Mozambique - Consultative group meeting in Paris, April 17-18, 1996 : chairman's report of proceedings

International Bank for Reconstruction and Development FOR OFFICIALUSE ONLY 84682 CG 96-32 FROM: Vice President and Secretary June 13, 1996 CONSULTATIVE GROUP FOR MOZAMBIQUE Paris, April 17-18,1996 CHAIRMAN'S REPORT OF PROCEEDINGS Attached is the Chairman's Report of Proceedings of the Meeting of the Consultative Group for Mozambique held in Paris, April 17-18, 1996. Distribution For Information Executive Directors for: Australia Germany Russia European Office Austria Ireland Spain Tokyo Office Belgium Italy Sweden Resident Representative, Mozambique Brazil Japan Switzerland Canada Mozambique United Kingdom Denmark The Netherlands United States Finland Norway France Portugal African Development Bank Arab Bank for Economic Development in Africa European Union European Investment Bank Food and Agriculture Organization International Finance Corporation International Fund for Agricultural Development International Monetary Fund Kuwait Fund for Arab Economic Development Nordic Development Bank Organization for Economic Cooperation and Development United Nations Children's Fund United Nations Development Programme United Nations High Commissioner for Refugees World Food Programme World Health Organization This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ~r 1ITTU~  TABLE OF CONTENTS Page No. Chairman'sReport .............................................................................. AnnexI Agenda ................................... 9 Arnnex II List of Participants.................................... 0 AnnexIII Chair's OpeningStatement ................................ 22 Ms. KatherineMarshall,AFI Director,World Bank AnnexIV Statementby the MozambicanDelegation ........ 27 HE PascoalMocumbi,Prime Minister AnnexV Statementby the IMF ................................... 35 AnnexVI UNDP Statement ....................... ............ 39 Mr. SolomonAkpata,UNDP Representative AnnexVII Steps TowardsEconomicand Social Development 46 Statementby HE Tomaz Salomao Ministerof Financeand Planning AnnexVIII Statementon FinancingRequirements 55 HE Adriano Maleiane,Governor, Bank of Mozambique Annex IX Statementon FinancingRequirements 63 Ms. Rocio Castro,Economist,WorldBank AnnexX Chair's Closing Statement.66 AnnexXI Press Release .72 11 1 __  CONSULTATIVE GROUP FOR MOZAMBIQUE Paris, April 17-18, 1996 Chairman's Report of Proceedings Backgouund 1. The Consultative Group for Mozambique (CG) held its ninth meetingat the World Bank's EuropeanOfficein Paris on April 17 and 18, 1996. The meetingwas Chairedby KatherineMarshall,Directorof the SouthernAfricaDepartmentof the World Bank. The WorldBank's AlternateExecutiveDirectorfor the group of countriesthat includesMozambique also attended. The Mozambicandelegationwas led by HE the Prime MinisterPascoalMocumbi,and includedHE Tomaz Salomao,Ministerof Planningand Finance, HE OldemiroBaloi, Ministerof Commerce,Industryand Tourism, HE AlfredoGamito,Ministerof State Administration, HE Paulo Muxanga,Ministerof Transportand Communications, HE LuisaDiogo, Vice-Minister of Planningand Finance,and HE AdrianoMaleiane,Governorof the Bank of Mozambique.The Mozambique delegationalso includedsenior Government officials. The meetingwas attendedby delegationsfrom Australia,Austria,Brazil, Canada,Denmark,Finland, France,Germany,Ireland,Italy, Japan,the Netherlands,Norway,Portugal,Spain, Sweden,the United Kingdomand the United States. Also representedwere the African DeveiopmentBank,the Arab Bank for EconomicDevelopmentin Africa, the European Comnmission, the EuropeanInvestmentBank,the Food and AgricultureOrganization,the InternationalFinanceCorporation,the InternationalMonetaryFund, the KuwaitFund for Arab EconomicDevelopment, the Organizationfor EconomicCooperationand Development,the UnitedNations Children'sFund, the United Nations Development Programme,the World FoodProgrammeand the WorldHealthOrganization. Representatives from Russiaattendedas observers. 2. The followingdocumentswere distributedfor the meeting: MozambiqueGovernment: * "Steps TowardsEconomicand SocialDevelopment" The WorldBank: * "MozambiqueCountryAssistanceStrategy" OpeningStatementby the Chair 3. In her openingstatement(AnnexII), Ms. MarshallhighlightedMozambique's achievements towards sustainabledevelopmentsincethe last CG meeting. She noted that the two previousCG meetingshad been held at criticaltimes for Mozambique. In  2 December 1993 the central challenge had been to complete the peace process, while in March 1995 the first democratic elections had just taken place and the goals for the future were being mapped out. In 1996, peace is well established and democracy is putting down roots, and the CG meeting is a timely opportunity to take stock of progress along the road to laying the foundation for a successful future for Mozambique. In particular, the CG as a group could focus more directly on the urgent task of improving the welfare of Mozambique's poor. 4. Ms. Marshall noted that in 1995 the group had traced an ambitious agenda for Mozambique, and that the Government had gone a long way towards meeting the goals that had been set. There is evidence that the living standards of the poor are improving, particularly in rural areas. Millions of farmers have resettled in the countryside and are growing food for their families, and the Government's efforts to support this process by promoting the development of markets, notably with the cashew marketing reform of 1996, have contributed to an increase in production and to improved incomes for farmers. Peace and democracy are being consolidated: a National Assembly meets regularly and consults with civil society and with opposition parties; the process of preparing for local elections, and for decentralization, is under way; the reform of the judicial system and the police is also in process; and there has been a real increase in spending in the social sectors, even in the face of a decline in overall public spending. In addition, inflation has been reduced, albeit to a level well short of the target; fiscal imbalances have declined considerably; and the enivironmentfor the private sector has greatly improved resulting in a real growth in output. 5. Turning to the future, Ms. Marshall noted that the agenda in Mozambique has shifted from the challenging one of securing the peace to the equally challenging one of generating growth. She suggested three areas for priority attention. The first is the urgent imperative to reduce inflation. Inflation affects poor people directly by eroding their purchasing power, and has a negative impact on investment and growth. Second, there are several key sectors with important potential for generating poverty-reducing growth. The first of these is agriculture, and it is central to the Government's strategy for both growth and poverty reduction. In addition to agriculture, Ms. Marshall noted that transport is kev to Mozambique's growth, given the country's important international transit corridors. A special side session would be held during the CG meeting on this subject. Third, improving the efficiency of public investment is an essential goal for the Government. 6. To conclude, Ms. Marshall noted that the challenges facing Mozambique in this post-war era are tremendous. She emphasized that Mozambique will need to orchestrate important structural changes and accelerate the rhythm of reforms, and will continue to count on the combined support of its ensemble of partners.  3 Statement by th- Mozambique Delegation 7. In his opening statement (Annex IV) the Prime Minister, HE Pascoal Mocumbi welcomed the representatives of the donor community and thanked them for their continued support. He declared that peace prevails in Mozambique, that the Government is making every effort to consolidate and strengthen the democratic process, and that the conditions for the country's economic and social development are being put into place. 8. On the issue of consolidating democracy, the Prime Minister highlighted the growing importance of the Assembly of the Republic; the rising activities of political parties within the Assembly; the participation of civil society in the political process; and the particular attention the Government has paid to eradicating corruption. He also noted the Government's progress towards decentralization and towards holding local elections. On the economic front, the Prime Minister reported that the Government was giving particular prioiity to the agricultural sector, particularly smallholder farmers. He went on to note the encouraging improvements he saw during his recent visit to a number of provinces, suggesting that the private sector is reacting flexibly to the reforms. 9. The Prinme Minster concluded by stating that the Government's priorities in 1996 will continue to be those defined in 1995, namely, to continue with the economic reform program; to strengthen governance; to assist agriculture, especially smallholder farmers; and to improve health and education services, especially in rural areas. He encouraged the international community to maintain its support for the consolidation of democracy and the creation of conditions needed for Mozambique's economic and social development. Statement by the IMF 10. Mr. Leite of the IMF (Annex V) noted that during the 1987-95 period growth averaged 6.7 percent, helped by large foreign aid inflows, structural reforms, and economic liberalization. He added that few countries could boast of such a strong economic recovery. However, Mozambique remains vulnerable to a number of factors: exceptionally high levels of foreign aid that may not continue in the future; high inflation, at around 50 percent; exports far below the country's potential; and an external debt burden unsustainable under current concessional debt rescheduling arrangements. He reported that during the discussions in February and March 1996, the Government reached understandings with the Fund staff on an economic strategy for the period April 1, 1996 to March 31, 1999, in support of which the IMF Executive Board is expected to consider a request for a new three-year ESAF arrangement. 11. Mr. Leite went on to note that Mozambique will be faced over the medium term with a significanLreduction in its capacity to import, as foreign assistance levels off and scheduled debt obligations increase, underscoring the need to increase domestic savings and the efficiency of investment. Public sector savings will be raised mostly through improvements in the tax and custom administration, while reducing inflation will create an enabling environment for private investment. Increased education and health 11'~~~ r I  4 expendituresare also expectedto raise laborproductivityand investmentefficiencyin the medium-to long-term. The main focus of reforms over the next three year period will be the rapid privatizationof the remainingpublic sector enterprises,particularlythe two state-ownedcommercialbanks. In addition,the mediumterm programwill focus on increasingagriculturalgrowththrough liberalization of markets;investmentin rural infrastructure,extensionservicesand seeds for rural poor; eliminationof minimum prices;fosteringof private sectormarketing;and reviewof the land tenure systemto ensureadequateaccessfor the rural poor whileencouragingmodem agriculture. 12. Mr. Leiteconcludedby indicatingthat the key objectivesof Mozambique's programfor 1996are a sharp reductionin the inflationrate, to 22 percent,enhanced support for educationand health, and a reductionin the country's dependenceon foreign assistance. The target for growthin 1996is 4 percent. To implementthe medium-term policies effectively,and meet the targets for the 1996program,Mr. Leite emphasizedthat the effortsof the authoritieswill need to be supportedwith concessionalexternal financialassistanceand an exceptionaltreatmentof its externaldebt in order for Mozambique to achievea sustainableexternalposition. MinisterSalomlo's Presentation 13. MinisterSalomaopresentedthe main Governmentdocument"Steps Towards Economicand Social Development"(AnnexVII). He beganby acknowledging the donor community'scontinuingsupportfor the democraticprocessand the country's economic and socialdevelopment. He noted that when the CG met in 1995,the Governmenthad committeditself to pursuingreforms whichwould lay the foundationsfor economicand social development. Althoughonly the first steps have been taken, these serve to demonstratethe Government'sstrong commitment to perseverewith the necessary reforms. 14. The Ministerthen summarizedthe Government'sachievements in 1995.Peace and democracyare being consolidated;inflationhas been reduced, albeitto a level well short of the target; fiscal imbalanceshave declinedconsiderably; and the environmentfor tbe privatesector has greatlyimprovedresultingin a real growthin output. The Minister went on to emphasizethe Government'scontinuedcommitmentto the three central tenets agreedto duringthe last CG: further structuralreform;a focus on fosteringgrowth in the agriculturalsector,especiallyamong smallholderfarmers;and an increasingshift of budgetaryresourcestowards social expenditures. Plena Discussion 15. Thieimperativeof achievingrapideconomicgrowthand loweringaid dependency were recurringthemesthroughoutthe discussions. There was a lively debatethroughout on the possiblenegativeimpacton growthof stabilizationmeasuresaimedat reducing inflation. Althoughthere were differingpoints of view, manyof Mozambique'said partnersunderscoredthe point that the currentinflationrate of 50% is too high and will stifle growth,ana welcomedthe Government'splans to reduceinflation,increase 11~~ I- ~ ~_ _ I_ - -_ _ __ _  5 also applauded the new Policy revenues, and improve expenditure management. They Bank and the International Monetary Framework Paper recently agreed to with the World including the privatization of the Fund. They noted that several reforms now under way, a privatization and restructuring two state-owned banks, a customs reform program, and important to greater economic program for state-owned enterprises, are particularly while they praised the solid stability and an improved business climate. However, the Government to accelerate achievements already made on these fronts, they urged shift in the allocation in budget actions in the fiuture. Delegates also urged a further Finally, participants noted the resources away from defense towards social spending. and lauded efforts in this importance of improving statistical information in Mozambique, area. external debt and growing 16. Delegates expressed concern that Mozambique's heavy ability to invest in the human debt service requirements limited the Government's and poverty reduction prospects. resource development so vital to the nation's growth an externally-financed debt relief The Government appealed for support in establishing service to be directed to increasing fund which would allow resources allocated to debt the need for continued health and education services. Other participants emphasized monitoring and accounting improvements and increased transparency in the management, programs for key sectors, of external aid. Sector policy frameworks and investment few years, will enable donors to which are to be prepared and launched over the next funds to be used more effectively. provide funds in a more flexible manner, and for those efforts to turn the budget into a In addition, participants welcomed the Government's effort will include integrating aid- useful management tool for resource allocation. This under the Fiscal Management financed expenditures into the budget process as intended Review recently launched by the Government. highlighted. Participants 17. A number of other challenges for the coming year were and Non-Govermnental called for continued partnership with the private sector encouraged the Government to Organizations in development efforts. Participants a sector investment program that increase its efforts to establish agricultural policies and several participants emphasized would promote smallholder agriculture. In that context, preparation contained provisions the need to ensure that the new land law currently under including the safeguarding of for adequate land tenure security for smallholder farmers, which, after agriculture, customary rights. In addition, on the subject of transport, the Government presented provides the best opportunities for growth in Mozambique, informal session held after the CG participants with its strategy for the sector during an intention to increase private sector meeting. Participants welcomed the Government's and aviation during the coming year. participation in railways, ports and coastal shipping, to pursue a series of actions-- Finally, participants supported the Government's intentions and deregulation--that would including further trade liberalization, tax and tariff reform, foster private sector development throughout the economy. of governance, where many 18. Of greatest concern among participants were issues as on economic issues. They delegates felt that progress had not been as exemplary - ~ .- … -  6 encouraged the Government to increase its efforts to strengthen democratic institutions and combat corruption. The Government announced its intention to continue to press forward with its plans for local government reform and decentralization, and renewed its commitment to update the Code of Conduct for civil servants and to establish a High Authority to combat corruption. Delegates emphasized the importance of holding local elections not later that 1997 to further consolidate democracy in Mozambique. On these matters, as well as others, the international aid partners and the Government agreed to continue the successful dialogue taking place in the budget and governance working groups based in Maiuto. Special Sessions 19. Special Sessions were held to discuss the Mozambican delegation's proposal for establishing an externally-financed debt relief fund, presented by HE Adriano Maleiane, and to discuss the World Bank's presentation "Growth and Poverty Reduction in Mozambique: Issues and Options", presented by Ms. Phyllis Pomerantz from the Bank. 20. In his presentation, the Governor recalled the unsustainable debt burden that hinders Mozambique's development efforts, and proposed a Fund for Debt Reduction. The proposed funa would receive donor contributions for non-Paris Club and multilateral debt, while counterpart funds in local currency would be allocated to the Government budget to be used in the health and education sectors. In her presentation, Ms. Pomerantz summarized the challenges facing Mozambique, and the proposed strategy for addressing them, includinigcontinuing macroeconomic reform, increased sector investments, and promoting high potential growth sectors, particularly small-scale agriculture. External Financing ReQuirements 21. Ms. Castro, who made the statement on external financing (Annex IX), noted that in 1996, the external financing requirement, excluding possible debt relief, was estimated at $557 million. She went on to note that the composition of external financing has changed, reflecting Mozambique's changing reconstruction needs, with less food aid and emergency financing. At the end of the meeting, the Chair indicated that the external financing requirements had been met with donor pledges of about US $871 million, of which 35% was for debt relief. The non-debt relief component of about US$ 567 million committed during the meeting included investments (34%), import support (21%), food aid (6%), and other programs (4%). Closing Remarks 22. In his closing statement the Prime Minster noted that the meeting had been characterized by a singular convergence of points-of-view around solutions to Mozambique's development challenges. He reaffirmed that in his view the private sector remains the corner-stone to economic and social development in the country, and that the Government will continue to pursue strategies to improve the climate for private sector- led growth in Mozambique. He also reaffirmed the central priority of agriculture,  7 Government's strategy particularly among smallholders, and of the social sectors, in the thanked all the for both poverty reduction and economic growth. The Prime Minister advice. participating delegations for their support, cooperation and valuable thanks to the 23. In the Chair's closing statement (Annex X), Ms. Marshall expressed as well their Prime Minister and his team for their open and constructive contributions, that all had gained willingness to listen and respond directly and thoughtfully. She added Mozambique. She a better appreciation of the challenges and the opportunities facing year's Consultative noted that the most widely held view at the meeting was that last was one of Group Meeting was a meeting of good intentions, whereas this year's Mozambique's aid accountability. The consensus at the meeting, she felt, was that meeting the partners recognized that the Government had gone a long way towards some had still fallen ambitious set of goals for the past year, even though progress on and combating short of expectations, notably in the areas of promoting decentralization discussion at the corruption and inflation. She then reviewed the main themes of meeting: economic issues, poverty reduction, and governance. growth and 24. On the economic front, the Chair emphasized the importance for steps for the poverty reduction of reducing inflation. She noted the next important banks; completing the Government, namely completing the privatization of the two state for private sector planned customs reform; furthering the improvement of the climate the state-owned railways activity; privatizing or increasing private sector involvement in (Petromoc) as (CFM), the airlines (LAM), and the petroleum distribution company of public sector rapidly as possible: and, at the same time, increasing the effectiveness the Consultative investment. On the question of debt, Ms Marshall observed that, while several participants Group meetings were not a forum for seeking definitive solutions, welcomed new had noted that Mozambique's debt position was unsustainable and the Chair noted that initiatives to tackle the pioblem. On the issues of poverty reduction, agriculture in the the group was in full agreement with the central role of smaliholder importance of land World Bank's country assistance strategy (CAS). She indicated the and growth, and tenure laws for poverty reduction as well as to promote private initiative of a Land noted that many participants had emphasized the need for rapid promulgation land rights. She also Law based on wide ranging consensus and which recognizes local in this context underscored the importance of liberalizing prices in the sector, and On the social sectors, applauded the recent decisions related to cashew marketing reform. expenditures in the Chair reiterated the group's satisfaction with the increases in public targets established in the education and health, but noted that these were still short of the the two main concerns budget. Finally, on the subject of governance, the Chair addressed She expressed by the group: corruption and the postponement of local elections. at the meeting, applauded the Government's commitment to combat corruption, affirmed critical for developing and reiterated the consensus among donors that local elections are an effective participatory Government. bulk of the 25. After expressing satisfaction that the donor community had met the the meeting closed. financing requirement for Mozambique in 1996, the Chair declared r~~~~ r - El~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~f i~~~~~~~~~~~~~~~~ i~~~~~~~~~~~~~~~~ ;00 Ct  9 ANNEX I Agenda Mozambique: Ninth Consultative Group Meeting April 17-18, 1996 Wednesday April 17 08:00-09:00 Registration 09:00-10:30 Opening Statements Chairman's Opening Statement Government Statement IMF Statement UJNDPStatement 10:30-10:45 Coffee Break 10:45-12:30 government Presentation General Discussion 12:30-14:00 Buffet Luncheon for all participants at the Paris Office 14:00-15:30 Continuation of Discussion 15:30-15:45 Coffee Break Issues and 15:45-17:15 Special Session: "Growth and Poverty Reduction in Mozambique: Options" Overall presentation by the Bank Short presentations on selected issues by Bank and Government General Discussion 17:15-18:00 External Financing Requirements Government Statement Bank Statement at Paris Office Close of Cocktail Reception hosted by Government for participants Session Thursday April 18 8:30-10:30 Participants Statements 10:30-11:30 Coffee Break/Working Discussions 11:30-11:45 Consideration of Press Release 11:45-12:30 Closing Statements Statement by Government of Mozambique Statement by Chairman 12:30 Meeting adjourns  10 ANNEX I Apr 18 9:30 FOR MEETING OF THE CONSULTATIVE GROUP MOZAMBIQUE Paris, April 17-18, 1996 Chair Ms. Katherine Marshall Director,Southern (AFI) Africa Department List of ParticiDants AUSTRALIA Head of Delegation Mr. Angus Macdonald Counsellor (Development) Australian Permanent Mission to the United Nations Geneva Mr. Waltraud Schut Coordinator Ministry of Cooperation AUSTRIA Head of Delegation Dr. Marielies Rehor Head of Section Mnistry for Foreign Affairs Dr. Konstantin Huber Ministry for Foreign Affairs Mrs. Waltraud Schiitz BRAZIL Head of Deleption Mr. Denis Fontes de Souza Pinto Conseiller aux AffairesFinanciereset de D6veloppement Ambassade du Bresil, Paris Ms. Silvia Hazan Menasce Adjointe au ConseillerEconomique Ambassade du Brcsil,Paris I - I _ __ __ _ Mozambique CG 11 April 17-18.1996 CANADA Mr. John A. Copland Head of Delegation Counsellor Canadian Harare HighCommission, Mr. ArthurM. Saper DirectorGeneral SouthernAfricaDivision Canadian Development International (CIDA) Agency DENMARK Mr. Bo Jensen Head of Delegation Head of Section Ministryof ForeignAffairs H.E. OleBlicherOlsen Ambassador The RoyalDanishEmbassy,Maputo Ms. SanneOlsen Head of Section SouthernAfricaDivision Ministryof ForeignAffairs FINLAND Mr. JuhaniToivonen Head of Delegation Cooperation Director,Departmentfor Development Unitfor Sub-SaharanAfrica Ministryfor ForeignAffairs Mr. KeijoRuokoranta Programme Cooperation Officer,Departmentfor Development Ministryfor ForeignAffairs Mr. Matti Kairiainen Charg6d'Affaires Embassyof Finland,Maputo Mr. HeikkiHaili ChiefEconomic Advisor Ministryfor ForeignAffairs zI r |~--F Mozambique CG 13 April 17-18, 1996 Germany (cont'd) Mr. WolfgangVoss Division Chief Kreditanstalt fur Wiederaufbau(KfW) [RELAND Mr. Barry Murphy Desk Officer for Mozambique DevelopmentCooperation Section Ministry of Foreign Affairs ITALY Minister AlessioCarissimo Head of Delegation Coordinator AfricaDivision Directorate General for Development Cooperation Ministry of Foreign Affairs Couns. Gianluca Cortese Head of Southern African Countries' Desk Directorate General for DevelopmentCooperation Ministry of Foreign Affairs Ms. Rosa Gallo Adviser Department of International Affairs Ministry of Treasury Mrs. DonatellaProcesi Expert, Mozambique Desk Southern Africa Department Mrs. Fiametta MilesiFerretti FirstCounsellor PermanentDelegationto the OECD iF~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Mozambique CG 12 April 17-18. 1996 FRANCE Mr. Fran;ois Farabolini Head of Delegation Adjoint au Chef du Bureau Afrique et Ocean Indien Direction du Tresor Ministere de l'Economie et des Finances Mr. Jerome Chastenet Chef du Poste d'ExpansionEconomique a Maputo Direction des Relations Economiques Exterieures(DREE) Ministere de l'Economie et des Finances Mr. Frederique Laurent Charge de Mission Ministere des AffairesEtrangeres Mr. Harold Valentin Redacteur Ministere des Affaires Etrangeres M4rs.DanielleRobin Charg6 de Mission Ministere de la Cooperation Mr. Philippe Lecrinier rharge de MissionGeographique Caisse Fran;aise de Developpement GERMANY Mrs. Dr. Elin Horn-Vornschlag Head of Delegation FederalMinistry of Economic Cooperation and Development(BMZ) Mr. JitrgerKurzhals Desk Officer SouthernAfricaDepartment BMZ Mrs. AnnemarieKonecke ProjectOfficer SouthernAfricaDepartment GermanAgencyfor Technical Cooperation(GTZ)  14 CG Mozambique April 17-18, 1996 JAPAN Head of Delegation Mr. Hironobu Yasumura Counsellor Embassy of Japan, Zimbabwe Mr. DaisukeYabuki SpecialAssistant Embassy of Japan, Paris THE NETHERLANDS Head of Delegation Mr. Arie ,an der Wiel Ministryof ForeignAffairs H.E.Mr. Roeland van de Geer to Mozambique Ambassador Mrs. EricSchouten DeskOfficer,Mozambique Desk Southern Africa/DevelopmentCooperation Ministryof ForeignAffairs NORWAY Head of Delegation Mr. Kare Stormark DeputyDirectorGeneral RoyalMinistryof ForeignAffairs Haug Mrs. Eldbj0rg SeniorExecutive Officer RoyalMinistry of ForeignAffairs Mr. Gunnar Boe Chargi d'Affaires Maputo of Norway, Embassy Mrs.AgneteEriksen RoyalMinistryofForeignAffairs ____r__--___ Mozambique CG 15 April 17-18, 1996 PORTUGAL Mr. Jose Toscano Head of Delegation Deputy Director General Department of Treasury Ministry of Finance Mr. Antonio AlmeidaLima Minister Counsellor Embassy of Portugal, Maputo Mr. Fredenco Santos Assessor Instituto da Cooperacao Portuguese Department of Treasury Ms. Carolina Stroia ICP RUSSIA Mr. Alexander Gorban Head of Delegation Department of Economic Cooperation Ministry of Foreign Affairs Mr. Eugeniy Lyamin Department of Foreign Credits and External Debt M.linistry of Finance Mrs. Larisa E. Safronova Counsellor Monetary, Pricing and Credit Administration Ministryfor ForeignEconomicRelationsof Russia Mr. SergueiVolkovski Embassyof Russia,Paris SPAIN Ms. MonicaJunquera Headof Delegation ProgamnneDirector Ministryof EconomyandFinance Ms. Maria-PazRamos DeputyDirectorGeneral Mnistry of Commerce and Tourism  16 Mozambique CG April 17-18, 1996 Spain (cont'd) Ms Vega Bouthelier Martinez TechnicalAdvisor Southern AfricanSub-Direction Ministry of Foreign Affairs Ms. Teresa Corella Rodrigo Technical Advisor Ministry of Foreign Affairs SWEDEN Head of Delegation Mr. Jan Bjerninger AssistantDirector General Swedish InternationalDevelopment Cooperation Agency (SIDA) Ms. AnnStodberg Counsellor(DevelopmentCooperation) Embassy of Sweden, Maputo Ms.Karin Andersson Desk Officer Regional Departmentfor Southern Africa SIDA Ms. Eva Cassel SpecialAdvisor Department Cooperation Development for International for ForeignAffairs Mlinistry SWMERLAND Headof Delegation Mrs. UrsulaFunk Program EastAfricaSection Officer, SwissDevelopment Cooperation FederalDepartmentof ForeignAffairs BiOrki Mr. Olivier Economist,ProgramOfficer SwissDevelopment Cooperation FederalDepartmentof ForeignAffairs NI - _ _-- r- _ _  Mozambique CG 17 April i-IS. 1996 Switzerland (cont'd) Mr. Felix Fischer Desk Officer, DevelopmentPolicy Division Federal Officeof Foreign Economic Affairs Federal Department of Public Economy UNITED KINGDOM Mr. Alan Coverdale Head of Delegation Head, British DevelopmentDivision Overseas Development Administration(ODA) Mr. David Keeling ODA UNITED STATES Ms. Caroi Peasley Head of Delegation Deputy AP;istant Admninistrator U.S. Agency for International Development (USAID) Mr. James T. Smith Acting Director USAID, Mozambique H.E. Mr. Dennis Jett Ambassador to Mozambique AFRICAN DEVELOPMENT BANK (AfDB) Dr. Alice Hamer Head of Delegation Chief, Human Resources Division Count:y Department South Region Mr. Victor Wahba PrincipalEconomist CountryProgrammes ARAB BANK FOR ECONOMIC DEVELOPMENT IN AFRICA (BADEA) Mr. Abdel DaniBenkhalef Senior Financial Analyst Projects of ProgrammesDepartment 'F-  18 Mozambique CG April 17-18,1996 EUROPEANCOMMISSION Mr. GiovanniLivi Head of Delegation Director for Eastem and SouthemAfrica Mr. Jose Leandro Economist Structural AdjustmentSupport Mr. Paul Malin Desk Officerfor Mozambique Directorate-Generalfor Development Mr. DanielContel Administrator Food SecurityUnit Mr. SvenKuhn von Burgsdorff EconomicAdviser,Maputo Mr. Jeremy Stickings SocialDevelopmentExpert DevelopmentPolicy Department EUROPEANINVESTMENT BANK(EIB) Mr. Justin Loasby Head of Delegation Head of Division Southern Africaand Indian OceanRegion Fontes Mr.Manuel Loan Officer Southern AfricaDivision FOODANDAGRICULTUREORGANIZATION (FAO) Mr. GuyBuperet Econornist Division PolicyAssistance Departmentof Cooperation INTERNATIONAL FINANCECORPORATION(IFC) Mr. TakuroKimura InvestmentOfficer, Sub-sahran AfricaDepartment I' 11'  Mozanibique CG 19 April 17-18. 1996 INTERNA'TIONAL MONETARY FUND (IMF) Mr. Sergio Pereira Leite Division Chief KUWAIT FUND FOR ECONOMIC DEVELOPMENT Mr. JbrahimR. Al-Fulaij Head, East, South and Central African Division ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD) Ms. ElisabethThioleron Administrator in the Aid Management Division UN CHILDREN' S FUND (UNICEF) Mr. Shob Jhie Representative UNITED NATIONS DEVELOPMENT PROGRAMME (UNDP) Mr. Solomon Akpata Head of Delegation Chief Southern AfricaDivision Regional Bureau for Africa Mr. Erik de Mul Resident Representative, Maputo Mr. Carlos Horta Senior Field Economist Division for Southem Africa Regional Bureau for Africa WORLD FOOD PROGRAMME (WFP) Philip J. Clarke Head of Delegation Country Director, Maputo Ms. Georgia Shaver Chief Desk Officer Eastem AfricaBureau ir- T ---- _ _ _ _ _ _ _ ___  20 Mozambique CG April 17-18, 1996 (WHO) WORLD IEALTHORGANIZATION Dr. NkamanyKabamba Headof Delegation Maputo WHORepresentative, Dr. M.H. Mathey-Boo ResourceMobilisation Chief,Interagency Dr. Nick Dragger WHOIntensified withCountriesICO/HQ Cooperation MOZAMBIQUE H.E. PascoalMocumbi Head of Delegation PrimeMinister H.E. TomazSalomao Ministerof Planning& Finance H.E. AdrianoMaleiane Govemor, Bancode Mocambique H.E. OldermiroBaloi Ministerof Commerce,Industry& Tourism H.E. AlfredoGamito Ministerof StateAdministration H.E. PauloMuxanga Ministerof Transport& Communications H.E. LuisaDiogo Vice Ministerof Planning& Finance Mr. AntonioAbreu GeneralManager,Bancode Mocambique Ms. EsmeraldaFernandes BancodeMocambique Director, Mr.ManueulChang of MP&F Director National Mr. AmadeAziza M&F Director, National I. I , _  MozamnbiqueCG 21 April 17-18, 1996 Mozambique (cont'd) Ms. YolandaFortes 'NationalDirector, MP&F Mr. GamilielMugambe National Director of MFA & Cooperation Mr. Silvestre Secheme Director at Prime Minister's Office Mr. Daniel Tembe Adviser Ministry of Planning and Finance EXECUTIVE DIRECTOR Mr. Joaquin Carvalho Alternate Executive Director WORLD BANK Ms. Katherine Marshall Chair Ms. PhyllisPomerantz Mr. Roberto Chavez Mr. Gene Tidrick Mr. Simon Bell Ms. Rocio Castro Mr. Jehan Arulprgasam Mr. Yash Pal Kedia Mr. Luis de Azcarate Mr. Jocelyn Mdason n l  22 ANNEX III MOZAMBIQUE ConsultativeGroup Meeting Paris, France,April 17-18, 1996 Chairman's OpeningStatement KatherineMarshall Director Southern AfricaDepartment World Bank Ladies and Gentlemen: Welcometo the 1996 ConsultativeGroup Meeting for Mozambique! This marks the ninth formal meetingof this partnership,which we see as an unusually important and active one on the internationalscene. I would like particularlyto extend a warm welcome to the distinguishedGovernmentdelegation,led by His Excellency, Prime MinisterMocumbiof Mozambique. We are all deeplyaware of the specialhistory and the extraordinarychallenges that Mozambiquepresents, and of the uniqueimportanceof externalsupport and its harmonizationfor Mozambique,as its Governmentand people strive to lay the foundationfco a successfulfuture. Even in the year sincewe met last here in Paris we have witnessed often the dynamismof both Mozambiqueand its partners in this group as we have responded to the challengesand opportunitiesthat are before us. The chance to meet together and to look forward towards Mozambique'smedium term developmentis thus particularlytimely. Our centralobjective here,therefore, is to take stock of where we are, as a group of partners dedicatedto the developmentof Mozambique, and to define our work in partnershipfor the nextyear. In 1993this group met for the first time after the end of the war. In 1995 we met after Mozambique's inauguralelection. We have also seen, over the past three years, a fundamnentaltransformationin the regional environmentin Southern Africa that has brought new hope, but also new challenges. And we have continued to see a transformationin the environmentwithinwhich we, as aid partners,operate, with new questions asked and new expectationson us all from our constituents. As we meet here today, we can see the direct significance of these changes for Mozambiqueand for our partnership. Above all, peace is well established and democracyis putting down roots. This meansthat we can focus more directlyon the urgent task of improvingthe welfareof Mozambique'spoor. Mozambique's rich potential emerges more clearlytoday, even as the immensechallengesahead to develop its humancapital stand in sharpjuxtaposition. Our work has onlyjust begun; the nF I -  23 challengesMozambicansface are enormous;and the course we have embarked on is long. Last year, we traced the ambitiousagenda facingthe Mozambique Govermnent. Lookingback, it is clear that much effort has gone to advance with the commitmentsmade. Despite delays in implementation of some measures,we see important progress. We have been most encouraged to see initialsigns that the living conditions of the poor are improving,particularly in rural areas. Millionsof farmers have resettled in the countrysideand are growingfood for their families. The Government's efforts to support this process by promotingthe developmentof markets --evident this year, for example,with cashewmarketingreform -- have contributed to an increase in production and to improvedincomes for farmers. Real expendituresin each of the social sectors increasedsignificantly in 1995, while expendituresfor defensewere reduced. Schoolsand health centers are availableto more people and, equallyimportant, clear benchmarksfor progress are being defined, and monitored. Recent informationindicatesthat there was a 5 percent increase in the volume of health servicesprovidedto the population,with most of the increase taking place in rural areas. Increasesin primaryschool enrollmentwere also significantand were also concentrated in rural areas. I note, however,that this is still an area of challengefor the Government: budgetary expendituresfor health and education have not yet reached the proportion of the overallbudget that had been targeted. Progress has also been made in consolidating the democraticprocess. Over the past year, we have witnessedthe birth and growth of important democratic institutions. The Assemblyof the Republicmeets regularlyand consultswith civil society and with opposition parties. Debates held at the Assemblyof the Republic on decentralization and on the National Budget are examplesof how this process is shaping up in concrete terms. This is all the more encouragingwhen we considerthat Mozambique's democracyis little over a year old. We are all aware, nonetheless,that Mozambique'spartners remain concerned about the range of governanceissues in Mozambique. The Government's challengeis to move forward with the actions outlined at the last CG meeting. These includethe introduction of a code of ethics, the establishmentof a Higher Authorityto combat corruption, and customs reform. In addition, increasedtransparency,through further fiscal reform aiid deregulation,should help to improveaccountabilityand to reduce the scope for discretionarydecisionmaking. Judicialreform continuesas a critical area. Finally, the role to be playedby civic organizationsin a post-emergencysetting, above all in helpingto build communityorganizationsand ensure broad participationin development,bears specialnote. We look forward to hearingthe Government'sviews and suggestions on how governance issueswillbe addressedin the remainderof 1996. Perhaps the most important structural items on the Government's agenda for economicreform over the past year have been customs reform and the privatizationof Banco Comercialde Mocambique,the largest state-ownedbank. Not unexpectedly, there has been a host of complexitiesinvolvedin implementing these programs, and the timetables announced at the last CG meetinghave turned out to be too ambitious. Nonetheless, the Governmentis taking the necessarysteps on both fronts. Customs reform is now movingahead: a restructuring unit has been establishedat the Ministry  24 of Planning and Finance;a new pre-shipmentinspectioncompanyhas been contracted; and a private firmnto managecustoms should be in placeby June this year. Tighter customs controls have already resulted in a 40 percent increasein duty collections last year. With respect to the sale of BCM, privatizationis now plannedfor June 1996, as foreseen in the timetableagreed with the World Bank in May last year. A Sales Prospectus has been completed,some initialmarketinghas taken place, and several foreign banks have expressedan interest in the purchase. A program of actions to privatize the other state bank, the Banco Popular de Desenvolvimento, by December 1996, is under way and a Sales Adviserto privatizethe Bank shouldbe appointed by June. The Government's efforts in these areas deserveour recognition. As we turn to focus on the future, it is clear that the agenda in Mozambique has shifted from the challengingone of securingpeace to the equallychallengingone of generating growth. Onlygrowth willincrease per capitaconsumptionfrom the abysmallevels of the past decade; only growth can ensure a better life for the citizens of Mozambique; and only growth can ensure Mozambique'slong-term external viability. The Governmenthas before it a formidabletask: how to generate this growth; how to ensure that this growth works to reduce poverty;and how to sustain this growth over a numberof years. As the Governmentfacesthese challenges,I would like to suggest three area for priority attention. The first is the urgent imperativeto reduce inflationin Mozambique. The persistence of high inflationcontinuesto limitgrowth and threatens future sustainability. High inflationaffects poor people directlyby eroding their purchasing power. High inflationalso has a negativeimpacton investmentand growth. In Mozambique, this link between inflationand stifledgrowth is borne out by constrained investmentand by the lack of long term finance. Strong monetary and fiscal measures to control inflation,therefore, remain of highest priorityin Mozambique. This underscores the importanceof the Government's effortsto privatizethe banks quickly, as well as the need to strengthen,urgently,the CentralBank, specificallyin monetary control and banking supervision. Second, there are severalkey sectors with importantpotential for generating poverty-reducinggrowth. The first and foremost is agriculture,and the Government has made this sector centralto its strategy for both growth and poverty reduction. Fostering the developmentof rural markets;increasingthe impactof public investments;and securingaccess to land by smallholder farmersare all central to promoting agriculturalgrowth. Rural markets are beingfostered through road rehabilitationand further trade liberalization.An integratedsector program, now under preparation, can increasethe efficiencyof publicinvestmentin agriculture. The Government should be commendedfor the NationalLand Policy announcedlast August, and particularlyfor the fact that this policyrecognizescustomary rights and communityparticipationin land titling. It is importantthat both the new land law and its implementationcontinue to reflectthese very importantprinciples. In addition to agriculture,transport is key to Mozambique'sgrowth. Given its important internationaltransit corridors, Mozambiquecan capitalizeon transport revenues for foreignexchange. Moreover, efficiencyin transport is imperativeto lowering marketingcosts and improvingdomestic and internationaltrade. The v -- 1 r--F  25 significanceof this goes well beyond Mozambique'sborders. In recognitionof the vital importanceof transport matters for Mozambiqueand its neighbors, we are planninga special side session tomorrow afternoonafter the formal conclusionof this meeting,which will be dedicated to these issues. In additionto reducing inflationand promotinghigh-potentialgrowth sectors, improvingthe efficiencyof public investmentis an essentialgoal for the Government. Mozambique. With scarce resources, everymeticalmust be spent wisely and with the central objectiveof poverty reduction in mind.The high levelsof support from aid partners can be expected to declineover time, while debt servicepaymentsare currently projected to absorb an increasingshare of the national budget. These circumstancescall upon us to maximizethe developmentimpact of our joint efforts. The Government's initiativesto improvethe efficiencyand impact of public spending through integrated sector programs warrantour full support. Sector programs have been elaborated and launched in the healthand roads sectors and are currentlybeing prepared by the Governmentfor the agricultureand education sectors. In addition, good fiscal managementwillbe essentialto improvingthe impact of publicspending on growth and poverty reduction. To this end, the Governmenthas begun a fiscal managementreviewprocess aimed specifically at turningthe budget into an effective managementtool for resource allocation. Here again,Mozambique and its partners will need to collaborateclosely to achievea fullyintegrated budget coveringboth externaland domestic resources. Two other topics emerged in our discussionslast year and we will hear during our meetingabout progress made: private sector development,and the role of external debt We all recognizethe vital importanceof the private sector: indeedit is a dominanttheme in the Government's strategy. We will look forward to hearingabout progress made in the essentialtask of enhancingthe environmentfor investment,from Mozambique and from abroad. On externaldebt, an issue prominentlyin international discussionat this moment, we hope that, as we had agreed last year, the issues for Mozambiqueare now more sharply defined. We will hope to advance in our discussionsof impact and options grounded on a clear analysisof the positionand projections for the future. To summarize,the challengesfacingMozambiquein this post-war era are tremendous. Mozambiquewill need to orchestrateimportant structural changes and accelerate the rhythm of reforms. It willcontinueto count on the combinedsupport of its ensembleof partners. In closingthe CG meetinglast year, we made reference to a symphony: an opus which required the timelyparticipationof different players. I trust we will once again strike a harmnoniouschord, startingwith this meetingover the next two days, and continuing throughout this year. Let me now turn brieflyto the practicalissuesof the agenda for the meeting and logistical arrangements: * We will beginthe discussionwith a statementfrom His Excellencythe Prime Minister. This willbe followedby a statement on the economic situation by Mr. Leite of the IMF and a statementby the UNDP.  26 Followinga coffeebreak, His Excellency, the Ministerof Financeand on the Plauning,MinisterSalomao,willgive us a presentation will then open the Government'seconomicand development strategy. We meetingfor a plenarydiscussion. lunch, outside this room, * We would then like to inviteyou to an informal designatesome tables for beginningat 12:30. As in past years,we planto Tentatively, we discussionof topics of particularinterestto participants. andfiscal issues plan to have tables for agriculture, social sector private sector development management issues, governance issues, and know, and privatization. Please let members of the Bank delegation duringthe coffeebreak, if you have additional suggestions. As always, some tables willbe reservedfor generaldiscussion. by the Bank of "Growth and * After lunchwe willturn to a presentation PovertyReductionin Mozambique: Issues andOptions". This will be on debt and poverty followedby a presentationby the Government taking a coffee reduction. This will be followedby plenarydiscussion, break at an appropriatemoment. to financing requirements,openingwith a X At about 5:15 p.m., we will turn GovernorMaleiane, followedby Ms. Rocio statementfrom His Excellency Castro of the World Bank. has kindly Government * I would like to confirmthat the Mozambican Bank premises,beginning invitedus to a cocktailreceptiontonighton the at the close of this session. at 8:30, moving 3 Tomorrow morning(Thursday),we willconvene to statementson externalfinancing by participants. After immediately positionand to the draft coffee,we will turn to a summaryof the financing we will concludethe main of our press statement. After closingremarks, meetingat 12:30p.m. The Government andthe Bank will hold a press p.m. conferenceon these premisesstartingat 1:00 * Last, but not least, tomorrow afternoon, from 3:00 p.m. to 5:00 p.m., we sector matters in will hold a specialinformalsessionon transport Mozambique. are satisfactory If these arrangements to you, I proposewe launchthe meeting by callingon the PrimeMinisterfor his statement. April17. 19 8:45AM  27 ANNEX IV C)peoning 3t.emeat by i* exsellency Dr. I'A3C4AL H4PCIUHl ]PRIME MINISTER OIFTCHE R]EPUBLIC O]FMOZAMBIQU]E 4.&d 17. 1996 n~ ~ ~~- X T_  28 MRS CHAIRPERSON, ILLUSTRIOUS REPRESENTATIVES OF THE DONOR COMMUNITY LADIES AND GENTLEMEN On behalf of my Government,the delegationwhich accompaniesme, and on my own behalf I would like to begin by welcomingyou to this important meeting. I Would also like to express the appreciationand gratitude of the People and Governnent of Mozambique for the assistance we have receivedfrom the governmentsand organisations which you represent. When we met here at the last ConsultativeGroup meeting, we were all pleased with the results achieved in the implementationof the General Peace Agreement, which had culminatedwith the swearing in of the new Governmentresulting from the first general multiparty elections. The country was emerging from a destructive war, its economydevastatedand its social fabric I N TATTERSThiswas why we declared at the time, that the Government's priority task was to "preservepeace and consolidate national unity, getting the country's life back to normal and creating the foundations for economic and social development". One year after that meeting we can affirm, and confidently,that the spirit of peace prevails among Mozambicansand that every effort is being made to consolidate and strengthenthe democratic process in our countiy. Peace is the prerequisitewithout which any development effort is doomed. For us it is thus one of the greatest victories achieved to date by the Mozambicanpeople. LADIES AND GENTLEMEN The strengthening and consolidation of democracy is still an important condition for the implementation of the Govemment Programme. In this process, I Would highlight the growing role of -~ - -- _ __  29 the Assembly of the Republic in the Country's political and socio- economic life. It must be stressed that the efforts made to ensure the normal fanctioning of the Assembly of the Republic have only been possible at the expense of sacrifices in some areas. The political parties are also strengthening and consolidating the democratic process, respecting plurality of ideas, expressing their points of view on the Country's reality trough a variety of fora. Another important aspect for strengthening and consolidating democracy is the national reconciliation issue. It is important that reconciliation between Mozambicans be based on mutual respect and dialogue between the various political forces and representatives of civil society. This requires that social groups and all citizens be involved in the Country's socio-economic and political process. Through their participation in associations and non governmental organisations of an economic, religious or other nature, citizens have contributed towards enriching the social dimension of the current reforms. Here, the Government has promoted dialogue and social reconciliation as a method of work. Its efforts to promote national reconciliation also include measures aimed at the politico-administrative unification of the country, to remove any focal points for division and tension. LADES AND GENTLEMEN The implementation of the Government's Programme requires the practice of good governance predicated on energetic action to prevent and fight corruption, on continuing the decentralisation process in tandem with the organisation of local elections, and on reform of the judicial system. My government has paid particular attention to the problem of L Hf --- r--  30 corruption, given its implications and costs in the political and social fields. In order to heighten awareness and to define mechanisms for identifying and fighting this evil, with assistance from World Bank the Government has held two seminars on the subject, attended by members of the Assembly of the Republic, members of the Govermment, religious leaders, leaders of political parties with or without seats in Parliament, the media and other personalities from civil society. The Council of Ministers discussed recently the mechanisms being established to ensure ethical conduct by leaders in public office and the establishment of a Supreme Authority against Corruption. The fight against corruption is not unrelated to the creation of mechanisms for transparency in Public Administration acts. The Public Administration reforms includes the simplification of admninistrativeprocedures in order to instil more dynamism into governance, the updating of the General Statutes for Civil Servants and the efficient management of human resources, all of which are vital elements for achieving greater transparency in the administrative process. A seminar on the current reform process and its impact on the country's political, administrative and economic systems is programmed for the end of the first semester this year. Another aspect related to good governance is the decentralisation process and the holding of local elections. The Local Authority reform programme is being launched now and draft legislation to complement law 3/94 has been prepared, as follows: . Electoral Law; . Election Registration Law; . Law on the National Election Commission; . Decree on the legal system for the administrative supervision of municipal bodies; and . Decree on the status of office holders in municipal bodies. n- --- -r---- __  31 As regards the timetable for the local elections, an Ad Hoc Parliamentary Commission has been established to prepare the necessary recommendationsfor achievingthis important objectiveof the democraticprocess. Meanwhile, the Government is continuing the preparation of technical aspects concerning the organisation of local elections in accordance with the law, and of the componentsdealing with local finance, infrastructuresand the creation of the necessary conditions for the decentralisationprogramme, includingthe deconcentrationof human resourcesmanagementto provincialgovernments. It should be stressed that the Public Administrationreform process has required due considerationof the local setting and guaranteedin depth knowledge of the economic, social, political, cultural and historical aspects of local institutionsand reality. Finally, last but not least, is the question of reform of the judicial system, which includes the domains of the Police, Courts, Attomey General's Officeand Justice. We are aware that refomiing this system is a necessity for consolidatingthe State of Law and establishing a market economy. This was made quite clear in the recent meeting between the Head of State and representatives of the sector. Achieving this objective implies allocating additional material and financial resources to the sector, and the simultaneous training and preparation of the administratorsof the judicial machinery. LADIES AND GENTLEMEN Of the various objectivesof an economicnature, activities within the rural development context are of particular importance - the rehabilitationof economicand social infrastructure,the reintegration of the demobilisedsoldiers to ensure their resettlement and human capital development. n X~~~~~ F  32 In the rural development field, the Government has given priority to assisting the family sector in order to improve crop yields, speeding up the distribution of land. Other important activities were the approval of the agrarian Policy and the National land Policy. The Land Law is being revised and it is anticipated that the new law will be approved by the end of the year. In the field of infrastructure rehabilitation, of particular note was the rehabilitation programme for primary and secondary roads. In order to guarantee water supply for rural areas, the Government has given priority to rehabilitating wells and bore holes and opening new ones. In this respect, I would like to express my admiration for what I saw during my recent visit to some provinces. This has given me a much more positive and enthusiastic view of Mozambique's reality: . With the establishment of peace and the positive performance of the special resettlement programmes, the family sector has clearly been revitalised, both agriculture and animal production are on the increase in the rural areas, regional links have been re-established and goods and people are circulating; The rise in small scale artisan production and small private investment initiatives is also clearly visible; The privatisation process has led to increased production and better quality products. This reality only serves to prove that the private sector is reacting flexibly and positively to the economic incentives we have been introducing. These results lead us to be optimistic about resolving the social problems created by unemployment in the large cities. At the same time the Government has emphasised human resource development, with priority for education and health through real increases in the budget allocations for these sectors and through the - ___ - r- --- r  33 rehabilitation and construction of new schools and health posts, particularly in rural areas. We are well aware of the need for even larger increases in he budget of these sectors, especially when compared with the budget for defence and public order. However, we must not lose site of the fact that the police force requires the minimum of equipment given the need to ensure public safety and tranquillity. Otherwise, all our efforts run the risk of being cancelled out by criminal activity. As the result of all these measures the economy has been growing, mainly due to the positive impact of peace and population resettlement in the rural areas, as I have already mentioned. Despite this progress, the external debt is still a serious impediment to economic development in Mozambique. How to deal with that problem requires special attention from our creditors. For the Governments part we have been giving priority to contracting new credits on highly concessional terms, resorting more to grant fanding and undertaking operation which convert debt into investment. Despite considerable efforts to find alternatives for greater debt relief, these measures have been insufficient. Channelling resources to pay debt service or reduce the stock of debt could make it possible to reallocate budget resources to the social sectors and to reduce poverty in Mozambique. LADIES AND GENTLEMEN The results obtained in 1995 encourage us to face this year with optimism. Above all we must bear in mind that Mozambique is a country which have just emerged from a devastating war, and which is thus passing through a process of transition and of the management of change. For this reason the Government's efforts have been directed towards creating an enabling environment for private investment and restarting productive activity which has been r -- r-----  34 paralysed for many years. Mozambicans in the rural areas are gradually getting their lives back together again concurrently with the process of resettlement and infrastructure rehabilitation. Complementing the Government's efforts, regional co-operation will continue to play an important role as an instrument for promoting the development of our countries. The implementation of projects in agriculture, transport and energy is a palpable example of this process. The Government's priority in 1996 will continue to be those defined in 1995. These are essentially to continue to consolidate the refornms began in all sectors of the country's political and economic life, namely strengthening governance, assistance to agriculture, the family sector in particular, and budgetary priority for the social sectors and areas where the productivity of investment is greatest. In our opinion, these objectives and priorities will reinforce our activities to date aimed at developing the country economically and reducing poverty. With this strategy, the Government reiterates its position as a facilitator and regulator of how the economy works. In the current climate of peace, Mozambique is undoubtedly a country in which the private sector has an important role in economic growth and social development. We hope that the support manifested by the international community will continue for the consolidation of democracy and the creation of conditions needed for Mozambique's economic and social development. Thank you very much Maputo, 17 de April de 1996 if _ I_  35 ANNEX V Statement of the Staff Representative of the InternationalMonetary Fund at the Mozambique ConsultativeGroup Meeting Paris, April 17-18. 1996 Mozambique launched its structuraladjustment program in 1987--the Economic RehabilitationProgram (ERP)--which was supported by a SAF arrangement from 1987-90. Subsequentprograms have been supported by ESAF arrangementssince then. During 1987-95, the rate of growth averaged 6.7 percent, helped by large foreign aid inflows, structuralreforms, and economic liberalization. Few countries can boast of such a strong economic recovery, particularly in the face of civil war, deterioratingterms of trade, and natural disasters. The liberalizationof the exchange rate, prices, interest rates, and trade policies is now almost complete; progress toward enterpriseand financial sector reforms was also significant, although more remains to be done in these areas. Moreover, since the signing of the 1992 peace accords,Mozambique has made good strides in normalizing its political system. Internationallysupervised elections have been held, millions of refugees and displaced persons have been resettled, and about 80,000 troops have been demobilized. Yet, Mozambique's future performanceremains vulnerable to a number of factors. First, the country has benefited from exceptionallyhigh levels of foreign aid that may not continue in the future. Second, inflation remains high, fluctuatingnear 50 percent. Third, foreign direct investmenthas been modest so far. Fourth, exports have been well below the country's potential. Finally, even though Mozambique has benefited from a series of concessionaldebt reschedulings,its external debt burden remains unsustainable. During the discussions in February/March 1996, the Government reached understandingswith the Fund staff on an economic strategy for the period April 1, 1996 to March 31, 1999, in support of which the IMF Executive Board of the Fund is expected to consider a request for a new three-yearESAF arrangement in May 1996. The Government that took power in December 1994 has sought to consolidate the economic recoveryby creating the conditions for sustainable growth and poverty alleviation. Preliminary estimates for 1995 suggest that real GDP growth was about 3 percent, with vigorous expansion in the productive sectors being partly offset by a sharp contraction in government services on account of the eliminationof the special programs associated with demobilization,resettlement,and elections. The inflation rate remained high--at 55 percent--eventhough this represented a decline from 70 percent in 1994. Fiscal policy was tightened considerablyin 1995, with the overall budget deficit before grants falling to 20 percent of GDP from 30 percent in 1994, largely on account of a reduction in expenditures,particularly current expenditurerelated to special programs. Underlying defense and security expenditure (excludingspecial programs) fell by 2 percentage a. .. F  36 points of GDP. Revenue increased by only 0.2 percent of GDP, owing in part to lower-than-expected customs collections. Net government repayments to banks reached 1.2 percent of GDP, an improvementover 1994. Monetary policy was tight in the first half of 1995. By midyear the liquidity situation of the state-owned banks began deterioratingmarkedly, resulting in frequent recourse to overdraft positions with the Bank of Mozambique (BM). This trend seemed to reflect an increase in nonperforming loans, as well as aggressiveefforts by the CommercialBank of Mozambique (BCM) to cover its open position in foreign currency. Late in 1995, the BM encouraged the state banks to actively pursue loan collections and to improve liquidity management, and established a schedule for the elimination of unplanned central bank advances to them. By end-1995, most financial aggregates had been brought into conformitywith the revised targets agreed with the Fund staff in October 1995. The sharp rise in net foreign assets as the year closed brought their 1995 expansion to some US$75 million, or about US$34 million above the program target. As a result of these factors, the stock of broad money increased by 56 percent. The balance of payments position strengthenedin 1995. The value of merchandise exports grew by 13 percent in 1995 to US$169 million, reflecting favorable internationalprices. Imports declined in response to lower foreign aid levels. The current account deficit before grants narrowed by US$210 million, to US$686 million (145h percent of exports of goods and services). Looking ahead, Mozambique will be faced over the medium term with a significant reduction in its capacity to import, as foreign assistance is expected to level off, while scheduled debt service obligations will increase. To ensure investment levels consistentwith the 5 percent real growth of nonenergy GDP envisaged under Mozambique'smedium-term strategy, the Government will need to increase domestic savings--inparticular, public savings--and the efficiencyof investment. Public sector savings will be raised mostly through steps to improve tax and customs administration, allowing revenues to grow as a result of an expansion of the tax base. A concerted effort will be made to bring inflation down sharply, so as to create an enabling environment for private investment. The efficiency of investment will be enhanced by fostering private sector development, as well as by improving the selection of public investmentprojects. Increased education and health expendituresare expected to help raise labor productivity and investmentefficiency in the medium to long term. Public enterpriseand financial sector reforms will be accelerated in the next three-yearperiod. The main focus will be on the rapid privatization of the remaining public enterprises,with particular emphasis on those that are the largest borrowers from the banking system. The decision to privatize the two state-owned commercialbanks in 1996 is a major step forward in advancing the financial sector reforms and improving the performance of the banking system. ___ _ II __ _ _ _ _  37 The cornerstone of the poverty alleviation strategywill be the developmentof the agriculturalsector through market incentives. The key elements of this strategy are efforts to increaseagriculturalgrowth through liberalized markets, investment in rural infrastructure(feeder roads, sanitation, and safe water projects), extension services and seeds for the rural poor, eliminationof minimum prices, fostering of private sector marketing, and review of the land tenure system to ensure adequate access for the rural poor while encouragingmodern agriculture. A public administrationreform needs to be carried out within the next three years to improve the efficiencyof the Governmentby decentralizing public administration,rationalizing public functions,and making the civil service more accountable. A civil service reform component will include a review of the size of the work force, its salary scale, and productivity incentives. The key objectivesof Mozambique'sprogram for 1996 are a sharp reduction in the inflationrate, enhanced support for education and health, and a reduction in the country's dependence on foreign assistance. The 1996 targets for inflation and growth are 22 percent and 4 percent, respectively. The program entails a further reduction in the overall government deficit before grants; closer monitoringof foreign aid flows and counterpart funds generation; a tight monetary policy stance; a market-determined exchange rate policy; and a strengtheningof the net foreign asset position. Greater transparencyand accountability in public matters will remain a priority. The deficit in the current account (excludinggrants) plus scheduled amortization is expected to decline by about US$120 million in 1996, a step toward reducing Mozambique'sfinancing needs. However, the Government will continue to need generous assistancefrom its bilateral and multilateral supporters. The total amount of official transfers and concessional loans assumed under the 1996 program is similar to the level obtained in 1995. For 1996, the remaining financing gap could be covered with debt relief from a new flow reschedulingagreement on Naples terms with Paris Club creditors, and by comparable debt relief from non-Paris Club bilateral creditors. An analysis of debt mustainabilityindicatorsshows that, even after possible debt relief under existing Paris Club mechanisms, and comparable treatmentby other bilateral creditors, it appears that Mozambique would not be able to achieve a sustainabledebt situation within a reasonable period of time. The net present value of debt and the debt-serviceratios after assumed debt relief would remain above 250 percent and 25 percent of exports, respectively,for more than five years. These indicators could turn out to be even weaker if adverse external shocks were to develop. In conclusion, Mozambiquefaces major economic and financial challenges in the period ahead. The effective implementationof the policies envisaged under its medium-term strategywill be critical to address these challenges. Even so, the efforts of the authoritieswill need to be supported with  38 concessionalexternal financial assistance and an exceptional treatment of its external debt in order for Mozambique position. to achieve a sustainable external ~~ l1'-~ ~ ~~~~-- --- --.. ---- -- I  39 ANNEX VI FOR MOZAMBIQUE CONSULTATIVE GROUP MEETING 1996 Paris, 17-18 April STATEMENT by Solomon Akpata Chief, Division II Regional Bureau for Africa Programme United Nations Development Members of Honourable Ministers, Distinguished is a great Madam Chairperson, It Delegation, Ladies and Gentlemen. the the Mozambican to represent Mrs. Ellen Johnson Sirleaf, pleasure for me Bureau for Africa in this Consultative Director of the Regional here with me, Mr. Erick de Mozambique. I have Group Meeting for and U.N. Resident Coordinator Representative the Mul, the UNDP Resident as the man on the spot, he will take in Mozambique. Naturally, that follow the statement session. lead role in the discussions to highlight to seize this opportunity Allow me, Madam Chairperson, aspects of Mozambique's economy, and UNDP's views on some crucial requirements of the present stage of what we believe are some Mozambique's development. The Challenges of Peace Meeting, the since the last Consultative Group shown Madam Chairperson, economic situation in Mozambique has peace political and stability and normality: of a return to encouraging signs of the young democracy was strengthened gained roots; the vitality and lively interface between government, as illustrated by the free Overall the social climate remained calm. legislature and media. reintegration were resettlement and important, further Equally and economic reform made consolidated; reconstruction progress. and that stable and predictable politicalrestoring It is undeniable environments are prerequisites for the macroeconomic investment and for generally providing production, attracting growth and development. Nonetheless, basis for much needed economicof peace and national reconciliation, the despite the consolidation challenges facing remains fragile and the I would like to socio-economic situation In this context, are still daunting. the country my remarks on three key and inter-related themes: briefly focus human development; * growth pattern and sustainable capacity constraints; * human resource and institutional and democratization. * governance, empowerment - r1  40 Growth Pattern and Sustainable Human Development Madam Chairperson, since the adoption of programme in 1987 Mozambique has made the structural adjustment visible strides towards establishing a market-based economy. However, bulk of the stabilization and structural due to the war, the recently has been confined to the public adjustment policies until sector essentially urban, economy. The cornerstones and the formal, programme have been tight fiscal and monetary of the adjustment containing aggregate demand and "disinflating" policies, aimed at exchange rate and trade liberalization; the economy; price, and privatization. financial sector reform; After the strong, but exceptional, recovery the first post-war year, in which GDP rose experienced in 1993, per cent, GDP growth slowed considerably by an impressive 19.2 down and an estimated 3 per cent in 1995. In 1996 to 5 per cent in 1994 4 per cent. Given that Mozambique takes growth is projected at off economic base and after factoring in population from an extremely low recent trend of lackluster growth performance increases, the GDP per capita increases too modest to make would translate into to, and sustain, the goals of poverty a tangible contribution development, reconstruction, and restorationreduction, social sector of external viability. It seems that in order to ensure equitable, sustained and environmentallya pattern of more rapid, much greater emphasis will have to be put sound economic growth, on policies to stimulate aggregate supply response relative to policies and reduce inflation. It has been argued to restrain demand inflation solely on the basis of demand that attempting to curb rather ineffective in Mozambique, given management policies may be of domestic supply and the sizable segmentsthe structural shortfalls the informal sector, that are likely to of the economy, such as be influence of the fiscal and monetary variables largely immune to the finance and monetary authorities. Some controllable by the correctly, the need for "stabilization with donors are stressing, importantly, economic growth is an absolutely growth", because more sufficient, condition for reducing widespreadnecessary, albeit not structural poverty. Madam Chairperson, in our judgment, Government, other donors, and I am sure which is shared by the long-term development vision and strategy the World Bank too, that a that such strategy would essentially be is needed. We suggest based on two growth vectors that must be made mutually reinforcing overcome the persistence of a dualist in order to gradually the traditional and more modern sectors economy and thus integrate of the economy: (i) on one hand, since more than 70 per cent of the population lives in the rural areas and relies subsistence on family-farm agriculture extensively for its predominate - it is apparent that a major, - where women source of potential growth lies in rural if not dominant, development grounded  41 by targeted public on peasant agriculture, to be supported at increasing investments and selective incentives aimed investment and productivity and promoting rural private of rural marketing. As we are aware, the revitalization of social production and trade coupled with the development for bettering rural and economic local networks are key and income for the livelihoods and generating employment thus being of resettled population and demobilized soldiers, stability. fundamental importance for preserving social lessen its massive aid (ii) On the other hand, for the country toto about 72 percent of dependency (which in 1994 amounted at nearly 4 times GDP), service the huge debt stock (standing viability, export- GDP), and ultimately regain external the current account oriented growth is vital as well. Until will be no real deficit begins to close significantly, there potential in export adjustment. Mozambique does have a large natural gas, cash crops, fisheries, agro-industry, mining, Nevertheless, in power, port-railroad services and tourism. future balance-of- view of the unsustainable debt burden, debt forgiveness payments viability hinges also on substantial and relief. should and can be linked Developing agriculture and rural markets provide a more solid basis to export growth. Such approach could and competitive import- for domestic economic integration while also substitution, for instance through agro-industry, savings. However, aside contributing to the increase in domestic fiscal, technological from calling for important public investment, requires very strong and institutional reforms, this strategy reallocation of political commitment because it implies significant capital accumulation and resources and changes in the pattern of would be crucial, income distribution. The role of the Government education, health, particularly in the provision of basic agriculture services vocational training, sanitation, water supply, the rehabilitation and and credit facilities as well as in (such as feeder construction of vital economic infrastructuresupport the emergence of roads) to bolster economic efficiency and areas made up of family a dynamic private sector in the rural farmers, traders, and micro and small industry. cannot ignore the fact Obviously, a long-term development strategy region and member of that Mozambique is in the Southern Africa regardless of the SADC. Yet, engaging in sub-regional integration structures and prevailing sharp disparities in socio-economic dependence on, and development stages risks heightening structural it is not feasible to dominance by, South Africa. In our view, between economies that achieve balanced integration and convergence where, as in Mozambique's exhibit wide disparities amongst them or dualist and disintegrated. case, the domestic economy is markedly required during which Long transition periods are normally capitalize on their structural gaps gradually narrow, countries  42 comparative advantages, and occurs - as for instance with some degree of sectoral respect integration where Mozambique can play to the transportation sector, context. an important role in the sub-regional In the framework of its support Building Programme, UNDP to the Economic Management stands Capacity articulate a long-term development ready to assist the Government development and formulate vision for sustainable human a together in a coherent fashionstrategic development plan, bringing human resource development stabilization, structural change and policies. Human Resource and Institutional Capacity Constraints Madam Chairperson, the magnitude for managing the complex and diversity of the requirements reconstruction and development changes implied by Mozambique's Government's overstretched process contrast sharply and with the capacity. The difficulties management and implementation rooted structural problems are exacerbated by a situation of deep- run. In particular, there that can only be overcome is in the long an acute shortage of technological management skills in all sectors and resource base may well represent and at all levels. The thin human growth and development. Tied the major bottleneck to sustained private sector is embryonic to this factor, the modern domestic is scarce, and indigenous entrepreneurial capacity lacking capital and managerial combination of a limited expertise. The weak supply of skilled labour with capacity has given an apparent assistance, accounting for rise to massive inflows of technical official development aid. an average of 25 per cent of total A country's development potential its skilled human resources. depends primarily on the size still at a relatively early It can be said that Mozambique of is human capital. Hence, human stage of accumulation of knowledge and capital formation must of an integral part of the previously necessity be advocated long-term strategy. We welcome the Government's in real terms in the social priority to increase budgetary spending and primary health care - sectors - particularly basic which education and higher productivity. In are central to human development the Government has managed spite of very tight fiscal constraints, health to boost the shares of education in total recurrent expenditures. and sustainability of these But to ensure future budget support. efforts Mozambique will probably require Governance. EmRoverment and Democratization Madam Chairperson, on several the Government ought to be occasions it has been advocated "in the driver's seat", promote that self-  43 reliance, and have local communities empowered through a process of democratic decentralization. But if Mozambique is to successfully effect a smooth transition to a full market economy, decentralized state, and democratic society, it clearly needs a strong Government, albeit redefined and streamlined. It is, therefore, of special concern to witness the slow progress made by the Government to manage the multiple and far-reaching economic, public sector, decentralization and local government reforms it intends to carry out. We must assist the Government in the search for innovative modalities to support civil service and organizational development reforms that aim at arresting the "brain drain" from the public sector and at improving its efficiency and managerial capacity. This will imply a review of current aid priorities, a rationalization of technical cooperation, greater public investment efficiency, and especially a concerted effort to reallocate more of the technical and capital assistance to human resource and management development at the central and local levels. In this regard, we urge the Government and donor community to reexamine the recommendations made in the joint issues paper by the World Bank and UNDP, "Technical Cooperation and the Labor Market in Mozambique", which was discussed at a special session of the 1993 CG devoted to improving the effectiveness of aid as well as later in a local seminar, but did not benefit from any decisive follow- up. UNDP is available to assist the Government and the donor community in pursuing the policy dialogue on civil service reform, capacity development, and ways to increase aid effectiveness. In this regard, a wider use of the programme approach or sector-based assistance, while enhancing Government ownership of donor-funded support and its ability to develop homegrown policies, would contribute to improving aid coordination, including technical cooperation management. It would also help Mozambique build capacity, improve public investment efficiency and generally allocate resources more effectively to the achievement of national development objectives. Because the approach requires joint programming with donors, it would also imply reinforcing or setting up coordination mechanisms such as the Government-donor working groups. Madam Chairperson, it is precisely because of the narrow management capacity of the public sector, lack of institutional capital and severe resource constraints that representatives of the local donor community have been insisting on the need to focus the extensive reform agenda on a limited and critical policy measures and investment programmes that can realistically be implemented and hopefully trigger quicker supply response and growth. Apart from advocating the reallocation of public expenditure from defense spending to education and health as well as greater Budget transparency and accountability, local donors have strongly  44 encouraged the Government and the international institutions to concentrate on the following financing core economic reforms: * streamlining the tax system and reform of administrations, which are essential the tax and customs for improvement of budget revenue performance; a much needed * financial sector reform, mainly by privatizing owned commercial banks; the two state- * private sector development by emphasizing: (i) deregulation of the business environment through simplification legal, tax and bureaucratic impediments or removal of transaction costs of doing business, curbin order to lower the facilitate rent-seeking, and investment and micro- and small-enterprise operations; and (ii) deregulation of transport services, including privatization of facilities and ownership. state management or While acknowledging the validity of these economic reform, UNDP believes that a shorter-term goals for comprehensive and consistent longer-term strategy along the lines outlined earlier is required. Local donor representatives are also underscoring priority to the following good governance the need to give issues: and democratization * establishment of an independent authority and procedures to prevent and combat corruption; of clear legal * deepening of the democratization process within a known time frame and with emphasis on decentralization, and reform of the judicial system. local elections Madam Chairperson, in the broad area of such crucial programmes as those dealinggovernance as well as in reintegration of demobilized military, with mine-clearance and the stimulus and support received from UNDP very much appreciates the donor community and Government while performing its donor coordination continue to strive for managing aid coordination role. UNDP will Aid-For-Democracy Group of donors, its specialized through the local the Government-Donor Working Group on Governance. sub-groups, and we recall, focus on democratization, These groupings, decentralization, and good governance. public sector reform, coordination has been to develop and One of the major aims of implement concerted donor frameworks or programmes of assistance building, strengthening of the rule to democratic institution- protection, covering in particular the of law and human rights media, organization of local elections, Civil Police, Parliament, and the Judiciary. 1F- -- I  45 Closing Remark Finally, Madam Chairperson: in order to pursue national reconstruction, which will lead to sustainable growth and human development path, and develop national capacity, Mozambique for many years will still need significant inflows of official development assistance and private capital. We all realize, however, that faced with a probable scenario of stagnating or declining aid, Mozambique must allocate and make use of the resources from external assistance to areas likely to yield the highest social and economic returns. This, in turn, will require improved aid coordination machinery and a higher degree of Government-donor cooperation and programming. The UNDP, as usual, stands prepared to be part of this process. I thank you. \96CJ-STA.2\O9.O4.96 !~ ~~~ _____  46 ANNEX VII NINTH MEETING CONSULTATIVE GROUP FOR MOZAMBIQUE STEPS TOWARDS ECONOMIC AND SOCIAL DEVELOPMENT SPEECH BY HIS EXCELLENCY DR. TOMAS SALOMAO |MNISTER FOR PLANNING AND FINANCE PARIS,APRIL 1996  47 STEPS TOW'ARDS ECONOMIC AND SOCIAL DEVELOPMENT MR. CHAIRMAN, ILLUSTRICOUS REPRESENTATIVFS OF TiE DONOR COMMUNITy LADIES AND GENTLEMEN, 1 would like to begii by welcoming you all and expressing the Mozambican people's gratitude for the international community's continuing support for the democratic process and the country's economic and social development. Wheni we met in this forum a year ago, I stated that the government was committed to pursuing reforrns w hich would lay the foundations Tod.ay, I would likc to give you a sumnmary for economic and social development, of the most important activities undertaken and the results achieved. The document presented by the Government to this "Steps Tonwards Economic and Social Developsnent" Consultative Group has been entitled despite our progress, much still remains to be precisely because we are aware that done given that our starting point is that of une of the poorest countries in the world. Our activities in 1995, whilc only a modest contribution to the rcal requirements of development, nevertheless have the virtuc of demonstrating the Government's strong comnmitrTient to persevere with the necessary reforms. I would like to recall that one of the main poinits on the Government's agenda in 1995 was to con1solidaLedemocracy and ensure that democratic institutions The State budget was one of the instruments were working properly. for achieving this objective. (O)neyear later, the Assembly of the Republic is functioning normally as a legislative body and an organ of national sovereignty, bringing together the democratically elected representatives of different party forces. Political thcir opiniions through all methods and meatis parties are operating freely, expressing for the public transmission of ideas. In the salutary exercise of democracy, on various occasions the Government has been called the Assrmbly of the Republic to explain to its policy options. 1 would draw your attention to the difference between this situation and that in 1992, w-hen rthe first steps towards the peace agreements were being taken. Despite the cuts in expenditure which had to be made, the Budget observed rigorously allocation of funds both for the Assembly the of the Republic and thc political parties, which were nor affected by these reductions. _ _ T _ I_ _  48 soldicrs continues to he a key elemcnlt in ensuring The social reintegration of demobilised the subsidies programnmed under the peace thle country's social stability. In 1995, soldiers with more than ten years servicc in aigreementswere paid, and 16,300 demobilised by awarded state pensions. This was accompanied the armed forces and war disabled were of tools for about 7,500demobilised soldiers. technical training courses and the distribution objective in 1995 was to strenigthen the climate of legality, by Another Government the safety of citizens and their property, reinforcin- the judicial system and improving as in many others, we have taken a first step towards improving the operation In thic field, more resources so chatthey can carry out their of theseinstitutions, providing thcm with for the judicial system grew 60 %/ain real duties more effectively. Budgetary allocations has becn for the police was 100.. 'lThe palpable result of thcsc options rerms. The increase with people the north to the south of the country, possible to ail improved climate of security from The increasedallocation also made it and goodwable to circulacein tranquility. the districts, an cssential prerequisite for the expand the judicial apparatus in dcconceniration of central authority. owing to the made concerning military expenditure were surpassed, The conmrnitments Actual expenditure was only 8.3%9/ of the programmed amount, shortage of budget funds. in total in real terms of 50% in relation to 1993.The weight of this expenditure a redi-rItion in 1993to 2.4°t. in 1995. currcnt expcnditure has fallen from 3.6°K% of increased transparency in public administration activities, made at the 1995 The promise its regularly provided informiation on both CG, has been kept. Last year the CGovernment Coordination with the international community policy options and the economic ouLtcome.of the Government and donor Budget and was achieved through regular meetings on the status of the measuresimplemented Governance groups and bi-monthlymeetings and the results achieved. the collection of countervalue.s also improved. The two isolated cascs of the Control over by the during thic year were hantdledtransparently misapplication of exLernalassistance detract from the management advances achieved. Government and are not sufficient to in is staking the country's future is investment of One of the areas where the Government to health and education in the allocation hurnan capital. We undertook to give priority real growth of 19% in the total current rcsources public resources. This we did, ensuring of cuts in expenditure. assigned to these two sectors, in a context 11% arc encouraging. In the education sector the number of schools rose by rate The results education rose by 9%. The school attendance and the total number of pupils in general health sector 103 health units werc concluded, grew considerably in relation to 1991.In to reduce thc current imbalance in relation to the most of which in rural areas, thus helping assessing of attendance units, the indicator for urban areas. In addition, the total number 4%} higher than in the previous year. was qutantirarivegrowth in health services, can only be achievcd through increased The country's economic and social development foreign. The Government thus gives priority to private investment, both national and I T  49 providfinlg a favourable climate for business, whether curbing inflation or through through econonic policies indirect measures aimed aimed at at facilitating investment. Covernmneit activities gave particular emphasis to this jtisr the mosr significant objective in 1995. The following Lneasures in this field: are the proesss of privatising the two State banks was decided and should be concluded and implenmented, in 1996; a start was made on simplifying a business, iand access to the bureaucratic procedures the facilities granted under for starting up became automatic; the Investment Law the privarisation of large companies continued and new companies; and has to date re-sulted in 4S a substantial part of public reconscruction of infrastructures,investment has been directed towards the roads in particular. The promction of exporE oriented goods and services part of lhe Government. warranted particular attention Exporters were given the on the foreign evrhange resulting possibility of retaining some from Lheir exports. of accessing of the a start -wasmade on liberalising credit in foreign exchange pursued, with a view to cashew exports. In addition, some major undertakings and generating substantial balance rhese include the reconstruction of payments revenue in the were of energy supply lines to future. of lines to Zimbabwe and South Africa, the Malawi, and negotiations construction tram;por of natural gas from on the investigation, production the Pandc and 'remane deposir. and Under rhe stahilisation programme, a shortfall in the collection as described in dcrail in the of the programmed revenue Government document, had to be made in both current and countervalues mcant that cuts t.o meer some of the and inve.stment expenditurc. targets set under the programme. Fven so, it was not possible progress, s.nce the budger The final result represents deficit before grants fell by subst:antial in relation to 1994. about 12 percentage points of GDP We w-ould like to stress that our evasion-on imports was honoured. commitment with regard to measures to reduce Thc planned aativities werc fi.scal shiprment inspection and implemented for customs both this will be reflected in increased management and capacity building. It is expected pre- revenue in 1996. that In the moT1netary policy field, the Government concentrated programnre targets. This task was hampered in particular its attention on meeting the undergoing privatisation by the fact that the banks did not observe the limits Ncverlheless, following set for their Net Domestic Assets. the was a sharp decline in the introduction of additional measures, in the last Net Domestic Assets. quarter there All the srructural measures under the inMtitutions were essemti2lly implemented progranmme agreed with the Bretton Woods according to the established timetable. 1 VX _ _-  50 The results of the cfforts I have described were clearly visible in the growth of privare economir :tivity. It is estimated that production excluding services grew about 7%, in 1995. Agriculture in particular contributed to this result, especially the family sector where maikered output rose 1 8 %. In 1995 Governmce,u suLpport for this sector included some fundamental decisions aimed at guaranteeing stability in thc use of land. In patticular, it approved EhcNational Land Policy andi a start was made on revising the Land Law, as part of a process which is still at the srage of discussiotns with the main partners. Other important decisions include the negotlarions started with the South African authorities on authorising farmers from tlhat countiy t) use land in Mozambique. They could make a positive contnrbution to development, not just through incrcased food production but also througli the diffusion of modern agricultrural techniiques. Industrial production grew for the first time in six years, and should reach about 5%. To a large extent, this growth is the positive ouLconme of privatisacion, particularly in the food, drink, and cement sectors. In the transport field, the beneficial effects of road rehabilitation are being felt, with a forecast of real growth of some 13%. Work continued oll the restructuring of Mozambique Railwayb to improvc its management, as did the process of awarding private management contracts for terminals, for example the container, sugar and coal terminals. In 1995, with technical assistance collaboration the Governmcnt worked on a srudy containing the main recommenclations for the restructuring of rail-port activities and private sector participacion. Thcse recommendations will be disseminatcd next month in a seminar on the development of the Maputo corridor, clcarly demonstrating the importance attached by Governm;lit to the role of private operators in the secttor. Twelve cost centres in the rail- port branch, including terminials, are now under private management. T he privatisation process in the maritime branch saw the launching of tenders for two companies and pre-privatisation studies for two others. In the air transport field, the restrrtrtitring of Mozambique Airlines continued and a tender was opened for the privatisation of TTA. Beforc closing nmy presentation on 1995, I would also like to mention that the country managed to take a substantial step towards reducing its external dependence. The tradc balanre deficit, measured in dollars, fell by about 29% in rclation to thc previous year, and that for current transactions fell by 20%. These results reflect both 19% growth in the export of goods and services, and a 15% fall in imports, excluding interest on foreign debt. MR. CHAIRMAN, LADIES AND CENTLEMEN n~~ ~ ~- - F-~-___ --- ___  51 Thiis sumrnm.risesthe Government's efforts in 1995 and the main results achieved. We a-ware that in many areas we have only are taken the first steps in the needed refrnms. Ho-wever, we are grarified that wc have made progress in the fundamental areas where we mIde c-mrinnitent.s hefore the internationall community, doing our utmost with the technical capacity availablc in the country, You will r(call thar in the docunient prescnred to thc 1995 Consultative group, Covernmenr ser out its main guidclines for the governmencal action, not just for one year for the period of its mandate. Consequently, but both the work done in 1995 and that planned for 1996. f.al wiEhin the franie-work of these major options. This y ear r e shall therefore continue with the and consolidating the reforms wc have begun. lines of work already laid down, deepcning In this context, one fundamental objective is to continue to promote economic and social growth anti development while progressively correcting the external inmbalance. Finding rhe harmonious balance between demand reduction policies aimed at curbing inflation and policies which stimulate increased supply, is a focus of Government attention and chat of the econiomic agents operating in the country. We are axware thaE without vigorous growth in the ecotonmy, the short term sacrifices curb intlation will not be sustainable in the to mediunm term. Onc important point on the Government's agend.s is thus to study policy slupport proriuction growth without jeopardisingmCasures which can be implemented to the stabilisation programme. Consequenrly, in 1996 the heart of economic rcsrricrive fiscal and monetary policies aisned policy will continue to be extrcmely at slowing down the rate of inflation. Thc second imbalance targcted by economic policy is the external deficit, which must reduced. Export growth has a fundamcntal be role here, as well aiSthe implementation rclared policics. of In this context, budgetary policy has been designed to achieve the following objectives: a reduction in the deficit before grants, by about 3 percentage points of GDP; a larger pcrcentage of total expenditure to bc financed by budget revenue; the establishment of savings in the banking system equivalent to 12% of budger revenue. On thus monetary policy side, the objectives are also extremely restrictive, with a target a 6% reduction in Net Donestic Assets compared of Reserves should reach about 70 million dollars. co 1995. In addition, Net International  52 In order to prevenr thcse restrictive policies fronmprovoking a reduction in the level of activity, thy scarce rcsources available must be allocated in such a way that they promote optimal ec-;nomic developmnct. Budget policy for 1996 pays particular attention to this principle, giving pnrority to activiLies which contribute to the development of human capital by raising the quantity and quflity of the services provided by the State in education and health. Consequently, the resources aIlocated to these sectors will rise in real terms. The central objectivc in health is to continue to increase the availability of primary care, with priority for health assistancefor the poorer sectors of the population, the rural areas and groups at greatest risk. l'hc reconstruction programnme for health posts in rural areas and the rehabilitation of hospitals will also be conitinued. In educacion, work on the rehabilitation of schools will continue, in order to ensure a 28%/ rise in the number of primary school pupils. The expansion of primary school coverage, particularly in rural areas, and improvcments in the quality of teaching will continue to be the main orientations for thc sector's activities. In 1996, the National Poverty Reduction Strategy will begin implementation and efforts will be directed at defining the profile of poverty, as a funidamcntal instrument for assessing the impact of this policy. Poverty alleviationprogrammes will bc revised so as to improve their efficiency. One of the Governmenti's concerns is to guarantee social peace and stability. A fundamcntal aspecT of this is the social reintegration of demobilisedsoldiers. Consequcntly, professional training courses will be organised for about 3,200demobilised soldiers and 140 disabled. In addition, mic:ro-projects will be financed, to create job opportunities for about 6,240 soltdiers demnobilised from both Government and Renamno forces. Retirement procedures for more than 15,300demobilised are under way, and will be concluded in 1996. Strengthening legality will continue to be a priority of the Government, with additional budget allocations in 1996 for the judicial system and the police. These public expenditure priorities follow the same guidelines as those defined in 1995, with specialattention being givento key areas of social development andcapacity building in the most important public services. This same orientation also guidesinvestment expenditure, where most of the resources will be absorbed by health,education, roads, water and agriculture, in the latter case assisting the family sector. As regards capacity building in the fiscal revenue field, work will continue on improving customs control. More rigorous forms of pre-shipment inspection began in January this year, and the company which wins the customs management tender will start work in June. -. I  53 The cuscoms tax structUre is also being revised, in order to simplify it and becttr adapt it ro the obje'nives of economic development. It is anticipated that in the future there will only be ihree tax levels, applicd according to the rclcvanice of the imported item) for domesti.- e.onnmic .irtivity. Simultaneously, all ctustoms exemptions will be incorporated into the ciitonms code system, and thcse will be defined on thc basis of their impact on eronomicr growth. A furrher underlying concern bchind the revision of the customs code is to try and encourage economllic agents to fulfill their fiscal obligations, widening thc basis of tax coverage to a larger volumc of imports, and thus making it possible to reduce thc ta.x appliei. Another aspect of tax collection are the necessary studies currently underway for the introduction of the Vahle Added Tax. In addition, wc shall proceed with activities which make investment in Mozambique attractive, creating favourable conditions for a business climnate. Of particular significance are the following: conclusion of the privatisation of the State banks in 1996, opening of the financial system to new national and foreign entities; strengthening norms and improving the central bank's role in the supervision of the financial system, in order to ensurc that it furnctions properly; continuation of the privatisation of companics; and the signing of programme contracts with various companies providing utility services, aimed at improving their economic public productivity and raLionilalisig the policy of State support for thcse sectors. It is clear from the above that in 1996 the Government will continue stitmiulating private initiative, rcscrving for the State the role activities aimed at of regulator of economic Fxrporr promotion will be pursued through actions which can be summarised as follows: support for the development of export projects, including in the fields of; electricity, gas, mineral resources, timber, agricultural products and tourism; the restructuring of public companies producing transport services, so uc to increasc their efficiency; support for the development of border trade with neighbouring countries; a rise in the percentage of foreign exchange export earnings retaincd by the exporter; |[ , _FI _ _  54 strengi hening public services which assist the exporter. In short, the Government's comrmitment is directed in particular at three levels of interven rio n- intended to the continuing implementation of macro-cconomic policies reduce inflation; which can best the improved allocation of resources to those sectors promote economic and social development; environiment activities which foment the establishment of a good business and which can create the conditions for greater private investment; strengthening national statistics. nmultitude of activities to be Given the country's fragile institutional capacity, the the Government. We hope that undercaken will require a tremendouA effort on the pant of support and stimulation needed the incernational community will continue to provide the to pursue this arduous task. In order to ensure its future The foreign debt is another major concern of the Govcrnment. field. 'he extemal debt can external viahility, Mozambiquc clearly needs assistance in this alleviating its budgetary bc used as an instrument to promote the country's development, to the priority be redirected expenditure on debt service and allowing these resources to d.lvelopment sectors. iMR CHAI R MAN, LADIES AND GEN1'LEMEN, Governmcnt is aware that the 1 would not like to conclude without mentioning that the involve fundamcntal options activities it proposes to undertake are far from easy. They efforts on a daily basis. and, given the country's limited institutional capacity, enormous this endcavour and that it will Thus, in conclusion, we hope that you will all comprehend continue to receive support from the international community. Thank you  55 ANNEX VIII NITH MEETING CONSULTATIVE GROUP FOR MOZAMBIQUE FINANCING REQUIREMENTS SPEECHBY H.E.THEGOVERNOR OF THE BANKOF MOZAMBIQUE PARIS,APRIL1996  56 MADAME CHAIRPERSON, DISTINGUISHEDMEMBERS OF THE DONOR COMMUNITY LADIESAND GENTLEMEN I am honoredto be able to address this important Ninth Meetingof the ConsultativeGroup for Mozambique. I would like to greet in particular the distinguished participants, in acknowledgment of the international community's constructive involvement in the reform process currently under way in Mozambique. It is significant that, since the beginning of Mozambique's structural adjustment in 1987, we have been able to count on the support and activepresenceof the internationalcommunityat each stage of not only the economic but also the political and social transformationsin the countIy. At the Eighth Meeting of the ConsultativeGroup for Mozambiquethe Govenmment committed itself to pursuing the structural adjustment process, in particular by implementinga macro-economicstabilization programme aimed at reducing our economy's intemal and extemal imbalances. Despite the uncertaintieswe have had to face along this road, there are noteworthy and encouraging signs of a definite and progressive stabilization of the Mozambican economy, due essentially to the monetaryand fiscal policies adopted. Net domestic assets, a monetarypolicy instrumentthe controlof which has repercussionsfor both budgetary policy and the extemal sector, were drasticallyreduced, falling from an expansionof 74% in 1993to r-- X  57 a mere 20% in 1995,when comparedwith the stock of broad money at the beginningof each year. The results of these policies are equally encouraging.From a worying fall in net foreignassets of some 54 million dollars in 1993, we rose by 70.3 million dollars in 1995, which made a significant contributionto improving the level of our import coverage.In turn, the fiscal deficit before grants as a percentage of GDP was reduced considerably,and the volume of financial resources which the state passed on to the economythroughthe banking system increased. We are continuing to reform the financial system, with emphasis on restructuring the State commercial banks with a view to privatizing them as plannedthis year. Our initial aim of privatising the CommercialBank of Mozambique, the institution with the largest share of the credit market and of internationalcommercialoperations, in 1995, had to be postponed to June 1996. This was because the strategy of selling shares initially adopted by the Government was replaced, on the advice of our partners, by the sale of assets. Given the complexityof this operation the timetable had to be reformnulated, with the involvement of the internationalcommunityrepresented in Maputo, within the framework of the Govemment'songoing consultationswith its partners in national socio-economic development. In 1995 the reform of the financial system also continued, with the modemization of the payments system, involving all the banks operating in Mozambique,as well as throughthe introductionof a new regime of mandatory reserves adjusted to the current reality of the banking sector. The Bank of Mozambique has devoted particular attention to the fimctioning of an efficient, modem and credible paymentssystem. r~ ~ ~~-  58 Within the spirit of opening up the financial sector to national and foreign private initiative, and of diversifyingthe products and services providedto the economy,a new commercialbank began operations in 1995, the banking network of existing private banks was expanded, a leasing company started up, and the number of foreign exchange operatorsand their respectivenetwork increased. In Mozambique, the functioning of the foreign exchange market is closely linked to the availability, absorption and utilisation of external financial aid and the way in which it is channeled to the economy. It will be recalled that over a long period of our adjustment process the assistancemade availableto Mozambique was essentiallytied. At the end of 1994 and in early 1995, Swiss Cooperation granted 12 million Swiss francs, allocated according to a model that was significantly different from the other mechanisms for channeling extemal assistance to the Mozambican economy. Its main features were as follows: * the funds are made availabledirectly in a currentaccount of the Bank of Mozambique; i theyare sold directlyto the commercialbanks within the frameworkof import support, on the basis that the first to present a purchasing proposal is the first to buy,at the market exchangerate; * auditing is done directly in the banks using the funds. At the same time that the Swiss model was launched, for external transaction with a maximum value of USD 5,000 the Bank of Mozambique eliminated exchange restrictions on foreign currency purchasesby residents. The combinedeffect of these measures resulted in a considerable reduction in the spread between the US dollar exchangerate on the officialand parallel markets, to under 10%. 1F~ _  59 The Governmentof Mozambique welcomed the Swiss initiative and informed the other donors of its advantages. Other proposals on making extemal assistance available in a more flexiblemanner began to be presented by our partners, reflectingan increaseddesire to make assistanceas untiedas possible. Consequently,in an attempt to synthesizethe various donor initiatives and ensure the harmonization of banking procedures, within the framework of the increased institutional coordination in the management of extemal assistance achieved in 1995, the Bank of Mozambique proposed a basic model for the allocation of extemal resources. This proposal covers procedures for disbursement, registration and sale to the conmmercial banks; the generation of countervaluesand their channeling to the State Budget; procurement rules; the principle of registering transactions balance of payments purposes;reporting;and auditing and supervision. The model benefitedfrom various suggestionsand improvementsfrom the import support group, the management and supervision coordinatingunit on the use of extemal assistance comprisingthe Bank of Mozambique,the Ministiy of Planning and Finance and the donors. This has resulted in the adherence of other donors such as the United Kingdom and Sweden. I hope that the number of donors and the amount of assistanceusing this channelingmechanism will increase in 1996. The advantages of this method are obvious, and in 1995 the results were in fact extremelypositive, with countervaluesfor the State Budget being generated more rapidly, more transparent management of extemal assistance, stimulation of the exchange market - with significantprivate sector participation - as well as the discouragement of the parallel market and improvements in foreign exchange management. If  60 The strategy of the financial programme, the bases of which were agreed with the InternationalMonetary Fund, envisages the reduction of inflation, the rapid privatisation of the State commercial banks," stronger control of prudential ratios and the imposition of greater discipline in the credit institutions' observance of net domestic assets limits and existing norms, including through fines and other financial penalties. Available central bank indicators up to the end of March and the first week of April show that base money is being tightly controlled, thus ensuring that net credit to the Governmentand net foreignassets are in line with the programme. There has been a notable fall in the State banks' overdrafts with the Bank of Mozambique, and the interbank clearing sessions have been functioning normally, with no sign of any future decline in confidencein the payments system. The timetable for privatising the State commercial banks is being followed rigorously, and we believe that the Commercial Bank of Mozambique process will be concluded as planned in June this year. With regard to the People's Development Bank, a sale adviser will be contracted in the near future and it is intended to complete the marketing process by September.The subsequent stages can then take place without any difficulty so that the process is concluded in December. We are already in an advanced stage of introducing an interbank foreign exchangemarket, open not only to the banking system but also to the exchange houses. With this market we aim to strengthen exchange management by the operators, facilitating more fluidity in channelingextemal resources to the economythrough this market, and a more realistic and flexibleexchange rate. In this regard, I would like to emphasize the need for greater donor participation in the provision of untied assistance, since resources of this nature will enable the interbank market to operatemore efficiently. 10 I - _ - - _ -_ _  61 In 1996we will strengthenand modernizeour intemal management of liquidity,and undertakemore active weekly monitoringof base money, in close collaboration with the Treasury. The aim is to prepare ourselves for the subsequent introduction of central bak and Treasury bill operations and in the medium term the operation of an interbank moneymarket. MADAME CHAIRPERSON LADIESAND GENTLEMEN In 1995 we referred to the problem of Mozambique's foreign debt, which is a serious constraint on the success of the Govemment's macro-economicstabilisation initiatives and an obstacle to continuous and sustainableeconomicgrowth. Our countrycontinues to face serious balance of paymentsimbalances. The solution lies in increased private investment in production accompanied by debt relief measures, including cancellation and reschedulingon more concessionalconditions.As a complementto the economicrehabilitationactions under way, the Governmentstill needs support from the international conmunuityin order to ensure that the structural adjustment process takes place in as stable a political and social environmentas possible. For the 1996 economic programme, balance of payments financing needs total some 850 million dollars, 315 mnillion of which are the year's external debt expenditurecomponentfor which the Government would like to obtain debt relief. The remainder, totaling USD 535 million, is essentially destined to financing current operations and investment. The Government hopes to conclude a new debt re-scheduling agreementwith the Paris Club creditorsby June. At the same time, it will attempt to obtain relief on arrears with creditors who are not  62 members of the Club - totaling USD 1.18 thousand million in 1996 - on conditionscomparableto those of the Paris Club. In conclusion, I would like to affirm Mozambique'shope of continuing to deserve the support of all our partners, and repeat my sincere thanks to the international community for its continued collaborationin our process of adjustmentand economicreconstruction. My thanks go in particular to the Bretton Woods institutions for their valuablecontributiontowards organising this ConsultativeMeeting for Mozambique, and their support for our Economic and Social RehabilitationProgramme. Thank you very much. Jr .1~  63 ANNEX IX MOZAMBIQUECONSULTATIVEGROUPMEETING PARIS, APRIL 17-18 1996 STATEMENTON FINANCING REQUIREMENTS BY THE WORLD BANK Ladies and Gentlemen The Mozambicaneconomy continued to grow last year, as a result of many positive factors. Improvedweather and the preservationof peace clearlyplayed an importantrole in sustaining economyrecovery. These favorableconditions were accompaniedby further economicreforms and continued external assistance. In 1996, strong growth is expected to continue. Increased exports will stimulate GDP growth and with increasedproductionof food and basic essentials,imports will decline. As a result, the trade balance will narrow by about $ 74 million relativeto last year. Althoughexternal financing requirementsare expectedto decreasein line with a gradual decline in external imbalances,Mozambiquewill neverthelesscontinueto need substantiallevels of external aid to finance imports,meet external debt service obligations, and reach the growth target for 1996. Last year, disbursementsfrom donor funds amountedto $574 million. This amount was well belowprogrammedlevels. In particular, balance of paymentssupport from grants were much lower than originally anticipated, partly because of delays in the signing of new agreementsand also because of complex disbursementprocedures. Faced with the associatedshortfall in counterpartfunds, the Governmentwas forced to adjust overall expenditures,includingaid-financedinvestmentprojects both from grants 1W I _ _  64 and credits. In 1996,external financingrequirements, excluding possible debt relief, are estimated at $557 million. Of this total, $527 million will come from existing commitments, including $59 million in food aid, $168 million in balanceof payments support,and $280 million in investment financing. Assumingnew grant commitmentsof $ 30 million, this level of assistance will be similarto that obtainedin 1995. I shouldnote that the compositionof external financing in the last two years, reflecting Mozambique's reconstruction has changed needs in the post-war period. There is now less need for food aid and emergency financing. This has resulted in a reduced share of grants relative to credits. However, the need for a more balanced investmentand balance of payments support remains very important, especiallyfor the budget. Mozambique's public investmentprogram is largely financedby donor funds. In addition, counterpart funds are an important source of financing for the recurrent budget, with direct implicationsto the execution of the investmentprogram. Increasingly,the execution of programmedinvestment has been constrained by the availabilityof recurrent funds. The internationalaid partners, have a criticalrole to play in improving the efficiency and sustainabilityof investment projects. First, concerted efforts must be made to rationalizepublic investment,according to govemmentpriorities. In this regard, the Government has begun to adopt sector programsin priority sectors and has recently launched a fiscal managementreview to fully integrate aid-financedexpenditures budget. Second,a steady flow of balanceof payments into the support from grants is required to generatecounterpart funds for the budget. The adoption of more flexibledisbursementmechanisms,such as the Swiss Model, will help to meet this objective. We are also pleased to announce that the World Bank has greatly simplifieddisbursementprocedures for balance of payment funds, which will be applicableto current and future credits. Under the new procedures, disbursementswill no longer require import documentation. Third, given tight domesticresources and the sustain expendituresin priority sectors, donors,particularly need to through sector programs, may want to consider directly financingthe recurrent budget within a medium-termexpenditureframework. Finally, furtherexternal debt relief over and above what is availabletoday would permit resources to be released for the Government's poverty reduction program.  65 Over the next year the World Bank is committed to working with the Government and other donors to address these issues. Thank you. -- --  66 ANNEX X MOZAMBIQUECONSULTATIVEGROUP MEETING Paris, April 17-18,1996 CHAIR'S CLOSINGSTATEMENT MS. KATHERINEMARSHALL DIRECTOR, SOUTHERNAFRICADEPARTMENT We havehad stimulating and productivediscussions over the past two days. BeforeI try to summarize themain themesI would liketo expresssincerethankson behalfof all participantsto PrimeMinisterMocumbiand his entireteam for theiropen and constructive contributions.The willingnessof the Mozambican delegationto listenand to respond forthrightlyand thoughtfully to the issuesand questionsraisedhas contributedimportantly to the successof ourdiscussions.We haveall gaineda better appreciation of the challenges and the opportunities facingMozambique. Someof you referredyesterdayto the musicalreferencesin my final statementof lastyear. Permitme to again pick up on thattheme. ThesoundsI have heard overthe last two days,thoughstill harmonious, seem to havecomefrom a differentcomposerthis year. This wasnot Mozartor Beethoven. There waspossiblyless emotioninvolved. But as one of you remarked,this is not modern jazz either, perhapssomethingmore subduedsuch as Baroquestylemusic. Harmonious, yes! Serious,yes!Elegant,yes! But also ratherslowand certainlyrepetitive,with some clear and recurringrefrains. Perhapsthe mostwidelyheld view wasthe sensethat lastyear's Consultative Group meeting,as put very aptlyby the AmericanandDutchdelegations, was a meetingof good intentionswhereasthis year is one of accountability.Theconstantreferencesto last yearare encouraging, as they suggestthat Mozambique'said partnersare beginningto developan institutional memory. Underthe threeheadingsthat we mentioned lastyear "Nurturingthe Democratic Process","Accelerating EconomicReforms"andAtrengthening the Aid Partnership" -- it wouldappearthatthe consensusis that therehas beengood progresson many issues,but nothingis yet finished.This depends on whetheryou view the glassas half fullor half empty. Manythingshave been done -- the glassis indeedhalf full. On the other hand,the glass is not full -- it is only half full. Alternatively we can say that last year's intentionswere over ambitiousor that theobjectiveshavebeenunder-achieved. However,althougha few centralthemeswere takenup by virtuallyeverydelegation, there wasa broadconsensuson most issuesand a very large consensuson most others. Let me sumup the issuesthatwere discussedunderthree broadheadings:economicissues, povertyreduction,and governance.Perhapsthe clearesttheme is the deep senseof satisfactionat the peacewhich prevailsin Mozambiqueand thedeepeningof democratic processes. The strongfocuson humancapitaldevelopment and povertyreductionwasalso applauded. nW r-- F  67 ECONOMICISSUES Growth, Stabilization and Poverty Reduction Nexus Severalparticipantsraisedan issue which has not featuredprominently in previous consultativegroupmeetings,that is the issue growthand achievinggreaterstability. The of possible tradeoffs between achieving higher strategyissue stabilization,povertyreductionnexus. The underlying turns aroundthe growth, stabilization premiseis that short-term may reducegrowth. Severalparticipants Carrissimospeakingfor the EuropeanUnion took the view expressedby Mr. take precedence who said "Rapid EconomicRecoveryshould over drasticdisinflation". Similarviews and the UNDPrepresentatives, were also echoedby the Swedish amongstothers. Thequestionwasnot fullydebatedand not needto pursuethe issueactively. I do, however, really settledhere,and I see an important not believethat such a trade off exists at want to givemy ownview. In sum,we do presentin Mozambique. TheFinanceMinister referredto the view of JeffreySachs,and I wouldalso liketo quoteProf.Sachswho record as saying "While moderate or low is on inflation is an important ingredientfor growth, reconstruction and rapid growth long term in Mozambique should take precedence rapid disinflation. Mozambique can over a safely aimfor inflation targets of 20-35 for 1996-97." My understanding percent peryear is that the averageinflationtargetfor 1996 establishedunder the PolicyFramework is 40 percentas Paper, of the year -- well withinthe rangestipulated comingdownto around22 percentby the end by Prof. Sachs. Recentresearchworkby MichaelBruno, no evidenceof any consistentrelationship Chief Economistat the WorldBank, found betweengrowthand inflationas longas was below40 percent. Above40 percent, inflation growthfalls sharply,but recoverssurprisingly stronglyafter inflationfalls. The findings "do not supportthe view that reductionof inflationcarries heavyshortto medium high run outputcosts". To come backto thetrade-offquestionitself, a very sizabletrade-offindeedfor the poor we shouldunderscore that it wouldtake to benefitfrom highergrowth,if this is accompanied by inflationof 50 percent or more, fromthe redistributiveeffectsof high inflation. becausethe poorare those whosuffer most Inflationis aptlylabelledthe cruelesttax all. of Anotherkey factor,in my view, is research of controllinginflationonceit is above that showsthat fewcountriesare capable 40 percent. Mozamnbique notablylacksinstruments of effectivemonetarycontrol. In this regard, Coverdalefrom the UnitedKingdom,emphasized both Mr. Jensen from Denmark,and Mr. strengthening the importance of privatizingBCMand centralbankingfunctions,to improvemonetary monetarycontrolwould also helpreduce control. Strengthening excessiverelianceon fiscaladjustment. Noneof this is meantto suggestthat monetary tight, but as MinisterSalamaosaid "The and fiscalpolicycan neverbe too issue is findingthe rightbalancebetween reducedemandand measuresto stimulate policies supply". We thinkcurrenttargetshave struck to appropriatebalancein Mozamnbique, but thesewillobviouslyneedto be kept the light of performanceand economic underreviewin conditions.  68 Financial and Fiscal Reform The privatization of the two state banks, is one of the major areas of unfinished business. Almost every participant emphasized the importance of quickly privatizing Banco Comercial de Mocambique. We note the excellent progress that the Governmenthas already made. It will be important for the Govemment to follow through on the agreed agenda of completing action by June this year for BCM and December for BPD. Another piece of unfinished business -- which was also frequently mentioned -- pertains to customs reform. Because this important process involved radical changes and thereforeinstitutionalresistance( we knowwhatthat is at the WorldBank!),theGovernment wasunableto presentthis as an accomplishment to the participants at this CGmeeting. We trust that theJunetarget in this areawill be achievednonetheless. However, we are pleasedto notethatthe very importantprocessof the Fiscal Management Reviewhas begunwhich,as the ViceMinsterof Financehas indicated, studybut a mediumtermprocesswith threeclearlydefinedstagesoverthe is not a courseof 1996. Weall look forwardto reviewingthe workof this on-goingexercisethroughout the courseof 1996. Environment for Investment Private Sector Development. Improving the environment for private investors -- nationalas wellas foreign-- is still clearlya concern. Participantsnotedwith satisfaction that manyimportant stepswhichbeardirectlyuponthe businessclimate,havebeentaken-- includinga revisionof the role of CPI,customsreform,a simplification of investment procedures, andthe processof dialogueestablished underthe systemof annualPrivateSector Conferences.In addition,there is the verysuccessfultrackrecordof privatizations havealreadytakenplace,includingthe increasing which number of largerscaleindustrial enterprises. However,wenotethat there is stilla lot of outstanding businessfromthe First PrivateSectorConference, most notablythe issuesof bureaucracy and red tape,and the variousnuisancetaxeswhich existalsoneedto be addressedas a matterof urgency, preferably in advanceof the PrivateSectorConference this comingJune. Anatmosphere mustbe createdwhichactivelyencourages and promotes the entryof privatesectorplayers. Thiswouldhelpaddressthe concernsof someof the participants that foreigninvestment remainsat unacceptablylow levels. Indeedforeigninvestment is the necessarycorollaryto the expectedanddesirablereductionof officialextemalassistanceover the longterm,a themenotedby manyparticipants.I wouldnoteherethe important linksthat we see in many countriesbetweenstability,includingmacroeconomic stability,and investment levels. Numerousparticipants stressedthe importance of privatizingthe threelarge parastatals -- therailways(CFM),the airlines(LAM), and the Government's importation petroleum anddistributioncompany (Petromoc) -- as expeditiously as possibly.Theaim is to promotecompetition and improveefficiency.It is clearlyimportant, as Ms. Peasley stressed, that the Government doesnot replacepublicmonopolies with privatemonopolies. Public Sector Investment. Whilethe importance of an enablingenvironment private entrepreneurs has been mentioned repeatedly, the conditions of for effective public investment has beenreferredto in all but narne. A very importantdimension to this is the 1 -- r- ~ T~1  69 needto supportthe Government's effortsto turn the budgetinto a useful management tool for resourceallocation. This meanssupportingefforts to integrateaid-financed expenditures intothe budgetprocessas intendedunderthe FiscalManagement Reviewrecentlylaunched by the Government.Anotherdimensionis the effectiveness of aid by moreappropriate coordinationbetweendonors.Severalparticipantssupportedthe rationalefor integrated sectorprograms. As the Dutch representative said, "ProjectAid can overwhelmlimited capacitiesand can leadto islandsof successin a sea of failure". Integratedsectorprograms wouldalso help reduceand rationalizetechnicalassistancewhich,as Mr. Akapta? and others emphasized,is overwhelming and threatensto underminedevelopment of local capacity. An importantnew directionfor officialassistancehas beenmentioned, notablyby the Swedishrepresentative, namelyso-called"direct budgetsupport". Aid geareddirectlyto budgetaryneeds, in termsof amounts,modalitiesand timing, (whilestill beinga form of balanceof paymentssupport)isjustified in principlein the circumstances of Mozambique. However,there is still a requirementfor moretransparent,comprehensive and timely budget process. Again, this is the objectiveof the FMR that is underway. Debt The issue of debt has beenwidelydiscussedover the past severaldays. This is not the forum to.seekdefinitivesolutionsto this problem. Nonetheless,severalparticipantshave notedthat the debt positionof Mozambiqueis unsustainable.Participantswelcomedthe debt proposalswhich are underdiscussionat the WorldBank and the IMF, but recognizedthat untilthese becomeeffective,Mozambiquewill continueto face debtservicingdifficulties. Meanwhile,an interiminitiativeto servicemultilateraldebt was proposedby Denmarkand joined by the Netherlands.TheGrouphas also been presentedwith a thought-provoking proposalby GovernorMaleianeof the centralbank of Mozambique. Speakingof half finishedbusinesson the WorldBank side,I haveto admitthat we havenot fully compliedwith our commitments undertakenlastyear.We promisedmore thanwe coulddeliver. However,we havenot been idle. Togetherwith the Fund,we have analyzeddebt sustainabilityin Mozambiqueas part of the PFPand thejoint Bank-Fund studyon debt amonghighly-indebted countries. The WorldBank standsreadyto assist Mozambiquein the area of debt managementand in the analysisof debtoptionsunder currentmechanismswhilealternativeoptionsare exploredin globaldebtfora. We look forwardto workingcloselywith the partnershipon this issue. POVERTY REDUCTION Growthand PovertyReduction It is universally recognized,and there participantsrepresentedhereagree,that povertyreductionwillonly be achievedwith strong,sustainedgrowth. We havesuggestedin our statementof proposedcountryassistancestrategy(theCAS)that a sustained5 percent per annumgrowthrate is needed. Wenote in our CAS that smallscaleagriculturewas the center piece of any povertyreductionstrategy. The grouphas also notedthat this is exactly in linewith Government thinkingand this did not give rise to muchdebate. However,areas of debatedo arise with respectto howto promotethe ruralfamilysector.  70 RuralDevelopment Peaceand re-settlementof refugeesand soldiersis one of the most dramatic,and indeedindispensable, achievements for rural development.This has nowessentiallybeen achieved.An equally importantissue is accessand userrights of smallholder farmersto their traditionalland. As our Finnishcolleagueindicated,landtenure lawsare requiredto addressedissuesof povertyreductionas wellas to promoteprivateinitiativeand growth. For this reason,manyparticipantsemphasized the needfor the rapidpromulgation of a Land Law, basedupon wide rangingconsensus,whichrecognizeslocal landrights. To achievesustainedruraldevelopment, there is a needto provideappropriate incentivesthroughimprovedpricingpolicies. In this regard,the recent decisionsrelatedto cashewnut taxes are to be applauded-- and latest reports on productionappearto have vindicated the Governmentin its implementation of this policy. However,there is still furtherneedto liberalizepricesand to ensurethe developmentof competitive marketing structures -- as notedby some participants. Naturallywe recognizethat fast growthwill not come fromsmallholder agriculture alone,eventhoughthis has the largestpovertyreductionimpact,hencethe importance of the other highgrowthpotentialsectorssuchas transportand energy. SocialSectors The othermain componentof a povertyreductionstrategy,as notedby many participants, is expenditureon humanresourcedevelopment -- particularlyhealth and education.In this respect,the groupnotedwith satisfactionthat 1995publicexpendituresin thesetwo sectors increasedsignificantly in real terms -- albeitshortof the target established in the budget. The Germandelegateand othersalso notedthat militaryspendingwas still very high and that this underminedsupportfrom tax payers in donorcountries.The Swiss also pointedout the fact that expenditureson securitywere significantly higher(2.3 times) thanthe healthbudget. Developing appropriate balances-- with particularemphasison ensuringgrowingexpenditures on healthand education,are integralcomponentsof an overallpovertyreductionstrategy. GOVERNANCE In my closingstatementlastyearI talkedabout "NurturingDemocracy".I am happyto notethat this grouphas universallyapplaudedthe Government'seffortsin maintainingpeace,establishinga NationalAssembly,establishingotherdemocratic institutions, and a moreopen styleof Government.All of these developmentsarevery satisfactory. Manyissuespertainingto governance were raised in this meeting. The one issue whichwasraised by morerepresentatives thanany other singleissuewasthe issueof corruption.This is a seriousdevelopmental issuebecausecorruptionundermines Government revenue;it createsnegativeprotectionfor local industry;and it weakens Government credibility. As the Britishrepresentativesaid, "goodgovernment" is the yardstickby which aid constituencies measureGovernmentperformance.Andas the Swiss representativeindicated,the costsof corruption are oftendisproportionately borne by the poor. JE - -- r~ _---  71 MinisterGamitorespondedthat the Govemmentis, to quote,on the samewave lengthas Mozambique's partnerson this issue. The Ministerindicatedsome of the steps that the Govemmentis takinga numberof steps to combatcorruption through civil service reform,the creationof inspectorsin each Government department, and establishinga Code of Conductand a HighAuthorityon Corruption. The other,very frequentlymentionedissuerelatesto the postponementof governmentelections. Theconcernamongdonorsis that decentralization local is seen as an extensionof democracy and as a way of managingdevelopment moreappropriatelyat a local level. Local electionsare criticalfor developingan effectivedecentralized Government. OTHERISSUES Other issueswerediscussed,and I do not want to diminishtheir importance by not alluding to them in this closingstatement. Four,of a diversenaturebut each important in itself,are: capacitybuilding,the problemof HlV/AIDs,regionalism and links with SouthAfrica, and -- cutting acrossmanyotherissues-- the lack of reliablestatisticalinformation. This probably calls, withinlimits,for someflexibilityamongotherthings in the use of performnance benchmarks.Effortsto improvethe situationare underway,supportedamong others by the Bank and by the Swedishgovernment,but we recognize the needto intensifyefforts. No doubt,we shallhave otheropportunitiesto discussthesequestionsin future.Whichleadsme directlyto acknowledgethe proposalmadeby several the near delegations regardingpossibleforns of "CG" activityin the field. I do not wantto decide at do want to reiterate,however,that in our view the CG is not just this meeting, this point.I or even principallythis meeting.It is rathera continuingprocessof partnershipamong ourselves, with the Government of course, in an effort to maximizethe effectiveness of ourjoint efforts toward the development of Mozambique.Weare thereforeopen to all formsof collaboration, particularlyin the field. The workinggroups in Mozambique shouldbe a model for consultativegroupsin othercountries. We also welcomeproposalsto broaden the debateto other groupsin Mozambique. CONCLUSION As lastyear,this year againthe aid community has foundthat progressmade on a broad front by the Mozambican Authoritiesand their programfor the near termjustified the financingrequirements presentedby the Government.Shortcomings in performance some areasof seriousdisappointment and have beendiscussed. Thefact that we have beenable to discusstheseproblemsso candidlyand so openlyis in itself a collective achievement! In closinglet me expressour appreciationto the supportteam, includingthe interpreters,for facilitatingthe smoothadministration of our meeting. I wouldalso liketo thank all participantsfor their contributionsto the exceptionally productivediscussionsof the past two days. Safejourneyand farewell! -11' II  72 ANNEX XI The World Bank European Office: 66, avenue d'Iena, 75116 Paris, France PEACE BRINGS NEW CHALLENGES AS AID PARTNERS RENEW SUPPORT FOR MOZAMBIOUE on April 17 and PARIS, April 18, 1996. The Consultative Group for Mozambique held its ninth meeting of 18, under the chairmanship of Ms. Katherine Marshall, Director of the Southern Africa Department Pascoal Mocumbi, the the World Bank. The ilozambican Delegation was led by His Excellency Dr. to discuss Prime Minister. The CG Meeting brought together over 30 bilateral and multilateral agencies Mozambique's challenges. poverty With peace well established and democracy taking root, Mozambique can now focus on reducing followed the through actions leading to sustainable and equitable growth. At the last CG meeting, which to a far-reaching development first multiparty elections in 1994, the new Government committed itself in program. Mozambique's aid partners recognized that the Government has made good progress and carrying out the initial steps of that program, while emphasizing that sound economic management determine the success of the good governance, including combating corruption, will ultimately Government's efforts. Participants Urge Rapid Economic Growth for the Progress in the transition from war to peace and democracy has made Mozambique "an example Government's continent" in the words of one delegate. On the economic front, participants noted the actions to achieve a greater degree of macroeconomic stability over the past year. They supported the an Government's plans to further reduce inflation in the coming year. Participants recognized that had recently been agreed with the World Bank and ambitious medium-term economic policy framework already in progress would contribute the International Monetary Fund. They noted that several reforms privatization to greater economic stability and improve the business climate. These reforms include the program of the two state-owned banks, a customs reform program, and a privatization and restructuring shift in the allocation in budget for state-owned enterprises. Participants also applauded the important declined from 3.9% of resources from defense to social spending: expenditures on defense and security GDP in 1993 to 3.6% in 1995, while current expenditures in health and education rose by 19%. spending and Participants noted the Government's intention to proceed with further reductions in defense increases in social spending. themes The imperative of achieving rapid economic growth and lowering aid dependency were recurring heavy external debt (almost four in the discussions. Participants expressed concern that Mozambique's ability to times GDP in nominal terms) and growing debt service requirements limited the Government's invest in the human resource development so vital to the nation's growth and poverty reduction aid prospects. A number of measures and proposals to reduce the external debt burden, lessen the meeting. dependency and increase efficiency in the use of external resources were aired during debt relief These included an appeal by the Government for the establishment of an externally-financed increasing fund to allow resources which would have been allocated to debt service to be directed to improvements and health and education ser ices. Otlherparticipants emphasized the need for continued  73 incr,ased transparencyin the management,monitoringand accountingof external aid. Togetherwith the preparationof sector policy frameworksand consolidatedinvestmentprograms for key sectcrs, these measureswould enable donorsto provide funds in a more flexiblemanner and for those funds to be used more effectively. Participantsalso agreed on the importanceof continued strengthening of local monitoringand coordinationmechanisms. Challenges Remain for the Coming Year A number of other challengesfor the coming year were highlighted. Participants called for continued partnershipwith the private sectorand Non-Governmental Organizationsin developmentefforts. Given the continued needto stabilizethe economy,participantswelcomedthe Government's plans to reduce inflation,increase revenues,and improveexpendituremanagement. Participants agreedthat further reforms in key sectors were also central to acceleratingpovertyreducing growth. Participants encouragedthe Governmentto establish agriculturalpoliciesand a sector investment programthat would promotesmallholderagriculture. In that context,severalparticipantsemphasized the need to ensure that the new land law currentlyunder preparationcontainedprovisionsfor adequate landtenure securityfor small farmers, includingthe safeguardingof customaryrights. In the transport sector,participants welcomedthe Government'sintentionto increaseprivatesector participation in railways,ports, coastal shipping and aviation. Participantsalso urgedthe Governmentto eliminate monopoliesand stimulate competitionwithinthese sectors. Finally, a series of actions -- including further trade liberalization,tax and tariff reform,and deregulation-- would foster privatesector development throughoutthe economy. In the area of governance,participantsencouragedthe Governmentto increase its efforts to strengthen democratic institutionsand combatcorruption. The Governmentannounced its intentionto continueto press forward with its plans for local governmentreformand decentralization, to updatethe Code of Conductfor civil servants,and to establish a HighAuthorityto combat corruption. Participants emphasizedthe importanceof holding local electionsnot later than 1997in order to furtherconsolidate democracyin Mozambique. On these matters, as wellas others, the international aid partnersand the Governmentagreed to continuethe successfuldialoguetaking place in the budget and governance working groupsbased in Maputo. Mozambique's FinancingNeeds Met The full amountof externalfinancingfor credits and grants of about US$ 871 millionwas sought for calendaryear 1996. The non-debtrelief componentof US$ 567 million committed during the meeting includedinvestments(52%), import support(32%),food aid (10%), and other programs(6%). The Governmentexpressedits gratitudefor the continuedsupportby the international communityfor its efforts to attainthe consolidationof democracy,sustainablesocial and economic development,and a lastingpeace. NMembersof the ConsuitativeGroupattendingthe meetingwereAustralia,Austria,Brazil, Canada,Denmark, Germany.Ireland,Italy,Japan, theNetherlands,Norway,Portugal,Spain,Sweden, Finland,France, Switzerland,the UnitedKingdomand the UnitedStates. Alsorepresented were the African DevelopmentBank,the ArabBank for EconomicDevelopment EuropeanCommission, the EuropeanInvestmentBank, the Foodand AgricultureOrganization,the International in Africa,the Corporation,the International Finance MonetaryFund,the KuwaitFundfor Arab EconomicDevelopment, the Organisation EconomicCo-operationand Development, for the UnitedNationsChildren'sFund, the United NationsDevelopment Programme, the World Food Programme and the WorldHealth Organization.Russiaattendedas an observer. 18/04/96 15:01