noted above and are elaborated in earlier chapters and in the remainder of this chapter. Other measures, such as selective support for intermediaries, and the training of traders, producers• associations and intermediaries• associations, also have a role to play. .. !/ Thia section drsw• hesvily from the papers referred to above, snd which sr• strongly recommended for• more detsiled analysis and discussion of the iaau•• considered here, There ,lfll" •r•, additionslly, several topic• not of primary relevance to this chapter that th• papers also develop, together with a comprehensive and valuable compilation of the available statistical material, The lack of reliable data at the rural level la a .. rloua constraint to the development of effective policy: this includes data covering the coats of marketing and of production for all sectors of the economy, and th• evolution of actual producer prices at a sufficiently disaggregate level (in terms of crop and district). With respect to marketing, there is a particular n..d to develop data covering the coats of transportation, handling, storage and conservation, lo••••, adnliniatration and security. 4/ Note the conclusions of chapter II with respect to the evolution of the agricultural tel'tllll of trade, -•'='"• - 122 - 6. The Impact of Marketing Issues on Pricing Policy. Given the lack of control and monitoring of prices at the producer level and the weakness of the competitive structure, the Swedish study argued that fixed prices should be established at the level of the district wholesalers• warehouse where enforcement is possible. Producer level prices could still be published as the basis for AGRICOM purchasing, and as a recommendation to traders and as a guide to producers. However, the enhancement of retailer trading competition would be the main mechanism by which producer level prices would be increased. The study recommended specifically that minimum buying and maximum selling ·· prices be established at the wholesaler level for maize and rice which are currently subject to fixed price control. Further decontrol in this area would be a medium term target, but one subject to the evolution of the competitive marketing structure. 7. Medium term pricing policy is analyzed more fully in chapter X, but these findings provide considerable guidance in this respect. Sununarily, several broad principles would seem appropriate given the realities of the . marketing system: (i) for the primary domestic food crops and export crops, the medium to long term objective should remain the effective operation of a minimum price system, under which only the minimum producer price is determined; (ii) for these same crops, given the serious existing deficiencies of local marketing, minimum buying prices should additionally be established, for the short term, at the district wholesaler level, where enforcement and monitoring are possible. Minimum producer prices should continue to be set, with AGRICOM acting as buyer of last resort wherever and whenever possible. Improving security would be the most important factor determining AGRICOM's capacity to implement effectively this role, and for attaining the longer term objective; (iii) or the primary domestic food crops, establishing maximum wholesaler selling prices should be analyzed as a means of constraining consumer prices in a period of highly volatile supply conditions; (iv) there is no case for establishing maximum selling prices at the wholesaler level for the export crops • . 8. In view of the problems associated with determining fixed marketing margins (section E below), moving away from both the fixed price system and from the current minimum price system - whereby minimum producer and maximum _ factory prices are set - is essential. The establishing of the appropriate prices for single minimum price systems does, however, require detailed analysis, and needs specifically to take account of the prevailing emergency conditions, the implications of decontrol on regional pricing and living standards, the international price levels, and the financial operations of AGRICOM. - 123 - 9. One aspect of the pricing problem that is particularly relevant to the export crops that undergo agro-industrial processing is the efficiency of the marketing and processing stages. In 1989, the major export crops were moved from the fixed price list to the minimum price list, but the fundamental problem of how to adjust the international price in order to determine the appropriate producer level price remained. The precise allowance for both marketing and processing costs are central to the producer incentive, and it is apparent that the price determination proces in the past has sheltered gross inefficiencies in these two stages. 11 Clearly the state of the existing capital stock and security play a role in the cost structure of domestic processing enterprises and traders, and price setting must allow for an appropriate rate of enterprise rehabilitation. Nonetheless, it would seem apparent that exerting pressure on domestic traders and processors may be desirable in order to facilitate greater producer incentives. 10. A further aspect of price decontrol that has received little attention in the past, but which may be judged to have a significant impact on both marketing and production, is the impact of phased price decontrol. While the producers' elasticity of substitution between crops is not known with precision, and certainly is not infinite given the importance of the local climatic and ecological characteristics and the risk involved in changing crops, a degree of substitution towards the decontrolled crops is probable as relative prices change. On the other hand, to the extent that the parallel market was already playing a major role, the substitution will be minimal. Similar arguments apply at the marketing level, with fixed margins constraining the incentive to private traders. This conclusion therefore points to the importance of appropriate sequencing of the decontrol proces, with potential substitute products being decontrolled in groups to avoid major unintended changes in the composition of production and in the trading patterns of the private sector. It also points to the importance of maintaining the remaining fixed prices at a sufficiently high level. 11, The Operation of Price Stabilization Policy. The existing fixed and minimum pricing systems both entail a role for the state as buyer of last resort. In practice, this has not operated as originally intended, in part because AGRICOM - which in principle is the designated guarantor of the official price - has inadequate capacity to fulfill this role. Alternative .. !/ The most striking example is provided by the processing of cashew nuts, which indicates that the output value of a given input in Mozambique is around 391 of the equivalent value in India, reflecting serious processing inefficiency: Tona~ l<Nt. iftpv\ Ken,ela ., .....uce4 ou.... R41J.c..... To\el Whit.. •hole. Scorch•d. White pi•c••· Scorched pi •c••. Moaaai- 1000 13,3 44.6 14.6 56.7 31.4 10.9 171.8 In,lia 1000 169.0 19.0 211.0 9.5 1.5 1.0 228.0 Using 1987 dollar prices for the four grad•• of nut, suggests that the total value for Mozaabiqu• and India of their output is, respectively, USS•a&.8 and USS12•&.e, implying a Mozambique efficiency of le•• than •01 of the Indian efficiency. Indeed, thi• conclu•ion rai••• the broader economic issue of whether Mozambique would be presently advised to export the whole nut for external processing. The data here are drawn from •The Cashew Industry of Mozambique•, FAO, 1987. - 124 - price structures. based on the es·tablishment of minimum buying and maximum selling prices at the district warehouse. entail the same potential role for AGRICOM as buyer of last resort. Determining the appropriate prices and formulating an appropriate financing policy for the agents undertaking the storage on behalf of the Government are major problems that require further analysis. If, under any of these systems, the purchase price is established too high, large stocks may accumulate, incurring significant costs in the interim storage, and, probably, at the disposal stage if a lower price is charged. On the other hand, too low a price may discourage production, and necessitate importation to compensate. Even with appropriate price setting, · costs will be incurred, and predetermining the financing plan should be undertaken. §../ 12. The Impact of the Emergency. In the late 1980s, donor aid provided around 0.5 million tons of grain per annum, with the bulk being marketed through IMBEC and AGRICOM to the retail level, and DPCCN having overall responsibility for the free distribution of emergency relief. There are three prime repercussions of this assistance to highlight: Ci) the interaction of these flows with production incentives, which has already been referred to earlier; (ii) an additional concern is that the there should be a greater degree of coordination between the two key agencies. Specifically, DPCCN should have a primary obligation to purchase any excess grain supplies stored by AGRICOM, if not directly from other private traders. This would be a major factor in maintaining a strong incentive to domestic production, and promote the most rapid substitution of domestic for donor-supplied grain. One implication would be that, while it would tend to improve the utilization of AGRICOM stocks, it would imply local currency costs being incurred by DPCCN. Consequently, the financial arrangements for DPCCN, and the role that donors might play in promoting this process of substitution, requires further attention. On the other hand, it would still remain necessary to minimize the aggregate flow of grain through DPCCN to that strictly required for emergency purposes, and .. maximize the grain marketed commercially. Pursuing this policy would, in combination with tighter control and monitoring of the emergency distribution process, facilitate a significant contraction in the emergency supplies that are diverted to the parallel markets; (iii) a further issue of interagency coordination concerns the mutual benefits to be derived from interagency swapping of grain supplies: for example, the exchanging of DPCCN emergency grain at the ports (closer to the commercial markets) for AGRICOM stocks in the rural districts (closer to the emergency requirements) could be undertaken to the benefit of both, given the savings in transportation. The initial organization and coordination of the scheme by both agencies, 8/ Utilizing emergency funds in the short term to fin•nce these stocks, •nd the •ddition•I h•ndling •nd tr•nsport•tion costs th•t the emergency ent•ils, would be one solution. Over th• medium to long term, oper•ting minimum price systems will require some system of short term budget•ry or banking •ssistance. - 125 - and by the Government in a more general sense with the donor community. would be crucial. 13. Finally. it should be noted that many of the issues considered in these paragraph apply equally to the emergency administration of other products. For instance. in the case of simple agricultural hand tools, there should be the same promotion of domestic production substitution. subject to a close scrutiny of the efficiency of the domestic supplier. C. The Prospective Role of AGRICOM 14. Since Independence, the number of private traders has decreased from over 6000 to around 2200 in 1989. Most private traders were located in the four northern provinces where family farming is most prevalent; then and now, over 50 percent of all traders operate in Nampula province. The Government has attempted to fill this void of local traders by establishing and expanding the role of the state enterprises, especially AGRICOM, and by allowing the cooperatives and farmers associations to play a greater role. AGRICOM was established principally as a wholesaler to receive agricultural products from and to provide agricultural inputs to rural traders, as well as to provide the long-term storage function, but has come to play a crucial role throughout the agricultural and rural economy, as (i) retailer, (ii} wholesaler, (iii) transporter, and (iv) storage provider. 15. Foremost, has been AGRICOM's role as designated buyer of last resort for agricultural produce. Since 1989, this has entailed: (i} in the case of products subject or the fixed price legislation, purchasing crops that the private sector refuses to handle because the marketing margins have been set too low to provide any incentive to trade; and purchasing in those regions where private traders have been driven out or refuse to go because of the insecurity problem; (ii)in the case of the products covered by the minimum price legislation, purchasing all that is offered at the minimum price should the private sector refuse to buy at any higher price; and purchasing in those regions where private traders have been driven out or refuse to go because of the insecurity problem; 16. Consequently, as a matter of policy, AGRICOM will purchase any amount of offered product at the established producer price irrespective of whether there is local storage available or whether the product can be transported safely to regional storage facilities. The prime motivation for AGRICOM playing this role has been the concern to maintain the production incentive for local producers, and, over time, this has led to an increasingly larger presence of AGRICOM in the retailing side of distribution, with extensive contact with producers. However, as was observed above, there are serious doubts surrounding the capacity of AGRICOM to fulfill its obligations in these respects, with major implications for the implementability of the incentive strategy. 17. As its role expanded, AGRICOM established a series of permanent and temporary facilities (table 1), including mobile brigade markets (a mobile - 126 - purchasing unit that visits remote areas at specified times) and fixed purchasing posts (often established in new areas of displaced population concentrations). In consequence, AGRICOM purchased about 30-35% of its farm produce acquisitions in 1989 through market brigades, or at fixed buying posts. Over the course of the 1980s, AGRICOM has marketed as much as 50% of the country's farm output, although this fell to about 30-35% in 1989. In addition, it presently provides about 80% of regional c~mmodity storage capacity in the country. Table 1: Commercial Network for A9rlcultural Marketing. Commercial Structure Number of ••tablishments 1982 1986 1988 3682 2462 2187 Con•umer cooperatives 706 1008 1034 AGRICOM [l] Market. brigades 68 100 62 Fixed posts 236 150 82 Local storage 111 119 111 Other 0 7 Other storage " 22 Other fixed posts " 393 3 94 99 Total 6092 3926 3674 [1] Thia does not include AQRICOM regional warehouses. Source: AGRICOM 18. The secondary link in the marketing chain is the wholesaler, though in some situations the traditional wholesaling functions have been performed by the retailer at the district level. In general, the wholesaler purchases ~ from the retailer and provides them with consumer goods and agricultural inputs to sell to farmers and local villagers. In some instances, the wholesaler is designated as an official purchaser for specific commodities for , processing plants. AGRICOM plays a major role in each of these respects. The wholesalers are typically located in provincial capitals but will often have some district outlets and in some cases accept commodities directly from the producers. Table 2, AGRICOM marketing share of a99re9at.e agricultural eroduction (19882, Percentt.ge• by Provine• Coo,111<>di t.)' C•bo 0.1. Nia- Na..., .. ,. z...... ;. Tat.. Hanic:a Sofola Inhao,bana C.u Maputo Maiz• 100 93 68 68 100 74 62 23 38 8 Rice 99 100 55 84 0 100 31 100 6 0 Sorghum 93 100 59 90 100 100 22 0 0 0 Manioc 99 76 39 52 0 0 0 100 0 0 Seana 100 75 65 86 100 58 0 51 59 0 Cr-ouod'nuta 96 0 49 0 0 0 0 0 0 0 S•••"'• Sunflower 98 88 0 96 88 80 14 100 0 0 0 60 87 14 0 92 0 0 0 0 Copra 0 0 0 10 0 0 0 41 0 0 Mafurra 0 0 0 0 0 0 0 39 16 0 Ca.aha• 0 0 11 5 0 0 5 15 37 0 - 127 - 19. The future role of AGRICOM. The integral role of AGRICOM in supporting the existing marketing structure in extremely difficult circumstances is apparent from the previous sections. With private sector participation in rural trading remaining volatile and uncertain with the persistence of the security problem, AGRICOM will continue to play a critical role in maintaining production incentives on a sustained basis. Without a buyer of last resort, pricing reform would be considerably less effective. It is. however, necessary to be realistic abou~ the ability of AGRICOM to communicate with the rural areas and about its capacity to implement universally the price legislation, and it is apparent that the exiting trading network is not able to cover all the rural areas as would be possible under peacetime conditions. 20. With the return of rural stability, and the likelihood of a significant expansion of private trading activities throughout the country, the role of AGRICOM should be reassessed. In the meantime, the disincentives to private rural trading remain substantial, and given the centrality of preserving producer incentives. a pre-condition for the withdrawal of AGRICOM from primary level operations should be the establishment of an adequate competitive base. Without adhering to this condition. the intended trend in the producer terms of trade can not be protected. II 21. There are, however, several respects in which AGRICOM is currently ill-equipped to perform the essential role that it is accorded. The foremost concern is the financing arrangements under which it operates, and the linkage with pricing policy. With Government subsidies severely constrained, and with credit extension being tightly administered, the finance sources available to AGRICOM are strictly limited. Consequently, any requirement for AGRICOM to undertake a major transitional storage role. in its role of buyer of last resort, may have two alternative repercussions. In the absence of adequate financing, it would be compelled to seriously disrupt its purchasing role, with critical implications for production incentives; or, assuming finance was made available in order to preserve the incentive structure. there would be major repercussions for the macroeconomic aggregates and the broader policy objectives. This points to a pressing need to review the determination of both the fixed and minimum prices with these considerations in mind, and to provide for contingency financing sources, albeit of a short-term nature.~/ 22. The objective of AGRICOM with the re-establishment of rural stability should be to focus on the wholesaling functions that have been its traditional concern and withdraw from its primary marketing operations, and, indeed, AGRICOM is already attempting to pursue this policy as security permits. Even in this event, however, the role of buyer of last resort should be maintained, 7/ Significant changes have already been mad• In ACRICOM's purchasing patt•rn, with th• proportion of its purchas•s constituting primary marketing decreasing from 361 in 1986 to 261 in 1988. Of the aggregate primary marketing from all agricultural sectors, ACRICOM accounted for only 7.81 in 1988. Retaining I residual rol• in some regions will, howev•r, be n•c•••ary for th• reasons noted above. !/ Other aspects of storage ar• considered in th• following section. - 128 - implying a continuing presence at the producer level, albeit on a less comprehensive basis. i/ 23. The balance between public and private sector marketing. There are basically three factors that determine the degree of private sector participation in rural marketing: firstly, the local security conditions; · secondly, the standard of the rural infrastructure, including the road network and the storage facilities; and, thirdly, the policy environment. The first two aspects are clearly crucial for both the private and public sectors, but ·· they are particularly relevant for the former in view of the loss or damage to private property and private livelihoods that may result (refer chapter V). 24. With the diminution of the insecurity problem, the policy environment will play an increasing important role, and the objective should be to . establish an environment in which there is neutrality as between sectors with respect to the access to resources, and in the degree of financial autonomy and accountability that is required. The former should be reflected in the · mechanisms by which both foreign exchange and credit are allocated, and in the manner in which domestic resources are marketed (chapter X). Reference has also been made already to the enterprise policy that is designed to impose greater commercial pressures on the operations of both private and public enterprises. Consequently, the macroeconomic adjustments may be seen to have already exerted a positive influence over the role of the private sector in distribution. This section has concluded that in the short term and especially while the security problems persist, it would be inadvisable to dismantle the state marketing and transportation agencies, since the capacity and rate of development of the private sector is subject to considerable uncertainty. Indeed, even over the medium term, there is no strong case for dismantling the state operations. The objective should be to facilitate the operation of agents in both sectors in a non-discriminatory environment, and allow the relative efficiency of their respective operations to determine the relative role that each plays. D. The Storage Infrastructure 25. The current constraints. The storage of agricultural products is dominated by AGRICOM, which controls about 80% of the regional storage capacity in the country. The existing capacity suffers from three related problems: Ci) the lack of facilities for drying, cleaning and fumigating crops; (ii) the poor condition of the existing facilities; (iii) the inadequacy of the existing stock of warehousing. 26. All AGRICOM warehouses were built only for bag storage, with are no facilities for drying or cleaning the products being available. Consequently, !/ An additional objective should be the reduction of its own-account fleet through a greater utilization of the specialized professional fleets. This is discussed further in chapter V. - 129 - food crops are purchased and stored with 10-15% foreign material, principally stones, sand, chaff, and other items that become mixed with the grain during the sun drying process. This has two important consequences. Firstly, there is no incentive for producers to improve the quality of their production, since the non-valuable components can not be separated at the warehouse and are therefore compensated the same price as the grain. Secondly, storage capacity is wasted, with unnecessary additional costs being incurred. A further problem is the absence of fumigation capacity, which is essential to combat infestation; particularly since all grain crops are insect infested, predominantly by grain borers. .. 27. Most of the existing warehouse stock was built during the pre- Independence period and is therefore in excess of 15 years of age. Consequently, the condition of many facilities has deteriorated over the years, and, in many instances, capacity has been partially or completely destroyed by armed bandits. Their value for safe storage of agricultural commodities is therefore diminishing as needed repair work is delayed. This is especially true for roof and sidewall repair where rain and rodents find easy access. 28. Some reconstruction and rehabilitation has been undertaken, but the general trend is toward less and lower quality storage space. In addition, since the destruction is to some degree random and population concentrations have changed because of the war, existing storage space in any given locality may not coincide with the current local needs. Estimates of existing storage capacity are liable to be seriously inaccurate, with little, if any, information being available with respect to the smaller structures. In some districts, contact has not been made for extended periods of time, and little current data is therefore available. Furthermore, in other areas, storage may exist but be inaccessible and therefore of little current value to the marketing system. The absence of reliable and safe storage at the local level is a serious disincentive to increasing marketable surplus from the family farm sector, particularly since there is a strong disincentive for the family farmers themselves to undertake the storage. Consequently, while the loss of an occasional large regional storage facility is dramatic, the more serious impact of the insecurity situation is the insidious loss of local storage units that have been destroyed or have deteriorated, often beyond recuperation from disuse or neglect. 29. Once the insecurity situation begins to improve, permitting the restoration of rural production on a sustainable basis, local traders and shopkeepers will return. The first priority will then be to provide them with technology, material and financing for local storage rehabilitation and construction. Thereafter, as the flow of marketable surplus increases, a critical need to repair regional capacity, and to construct new regional warehouses will emerge. Incorporating facilities for cleaning, drying and fumigating the crops prior to storage should be an important component in the restoration of capacity. 30. One of the major problems at present is attributable to the linkage between pricing policy and the incentive to provide storage capacity. For those products covered by the fixed pricing legislation, there is no incentive for any agent (producer, retailer or wholesaler) to undertake the storage - 130 - function, since storage costs and risks can only reduce the profitability of their operations. Thus, for those products that are traditionally stored for later sale to local consumers at the pre-determined price, the wholesaler has an incentive to sell almost immediately to AGRICOM, which is in turn obliged to purchase the products and store them until they are needed in the market. For providing this service, AGRICOM is given a small subsidy, but this is generally inadequate to cover the storage costs. With the deregulation of price controls, the incentive for the private sector to accept more of the long-term storage ~unction is increasing, since seasonal price differences are more able to cover storage costs. Thus, the role of AGRICOM as the dominant source of long-term storage capacity should decline and a division of responsibility for new regional warehouse capacity should be established to guide future AGRICOM investments • . 31. On the other hand, the insecurity problem continues to provide a major disincentive to storage, especially in rural areas, and this will prohibit any fundamental shift in responsibilities from AGRICOM to the private sector in the short-term. AGRICOM will remain the key agent in restoring rural production in many areas. Table a: ACRICOM Storage Capacity by Province as of May 1988. Number Capacity Known changes Province of unit• (tona) May 1988-March 1989 Cabo Delgado 13 9380 Nia••• 13 13800 Tete 10 13600 -608 Manica 12 13688 -688 Sofala 2 1380 Inhamban• 11 6136 Gaza 9 18680 -6080 Maputo 1 168 Nampula 24 32468 -6880 Zambezi• 13 4268 480 Total 108 18484& -10708 Source: AGRICOM [l] The 1986 total number of units••• 189, and the capacity waa 162,320 tona. 32. Future infrastructural needs. The principal analytical concern now should be the adequacy of the warehouse stock both for the immediate future, with rural· production slowly recovering but still seriously affected by the insecurity, and, secondly, in the event of a substantive improvement in the security situation. With respect to 1989, it can be concluded that the aggregate available storage capacity is adequate for the prevailing levels of production, but that the distributional problem is in some instances a serious obstacle. As of May 1988, AGRICOM had inventoried 108 warehouses with a combined capacity of 105,000 tons. Of this, about 53,000 tons were in nine regional warehouses with capac~ties of 4,000 tons or greater. An informal - 131 - accounting of known losses to sabotage and of new construction since May 1988 shows a net loss of 10,700 tons capacity by March of 1989, principally in Nampula and Gaza Provinces (table 3). These losses were principally in large warehouses with the result that regional storage capacity has been reduced to about 45,000 tons. This is a reduction of about 10% in AGRICOM storage capacity in less than one year. Over a longer time horizon, capacity is down from 152,320 tons in 1985, or a loss of almost 40% in four years. In the immediate term, following the substantial reductions in the marketable surplus (that has fallen by 62% since 1970), this loss in storage capacity is not acutely·felt except in the specific areas of loss. Consequently, the current .. estimated AGRICOM annual storage throughput of 117,000 tons can be handled adequately in existing storage through normal turnover of commodities in storage, subject to specific regional shortages in areas where major destruction has occurred. Table 4: AGRICOM Storage Capacity and Marketable Surplus by District. 1 in Province of Cabo Delgado, Jan-Sept 1988. Diatrict. Capacity (tons) Co111111ercialized product• Palma 210 2 Nangade 150 1608 Mueda 21EI 3432 Muidumbe El 1178 M. Praia laSEI 164 Maco111ia •UEI 385 Ancuabe 22EI 255 Meluco• El El Auissanga• El 0 Cl iune 150 54 Montepuez 2000 97EI Na111uno 210 948 Balama 10EI 1477 Met.uge• 0 4 Pemba• 4fJ0EI e, Ibo 0 El Tot.al 898e 18376 * Not announced Source: Grain Warehouse Proposal - SIDA 1988 33. Current estimates are that AGRICOM warehouses process about 100,000 tons of commodities a year, of which about 40% is agricultural products, 40% is food aid, and 20% is agricultural inputs. With an immediate cessation of hostilities and the resumption of higher levels of marketable agricultural surplus, AGRICOM's storage requirements are projected by the Swedish International Development Agency (SIDA) to increase almost five-fold to about 500,000 tons by the mid-1990s (table 5). Food aid is expected to drop to zero, while marketed agricultural products are projected to increase- by about nine times from 43,000 to 352,000 tons. 34. However, once agricultural production regains the peak levels of the early 1980s, significant storage shortages will be evident. Significantly, even with the reduced volumes of 1987-89, there are substantial imbalances of - 132 - storage capacity and marketable production at the local level. For instance. in the Province of Cabo Delgado, 10/ an increase of annual marketable production in recent years has now led to storage demands in excess of existing storage capacity. A comparison between the marketed quantities and available storage by district in Cabo Delgado is shown in table 4. Clearly there is little relationship on a district basis between the location of . warehouses and the location of production. Heavy inter-provincial transport is therefore necessary to utilize the current storage facilities. However, as was noted in chapter v. the fragmentation of the economy and specifically the lack of inter-regional mobility precludes such transfers. Consequently, the required capacity under present circumstances exceeds that which would be required in peace-time conditions. Table S. Estimated Present and Future Storage Capacities for AGRICOM. Items 1989 199,-1999 Locally produced agricultural products [1] ,2775 362000 Food Aid [2] 37880 0 Input Support 21700 138600 Sub Total 102136 ,88600 Contingency 16 percent 16320 73276 Total [3] 111,55 661776 Source: •Crain Warehouse Proposal• - SIDA [1] 1988 Figure based on 1988 marketing campaign. [2] 1988 Figure based on three month r .. upply schedule. [3] Estimate for 1994-99 baaed on serving 2.99 million urban population and 3.67 million displaced rural population at minimum nutritional level of 178.8 kg of cereals per person per year. [4] Estimates assume AGRICOM has a 301 market share. - 35. Four factors, however. would probably reduce the needed capacity somewhat below SIDA estimates. Firstly, the likely return to rural areas and subsistence agriculture of a proportion of the displaced population, which would reduce the consuming population accordingly. Secondly, the turnover of commodities and inputs in storage throughout the year would allow the annual flow of stored material to exceed the stock of available capacity. In the 1983-85 period, annual turnover in AGRICOM warehouses ranged from 2.2 to 5.2, 10/ This is the only Province with storage and marketing data currently compiled on a district basis. - 133 - with average product durations of 70 to 166 days. Thus, required installed capacity would be somewhat less than estimated annual throughput, but would be significantly greater than the present (and declining) capacity today. Thirdly, estimates of storage capacity availability and future needs are focused on AGRICOM which handles most of the food crop marketings and controls most of the regional warehouse capacity. The SIDA study concluded that location of new AGRICOM warehouses could not be determined accurately with present information and recommended that AGRICOM "further investigate this matter before a final decision on capacities and locations is taken". The non-AGRICOM storage capacity, which is principally for export, industrial crops and the remainder of food crops, has not been surveyed. These needs must also be determined before a realistic estimate of future storage needs can be made. Finally, the SIDA assumption with respect to the rate of agricultural recovery is optimistic, and a lower rate of recovery would entail a lower storage requirement. 36. In summary, it is clear that the rate at which the storage capital can be improved will be directly related to the evolution of the security situation. The primary need is, however, to maintain a contingency plan that may readily be implemented when and where circumstances permit. In particular, the following should be addressed: (i) a district-level and regional-level inventory of existing capacity and its condition should be maintained and regularly updated; (ii) a district-level and regional-level assessment of storage requirements, based on an assessment of the district cropping patterns, should be maintained: firstly, on the basis of existing security conditions, and, secondly, for a 5-10 year horizon on the basis of a marked improvement of security; (iii) an estimation should be made of the prospective role of the private sector in the provision of storage capacity at all levels under an unconstrained pricing system; (iv) a prioritized schedule for the rehabilitation and reconstruction of warehouses should be established on the basis of (i), (ii) and (iii) above. Implementation should be constantly under review, and responsive to the constraints imposed by security and financing availability. (v) the technical specifications of the required capacity should be reviewed, particularly with respect to the cleaning, drying and fumigation of the crops; and the conclusions should be incorporated into the rehabilitation and reconstruction planning. E. The Determination of Marketing Margins 37. The ERP recognized the need to provide greater flexibility in the trading process by initiating the major steps towards price and distribution - 134 - decontrol that have been analyzed earlier. At present, the Government is maintaining both the fixed pricing system and the minimum price system. In the case of the fixed prices, the intermediate costs and margins are specified at each stage of the marketing process, while, under the minimum price system, only producer and wholesaler's warehouse price levels are specified, with the market being left to determine the distribution of the intermediate costs and . margins between the various marketing functions. 38. Within these pricing structures, the procedure for determining the margins is a major concern given its impact on the efficiency of the price at all levels of the marketing chain. Firstly, the assumption of pan-territorial pricing systems is itself a major distortionary element, particularly in the Mozambique context where the geographical variations in marketing cost are so pronounced. Secondly, the calculation of the margins using the product value as the basis, rather than the services performed in the marketing system, introduces another important distortion. On the other hand, to the extent that the legislation is de facto only partially implemented, these issues may . be less important. Indeed, were a single minimum price system, or a system of setting minimum buying and maximum selling prices at the district warehouse level, to be introduced, the problem would be eliminated. The determination of these prices would then be the critical factor, since no fixed margins would exist. However, since, in principle, these are the offi~ial legal systems and at least in some areas of the country the systems are in fact operated, the concerns here are relevant. 39. The basic fixed pricing procedure involves a series of conunon coefficients for each stage in the marketing process, with the coefficients conunonly applied to the original value of the conunodity plus the value added to that stage. Thus, profit margins and taxes will be substantially greater for higher value crops, even though the marketing services performed may be quite similar. On the other hand, for some costs, such as transport (for which a ton/kilometer cost is used) costs bear no relationship to the value of the product. However, in the current high transport cost situation caused largely by the insecurity problems, the transport cost levels used in determining administered pricing are grossly inadequate. The implications a~e clear: the private sector is much more willing to market the higher value crops, leaving the marketing of lower value crops whenever possible to AGRICOM, the buyer of last resort. Consumption is affected as well~ since the higher value crops are sold at a relatively higher price. In those instances where it is necessary that fixed prices be continued, marketing margins should be based on estimates of true costs rather than on formulae that determine individual product marketing margins solely on the basis of differences in producer prices. However, given the huge cost variability caused by the insecurity problem - regionally and especially in transport and storage costs - the determination of marketing margins based on actual costs appears hazardous given the inappropriateness of averaging national costs. 40. This would argue strongly for a rapid move toward a single minimum price system, or the fixing of prices only at the district warehouse level, or free prices, with the choice requiring a crop-specific analysis. Although the fixed price legislation only applies in 1990 to a very limited number of products, there has been a rapid expansion of the minimum price system (with fixed prices at the producer and warehouse levels) and the problem of the - 135 - aggregate margin between the two stipulated prices remains. It is important to note that this issue is equally valid whether or not producer prices are made a function of international prices. Allowance for transport, marketing and processing costs would always need to be estimated. 41. The use of international pricing, additionally, raises some interim methodological issues with fairly important consequences for incentives in the agricultural production sector given the current state of low agricultural productivity. For example, with the current low level of maize, rice, and bean production, most marketable surplus is sold in local rural or, at least, in internal country markets. Major border city markets (Maputo, Beira and Nacala) are currently supplied by imports as are some internal urban centers. Thus, the relevant producer price should be the international price plus internal transport and marketing costs rather than the international price minus internal transport and marketing costs. By setting producer prices at this more favorable level, producer response would likely be significant and help resolve some of the current food shortages. However, in the future, increased production would lead also to surpluses in production regions and to the need to export food to coastal urban areas, and possibly to international markets. This would reverse the impact of transport and marketing costs on producer price levels. Thus, the net result of moving from a deficit to a surplus production situation is the need to adjust -producer prices lower in the future, as local production becomes sufficient to once more serve external markets. Conclusions 42. In swmnary, this chapter illustrates the importance of tailoring pricing and marketing policy to the current realities of the economy, and specifically of adapting policy to the weak competitive structure. The future development of the marketing structure is fundamentally tied to the evolution of the security problem, and, until security improvements are made, major progress in restoring strong competition in rural trading is not feasible. In this context, the chapter has focussed on the lessons both for the choice of pricing structure and for the role of the Government in the overall ESRP strategy of re-establishing a strong production incentive framework. In addition, the infrastructural needs were considered, and the importance of establishing a contingency planning process for the provision of storage capacity was emphasized. 136 CHAPTER VIII THE IMPLICATIONS OF FUTURE DEMOGRAPHIC TRENDS. 1. Mozambique is a country with severe rural insecurity, and hence suffers from profound short-term demographic disturbances of which the most striking are the massive displacements of population, both_internally and into neighboring countries, caused by ever-shifting rural banditry. When peace is restored, there will once again be demographic upheaval and rapid change as the population resettles and resumes normal life. Yet at the same time, Mozambique's underlying demographic characteristics and trends are already, or potentially will become, very similar to many other countries of the region, with a dominant pattern of rapid population growth and accompanying high dependency burdens that threaten to outstrip any achievable rate of socio-development and growth. The consequences of these underlying patterns, though masked at present by the more immediate and dramatic effects of the insecurity, will assume an overwhelming importance after the restoration of stability and normal development. They therefore must be taken into account when planning for the longer term. Population issues are thus treated in two separate sections, the first devoted to the long-term issues of population growth and the second to the immediate problems of population displacement caused by the insecurity. I. National Population Issues in the Long-Term: Rapid Population Growth 2. Demographic Patterns and Trends: Based on the 1980 census results, the population stood at around 12 million in 1980, It had doubled in size over the 30 years since 1950. The estimation of population growth during the 1980s is problematic, due to the upheavals of the last decade, but latest Bank projections!/ put the population at the end of 1989 at just over 16 million with a current annual growth rate of around 2.7 percent. Of these 16 million Mozambicans. at least one million are at present refugees in the neighboring countries of Malawi, Tanzania, Zimbabwe, Swaziland and South Africa; another two to four million have been displaced by rural banditry to settlements which are mostly located around major cities and provincial and district capitals. 3. Little information is yet available I/ on the effects of the war on national fertility and mortality levels and trends. On the basis of experience elsewhere, however, it is likely that these displacements and 1/ Population projection• were originally made for the forthcoming Population, Health and Nutrition Sector Report, following a •i••ion in •id 1987. Th••• have been revi•ed for the CEW, •Ince the event• of the last two year• have made it nec•••ary to change a••umptlon• on when peace and •tability would be re•tored, and on the cumulative effect• of the war on demographic indic••· 2/ Some data should become available over the next few months from the analysi• of re•ult• from the 1987 National Study of Reproductive Behavior carried out by Wini.try of Health, though of necessity the rural sample used in the survey was not fully representative and excluded the area• mo•t •everely affected at that time. A full revision of demographic estimates and population projections will then be po•slble and worthwhile, and will be carried out for the Population Sector Review scheduled for preparation in 1990/91. - 137 - their adverse effects have halted and reversed any previous mortality declines and have temporarily at least somewhat lowered fertility, the net effect being stagnation or reduction in earlier rates of population growth. Currently life expectancy is guesstimated to be stagnant at around 45 years, with the crude death rate at just over 20 per thousand and a little over one quarter of all children dying before reaching five years of age. Current fertility is guesstimated to be a little lower than normal, at a total fertility rate (TFR), or average total number of births per woman, of 6.5 and a crude birth rate of a little under 48 per 1000. The resulting population growth rate of a little over 2.7 percent, though probably lower than it was in the late 1970s and early 1980s, is still high enough to double the population again in another 25 years. 4. Future Demographic Trends: To examine the implications of current and future demographic trends for socio-economic development, a set of national population projections was constructed to cover the next 30 years from 1990 to 2020 -- a period well within the lifetimes of today's children. These projections, based on the 1980 census, cover all Mozambicans whether currently living in Mozambique or refugees in neighboring countries, on the assumption that virtually all will return when peace is restored. Three scenarios were used to derive assumptions on trends in fertility and mortality, 1/ namely: l. Continued Insecurity Scenario: This pessimistic but possible scenario assumes that peace and stability are not effectively restored until 2005, or 15 years from now; that mortality does not begin to decline from its current level till 2005; and that fertility rises slightly after 2005 (as normally occurs in immediate postwar periods) and does not decline thereafter, since such a long continuance of insecurity would probably hinder any effective long-term development of family planning services at least until 15 years or so after peace is restored. 2. Recovery Scenario: This more optimistic scenario assumes that peace and stability are effectively restored by 1995, or only five years from now, that mortality declines steadily from its current level after 1995; and that fertility, after rising in the immediate postwar period 1995-2000, then falls steadily to reach replacement level by the year 2040, or 50 years from now, on the assumption that family planning services will continue to develop and expand from now on. 3. Rapid Fertility Decline: This extreme but not impossible scenario, which is of use mainly for setting a minimum boundary to population growth, is a variant of the Recovery Scenario differing only in a faster fertility decline from 2000 onwards; fertility is assumed to fall to replacement S/ s.. the computer print-out of projections reproduced in Annex?, Table?, for further details of the input to each scenario, - 138 - level by 2025, or 35 years from now, on the assumption of a very vigorous effort by the Government to reduce fertility and population growth rates in the postwar period. 5. The detailed fertility and mortality assumptions are shown in Table? Annex?. By the period 2015-2020, life expectancy is projected to rise from a current value of 44.5 years to 51 years under either recovery scenario. It should be noted that these projections assume that any future AIDS epidemic will not make a significant impact on mortality trends in Mozambique, at least over the period 1990-2020. This appears the most plausible assumption for two reasons: first, the epidemic has barely begun yet in Mozambique (because of the country's war-induced isolation and breakdown in internal communications) and probably will not get fully under way till normal conditions are restored; and second, the massive and intensive R&D efforts underway worldwide to produce a cure and/or vaccine for AIDS are likely to have borne fruit by the time the epidemic does become important. The total fertility rate is projected under the Continued Insecurity scenario to remain at 6.5 until 2005 and thence to remain at 7.0 until 2020; it falls to 4.0 by 2015-2020 under the Recovery Scenario and to 2.7 under the Rapid Decline Scenario. Table 1. · Projected Size and Crowth of the Mozambican Population, 1990-2020 Mid Y•ar Population Population (in millions) [1990=100] 1990 2'588 2fJ2fJ 2eee 2028 Continued In••curity 18.28 21.43 39.87 132 24& R•cov•ry 18.28 21.88 38.48 134 224 Rapid F•rtility D•clin• 18.28 21.88 31.77 134 19& Average Annual Growth Doubling Time (in Rat• (percent) Years) at 2016-20 Crowth Rat• 1990-96 2000-06 2016-20 Continued Insecurity 2.74 2.77 3.28 21 Recov•ry 2.74 a.es 1.99 36 Rapid Fertility D•clin• 2.74 2.47 1.38 &1 SOURCE: Population projection printouts in Tabl• ?, Annex?. 6. The key results of these population projections are summarized in Table 1 which shows the projected size and growth of the population over the next 30 years under the three scenarios. Two very striking features stand out. Firstly, Mozambique is set to experience massive population growth over the next three decades. Under any scenario, the population - 139 - will increase by about a third over the next 10 years. reaching between 21 and 22 million by the year 2000. and will double or more over the next 30 years, reaching 32-40 million by 2020. Even beyond 2020, considerable potential for further growth will remain, with growth rates still high enough to permit, if maintained, a further doubling within the following 20-50 years. Thus under any likely conditions short of a substantial and sustained rise in mortality, Mozambique will have to accommodate a much larger population in the fairly near future. 7. Secondly, the dominant role of fertility in determining longer- term population growth trends is very clearly demonstrated. Population growth is projected to be much higher over the next 30 years under the Continued Insecurity scenario than under either of the Recovery scenarios, primarily because of the lack of any fertility decline over the postwar period. This is despite initially having somewhat lower fertility, and higher mortality throughout. By 2020, the difference in population totals amounts to between 3 and 9 million, or a 9-21 percent reduction over what would be expected with no change in fertility. The effect on longer-term potential for continued population growth is even more dramatic, with further doubling times stretched from 20 to 35-50 years. Thus policy decisions related to fertility are likely to have a substantial impact on long-term development. Table 2. Projected Poeulation Structure of the Mozambican Poeulation 1 1990-2020 Chi Idren under 15 [!] Deeendencl Ratio [l] 1990 2000 2020 1990 2000 2020 Continued Insecurity '16 .... '17 91 87 98 Recovery '16 '16 38 91 90 71 Rapid Fertility Decline '16 '16 31 91 90 6'1 [l] Defined as the numbers aged under 16 years and 66 years and over per 10/a adults aged 16-6'1 years. SOURCE: Population projection printouts, Table?,_ Annex?. 8. The effect of fertility trends is just as dramatic on population structure, as can be appreciated from Table 2 which shows the projected evolution of dependency ratios and proportions of children in the population. High-growth, high-fertility populations are youthful societies with heavy dependency burdens; thus, even under present conditions of severe childhood mortality, children aged under 15 years make up 45 percent of the population and every 10 adults of working age must support approximately 9 dependents. This situation will not improve as long as fertility does not fall; indeed the trends of postwar sustained higher fertility and falling childhood mortality which are projected after 2005 in the Continued Insecurity scenario would significantly increase the dependency burden in Mozambique by 2020. Yet even a fertility decline starting only after 2000 would cut the dependency ratio to 5-7 dependents per adult worker by 2020, and the proportion of children to 31-38 percent. - 140 - Such a lightening of dependency burdens would last for many decades before the proportion of elderly in the population rise to high enough levels to offset the low percentage of child dependents. It would afford a welcome opportunity to improve investment and savings rates. 9. These declines in dependency burdens would precede any significant effect of reduced fertility on the size of the labor force by 20 years or more, since lowered numbers of births do not translate into lower numbers ·of entrants into the labor force until 15 years later. This is demonstrated in Table 3, which shows that under any scenario, the working-age population of Mozambicans is set to grow by 35 percent over the next 10 years to 11.5 million men and women, and to increase 2.4 or 2.5 times over the next 30 years to reach 20 or 21 million. Thus there would be no danger of any shortfall in the availability of labor to help rebuild and relaunch Mozambique's economy when peace returns. Table 3 Projected Working-Age Population of Mozambicans, 1998-2020 Population Aged 15-64 Years Working-Age Population (ml I I Ions) [1990 = 100] Scenario 1990 2000 2020 2000 2020 Continued Insecurity 8.6 11.6 20.2 136 238 Recovery 8.6 11.6 21.4 136 262 Rapid Fertility Decline 8.6 11.6 20.7 136 244 10. Implications of Future Demographic Trends: The preceding analysis of current and future demographic trends shows that Mozambique, despite the current insecurity, resembles most other African countries in its high fertility, youthful population structure, and rapid current and potential population growth. In the perspective of long-term socio- economic development Mozambique must therefore, like the rest of Africa, face up to the issues posed by rapid population growth. 11. However Mozambique is fortunate in escaping the grave fundamental mismatch between explosive population growth and limited natural resources that characterizes so many African countries. The country possesses an excellent natural resource base capable of supporting its fast-increasing numbers into the indefinite future. Agricultural resources are ample under any time-frame. At present, less than a fifth of the land suitable for agriculture is actually under cultivation and there remain large reserves of fertile and well-watered land in the north into which cultivation can expand in the shorter term. A population three or four times larger than current numbers -- reached in 40 to 50 years of population growth at an annual growth rate of around 3 percent -- could be supported at improved nutritional levels from the extension of cultivation alone, without any improvements in agricultural technology, provided only that the settlement patterns of the growing population could be well- matched to the distribution of good agricultural land reserves. In the - 141 - longer term, there is potential for massive increases in land and labor productivity since family sector agricultural technology is still at a very low level. Crop yields could be multiplied many times with suitable development of seeds, fertilizer use, tools and irrigation. 12. As regards mineral and energy sources, Mozambique possesses extensive known mineral resources, including coal and gas, with more probably awaiting survey and discovery; these have been little exploited to date for export or industrialization. Other energy sources, such as forests and surface water systems with hydroelectric potential also are sufficiently abundant to meet, under suitable development, the household and industrial needs even of a much larger population into the foreseeable future. Mozambique can therefore support much greater numbers of people than at present. Indeed the country would benefit in many ways from a substantially larger and more densely settled population. Economies of scale could then be realized in manufacturing and industry, in administration and government, and in the provision of infrastructure and social services. 13. However, the speed at which a larger population should be attained is still a major issue in Mozambique, as in other naturally well- endowed African countries. Rapid population growth, with its accompanying high dependency burdens, act to reduce the speed with which a country's progress in economic and agricultural development can be translated into improvements in incomes and living standards of the people, by expanding consumption needs for basic goods and social services faster than growth in production can match. This is of particular concern for the future of Mozambique because the current level of economic and agricultural development -- which is the base from which future growth in production must begin -- has been kept low by the disruption of the past two decades. 14. Unfortunately, progress in development will remain constrained for some time to come even under the most optimistic assumptions. A decade of economic growth at 4 percent per annum would be required to restore GDP to its 1973 level and a further 20 years to restore 1973 GDP per capita; yet even this level of growth (the objective of the ESRP) can be achieved only if security conditions improve. Any permanent settlement of the insecurity would itself bring further temporary disruptions and massive short-term spending needs as the families displaced both internally or abroad -- amounting probably to over one-quarter of the Mozambican population -- resettle either in their former homes or elsewhere (see following section). Even when normal conditions are finally restored, the establishment of long-term stable and rapid agricultural growth and development will require massive investment and considerable time. 15. At the same time, the rapidly-growing and youthful population will generate huge increases in the need for social services such as education and health, Government-funded services essential both for the development of badly-needed human resources and for raising welfare levels. These increases are illustrated in Table 4, which shows projected growth in children of school age and in mothers and children needing maternal and child health (MCH) care. - 142 - Table 4 Projected Numbers of School-Ape Children and MCH Clients, 1990-2000 Population (in •II lions) Average Annual Crowth Rate (percent) 1990 2000 2020 1990-2000 2000-2020 Children of Primary School Age (6-10 years)• Continued Insecurity 2.36 2.90 6.86 2.1 3.6 Recovery 2.36 2.92 4.68 2.2 2.4 Rapid Fertility Decline 2.36 2.92 3.31 2.2 0.8 Children of Secondary School Age (11-16 years)• Continued Insecurity 2.28 3.08 6.82 3.1 3.0 Recovery 2.28 3.08 6.44 3.1 2.8 Rapid Fertility Decline 2.28 3.08 4.20 3.1 1.8 MCH Clients•• Continued Insecurity 3.66 4.84 9.30 2.8 3.3 Recovery 3.86 6.27 6.76 3.7 0.4 Rapid Fertility Decline 3.66 6.27 3.97 3.7 -1.4 • In practice, at present, Mozambican children spend 6 years in primary school (beginning officially at 8 years of age) and 8 years in secondary school. Projections for the •official• age groups of 8-12 years and 13-17 years show essentially the aa. . picture. •• Composed of all children under 6 years of age plus all mothers delivering in the given year. 16. For the rest of this century, a period when the effects of the insecurity or of inunediate post-war recovery will be dominant, annual growth in the needs for these social services will range between 2 and 4 percent, with variations depending on assumptions about mortality trends and a post-war baby boom. Social service budgets will need to increase at matching rates just to maintain current levels of coverage and quality, themselves considered still far too low for optimum benefit; any improvements in coverage and/or quality will demand yet higher increases in spending. In turn, GDP and Government revenues will have to grow at least at matching rates, in order to avoid the need to devote larger shares of Government and family budgets to these expensive services just to maintain the status quo in coverage and quality. 17. After 2000, when peace and normal development are assumed to be either already prevailing or soon restored, the effects of fertility trends become dominant. Under the scenario of peace after 2005 and a subsequent baby boom, needs for education and health will grow at an annual rate of over 3 percent, forcing at least matching increases in social service budgets if services are to be maintained or improved. A moderate fertility - 143 - decline however. even in the presence of lower childhood mortality. would result in markedly lower growth in demand for education and MCH care. ranging from close to zero for MCH clients (since numbers of births and young children are the first to be affected by falling fertility) to 2.8 percent for secondary school-aged children (the last to be affected). A rapid fertility decline would actually cut numbers of MCH clients between 2000 and 2010 and would reduce annual growth in the school-age population to less than 1 percent for primary school ages and less than 2 percent for secondary school ages. Such reductions would provide greater opportunities for improving service coverage and quality even without real increases in annual spending -- opportunities that would be particularly welcome during the postwar period of rehabilitation, reconstruction and the re-launching of development. 18. Population growth can of course be slowed in many ways: by rising mortality, by increased emigration to other countries. and by declines in fertility. Indeed all these forces may have been operating together in recent years, due to the widespread population displacement, family disruption and malnutrition caused by drought and insecurity. Rising mortality is, of course, a catastrophe to be fought against. and quite incompatible with successful development. Emigration on a sufficiently large and sustained scale to affect population growth substantially is not a practical P-Ossibility for Mozambique nowadays, since, of all its neighbors, only Tanzania and Zambia (which both lag behind the rest of the region in general development progress) do not already suffer from acute shortages of both land and job opportunities. Moreover. emigration typically deprives the sending country of its best- educated and most dynamic youth, which Mozambique, with its acute shortage of skilled and educated workers, cannot afford to do. Declines in fertility, on the other hand. not only promote maternal, child and family health, but also change the age structure in highly beneficial ways for a country at Mozambique's stage of development. Fertility decline is therefore the only sensible approach to the reduction of population growth in Mozambique. 19. The slowing of population growth through the lowering of fertility can thus make a valuable long-term contribution to socio-economic development and progress in Mozambique. It can, by stretching out the period of time over which a larger population is achieved, buy time for the orderly and well-grounded development of agricultural, mineral, energy. industrial and human capital potential; increase the speed at which incomes can be raised. and permit faster strengthening and expansion of the social services network. Reductions in fertility have the added benefit of immediately cutting growth in numbers of births and children, with their maximum need for social services, while leaving labor force growth little affected for the subsequent two or three decades. Thus the numbers of adults available for productive activities and contributions to Government revenues would continue to grow unchecked over the next few decades, while the growth of dependents and prime consumers of government-financed socjal services would be lowered. This could be a vitally important contribution to the re-launching of economic development. - 144 - 20. Population Policies and Programs for the Longer-Term: The Government. though keenly concerned over issues of population distribution settlement patterns, has never adopted any position or formulated any policy on issues of population growth. No doubt in these troubled first 15 years of Independence other problems have more urgently demanded attention, and consideration of reductions in fertility and population growth probably seemed insensitive and inappropriate at a time of widespread war-related mortality and suffering. 21. Nevertheless, awareness has been growing of the importance of population growth as a factor in longer-term development prospects, and as a policy area that needs attention in the context of longer-term postwar planning. Some first steps have already been taken towards the integration of population issues into development planning, notably the establishment of a UNFPA-financed Population Unit and the formation of a Committee on Population, with representation from the Ministries of Planning, Labor, Education and Health as well as the University. The sample census of population planned for the near future will also focus attention on population issues. 22. Of equal importance, the Government has also been active in developing family planning (FP) services as a part of Ministry of Health MCH programs. Though family planning services have been and can be entirely justified purely as an MCH intervention, aimed at ensuring adequate spacing between pregnancies to safeguard the healt~ of both mothers and children, they are also the potential channel through which reductions in fertility can be achieved in the future. Indeed, fertility has already fallen by a quarter to a third in the two neighboring countries of Zimbabwe and Botswana after only a decade of Government-run family planning programs that vigorously promote child spacing as an MCH intervention; in these two countries, more than one-third of married women are now practicing modern family planning. 23. The Mozambique program, whose long-term goal is to provide FP services in every MCH outlet in the country, has necessarily made slower progress, due to war-related difficulties in managing and developing the health service system; following a phased schedule of implementation, it concentrated first on building up services in Maputo and all provincial capitals, and is at present developing services in district capitals. So far only Maputo has achieved full provision of family planning in all MCH units, and still accounts for half of all FP users in Mozambique. The program has encountered considerable demand in Maputo; by mid-1987, 15% of women in Maputo were using a modern family planning method, a very high rate by comparison with almost all other African countries and a notable achievement for a very young program. 24. It is of the utmost importance that these first steps in confronting long-term population issues should be strongly followed up even under current conditions, since population policies and family planning programs normally require a decade or more before achieving a significant impact on fertility and population growth. An early, well-conducted and rapidly-processed sample census will make a vital contribution to building awareness of long-term population issues, together with further development - 145 - of the Population Unit and Population Committee activities; it is also of crucial importance that the momentum of the promising family planning program not be lost, but capitalized upon and vigorously developed in the future. II. Population Issues in the Short to Medium Term: Displacement and Resettlement 25. The preceding discussion has focused on long-term and essentially post-recovery population issues; hence on issues of population growth. In the shorter-term (that is, the period covering both the remaining duration of the insecurity problem and the immediate post-war years of recovery and stabilization), the major population issues of concern relate to the distribution of population, in particular the massive displacements and resettlements caused by the insecurity. The Government has indeed always considered population distribution patterns important. 26. With regard to urbanization, Mozambique, like most of East and Southern Africa, is still only lightly urbanized. In 1980 only 13 percent of the population was classified as urban-dwelling; district capitals were not considered as urban centers, but their populations were in general so small that their inclusion would probably not have raised the proportion urban to above 20 percent. Nevertheless, urban growth has been rapid in recent decades; and Government has always taken the general view that rural to urban migration should be regulated to avoid excessively fast urban growth, with its consequent pressure on the absorptive capacity of urban infrastructure and social services and danger of mass unemployment or underemployment in the urban labor force. 27. With regard to rural settlement patterns, Government has always favored changes in the dominant pattern of normal times, which is the usual Eastern African system of scattered homesteads with each family living on its area of cultivation and little or no nucleation into villages. This traditional settlement pattern, though well-adapted to traditional shifting-cultivation subsistence agriculture, has the disadvantage of being difficult and very expensive to service with the infrastructure of modern socio-economic development, such as feeder roads, produce marketing networks, schools, health facilities and general administration systems. Thus, in the early years of Independence, the Government attempted to implement a policy of relocating and grouping families into nucleated communities or villages. This initiative was unpopular and made little progress; it has now lapsed with the intensification of the insecurity problem, but the general concern still remains. 28. Current Patterns: In recent years, additional and more urgent problems have arisen related to population distribution and movements.· Existing urban and peri-urban populations (including district capitals), which were estimated in 1989 to total around 2.6 million, or 17 percent of the total Mozambican population (see Table 6), have been at least temporarily swollen by floods of refugees from the countryside who have resettled, either spontaneously or under government programs, in the safe - 146 - zones around provincial and district capitals. These influxes again have imposed severe stress on urban infrastructures and services. particularly in the district capitals which are usually small and of limited resources, yet have often seen their populations multiply many times from their normal size within the space of a few years. In addition, separate huge outflows of rural refugees have crossed Mozambique's borders to seek asylum in neighboring regions of Malawi, Zimbabwe, Zambia, Tanzania, Swaziland and even South Africa. In many of these areas they are also generating severe pressure on local resources, and cannot expect opportunities of permanent settlement in the countries of refuge. 29. Accurate and precise measurement of these massive population displacement is almost impossible. Accurate and up-to-date counts even of those refugees who have contacted Government administrations or refugee support networks are made difficult by the constant movements in or out or around the receiving areas, and by the limited administrative resources available for such purposes. It is still more difficult to estimate the numbers of refugees who have moved and resettled spontaneously and independently. However, according to figures from the United Nations High Commission for Refugees (UNHCR), there are at present around one million known Mozambican refugees abroad, amounting to about 6 to 7 percent of the total Mozambican population. Of these, over 600,000, or more than half, are in Malawi. The rest are divided between Zimbabwe, South Africa, Zambia, Tanzania and Swaziland. 30. Internal refugee flows are even harder to measure, particularly for those who are displaced and relocate independently without any assistance from the Government or NGOs. However Table 5 shows the 1989 figures which were used by the Government for the latest emergency appeal to donors, and which are based on the data supplied by local government administrations. The displaced population includes all those registered with Government as displaced and eligible for participation in resettlement programs elsewhere: eligibility is supposed to last for 18 months or so after initial resettlement. The affected population is heterogeneous: it includes both those who were displaced and resettled more than 18 months ago and hence have •graduated" from the resettlement program (though still away from their normal homes) and those who were not displaced from their normal homes but whose capability for agricultural production has been either temporarily or permanently damaged by bandit activities. ii 31. According to Table 5, there were 1.7 million people displaced from their homes over the 1987-89 period. Another 2.9 million people had lost self-sufficiency in food production; many, perhaps most of these had also been displaced at some earlier period. Thus, taking into account that not all those who resettled because of the insecurity may have asked for Government assistance, between 10 and 30 percent of the total Mozambican population are currently displaced from their homes. Adding in the ii For ex•mple, through person•I injuries or f•mily de•ths •t the hands of b•ndits, or through theft or destruction of crops, seeds or tools by bandits. All •ffected persons were considered to be able to produce only 48 percent of their food n..ds themselves, •nd hence to be in need of substantial fr.. or subsidized f~~d-•id. - 147 - refugees abroad, 17-37 percent are displaced, a total of between 3 and 6 million. 32. The impact of this massive dislocation of population has been heightened still further by the very uneven distribution of internal refugees. Provinces. and still more districts, have suffered very unequally; some districts have been little touched, while in extreme cases some have seen more than half their rural populations uprooted. Moreover, almost all internal displacements have been out of rural areas towards the safer urban centers, with resettlement taking place in a ring around major cities, provincial capitals and district capitals. In normal times, as previously mentioned, Mozambique was only lightly urbanized; the rural population, as usual in Eastern Africa, clustered in non-nucleated fashion along lines of communications (roads, rivers, coasts) and in areas of good land and water resources or more advanced development. This settlement pattern has been replaced by one of dense clustering around cities and towns and corresponding emptying of the countryside; the refuge_ S4tt-tlers probably outnumber the original core urban populations both overall at national level and in most of the affected district capitals. Table 6 Estimated Numbers of Internal Refugees and War-Affected Persons In Mozamblque 1 1989 Province Population (in thousands) Percentages Estimated Urban Displaced Affected Estimated Urban Displaced Affected Total Peri- Total Perl- Population urban Population urban Maputo 1,860 1,246 173 226 100 67 9 12 Caza 1,200 92 as 668 100 8 3 66 Inhamban• 1,310 198 188 426 100 16 14 32 Sofala 1,242 266 126 196 100 21 10 16 Manica 764 S8 98 147 100 7 12 19 Tete 1,010 49 97 126 100 6 10 12 Zambezi a 3,078 228 639 866 100 7 18 12 Nampula 2,943 330 200 636 100 11 7 18 Niassa 686 80 199 119 100 18 31 19 Cabo Delgado 1,184 69 36 79 100 6 3 7 Total Mozambique 16,166 2,699 1,688 2,874 100 17 11 19 SOURCE: World Bank Report No. 7963-MOZ, •Mozambique Food Security Study•, October 1989, Table 1.4, page 11. 33. An heroic effort has been made by the Government and donors to meet the needs of these landless rural refugees. A general program of assistance has been mounted for all displaced and affected persons, supplemented by SJn8.ller specific program in various areas or for various special population groups. It includes: - 148 - allocation of unused land for the landless within, or within daily commuting access from, safe zones; distribution of seeds, tools, construction materials, clothes, and basic household goods to all those in need, whether landless or still in possession of land; provision of supplementary food aid, free or subsidized as appropriate, for as long as needed; provision of services to the resettled, including access to clean water, schooling, health care, agricultural extension advice etc. Displaced families or persons enter the program by registering with the local administration on arrival at their chosen place of refugee. They are given maximum support for a period of about 18 months (or two harvests) and then are graduated out of the "displaced" category into the "affected" category, which still qualifies for food aid as necessary but is expected to have attained some significant degree of self-sufficiency in food production. 34. Specific refugee communities ("aldeias"), each housing between a few hundred and a few thousand families, have been established on the outskirts of p~ovincial and district capitals. There refugees are settled, provided with land, equipment and services to the extent possible, and their progress and welfare monitored regularly. Local government officials administer the program and donors provide the funding for distributed inputs such as food, seeds and goods, as well as some assistance with program management, in response to regular government appeals. An effort is made to site the refugee communities in areas where adequate land for cultivation is available and some services already exist. 35. Neighboring countries and the international donor community have likewise responded generously to th~ influxes of refugees from Mozambique; only in South Africa have the refugees met with widespread official harassment and, often, forcible repatriation. Elsewhere, neighboring countries with the assistance of UNHCR have established refugee camps and provided food, shelter, water, clothes and goods, schools and health care, where possible land for cultivation has also been provided. In Malawi and Zimbabwe, however, which together account for a majority of Mozambican refugees, the existing acute shortage of arable land has limited land allocations very severely, and instead emphasis is put on the development of craft and informal sector skills. In Malawi, indeed, land and employment shortages are so critical that refugees are being actively discouraged from contemplating any permanent settlement in the country. 36. Resettlement programs have also been established for refugees abroad who decide to return home or who have been forcibly brought back to~ Mozambique. An estimated 200,000 persons returned over the 1988-89 period: of the 65000 who returned in 1989, only 8000 came back under an organized repatriation scheme while the rest moved indep~ndently. Under the resettlement programs, which are administered by UNHCR in conjunction with - 149 - the Ministry of Planning Refugees Unit, and funded through donor appeals, all returnees are contacted by the UNHCR Mozambique office when they cross the border or come to the attention of local administrations. They are then taken either to their area of origin or to new designated resettlement areas with land available for cultivation, as they prefer; most apparently choose not to return to their former homes but to resettle. Those who do go home are provided with seeds and tools; those wishing to resettle are established in communities similar to the aldeias set up for internal displaced persons and equipped with infrastructure, schools, health facilities, etc. These programs can serve only very limited numbers, however, since donor funding has been very difficult to obtain. 37. Current Issues: Unfortunately, the admirable efforts by Government and donors described above have been unable to meet the full needs at least of the internal refugee populations, due to shortages of financial, land and human resources and deficiencies (both pre-existing and war-related) in transport, distribution and administrative systems. In particular, land reserves -- the crucial need of uprooted rural peasant families -- are often insufficient to provide eventual self-sufficiency in food production at an adequate level of nutrition, let alone marketable crop surpluses to generate cash income. Though land reserves are ample at the aggregate national level, they are bound often to fall short within the inelastic ·limits of a safe, accessible zone around a provincial or district capital; whatever the size of the refugee influx, military forces cannot provide protection beyond a given radius of their bases without reinforcements, nor can men and women commute more than a given distance to and from their fields if they are to be back by nightfall and still achieve a reasonable number of hours of agricultural work. 38 At present, therefore, the displacement and resettlement of rural refugees has created a number of major and interrelated problems and issues for the receiving urban areas, the refugee populations themselves, and the country as a whole. The two most important problems of the receiving urban areas are: pressure on urban infrastructure and services: sudden large influxes of refugees severely strain urban water, sanitation, education and health care systems and facilities, which were designed to serve much smaller populations and have already suffered from the spending cutbacks forced by the country's economic and financial difficulties. District capitals are particularly hard-hit, since they in general benefited little from post-Independence social services development (whose focus was expansion into the rural areas) and usually received much larger inflows relative to their base populations than did the provincial capitals or the cities of Maputo and Beira; pressure on their surrounding lands: as mentioned above, resettled refugees are frequently crowded into land allocations that are grossly inadequate for cultivation with traditional agricultural practices and levels of technology. Systems of shifting cultivation and long fallows become impossible; yet there are no resources either to donate or buy compensating - 150 - packages of fertilizer and improved seeds. Nor, around the district capitals at least, are there compensating opportunities for hired agricultural labor or off-farm employment. As a result, supplementary food aid is a permanent necessity for survival, let alone adequate nutrition, and over the longer term soils progressively deteriorate in fertility, leading to ever- falling crop yields and the danger of permanent severe degradation of the land. 39. From the point of view of the refugees themselves, the two major linked problems, both related again to the impact of refugee influxes on the receiving urban areas, are: long-term damage to their agricultural productivity: this arises from the shortages of land referred to above, compounded by frequent shortages of the seeds, and tools supplied under resettlement programs, and by the reduced time and energy available for a-gricu:ltural labor whenever the land to be cultivated is a long journey away from their new homes; long-term damage to their health and welfare: this arises from the malnutrition caused by inadequacies in domestic food production and supplementary food aid (either in quantity, frequency and variety of food stuffs), from the inadequate or overstrained schools and health services in the resettled communities themselves or in the nearby urban center, and from the reduced time and energy available for child and family care (including food preparation) when women must travel many hours a day to and from their fields. 40. From the point of view of the country as a whole, these pressures on refugees and receiving urban areas alike have led to heavy immediate financial burdens and pressure on scarce management and administrative resources, in connection with the resettlement, re-equipping and continued long-term support of the rural refugees. There is also the fear that these peri-urban refugee settlements may eventually evolve into a permanent landless, or semi-landless, urban underclass that constitutes a perpetual drain on urban infrastructure and services, while contributing little but a reservoir of crime and unemployment to urban economies. 41. Future Trends: Current patterns of population dislocation and resettlement are clearly a crisis response to the ebb and flow of war- related disturbances. As such they will a priori be liable to further change and reversal as conditions change; and indeed limited flows back to the original home areas have occurred whenever security conditions in those areas seemed to have reliably improved. Nevertheless, full-scale return and stabilization of the mass of current refugees inside and outside Mozambique is not expected until a stable peace is achieved. At that point, however, such a mass return will become a major - perhaps the major development issue, as Mozambique faces the enormous costs, in terms of both financial and human resources, involved in mass resettlement and productive reintegration of at least one qua-rter of the Mozambican population into the national economy and society. It should be noted that - 151 - these costs will be incurred whether the internal refugees return to their original homes, stay in their current areas of resettlement, or resettle again permanently in other areas, since wherever they are, they will require social services and assistance with reintegration into the national development effort as self-sufficient and productive members of society. 42. The development of strategies and plans for managing this fresh, but hopefully final, demographic upheaval is therefore an essential major element of longer-term development in Mozambique, and the Government has already made a beginning in this respect. While detailed plans and programs cannot be devised until a definite date for the cessation of hostilities is reliably in sight, broad strategies can, and are being, mapped out, notably in the context of the Priority Districts Program. For such efforts, it is useful to have some approximate idea of the scale of costs and of numbers of people involved. An illustrative projection was therefore constructed of the total displaced population of Mozambicans, including -both tha_se _internally displaeed and those abroad. While indicative only, because of the difficulties of precise definition and accurate measurement of the refugee population, it provides a useful guide to the scale of reintegration programs that will be required. 43. This projection, shown in Table_ of Annex_, has been made only for the period 1990 to 1995, hence following the Recovery Scenario described earlier for national population projections. It was not felt useful to project refugee numbers for a longer period since projection of refugee migration becomes very uncertain over many years and since strategic planning for a peace more than 15 years distant and preceded by such a prolonged war would be of very dubious utility now. The refugee population at the end of 1989 has been conjecturally put at 4.25 million, calculated as 1 million refugees abroad, plus 1.7 million "displaced" plus an arbitrary half of the 2.9 million "affected" (1,5 million), or total of 4.2 million rounded up to 4,25 million.~/ 44. The final key assumption was of an added displacement of 900,000 persons (with the same age/sex structure again) between 1990 and 1995. This was calculated as a generous half of the 1.7 million "displaced" who had been cumulatively uprooted during the previous 18 months or so. &I !/ Their age/sex structure has been assumed, in the absence of reliable data, to be the sa111e as that of the national population in 1988. Mortality has been assumed arbitrarily to be higher by 6 years leas of life expectancy than the level projected for the national population over the period 1998-95, at a life expectancy of around 48 years; fertility has been put at a TFR of 6, on the assumption of a national level in 1998-96 of 6.5 reduced by war-related disruptions frot1 a •normal• level, and a •nol"lllal• level for the non-refug.. population of 7.8. 6/ This was baaed on the rather arbitrary assumptions that displacement• would only continue 7or another 2 years or so if full peace and normality were to return by 1996 1 that further refugee IIIOVements abroad would be very limited, and that the safe zones of perl-urban settlement could not absorb additional influx•• greater than 68 percent of their current refugee numbers. (It should be emphasized again that any such projection can only be illustrative given the lack.of accurate and detailed data on refugee populations and their mov-nta). - 152 - 45. Some key features of the projected external and internal refugee population by 1995 or the time of peace and resettlement according to the Recovery Scenario - are shown in Table 6. The total population of refugees is projected to grow to 5.67 million by mid 1995, an increase of 30 percent over current numbers; this high growth is due primarily to additional refugee migration, since natural increase is relatively low {at around 1.6 percent) because of the assumption of elevated mortality and depressed fertility levels. By mid-1995, total refugees would make up 30 percent of the entire population of Mozambicans. Numbers of school-age children in the refugee population would increase similarly from around 1.2 million to 1.6 million, and numbers requiring MCH care would increase from around 930,000 to just over 1 million. The population of working age, and hence needirig land or other job opportunities, would grow from 2.3 to 3.2 million. Table 6 Pro'ected Mid- ear Po ulation of Internal and External Refu ees 1990-9. m1 ions 1990 1996 Total Population -4.36 6.67 Population of Working Age• 2.32 3.17 Primary School-Age Population• 0.61 0.81 Secondary School-Ag• Population• 0.61 0.83 MCH Client Population• 0.93 1.03 • For definitions of these populations see Tables 3 and -4. ~: Population Projection computer printout in Annex_, Table 46. Future Issues: These, then, are the overall numbers of Mozambicans who by mid 1995 -- if the Recovery Scenario is realized and peace is then firmly restored -- would require assistance in economic reintegration and reestablishment in normal living patterns, besides the usual range of government - provided social services. However a major issue for the future welfare of both the ex-refugees and the country as a whole will be their optimum pattern of distribution after the restoration of peace, whether remaining in peri-urban areas, re-established in their original rural areas or resettled afresh, but permanently, in other rural areas. Refugees coming back from abroad will probably, as now, have the choice of only the latter two options, but it is quite uncertain as to how the internal refugees currently resettled in peri-urban zones will react to the restoration of peace. Much would probably depend on the circumstances and options of each community or family in terms of availability of land, social services or income-generating opportunities under each option, besides other factors such as the time elapsed since leaving home and the degree of destruction or damage to the original home community or farm. The prevailing view at present seems to be that both 100 percent removal from the peri-urban zones and a 100 percent desire to remain are unlikely, but opinions vary widely on_the broad proportions likely to choose each option. - 153 - 47. A further issue then arises of whether and how the Government should attempt to influence or direct these choices. Both urban and rural sectors would suffer if the entire resettled population at present tightly clustered around towns and cities were to remain as they are, particularly in the case of the more severely-affected district capitals. However. any program of involuntary removal and resettlement would probably be at least as unpopular as past attempts at villagization, and quite possibly as unsuccessful. An approach based on creating incentives for voluntary rural resettlement, either in home or new areas, is more likely to be effective, and can in fact be easily embedded in the matrix of the Priority Districts Program currently under preparation by Government. Nevertheless it may be .· wise to accept that a certain proportion of peri-urban refugee settlers will choose to remain where they are, and to plan accordingly for their most effective integration into urban/peri-urban and national economy. 48. Another important issue is of course the costs of reintegration of the refugee population. These include such elements as the costs of: transport to the permanent resettlement site; provision of land, seeds, tools, goods and materials; construction or upgrading of water supply systems, education and health facilities, roads and communications; supplementary food aid during the re-establishment process; and any other assistance needed for development of extra income-generating activities. There is little information available on.which to base estimates of such costs, particularly costs in terms of human resources, though such an exercise should be possible with careful compilation of data from all the contributing agencies to current resettlement programs for both internal and returning external refugees. To give some indication of the magnitude of costs involved, however, the population numbers from the refugee population projection described above have been combined with the UNHCR's working figure for unit costs of resettling refugees returning from abroad to Mozambique of around US$23 per capita; this figure, regarded very much as a bare minimum, does not include overhead administrative costs, nor costs of transport or any assistance beyond the first phase of establishment of the household. Resulting aggregate costs are shown in Table 7 on various assumptions about the proportion of peri-urban resettled refugees who will choose to relocate. Table 7 1n er1-ur an Areas* 761 261 Total Numbers to be Resettled 2.25 a.•e •.s& (millions) Total Costs at Unit Cost USl23 62 78 105 (USS million) • On the assumptions that the total refug.. population is S.7 million in 1996 (s.. refug.. population projection), that the refugees abroad increase only slightly in numbers-by 1996 and that all refugees abroad relocate to rural areas. - 154 - 49. According to Table 7, even the most basic rural resettlement program will cost a minimum of US$50 - 100 million at 1989 prices, if peace were to return by 1995. Moreover, almost all of this amount will need to be spent within 2 years or so of a peace settlement, since any ex-refugees still unbenefitted by then are likely either to move independently (but with probably much greater hardship) or to settle down permanently where they are. Probably also, funding on a similar scale would be required at least for a few years thereafter to ensure full and cost-effective reintegration of the resettled population into the mainstream of normal socioeconomic development. SO. In addition, it would be necessary to afford some assistance also to those ex-refugees who remain in their peri-urban settlements and to their urban centers, the scale of assistance depending on the size of the remainder. If, for example, 75 percent of the ex-refugees were to stay in peri-urban zones, around 3.6 million persons would be added to the "normal" core-urban populations, which by that time might number around 3.4 million (assuming an annual urban growth rate, exclusive of refugees, of 5 percent). Thus the combined urban and peri-urban population would about double - no doubt substantially more than double - in many district capitals, with corresponding implications for their long-term future needs in terms of infrastructure, services and economic investment. Around 37 percent of the population of Mozambique would then be urban or peri-urban dwelling, with far-reaching implications for future socioeconomic change and development in every sector. Even if only one quarter of the ex- refugees, or around 1.2 million, elected to remain peri-urban dwellers, thereby raising the total urban/peri-urban population to around one-quarter of Mozambique's total by 1995, existing urban infrastructure and services would still require substantial long-term strengthening to acconunodate them permanently. The costs of such developments will be extremely difficult to quantify in isolation, but they will need to be kept in ·mind for long-term development planning. 51. Population Distribution Policies and Programs for the Short, Medium and Longer Term: The problems and issues discussed above have arisen as a crisis reaction to the stress of prolonged and widespread insecurity. It is not surprising therefore, that the policy and program response has also to date been largely one of crisis management and temporary accommodation, nor that financial and human resources have been inadequate to meet the needs. The time has now arrived, however, when a longer-term and integrated perspective is both possible and useful, and policies and programs can be designed which both cope with iuunediate needs and at the same time feed into planning for the longer-term goal of the re- launching of normal development after the restoration of peace and stability. The Government has already begun this process, most notably with the development of its District Priority strategy into which a specific strategy for refugee resettlement may easily be incorporated; a broad context for such efforts is suggested in what follows. 52. For the short-term, while the country still continues on a war -footing, it is clearly necessary to continue and expand the core refugee resettlement programs now in existence, including those for resettling refugees from abroad. Even greater attention needs to be paid to adequate - 155 - availability of land. Indeed, whenever safe rural zones can be created even now - in the context of the Priority Districts Program for example - priority might be given to resettling both external and internal refugees there, even at the cost of transporting them from their initial places of refuge. 53. There are two other ways in which current resettlement programs need to be broadened even now, from both a short- and longer-term perspective. Firstly, the infrastructure and social services of at least the smaller and more heavily affected provincial and district capitals urgently require strengthening and greater priority in allocation of resources. This is necessary in the short-term to cope with the added burdens of refugee influxes, and is entirely justifiable on equity grounds since such a significant proportion of the rural population is now depending directly on them; if the populations to be served relocate, then access to schools, health care, etc., must be shifted also to follow them. Such reinforcement would also provide two longer-term benefits; it would directly serve the postwar urban populations, which are likely to be permanently enlarged at least to some degree, and it would help to build a capability for supervision, referral and technical back-up at provincial and distinct levels that could be used later to manage and monitor rural systems as they expand again after the war. 54. Secondly, attention needs to be given to the potential role and functions of the peri-urban settler population in the overall postwar socioeconomic development of their urban centers and to how they can best be aided to develop now in the required directions. Again taking for granted that at least some peri-urban settlers will remain, how can they be productively integrated into the enlarged urban economies? For example, possibilities could be explored for developing higher-technology "service" agriculture or market gardening on at least the smaller plots of land, with sale for urban consumption the primary aim rather than subsistence agriculture; or for setting up craft and informal sector industries or businesses, again geared to the urban market. Precedents for such attempts exist in the Maputo Green Zone programs and in the refugee camps for Mozambicans abroad, but would require study, adaptation and detailed programming for the smaller provincial and district capitals. If even a start could be made now, the postwar transition period could be significantly smoothed for the affected urban centers. 55. In the medium and long-term, once the country is safely at peace again, the first priority will be the permanent resettlement and reintegration of the refugee population. Broad strategies can even now begin to be elaborated for designing, managing and funding permanent resettlement programs, and any broad new development strategy or program, such as the Priority District Program, will need specifically to incorporate provision for appropriate elements of resettlement activities. In particular, incentive structures to lure at least part of the peri-urban settlers back into suitably-endowed rural areas need to be designed, including access to income-generation opportunities, amenities and social services that can compete at least with nearby district or provincial capitals and hence attract a population that has become used to such benefits. - 156 - 56. At the same time, however. attention will have to be given to planning for the long-term constructive development of district, and to a lesser extent provincial, capitals, as previously mentioned. The war may well permanently alter population settlement patterns in Mozambique, leaving a legacy of denser clustering around all urban centers, particularly the smaller ones. It will be imperative therefore to plan to turn such an eventuality to good account for national development, and above all to re-think the role and function of smaller urban centers and their peri-urban fringes for the postwar future. Their infrastructure, administration and services will require strengthening simply on equity grounds (as previously mentioned) if urban populations are to be permanently enlarged, but the future socioeconomic structure and contribution to national development of the provincial and district capitals also need careful strategic consideration and planning. 157 CHAPTER IX THE DEVELOPMENT OF HUMAN RESOURCES 1. Human resource development has a decisive role in attaining the main objectives of the Economic and Social Rehabilitation Programme. In this . chapter, the current state of the sector will be evaluated by sub-sector, and the search for improved strategies for the medium to long term will endeavour to answer two questions and review the issues arising in the current education sector response. The two questions are: Ci) whether the various systems of education and training are preparing each population cluster for optimum participation in production, geared to the highest rates of productivity both in respect of the present situation and of accelerated economic growth such as should occur in the event of improved security; (ii) the role which education can play in alleviating the difficult living conditions people will suffer before economic recovery can reach a sufficient level. 2. These two questions are certainly not the only perspectives from which education should be evaluated, but, in view of the nature of the current economic problems, this emphasis is considered appropriate here. A. CURRENT STATE OF THE SECTOR a. General Overview 3. The general educational level of the population of Mozambique is one of the lowest in the world. Although 24% of the school-age group had been attending four-grade primary education in the two years before Independence, 78% of the work force was still illiterate in 1980. 1/ Moreover, after peaking in 1980, enrolment rates have slowly but constantly declined: the pace of admissions to primary education failing to match demographic growth, while adult education activities, which recorded an impressive success in reducing !/ Like mo•t of the colonial power•,- Portugal imported its own education eyet.. , which wae 11111inly reserved for national citizens. Schools in rural areas provided three years of •rudimentary• training, with Portuguese, Catholiciem, arts and crafts being taught at that level. Thie wae . .ant to be the final educational level, although it wae followed by a four-year elementary couree in eome mission•. Even so, ln 1973, two years before independence, only 328,000 children were enrolled in rural primary school•. Education in urban area• followed the eame programmes, levels and types as in Portugal. In 1976, there were seven secondary schools providing education from the 7th to 9th grades, and thr.. for the 10th and 11th grades. At independence, the teaching staff was decl~ated by the departure of the majority of the expatriates. In 1978, an immense effort wae aeked of the remaining ~rsonnel and young volunteers, and the school enrolment increased by 871 in one year. From 1981, thought started to be given to reforming the system, which resulted in-the adoption of a law on the •Sistema Nacional de Educa~ao•. After 7 years' enthusiastic efforts and genuinely valuable results, the Ministry is now trying to situate this educational development within the context of a more rational long-term plan, in which closer attention will be paid to the financial and human constraints. - 158 - illiteracy in the early years of Independence, have deteriorated. The upper levels of the general education system now show an extremely narrow pyramid compared with the first years of primary education. In 1988, there were about 2700 students attending university - a remarkable figure compared with the 40 Africans enrolled among the 3000 students in 1975, but still a very low percentage of the age-group. 4. Of all the children of a given school-age population in 1990, 38% will not have access to schooling and 42% will leave primary education before having reached the fourth grade, and therefore have little or no prospect of their acquiring _functional proficiency in reading or writing. Accordingly, less than 20% of this cohort will have completed (or almost completed) primary schooling or will go on to secondary school. Fewer than 1.3% of these children will obtain a specialized diploma. i/ At first sight, these figures seem to be very low, but it is very difficult, failing a more far-reaching investigation, to ascertain whether this "production of diploma-holders" can cater for the needs of the modern sector and of the small proportion of the informal sector requiring a formal school education. The information needed to an,wer this question should be provided by the proposed study on training needs to be undertaken jointly by the Ministry of Labour and the Bank in 1990-91. 5. In addition to the formal school system described above, the Ministry of Education provides adult literacy courses. In this regard, there can be no doubt that the primary-level classes organized just after Independence were a success, but there has now been an extremely steep fall-off in the number of people attending. There has, however, been a renewed interest in adult secondary education, but in both cases the training provided is highly academic and covers the same content as in the formal system. There were also several agencies in the early 1980s, under the Ministry of Agriculture, responsible for rural extension work, specialized by crop type or by area of activity (such as stockraising and irrigation). Very few of these, however, have continued to be operational, owing to the prevailing climate of rural insecurity. 1/ 6. The economy in 1990 is characterized by serious inadequacies in the supply of both highly skilled senior professionals and of middle-grade officials. Moreover, the middle-grade staff have, in general, an insufficient command of the management techniques they need. In order to ameliorate these skill deficiencies, the Government has been providing these officials with frequent leave of absence, for the purpose of attending additional training !/ Th••• compri .. 8.41 ••primary-schoolteachers, 8.61 in ao... specialized technical or vocational field, and 8.41 with the ••condary-school leaving certificate, enabling aOllle of the•• to go on to higher education. !/ The most active progra_.., which Is a multipurpose one, involve• fewer than 18,IJIJ8 peasants, aa against the almost 6 million people engaged in agriculture. There are probably other adult training activities in the health and social development sectors, but it has not proved poaaible to assemble sufficient information to describe them. "\. - 159 - courses, although this policy has necessarily only exacerbated the short term problem. Despite these major shortcomings, several factors over the early Independence years served to counter these problems, including the contribution made by volunteers in all areas of development, but especially in respect of training activities, and the continuing impact of the revolutionary enthusiasm of the Independence period. This determination has compensated to some degree for the inadequate training of the manpower resources, and proof of this can be seen in the actual improvements recorded in recent years. A fundamental lack of skilled manpower does, however, persist. b. Sector Organization and Structure 7. The Ministry of Education, through its National Directorates, directly manages three sub-systems: the general education system, covering primary education, divided into grades-1-5 -(EP!) anc:i grad.es 6 and 7 (EP2), and secondary education, divided into general secondary education for grades 8 to 10 (ESG), and university preparation for grades 11 and 12 (EPU); the teacher training system for primary level (also divided in two levels); and adult education (primary and secondary levels). Two other subsectors are also formally supervised by the Minister of Education: (a) vocational and technical training which is under a State Secretary (SETEP), and includes training at three levels; and (b) higher education activities carried out by the Eduardo Mondlane University and the Higher Pedagogical Institute. The former is responsible for preparatory courses and university courses (bachaleratos and licenciaturas); and, the latter is responsible for teacher training for lower and higher secondary schools. c. The General Education System 8. Current state. Although the rate of growth of enrolment in the first stage of primary education (EPl) was amongst the highest in Africa between 1975 and 1981 (nearly 16% annually), the country has been unable to maintain the same effort during the last seven years. Consequently, the number of pupils decreased from 1.38 million to 1,2 million over the 1981-88 period, while the school-age group increased by 730,000 children both for demographic reasons and because EPl was increased from 4 to 5 grades. The gross admission rate of 7-year old children, which was higher than 100% in 1980 due to the intake of over-age pupils, declined to less than ~wo thirds of the target population (61.6% in 1988). In part, this resulted from the closure for security reasons of 25% of primary schools between 1983 and 1986. The fact that the total enrolment stayed exactly the same during that period can be explained by a combination of factors: migrations, increase of enrolment in safe areas and decrease in zones troubled by armed banditry. On the other hand, the introduction of a fifth grade in the first stage of primary education (Efl) also helps to account for the decline in admissions: schools had to deal on a priority basis with this extension of the programme of studies and were unable to increase entries at the same time. There were also significant regional disparities attributable both to the insecurity, and also to inequalities in development. Firstly, the school network is unequally spread; secondly, in 1988, only 45% of schools offered a complete five-grade course; thirdly, many do not have the minimum furniture; and, finally, in many - 160 - cases, neither the state nor the communities are sufficiently concerned about their maintenance. A positive aspect should, however, be underlined: the participation of girls is improving, rising to 43% in EPl, as compared with 34% in 1975. 9. The decrease in EP2 enrolment is only apparent, and is a consequence of the change in structure, this stage of education beginning at the sixth grade as compared with the fifth earlier. On the other hand, secondary education saw a considerable increase in enrollments between 1981 and 1988, with the first stage (ESG) increasing by around 125%, from about 10750 students to about 26200, and the second (EPU} increasing by around 190% from about 880 students to about 2500. Even with such growth, however, they only represent a tiny proportion (2.2%) of enrollments in general education. 10. In the lower primary schools, an increasing proportion of masters teach in three shifts a day. The authorities would like to reduce this practice and re-establish the two shift classes as the normal pattern in urban areas, but due to limited budgetary resources, both investment (to construct additional classrooms} and recurrent (to hire additional teachers), this has proved to be impossible. It is important to stress the improvement in the qualifications of teaching staff, i/ although many of them still do not have an adequate level of general education. This is particularly the case with primary school teachers who do not always possess an acceptable command of the Portuguese language, and for whom upgrading schemes and supervision should be reinforced. al In 1988, there was an average 34.4 students per class in the teacher training centers, but, with an average 2.3 teachers per class, the student/teacher ratio is only 1:15. ~/ The low student teacher ration and the fact that all teacher training colleges offer free boarding makes this a very expensive educational sub-system. ~1. The internal efficiency II of the general education system is very low, with between 25%-50% of the pupils (entering a grade for the first time) repeating the grade. Many, moreover, subsequently drop out. In 1988, around 28% (or more than 360,000 places) of the general education system was occupied .. by repeaters, with significant repercussions for the access of children not yet enrolled in education. The drop-out phenomenon is even more striking and appears clearly in figure 1. Looking at the 1987 year, one can observe that 4/ The proportion of teacher• having received teacher training now being aa follow• (1988 for EPl, 1988 other levels): EPl EP2 ESC EPU 89" 75" 99" !/ The number of atudents in teacher training colleges is now 5400. The lowest level of training ceased to exist in 1987 when the one year training programme for students with only 8 years of primary education was discontinued. Y Annexes E2 and Ea give basic statiatical data on general education and teacher training colleges. - !/ Internal efficiency is defined to measure th• flows of students within th• system. - 161 - one third of a cohort leaves the education system without going further than first grade, and less than half of that same cohort reaches third grade. Since other analysis §./ has shown that more than 50% of the primary education budget is devoted to the first two grades, a quarter of the total is therefore · spent without any social or economic effect due to the internal inefficiency in the system. In the same graph, it can also be seen how the performance in primary education system improved between 1981 and 1987. This is particularly notable at the fifth grade and demonstrates the importance of the structural modification introduced by the "Sistema nacional de educa~Ao" law in 1981. The same is also true at 6th and 7th grades, which were transformed into a second stage of primary education (EP2) by the same reform. The 1995 target shows that the Ministry of Education is hoping that this improvement will continue, but the poor results recorded at 1st and 2nd grades are a major concern and specific treatment of this problem in order to enhance efficiency at all subsequent grades in the primary system should be the top priority. 12. In secondary education where reform has not yet been effected, efficiency is on the decline (see figure 2). Whereas in 1981, for 1,000 admissions there remained 696 students at the end of 9th grade, and 223 at the end of secondary education, those numbers in 1988 were respectively 531 and 138, despite a slight improvement in success rates at upper secondary level. d. Adult Education 13. In the immediate post-Independence period, several literacy and post- literacy campaigns were organized in order to acconunodate the aspirations of the uneducated population to be more rapidly assimilated into the newly evolving social framework. i/ From 1983, adult education was reorganized into two subsystems (primary and secondary), directly reflecting the formal equivalent. These courses were taught in Portuguese, using textbooks designed for primary or secondary pupils (in rare cases written at local initiative), and leading to the common general education degrees. This reorganization has played an important role in the rapid decline in the adult system since this time. 10/ The loss of interest of adults in basic education may be attributed to many educational causes: (a) the use of Portuguese as the language of instruction for people with poor levels 0£ comprehension entails a twofold effort in the learning process, namely language and literacy; (b) the lack of interest in literacy and in Portuguese in rural areas where people have very few opportunities to find written information and to use other languages than §./ •Analy.. de la faisabi lite financier• du Systeme National d•Education au Mozambiqu•• (Baudouin Duvieusart, UNESCO, 1986). '!} Th••• campaigns were run mainly on th• basis of voluntary work. 10/ In 1989, only 40,000 adults followed cl••••• at EPl level,•• compared with an enrolment of 450,000 in 1981; at EP2 f•v•I, the decline in attendance started In 1986 from• level of 26,000 students, falling In 1989 to 16,000. The two stages of secondary education are still showing an increase in enrolment: attendance repre..nts nearly 601 for the day courses with respectively 16,000 and 1,600 students. Despite the low success rates, they certainly continue to play an important social function (statistics are set out in annex E7). - 162 - Fig. 1 Internal efficiency, primary education. MOZAMBIQUE !.VTER,VAL Eff/C/E1VCY: GRADES 1 TO 7 Fig. 2 Internal efficiency, secondary education. MOZAM81QUE INTlRNAL lff/CllNCY: CRADlS 7 TO tt - 163 - their own; (c) a decline in the motivation of volunteers, and the bureaucratization of initiatives; (d) poor quality of teachers, programmes and teaching material; (e) incompatibility of school calendar and time schedules with work imperatives both in enterprises and in rural life; (f) poor supervision; and, (g) tiny budget and material resources. 11/ In addition, and in many cases, more compelling, are the economic factors, including the opportunity cost of the participants' time in terms of foregone income and employment, and, if applicable, the cost of the courses themselves. A recent study of the construction sector workforce 12/ asserts that workers are fully prepared to undertake the necessary studies to ensure that they could be classified as literate, and thereby reduce the probability of being fired, but that to pursue further studies (beyond 4th grade) incurred considerable costs (including inconvenient school hours, no salary increases or promotions, fatigue). e. Vocational and Technical Training 14. The State Secretariat for vocational and technical training (SETEP) has up to 1990 been offering three levels of education: (a) one or two grades at the "elementary" level, after five years of primary education; (b) two to four grades at the "basic" level, after seven years of general education; and (c) two to four grades at the "media" level, after lower secondary education. Only the latter two levels propose specialties in all three main sectors : agriculture, commerce and industrial techniques. SETEP is proposing that the "elementary" level be superseded, and replaced by short introductory courses mainly focused on rural occupations, together with technical upgrading for adults. 13/ Meanwhile, there has also been a sharp reduction in the number of students at both higher levels : between 1983 and 1987, enrollments at those levels decreased by 25%, dropping from 12,200 to 9,300 students, although numbers have risen again to over 10,000 in 1989. As the number of teachers continued to rise during this period, the student/teacher ratio went from an already comfortable 12.4 : 1 ratio in 1985 to levels that few countries can afford (9.3 : 1 in 1988). A positive point to be emphasized is that the proportion of foreign teachers is decreasing and is currently lower than 7%. 14/ 11/ Ministerio da Educacao, Direccao de Planificacao, •Plano integrado de eliminacao do aiiilfabetismo em Mocambique•, September 1989. 12/ Anthony Maris Johnston: Resultados, conclusoes e recomendacoes em relacao a educacao e formacao d;-froca de trabalho em empresas sob a tutela do Ministerio de Construcao e Aguas, Republica Popular de Mozambique, unpublished, confidential draft SIDA report of June 1989. l:lJ However, no action plan has yet been designed. 14/ Despite the unavailability of some basic indicators, one may estimate internal efficiency as fo'Tlows: Grades 1 2 3 Grad. Basic 1000 456 318 281 Medio 1000 638 401 401 - 164 - 15. In general, data collected by SETEP show that, owing partly to the fact that technical graduates are drawn to the University and that a higher income is expected from a higher degree, the supply of graduates is inferior to the demand of enterprises, with the exception of the agricultural sector where graduates from the formal education system are not always appreciated by employers: Table 1. Offer and Demand for Graduates from Technical Trairiin; Basic level Medio level demand supply demand supply Agriculture 200 273 207 Co111111eree 1378 993 161 Indu.try 1176 8 7 Quoted in •Relatorio do grupo de trabalho sobre impacto do •PRE• na educa;ao•. f, University Training 16, Since 1986, enrollment at the University Eduardo Mondlane in Maputo has increased by almost 30% from about 2,100 students to about 2,700 students in 1988. Of the total in 1988, 81% were enrolled in higher education, the remainder at pre-university level. 15/ The number of graduates, however, remains very small: in 1987, 61 obtained a three year certificate (bachalerato), and 76 obtained a five year degree (licenciatura). 16/ The academic authorities have recently decided to abolish the first degree (bachalerato) reducing the role of the university to preparing for the licenciatura degree, and to transfer teacher training for the upper grades of secondary education to the Instituto Superior Pedagogico, which comes directly under the Ministry of Education. The number of university personnel, including those not working directly in the faculties (about three-quarters of the total), is large: there were 1.8 students per university personnel in 1987, with each member of the academic staff being responsible for 6.7 .,. students, and one non-academic staff member for 2.5 students (Annex E9). 17/ ll/ EnginNring WH the largest faculty in 1988 with 882 students, fol lowed by Economics with 424, !§./ In addition, 116 teachers were trained at pre-university level (sN Annex ES). !11 University personnel (1987): Academic Non-acad; Total Administration 12 464 476 Faculties 336 480 816 Cult. research 21 93 114 Total 388 1037 UfJS - 165 - g. Public Expenditures 18/ 17. The education sector received 4.4% of the state budget for both recurrent costs and investments in 1987, compared with an average of 12% · during the previous seven years. Between 1980 and 1986, recurrent expenditure on education in the state budget represented between 17% and 19% of the total state recurrent expenditure; this proportion declined sharply to 9% in 1987. Investment in education represented 1.5% to 2% of the investment budget and was probably around 0.3% in 1987. In consequence, the aggregate budget of the Ministry of Education measured 4.5% of GDP in 1983, before falling to 3% in 1985/86 and then to 2.3% in 1987. It then represented one of the lowest figures in Africa. Table 2. Budgetary exeenditur• in education. Mt.. bi II lon. Actual Plan 88 81 82 83 84 86 88 87 88 89 98 Recurrent State 14,1 17.3 19.6 21.7 22.9 24.4 28.2 11117.7 148.8 249.9 327.9 Education 2.6 3.9 3.7 a.a 4.1 4.1 6.9 9.4 n.a. 23.8 n.a. l education 17.9 17.6 19.8 17.6 17.8 17.9 17.6 8.7 n.a. 9.9 n.a. Investment State 9.9 14.9 14.3 17.1 19.6 8.1 11.6 114.1 139.7 214.3 427.6 Education 9.4 9.2 0.2 0. a 0.3 0.3 9.1 0.3 n.~. 11.1 28.9 I education 4.8 1.8 1.2 1,8 2,4 3.1 1.9 9.3 n.a. 6.2 8.8 Education exeenditure as i 0'1 GDP, 3.7 4 .0 4,2 4.5 4 .8 3.8 3.8 2,3 n.a. 3.7 n.a. 18. The aggregate Ministry budget is distributed as follows between the different levels and types of education: Table 3. Budgetary exe,nditure by levels and tye,s of education. (1986; I ) , Primary (1-4) 36.8 Technical training 8.9 Secondary (6-9) 14,4 Adult education 1.6 Secondary (10-11) 8.7 Hostels 2.8 Teach. train. 3.1 Provincial administ. 11.9 Central adm,/University 22.8 Data on the distribution of recurrent expenditure between salaries and material costs show that the proportion of goods and services has been 18/ An analysis of education expenditure and costs was conducted in 1988 within the framework of the Public Expenditure Review (World Bank, October 1989). The paragraphs here sunnarize the 11ain conclusions of the study. - 166 - declining every year from 27% of the aggregate Ministry budget in 1982 to 21% in 1986. The balance between salaries and the cost of goods and services varied from one type of education to the other. An extreme case was found in the direct costs of primary education: 97% was expended on the salaries of teachers, 1.5% on the salaries of non-teaching staff, and 1.5% on material costs. In other types of education, expenses for goods and services varied from between 13-14% (secondary general) to 36.5% (technical training) and 50% (teacher training and university). 19/ 19. The provisional data for 1989 reflects a significant increase in the resources devoted to education: the sectoral share in the recurrent budget rose to 9.9%, and, in the investment budget, to 5.2% 20/. As a proportion of GDP, aggregate education expenditure rose for 2.3% in 1988 to 3.7% in 1989. The 1989 increase in the share of the education sector does not, however, reflect a conscious political decision to allocate more resources to the sector, nor does it automatically translate into a better quality of education. The increase in share was primarily caused by the salary bonuses given to all public sector staff in the provinces, and, given the heavy weight salaries have in the sector's budget, the sector's overall share of the Government budget automatically increased. In general, improvements in the quality of education necessitate increased expenditures on goods and services, and the 1989 budget also shows encouraging trends in this respect. In aggregate, the proportion of total expenditure allocated to goods and services was 32%, while for technical education and higher education the allocations were 65% and 58%, respectively. Further emphasis on education is planned in 1990, with investment expenditure programmed to increase to 6.6% of aggregate budgetary investment expenditure. 21/ 20. Cost Recovery . .Outlays directly borne by families for school supplies and school fees quadrupled at current costs between 1986 and 1988 (at constant prices this meant a yearly 7% increase). Since family incomes have not risen at the same pace as costs, the burden is heavier every year. A family with three children at school (4th, 6th and 9th grade) would pay Mt 18,745 in 1988 ]!j_/ At constant 1987 prices, the coat of educating a student during one year was estimated at Mt 7,940 in 1984, this figure declined to Mt 4,160 in 1987: in three years, education unit costs were halved. Evolution of direct unit costs (Mtl, 1984 1987 Expenditure Relative cost 1984 = 188 Primary= 1 Primary 6004 2482 60 1 Lower secondary 19697 10807 66 4 Upper secondary 63436 21134 40 8 Tea~her training 168139 48452 81 20 Technical training 86114 56478 88 23 Adult education 948 1674 168 0.8 University 831332 371836 69 160 20/ This latter figures ls probably still underestimated as many donor-financed investments were stTII not recorded. 21/ Although some of this increase may be due to improved coverage. - 167 - as compared with Mt 3714 in 1986. This represents 35% of the m1n1.mum wage in agriculture, or 6.3% of an average salary, as compared respectively with 15%, and 5.2% two years earlier. For the poorest part of the population this • represents a maximum, and could be one of the causes for the decline in school attendance. 22/ B. THE ROLE OF THE EDUCATION SYSTEM 21. The different elements of the education system should, as a primary objective, be required to equip the population to play an intensive part in all areas of development, be they.economic or social development. The existing and projected occupational structure of the population should be one of the key inputs in the formulation of educational sector policy, but little is known of the present or future requirements. Education should also respond to cultural and social problems, in this case particularly the effects of the war. 22. Occupational Structure. The 1980 census is the only statistical source giving an overall picture of the breakdown of the population by type of occupation. In 1980, almost half of the 11.7 million inhabitants were in employment. Of this working population, 85% were engaged in agriculture or fisheries; 8% in mining, industry, construction, transport and communications; and 6% in the trade, administration and services sectors. If the urban population is defined by those living in the twelve main cities, it can be seen that 13.2% of the country's population lived in urban areas in 1980 compared with only 3.2% in 1970. Yet, in spite of these large-scale migrations, the population was still primarily rural, accounting for 87% of the total population. 23. In the ensuing years, significant changes occurred in employment and settlement, although no exhaustive study giving a coherent picture of the current population distribution has been carried out. In 1987, almost 169,000 people were recorded as working in the country's 4000 largest enterprises. 23/ In addition, the civil service employed around 111,000 people in national and regional institutions, and throughout the education and health services. These two sub-categories of modern employment account, however, for only 3.6% ~ of the population in the 15-64 year age-group, which was estimated at 7.7 million people in 1987. The bulk of the population is therefore engaged on a more or less full-time basis in activities in the traditional rural sector, such as agriculture, fishing, hunting, handicrafts and small-scale trading, or else in unrecorded semi-urban jobs. Although there are no precise data on this subject, there are grounds for thinking that, as a result of the migration of about 1 million people out of the country and of the relocation of an estimated 1.7 million people on account of the rural insecurity into the provincial and district capitals, rural areas account for only about 70% of 22/ Ministerio de Educa~ao, •Relatorio sobre impacto do PRE na educa~ao•, 1988 23/ The Ministry of Labour keeps a record of individual data for employment in enterprises and produces annual statistics based on this source. Further detail is given in Annex El. - 168 - the total population in 1990. 24. Mozambique does not have any long-term projections for the growth of its human resources, and it is particularly difficult to engage in an exercise such as this on account of the impact of the insecurity on the population pattern and of the difficulty of interpreting past trends in the country's economic history. However, it is essential to formulate broad estimates of the evolution of the availability of human resources in order to identify the context in which economic development may take place in the coming twenty to twenty-five years. Using sophisticated projection techniques on such flimsy data is impractical, bqt constructing the most likely scenario is essential if plausible orders of magnitude are to be obtained. On the assumption that the population growth rate will increase slightly from 2.60 to 2.76%, the population would grow from almost 15 million people in 1987 to 27 million in the year 2010, when the working-age population would amount to some 15 million people. On the basis of the most probable evolution of the economy over this period, 24/ the sum total of employment in the modern sector in 2010 would be only slightly less than 6% of the working-age population. Hence, even with relatively rapid and sustained economic recovery, there will be no dramatic shift in the occupational structure in the next quarter of a century. The population will continue to be chiefly engaged in rural activities and in semi-informal urban activities. 25/ 25. Contribution of Education and Training. In the modern sectors, which call for academic standards of training, the formal general, technical and higher education systems should primarily be responsible for directing the flow of student towards the types of employment most in demand. A study of training needs is planned to be undertaken in 1990 and this should provide indications of the desired trends in terms of the number of graduates required at the different levels of qualification, of the career profiles demanded by enterprises and public services, and of the expected quality standards. A constant dialogue should be established between users and training systems, as well as between the sub-systems themselves, with respect to recruitment requirements at the different types and levels of education. In addition, .. these systems should take steps to ensure that the "production process" for. diploma-holders is as effective as possible, in terms of its internal efficiency, the reduction in the repetition and drop-out rates, career guidance and the optimum use of the human, physical and financial resources needed for the training system. 24/ If it is •ssumed that there would be sustained economic growth in the modern production aeetor (Tiicluding rel•ted services) of 61 to 81, accomp•nied by an increase in labour productivity of between 11 to 31, the number of people employed in these activities would increase from •bout 169,""8 in 1987 to about 66t,tl/Jfl in 2018. During thi• time, the number of people employed ln the civil service would, in the presence of such economic growth, incre•se more quickly th•n the population growth rate, especl•lly in health, education and agricultural extension service•. If, by w•y of illustr•tion, an •nnual growth rate of 61 and 61 respectively is adopted for each of these two decades, the number of people employed in public service would incre••e frota 111,ttt to 328,""8. !!f The figure• for 1988 and those used for thia acenario are not atrictly comp•rable, aince the censua make• no distinction between employment in the 1AOdern and inforaal aector•, where•• the•• are the categories used to describe the population In 1987 and 2818. - 169 - 26. In the rural sector, both basic education and specialized training should equip the population to step up productivity and, in particular, should foster the ideas of crop diversification and technological change. This will . entail functional training in the natural sciences and in applied agricultural, fisheries and stockraising techniques. It will also entail providing introductory instruction in all aspects of management, including •· cooperative methods, storage problems, marketing and distribution, and obtaining credit. In addition, the wide range of part-time trades or occupations in which people engage in rural areas will necessitate the provision of basic training in production and maintenance techniques to a variety of craftsmen. These producers will be operative in widely differing activities, covering the provision and maintenance· of infrastructural facilities, the production of household consumption goods, simple agricultural inputs, and the initial processing of agricultural and stockraising produce. 27. With respect to jobs performed in urban and semi-urban areas of the informal sector, .26/ the population upheavals, which have occurred in recent decades, have had a very significant impact. Although there have been no exhaustive studies of this impact, it is clearly of major importance given that between 20% and 25% of the active population - depending on the number of people who are expected to return to rural areas once the insecurity problem improves - derive their primary income from this sector. Production and productivity in these sectors could be significantly improved if a more precise analysis were made of the activities performed and the technologies being used or capable of being introduced. In addition, actions to provide further technical training on a formal basis or in the form of very short modules, and the introduction of training in management techniques geared to these micro-enterprises and to the cultural level of the people working in them would play an important role. 28. For all three of these roles described, good quality primary education which offers all people the opportunity to become literate and numerate, as well as to acquire thinking skills and understanding of their own environment is a prerequisite. 29. The function of education is not primarily economic. In the very first ~ instance, education should provide the population with the cultural wherewithal which enables it to accommodate to its environment. Moreover, education is a form of welfare in itself. Yet, in the dramatic circumstances through which the population of Mozambique has been living, cultural tools such as these must, as a matter of the utmost urgency, enhance the population's ability to cater for their basic needs. These should include health, hygiene, nutrition, food self-sufficient and a balanced diet, the reduction in the most tedious physical labour by the use of appropriate technologies, the improvement of housing and the environment, as well as the ~/ ThHe jobs cover a range of tasks, including thoH with formal qua I iflcations (such as carpenters, electricians or mechanics), and those who have acquired special skills through a non- formal apprenticeship (such as garment cutting, trade, construction, metalwork, or more traditional crafts and services). - 170 - development of land-use and community amenities. 30. It is only when these basic needs have been partly satisfied that it will be possible to take steps to enhance the population's cultural well- being. In this respect, there are a number of urgent issues. Foremost, is the provision in all the training programmes for components aimed at contending with the structural breakdown in social and family life and in ., moral and civic behavior, which have been generated by colonization, the disorders accompanying the revolution and hostilities. Secondly, there is a pressing need to introduce teachers to special teaching methods that are designed to ensure that a proper approach is taken to both children and adults who have been psychologically disturbed or physically affected by the war. Thirdly, there is a need to re-enhance the positive aspects of autochthonous cultural traditions; and, finally, the population must be equipped to adapt to the new values of society, so that it can make the most of the written or other forms of information flows to which it will be exposed. C. SECTORAL RESPONSE AND ISSUES a. Managerial Reasons for the Inadequacy of the Sectoral Response 31. This rapid overview reveals a number of imbalances between the needs identified from the economic and socio/cultural point of view and the output of the various education systems. The first reason accounting for these imbalances is the lack of an agency with overall coordinating responsibility for planning the entire human resources sector. The education sector currently has three Planning Directorates: one for general education and teacher training, the second for technical and vocational training establishments, and the third for university education. Although the value of the work performed by these Directorates is impressive, their terms of reference entail their administering, on a medium or longer-term basis, the development of the establishments coming within their administrative purview, with no body having a broader mandate. Consequently, the sub-sectoral •. programmes do not tie in with the whole range of the country's manpower needs or - except in the budget context - with the long-term outlook for its economic and social development. 32. The second reason is that the curriculum planning and development specialists are not very accustomed to breaking down tangible development targets into operational training activities (involving prerequisites, performance and monitoring), designed for target populations with a specific cultural profile. They are still less prepared for selecting means of conveying knowledge that depart from the teacher/pupil relationship (such as the use of development officers who have not been given any teacher training, or distance education). 33. Lastly, the management methods and institutional structures are plainly designed for administering schools that are entrusted to people who enjoy civil-servant status rather than to training/action programmes. In fact, the entire administrative apparatus responsible for education is designed for - 171 - school management purposes, rather than as a human resources institution whose task it is to identify and implement activities that are as effective as possible, in terms of national development. 34. MINED's Long Term Development Plan. 27/ For the first time, the Ministry of Education has drawn a quantitative plan for the general education system. ·This plan was prepared using a micro-computer simulation model within the Ministry's Directorate for Planning, and covering the years 1989 to 2000. 28 / The main objectives _can be sununarized as follows: (i) to reach an average admission rate into primary education of 86% of the 7 year age group by the year 2000, with a much smaller dispersion by province than in 1990; (ii) to improve efficiency through a reduction in both repetitions and the drop out rate; (iii) to attain transition rates from one stage to another as follows: I EPl - EP2 EP2 - ESQ ESQ - EPU ---------l------------------------------------------------------ 1988 I 73 ~ 49 ~ 34 ~ 2000 I 68 ~ 51 I 39 I (iv) to increase the student/classroom ratio in order to stay within affordable costs, as follows: I EPl EP2 ESQ EPU ---------1----------------- 1988 I 46.3 ------------------------------------ 42.2 40.1 37.3 2000 I 66.0 62.6 44.7 44.6 35. The Plan makes detailed estimates of the expenditures implied by the program envisaged to meet these objectives. 29/ In aggregate, including other estimates for technical and higher education, the recurrent expenditure requirements to be supported by the Government budget would grow from Mt 8.3 million (constant 1987 prices) to Mt 15.0 million in 2000. This implies that, ~ 27/ Winisterio da Educacao, Oirreccao de Planificacao: •Linhas gerais para~ definicao de uma pofitica educativa•, (August 1989); and •Projecto 2000•, (September 1989); and •Alternativas fe finaciamento da Educacao•, (July 10,1989). 28/ Enrollments are projected by provinces, stages and grades aiming at achieving more balanced attendance rates, and based on regional demographic projections. This model takes into account improv-nts in efficiency in the I ight of a series of measures I inked with the reform, and calculates needs for teachers and classrooms according to normative ratios of utilization of human and 111aterial resources. The results of those projections are synthesized for the whole nation in a second model which translates enrolment into recurrent expenses through the use of unit costs; the budget estimates are then compared with fores.. n public resources. 29/ The evolution of unit costs assumes over the period the following elements: (a) an increase iilthe proportion of staff teaching in two shifts a day in EPl from 18.3 to 39 I; (b) an increase in salaries of 01 up to 1992, of 1.51 p.a. during the next five years, and 41 thereafter on top of a 11 annual increment for scale promotion; (c) a slightly larger share of the Government budget in the costs of teaching material and other goods and services; and, (d) no modifications in administrative costs. - 172 - with an 4% p.a. rise in the Government budget. the share devoted to education would increase from 8.5% to 10.8%: a proportion far inferior to the 19% recorded in 1982. 30/ 36. While the Plan has made impressive progress in documenting internal efficiency (that, is the quantitative target flows of students within the system), it has so far given little emphasis to analyzing qualitative aspects: .. that is, the causes of their relative performance and the associated means by which these target flows may be attained. To improve the quality of education in the two stages of primary education, several actions should be undertaken on a priority basis: (i) mother tongues should be adopted for the first two grades. where necessary, before introducing Portuguese as a second language. This would help to overcome the weakness not only in Portuguese, but in all subject matters, which results in part from the problems of utilizing Portuguese as the teaching language. This tends to prevent pupils from understanding the classes and even the examination tests. (ii) reviewing the (over-ambitious) objectives of the curriculum after a scientific assessment of the results of a sample of students, and re-designing some of the textbooks to meet average needs; (iii) integrating new foci in subject matters and new programs of considerable value for external efficiency, but which are not taught today, although they are included in the curriculum (practical activities and aesthetics); (iv) working out evaluation methods. setting norms and training teachers to apply them; (vi) upgrading teachers in their general education, training or retraining them in teaching methodologies, including practical .. activities and multigrade classrooms. and increasing their mastery of specific subject-matters; (vi) preparing school directors for management functions : allocation of teachers according to their capacities and the specific difficulties presented by each grade, monitoring of personnel job- satisfaction, performance and achievements, organization of classes for a more rational use of premises and teachers, maintenance of infrastructures and furniture, community relations; ~ Various simulations were tested before arriving at this target; the results were discussed by the Ministry of Education and the Ministry of Finance and th• latter found the project feasible. This plan is to be submitted to the Council of Ministers for exa•inatlon and approval, A aynth.. ls of enrolment projections and estimates of the financial requir...nta are set out in annexes E,. and ES. - 173 - (vii) reinforcing the supervision network, reviewing the organization of supervisors' work (administrative tasks, management of the human resources of their area with a view to greater efficiency, training of educational personnel); (viii) making new arrangements for textbook distribution and cost recovery: the cost charged to parents is prohibitive compared with their income, and the stock of books sent to the provinces is hardly sold. 37. An additional program is required to introduce reform in the first stage of secondary education and identify provisional measures to cope with the consequences of the delays observed in the production of progrannnes and textbooks. The strengthening of the performance requirements in EPU, particularly in science, should also be promoted with a view to better preparing school leavers for higher education. 38. 'While most of the possible solutions to internal efficiency problems are being examined within the various departments of the Ministry of Education, external efficiency does not seem to be a central concern. Though general education is at present, and will remain for years, the final stage of education for the majority of the pupils, it is generally regarded as a step towards further training and an introduction to modern society. For this reason, it is surprising that the educational plan - even if this plan is by definition restricted to general education - does not at least consider summarily the professional future of the students. Moreover, an evaluation study of the effects of the introduction of the reform in primary education shows that, firstly, practical employment-oriented training, aesthetics, and political education "are not taught in schools operating in three shifts, or are not given with a complete time schedule in schools operating in two shifts"; secondly. that "teachers feel insecure in these subjects due to lack of both training and good progrannnes" and, thirdly, that, "as there are no exams in those matters, they only receive secondary attention from the teachers and the pupils themselves". 31/ Moreover, the last Education Coordination Council decided to suspend provisionally the first two aforementioned courses from the curriculum because of the difficulties met. On the contrary, sciences (mainly environment and knowledge of the Mozambican provinces) are relatively well mastered. 11:../ 39. Both the education plan and several analyses of the main difficulties met in the introduction of the reform have been submitted to the series of education sector meetings, culminating with a meeting of the"tfational 31/ Ministerio da Educa,&o, Oirec,io de Planifica~io, •ealan~o da introdu,io do Sist.....a Nacional d;-Educa~ao•, September 1989. 32/ There are other assertions closely linked to external efficiency, like •adaption of the curriculum to socio-political and economic realities•, •vocationalization of general education• and •community related education•, that seem none the less to be more ideological statements than operational objectives. - 174 - Education Council and the Ministers• Council in January, 1990, in order to identify and reach consensus on high-priority action programs. This programme of action to be implemented in coming years will serve as an adjunct to the quantitative education plan. In addition to this internal work, the Directorate for Planning will submit the program and plan and the parts of these programs for which national financing or specific expertise is not available to a coordination meeting of education sponsors planned for February 1990. It is important to highlight the extremely valuable work undertaken by the Ministry, not only in the elaboration of the plan, but also in the use made of it; all the activities of the administration should follow certain main lines and all energies (provinces, operational departments of the Ministry, other institutions at the state level, including the Ministry of Finance, and external assistance), should be united in order to achieve the major objectives of development. 40. Adult Education. Designing the most appropriate education and training activities to be undertaken for adults, the best channels to be used, and the necessary means, requires major preparation. The concept of adult education is itself currently undergoing a far-reaching re-evaluation, and several traditional notions of adult education are being questioned. In particular, the following issues are under review: the necessity of all programmes achieving literacy; the possibility of using national languages while pursuing the objectives of the programmes; the need to diversify programmes according to target populations; and, the urgent need to reinforce the functionality of the curricula. If these new approaches are to be adopted, it would be advisable to undertake major research: Ci) to divide the population into "clustersn according to the diverse functions they perform (productive, financial, in the family, conununity and public life); (ii) to investigate, in collaboration with development agencies, the major difficulties or shortcomings encountered in the implemen- tation of those functions; (iii) to specify, for each cluster, training objectives in terms of performance to be achieved or behavior to be modified; (iv) to deduce the formal prerequisites (specific knowledge or abilities, scientific awareness, capacities in numeracy, literacy). .,,,, 41, In implementing these programs, the scarcity of resources, and primarily of specialized personnel, should be an incentive to cooperate with development institutions, especially the agricultural extension, health, social development and welfare agencies. The Ministry of Education should also provide specialized training for its curriculum planning and development experts to enable them to prepare informal education prograumes for illiterate persons. If adult education is to become more generally available, the question of its institutional organization should additionally be re- evaluated. - 175 - 42. Vocational and Technical Education. A long-term. strategy for the technical and vocational training system should now be prepared, taking account of the main requirements of the market, both in the organized sector, . and in informal activities. These requirements should not, however, serve as the only basis for policy: many countries, ranging from those with the lowest levels of industrial development to the most advanced, demonstrate that trade- . offs are possible for the preparation of qualified personnel. Short intensive courses, even when they are more expensive, may be more cost-effective than academic classes. Moreover, in the event of rapid economic change, such as might be expected if hostilities cease, short vocational training schemes would be a more flexible arrangement, able to respond quickly to demand. On . the other hand, educational provision for those with the lowest levels of qualification would be highly beneficial; short modules in technical skills or managerial abilities could certainly enhance the productivity of people work- ing in traditional or semi-modern occupations, whose contribution to GDP is of the utmost importance. Finally, in order to produce the best mix of engineers, managers, high-level technicians, technicians, qualified or semi- qualified personnel; the pattern of relative needs should be more appropriately reflected in the educational structure. 43. University Plan to 2000. A first draft of a long term development plan was drawn up by a university commission in 1989. In general, the development of the plan is highly appropriate, but several reservations may be expressed at this early stage: (i) all those who have completed secondary education are assumed - in a first hypothesis - to be possible candidates for the University and to embark on the licenciatura course. The introduction of an entrance exam to screen EPU·graduates makes this hypothesis outdated. However, in general, the creation of one-to-three year higher education degrees - whether inside or outside the university - is absolutely mandatory: first, on account of the very wide diversity of abilities shown by secondary education graduates; and, secondly, because it is a requirement of the employment market; (ii) drop out and completion rates are not assumed to improve significantly. Yet, the University is about to introduce a full preparatory year for students in the basic sciences rather than a semester, and at the EPU level students have also been divided into science and humanities majors. These measures, together with the entrance exam should have some effect; (iii) the pedagogic organization of studies, based on a 30 student course enrolment, and the quite high number of teaching hours foreseen (from 25 to 34 hours a week according to specialties and levels), imply a very generous personnel/student ratio. This ratio is most unlikely to be sustainable in view of the implied unit costs; - 176 - (iv) the calculation of current capacity is currently based on statements made by each faculty. Optimal use of premises calls for the utilization of every available space, irrespective of the faculty with direct responsibility. A technical analysis of present spatial capacity entails a survey of all existing rooms, an analysis of the purposes they may serve and the use of programming techniques to assess the probable occupation rates within an extended weekly period. This technical exercise should be performed before providing for any extension of the infrastructure; 44. The long term development of the higher education sub-sector necessitates the preparation of a detailed sub-sector study, with specific analysis being made of internal efficiency, the performance of students, the social origin of students, the ratios of utilization of personnel and infrastructure, and the appropriate unit costs by discipline, not only of the University but also of the Higher Pedagogical Institute and of other small institutes at this level managed by other sectors. The study should use the findings of the training needs study on the needs of highly qualified personnel as a benchmark to measure its external efficiency and possibly to reappraise its development objectives. Moreover, it is proposed that a thorough review be made of both the projection methods employed in the draft plan, and the hypotheses underlying them, in order to find out the most cost- effective alternatives for higher education development. 45. Investment Policy. Utilizing the simulation model referred to earlier, MINED's Plan provides estimates of the budgetary needs for the expansion, rehabilitation and maintenance of the capital stock. Although there will be an increasing demand for the.expansion of the stock, the priority over the short to medium term is for the rehabilitation of the existing capital, which has, in particular, suffered severely from the lack of maintenance over the post-Independence period.~/ Moreover, a reevaluation of the priorities within the Ministry itself is required, with more attention being devoted to the respective roles of the various construction units in the planning process, and to the management, financing and implementation of the programs. It is roughly estimated that, using the best available unit costs, the total , investment requirement between 1990 and 2000 will be nearly US$500 million, comprising US$187 million (constant 1987 prices) for capital expansion, US$212 million for rehabilitation (including reconstruction of unsalvageable schools), and US$94 million for maintenance. This aggregate would be equivalent to more than four times the Government investment expenditure on education over the recent past, when only 3% of its resources were designated for the sector. 33/ Despite the peucity of informetion regerding pest expenditure of the Ministry, the educetion plin deals In a satisfactory way with recurrent costs. As far as needs for Infrastructure are concerned, the projection model is able to determine the number of classro0111s to be built to enable the system to expend, and multiplies it by estimeted unit costs for new constructions (s.. annex E6), - 177 - 46. The principle focus of investment expenditures should be on, firstly, the EPl primary level, to which around two-thirds of the investment requirement is attributable; and, secondly, on the rural areas for the rehabilitation and extension of the capital stock. A high priority should be given to: (i) studying the pilot constructions already implemented in several regions of the country, and applying improved technology to local raw materials, in order to analyze the feasibility of reproducing these schemes in other provinces (possibly with technical · variations); (ii) setting basic standards for the investment and rehabilitation; (iii) reorganizing the construction operations, including the respective role of comm.unities, local contractors, technicians and public administration specialists. This would probably lead to the modification of management structures and procedures at both national and provincial levels. It would also make it necessary to decide on the advisability of organizing part of the work on a private basis; (iv) establishing teams responsible for the siting of new schools (school mapping) and to undertake negotiations with local comm.unities concerning their participation. Fi.g. 3 Investment Needs. 7CI _ _ _ _ _ _ _l!Ot*-IT41'0t AHO !)(P.,.CIN ,;;;.;;.;;;.;;.......;._.....;._ _ _ _ _ _ _ _ _- - , ,0 ~ . to ... I •'II ~ :) 'II I 3 ! JO lO ,o ........ llwlllt SOURCE: Ministry of Education - 178 - 47. All the reorganization measures need to be designed within the framework of national and regional plans, and subject to the financing constraints. Moreover, they must be accompanied by training schemes for provincial teams owing to the lack of managers, technicians and operators outside the main cities. The primary and necessary condition for the effective implementation of the expenditure program is the enhancement of policy decision-making, modification of the institutional structure, and improved financial management. In the absence of these institutional changes, the sectoral expansion targets would not be feasible. 48. Balance between Expenditure and Resources. Although the financial simulations for the development of the general education system seem to be satisfactory as far as recurrent costs are concerned, the educational plans for vocational training and university still need to be studied in greater depth. Even so, the current balance does not take sufficiently into account the costs of other development schemes which appear necessary to respond to growth and welfare objectives, such as broadening of adult education, creation of short vocational training programmes, the preparation of higher technicians and coping with specific social needs (special education, education for the poorest groups, school meals); specific provisions should be made for those new developments. As described earlier, the investment issue will not find an easy solution within the current structure and needs a more imaginative approach. Finally, private education which is beginning to be considered as a possibility, is not yet sufficiently well-defined to be a major source of funds in the near future. 49. The Impact of Improved Security. The assumptions underlying MINED's education plan presuppose that expansion of the primary system only takes off after 1995. An improvement in the security situation would raise three main issues for renewed analysis: (i) the long term quantitative targets of the education plan will remain broadly valid. The present demographic projections, used as a basis for the admissions and student flows throughout the system, have been calculated assuming an unchanged population growth rate and no resettlement. Changes in population growth rate would necessarily affect the long term needs of the system, ,. and require further analysis. Resettlement would not affect the global quantitative objectives, as currently estimated, but it would imply a relocation of the school population. :J.!i/ .,,, (ii) if improved security allows access to areas that have been isolated for extended periods and where few educational services have therefore been provided, two new demands will arise. Firstly, provision would be required for the school-age population in the normal way; and, secondly, several generations deprived of general education over this period will demand training. Meeting 34/ Currently, many districts are not accessible allowing other districts to receive a greater attention. -·-=·. - 179 - this latter need through the normal system would exhaust the existing capacity for years and make it impossible to accept new cohorts. Other educational opportunities should be offered to these "lost generations•, including crash courses in out-of-school facilities provided, if possible, with personnel not currently directly attached to the teaching profession. 35/ (iii) while the security-related damage to the physical capital stock has been disastrous, the impact on the population has been more dramatic: physical violence, and the psychological and moral effects on youth and teachers are pressing concerns. Emergency programmes to provide food aid and reconstruction would play an important role, but the need for special education systems would be great. These would include the upgrading of teachers in special education, and research on the social consequences of the war. The shortcomings in the existing supplies of trained manpower in both teaching and educational management make this additional burden a serious concern. 1§../ 50. To date, the Ministry of Education has given relatively little attention to the capacity and response that will be required as security improves. Even if adequate finance were to be made available to provide all the population with access to educational services again, the managerial requirements would be beyond the limited possibilities of the central level staff. While this argues for effective decentralization, the availability and management level of provincial and district staff is not necessarily any greater. As the army would be able to demobilize or play a different role, some thought could be given now to the possibility of adapting the existing military structures in order to retain the men for peacetime construction and rehabilitation programs. Moreover, the existing units could form the basis for further training in basic education and work related tasks. D. Conclusions 51. The current state of Mozambique's education system shows that at present it can only respond to a very small extent to the needs and aspirations of the ' population. Decreased financial resources, the continuing rural insecurity and limited human resources are all factors which contribute to this situation. The current state already demands that the education sector uses innovative ideas to utilize the available resources in the most cost-effective and efficient way and that all donor resources are mobilized for the highest priorities. 52. The first Education Plan for the general education system for the next 35/ These might include volunteers, demobilized personnel with a sufficient level of education, o;:-development officers. 36/ Also refer to: Ministerio da Educa~io, •Document sobre emergencia no sector da educa~&o•, Agosto de 1989 - 180 - decade, prepared by MINED, certainly attempts to provide an adequate response. It is a high quality exercise, which directs attention and resources to the· most important areas: the improvement of the quality and internal efficiency of basic primary education, rather than the expansion of the system; and the rehabilitation and maintenance of the existing facilities for general and vocational and technical education. Such a detailed planning exercise with concomitant policy review process should also take place in the vocational and technical training field and in higher education. The support of the donor conununity for these plans will be a crucial element. 53. It has been noted throughout this chapter that an emphasis on the provision of a basic primary education, which.provides all the population with the opportunity to become literate and numerate, is considered appropriate. However, all these plans focus solely on the mechanisms for improving the existing education sub-systems with respect to the quality of the basic education, internal efficiency, and management. What is missing is the link with the requirements of the country's economic, social and cultural development at this specific moment in time. The external efficiency - the relevance of the type of education and training to be provided by the whole system - is not under discussion, and yet, when security is restored, extraordinary demands will be placed upon the education sector in this respect. It is strongly recommended that a further consideration of these aspects of external efficiency is undertaken, with a view to establishing these additional foci alongside the literacy and numeracy foci. Resources to provide all the population with traditional primary school and further training will not be available until long into the next century. Some kind of non-traditional system, therefore, that provides literacy, numeracy, thinking and coping skills for the mostly rural environment, and the restoration of people's productive, affective and social roles will be needed. Otherwise the rural population and urban poor will be condemned to a second rate education system that does not allow for mobility. For this kind of mobilization, the education sector will have to join forces with many other sectors to enable a comprehensive response to people's needs and aspirations. - 181 - CHAPTER X THE DEVELOPMENT OF MEDIUM TERM POLICY 1. In this chapter, the development of medium term policy is discussed from two perspectives: firstly, in the context of the medium term macroeconomic framework; and, secondly, from the perspective of structural change. Finally, the political and economic uncertainty that will characterize the medium term is analyzed. In particular, the various policy alternatives are considered in the context of a series of alternative economic scenarios. A. The Economic and Social Rehabilitation Program 2. It has been noted at many points in this report that the strategy of the Economic Rehabilitation Program has been generally successful in meeting its objectives. Moreover, the fundamental elements of the strategy that were pursued over the 1987-89 period remain appropriate for the next phase of the reform program (paragraph 15). In designating the reform and rehabilitation program for the 1990-92 period the Economic and Social Rehabilitation Program (ESRP), the Government is committing itself to the continuation of the basic strategy with only relatively minor amendment, but indicating that an increased emphasis will be given to the short term alleviation and longer term reduction of poverty. 3. The ESRP strategy for the 1990-92 period, and the development strategy throughout the 1990s, therefore embodies the principal elements that formed the basis of the ERP strategy for the 1987-89 period. There are aspects of the ERP strategy that require greater emphasis, however, with their importance only being fully appreciated in the course of 1987- 89. These are implicit in the foregoing chapters and are expanded in detail below. One central point is the need to give greater weight to the structural evolution of the economy, and to the role of the support services in the recovery process. The primary focus of the strategy will therefore be: 1/ (a) focusing on the agricultural sector, and especially tbe family ... and private commercial subsectors . (b) fostering the development of efficient light industry, given the sector's integral role in promoting agricultural development. (c) maintaining and enhancing the progress already made in the financial stabilization of the economy, particularly by continuing to maintain tight control of fiscal expenditures so that no domestic bank financing of the budget is necessitated, 1/ The detailed policy program is provided in the document •People•s Republic of Mozambique: Economic Policy Framework, 1990-92• ( .. March 1990). - 182 - and by constraining credit expansion to the non-Government sector in line with the anticipated growth of GDP and inflation (d) emphasizing the role of an appropriate incentive framework. This framework should incorporate: (i) exchange rate policy, aimed at the integration of the domestic economy within the international economy, (ii) the domestic pricing structure and policy, (iii) the provision of consumer incentive products, and (iv) the provision of appropriate supporting infrastructure in the marketing, transportation and financial spheres. (e) enhancing the utilization of domestic and external resources, through accelerating the introduction of a more flexible and less rigorously controlled trade regime, and through greater analysis and prioritization of the Government expenditure program. (f) maintaining and augmenting the external capital inflows, in order to finance both the consumption and investment requirements of the strategy. (g) taking account of the security problem, and the limitations this imposes on reform. On the other hand, however, the establishment of a more appropriate policy framework, which will provide the basis for faster development once the security improves, should be pursued, irrespective of the immediate adverse impact of the insecurity on the robustness and magnitude of the economic response. 4. The critical determinant of economic development will continue to be the evolution of the security situation. While policy reform and industrial rehabilitation are necessary elements for growth, the basic development strategy will continue to be constrained by continuing rural insecurity. Although, from the economic perspective, the security situation will remain a largely, though not entirely, exogenous factor, economic growth will be unsustainable without agricultural development. Consequently, in those areas of the country that are sufficiently secure and which are determined to have a priority economic importance, the implementation of the development strategy with its focus on agricultural .. recovery - and, particularly, the rehabilitation of the rural economic and social infrastructure - should proceed as rapidly a~ is feasible. I/ In ,,. addition, contingency plans should be regularly reviewed for other areas of critical economic significance, but which are currently inaccessible. 5. The analysis of the previous chapters raises, however, a series of concerns that underlie the discussion here of the future direction and development of economic policy. These include: (i) the structural weaknesses: Y This •ppro•ch ia the bHis of the newly developed Priority District• Progr•• (POP)_. - 183 - a. the weakness and volatility of the supply response, and the degree to which this is attributable to factors other than the insecurity problem; b. the evolution of the internal terms of trade, and the constraints to enhancing both the price and non-price incentives. This embraces the evolution of both producer good and consumer good prices, and the factors determining them, together with the obstacles to trade imposed by the deficiencies in the transportation, marketing and financial infrastructures. Moreover, there is a continuing need to effect a unification of the domestic official and parallel markets, and of the domestic and international markets; c. the importance of integrating the structural components of the Emergency Program within the medium term ESRP. (ii) the limited administrative and absorptive capacity; (iii) the problem of poverty: the prevalence of severe and widespread poverty. This particularly affects the degree to which future adjustment is constrained by the need to maintain consumption levels, and the importance of restoring subsistence agricultural production; (iv) the weaknesses of the external sector: a. the inefficiencies in the allocation of external resources on account of the constraints imposed by both the donor and Government, and with respect to both the investment program and the provision of import support; and the adverse impact of this problem on the development of the trade regime; b. the appropriateness and necessity of the extreme dependence on external capital inflows; the sustainability of these flows; and the potential dangers arising from these flows. In addition, the inadequacy of the debt rescheduling agreements and the continuing problem of an unsustainable debt service burden are serious unresolved issues; 6. These are concerns which should shape the-economic strategy over the medium term, and which are the fundamental underpinning of the following sections. B. The Development of Macroeconomic Policy 7. The Macroeconomic Framework. Even with a continuing adherence to the development strategy of the 1987-89 period, the macroeconomy over the medium term will be dominated by the persistence of major macroeconomic imbalances. The formulation of policy will therefore be conducted within a macroeconomic framework which is directed at: - 184 - (a) the progressive, albeit protracted, reduction in the very· substantial degree of sectoral imbalance, as reflected in both the level of dissaving and the aggregate financing requirement; (b) the acceleration of the recovery of production, since this is the principal determinant of the rate at which (a) may be achieved; (c) the minimization of the potential adverse consequences of such a significant degree of macroeconomic imbalance, and, in particular, of such an extreme dependence on external aid. 8. Specifically, the ESRP strategy defines the problem of macroeconomic imbalance to be one of production, rather than one of excessive expenditure. Consequently, the critical element in restoring macroeconomic stability is the evolution of production. Firstly, through increased income, non-Government dissaving would be progressively eroded, and would eventually displace foreign savings as a source of finance for both domestic consumption and investment. Secondly, increased incomes would generate greater tax revenues, and make the attainment of the twin objectives of fiscal balance and increased recurrent expenditures more feasible. Since the recovery of production is necessarily a long term process, so too will be the restoration of macroeconomic balance. 9. It is therefore arguable that the major concern should be the identification of the primary determinants of production, and the formulation of policy directed at these factors. The next section reviews these determinants, and discusses the key areas of structural policy that should form the basis. In the remainder of this section, we consider further the major parameters and broad framework that must guide macro policy in order that the structural policy may be implemented successfully. 10. The framing of policy to attain the macroeconomic objectives will differ from the 1987-89 period to the extent that a major redistribution of the financial imbalances has already occurred. Most notably, Government dissaving has been substantially reduced, if not eliminated, J/ and medium term policy should maintain this position of approximate balance. There are therefore two features of the imbalance .. that require attention: firstly, the financing of both the Government and non-Government investment programmes, and, secondly, the financing of the non-Government dissaving that derives from the increased -levels of consumption. In general, the investment·expenditures are automatically financed from external saving, and this should be a continuing policy condition. Moreover, in the case of the Government account, the medium- term goal would be for some level of savings to be ge~~ced which would enable a small degree of internal self-financing to be attained. In the short-term, such positive savings are neither feasible nor desirable, given the extreme need to increase the recurrent expenditures on the social sectors and on maintenance and operational costs, and given the dangers of !J This is subject to the major qualification that budgetary classifications are still imperfect, with the investment budget reflecting the levels of external assistance inclusiv• of recurrent expenditures in many instances. - 185 - increasing the tax burden. With continuing dissaving by the non-Government sector to finance both its consumption needs, it is highly unlikely that this sector will make much contribution to financing its investment over the foreseeable future. Two further important policy conditions must be adhered to: firstly, external resources should only be mobilized on the most concessional terms, and, secondly, the efficiency and priority of the investments in the context of the ESRP must receive close scrutiny. 11. With respect to non-Government dissaving, the implications for financial stability are potentially more serious. i/ Ultimately, the counterpart of this domestic dissaving would be foreign saving, which effectively finances the import of consumption goods, with the monetary implications of the dissaving depending on the nature of the domestic financing available to the sector. To the extent that a run-down of non- Government excess liquidity occurs, further domestic credit would not need to be extended. However, despite the prevalence of considerable excess liquidity in the system in 1986, there is little evidence that this situation persists after the adjustments of 1987-89. Consequently, to the extent that domestic credit is extended to finance these expenditures, there will potentially be important monetary implications. These ramifications are considered below. In general, non-inflationary monetary growth to support importation will be essential. Moreover, eliminating monetary financing of the budget should allow monetary policy to focus on the extension of domestic-sourced credit to the non-Government sector. Throughout the protracted period that will be necessary in which to restore the financial imbalances to a more sustainable level, the guiding principle should therefore be the adherence to credit policies that limit the growth of credit to the anticipated growth of domestic prices and of production. 12. A further substantive issue, that is also considered in the following sub-sections, concerns the compatibility of shifting the dissaving burden from the Government to the non-Government sector with the needs for enterprise rehabilitation and investment and for enhancing the financial stability of the sector. Given the fiscal policy with respect to enterprise subsidies and the financial policy with respect to enterprise credit for operating losses, the macroeconomic policy therefore raises major issues of microeconomic consistency, and the real possibility of enterprises being forced to close in some instances. 13. Over the medium term, the financial imbalances resulting from the external support of existing consumption levels should decline as domestic production recovers. On the other hand, reductions in external assistance to investment may occur only slowly, given the extreme need that will persist for at least the next ten years. Indeed, any amelioration of the security problem may be anticipated to increase the degree of external investment aid, since both the possibilities and demand for rural infrastructural investment will expand dramatically. Subject to the qualifications noted above, however, this component of the financial imbalance is not a primary concern despite its long term nature. 4/ It should be noted that, to the extent that Government investment expenditures are reclassified as recurrent, this will decrease Government saving. - 186 - 14. The central policy instruments required to meet the macroeconomic objectives of the above framework over the medium term have already formed the basis of the program over the 1987-89 period, and should therefore remain the key elements. These are: (i) the maintenance of balance in the Government current account in the short term, with a longer term target of small positive savings; (ii) the continued mobilization of concessional external savings to finance domestic investment; (iii) the constraining of the expansion of net domestic-sourced credit to the non-Government sector; (iv) the management of exchange rate policy to facilitate the provision of enhanced production incentives. 15. Exchange Rate Policy. One of the key policy elements in Mozambique's long term development will be the exchange rate. In two respects, it will remain central: firstly, to the establishment and maintenance of the incentive framework; and, secondly, to the transformation to a less controlled trade structure and foreign exchange allocation mechanism. 16. Over the medium term, however, the appropriate exchange rate will remain an imprecise concept. Indeed, it is difficult to define, even at the theoretical level, the equilibrium or market clearing rate. 1/ In the early years of the ERP, the direction and magnitude of the required adjustment were easily defined, given the immensity of the distortions, but, over the coming years, the adjustment path will become progressively more problematic. It will be impossible to remove the ad hoc nature of a point estimate, and therefore, unwise to aim for spurious fine-tuning. The objective, therefore, should be to attain and maintain a rate that lies within a broad range of an estimated sustainable real effective rate, given the existing levels of donor assistance. .. 17. While precision is infeasible, it is apparent that the real effective exchange rate in January 1990 is over-valued.~/ Despite the limitations of the various indicators, an official market rate at less than 50% of the parallel market rate, and, moreover, a divergence that may have increased marginally over the recent period, is an important indicator of excess demand for foreign exchange. There will be a continuing need to 2/ Methodological approach•• to estimating real equilibrium rat•• based upon zero balance current accounts are not applicable given the size of the expected inediu• (and •v•n long term) d•p•nd•nc• on •xt•rnal aid. On th• oth•r hand 1 taking account of th• magnitude of the •xternal capital inflows pr•••nts additionrl problem• 1 r•quiring con•ld•rable judgement as to th• sustainable long ter• l•v•I of such flows. !/ T•chnical improvements w•r• mad• in 1989 to enhanc• •xchang• rate policy, including adopting a bask•t of curr•nci•s for future •xchang• rat• d•t•rmination, and rapidly adjusting th• rate to tak• account of diff•r•ntial inflation rat•. - 187 - depreciate in real terms. The costs of misalignment will, moreover, become more obvious as an increasingly open trading environment is introduced. 18. Continued appropriate exchange rate policy will be necessary for economic development, but it will by no means be sufficient. Substantive step-changes in the real rate are likely to be a limited value in the short term, given the severity of the structural constraints within the economy. Focussing attention on the fundamental determinants of international competitiveness and efficiency within the trading structure will be of primary importance. 11 As was noted in part 2, the existing weaknesses of the transportation and marketing infrastructure are major obstacles to achieving a supply response, and therefore limit the impact of increasing price incentives in the short term. Moreover, the impact of substantial exchange rate adjustment on urban living standards and on inflation will be immediate, particularly since imports comprised 60% of GDP in 1989 and 85- 90% of marketed grain was supplied through the donor-assisted import programs. Thus, with little prospect of a major agricultural production response, the short term costs will be very high. There is, therefore, a strong case for adjusting the exchange rate progressively to achieve an appropriate realignment, without major discrete changes, and accompanied by concerted efforts to remove the structural bottlenecks that inhibit the critical productive response. Indeed, from the political standpoint, large discrete changes of the rate would appear to be unacceptable for these reasons. This, therefore, points to the importance of a multi-year counnitment to steadily improve the real rate to attain an approximate sustainable rate.~/ 19. In the coming years, the prime indicator of exchange rate sustainability should be the experience obtained from the operations of the SNAAD. This does not imply that there is no role for the parallel market indicators, but they should have a declining relative influence. In its initial stages of operation, the market coverage of the SNAAD is strictly limited, and the appropriate rate for such a small market may well not reflect the aggregate economic need. However, with the expansion of the coverage, the sustainable rate for the SNAAD market should converge towards the economy-wide rate, and, therefore, provide an increasingly meaningful indicator of the broad acceptable range for the real rate. Indeed, the implications of an unsustainable exchange rate are most serious for the SNAAD, in particular, and for trade reform, in general. In the event of a persistent over-valuation, preserving automatic access to exchange would be infeasible, and would require the imposition of potentially large import II One of the serious defi<:•ncies of considering exchange rate policy in relation to the profitability of specifi~exporting enterprises is directly relevant in this context. The internal inefficiency of the enterprises may be the most critical obstacle to setting appropriate producer prices, with the exchange rate being secondary at the margin. In Mozambique'• case, there is the additional problem that, currently, the enterprise accounting systems are too primitive to isolate the security related costs, and therefore permit a judgement of the underlying economic efficiency. ~/ This is not the appropriate document in which to specify exchange rate targets, but, even with the weaknesses of parallel market indicators, it would appear that an official rate of between 601-801 of the parallel rate would be more defensible than the 401-601 range that prevailed in the 1988-89 period. As is stressed in the text, other indicators, especially the SNAAD should be given increasing dominance in the specific formulation of policy. - 188 - surcharges, which would distort the relative price structure, or the abandonment of the system, which would be more detrimental to the process of trade reform. It is for this reason that the enlargement of the SNAAD should be accompanied by appropriate exchange rate adjustments. 20. Fiscal Policy. The section above regarding the macroeconomic framework outlined the broad policy objectives that will be needed for medium term fiscal policy. However, as was noted in chapter II, the definition of medium term quantitative targets for the fiscal accounts, using the conventional indicators, is presently highly problematic, and only of value in a broad indicative sense. Major shortcomings in the degree of budgetary coverage existed in the early years of the ERP, and, although significant improvements were made in the 1990 budget, it is highly probable that further steps to establish a comprehensive coverage will be required. i/ In addition, the capital account is still more accurately defined as an externally financed development account, and, as yet, little progress has been made in subdividing the recurrent and capital components of this account. Furthermore, with the exclusion of the finance from counterpart funds from the current account, the variation of these substantive and volatile resources for recurrent expenditures is necessarily reflected in the current balance. These factors clearly indicate the limited value of targeting Government savings until a more transparent accounting structure is in place. Furthermore, the conventional measures of overall fiscal balance after grants are equally of limited value, given their inability to take account of the grant element of external borrowing, which is especially high in the case of Mozambique. Adhering to targeted reductions in the ratio to the GDP, for example, completely overlooks the trend to increasingly concessionary credit ~/ The following table provide• an illustration of the coverage problem, r•flecting the more comprehensive coverage introduced for the 1999 budget (th• •new• basis) compared to the 1989 budget (the •old' basis). Th• impact on Investment and on the overall deficit after grants is the most striking feature. Note that no reclassification of externally financed exp•nditure• has occurred to differentiate betw.. n recurrent and capital components. Percenteg11 of GOP. Curr. exp Inv. exp Tot.al exp Cur. deficit Ov•r•II def.(aft.r gr) B••i• New Old New Old New Old New Old New 1989 26.2 22.6 lt7.7 2.7 8.lt 1991 26.8 26.1 26.9 34.1 61.7 60.2 3.6 3.8 ,. .6 13.2 This analysis includes an additional disturbance in 199" due to the assumption by the Government of public enterprise bad debt, equivalent to 3.21 of GDP. This is recorded in the investment budget. This may be perpetuated in 1991 to a lesser extent, but generally may be regarded as a once-for-all disturbance, rather than a coverage issue, - 189 - finance. The increasing role of IDA financed expenditures provides a pertinent example of the weakness in this respect. 10/ 21. Consequently. over the medium term. the principle indicator of fiscal stability should be provided by the level of domestic bank financing to the budget. with a major policy objective being the enhancement of the budgetary accounts to facilitate more meaningful analysis. This conclusion does not obviate the need for long term target reductions in the overall fiscal deficit. both before and after grants. and in aggregate public expenditure, but it does suggest that the primary focus needs to be placed on the underlying detail until a more transparent and stable structure has emerged. 22. While these transitional steps are in progress. there are. however. several general issues of budgetary principal that need to be analyzed, and which should initially be addressed in the context of the rolling three-year financial plan and three-year investment plan: (i) the integrated planning of all public expenditure. The coverage issues raised above are one aspect of this problem. since without a formal incorporation of all sources of funding and expenditure at the accounting level. integrated planning is precluded. More importantly, all expenditure proposals should be evaluated and prioritized at the Ministry level according to the sectoral and macroeconomic objectives. irrespective of the funding source: specifically. the emergency needs. and other special concerns of the Government. such as the alleviation of chronic poverty, should be handled within the same framework. There should be a strong presumption against excluding revenues or expenditures from this process. and against the maintenance of special extra-budgetary funds. 11/ The rolling three year investment and financial plans should be the instrument for this process. (ii) the recurrent cost implications of the capital expenditure programme. The magnitude of the current investment program raises pressing questions of the long term sustainability of the capital stock in terms of its operation and maintenance. In the case of capital projects under appraisal, it would appear that. even if justifiable in terms of the three decision criteria 10/ An additional long term policy objective should be the progressive reduction in public ii'penditure as a share in GDP. Targeting this variable in the short term is. however, subject to the same problems as the current and overall balances, until the coverage problems are resolved. 11/ A further aspect of integration is highlighted by the apparent discrepancy between the ii'ternal assistance as recorded in the external accounts and that recorded in the budgetary accounts. In 1988 and 1989, the shares of external loans recorded in the budget as a proportion of the balance of payments figures were respectively 471 and 401; while for grants the shares were respectively 471 and 661. Further analysis of this issue would be advisable. - 190 - identified earlier 11_/. the addition of a fourth would be advisable: namely, the feasibility of meeting the future recurrent finance requirements. In addition, a more general analysis is required of the on-going projects and of the existing capital stock to allow a clearer identification of the recurrent need. 13/ (iii) the role of counterpart funding of the budget. Counterpart funding raises two central concerns: firstly. whether a dependence on these funds for recurrent expenditures is imprudent given the short-term nature of this source; and, secondly, whether there are adverse monetary implications of this funding. The second issue is considered later. Prima facie a long term dependence on a short term finance source is not supportable. However, there is a strong case in the present circumstances for believing, firstly, that in part the use of these resources are themselves transitory, 14/ and, secondly, that in part other resources would naturally become available when these transitory resources decline. 15/ The synchronization of these trends is clearly highly uncertain, but the basic danger of dependence is arguably manageable. 23. Further structural aspects of fiscal policy are considered in later sections of this chapter. 24. Monetary Policy. In the discussion of the evolution of the macroeconomic imbalances, the broad objectives of monetary policy were outlined: firstly, the elimination of bank credit to the Government, with some very limited scope for repayments over the medium to long term; and, secondly, the control of credit to the non-Government sector in accord with the anticipated growth of the sector and inflation. Two important issues that underlie the implementation of this strategy are singled out here: the procedures for the allocation of credit; and the use of counterpart funds. 25. Many of the problems of credit allocation were addressed in chapters II and VI. Here it was noted that, while credit policy was explicitly directed at precluding the crowding out of non-Government credit, the existing allocation system could discriminate against the provision of credit to the private enterprise sector. On the other hand, it was concluded that transforming the credit mechanism to one based 12/ Refer chapter II, paragraphs 83-88. The criteria included the economic and financial vTability of the project; the availability of adequate finance; and th• availability of appropriate administrative and implementation capacity. 13/ It could, for example, be argued that the decline in defence expenditure will facilitate the necessary recurrent expenditures. Thie, however, makes important assumptions about the evolution of the security situation, and the possible rate of decline in th••• expenditures. !if For instance, the financing of measures to alleviate chronic poverty. 16/ A reduction in emergency assistance would be a major reason for declining counterpart funds, but a reduced level of emergency aid would likely be related to a diminishing rural crisis, and therefore with decreased expenditure requirements in defence and security, and increasing revenues from accelerating production, - 191 - principally on market mechanisms, rather than·administrative allocation and credit ceilings, could only occur once the commercial structure of the financial sector had been restored, and, in particular, once the commercial and central banking functions of BDM had been separated. In the interim, the progressive reestablishment of commercial principles in the assessment of credit applications, and, specifically, the elimination of bank credit to finance operating losses, are important steps to pursue. 26. The fiscal and monetary implications of counterpart funds have come to be a major issue as the scale of external assistance has grown. 16/ As the availability of counterpart funds has increased, the pressure to utilize this source of finance for budgetary purposes at a time of immense need and resource scarcity has been considerable. In particular, these funds have been viewed as a key element in the programs of rural and agricultural development, and of poverty alleviation and reduction. While, in principle, this is feasible, these funds are denominated in local currency, and do not provide an automatic access to foreign exchange. Secondly, if the original foreign exchange recipients were financed through domestic bank credit, rather than through their own resources, then the expenditure programs financed in this way will entail a monetary expansion (refer to previous footnote). Consequently, this budgetary decision will necessitate the contraction or restriction of non-Government credit, assuming the credit ceilings are binding. This reallocation of credit may be a desirable objective if the Government expenditures are viewed as priority, and of direct benefit to the non-Government sector, but this implication needs to be explicitly considered. Over the medium term, this trend would not be desirable, but given the short term needs of the infrastructural and poverty programs, it may be an appropriate 16/ External assistance is provided in many forms, with varying repercussions: (i) emergency food aid, that is distributed free, has no direct fiscal or monetary impact. (ii) emergency food aid, that is sold and whose revenues accrue to the Government, generates grant revenue to the budget. There is no monetary implication unless the initial purchases of food were financed through the extension of credit, which is rarely, if ever, the case. (iii) import support may have monetary implications if the importer obtains credit for the purchase. In this case, if the counterpart funds accruing to the Government are sterilized in a blocked account at BDM (as in the case of IDA import finance), there is no direct monetary impact. Thia form of credit is currently excluded froa the credit ceilings for this reason. On the other hand, if the counterpart la treated as a financing source for the Government, there is a direct monetary impact from the Initial credit expansion. (iv) project support may have a monetary impact depending on the agent undertaking the project. For Government projects, the foreign exchange provided leads to no monetary expansion except to the extent that the donor provides exchange In exc••• of the project's requirement. Thia excess exchange may then be ...n as import support. For non-Government projects, the provision of credit to the enterprises undertaking the project wil I lead to a monetary expansion if the enterprise obtains bank credit and if the counterpart accrues to the Government and is not sterilized. The technical problems of differentiating between these different sources of counterpart funds and determining how the importer in fact financed the foreign exchange purchase are often highly problematic. - 192 - redistribution. As has been noted-before. if counterpart funds are made available for Government expenditure, the utilization and prioritization should be determined within the overall framework of public expenditure. 17/ 27. Debt Policy. As was noted in chapter II, Mozambique•s debt service ratio is about seven times as high as other low-income Sub-Saharan African countries and thirteen times as high as low-income Asian countries. 18/ This raises the important question of whether the debt burden can be reduced in conditions compatible with economic growth, and, if so, over what period of time. In analyzing this question, particular attention needs to be given to macroeconomic consistency of fiscal policy, exchange rate policy, inflation and growth. 28. Unlike other countries, Mozambique's non-interest current account deficit was not the main factor accounting for the increase in the debt-export ratio in the 1980s: overall, the sharp decline in exports was the main factor. Moreover, export growth will be crucial to restoring external financial viability. Since Mozambique will have to remain a structural importer of capital for many years, the non-interest current account deficit will not fall significantly below its current level (as a percentage of debt). However, given Mozambique's high indebtedness, export growth would have to be extremely high if Mozambique's export-debt ratio is to fall substantially. The implication is clear: other policy measures have to be implemented in addition to export growth. 29. Almost 93 percent of Mozambique's total debt is official debt (mainly bilateral on highly concessional terms) or is guaranteed by official agencies, whereas commercial debt amounts to only 6.5 percent of Mozambique's debt. It is for this reason that most of the effort to reduce the debt burden should be focussed on official debt. 30. However, debt rescheduling will only postpone the central debt problem without solving it. Even making the most optimistic assumptions about debt rescheduling (namely, that the annual debt-service obligations would be rescheduled each year over the 1991-2000 period) 19/ results in limited improvements in the overall external balance. The reduction in debt service payments falls gradually from US$318 million in 1990 to US$100 .. million in 1996, and afterwards the reduction is negligible. The post- .. 17/ A further technical issue relates to the availability for re-lending of credit "[<.iriginally lent for importation of gooda financed by external aaaistance) that la repaid to the banking ayatem. While, in the event of the counterpart being sterilized (as In the case of IDA finance), the initial credit la excluded from the monetary ceilings. it has been argued that the secondary and subsequent re-lending should be included, since no 111atchlng external resources are available in this instance. In practice, the present accounting procedures make this degr.. of sophistication difficult to Implement, and therefore for pragmatic reasons it is unlikely that the defined net credit ceiling• can take account of this factor. 18/ Baaed on the World Bank reporting system, th• debt service ratios were 171 for low- Tncome Asian countries, 29.81 for low-income Sub-Saharan African countries and 2211 for Mozambique in 1988. 19/ Refer Scenario 2 in the last section of this chapter. - 193 - relief debt service ratio would fall from 51 percent of exports in 1990 to 29 percent in 1990 and the debt-export ratio would decline from 17.9 to 10.4 over the same period. According to both ratios Mozambique would still be classified as a highly indebted country in 2000. 20/ 31. The high debt ratios (after debt rescheduling) throughout the 1990s indicate the insufficiency of debt rescheduling. Restoring normal debt-servicing capacity will require the cancellation of part of the outstanding external debt and/or debt service payments. Restoring external financial viability 21/ would be achieved if Mozambique were to receive on average about US$240 million in grants every year from 1990 to 2000, to would cover the repayments of principal due on the debt outstanding as of end-1990. This alternative would not cost much more than annual rescheduling (Table 1), but the benefits would be greater. Firstly, there would be no need for annual debt rescheduling; and, secondly, the balance of payments would become financially viable within a shorter time horizon as the post-relief debt service ratio would fall from 37 percent of exports in 1991 to 19 percent by 1995 and to 15 percent by 2000. 32. Maintaining a growth-oriented fiscal adjustment is a priority over the medium term. Moreover, fiscal policy must be consistent with debt policy, and reconciling these two concerns will be made especially difficult by the fact that Mozambique is, and will remain, a structural importer of capital. Current account deficits are the counterpart of the external resources used to finance domestic consumption and investment, and reducing them sharply would result in lower economic growth. 33. Servicing Mozambique's debt is further complicated by the fact that most of the foreign debt was incurred by the Government sector, whereas exports are generated by the enterprise sector. The transfer of debt service payments from the Government to foreign creditors entails, therefore, an internal transfer of resources from the enterprise sector to the Government sector. Achieving this will require the mobilization of domestic resources through fiscal policy. Whether this is feasible is a critical policy issue. 34. The key element determining whether external borrowing is sustainable is economic growth. If the difference between the real interest rate and the growth rate of the economy is positive, the debt-GDP ratio will rise without limit unless the primary deficit remains 29/ Although there are no precise criteria for defining external financial vlability or for 'forecasting debt servicing difficulties, the observed values for the debt indicators of countries that have had recently debt servicing difficulties are useful indicators. These are: a debt-GNP ratio of 50 percent; a debt to export ratio of 275 percent; a ratio of scheduled debt service of 30 percent; and a ratio of scheduled interest payments to exports of 20 percent. 21/ Refer footnote 20. - 194 - sufficiently below monetary financing. 22/ In the 1990s, real interest rates on external debt have fallen to a level close to 0% and GDP growth is forecast to reach around 6% per annum. As economic growth will lead to a decline in the debt to GDP ratio, external borrowing can be consistent with a constant or falling debt-GDP ratio: thus, the faster the economic growth, the more rapid the decline in the debt to GDP ratio. As was the case for the debt to export ratio, economic growth is the key for improving external financial viability. However, this is not the only fact~r. The primary deficit (after grants) must also be contained, otherwise the increase in borrowing will exceed the amount made financially feasible through growth. The precise degree of fiscal discipline that is needed cannot be specified without determining the other macroeconomic targets concerning external debt, inflation, exchange rate, and growth. Table 1 Financial Impact of Debt Service C1ncellation compared to Debt Rescheduling, 1990-2""'11 199fJ 1992 1993 199. 1996 1998 2""'11 Debt service reduction {USSm,l Debt rescheduling scenario 1/ 318 222 188 189 161 19• 3 Partial debt service scenario 2/ 306 273 249 241 232 188 269 191 126 102 87 76 89 87 61 43 39 36 33 31 29 61 27 26 24 19 17 16 Debt to exeort ratio (i) post-rescheduling 17.9 16.3 16.4 1•.8 13.8 13.1 19 •• (ii)post-partial debt service cancellation 17.9 1•.1 12.7 11.6 10.6 9.7 1 .• 1/ Bas<KIon scenario 2 from the last section of this chapter. Difference between the debt service payments before and after rescheduling. 2/ In this scenario, there would be only one debt rescheduling in 199fJ, but grants would be provided to Mozambique by bilateral donors to cover the principal repayments due on the debt outstanding as of end 1989. Source: Mission estimates 35. The large external debt results in a negative trade-off between economic growth and external financial viability. Provided debt can be rescheduled every year in the 1990s, a constant debt-GDP ratio would be consistent with a primary fiscal deficit of about 4-7 pe(cent in 1991-94. As this level is comparable to the 1989 level (5.2 percent), fiscal policy 22/ This was Mozambique's case in the early 1980s. During th••• years the int.rest rat. on Mozambique's external debt was positive In real terms, GOP was falling and the Government was running a primary deficit well in excess of monetary financing. The debt dynamics were therefore unsustainable as the debt-GOP ratio would have ri ..n without limits. - 195 - would appear to be consistent with the objective of achieving 5-6 percent GDP growth. However, this policy scenario would be inconsistent with long term financial viability of the balance of payments (see definition in footnote 20). To achieve that under debt rescheduling, would require a much stricter fiscal policy. On average Mozambique would need to generate a primary fiscal surpluses of about 14 percent of GDP in 1991-92 and 10 percent in 1993-95. Achieving such surpluses would be a daunting task: it would require doubling tax revenues or reducing budgetary expenditures by about one-third. Given its strong deflationary impact, it is unlikely that such a policy would be consistent with economic growth at 5-6 percent. 36. Furthermore, Mozambique would not derive much benefit from a fiscal austerity program. Nearly all the additional resources generated through the budget would accrue to foreigners in the form of higher debt service payments. Given such a high marginal "tax" on the rewards from fiscal austerity, Mozambique would not face strong incentives to rapidly improve external financial viability. 37. In sununary, debt reduction is the only policy consistent with economic growth and the restoration of external financial viability by the second half of the 1990s. Moreover, this policy would require donor countries to provide grants for the purpose of repaying the principals due on the external debt outstanding as of end-1990. Domestically, this policy would not be equivalent to fiscal expansion: Mozambique would still have to generate a primary fiscal surplus equal to about 3 percent of GDP on average. 23/ Such a goal is feasible in view of Mozambique's high budgetary expenditures (forecast to reach 60 percent of GDP in 1990): it would require expenditures to fall by an additional 3 percentage points of GDP by 1992 as compared with current Government projections. 38. Several results must be stressed: (i) high indebtedness is a key macroeconomic constraint which acts as an overhang on both economic and financial policies. Unless it is addressed explicitly, debt renegotiations and the accumulation of arrears will persist beyond 2000. (ii) without debt cancellation, extraordinarily restrictive fiscal policy would be·required for external financial viability even with the rescheduling of all annual obligations. In this case, growth would not be sustained. (iii)a key component for attaining external financial viability is the growth of GDP and exports. Fiscal adjustment at the cost of slow economic growth will not improve financial viability. Exports and GDP are still substantially below their mid-1970s levels; restoring such levels would contribute more to reducing debt ratios than severe cuts in budgetary expenditures. 23/ It is important to note that this estimate is subject to considerable uncertainty which can only be resolved by improving the quality of the-debt statistics. - 196 - (iv) debt service payments must be reduced through debt cancellation. This would provide an incentive to improve the external accounts: otherwise nearly all the benefits would be used for debt service payments. C. The Development of Structural Policy 39. With respect to the structural aspects of the ESRP strategy, .. there are six areas of concern that arise from the earlier analysis of the structural adjustment, which are addressed in this section: 24/ (i) the price incentive framework; (ii) the structure of fiscal revenues and expenditures; (iii) the allocation of external resources, and the development of the trade regime; (iv) the provision of rural support services; (v) industrial policy; (vi) the alleviation and reduction of poverty. 40. The Price Incentive Framework. As has been the case over the 1987-89 period, price incentives should continue to be the primary instrument over the medium and long term for the recovery of production. The realignment of domestic prices towards their international levels should therefore be the overriding policy objective. In general, and over the long term, this may be best achieved through the decontrol of all levels of pricing, but this is clearly not appropriate for all products in the short term. In chapter VII, serious concerns were raised with respect to the adequacy of the marketing network at the producer level, and the ability of AGRICOM to fulfill its designated role of buyer of last resort. In consequence, it was concluded that the enforcement of producer level .. prices either through the fixed or minimum price systems was inconsistent and varied widely across the country. In view of these findings, and the reality that price enforcement could only be effectively monitored at the district wholesaling level, a strong case was advance for introducing an interim price control system at this level. Several broad principles would therefore seem appropriate in the formulation of pricing policy: (i) for the primary domestic food crops and export crops, the medium to long term objective should remain the effective operation of a minimum price system, under which only the minimum producer price is determined; 24/ The issues relating to the management of public expenditure• are not discussed in detail here, although they are clearly one important element in the medium term structural policy, They are already extensively discussed in the •Public Expenditure Review• (World Bank, October 1989), - 197 - (ii) for these same crops, given the serious existing deficiencies of local marketing, minimum buying prices should additionally be established, for the short to medium term, at the district wholesaler level, where enforcement and monitoring are possible. Minimum producer prices should continue to be set, with AGRICOM acting as buyer of last resort wherever and whenever possible. Improving seGurity would be the most important factor determining AGRICOM's capacity to implement effectively this role, and for attaining the longer term objective; (iii) for the primary domestic food crops, establishing maximum wholesaler selling prices should be analyzed as a means of constraining consumer prices in a period of highly volatile supply conditions; (iv) there is no case for establishing maximum selling prices at the wholesaler level for the export crops. 41. The existing rationale for the maintenance of selective price controls is based on a series of factors, which define categories of product for which control is economically justified. The maintenance of controls will, however, be contingent on these specific circumstances continuing. With a significant improvement in the emergency situation, for instance, the validity of some of these categories would be progressively weakened, enabling decontrol to be further effected. The rationale should therefore be kept under review. For the immediate future, controls will be necessary for selected products which are considered strategic in the light of the security problem; or which are in extremely limited supply and for which an equitable regional distribution is necessary, including products distributed through the ration system; or which are widely distributed free through the external emergency assistance program; or which are of critical importance to the Government's tax revenue policy; or which are traded in monopsonistic markets; or which are subject to the conditions of donor contracts and agreements. In addition, even in the short term, it should be noted that greater coordination between the key emergency agency (DPCCN) and the primary marketing agency (AGRICOM) would contribute greatly towards safeguarding production incentives, and weaken the case for price controls. 42. For those products that continue to be subject to the fixed price legislation, it is of paramount importance that the producer price is set in accord with the international price and only after allowance for appropriate transport and processing costs. These costs should notably take account of the problems of transportation and embody an acceptable level of efficiency at the processing stage. Specifically, the manner in which the extraordinary costs associated with the insecurity are handled requires careful consideration, both with respect to the price determination process and to the potential role of budgetary support. Similarly, in the case of the products covered by the minimum price system, the specification of the minimum price should be consistent with the international price, and, in those cases where a fixed factory gate price is additionally stipulated, this price should follow the same guideline. - 198 - 43. In some respects, the rapid expansion of the minimum price system may be considered premature. 25/ The foremost reason for maintaining fixed prices in the case of domestic food crops is attributable to the critical importance of maintaining domestic producer incentives in circumstances of massive emergency aid. The supply of this aid is highly volatile and lumpy, and in some regions and at some times of the year there may be a sufficient excess supply to greatly damage the local production incentive. ~n principle, a minimum price can protect against this eventuality, but minimum pricing can only be successful if, in general, actual producer prices, firstly, exceed the minimum, and, secondly, bear an appropriate relationship to a broad-based international price, and not merely to a localized and possibly highly unrepresentative donor or market- specific price. In the current circumstances, neither of these conditions appear likely, and, in view of the acute need to regenerate domestic food production (especially given the vagaries of donor emergency support), a guaranteed producer price that is in line with the broad-based international price appears to be of utmost priority. One possibility is to set the minimum price high enough so that it does ensure that this condition is always met: this solution would, however, probably be no different to a fixed price. With respect to the other crops not supplied through the emergency program, and especially the export crops, the case for minimum pricing is more compelling, subject to the concerns noted above. There are, additionally, four aspects requiring further attention both immediately and on an on-going basis: (i) the methodology and assumptions underlying the setting of the minimum price; (ii) the financing implications and contingency plans for supporting the buyer of last resort, and the potential budgetary and/or monetary implications of this support; 26/ (iii) the appropriateness of the system in any of the circumstances noted in paragraph 41. 44. With respect to consumer prices, the basic principle underlying the continued control of selected products is the Government's desire to .. protect the consumer from erratic price movements when the products are themselves subject to an erratic pattern of supply. This is the basis for both the conditioned price system and for control of consumer prices under the fixed price system, including the ration price system. It is, moreover, necessary to maintain the ration products within the fixed price system, given the desire to maintain both a fixed consumer price and the fiscal objective of eliminating consumer price subsidies. While this line of argument provides an acceptable justification for the most basic g§/ In Janu•ry 1989, six products were introduced to the syste111 (cotton, cashew, copra, groundnuts, sunflower and mafurra); and, in May 1989, • further thr.. were •dded (beans, sesame, and sorghum). 26/ This concern is, moreover, one that is equally pertinent to the fixed price syste111, where AQRICOM is the designated buyer of last resort, and where the financing probl41111 is having a major impact on the efficiency of the marketing process (paragraph •• ), - 199 - consumer products, it is not a satisfactory explanation for maintaining all industrial products within the conditioned system. A more transparent definition of the essential products for which consumer protection is necessary is urgently required. Over the medium term, a rapid move to decontrol those industrial products not regarded as essential should then be effected. Only a core of essential products would remain subject to either the fixed or conditioned price legislation, as determined by the rationale outlined earlier. 45. The Structure of Fiscal Revenues and Expenditures. One of the notable characteristics of the economy is that the level of budgetary revenues is already substantial as a proportion of GDP, and comparable with many other more stable African economies. In 1989, tax revenue accounted for 23% of aggregate GDP, and for an estimated 33% of marketed GDP. Consequently, the scope for further increases is very limited. Detailed recommendations are beyond the scope of this report, but further adjustment to the taxation structure and to tax rates will need to look more closely at the microeconomic implications, including: (i) the impact of the turnover tax. The tax currently has many serious shortcomings: it discriminates against products which change hands a greater number of times than others; specifically, it discriminates against domestically produced products vis-a-vis imports, since the former are subject to more points of taxation and therefore to a greater cumulative tax burden; and the structure is highly regressive. It therefore induces significant distortions into the distribution system. Any increased tax burden would further exacerbate the existing problem. The recommendations of the IMF 27/ in 1988 supporting a move to a valued-added type of structure should be reconsidered in this regard: especially the steps necessary to introduce such a structure to displace the turnover tax. The benefits of such a system are substantial, and this provides a further reason for giving a high priority to the development of the appropriate enterprise accounting systems. Transitional steps should urgently be considered; including the displacement of the turnover tax by a general uniform sales tax on all sales of domestic manufactures and imported products. (ii) the impact on production and work incentives of direct taxation. In the first three years of the ERP, the substitution of indirect tax for direct tax has been a dominant trend. Over the medium term, it will continue to be important to foster the recovering family sector and the small and medium enterprise sectors through the provision of favorable tax treatment, and to exclude the lowest income earners from the income tax brackets. On the other hand, the discrimination in the personal tax system which exempts Government employees remunerated from the state budget from income tax should be removed. Not only does it obscure wage and salary relativities between the Government and '{]_/ Refer to •Memorandum on the Tax System of Mozambique•, (IMF, March 4, 1989). - 200 - non-Government sectors, and render the minimum wage legislation less transparent, but it also increases the regressivity of the system. (iii) the impact of import taxation. The import tax structure is a fundamental factor affecting the internal terms of trade, both with respect to the final price of imported consumption goods, and with respect to the effective price of inputs to domestic consumer good production. In establishing the revenue targets from this source, these two competing factors need to be taken into account, given their centrality to the basic ESRP strategy, with an appropriate balance being struck. 46. With regard to recurrent expenditures, the Public Expenditure Review in 1988 concluded that, in many sectors, expenditures had been reduced to extremely low and sometimes dysfunctional levels, and real increases in these expenditures would be necessary, especially in the provision of social services. It is, for instance, estimated that real recurrent expenditures in the health and education sectors fell by an annual average of 17% and 21% respectively over the 1985-88 period, 28/ and in 1988 stood at less than 50% of the 1984 real levels. 47. Two problems were identified: firstly, there was a general need for priority in aggregate expenditures to be given to operational, maintenance and rehabilitation expenditures rather than new investment; and, secondly, there was a need for a redistribution of recurrent expenditures towards the social sectors. 29/ From the macroeconomic perspective, the need to increase recurrent outlays therefore suggests that the attainment of significant positive Government savings, in order to increasingly finance the investment program, can only be a longer term objective. Merely maintaining a fiscal current balance will in any case entail more serious attention being given to the priorities and trade-offs in the recurrent budget. 48. Investment expenditures display the same characteristic as fiscal revenues in that they are already a substantial proportion of GDP, .. 'J:.!/ Real growth of recurrent expenditures: Percentage Health Education 1985 -19.9 -22.8 1988 -19.4 -12.0 1987 -18.4 -28.5 1988 -15.8 n.a. 1989 (projected) +81.7 n.a. Refer also to chapter IX for a further discussion on the evolution of public sector education expenditures since 1989. 29/ It was noted in chapter II that aggregate real recurrent expenditures increased tliroughout the 1987-99 period, but that the real expenditures on the social sectors fell markedly. - 201 - and compare favorably with other African· economies. In the case of investment, a greater emphasis compared to other economies is probably justified, at least in the short term, given the extreme deterioration of the capital stock that has occurred. As was noted in chapter II, real investment expenditures have grown strongly over the ERP period, and are projected to increase by a further 60% in 1990. These growth rates are, however, unsustainable for two compelling reasons: firstly, the implementation capacity of the economy is already over-stretched, and there are major doubts about the ability to implement the 1990 increase as programmed; and, secondly, while the donor community may be anticipated to sustain these levels of investment, it is highly unlikely that they will be augmented significantly over the medium term. 30/ It should equally be noted that the implementation of the future investment programme, and particularly the 1990 programme, is inextricably tied to the evolution of the security situation given its increasing focus on agricultural and rural development. 49. The central concern with respect to investment should be with the efficiency with which investment finance is used, rather than with an increased flow. Two aspects of efficiency may be identified. The first concerns the criteria for the adoption of new investment projects (referred to in chapter II, and in paragraph 22 above); and the second concerns the efficiency of the sectoral composition of investment within the broader ESRP strategy. 50. Major changes in the sectoral composition of investment expenditures are already envisaged over the coming years. The 1990 Plan identifies a fundamental redirection of investment policy in accord with the objectives and strategy of the ESRP, in general, and in particular, with the Priority Districts Program (PDP). 31/ Table 2 shows the composition of the budget-financed investment program by economic sector over the 1975 to 1990 period. 32/ Most striking, is the decline in the share of the construction and water sectors, reflecting the conclusion of dam construction and of the associated large-scale irrigation schemes. Equally marked is the projected growth in the social sector expenditures that rise from a long term historic average of 2-4% to over 13% in 1990. The planned program for 1990 also reflects the explicit policy of redirecting expenditures towards the provision of rural services and infrastructure, with the intention of facilitating the production of the 30/ This issue is handled further later in this chapter. 31/ The PDP is expected to be a thr.. year program, introduced in the first half of 1990, and covering in aggregate around se• of the rural population in 40 district• (about ae• of th• nation'• districts). It would, moreover, cover around as• of those in emergency situations in the rural areas, and about 661 of the rural population judged to have the potential for commercialization. The principle criteria for selection of th• districts are (i) the accessibility; (ii) the assurance of security; and (iii) the economic potential of the district. 32/ There is a likelihood that some of the perceived changes in composition are the result o7 changes in coverage. Thi• may be especially true for the social sector expenditures. To th• extent that railway expenditure is financed through SADCC, the data here understate th• transport sector share in national investment. On the other hand, sine• this source of finance is probably not fungible, it is lesser relevance in considering compositional policy. - 202 - family sectors and the activities of rural traders. Consequently, almost 28% of the 1990 program is designated for rural areas, and, although earlier data are not available for comparative purposes, this is qualitatively a major shift in emphasis. Table 2. toeeos1t1on of Budaetary Inv..taent 9 1975-98. Percentage. Average 1976-86 1987 1988/89[2] 1998 .- Agriculture 23.8 17.1 18.7 16.2 Industry, Energy and Minerals 19.8 28.8 16.1 6.6 Construction and Water 82.8 28.6 34.6 16.2 Transport and Co111111unicationa 6.2 16.4 16.8 24.2 Eduction 2.2 1.4 8.4 8.2 Health 1.3 8.6 8.8 6.4 Coverninent, Provine•• and Other [l] 16.6 16.6 11.7 26.7 TOTAL 188.8 188.I 188.8 188.8 [l] Includes Covern111ent, Provincial allocations, new state enterprises, and budgetary reserve allocations. (2] 21 month program. 51. In general, this redirection of investment towa;ds the provision of rural infrastructure and agricultural development, with a greatly diminished emphasis on the construction of major dam projects and large- scale irrigation schemes, and on the state farm sector, is appropriate, and should be maintained as the major thrust of the investment program. The preferred composition will of course remain a direct function of the security situation, with significant improvements in security providing the opportunity for even larger redirection of expenditures. While some increases in aggregate investment might be justified in these circumstances, issues of implementation capacity and debt service capability would require very close scrutiny. •. 52. One major area requiring further analysis is the role of the Government in the rehabilitation and investment programs of the enterprise sector, and the appropriateness of the appropriations earmarked for the sector. With a relatively low level of Government support, enterprises are increasingly undertaking the required capital improvements from their own resources and from credit utilization. It is not clear, however, whether this trend is compatible with their underlying financial position. The macroeconomic analysis indicated that, over the medium term, the non- Government sector would be dissaving heavily, and this would be concentrated in the enterprise sector. While this does not necessarily imply the existence of trading losses, it is indicative of serious weakness in the enterprises• financial structure. Consequently, with the stricter adherence to commercial principles in the allocation of credit, the implementation of the desired investment program may prove problematic. This issue requires further analysis. - 203 - 53. One additional key constraint on investment policy should continue to be the necessity of securing external capital support only on the most concessional terms. In section ... below, the importance of this issue is further discussed. The striking conclusion is that not only are concessional terms necessary in contracting new assistance, but that there should additionally be a strict limitation on the use of even interest-free credit. Such is the magnitude of the existing debt burden, and the effect of the rescheduling agreements, that by the year 2000, the repayment burden will be massive. If additional loans are contracted at a rate of around US$400 million per annum, as is anticipated currently, the stock of debt will increase by around US$6 billion by 2000, adding to the 1990 stock of around US$2.4 billion (after allowance for the Toronto agreement). This would imply a post-debt relief debt service ratio that rises to 85%. Investment finance must therefore be largely in the form of grants, with interest-free loans, including IDA, being restricted. 54. The Development of the Trade System. Reform of the trade system is a priority. In the first three years of the ERP, little progress was made, as noted in chapter II, but, given the key role of imported products in domestic production and consumption, improved domestic resource allocation is closely related to the efficiency with which foreign exchange is allocated. The deficiencies of the existing system were considered earlier, and it was concluded that greater flexibility in the trading system depended on both the Government and donor community: the former needing to formulate and implement the detailed policy steps, and the latter needing to provide the external assistance in an untied form suitable for application through non-administered mechanisms. 55. The medium term objectives of reform in the exchange system are basically twofold: (i) progressively decreasing the role of administered allocation mechanisms; (ii) simplifying the structure through the integration of the multiplicity of existing systems. 56. In fulfilling these goals, the focus should be on the expansion of the newly-established System for the Non-Administrative Allocation of ~ Foreign Exchange (SNAAD). In chapter II, it was noted that this system has the essential characteristics of a non-administered system: allocation is determined by the prevailing effective price of exchange, and access to exchange for the selected products is automatic and unlimited. 33/ The preservation of these characteristics would be essential for this focus to be justified. An important additional principle that should underlie reform would be the channelling of all resources for the SNAAD-eligible products through the SNAAD itself, with no competitive sources being made available for these products. 33/ The qualification to this in chapter II was that, in the first year, uniform ceilings per enterprise were operating, and that basic enterprise eligibility criteria existed (covering legal compliance with the tax and accounting codes). - 204 - 57. For a medium terin program of reform, based on the SNAAD, to be successful, several pre-requisites must be fulfilled: (i) foremost, an appropriate real effective exchange rate must be consistently maintained to prevent the emergence of serious destabilization in the SNAAD. In particular, it should be noted that the first year of operation provides an important indication of the appropriateness of the exchange rate, and, thereafter, the reduced uncertainty in this respect should permit a more rapid expansion of the system. (ii) the tariff rates applicable to the selected products must be determined with due attention to the economic implications (including the revenue, protective and inflationary implications, and the effect of tax exemptions). Notably, all imports of the same product should be treated uniformly, with no sources being subject to a lesser tax rate, or exempted. (iii) there should be a general commitment from the donor community to the untying of aid. In particular, the inclusion of any specific product within the SNAAD will require untying agreements covering a substantial proportion of the exchange previously earmarked for these commodities. Otherwise, not only would there be serious exchange deficiencies, but the tied donor resources earmarked for these goods would be left underutilized. 34/ In general, the rate of untying donor aid is a fundamental determinant of the rate of expansion of the SNAAD. It should be noted, however, that agreement with all the suppliers of exchange for any particular product is not essential, since the conclusion of the product within the SNAAD is itself a major incentive for donors to participate. (iv) a clearer definition of the priority products under the ESRP is required, with particular attention being given to the selection criteria. (v) the selected products for inclusion under the SNAAD should not •. be subject to domestic price controls. (vi) the reform should also accommodate the constraints imposed by the equity needs of the economy.: notably, the requirement to retain provincial distribution guidelines for some products (for instance, vehicles: refer chapter V). 58. The progression of trade reform will be determined by the factors noted above, but a broad outline for the medium term should incorporate several basic elements. The second phase will embody three new 34/ The tied finance for a given product immediately becoMe• relatively unattractive once tlie product i• incorporated into the •y•tem, sine•, in general, untted finance allow• th• procurement of the saMe product at a lower price, and since the untied finance 111ay involve less administrative cost to the enterprise. These funds would therefor• tend to be left unutilized. Note also th• pre-requisite noted above with respect to the taxation of import•, - 205 - developments with regard to the SNAAD: 35/ firstly, the specification of the selected products in terms of the Brussels Trade Nomenclature (BTN), which will increase the transparency of the system; secondly, the expansion of the system; and, thirdly, the dismantling of the first year ceilings per applicant. The products selected for inclusion should be subject to the considerations noted above, but there should be a basic presumption in favor of productive inputs and spare parts. 36/ Further, there is a case for the inclusion of the most basic consumer goods, since this would eradicate many of the competitiveness problems noted in section ... below. This would, however, be possible only after a careful analysis of the appropriate degree of protective tariff if domestic enterprise recovery were not to be stifled prematurely. 59. In addition, the integration of the array of systems should be accelerated by the adherence to a basic principle throughout the reform: namely, to not making foreign exchange available for those products selected for inclusion in the SNAAD from any of the following sources: the Export Retention Scheme (ERS), the Market Fund (MF), the Small and Medium Enterprise Fund (SMEF), and, to the maximum extent permitted by donor contracts, finance provided by bilateral and multilateral donors. There is, moreover, a case for the gradual dismantlement of those funds that are not subject to donor agreements, such as the MF and SMEF. Indeed, the principle just outlined will naturally lead to a progressive diminution of the role of these various funds, and, therefore, the value of continuing to administer the funds should be kept under review, with a view to their dismantlement. 60. The long term objective should be the direction of all non- project assistance and all domestically generated exchange through the system. Control over importation in order to meet priority social and economic objectives should be exercised through the indirect mechanism of the tariff structure, and through the definition of a negative list. Reform over the medium term should facilitate the attainment of this goal, as and when the constraints noted above permit. Specifically, there should be a progressive broadening of the coverage under the SNAAD on a regular basis. In addition, these changes should always embrace the basic principle of eliminating sources of finance that compete with the SNAAD in order to further the integration process. 61. The Provision of Rural Support Services. Throughout this report, and particularly in part 2, various elements of a rural support services program have been identified and discussed in detail. Consequently, in the following paragraphs the objective is to underline their centrality to the economic recovery. Two broad elements have been defined: firstly, the provision and maintenance of physical infrastructure in the transport, marketing, health, and education sectors; and, secondly, the provision of current services in health, education, finance and 36/ These are detailed in the •Letter of Development Policy• (March 17, 1989) attached to the IDA President's Report for the Third Rehabilitation Credit. 36/ The case for the inclusion of commercial vehicles was discussed in chapter V. - 206 - agricultural extension. 37/ Two general points bear repetition: many of these elements are the focus of the proposed Priority Districts Program, and should therefore form an integral part of the public expenditure planning process; and, while the needs in each of these areas may be defined, the progress towards establishing a coherent program of rural support will inevitably be subject to the evolution of security. 62. Generalizing about the relative priority of these competing claims on resources is highly problematic, but some broad conclusions may be drawn. Firstly, it appears indisputable from the Mozambican experience .. and from that of other African countries that without an adequate system of rural transportation and communications, the provision of rural services and the integration of rural producers within the market economy are rendered extremely difficult. The inadequate ability to market the rural surplus and provide incentive products to rural producers may be viewed as one of the most serious disincentives to production. In Mozambique's case, it is, more fundamentally, likely to be a deterrent to the resettlement of the population when security conditions permit. On the other hand, the conclusion of this report that extensions to the banking infrastructure are currently infeasible and, probably, unnecessary. suggests that the focus in this sector should not be on the physical infrastructure. Instead, the emphasis should be placed on restoring the commercial operating capacity of the structure as it. presently exists, and on identifying credit terms and conditions with existing wholesalers and retailers which facilitate the extension of informal credit to the level of the family sector producer and to the smaller traders. Furthermore, while agricultural extension is critical to improved productivity over the medium term, an immediate effort in this area to the detriment of the provision of physical infrastructure would seem misplaced. 63. These observations may serve as an initial guide in a situation of scarce financial and manpower resources, but are no substitute for detailed district-level analysis. 64. The Development of Industrial Policy. It was noted earlier that industrial development, although of a secondary importance, is still instrumental in accelerating the recovery process, and should therefore •. receive a high priority in medium term policy making. The detailed development of industrial policy is beyond the scope of this report, 38/ and, therefore, only the policy elements that are central to this report are considered. There are two conflicting, but equally essential, factors underlying the formulation of industrial policy in the short to medium term. Ci) the desirability of supporting only economically efficient enterprises. This objective suggests that policy should focus 37/ Issues relating to health, water supply and agricultural extension have not been covered Tii this report in any detail. 38/ Policy is currently under review in the Ministry of Industry and Energy, and forms a iiiijor component of the •Business Environment Study•, (World Bank, June 28, 1989): s .. Chapter II. - 207 - on establishing an appropriate competitive and commercial environment, based on market-based mechanisms of resource allocation, with enterprise autonomy and self-accountability being necessary pre-requisites. (ii) the necessity of making an ex ante selection of enterprises that should receive preferential treatment. The urgent need to rehabilitate the capital stock of the enterprise sector with only scarce resource·s, implies that ex ante judgement must be conducted of comparative adv~ntage and efficiency, even in the absence of adequate data. An additional factor reinforcing the need for selectivity is provided by the important role of foreign exchange as a factor input, and by the existence of substantial tied aid, which again requires an administrative selection process. A further aspect of selectivity that requires emphasis is the design of the tariff rate structure, with the inherent protection and discrimination that such a structure entails. 65. The most appropriate industrial policy in these circumstances has not been considered so far in a systematic and coherent manner. Nonetheless, many of the elements of an appropriate policy for the fulfillment of the first objective - that is, the establishment of a competitive and commercial environment - have been implemented in part, and have thus been analyzed elsewhere in this report. Moreover, their evolution over the medium term has already been the subject of earlier sections of this chapter. These sununarily include: (i) policy directed at fundamental financial stability and an integrated economy, including exchange rate policy, and monetary and fiscal policy. (ii) resource allocation policy: including reform of the foreign exchange allocation system; of the pricing structure; of the credit and subsidy systems; and of the controls over the distribution network. (iii) the instilling of enhanced commercial practices through adjustments noted in (i) and (ii), and through the provision of greater managerial autonomy in both the private and public enterprise sectors. 66. The second factor in paragraph 64 may be seen as a short to medium term necessity while the most critical rehabilitation phase is underway. However, little systematic work has been undertaken to facilitate the selection proce~s. In any event, the existing data sources make efficiency analysis (especially, systematic domestic resource cost analysis) highly problematic, and to date these more sophisticated analyses - 208 - have not been attempted.~/ Moreover, no subsectoral analysis has been undertaken either, leading to the conclusion that the basis for both enterprise-specific and sub-sectoral industrial policy making is very weak. Despite these deficiencies, policy under the ERP appropriately recognized the urgency of enterprise restructuring, and enterprise and sectoral selections were undertaken. 40/ The basic selection criterion has been the historic importance of the enterprise within the economy, in terms of the enterprise's contribution to aggregate production, exports, employment and import substitution. 'While this is a pragmatic second best set of criteria, which allows policy to be operationalized in the short term, the application of very substantial rehabilitation finance over the medium term must increasingly be guided by both more detailed subsectoral study, and by the adoption of more market-based allocation mechanisms. 67. In the remainder of this section, one further issue is highlighted that is of particular relevance to the theme of this report; namely, the role of imports in domestic industrial development. The positive benefits of substantial aid and import flows have been discussed previously. There are, however, two related aspects which may deter domestic development. 68. Firstly, there is a concern that industry is seriously demand constrained. Certainly, aggregate demand has fallen substantially since 1980-82, as evidenced by the 35-40% of the population that is seriously affected by the rural insecurity problem (chapter III), and by the deterioration in purchasing power of the urban population. On the other hand, the proportion of domestic demand satisfied currently by imports is very significant, with imports standing at around 65-70% of GDP in 1989. Imports include a wide range of products that Mozambique does not currently produce, and is unlikely in the medium term to develop any capacity to produce. On the other hand, there are some products for which there is a considerable domestic demand that is currently supplied through imports (including the Emergency Program), and which could potentially be met by efficient domestic production. Most importantly, these include the basic consumer products, that have both a growing domestic demand and an existing production capacity (for instance, agricultural tools, blankets, soap and garments). From a theoretical perspective, there is no necessity for Mozambique to satisfy its own consumer good needs, if importing is the most efficient solution. However, given a prima facie comparative advantage in the most basic consumer goods and the seriousness of the foreign exchange constraint, this potential should be exploited. In this case, it is more accurate to define the problem of domestic producers as one of supply constraint and uncompetitiveness, rather than lack of demand. On the other !!,/ In!tia! work.reported in the Busines• Environ11Mtnt Study, suggest• that broad general1zat1ons with re•pect to Industrial efficiency are liable to con•lderable inaccuracy, and that detailed enterprise level work is needed to be more precise. In general, despite the obstacles in the recent past, the estimated efficiency levels of the sample investigated did suggest that rehabilitation of many industrial enterprises would be .conomically ju•tified. 40/ Under the ERP, in the context of the enterprise restructuring, many enterprises have been appraised for rehabilitation, under the direction of the Enterprise Technical Unit within the Ministry of Finance, and with the direct support of the donor community. - 209 - hand, there are other products that are currently supplied only or predominantly through domestic production (such as radios, cigarettes, bicycles and certain processed foods), and for which a demand constraint could be identified. 41/ 69. It is the issues of supply constraint and uncompetitiveness upon which industrial policy should focus. Again, many of these are addressed elsewhere in this report, but, with regard to import competition, there are several additional aspects of competitiveness that need to be urgently addressed. These are all factors that have led to the hampering of industrial growth through inadvertent discrimination in favor of imported products: (i) the discrimination inherent in the taxation system against domestic production vis-a-vis imported products; (ii) the incidence of underpricing of competing consumer goods supplied through the donor programmes; and the overpricing of industrial inputs and capital equipment supplied through the tied donor programmes; (iii) the competition from goods imported under the Emergency Program and distributed free or at subsidized prices, which are then diverted into the commercial markets, and sold at a discount on their true market valuation; (iv) the competition from illegal imports, principally from South Africa, that are marketed at a lower tax-evading price; 70. The underlying objectives of paragraph 64, therefore, provide areas that industrial policy should address urgently. Foremost, is the enterprise selection criteria, which, while only having a transitory value, are nonetheless critical in ensuring that the rehabilitation and favorable treatment in administrative resource allocation (especially foreign exchange allocation) are appropriately directed. Enterprise and subsectoral analysis is critical in this regard. It is also a pre- requisite for the design of market-oriented policy, which should form the basis of medium term selection. 71. The Alleviation and Reduction of Poverty. The alleviation and reduction of poverty is the central objective of the ESRP, and the structural economic adjustment that is being effected under the program is clearly the most potent instrument over the medium to long term for addressing extreme poverty. As has been noted earlier, however, the recovery of production and the increase in living standards to a level sufficient to eliminate poverty will be a long process. Meanwhile, the Government is concerned to promote short term policy explicitly directed at 41/ In the case of the agro-industrial sector, it can be assumed that demand is not currently a constraint. - 210 - mitigating the most serious manifestations of poverty. This section briefly provides an overview and the framework for these concerns. !!1:,./ 72. The comprehensive nature of poverty in Mozambique is striking. Estimates of the scope of poverty are inevitably tentative, but the best available evaluation is that in the Green Report which indicates that around 60% of the population were living in "absolute poverty" in 1989. A household is defined to be living in absolute poverty when its expenditures on food amount to more than 60% of its total income, inclusive of both wage earnings and other self-generated income. From a macroeconomic perspective, the same picture emerges, with estimated per capita income in 1989 of only between US$ 80-100. 43/ Although this estimate may tend to understate income, due to the problems of accounting for both income transfers from abroad and for subsistence income, it nonetheless places Mozambique as one of the poorest countries in the world. 73. There are a multiplicity of causes for the extreme poverty in Mozambique, including: firstly, the historical development of the economy, and the structural problems that it has created; secondly, the cumulative impact of the insecurity, particularly since the early 1980s; and, most recently, the transitory adverse impact of the economic adjustment under the ERP, especially in the urban areas. The roots of the structural problem lie in the economic policy adopted in the ~olonial era and with its associated implications for economic and social development. The economic policy choices of the pre-ERP period additionally hampered the rate of development. Both these issues have been discussed elsewhere: as has the role of insecurity. Equally, the urban costs of the adjustment process since 1987 were analyzed in chapter II, particularly with respect to the impact of: (i) fiscal reform on employment, salaries, and consumer price subsidies, (ii) exchange rate and pricing policy on the internal terms of trade, and (iii) macroeconomic policy, in general, on the levels of demand. 74. In addressing specific poverty concerns, the cause of poverty in these instances is of secondary importance compared to the nature of the existing problem. The prevailing poverty may be characterized from several different perspectives, which each provide a basis for the formulation of poverty alleviation programs. In this regard, the Government is seeking to adhere to one overriding principle, namely the integration of these programs with the broad ESRP. Indeed, as with the emergency programs the intention is to concentrate all poverty programs in the sectoral ministries, within which a comprehensive and prioritized expenditure program may be designed. Poverty alleviation would then be pursued either ~ A 1110r• d•talled franHtwork pa~r is curr•ntly und•r pr•paration in collaboration with th• Gov•rnnHtnt and th• donor cOllllllunity. 43/ With th• major •xchang• rat• adjustments that hav• taken place, estimates of ~r capita Tiicome ar• highly sensitive to the selected rate. At the actual av•rag• •xchang• rat• of 1989, the per capita income is estimated at USS82. Thia rate still represented an overvaluation of th• curr•ncy, and, at an indicativ• austainabl• rat• for 1989, ~r capita income is •stimated at about US166. Th• tr•nd in p•r capita incolHI using th• thr.. y•ar moving av•rage methodology shows a drastic declin• since th• early 1980s, with th• •stimat• .falling from USS203 in 1982 to USS118 in 1989: this trend is how•ver subj•ct to th• pr•vious qualification regarding the exchange rate. - 211 - through specific projects aimed at achieving an immediate impact on poverty, or through more general sectoral projects. In the latter case, poverty alleviation would be addressed in the detailed definition of the project (for instance, road rehabilitation would seek to incorporate labour-intensive methods where economically justified), or would lead directly to improved living standards. 75. While the economic adjustment program may be identified as the key factor in raising living standards over time, alleviating the most serious instances of poverty immediately in a systematic and targeted manner is necessary both for humanitarian reasons, and because the political sustainability of the economic restructuring process rests on these steps being taken. Specifically, further reductions in living standards for the poorest households in Mozambique is no longer a realistic option from both perspectives. The definition of appropriate measures to alleviate poverty initially requires a differentiation between urban and rural poverty. The former has received least attention over the recent past: the latter has been directly addressed for the immediate term through the Emergency Program, and through the fundamental emphasis of the ERP on agricultural and rural development. The PDP is the most recent program to pursue this focus. Consequently, the remaining discussion of this section centers on the urban poor. 76. Three main dimensions of poverty may be identified, which may serve as the basis for short term poverty alleviation programs: (i) the prevalence of food insecurity, and the associated problem of malnutrition; 44/ (ii) the inadequate provision of health care and education services; (iii) the absence of sufficient employment opportunities for the poorest. The following paragraphs very briefly review the key elements in these programs, and their link to the broader ESRP. 77. The immediate causal factor with respect to food insecurity and malnutrition is the inadequacy or absence of a household income. The Government is therefore intending to develop further the safety net for the urban poor, including: (i) the provision of whole yellow maize through the existing ration system. Since yellow maize is considered an inferior good in Mozambique, the provision of a fiscal subsidy to the consumer price should facilitate the self-targeting of the subsidy, and thereby meet both the poverty and fiscal objectives. 44/ The issues of food security are comprehensively analyzed in •Mozambique: Food Security study•,· World Bank, October 12, 1989. - 212 - (ii) the provision of a food security income supplement. This would be made available to households of more than six members, with only one salary that is less than 1.5 times the minimum wage, and with no other significant sources of income. (iii) the provision of a food security income transfer. This would be available only to non-salaried households, with a female head of the household, or with an aged or disabled head, or comprised of only one or two aged or disabled persons. 78. The eligibility for the latter two schemes provides a further indicator of the degree of urban poverty. It is estimated that of the aggregate urban population of 2.6 million in 1989 (Table 5, chapter VIII), around 60,000 households (about 480,000 persons) would qualify for the income supplement, and around 65,000 households (320,000 persons) would qualify for the pension. 45/ These schemes are currently programmed for a three year period, but the primary determinant of their dismantlement will be the progress made in raising urban incomes and employment. 79. Reconnnendations for improving the efficiency with which food aid is managed are outlined in detail in the Food Security Study (q.v.). In sununary, the key recommendations focus on improving the donor coordina~ion of food aid and its shipment; the provision of more resources to enhancing internal food distribution networks; and improving the management and monitoring of food aid flows, including the associated counterpart funds. 80. The enhancement of health care services rests fundamentally on the provision of more resources to the sector both for capital and, especially, recurrent expenditures. However, there is also scope for increasing the efficiency with which resources are utilized. These expenditures should be reviewed and prioritized in the context of the Government's overall public expenditure framework, 46/ but in principle should focus on: (i) improvements in access to basic public services such as curative and preventative health service, water and sanitation services; (ii) strengthening the programs to control specific diseases such as malaria, measles, diarrhoea and parasitic diseases, which are a primary contributor to malnutrition and infant mortality. 81. The Government emphasis on short term employment generating policies is appropriately placed, but it is arguable whether this should entail specific additional projects or programs. Instead, the more concerted implementation of existing projects, and a closer scrutiny of the opportunities within these projects for creating employment is probably a better use of the existing resources. Nonetheless, the Government 46/ These estimates and the detail of the two schemes are provided in a not by Professor R. <freen, •Food Security Salary Supplement and Pension (proposals)•, Noveaber 8, 1989. 46/ Refer •Population, Health and Nutrition Report•, World Bank (January 2, 1999). - 213 - envisages specific additional measures to assist the poorest households including: (i) assistance to small-scale, labour-intensive private businesses; (ii) training schemes for the unemployed; (iii) public employment schemes directed at the rehabilitation and development of the basic economic and social infrastructure. 82. This suuunary provides the framework within which the Government is pursuing the short-term alleviation of the most serious poverty. The detail may be drawn from the specific sectoral programs. D. The Policy Alternatives 83. In this section, three alternative scenarios are analyzed. 47/ The objective of this comparative exercise is to provide further insight in four areas: the degree of aid dependence for growth, the linkage between imports and GDP growth, the evolution of the macroeconomic balances, and the impact of improving national security. In all three scenarios, it is assumed that progress in the implementation of the Economic and Social Rehabilitation Program is in accord with that envisaged in the Policy Framework Paper, 1989-91, and the likely evolution of the policy reform in the years beyond that as discussed earlier in this chapter. The three scenarios may be characterized as follows: (i) the first may be regarded as the central scenario. Most importantly, it assumes an unchanged security situation: that is, one in which the response to the reform program is significant, but only partial and seriously constrained by the rural disturbance and destruction. The scenario additionally reflects the level of external capital assistance that is estimated to be necessary for the support of the policy reform. 48/ Consequently, to the extent that these aid levels are greater than currently envisaged, the scenario includes a financing need. In summary, GDP growth, the import elasticities, and anticipated external aid are exogenous to the scenario; and the financing gap is endogenous. (ii) the second scenario is based on the same assumptions as the first scenario, with one major exception: the insecurity is 47/ The first scenario is founded on the basic premises that have underlay the projections of the first thr.. Policy Framework Papers (1987-89, 1988-90 and 1989-91). The-second scenario is more closely related to that included in the PFP, 1990-92. 48/ In this section, the external capital flow refers to the aggregate of medium and long term loans and grants. The provision of other external-capital support through debt relief is not considered variable; the broad assumption is that the rescheduling terms negotiated over the 1987-89 period, as a result of the 1987 Paris Club, are attained in all future annual rescheduling. To the extent that the Toronto Agreement provide additional benefit, this is additionally incorporated. - - 214 - assumed to improve markedly, with a consequent impact on the anticipated GDP growth rate. The intention is therefore to identify both the likely real and financial implications of this contingency. In summary, GDP growth, the import elasticities, and anticipated external aid are exogenous to the scenario; and the financing gap is endogenous. (iii) the third scenario focusses on the implications of the donor community substantially reducing its levels of real external aid. It additionally assumes unchanged security in common with .• scenario 1. Moreover, to preserve the internal consistency of the scenario, the feasible financing gap is more tightly constrained on the grounds that if the anticipated aid flows are reduced, the expected finance forthcoming to meet a finance gap will equally be severely restricted. In summary, both the anticipated external aid and the financing gap are exogenous, as is the responsiveness of GDP to reduced import levels; the GDP growth rate is therefore endogenous. The impact on consumption levels is a particular concern. 84. Scenario 1 : The Central Scenario. This scenario is designed to reflect the most probable evolution of donor support under the status quo assumption with respect to security; that is, the economic response is severely affected. 85. The primary assumption of this scenario is that GDP growth is at the maximum permitted by the on-going insecurity, and that the necessary supporting import flows are forthcoming. Thus, GDP growth of 3,5% is assumed throughout the projection period, which is comparable with the experience of the 1987-89 period. These figures presume that agricultural and industrial growth continues at around 3% and 4,5% respectively. While this is considerably below the potential growth rate, it is judged to be feasible given the security constraint. 86. Import requirements are derived by making additional assumptions with respect to the appropriate import elasticities. Given Mozambique's economic decline of the early 1980s, and the current program of rehabilitation, elasticities can play only a partial role in the estimation of imports. Much of the investment and rehabilitation expenditure is not directly related to changes in GDP, but more a function of the level and previous change in the level and quality of the capital stock. Similarly, while the importation of consumer goods has been instrumental in eliciting the productive response, the initial program of importation was a policy decision to provide the incentive for the generation of production and income. Moreover, to the extent that importation was demand related in the first instance, it was demand financed by the accumulation over many years of liquidity, and not a direct function of the annual income flow. The import of productive raw materials can be more closely related o GDP growth. Nonetheless, appropriate import elasticities can be used as a proxy for these various considerations. Over the 1987-89 period, import elasticities in excess of unity have been recorded, reflecting the import strategy and the considerations above. In this central scenario, elasticities are therefore constrained to follow a slowly declining trend, - 215 - starting in 1990 at a little over unity and stabilizing at 0.9 after 1994. 87. External capital inflows are assumed to be maintained in real terms throughout the projection period, with the residual need being identified in the financing gap. Scenar-i o 1. Table 3. KEY MACROECONOMIC INDICATORS. ·- 1989 1990 1991 1992 1993 1994 1995-97 Hean 1998-20 Hean RHI Economy: [I growt.h] ------------- Agg,-egate COP fc 3.2 3.5 3.5 3.5 3.5 3.5 3.5 3.5 Agriculture 3.0 3.1 3.1 3.1 3.1 3.1 3.1 3.1 Induet.ry 4.0 4.5 4.5 4.5 4.5 4.5 4.5 4.5 Qt.her 3.0 3.5 3.5 3.5 3.5 3.5 3.5 3.5 Inveat ... nt 2.5 13.6 2.8 2.8 2.8 3.1 2.6 0.8 Conauapti on pc 1.1 0.6 0.6 0.5 0.4 0.2 0.4 0.9 Import Dependence: ------------------ I111port ¥alue Import volu . . !•port.a/ CDP !t'•-l l g.J 766.0 3.2 60.1 836.1 10.4 63.2 888.9 3.1 64.9 951.0 3.0 66.6 1015.8 2.8 68.1 1085.3 2.6 69.5 1230.6 2.6 68,4 1484.4 2.6 66.6 Non-food Coode 1.5 3,0 1.1 1.0 1.0 0.9 0.9 0.9 elaaticity Debt. eee¥. (USI•) 460.5 533.8 483.9 454.9 420.3 407.1 347.6 526.6 Debt aervice/XCS 181.6 199.7 160.3 147.4 126.3 113.3 84.3 100.5 Debt. aervice/CDP 35.3 40.4 35.3 31.8 28.2 26.1 19.5 23.5 r1 Extern a I Account: ----------------- E•port.a/b,port.a 12.0 12.8 13.2 13.9 14.5 15.1 16.5 18.6 Trade balance/CDP I -52.9 -55.1 -56.3 -57.3 -58.3 -59.1 -57.1 -54.3 Current. acc./CDP Overa I I account Finance gap ft: I ,n USS• -50.0 -404.4 0.0 -64.0 -420.9 -5.6, -63.7 -373.6 -20.9 -64.2 -344.6 -19.6 -63.6 -309.6 -68.8 -63.3 -296.2 -73.9 -60.2 -230.2 -104.2 -56.4 -399.9 -157.1 Crante and HLT Crant.e and HLT r:~i 655.0 9.8 767.0 17.1 803.7 4.8 844.5 5.1 887.2 5.1 932.3 5.1 1030.3 5.1 1195.6 5.1 Macro balancea: --------------- Inveat.ment./CDP [Ii 33.5 37.2 36.9 36.5 36.0 35.6 33.4 28.8 Nat.. aavinga/CDP [ i -25.6 -27.7 -26.8 -27.7 -27.6 -27.7 -26.8 -27.6 Ext.. eavinge/CDP [] 59.0 64.9 63.7 64.2 63.6 63.3 60.2 56.4 o.o Cov. •••inga/a:>P Non-Cov. •••/CDP f:l -2.7 -22.9 -3.9 -23.8 -1.9 -24.8 -4.4 -23.3 -27.6 1.0 -28.7 2.0 -28.8 2.0 -20.6 88. Several conclusions may be drawn from this scenario. Firstly, with the assumed GDP growth rate, per capita consumption continues to have a positive growth rate, but it is less than 1% p.a. and thereby implies a very slow recovery of the 1980 standard of living. In addition, exports recover slowly, and only account for an average 19% of import values over the 1995-2000 period. Secondly, even to attain this relatively weak growth, substantial external capital inflows are required, and the financing gap rises to average US$130 million over the 1995-2000 period. In other words, increasing real levels of external aid would be necessary to sustain this scenario. Thirdly, as a consequence of continuing need for external savings, little improvement is seen in the degree of macroeconomic imbalance: the decline in investment to a more sustainable level reduces the need for external support, but the level of national dissaving is unchanged. 89. Scenario 2: The Impact of Improved Security. Although the restoration of rural security is unlikely to be sudden once a political settlement is reached, it would be legitimate to regard that t.ime - 216 - (indicatively taken as 1990 in the scenario) as the point for the re- launching a second Economic Rehabilitation Program. Despite the progress that has, and will have been, achieved by this time, a reconsideration of both policy and rehabilitation will be urgent. It was observed in chapter Ill that, even were the insecurity problem to improve dramatically in 1990, the need for the funding previously made available under the Emergency would remain for many years. This conclusion may in fact be broadened, since there is a case for assuming an even greater need for non-emergency external aid in this event. The major weakness of the rehabilitation and investment program over the 1987-89 period has been the gross inadequacy of rural projects (refer chapters V to VII). With the return of rural security, the opportunities for the development of the economic and social infrastructure will expand dramatically, and, for the return of rural self- subsistence and the agricultural surplus. the provision of these needs will be urgent. Thus, while higher growth rates may be anticipated, especially in the early years, sustainable high growth rates will be contingent on the provision of the marketing and transportation infrastructures in particular. There are already examples in many countries of rural stock- piling and production disincentives resulting from the inability to transport the surplus, and Mozambique would rapidly find itself in this circumstance in the absence of a rapid response to the changed environment. 90. The specific danger is that the donor conununity would react to the diminution of regional insecurity by channelling its resources elsewhere, or by no~ supporting the higher potential growth. This would be particularly serious if donors view the "emergency" as having ended, and therefore terminate their emergency aid programs, and if the financial aid that is politically rather than developmentally or economically motivated were to be reduced. 91. In other respects, this scenario is structurally similar to scenario 1, with import requirements being determined from exogenously determined GDP growth rates and import elasticities. It is assumed that the higher growth of around 6% is proportionately divided between production sectors, and that this gives ~ise to higher imports, given the same import elasticities as scenario 1. For the purposes of this scenario, external capital inflows are maintained at the levels of scenario 1. Consequently, the scenario defines imports and the financial gap as endogenous. 92. Several conclusions may again be drawn from this scenario. Firstly, with the assumed GDP growth rate, per capita consumption shows a marked improvement and grows by around 2% p.a •• In addition, exports recover more rapidly, and account for an average of almost 30% of import values over the 1995-2000 period. Secondly, with substantial improvements in the trade account occurring, the residual financing requirement rises only modestly to average US$50 million over the 1995-2000 period. In other words, a stable level of real external aid·would be adequate to sustain this scenario. Thirdly, as a consequence of the declining need for external savings, substantial improvement is seen in the degree of macroeconomic imbalance: the decline in investment to a more sustainable level is reinforced by a substantial fall in the level of national • .. - 217 - dissavings. Consequently, by 2000, significant progress is made towards macroeconomic balance. Scenario 2. Table 4. KEY MACROECONOMIC INDICATORS. 1989 1990 1991 1992 1993 1994 Hean 1995-97 Hean 1998-20 Real Economy: [I growt.h] ------------- Aggregate CDP fc 3.2 5.6 6.0 6.0 6.0 6.0 5.5 5.5 Agri cu I ture 3.0 4.7 5.3 5.3 5.3 5.3 5.0 5.0 Induatry 4.0 8.0 8.0 8.0 8.0 8.0 7.0 7.0 Other 3.0 6.0 6.0 6.0 6.0 6.0 5.5 5.4 Inveat111ent. 2.5 19.2 4.9 6.0 4.2 4.6 3.6 3.6 ConauiRpt ion pc 1.1 2.3 1.5 1.8 2.1 2.0 1.9 1.9 Import Dependence; ------------------ Import value liRport vo I u . . l•porte/ CDP ~···l ] gr] 766.0 3.2 60.1 875.0 15.4 64.8 2.7 930.5 3.3 65.1 1013.5 4.9 66 .• 1095.8 4.1 67.1 1186.7 4.0 67.8 0.9 1382.5 4.0 65.9 0.9 1744.3 ,.2 63.• 0.9 Non-food Cooda 1.5 1.1 1.1 1.0 elaaticity Debt aerv. (USI'") 450.5 533.8 483.9 454.9 420.3 407.1 3"7.6 528.2 Debt eervice/XCS 181.6 190.7 152.5 125.3 102.1 87.2 60.0 62.6 Debt. aerv i ce/a:JP 35.3 39.6 33;9 - 29.Sc .. 25.7 23.3 16.8 19.0 r1 External Account: ----------------- 12.0 13.7 15.5 17.4 19.1 20.8 2,.1 29.1 E•porte/Iaporte Trade balance/CDP I -52.9 -56.0 -55.0 -54.8 -54.3 -53.8 -50.0 -4,.9 Current acc./CDP I -59.0 -65.4 -61. 7 -60.5 -58.1 -56.1 -50.5 -43.7 0Yeral I account.~ m -40•.4 -•15.3 -3"8.6 -315.8 -272.3 -249. 7 -162.9 -293.4 Finance gap Im 0.0 0.0 4.1 9.2 -31.5 -27.4 -36.9 -50.7 Crante and HLT Crante and HLT fuss I gr .l 655.0 9.8 797.8 21.8 837.7 5.0 880.1 5.1 92,.8 5.1 971.7 5.1 1073.6 5.1 1245. 7 5.1 Macro balancea; --------------- [ll 33.5 38.3 37.9 37.7 36.8 36.1 33.0 28.9 Inveat..ent/CDP Nat. aavinga/CDP [ Eat. aavinga/CDP [ ] l -25.6 59.0 -27.2 85 .• -23.8 61.7 -22.8 60.5 -21.3 58.1 -20.0 56.1 -17.5 50.5 -14. 7 43.7 Cov. aavinga/CDP -2.7 -3.8 -1.9 -•.1 0.0 1.0 2.0 2.0 Non-Cov. aav/CDP f:l -22.9 -23.• -21.9 -18.7 -21.3 -21.0 -19.5 -16.7 93. Scenario 3 : The Decline of Real External Aid. The underlying rationale for pursuing this scenario is that the Government strategy is predicated on continuing growth in the level of external assistance. As was noted in chapter II, a sustainable policy reform program rests on the sustainability of external aid. The purpose of this scenario is therefore to isolate the impact of a decline in the level of real external support, which could result from the donor conununity attributing a lower priority to Mozambique vis-a-vis other competing ~laims, or from adverse trends in the internal budgets of the donors. 49/ 94. The primary assumption of this scenario is therefore that external capital flows grows at only 3% p.a., compared to the 5% of the first two scenarios: this may be seen as a fall of approximately 20% in real terms. Given the automatic link between donor aid and import levels, this aid reduction would feed through to imports automatically and without lag. An additional consideration is the finance gap, which is constrained to be no greater than under the first scenario, reflecting this same donor constraint. -49/ In this regard, there are already indications that the Eastern Block support may be reduced due to domestic budgetary considerations; and OECD support could become more uncertain as other claims increase (in the case of Southern Africa, for instance, with the changing circumstances in Angola and Namibia). - - 218 - 95. The key structural difference between this scenario and the previous one.is that GDP is now a function of imports, that is, an inversion of the previous relationship assumed in the first scenario. In this manner, the import constraint is simulated, with the underlying assumption that the lower importation of incentive goods and raw materials will immediately impact adversely on growth, and that reduced investment and rehabilitation will produced a lagged relative fall in grow.th. The precise specification of the linkage is, of course, purely indicative, but the qualitative affect is accurate, with both agricultural and industrial development being hampered. 50/ Scenario 3. Table 6. KEY MACROECONOMIC INDICATORS. 1989 1990 1991 1992 1993 1994 Mean 1995-97 Hean 1998-20 _______ ____ .,. ... Real Econo111;y: [I growth] Aggregata CDP fc 3.2 3.5 0.7· · 0,4 0.11 0.1 0.4 0.7 Agricult...re a.o 3.1 3~1 3.1 3.1 3.1 3.1 3.1 I,,duatry 4.0 4.5 4.5 4.5 4.5 4.5 4.5 4.5 Other 3.0 3.5 3.5 3.5 3.5 3.5 3.5 3.5 Inveat.a.nt 2.5 13.6 0.0 -0.3 -0.4 -0.2 -0.5 -1.8 Con•u•tion pc: 1.1 0.6 -2.1 -2.4 -2.5 -2.7 -2.3 -1.6 Idlport Oependence: ------------------ Import. value Import volume Imports/ COP Non-food Goode r:;···l l gr] 766.0 3.2 60.1 1.5 836.l 10.4 63.2 3.0 867.4 0.6 65.1 1.0 904.4 0.3 67.0 1.0 942.5 0.2 69.0 0.9 983.2 0.1 71.0 1064.2 0.2 70.9 0.8 1205.5 0.5 70.5 1.1 0.9 elaaticit.y Debt ae rv • (USS•) 450.5 533.8 484.7 453.9 418.1 400.4 336.8 507.4 Debt. aerv i ce/XCS 181.6 199.8 171.9 151.5 131. 7 119.0 90.6 lU.4 Debt aervica/CDP 35.3 40.4 36.4 33.6 30.6 28.9 22.6 29.5 Eiiternal Account: ----------------- E,iport.a/Import.a Trade ba I ance/CDP I1·1 12.0 -52.9 12.8 -5.6.1 13.1 -56.5 13.6 -57.9 14.0 -59.3 14.3 -60.9 15.l -60.2 16.3 -59.0 C:-,rrent ac<:./CDP I -59.0 -64.9 -64.1 -65.1 -65.0 -65.4 -63.4 -61.2 Overall account~m -404.4 -420.9 -370.3 -336.8 -298.5 -279.3 -209.2 -376.1 Fi nanc• gap • o.o -5.6 -17 .6 -11.8 -57.7 -57.0 -83.2 -133.4 Cront.a and HLT Cran ta and MLT W:~J 655.0 9.8 767.0 17.1 790.0 3.0 813.7 3.0 838.1 3.0 863.3 3.0 916.l 3.0 1001.0 3.0 Macro balanc-: --------------- Inve•t,..nt/CDP [~ Nat: aavinga/CDP [ E,it, aavin;a/CDP [] i 33.5 ·25.6 59.0 37.2 -27.7 64.9 36.9 -27.2 64.1 36.4 -28.6 65.1 36.0 -29.1 65.0 35.5 -29.9 6S.4 33.3 -30.1 63.4 28.7 -32.4 61.2 <lov. ••• i nga/CDP Non-COv. aav/CDP ~j ~ -2.7 -22.9 -3.9 -23.8 -2.0 -25.2 -4.6 -24.0 0.0 -29.1 1.0 -30.9 2.0 -32.1 2.0 -34.4 96. Several conclusions may again be drawn from this scenario. Firstly, with the assumed capital inflows, and with the financing gap restricted to be US$25 million smaller on average over the 1995-2000 period, GDP growth rate is weakly positive, averaging around 0.5% over the ten years. Consequently, per capita consumption shows a serious decline of over 2% per annum. This factor alone raises the important question of the viability of the program under such circumstances. The social cost of this scenario and the political ramifications would be far-reaching. Furthermore, exports recover very slowly, and account for an average of only 16%-of import values over the 1995-2000 period. Secondly, as a ~ While the change in aggregate GOP is obtained by inverting the iiaport functions, the distribution of GOP growth betw..n sectors is arbitrary. Furthermore, the growth of gross output is assullled to equal the growth of sectoral value added, and, in agriculture, this is split between th• export crops. - 219 - consequence of the continuing need for external savings, no progress towards macroeconomic balance is possible: the declining investment is offset by increasing levels of national dissavings. Summary 97. The restoration of macroeconomic balance has been a major concern of this report, and the role of growth is clearly discerned in the indicative scenarios presented here. The recovery of the productive base is once again seen to be fundamental to economic and financial stability. 98. In these scenarios, import elasticities of close to unity are assumed necessary for sustained development. A long term unit elasticity would imply that the import to GDP ratio would be held constant at the existing extraordinary high level, ceteris paribus. A longer term scenario would be needed to reflect an increasing level of efficient import substitution, which could be anticipated in several respects. Firstly, increased self-reliance in basic food and non-food consumption products could be expected; secondly, domestic production of fuels could be significantly increased both from internal hydro-electric generation and from the recovery and development of fossil fuels; and, thirdly, some domestically produced industrial inputs could displace existing imports. These scenarios are relatively conservative about the rate at which·import substitution occurs, and it could be argued that by the late 1990s a more rapid return to macroeconomic balance would be seen. A further factor may also reduce the current price ratio of imports to GDP: namely, the significant reduction in import prices. This is expected to be a major influence as the move away from tied donor finance to untied finance proceeds, and thereby permits imports to be sought from the least cost source at market determined prices, rather than from donors at artificially inflated prices. 99. It is unlikely that a step change in the degree of external dependence could be accomplished without serious costs to both production and consumption levels, and, as was observed in scenario 3, consumption declines are not a viable option for the credibility of the program to be sustained. - 220 - E. Conclusions 100. The future course of economic and social development is necessarily uncertain given the centrality of the external determinants of growth; namely, the evolution of the insecurity and the dependence on external capital. Nonetheless, the economic policy reform program, and the .' productive response associated with it, are combining to develop an economic structure over the medium term that differs substantively from that of the· pre-ERP period, and, indeed, from that of 1989. 101. The evolution of both the productive structure and of production will necessarily be closely related to the evolution of the policy environment, and particularly the macroeconomic policy environment. Already, major steps have been taken towards increasing the role of the private sector in most areas of economic activity, and in decreasing the scope of centralized controls. This trend will continue, although its pace will be subject to the constraints imposed by the emergency. Thus, by the end of the 1990s, the economic structure should be considerably more decentralized, and largely controlled through indirect policy instruments. In the interim, the Government will have a key role to play in maintaining production and distribution to compensate for the extreme weaknesses of the market structures, but with the restoration of stable growth, this conunitment can be reduced. On the other hand, the Government will continue to have a key role in the long term infrastructural development of the economy and in the provision of many social services. 102. It would be hoped that rural stability and peace will return in the first half of the 1990s, thereby allowing a considerable acceleration of the existing development program. Towards the end of the 1990s, a more robust and sustainable growth path should be established, especially in the agricultural sector, and thus allow a stronger and less volatile recovery of exports. The potential for growth is impressive. There is no reason prim.a facie to believe that the comparative advantage of Mozambique has changed significantly since Independence, particularly in view of the resource base remaining largely unchanged. Consequently, growth will be predominantly agriculture-based. The re-establishment of rural subsistence will be a major contributor as the resettlement process is completed. Moreover, the reintegration of rural producers within the conunercial structures, as the rural infrastructural development proceeds, should enhance the degree of conunercialization of the rural surpluses in both food and export crops. The key response will therefore come from the production of maize and rice, on the one hand, and from cashew, cotton and copra, on . ' the other hand. However, a major contribution to growth will also come from the development of the mineral sector, where substantial resources await exploitation, and which have the potential to rapidly augment the rate of development. Processing industry will reflect the response of the agricultural and mineral sectors, and, as was stressed in this chapter, the promotion of domestic light industry should play a key role. - 221 - 103. Ultimately, the objective of the economic development program is the significant improvement in living standards for all the population. •· The fundamental changes to the economic structure and the restoration of peace are essential for the sustainable growth of incomes, but, even with a buoyant recovery, it will be many years before acceptable living standards are attained. Consequently, poverty in Mozambique will remain a serious problem for many years, with external support playing an important role in sustaining the anticipated growth in per capita incomes. * * * * * * * * .4 -222- BiBLIOGRAPHY Duvieusart, Baudouin. UNESCO. "Analyse de la faisabilite financiere du Systeme National d'Education au Mozambique," 1986. FAO. "The Cashew Industry of Mozambique," 1989. Government of Mozambique. "Alternativas de finaciamento da Educacao," July 10, 1989. "Economic Rehabilitation Program, 1987-90." ,_ Ministerio da Educaca, Dirreccao de Planificacao: "Linhas gerais para a definicao de uma politica educativa," August 1989. "National Study of Reproductive Behavior," 1987. "National Transport Study," 1978. "Projecto 2000," September 1989. Government, World Bank, International Monetary Fund. (jointly produced) "Economic Policy Framework, 1987-89," May 5, 1987. "Economic Policy Framework, 1988-90," March 3, 1988. "Economic Policy Framework, 1989-91," February 21, 1989. "Economic Policy Framework 1990-92," April 1990. Green, R. "Estudo SDA: Social Dimensions of Adjustment." (The "Green Report") February 1989. International Monetary Fund. (Fiscal Affairs Department) "Memorandum on the Tax System of Mozambique," March 4, 1988. NORAD. "Coastal Transport Study," April 1989. SIDA. "Grain Warehouse Proposal," 1988. SOGREAH, Rapport de Syntheses; Grenoble, France. "Plan Directeur des Transports Maritimes au Mozambique." November 1988 United Nations. "Emergency Situation in Mozambique, 1988-89." _____ "Emergency Situation in Mozambique, 1989-90." "Priority Emergency Assistance Requirements," March 14, 1987. United States State Department. "Summary of Mozambique Refugee Accounts of Principally Conflict-Related Experience in Mozambique," April 1988 (The Gersony Report). World Bank. "Agricultural Sector Survey," 1988. No. 7094-MOZ. _____ "Beira Transport Corridor Project, Staff Appraisal Report," July 18, 1989, No. 7709-MOZ. "Business Environment Study," June 20, 1989; No. 7705-MOZ. _____ "Consultative Group Meeting for Mozambique; Chairman's Report of Proceedings." Reports of February 1988, February 1989, and March 199~. ______ "Mozambique: Food Security Study," October 1989, No. 7963-MOZ. _____ "Mozambique: An Introductory Economic Survey," June 6, 1985, No. 5610-MOZ. -223- "Mozambique: Transport Sector Review," October 31, 1989. "Mozambique: "Public Expenditures Review," Report No. 7615-MOZ, September 5, 1989. Population, Health and Nutrition Report," January 2, 1990, No. 7422-MOZ. "President's Report for the Third Rehabilitation Credit: Letter of Development Policy," March 17, 1989.
Groupe de la Banque mondiale · Country Economic Memorandum
Mozambique - Country Economic Memorandum : Main Report
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