Mozambique - Financial Sector Capacity Building Credit

Report No. PIC885 Project Name Mozambique-Financial Sector Capacity Building Credit Region Africa Sector Economic Policy and Development Project ID MZPA1811 Project Cost US$10 million Financing Plan US$9.0 million -- IDA US$1.0 million -- Govts of Switzerland and United Kingdom Appraisal Date November 1993 Projected Board Date March 1994 Background 1. In 1987, the Government of Mozambique embarked on an economic rehabilitation program which sought to guide the economy through a transitional period from socialism to a market economy, and onto a steady growth path during the 1990s. Significant reform has already taken place, however, substantial additional reforms are still required. The signing of a peace accord between the Government and Renamo in 1992, should it result in the permanent cessation of hostilities, will place the Mozambique economy in a good position to achieve substantial growth throughout the remainder of the decade. The financial sector has been identified as a key constraint to further growth in the economy. Payment systems have largely broken down, banking services are limited and inefficiently provided, and financial innovation in terms of institutions and instruments has been virtually non-existent. Recent financial sector deregulation has led to the entry of two new private sector banking institutions -- which now means that three of the five commercial banks are privately owned. This bodes well for the development of the sector, the growth of competition, development of services and innovative financial instruments. However, the majority of the staff working in the financial sector have very limited amounts of formal education, and their training has mainly been acquired in a period when the banking system operated under the Government plan rather than in a free market environment. There is, therefore, a pressing need to train banking staff to adapt so that they can undertake banking business in a deregulated environment. It is also important to train policy makers to conduct macro-monetary policy management in a liberalized setting. Objectives 2. The Finance Sector Capacity Building Credit (FS CB) would support the Financial and Enterprise Sector Adjustment Credit in achieving desired policy and institutional reforms. The two main objectives of the credit would be to support: (a) TRAINING in three key areas (i) the main focus would be on CENTRAL BANK TRAINING, (ii) but assistance would also be provided in key areas of COMMERCIAL BANK TRAINING, including limited support for training in the insurance sector and in securities markets,  and (iii) support would be specifically provided for LEGAL TRAINING; and (b) INSTITUTIONAL STRENGTHENING to support the overall program of financial sector reform, with a strong training element attached to this, mostly short term, technical assistance. Description 3. The total credit of US$9.0 million will be divided into five components. The first will consist of central bank training in key areas -- but particularly in the areas of macro monetary management, banking supervision, exchange control, and accounting/auditing; the second will consist of commercial bank training, including some support for the Banker's Training College at Matola (8 kilometers outside of Maputo); the third is a program of legal training for staff in the central bank and the Ministry of Finance to assist them up-grade and develop laws in support of the financial sector reform program; the fourth is institution building, mainly via the provision of short term technical assistance in key areas; and the last is a small component of funding for studies. Environmental Aspects 4. The project will have no environmental impact. The proposed environmental assessment category is C. Implementation 5. The central bank -- Banco de Mozambique has the primary responsibility for this operation. The project coordinator is the Head of the Human Resources Department of the central bank. The five sub- components also have coordinators -- all located in the central bank. Institutional Capacity 6. The central bank is one of the best Government institutions in terms of institutional capacity. Staff are relatively well trained and educated, and most have a long history of work with the central bank. Nonetheless, support will still be required in critical areas of policy formulation and implementation. Support is being provided by donors, both bilateral and multilateral. Close coordination has been maintained between the donors to ensure that full cooperation/coordination is maintained between institutions/donors supporting this sector. Benefits and Risks 7. A major risk for the overall adjustment operation is a lack of sufficiently trained manpower. The current support program will therefore attempt to address this constraint. Importantly, the Mozambican Government and Banco de Mozambique place a high priority on training Mozambican staff. This should ensure strong support for the program. Another risk is that it may prove difficult and time consuming to recruit adequately qualified, Portuguese speaking technical experts in key fields, which are acceptable to the Government. Nonetheless, every effort will be made to ensure that well qualified individuals are placed in key positions as quickly as possible. To address this issue, - 2 -  work on recruiting several key consultants has already commenced and will be financed under a Project Preparation Facility (PPF) advance. This advance work should help in addressing some of the anticipated delays in this area. 8. An important justification is that, with the advent of the peace accord, Mozambique is well placed to rejuvenate economic activity and launch into a period of strong growth. Reform of the financial sector is extremely important to service the needs of the sectors which will now be able to perform productively in a peaceful environment. Contact Point Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. -3-