Mozambique - Consultative group meeting in Paris, May 15-16, 1997 : chairman's report of proceedings

International Bank for Reconstruction and Development 84684 FOR OFFICIAL USE ONLY CG97-29 July 24, 1997 FROM: Vice President and Secretary CONSULTATIVE GROUP FOR MOZAMBIOUE Paris, May 15 - 16. 1997 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, May 15 -16, 1997. Distribution For Information Executive Directors for: Australia Germany Russia European Office Austria Ireland South Africa Tokyo Office Belgium Italy Spain Resident Representative, Mozambique Brazil Japan Sweden Canada Mozambique Switzerland Denmark The Netherlands United Kingdom Finland Norway United States 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 Islamic Development Bank 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 documenthas a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contentsmay not otherwisebe disclosed without World Bank authorization.  TABLE OF CONTENTS Page No. Chairman's Report .............................................................................. I Annex I Agenda ................................... 12 Annex II List of Participants ....................... ........... 14 Annex III Chairman's Opening Statement ................................ 28 Ms. Phyllis Pomerantz, World Bank Annex IV Statement by the Mozambican Delegation ........ 34 HE Pascoal Mocumbi, Prime Minister Annex V Statement by the IMF .................................. 44 Annex VI UNDP Statement ................... ............... 48 Mr. Solomon Akpata, UNDP Representative Annex VII The Challenges Ahead .................................. 52 Statement by HE Tomaz Salomao Minister of Finance and Planning Annex VIII Statement on Financing Requirements .............. 92 HE Adriano Maleiane, Governor, Bank of Mozambique Annex IX Statement on Financing Requirements .............. 102 Ms. Rocio Castro, Economist, World Bank Annex X Chairman's Closing Statement ............ ........ 106 Annex XI Press Release .................... 112  CONSULTATIVE GROUP FOR MOZAMBIQUE Paris, May 15-16, 1997 Chairman's Report of Proceedings Background 1. The ConsultativeGroupfor Mozambique World Bank's EuropeanOfficein Paris on (CG)held its tenth meetingat the May 15 and 16, 1997. The meetingwas chairedby Phyllis Pomerantz,Country Directorfor Mozambique for the World Bank. The WorldBank's ExecutiveDirectorfor the group of countriesthat includes Mozambique also attended. The Mozambicandelegation MinisterPascoalMocumbi,and included was led by HE the Prime HE Tomaz SalomAo, Ministerof Planningand Finance,HE OldemiroBaloi, Ministerof Commerce,Industryand Tourism,HE Alfredo Gamito,Minister of State Administration, HE and Finance,HE Adriano Maleiane,GovernorLuisa Diogo,Vice-Ministerof Planning of the Bank of Mozambique, and HE Jose Rui Amaral,Ambassadorof the Republic of Mozambiqueto France,and other senior Governmentofficials. The meetingwas attendedby delegationsfrom Australia,Austria, Brazil, Canada,Denmark,Finland,France, Germany,Ireland,Italy, Japan, the Netherlands,Norway, Portugal,Spain, Sweden, the United States. Also representedwere Switzerland,the United Kingdomand the AfricanDevelopmentBank,the European Commission,the EuropeanInvestmentBank, the Food and AgricultureOrganization,the InternationalFund for AgriculturalDevelopment, IslamicDevelopmentBank,the KuwaitFund the InternationalMonetaryFund, the for Arab EconomicDevelopment,the Organizationfor EconomicCo-operation and Development,the UnitedNations Children's Fund, the United Nations Development Program,the World Bank,the World Food Programand the World HealthOrganization. observers. South Africaand Russiaattendedas 2. The followingdocumentswere distributed for the meeting: MozambiqueGovernment: * "The ChallengesAhead" * The Proceedingsof the SecondPrivateSector Conferencein Mozambique, Ministryof Industry,Commerceand Tourism of Mozambique. The World Bank: * "Mozambique:AdministrativeBarriers to Investment:the Red Tape Analysis" ill ~~~~~~~I'  2 OpeningStatementby the Chairman 3. In her openingstatement(AnnexIII), Ms. Pomerantzobservedthat, at the conclusionof the first decadeof the partnershipbetweenMozambique and its development partners,the countryhad come furtherthan most peoplehad dared hope ten years ago, and that thingswere continuing to changefast. In particularthe growthrate acceleratedto over 6 percent last year, the grainharvest was the highest in twenty years, the cashew outputmore than doubled,and the recoveryof the industrialsector continued for the secondconsecutiveyear. 4. Referringto the agenda set duringthe last CG meeting,she notedthat the Governmenthad brought the annualinflationrate downto single digitsduring the first quarterof this year for the first time sinceadjustmentbegan in 1987.At the same time, the nominalexchangerate remainedstable and interest rates were declining. In addition, with the privatizationall but completeof the BPD and BCM,the two previouslystate- ownedbanks, monetarypolicy had become much more effective. On the revenue side there had also been progresson customsreform,while on the expenditureside, the Governmenthad been ableto protectrecurrentexpendituresin healthand education. Finally, she commendedthe Governmenton encouragingfirst steps in tacklinga range of governanceissues. 5. These changesin Mozambique are forcingpeople to look at the countrywith new eyes. The Chairman drew a picture of her vision for Mozambique,acknowledging it was optimisticbut suggestingthat it was not unrealisticgiventhe progressthe countryhas seen over the last few years. However,she went on to say the Governmentfaces many challengesto reach this vision. She put its task in perspectiveby remindingdelegates that even with 9 or 10 percent growthrates over the next ten years, Mozambique will still be among the poorest countriesin the world. 6. Turningto the future,she outlinedthe most urgent set of challengesfacing the Government. The first will be to spur a dynamicrural economy. She notedthat the PROAGRIsector programfor agriculture,currentlyunder preparation,will lay the policy frameworkand strategyfor sustainedandrapid agriculturalgrowth. 7. The secondwill be to createan environment that will foster privatesector developmentand accelerategrowth. Consolidatingmacroeconomic stabilitycontinuesto be of primaryimportance.The focus now needs to shift to fiscal reform, particularlyto expand domesticrevenue,especiallythrough continuedcustomsreformand the introductionof a VAT. She stressedthe importanceof the fiscal managementreview now under way. In addition,fiscal sustainabilityhinges on debt relief,and she commendedthe initiativeof some donors in creatinga debt fund and informeddelegates that Bank and Fund staff soon hope to have their respectiveBoards establish Mozambique'seligibility for debt relief under the HIPCinitiative. Finally,beyond macroeconomic stability,continuingstructuralreform will be criticalto private sector growth, includinglegal reform and reducingadministrativebarriers. Howevershe  3 cautionedthat it is essentialto the sustainabilityof growth that Mozambicans benefit from growth,and thereforethat the nascent entrepreneurial sector be encouraged. 8. The Chairmanwent on to note that a number of 'mega-projects', Pande and Buzi gas fields, the MaputoDevelopmentCorridor, such as the a new hydroelectricplant on the Zambezi,and the MOZALaluminumsmelteroutside Maputo,are now becoming reality, and representboth opportunitiesand somerisks to Mozambique. She emphasized that the potentialfor increasedrevenue broughtnew possibilitiesto the Mozambican Governmentand its people. However,since theseprojects, like Mozambique'sgrowth prospectsmore generally,are based on natural resources, the Governmentmust be sure that the investmentsare environmentallysustainable. 9. The Chairmanstressed,however,that the greatestchallenge and its most urgent priority,will be to build capacity. facing Mozambique, She emphasizedthat Mozambique needs to approachthe problem from severalfronts and with a wide range of instruments, includingeducationfrom primarythrough secondaryto universityand vocational instruction;improvementsin health; and progresson public sectorreform from defining the role and responsibilitiesof governmentto providing adequateincentivesfor civil servants. 10. To conclude,the Chairmanremindeddel0gates that as Mozambiquechanged,so the relationshipbetweenMozambiqueand its partners neededto change,and welcomed their suggestionon how the partnershipcouldbe strengthened. to the Governmentto enlargethe partnershipby joining In addition,she appealed forces with civil societymore broadly,and strengthening ties with its neighboringcountries. Statementby the MozambigueDelegation 11. In his opening statement(AnnexIV) the Prime Minister, HE Mocumbiwelcomedthe representativesof the donor community Dr. Pascoal and thankedthem for their continuedsupport. He noted the encouragingadvances that have the last ten years during whichMozambiquehas been implementing taken place over politicaland economicreforms. However,he also noted fundamentalsocial, the seriouschallengesthat lie ahead. 12. Notinghis Government'sefforts at consolidating political stability,the Prime Ministerdrew the meeting's attentionto the legislative package on creatinglocal authoritiesthat was recentlyapprovedby the assembly. The laws enablemore direct participationby citizensin managingnationallife and development for the first ever local elections in Mozambique, and lay the ground which he announcedwouldtake place before the end of the year. The Prime Ministerthen pointed to the recent successesat establishingeconomicstabilityand underscoredthe favorable impact on stimulating private sectordevelopment. He also underlinedthe encouraging pace of the privatization program, notingthe privatizationof BCM and the decision to privatize 51 percent on the national airline,LAM. In all, he observed,recentevents suggestthat the foundationsfor a market economyhave now been laid, and that the economy is stabilizing. - 18 I 1'  4 13. The Prime Minister then listed the principal challenges that face his government in the immediate future, including persistent high levels of unemployment and poverty, and worsening regional imbalances; lack of capacity; investment; low efficiency of public administration weak expansion of private and public investment; and a continued high dependence on external resources. He announced that to overcome problems the Government was continuing these to focus on short-term macroeconomic management, but now must compliment these measures with medium- and long-term structural reforms. These encompass continuing administrative reform, including measures to reduce corruption and increase the transparency of the administration public funds; building capacity, particularly of in the public sector and by providing greater and better quality education at all levels with the participation of the private sector; continuing to increase health care coverage; improving infrastructure, especially in areas; improving the environment for private rural sector expansion; and addressing poverty directly, through local planning units as part of administrative decentralization. the Prime Minister urged Mozambique's Finally, aid partners to support the HIPC initiative. Statement by the IMF 14. Mr. Leite of the IMF (Annex V) began by congratulating the Government for vigorously pursuing its economic strategy and for the remarkable achievements of year. He reported that Mozambique's the last economic performance was strong in 1996 early results for 1997 seem to indicate and that that another good year lies ahead. Real growth reached 6.4 percent (up from 1.5 GDP percent in 1995), and inflation declined percent (down from 54 percent in 1995). to 17 Moreover, he emphasized that these positive results were achieved under difficult conditions. Grant financing for the budget declined by 4 percentage points of GDP, and tax revenue declined slightly. In addition, money expansion was only 21.6 percent, broad less than half its expansion in 1995, due improved monetary control in 1996, partly to as a result of the privatization of BCM. 15. Turning to the future, Mr. Leite observed that Mozambique's economic strategy for 1997 to 1999 is to capitalize on the gains achieved in 1996 in both macroeconomic stabilization and economic liberalization to encourage rapid growth in the private The main elements of this strategy are: sector. (a) fiscal adjustment to put the budget on sustainable trajectory, including tax and a customs reforms, and expenditure restraint, with increased allocations to the social along sectors; and (b) structural reforms in key such as privatization and private sector areas development, deepening of financial and exchange markets, and public administration (civil service and decentralization). He went on to announce that in late June 1997, the IMF Board is expected to consider request by the Government of Mozambique a for a second annual ESAF arrangement. 16. Mr. Leite indicated that the program for 1997 will seek to achieve real growth of percent, a further decline in inflation to 6 14 percent in 1997 and 10 percent in 1998, increase in the net foreign assets of the and an banking system by $90 million. He concluded observing that the Mozambican economy by has an excellent opportunity to maintain growth momentum in the next three years, its provided that macroeconomic conditions  5 remain stable, but cautioned that the debt burden is heavy, and foreign assistance will remain crucial. He also indicated that, once agreement had been reached between Russia and the Paris Club on the handling of Russia's claims, the IMF staff hope that the Boards of the Bank and the Fund will be able to reach a decision quickly on Mozambique's eligibility for the HIPC initiative. Minister Salomao's Presentation 17. Minister Salomao presented the main Government document "the Challenges Ahead" (Annex VII). He began by acknowledging the donor community's continuing support during the ten years during which economic, social and political reform have been under way in Mozambique. He reminded delegates that together Mozambique and its partners had come through some difficult times, but that the country had held firm to its adjustment program. He went on to note that the medium-tern strategy on which the country had been launched in 1995 had already brought positive results in 1996. Most notably, Mozambique was able simultaneously to achieve a significant reduction in inflation and strong economic growth. The Minister then went on to describe the achievements in 1996. 18. The Minister stressed, however, that the Government is fully aware that the challenges ahead are as great if not greater than those it is leaving behind. During 1997 economic policy in Mozambique will seek to consolidate and broaden the successes of the past. Specifically it will focus on four fundamental areas: macroeconomic stabilization, especially further reductions in the rate of inflation; promotion of increased private investment; promotion of social equity, through redistributive policies; and strengthening of public administration. He emphasized that the Government's fiscal strategy should be viewed in the context of the Government's efforts to shift from exclusively annual programs to a medium-term budget framework, and that this in turn indicated a shift away from short-term emergency management towards a longer term strategy for sustainable development. He added that implementing such a budget framework successfully would require a commitment from all partners, Government, bilaterals and multilaterals alike, to abide by the priorities, financing and procedures of the framework. Plenary Discussion 19. Plenary discussion during the CG meeting centered on three principal themes. The first of these was agriculture and rural development. The Government and its partners agreed wholeheartedly on the central role of smallholder agriculture for broad based growth and poverty alleviation. There was considerable discussion and a variety of views on the specific role and activities of the public sector in promoting rural development. All participants agreed on the importance of completing the preparation of and launching the Government's sector program in agriculture, PROAGRI. Participants also stressed the importance of clarifying land issues and underscored the fundamental role of women in agriculture and rural development. All agreed that product and input 1V,_ - , -  6 market development and the associated development of rural financial critical, but a number of aid partners services questioned the Government's proposed were support for cantina (small rural program of stores) development. The Government alternative suggestions, and a number welcomed were tabled, including the adoption multifaceted approach which would of a increase work on feeder roads and of micro and small scale financial the development services. 20. The second theme was private sector expressed satisfaction at the progress development. Mozambique's aid partners so far, but stressed the importance the pace of reform and ensuring of maintaining that important privatizations now completed, specifically the privatization underway were of BPD (the state bank) and LAM airline) and the private concessioning (the national of CFM South (part of the national Participants also complimented railways). the Government on the 'Red Tape' the need for rapid action on the study and emphasized issues that had been identified. that additional work needs to be Delegates also noted that done on the regulatory framework management and labor health and for environmental safety requirements. This was especially important, given the considered to be potentially large mineral, gas, industrial development projects power, forestry and currently on the drawing board. the Government's concern that Delegates also shared Mozambicans participate to the country's economic growth. fullest extent in the They supported the Government's that help enhance the skills of local desire to seek instruments entrepreneurs, increase their technical provide them with credit facilities, know-how, and create a supportive regulatory environment. and legal 21. The third principal theme was capacity beyond the traditional areas of building, and the discussion ranged primary and secondary education well on building capacity in the public and focused particularly sector. The presentation by the Administration set the scene (para. Minister for State 25.) While indicating that parts needs further elaboration, Mozambique's of the strategy still aid partners indicated their willingness support a comprehensive public to sector reform. All agreed that discussion in the coming months. this was an area for further 22. On questions related to governance, Government's progress in enacting Mozambique's partners applauded the legislation for holding local the decentralizing responsibilities to elections and the provincial level. Participants local elections planned in 33 municipalities looked forward to the They also welcomed the commitment for December 1997 or shortly thereafter. made by the Government to prepare local elections countrywide. On plans to extend another governance issue, participants Government for the anti-corruption commended the legislation submitted to the National stressed that this was a first step Assembly, but that would need to be complemented necessary institutions and taking by creating the rapid action. 23. Participants also agreed that reducing levels was an urgent necessity. Mozambique's debt burden to sustainable They recognized Mozambique's initiative in this area by  7 setting up a multilateral debt fund which was supported by several of the aid partners. In this context, Consultative Group members made a strong appeal for Mozambique's participation in the HIPC initiative at the earliest possible date. 24. Finally, several participants suggested that the next Consultative Group Meeting be held in Maputo. At the end of the meeting, the Government indicated its agreement with this suggestion. Special Session 25. A Special Session was held to discuss the Government's strategy for Public Sector Reform. The Minister for State Administration, HE Alfredo Gamito, presented the Government's paper, entitled "Public Administration Reform; Perspectives and Strategies". 26. In his presentation, the Minister gave a summary of the reforms now being undertaken in Mozambique. Among these he stressed the work on rationalizing the civil service career framework and decompressing the civil service pay structure. He reminded delegates that the current civil service wage bill, which stands at 4.2 percent of GDP, is low by international standards. In addition, a combination of across-the-board salary raises and the erosion of already low wages through inflation has resulted in only a 7.6 differential between the highest and the lowest wage levels, leading to high levels of absenteeism, poor staff performance, and flight of skilled technicians from the civil service. The new framework will help correct this situation, and improve civil service performance more generally, but there are still several stages to be completed before it can be implemented. The Government expects to begin implementing the new system in 1999. In the meantime, he announced that the Government planned to begin decompressing salaries to stem the flight of technical staff, as an interim measure under the current framework. He requested the cooperation of Mozambique's partners in financing it. Delegates applauded the Government's initiative, emphasizing the urgency of Public Sector Reform to Mozambique's development, and agreed in principle with the strategy presented. Delegates encouraged the Government to finalize the details of the interim plan. External Financing Requirements 27. Ms. Castro, who made the statement on external financing (Annex IX), reported that in 1997, the financing requirement, excluding possible debt relief, was estimated at $560 million. She went on to note the composition of external financing has changed, reflecting the country's new economic realities and development needs. Ms. Castro drew the meeting's attention to the encouraging fact that private capital flows continued to increase and would amount to around $165 million, equally distributed between private borrowing and direct foreign investment. At the end of the meeting, the Chair indicated that the external financing requirements had been met through a combination of investment (55%), balance of payments support (28%), food aid (6%), and other programs (11%). 11''I  8 Closing Remarks 28. In his closing statement the Prime Minister thanked Mozambique's partners for their continued support. development He declared that the increasing nature and depth of the dialogue candor, constructive between the decade has brought a deeper understanding Government and its partners over the last community, leading to a richer of Mozambique by the international debate and a singular convergence underscored the fact that the two of points-of-view. He overarching challenges that faced poverty and aid dependence. To Mozambique were address them he observed that the among others, had met with unanimous following activities, agreement: i) ensuring Mozambique's participation in the HIPC initiative at the earliest possible date; ii) rehabilitating infrastructure and expand coverage rural of services in health and education; capacity and efficiency of the public iii) improving the sector; greater participation of local entrepreneurs iv) supporting initiatives that will enable in Mozambique's private sector-led and correct growing regional imbalances; growth, v) integrating gender and environmental in Mozambique's development strategy; issues and vi) decentralizing Public Administration. Finally, he announced that with increasing macroeconomic stability now able to turn to pressing medium- the Government was and long-term issues. 29. In the Chairman's closing statement (Annex X), Ms. Pomerantz expressed to the Prime Minister and his team thanks on behalf of all participants for noting that the success of the meeting their contributions, was due in large part to their lucid and thoughtful responses to issues presentations raised. She added that the consensus this year was that this CG meeting among delegates was one of accomplishments. All of the Government's achievements agreed that the list over the last year was truly impressive, Mozambique had proved that it and that is possible to have both lower inflation growth. In this respect, she felt and higher that Mozambique's success had Africa, by showing that persistent wider implications for effort on structural adjustment does illustrating the importance of external bear fruit, and by support for committed economic However, she emphasized that despite reformers. these achievements, Mozambique the poorest countries in the world, remains one of and observed that the discussion had, appropriately, focused mostly during the meeting on what must be done in the future. suggested, was that this meeting Most striking, she marked a shift in emphasis from term stabilization to medium-term emergency and short- development issues. She then reviewed themes of the discussion: agriculture the main and rural development; private sector capacity building; and the future development; of the relationship between Mozambique partners. and its external 30. On the subject of agriculture and rural development, the Chair stressed importance of the family and smallholder the sector, and re-emphasized the willingness Mozambique's partners to join the of Government in finding solutions markets and rural infrastructure to developing rural as rapidly as possible. On private she emphasized the need to maintain sector development, macroeconomic stability and establishing supportive physical and institutional a infrastructure. She added that an to ensure that Mozambicans participate emerging theme is to the fullest extent in the development of the  9 economy. On capacity building, she reiterated that the Government must address this issue on several fronts, but noted that building capacity within the public sector was central to ensuring that Mozambique fully realized its development potential. Finally, on the future of the relationship between Mozambique and its development partners, she underscored the importance of reducing Mozambique's aid dependency, and of supporting increased Government leadership through such instruments as the medium- term expenditure framework and Sector Investment Programs. After expressing satisfaction that the donor community had met the bulk of the financing requirement for Mozambique in 1997, the Chair declared the meeting closed. 1-' -  ANNEXES III ' I .I.___,  12 Annex I ProposedAgenda Mozambique: Tenth ConsuNNive Group Meetng May 1-5-169 I Ihnmda5M~h 08:00-09:00 Registration 09:00-10:15 Opening Statements Chainnan's Opening Statement GovernmentStatement IMF Statement UNDP Statement 10:15-10:45 Coffeebreak 10:45- 12:30 The Economic Reform Progrm and PrivateSadorDewdepmt Presentationby the Govemrnment General discussion 12:30-14:00 Buffet Luncheon for all participantsat the Pais Office 14:00-16:00 Continuationof discussion 16:00-16:30 Coffee break 16:30-17:30 Special Session: "Public SectorRef*rn' Presentationby the Govemnment General discussion 17:30-18:15 External Financing Requlrements Governmentstatement Bank statement 18:15 Close of session 18:15- Cocktail Reception hosted by Govenment for participants at Paris Office Friday MU 16 8:30-10:30 Participants' Statements 10:30-11:30 Coffee break/Working discussions 11:30-11:45 Considerationof Press Releae 11:45-12:30 Closing Statements Statement by Govemmentof Mozambique Statementby Chairman 12:30 Meeting adjourns June 10, 1997 -U--- - -T  05l6i97 10:43 AMI 14 Annex II MEETIDG OF TEE CONSULTATIVE GROUP FOR MOZAMBIQUE Paris, May 1516, 1997 Chair: Ms. Phyllis Pomerntz Country Director Southern Africa Department The World Bank Lust of Partleipants AUSTRALIA Mr. Angus MacDonald Counsellor (Development) Australian Mission to the United Nations, Beira AUSTRIA Mrs. Marielies Rehor Head of Delegation Director, Development Finance Departnent for Development Cooperation Ministry of Foreign Affairs Dr. Joachim Oppinger Desk Officer, Southern Africa Department for Development Cooperation Ministry of Foreign Affairs Mr. Hannes Hauser Representative of Cooperation, Beira Ministry of Foreign Affirs BRAZIL Mr. Laudemar Aguiar Head of Delegation Head of Economic Service Embassy of Brazil, Paris Mrs. Silvia Menasce Assistant to Economic Adviser Finance and Development Division Embassy of Brazil, Paris .I . 1. . ---  Meetfng of the Consultative Group for Mozambique Paris, May 15-16, 1997 15 CANADA Mr. John A. Copland Counsellor(Development) Head of Delegation CanadianHigh Commission Harare,Zimbabwe Mr.Peter Houliston AssistantDirectorGeneral Southeem AfricaDivision AfricaDepartment CanadianInternationalDevelopment Agency(CIDA) DENMARK Mr. PeterLysholtHansen Head of SouthernAfricaDepartnent Head of Delegation Danish International DevelopmentAgency(DANIDA) Ministryof ForeignAffairs Ms. Sanne Olsen Head of Section Departmentof SouthernAfrica Ministryof ForeignAffairs Mr. Ole BlicherOlsen Ambassador RoyalDanishEmbassy,Maputo FILAND Mr.Juhani Toivonen Director,Unit for Sub-Saharan Head of Delegation Africa Ministryfor ForeignAffairs Mr. HannuRlissnen First Secretary Unit for Sub-Saharan Africa Ministryfor ForeignAffairs Mr. MattiKErisnen Charged'Affaires Embassyof Finland,Maputo -'11 1-~~~  £YZMUM5S Wsm '.ummftvs 9PSovep Pari May1521, somusms m1 RUSSIA FEDERATION Ms LarisaE. Safoaova Cousellor, Mo.esty Minisy of Foreip ad Fium DqSpUm EcomomeI Ral_m SOUTHAFRICA Ambassdor Babar Maka of SouthAfricp Embay, Pa Delegation Ms.Nataulie Africa Counsellor forMukdiahArl hA Sottd Ai;can EMassy, Pfis -r --  Meteng of the ConsualttiveGroup for Mozablq.e 17 pars, MSy 15-16,1997 FRANCE Mr. FranpoisFambolini Adjointau Chef du BureauArique Head of Delegation at Ocan Indien Directiondu Trdsor Ministcrede I'Economieet des Finaces Mr. FranpoisBrunier Adjointau Chef du BureauA*ique et Oc6n Indiun Directiondu Tresor Ministerede l'Economieat des Finaces Mr. Ur6me Chastenet Chef du Post d'Expsion Economique &Maputo DREE Minist6rede I'Economieet des Finances Mrs. Anne Peltier ChagE de MissionO6ographique Mozmnblqu Min e des AffairesEtrangmres Mrs. DanielleRobin Chargede MissionAfriqueAusale MinistErede la CoopEration Mr. Jean-Christophe Pecresse Chargede Mission(idogaique pour leMozambique CaisseFranpise de D6veloppe ent (CFD) GERMANY MT.UllrichLttkeken Federl Ministryfor EconomicCo-opeaon . Head of Delegaton and Devlopmem MZ) MI. Ernst Joachimn KIute Desk Ofricerfor NortheraAfri BMZ Mr. CarstenSandhop Project Officer Eastern and SouthernAfiica Depament Kreditanstajz forWiederautau(xW Dr. RenatePollvogt Gesellscha*fir Technische Zusaes wbek (GTZ) -F -l  M.tlg ofthe Cosulttbve Group ftr MOZabique 18 Pail, May 5-e16 1997 fLANYD Mr.MartinGreene Counsellor,IrishAid Departnent Head of Delegation Ministryof ForcignAffairs Mr.EdwardJustinCaToll Charg d'Affaires Embassyof Ireland,Maputo ITALY Dr.CristianoGallo FirstSecsay, SouthernAfica Division Headof Delegation Development CoopastionDiectorate Ministryof ForeignAffairs Mr.Paolo Cappellacci Department of International Affairs Ministryof theTreasury JAPAN Mr.HironobuYasumura Counsellor Headof Delegation Embassyof Japan,Zimbabwe Mr.DaisukeYabuki Speca Assistant Embassyof Japan,Paris Mr. Takemichi Shirai JapanInternational CoopentionAgency(nCA), Pais Observer Mrs. YukoSaksuhita Wenk nCA,Paris Observer NiETHRLANDS Mr. GertianStorm DeputyDirectorGeneralof Intenational Head of Delegation Cooperation Ministryof ForeignAffairs W. Arie Vander Wiel Headof Southern AfricaDivision Ministryof ForeignAffairs Mr.RoelandVan der Geer Netherlands Ambassador,Mozanbique  Mcdng of the CoasultstiveGroup for Mozambique 19 Park,May 15C6,1997 Netherlands (cont'd) Mr. RobertVan den Dool First SecretaTy NetherlandsEmbassy,Mozanbique Mrs. DorineE. van Norren Desk Officer SouthernAfricaDivision Ministryof ForeignAffairs NORWAY Ms. TanjaH. Storm Deputy DirectorGeneal Head of Delegation Dcparanentof BilateralDevelopment Coopetion Ministryof ForcignAffairs Mr. SveinAageDale AssistantDirectorGeneral Departmentof BilateralDevelopment Cooperasion Ministry of ForeignAffairs MinisterCounsellor GunnarBee NorwegianEmbassy,Maputo Mrs. AnneBeatheJensen Adviser,Southern AfricaDivision NorwegianAgencyfor DevelopmentCooperaton (NORAD) PORTUGAL Mr. Jos6 Intcio Toscano Deputy DirectorGeneral Head of Delegation Treasury Mr. AntonioAlmeidaLima Minister-Counsellor PortugueseEmbassy,Maputo Ms. Grama Lima Program Officer EconomicCooperation Services Instituto da Cooperao Portuguesa Ms. Helena Cordeiro Alemate Executive Director The WorldBank  Meetingof the ConsuItatiVe Group for Momzabique Paris,May 1516, 1997 20 SPAIN Mrs. Marta GarciaJauregui DeputyDirectorGeneral Head of Delegation MultilateralFinancialInsftutions Ministry of Economyand Finance Mr. Juan JoseBuitrago First Secretary SpanishEmbassy,Maputo SWEDEN Mr. Jan Cedergren Director-Generalfor Intenational DcvelopmentCooperation Head of Delegation Ministy of ForeignAffairs Ms. MarieAnderssonde Frutos SeniorAdministrativeOfficer AfricaDepartment Ministryof ForeignAffairs Mrs. Lena Rupp DeskOfficer Westand CentralAfricaDivision SwedishInternationalDevelopment CooperationAgency (Sida) Ms. Ann Stadberg Counsellor SwedishEmbassy,Maputo SWITZERLAND Mr. Jorg G. Frieden Head,Easternand Southerm Head of Delegation AfricaDivision SwissAgencyfor Developmentand Coopeation (SDC) Mr. GregorBinkert Charged'Affaires SDC, Maputo Mr. Felix Fischer Economist,Balanceof PaymentsOpeations and Debt Reduction Federal Officeof ForeignEconomicAffairs  M.egtg of the ConsultativeGroup for Moaamblque Parl, May 13516,1997 21 UNMED KUNGDOM Mr. Mark Lowcock Head of BritishDevelopment Division in Central Head of Delegation Africa Deparmnent for IntemationalDevelopment OverseasDevelopment Adminisation (ODA) Mr. MalcolmSmart EconomicAdvisor British Development Division in CenDa Ahica ODA Mr. Julian Chandler Head of Section Zambia,Zimbabwe,Malawi,Angola, Mozamnbique, Namibia Foreign& CommonwealthOffice UNTD STATES Ms. CarolPeasley ActingAssistantAdministrator Head of Delegation Bueau for Africa U.S.Agency forInternationalDevelopment(USAID) Mr. James Smith ActingDirector USAID,Mozambique Ms. CynthiaRozell Director-Designate USAID,Mozambique AFRICANDEVELOPMENTBANK (AUDB) MW.Elfatih Shaaeldin DivisionChief Head of Delegation CountzyOperations Division Mr. RaymondKaileinbo CountryEconomist CountryOperations Division ' 1I'1'--  Meetingof the Consultative GroupforMozambique 22 Paris, May 15-16,1997 EUROPEANCOMISSION Mr.Josc SilvaDomingos Director Head of Delegation DirectorateGeneralfor Development Mr. Josc Leandro Economist,StructuralAdjustmentDivision Directorate-General for Development Mr. Paul Malin DeskOfficerfor Mozambique Directorate-General for Development Mr.Franciscoda Cianara Head of SouthernAfricaDivision CooperationDepartment Wr.AlvaroNeves da Silva Head of EuropeanCommissionDeletion, MapUo EUROPEAN INVSTMENT RANK MM Wr.Justin Loasby Head of Division Head of Delegation SouthernAfricaand IndianOcan Mr.FranciscoJ. Jordlo Gaspar SeniorLoan Officer Angola,Mozambique,Swaziland FOODANDAGRICULTURE ORGANIZA7ION (FAO) Mr.Bernhardd'Avis SeniorAgriculturalPolicyOfficer PolicyCoordinatingService PolicyAssistanceDivision TechnicalCooperationDepartmant INTERNATIONALFUND FOR AGRICULTURAL DEVELOPMENT (IFAD) W. Phillips 3. Young ProjectController,Africa II Division ProjectManagement Department -iA -_1  Meetingof the Consultative Group for Mozambique 23 Paris, May 15-16, 1997 INTERNATIONALMONETARYFUND (DM) Mr. SergioPereiraLeite DivisionChief,SouthernAfricaII Division AfricaDepartment ISLAMIC DEVELOPMENTBANK (IsDB) Dr. Muhammad Ahmad Director,Operations & ProjectsDepartment KUWArr FUNDFOR ARABECONOMIC DEVElOPMENT * Mr.Abdul-Rahmun Al-Hashim Head, WestAfricaDivision OperationsDepartment ORGANISATION FOR ECONOMIC CO-OPERATIONAND DEVELOPMENT (OECD) Ms. ElisabethThioleron Administrator, Development Co-operationDirectorate Head of Delegation Ms. FranceseaCook Administrator,AidManagementDivision DevelopmentCooperationDirectorate UNITEDNATIONSC33MDREN'SFUND (UNICEF) Mrs. CeciliaGjerdrum Officer-in-Charge Head of Delegation UNICEF,Maputo Mr. GabrielPinhoPereira Assistant Programme Officer Representative'sOffice UNICEF,Maputo MUNEMD NATIONSDEVELOPMENTPROGRAM9E (DP) Mr. SolomonS.O.Akpata Chief, SouthernAfricaDivision Head of Delegation RegionalBureaufor Africa Mr.E. Dierelo de Casterle ResidentRepresentative, Mozambique 1W- I - Meing oftheConsul4tiveGroupfor Mozambique 24 Paris,May 15-16, 1997 UNDP(cont'd) Mr.Moise6sManuelDa Mota ProgammeOfficer Unitfor Rehabilitation and Reconstruction UnitedN4ations E-dueatkrnsl-Scientific and r-n1tnvaI ikgannmtinna=sNFcO') Mr.LouisTiburcio UNESCO Representative, Maputo UNITEDNATIONSWORLD FOOD PROGRAMME(WFP) Mr.Mohamed Zeijari Head of Delegation Directorfor Africa Mrs.GeorgiaShaver CountryDirector/Regional Manager AfricaDivision WORLDHEALTE ORGANIZAT1N (WHO) Dr.CarlosTmy Headof Delegation WHORepresentative, Maputo Dr.Marie-Helene Mathey-Boo RegionalOfricefor Africa,Braavillc Dr. NickDrager HeahhSystemsDevelopment Programme StrategicSupport to Counties Mr.ReinaldoFlor&s MedicalOfficer Emergencyand Humanitarian ActionDivision MOZAMBIQUE H.E.Dr.PascoalMocumbi Head of Delegation PrimeMinister HE. Mr.TomazA. Salomao Ministerof Planningand Finance H.E. Mr.OldemiroBaloi Ministerof Industry,Commerceand Tourism HE. Mr. AlfredoGamito Ministerof StateAdministation __________ ___ - [~ Meetng of the Consultstive Group for Mozambique 25 Park, May 15-16,1997 Mozambique (cont'd) H.E. Mrs. Luisa Dias Diogo Vice-Minister,Planning and Finance H.E. Mr. Jose Rui Amaral Ambassadorof the Republic of Mozambique,Paris ILE. Mr. AdrianoA. Malciane Governor,Bank of Mozambique Mr. Daniel Tembe Advisor and Member of the Administative Counselofthe African DevelopmentBank Dr. Silvestre Sechene Cabinet Director for H.E. the Prime Miister Mr.Manuel Chang Ministry of Planning and Finance Mrs. lolanda Fortes Ministry of Planning and Finance M. Pedro Couto Ministry of Planning and Finance Mr. Aiuba Cuereneia Ministry of Public Administration Mr. Gamiliel SepulvedaMunguambe Mfinistry of ForeignAffairsand Cooperation Mr.Antonio Abreu Bank of Mozambique Mrs. Joana Saranga Bank of Mozambique Mrs.Esmeralda Fernandes Bankof Mozanbique Mr. Fernandes SumbanaJunior Centerfor InvestnentPromotion Dr. JosdDias Loureiro Economic Advisorto H.E. the Prime Miniser Mr.JoseBernardoManhique HeadofProtocol for HE. thePrimeMinister Mr.Jorgede SousaMateus Advisorto theEmbassyof Mozambique, Paris  Meeting of the Consultative Group for Mombiqm. 26 FAAis May 15-16, 19M Mozaubique (cont'd) Mr. AntonioMacheve Second Secretary Embassyof Mozambique, Paris EXECUTIVE DRECTOR Mr. JoaquimCarvalho ExecutiveDirector WorldBank WORLD BANK Ms. Phyllis Pomeantz Country Director Cha Mr. RobertoChavez ResidentRepresenative Ms. Rocio Castro CountryEconomist Mr. Gene Tidrick Lead Specialist,Economics Mr. Simon Bell SeniorFinancialEconomist Mr. Jehan Aruipragsm Economist Mr. Arnold Sowa PSM Specialist Mr. JocelynMason Opertions Analyst 1V m -Q7I  28 Annex III Mozambique Consultative Group Meeting Paris, May 15-16, 1997 Chairman's Opening Statement PhyllisPomerantz CountryDirectorfor Mozambique AfricaRegion WorldBank Ladiesand Gentlemen: I. Bon?dia e bemvindos a esta reuniao do Grupo Consultativo para Mogambique. Good morning and welcometo the 1997Consultative for Mozambique.Thisis the tenthformal Group Meeting meetingof this group, and it is a real pleasureto welcomeso manyfamiliar faces. In particular,I would like to extend warm welcometo the distinguished a Government delegation, led by His Excellency PrimeMinisterMocumbi. 2. The conclusionof thisfirst decadeof our partnership Mozambique has comea longway- further,perhaps,than marksa milestone. ago, or evenfive years ago. Thingsare changing we dared to hope ten years consolidation fast in Mozambique! Peace, the of Mozambique's young democracy, and steady reforns have injected new dynamism into the economy that catchesthe eye of even the casual observer. a momentum for economicgrowthwhichbeganwith the The growth acceleratedto over 6 percentlast year; end of the war continues: GDP twenty years,cashewoutputmorethan doubled; the grainharvestwas the highestin sector continuedfor the secondconsecutive and the recoveryof the industrial year. At the sametime, more peoplehave access to healthservicesandmorechildren are areas. Our objectivetodayand tomorrowis goingto school,especiallyin rural to take new look at where we want to go, andto define stock of wherewe are, to take a year. We are delightedand congratulate our work in partnershipfor the next the Government on what it has achievedso far, whilewe recognizethat there are many seriouschallenges ahead. We that progressis maintained, andbuiltupon, throughthe next decadeand mustbe sure beyond. 3. Everyyear the agendawe havetraced together moreambitious,and last year was no exception. at these meetingshas been achievement Perhapsthe most outstanding over the last year is that growthwith stabilization For the firsttime sinceadjustment has become a reality. beganin 1987,the Governmnent has succeededin bringingdownthe annualinflation rate to singledigits. At the sametime, the exchangerate remainsstableand interestrates nominal privatization are beginning to come down. With the all but complete of BPD andBCM, the two state-ownedbanks, policy has becomemuchmoreeffective.In monetary fact, Mozambique may be one of the countriesin Africawherefinancial sector reformis taking hold. There has also few progresson customsreform. And,perhaps been most importantly especially for the poor in Mozambique, the Govemment has been ableto protect recurrentexpenditures and educationdespitea verytightbudget constraint. in health .X -- I'~~~~~I  29 4. At this meetinglastyear Mozambique's partnersalsoexpressedconcemabout a rangeof governance issues. Duringthe past year the Government has gone some way towardsaddressing theseconcerns. After extensivediscussion in the Assembly, the role of localauthorities has beenredefinedto allowfor the decentralization of publicadministration, andnewlawsare now in place whichprovidethe frameworkfor local elections. Moreover,the Government has presentedto the NationalAssembly the Government EthicsBill andthe High AuthorityAgainstCorruption Bill. The Government shouldbe commended for these initiatives- they are importantfirst steps. 5. Thesechangesareforcingus to look at Mozambique with neweyes. If ten yearsago we hardlydaredhope to be wherewe are today,then surelywe can be even moreambitiousfor the future. I wouldlike to share some of my visionfor Mozambique'sfuturewithyou. 6. The first thingI see as I cast myeye over the futureis a ruralscene. Country marketsare thriving;andfarmers, secure on their land,are growingfood for their families and cash cropsto trade. Childrenare going to schoolin an adequate classroom with a trainedteacheranda good supplyof textbooks,andpeoplewho are ill are beingtendedat a well equipped clinic. As I turn to the cities,I see they are bustlinghubs whereMozambican privatebusinessesare growingandcompeting freely. Thesebusinesses are basedon the immense natural and humanresources this country possesses. I see busyports, railways and roads bringingprosperity to Mozambique and beyond. And as I lookmoreclosely,I see a population with the skillsto run its own affairsin an open,vibrantand transparentcivilsociety. And,no matterhow hard I look, I can find very few of us - the aid donors! -- Given what we have seen over the last fewyears, I don't thinkmyvisionis a mere dream. 7. But to get therethe Government facesmanychallenges.To putthingsin perspective,even if Mozambique growsat 9 or 10 percentannually for the next ten years,it willstill amongthe world'spoorest countries. So what willit needto get there? Raisingrural incomes meansbuildingbetter roads and gettingrural marketsto work so that farmerscanget the farmingsuppliesthey need andmarkettheir crops at attractiveprices. The foundationfor a dynamic rural economy also callsfor a land policythat providessecureaccessto landfor smal farmersandthat allowsan active land marketto develop. PROAGRI, the sectorprogram for agriculture that the Government is now preparing -with cooperation from many of us - will lay down the policyframeworkandstrategyfor sustainedand rapid agricultural growth. We look forwardto it startingsoon. 8. Encouragedbythe reformns and the drop in inflation,the privatesector has begunto movein Mozambique, and the Government, togetherwith its partners,must be sureto encouragethis trend. It almostgoes without sayingthat the firstthingto do is to consolidatemacroeconomic stability. As part of this,the spotlightnow needsto focus on fiscalreform. Mozambique's most pressingpriorityover the next few years willbe to expanddomestic revenue,especially given fallingaid levelsandthe country's still enormousneeds. Both customsreforrnand the introductionof a VATwillbe critical. Thesewillbe difficult reformsand we must stand readyto help. In addition, giventhe country's limitedresources,everymeticalmust be used wisely. The  30 Government deserves our full support of their ongoing fiscal management review process. 9. Fiscal sustainabilityalso hinges on Mozambique's receiving deep and meaningful debt relief. Mozambique's debt fund, established with the support of some bilateral donors, will be helpful in the short term as it will release resources for social programs. In addition, by mid-1997, Bank and Fund staff hope to have their respective Boards establish Mozambique's eligibilityfor debt relief under the HIPC Initiative. As you know, the HIPC Initiative would mean bilateral and multilateral debt relief so that Mozambique's external debt is brought to sustainablelevels as soon as possible. This is an area where we, Mozambique's external partners, must lend our full support. 10. Macroeconomic stabilization,including debt relief, will not be enough to foster private sector-led growth. The Government must also accelerate the pace of structural reform. The privatization program, one of the largest in Africa, is almost complete, and new private firms are emerging every day. The Government is now taking steps to make the laws of the country clearer and more up-to-date. It is also taking a closer look at the "red tape" of its bureaucracy and how to enforce its laws more effectively. This will allow private operators to enter, invest, and function easily throughout the economy. The Government is also very concerned about and committed to stimulating the nascent local entrepreneurial sector, so that Mozambicansfrom all walks of life can participate in the growth we foresee. There is a lot to do, and Mozambique's partners will need to continue to help. 11. Some of you, by now, will have heard the new term 'mega-projects' that is being used to describe some of the most excitingopportunities emerging for Mozambique. These projects, such as the Pande and Buzi Gas fields, the Maputo Development Corridor, a new hydroelectric plant on the Zambezi, the MOZAL aluminumsmelter outside Maputo, and the proposed eco-tourism development in the south, are no longer just possibilities. They are on the drawing board and are rapidly being transformed into reality. Again, this is happeningfaster than many of us dared hope. These projects offer tremendous opportunities and tremendous risks. With them, Mozambique's economy could benefit from a real boost -- soon. They promise the sort of rapid growth that, under the right circumstanceswill provide the resources to put a real dent in Mozambique's poverty. But it is important that the Mozambican Government and its people are in a position to take full advantage of these opportunities and to benefit from them. We also need to recognize that Mozambique's growth comes primarilyfrom natural resources. In the efforts to increase growth, there is a need to ensure that Mozambique's development is envirornentally sustainable. We must be careful not to kill the goose that lays the golden egg. 12. Given all this, building capacity has to be Mozambique's greatest challenge and first priority. The new vibrancy in the economy is like the roaring of the engine of a brand new car. But to actually get somewhere, there haveto be roads to drive on, there has to be gas to refill the tank, and the driverneeds the skills to firmly control the wheel - even on the most dangerous curves. Now, more than ever, building capacity is at the heart of the development challenge. In today's world, capacity extends far beyond basic education or skills training. The complexityof this challenge requires that Mozambique approach it from several fronts and with a wide range of instruments. 1 .I- '  31 The coverage and quality of primary and starting the education sector investment secondary education must be increased, so The Govemment has also rightly program as fast as possible will expressed the urgency of increasing be essential. through vocational education, training, local skills leaping into the twenty-first century and a universitygrounded on excellence and sectorprogramis alreadymaking through technology. In health, the Government's progressandis expectedto increase coveragefrom 40 to 60 percentof the basichealth the populationby the year 2000. We that it keeps up the pace. And finally, mustbe sure progressin publicsector reform- carefullook at the role and responsibilities from taking a incentives of government to providing adequate for civilservants-- is sorelyneeded. Reformlater today willprovidean A SpecialSessionon PublicSector opportunity for the Government to presentits plans in this area. 13. I have sharedsomeof myvisionwith than that of many of yours -- I may you today. I am sureit is not so different not even be as brave and bold as This meetingis our opportunity to thinkhow our partnershipcan help some of you. vision. As the situationchangesin Mozambique, realizethis also change. In past CG meetings, the nature of our partnership must we driver'sseat; today, morethan ever, notedthat the Government wasfirmlyin the Mozambique is in controlof its own destiny. The Government'sleadership and our evolving open, frank,and productivedialogue experience together is resultingin a more As Mozambique'spartners,we must between the Government and us, its aid partners. continuallynurture this dialogue and striveto improvethe focus of our efforts. The sectorinvestment programs, the management reviewand now the publicsectorreform fiscal Govemment'sleadership processwill all enhancethe and sharpenthe focus of our activities. 14. As we look to the future,we changesin the waywe worktogether, willneedto thinkaboutintroducing other thoughtson this topictoday. I would and I would urge you to air some of your effortsto build on our partnership alsolike to urge the Government to continueits for development-- makingit deeper forceswith NGOs, privatesectorassociations, byjoining it broaderby embracing and civil society in general;and making commonobjectives Withthe Government'sstrong leadership, andactionswithneighboring countries. can makethe visionof Mozambique's the combined energies of all of us together futurecome true. 1S. Now, turningf6r a moment from the visionary to the practical,let metalk brieflyaboutthe propo'ed agenda for the meetingand logisticalarrangements: * First, let me apologize for the limited seating at the Mozambique has grownbeyondthe capacityof ourtable. The interest in to limitdelegations table,so we havehad to one seat at the table. * We willbeginthe discussion thismomingwith a statementfrom Excellency the PrimeMinister.This willbe followed His Mr. Leite of the IvF anda statement by a statementby * Followinga coffeebreak,His by the UNDP. Excellency Planning,MinisterSalomlo,willgive the Ministerof Financeand us a presentationon the Government'seconomic reformprogramand privatesector strategy. We willthen openthe meeting development for a plenarydiscussion.  32 to an informal lunch,outsidethis room, * We wouldthen like to inviteyou we planto designatesometablesfor beginning at 12:30. As in past years, we participants.Tentatively, discussion of topics of particularinterestto PublicSector Refonm, Development, planto havetables for PrivateSector and the MaputoDevelopment the FiscalManagement Review,Agrculture Bankdelegation know, duringthe Corridor. Pleaselet membersof thesuggestions.As always,some tables coffeebreak,if you have additional conversation. will be reservedfor moregeneral discussions. * After lunchwe will continueour we willturn to a presentationby the the afternoon coffee break * Following by a plenarydiscussion. Government on PublicSectorReform,followed openingwith a 5:30, we will turn to financing requirements, * At about GovernorMaleiane, followedby Ms. Rocio statementfromHis Excellency Castro of the World Bank. Government has kindly the Mozambican * I wouldlike to confirmthat tonight here,on the Bank premises, invitedus to a cocktailreception at about 6:15 p.m. beginning at the close of this session,hopefully to morning we will reconvene at 8:30, movingimmediately * Tomorrow turn on external financing by participants.After coffee,we wil statements to a summary of the financing positionandto the draft of the press at we will conclude the mainmeeting statement. After closingremarks, on Bank willhold a press conference 12:30. The Govemmentandthe thesepremisesstartingat 1:00p.m. to you, I proposeto launch the meeting If these arrangements are satisfactory 16. Mocumbifor his statement. by callingon HE PrimeMinister  34 Annex IV Consultative Group on Mozambique lot- Meeting $peeeb y l br. P'ASCOAL HEOCIUMIBI PRIME-MINISTER OF THE REPUBLIC OF MOZAMBIQUE P41W. 5 7f 1997 v-ATX I-  35 Mr. Chairman DistinguishedRepresentativesof the Donor Community Ladies and Gentlemen, Allow me to begin by welcoming you on behalf of my government, my delegation and on my own behalf to this Consultative Group Meeting on Mozambique, and by wishing you every success in the work of the meeting. I would also like to take this opportunity to express once again the appreciation gratitude of the people and government of Mozambique and support we have received from the governments for the and organizations you are representing here. This meeting is taking place at a moment when Mozambique completed its tenth year of implementing fundamental has political and economic reforms. Encouraging though social, they are, serious challenges nonetheless lie ahead if we are to consolidate the steps already taken and take our country to higher social and political stabilityand accelerated, sustainable levels of growth. My government's current activities economic are essentially focused on these challenges and a systematic search for ways of meeting them. We therefore wish to bring to this meeting our vision and our choices, in order that we may share them We have no doubt that as in the past we will emerge with you. enriched by your contributions, and that our programmes will continue to deserve your invaluable support. Ladies and Gentlemen, As you have been able to observeover the last 10 years, progress has been made in re-establishing peace enormous and socio- political stability, deepening democracy, and liberalising and stabilising the economy. 1 T-~ -T  36 Followingthe general multi-party elections and unceasing labours in favour of national reconciliation,today's environment is one of growingstability with widespread participation of political forces and civil society in public affairs. The Assembly of the Republic (the national Parliament) is proving to be increasingly active and efficient in discussing and taking decisions on fundamental national issues. The Parliament and govermnent that emerged from the general elections continue committed to preserving peace, deepening national reconciliation and promoting citizen's broad democratic participation. In this context I would like to mentionthe Assembly's recent approval of the legislative package on creating local authorities. A fundamental change in the direction of large scale decentralisation will take place in Mozambique's public administration, enabling more direct public participation in managing national life and development. The first ever local elections will take place before the end of this year, covering the main cities and towns. Any political party as well as independent candidates may stand for election. LadiesandGentlemen, In the economic sphere, the government will continue to implement a macro-economic stabilisation and structural adjustment programme. In addition to restrictive fiscal and monetary policies, price liberalisation,exchange rate liberalisation and commercial and financial liberalisation, the reforms have included redirecting public spending towards the education and health sectors and basic infrastructures, and a far-reaching privatisation process. More recently, and particularly since 1996, the reforms have been gaining unprecedented impetus with measures that have a major impact on increasing the space and developing a favourable climate for the expansion of the private at the CGMeeting- Paris,I5 Mocumbi, Dr.Pascoal of Moambique. by HE thePrimeMinis'er Speech May 1997. - -T'  37 sector. The pace for privatisation, including in the financial sector (not least privatising the largest commercial bank in the country) and in air transport (with the decision to privatise 51% of the national airline company already taken), should also be mentioned, as should the first efforts towards reducing the tax burden on the private sector, with the reform of customs tariffs that was introduced in the second half of 1996. This latter measure required additional actions to increase the efficiency of the customs services and apply the new tariffs in a transparent manner. The government thus decided to contract customs managementout to a private company for a 3-year period. As an overall objective, I can state that the government aims to adopt a style of economic management which is increasingly based on indirect forms of intervention. The combined effects of the peace and political stability and the economicreforms resulted in 1996 being the most successfulyear since the reforms began in 1987. It has been a cumulativelearning process, sometimescarried out in adverse conditions,in which we all learned by doing. Effectively,the bases for the operation of a market economy have been established and the economy is tending to greater stability. Gross domestic product grew by around 6,4% and exports of goods by 30%. These results came in parallel with both a lower inflation rate, 16.6% against over 50% in the two previous years, and lower levels of currency depreciation, of only around 5%. Ladies and Gentlemen, An ability to identify the main challenges of the future is indispensable to guaranteeing that the road we have already travelled and the successeswe have achieved are irreversible.We Sptch by HE the Prime Minister of Mozmbique, Dr. PascoalMocumbi,at the CG Meeting - Paris, 15 May 1997. nil~ '~~ 1 .- . .-  38 cannot forget that serious structural problems persist and require appropriate solutions,for example: * High levels of unemployment and poverty. Mozambique continues to have one of the lowest per capita incomes in the world, and around 60% of the populationare living in absolute poverty, mainly in the rural and peri-urbanareas; * High illiteracy rates, low levels of skills in the national labour force, the prevalence of endemic diseases and low levels of coverageby the public health and educationnetworks; * A- weak export recovery that continues to be based on traditional goods from the primary sectors; * Low efficiency and poor supply of goods to meet domestic demand (includingnon-tradable); - Weak expansion of private investment, both national and foreign; * Low efficiencyof public investment; * Low efficiency of the public administration; * Continued, and worsening, regional imbalances; * High dependencyon external resources, creating unsustainable balance of payments positions with debt growing to unsustainable levels or implying extreme dependency on grants. Speech byHIEthe PrimeMinister of Mozambique.Dr. PascoalMocumbi, ao the CG Meeting - Paris, 15 May 1997. _ - I.  39 With a view to overcomingthese problems,the government's option is to continue its rigorous short term macro-economic management, alliedand adaptedto the need to introduce and longterm structuralmeasures: medium * The processof administrative reformis a requirement govemnance. Excessivebureaucracyand associated for good are obstaclesthat must be removed corruption with the necessaryurgency and decisiveness.Efficient management competentcivil servantswho are of the state requires concernedwith res publica. The commoncitizen,the investor (national have confidencein the public institutions. and foreign)must thinking,the government Along this line of has sent bills on Governments Ethics and creating the High Authority Against Corruptionto the Assembly for approval.Lawson (i) the integration Budget and General Accounts,(ii) of the State Sectionof the Administrative the Proceduresof the 3rd Tribunaland (iii) supervisionof the Public Accountshave already been contributeto increasedtransparency approved,and will also in the use of publicfunds. * An essential feature of administrative Building programme. In the reform is the Capacity government's view, this programmeis intimatelylinked to training and being able to retainhighlyqualifiednationaltechnicians achieving is anotherfactor for this goal. * In the healthsector,the goverm-nent will continueto implement policiesaimed at increasingthe availability care and expandingcoverage.With of essentialhealth regard to education,the goal is to carry out large scale training effectivecapacitybuilding,in a context as a key element in human resources. In a long term of the free mobilityof perspective the training programmetakes basic education as its priority, but also necessarilycovers higher education and technical education S*echbyHE thcPrimeMinister of Mozambique, mary 1997. Dr. Pascoal Mocumbi, at theCGMeeting- Paris,IS  40 (basic, middle level, craft and professionaltraining). There will be a systematiceffort to improve the quality education system at all levels. The involvement of the private sector is very welcome in the education and heath sector activities. * In view of the accelerated grow of the economy,programmes to develop basic infrastructures continue to be a government priority, particularly those in the rural areas such as water supply, irrigation, storage and conservation of produce, roads, transport, communicationsand marketingnetworks. * At the same time, the effort to improve the environmentfor the private sector expansion and development will be taken concerning privatisations, introducing favourable fiscal regimes, revising commercial and investment legislation and reviewing procedures with a view to simplifying and "de- bureaucratising" them. The government is also concemned to develop specific actions in favour of the national private business class, which is still nascent and lacking in financial resources. This group has to an extent been penalised by the restrictivepolicies that help slow down inflation,particularly in the decapilatised rural areas. It is therefore the government's intention to request the support of the internationalcommunity also in mobilisingresources for: * clearing the debt contracted by the national private sector during the war, which became unrevocable for this reason, and creating the bases for recapitalising the sector; * transforming and expanding the existing Economic Rehabilitation Fund (FARE) into a financial institution that will promote the development of the national private business class, particularly the segment operating on a Speech by HE the PrimeMinister of Mo:ambique,Dr. Pascoal Mocumbi, at the CGMeeting - Paris. 15 MV' 1997.  41 small scale and linked to the rural areas. This institution will be open to financial and management from the private sector itself, participation organizations, non-govermmental donorsand other-interested parties;and * Finally,the existingsocialinequalities could endanger and regionalasymmetry the climateof peace,calmand social that is a basic prerequisite for balanced harnony socio-economicdevelopment. Full and self-sustaining equalityof accessto available resources citizenshiprights imply the results of economicgrowth. Within and to enjoymentof framework,eliminating this decidedlymoral poverty is one 1995-1999GovernmentProgramme. of the prioritiesin our searchfor greaterequityin regional Thus, as a part of our development, in additionto thejoint venturesreferredto above we local planning units as part will continue to promote decentralisation- bodies that are of the administrative autonomousfrom the public administrationor operate as private participation. institutionswith state Wewouldcite the recentcreation of the Zambeze PlanningOfficeas an example for the task of identifying basic this. Theseunits will have infrastructure development activities,promotingpreparationof and projectsand mobilising the relevant programmes resources They will also work to identify for their implementation. opportunities. and promote business Ladies and Gentlemen, Continuing with the political and establishing economic reforms and securebases for growthand sustainable in Mozambiqueis still dependenton development resources.As we have already said, the availability of external this need has generated an accumulated foreign debt at unsustainable serviceexercisinga constrainingpressure levels, with debt on the social and other Sewchby HiEtie PrimeMinister of Moambique,Dr.Poscoal MAy 1997. Mocumbi, at the CGMeeting- Pans, 15 -11V'  42 basic publicprogrammes.The perspectivesfor growthbased on the private sector show no sign that resources for paying the public debt will also have to be met. Concessionarydebt alleviationat the level of the Paris Club or bilaterallyis therefore of utmost importance. The initiatives of bilateral donors in supporting servicepaymentson multilateral debt, the questionof Mozambique's eligibility for the debt reduction initiative for highlyindebtedpoor countries(HIC) is crucial.Your supportin favourof an urgentfinal decisionon this matter wouldbe greatly appreciated by my government. Ladies and Gentlemen, My delegationis at your disposal to go into a greater depth regardingthese and other questionson the course of reforms in Mozambique and the perspectives for socio-economic development. I wishthe meetingeverysuccessand thankyou for your attention. Thankyouverymuch. Paris, 15May 1997. Speechby HE the at he CGMeetin - Parsm Dr.Pascoa Mocumbi, of Moa=mbique, PrimeMinistcr IJ Ma'y1997. -~~~~~  44 Annex V Statement of the Staff Representative of the International Monetary Fund at the Mozambique Consultative Group Meeting Paris, May 15-16, 1997 1. When we last met in April 1996, we were concerned that Mozambique's inflation rate had remained stubbornlyabove 35 percent sincethe beginningof the structural adjustment effort in 1987. I am glad to report that Mozambique's economicperformance was strong in 1996 and that earlyresults for 1997 seem to indicate that another good year may Hie ahead of us. Real GDP growth reached 6.4 percent in 1996 (up from 1.5 percent in 1995), and the inflation rate declinedto only 17 percent (down from 54 percent in 1995). For the first four months of 1997 cumulativeinflationwas 5.7 percent, compared with 17.5 percent in the same period of 1996. Furthernore, structural reforms continued to move ahead at a good pace. These are remarkable achievements,and I would like to start by congratulating the Mozanbican authorities for vigorously pursuing their economic strategy. The authorities' efforts certainly paid off in 1996, suggesting that stabilizationmay be conduciveto growth, even in the short run. 2. It is importantto note that these positive results were achieved under difficultconditions. Grant financingof the budget declinedby 4 percentage also declinedslightlyas a percent of GDP on account points of GDP in 1996. Tax revenue of widespread duty exemptions, the deteroration of customs administration,and tax arrears by the state-owned oil company, stemming from domestic price controls and rising intemational oil prices. The authorities reacted to the declinein revenue and grant financing by reducing expenditures and net lending by 4 percentage points of GDP and by increasing net foreign borrowing by 1 percentage point of GDP. The cut in expenditures (mostlyin investment) was sufficient to offset the decline in grant financing,but the overal deficit after grants increased slightly(by 0.2 percentage point of GDP), because of the declinein revenue. 3. Improved monetary control in 1996, pardy as a result of the privatization of the Commercial Bank of Mozambique in mid-1996, allowed decelerate sharply.For the year, broad moneyincreased broad money expansion to by 21.6 percent, less than half its expansion in 1995. The monetary expansionwas drivenmostly by the accumulation of net foreign assets, as the behavior of net domestic assets was contractionary. However, as the govermmentwas once again able to provideresources to the banking system, credit to the economy grew strongly without rekindling inflationary pressures. 4. The balance of paymentsposition strengthened in 1996, exceeding programn objectives. Merchandise exports and imports both grew rapidly, net serviceexports increased, and official transfers declined.The extemal current account deficitnarrowed from 23 percent of GDP in 1995 to 21 percent in 1996. The capital account surplusnearly quadrupled, reflecting substantiallyhigher officialand private sector net borrowingand a strong increase in direct AACG97BIS.DOCMay 10, 1997(2:3 1pm) 1W 1 '  45 private investment. Consequently,gross internationalreserves increasedto about 4.4 of imports of goods and nonfactorservicesat end-1996, months and the meticalwas relatively stable during the year. 5. Mozambique's economicstrategyfor 1997-99 is to capitalizeon the gains achieved in 1996 in both macroeconomicstabilization and economicliberalization of the private sector. The main elementsof the strategy to encourage a takeoff are (a) fiscal adjustmentto put the budget on a sustainabletrajectory,includingtax and customs reforms,and expenditure restraint,along with increasedallocationsto the social sectors and investinent;and (b) structural reforms in keyareas suchas privatization and private sector development, deepeningof financial and exchangerate markets, and public administration(civil decentralization). In late June 1997,the Executive Board of the IMF is expected service and request by the Governmentof Mozambiquefor continued to consider a support of its economic program in the form of a second annualESAF anrangement. 6. The 1997/98program willseek to achievea real growth rate in the nonenergysector of 5 percent in 1997, a flrther declineof inflation(on an end-period basis) to 14 percent in 1997 (end-period basis) and to 10 percentin 1998, and an increase bankingsystem by US$90 million.Ongoinginvestments in the net foreign assets of the in the energy sector shouldraise total real GDP growth to about 6 percentin 1997. To improve the businessenvironment,the governmentplans to simplify licensingrequirements,to review the commercialcode, more generally,to ensure that businesses and, located in Mozambiquecan successfully compete domesticallyand abroad. 7. Measures will be taken to increasetax revenue by 1.3 percentage includingimprovementsin customsandintenal tax administration, points of GDP in 1997, customsduty exemptions,quarterlyadjustmentsof the a further reduction of excisetax on petroleumproducts to keep petroleum tax revenuesgrowingin line with inflation, and monthlyadjustmentsof the domesticprice of petroleumproductsto protect the cash-flow positionof the state-owned oil company.However, further efforts are required to improve the efficiencyand equity of the tax system The 1996 tariff reformwas a step forward, but additionaladjustmentsare still needed to reduce tariff dispersion,and to avoiddistortions caused by efforts to protect domestic production. Reformsto reducetax rates and broadenthe tax base are alsoneeded, including the introduction of the value-added tax as scheduledin miid-998. 8. Total expenditure and net lendingwill increaseby 5.8 percentagepoints of GDP, reflectingmainlythe incorporationinto the budget of spendingthat was previouslyoutside the budget (govermnent on-lendingand tansfers to public enterprises, and the cost of the contract for preshipmentinspection),as well as new special programs, suchas the contract for castoms managementand socialexpendituresfinanced with counterpartfimds associated with the earlyrepaymentof debt to multilateralinstitutions. As a safeguard,the authorization for expendituresamountingto I percent of GDP is contingent upon meetingthe revenue targets in the first half of 1997. The programenvisagesan increase in educationand bealth 11~ '  46 expendituresby I percentage point of GDP, and we urge the authoritiesto conduct regular surveysto assess whether social indicators are improvingas a result. 9. In 1997, the governmentaims at limitingthe overallbudget deficit after grants to 6.2 percent of GDP or lower, and accumulatingdepositsin the banking system amountingto about 1.1 percent of GDP. These targets assume net externalfinancingof 22.5 percent of GDP, an increase over 1996. 10. The 1997 program envisagesa prudentmonetarypolicybacked by close monitoring of financialtrends and strict enforcementof regulations.The restructuring and privatizationof the Banco Popular de Desenvolvimento will be a milestonein working toward these objectives.Broad money growth will be limitedto about 20 percent. Somefurther build-up of net foreign assets is envisaged,partly to relieve pressureon the exchangerate. However, continued governmentrepaymentsto the bankingsystemwillpermit an extension of credit sufficientto sustain growth. 11. Despitethe good progress to date, Mozambique'sadjustmenteffort in the next few years wil remain challenging.The potential for agriculturaldevelopmentis considerable,but will need to be unlockedby a concerted effortto ensureequitableaccess to land, encourage smallholdersto increase yields, and expand marketablesurpluses.Development of a rural marketingnetwork, road access to areaswith agricultural potential, and improvementof the delivery of government servicesin rural areas, particularlyeducation and health, will be crucial to ensure that agriculturebecomes an engineof growth andpoverty reduction. 12. Local elections and governmentdecentralization are expected to take place in the near future, whichwould bring government programsunder closer public scrutinyand require a better alignmentbetween governmentexpendituresand local economic developmentneeds. Accordingly,local financeswill need to be transparentand to be reported accurately and in a timely manner to enable a proper assessmentto be made of the state of the government finances. The expected increase in governmentemployment at the local level will need to be coordinated with reductions at the central level to prevent an excessivegrowth of the civil service, a problem that Mozambique has avoided so far. The devolutionof responsibilitiesto local governmentsalso presents a good opportunityfor the central government to eliminate duplication,low priority activities,and activitiesthat can be efficientlycontracted out to the private sector. 13. External financingrequirementsfor 1997 will amountto about USS5.5 billion, including regularization of obligationsto the RussianFederation(estimatedat about US$2.2 billion) and other non-Paris Club bilateral creditors, as well as arrears on the private sector commercial debt of the Cahora Bassa project (about US$1.7 billion).About US$3 billionof the financing gap could be coveredby the completion of bilateralagreementswith non-Paris Club creditors on terms at least comparableto those obtainedfromParis Club creditors. An additional US$135 million in current maturities fallingdue to Paris Club creditors in 1997 will be rescheduled under the terms of the 1996 Paris Club agreement.A further US$1.7 _ I . . ~~~~~~~~~~ XE  47 billion-corresponding to the Cabora (the remaining Bassaproject-is assumed to be rescheduled USS760 million,it is expected pzivately. commitments that disbursements from edsting frommultilateral creditors wouldaccountfor US$260.million, investment and commercial loansto the privatesectorwouldamount directforeign million,withUSS335million expected to aboutUS$165 frombilateralcreditors. 14. Theimprovement in economic performance, to increased togetherwithpeaceand democracy, hasled investorinterestin Mozambique. The opportmity to maintainits growth momentum Mozambican economy hasan excellent macroeconomic in the next three years, provided that conditions remain stable.However, the debtburdenis heavy,and foreign assistance willremaincrucial, as thereis stillmuchto be accomplished economy, improving socialconditions, in reconstructing the andin creatinga dynamic export base long-termviability of the balanceofpayments. to ensure the community Thisis whyit willbe important for the donor to provideadequate amounts of concessional requirements ofMozambique. assistance to meet the fnanmcing 15. It shouldalso be notedthat Mozambique's burdenmakeit a potential economic performance and heavydebt candidate for assistance underthe HIPC complete debt sustainability Initiative. However,a analysisforMozambique requires information treatment of Mozambique's debtto the Russian on the expected the ParisCluband the Russian Federation.Discssions are ongoingbetween Federation on the issueofcomparability creditors.The staffhopesthat, onceagreement of treatmentamong Clubon the handling hasbeen reached between Russiaand the Paris ofRussia'sclaims, it willbe possiblein timingwouldhaveto be decided the near future-though the by theBoardsof the Bankandthe Fund-to onMozambique's eligibility for assistance reach a decision underthe HIPCInitiative. ;1'1 '  Annex VI 48 Consultative Group Meeting on Mozambique Paris, 15-16th May, 1997 STATEMENT BY UNITED NATIONS DEVELOPMENT PROGRAMME (tNIDP) By Solomon S. C. ALPATA, Chief, Southern Africa Division, Regional Bureau for Africa Madam Chairperson, Honourable Prime Minister, Honourable Ministers, distinguishedmembers of the MozambicanDelegation, Ladies and Gendemen. Let me first and foremost thank the World Bank for arranging this timely CG meeting and for this oppormnitygiven the UNDP and indeed the UN agencies to participate in it With me this morning is Mr Emmanuel de Casterle, the UN Resident Co-ordinator and UNDP Resident Representativefor Mozambique. He will take over this seat after this statement. You will agree with me that he is closer to the scene and more akin to the deliberationswhich we wMl have in the next two days. Mozambique, becauseof our role in the peace process amongst others, is a nation close to the heart of the United Nations. The presence of several of the UN agencies here today is a proof of our continued interest in the socio-eonomic developmentof Mozambique. I acknowledge the comprehensive statement made by the Honourable Prime Minister. It is fall of hope and achievements. It calls for the continuationof our joint efform in seeing Mozambique succeed in their determined drive towards sustinable growth that will lead tO an improved livelihood for all its people. Madam Chairperson, only four years ago, Mozambique signed the peace agreemene that ended a long drawn out devastating civil war. Today, we note the tremendous achievementsregistered so far in the country. Peace has been consolidated, democraticrule is in place with a strong opposition party. Positive and significant economicgrowth has been. registeredwith an advent of an apparent buoyantprivate sector. UNDP congratulates the Governmentof Mozambique for these achievementsand we hope that the present consolidation will lay a s;ronger foundation for the needed impetus for a higher sustinable growth. Madam Chairperson,while we speak of consolidation,and the recognition of the gains already made, at the same time we note the major challenges that still persist, that must be tackled now and in the near futre. MadamChair, Ladies and Gentlemen, there is still a lot to be done, especially in the areas of good governance and poverty alteration. UNDP, as you all know by now, strives through its development interventions in our programme counties, for sustInabl humn development, a development that perpetuates equality that is sustainable and worth sustmaing. In this effort, the private sector has a very important role to play. This is very true for Mozambique. While external aid is still needed to solidify this development, an internallystimulatedgrowth and thus ownership is a must.  49 Madam Chairperson, the UTNSystem wide supported by the World Bank and EC-A, Initiative on Africa which is fully has as one of its pillars the issue of Governance. UNDP fmds a direct relevanceto Mozambique's UNDP Administrator, developmentto good governance. As the Mr Gus Speth recently stated, 'the effectiveness uis relationshipsto civil society are key of government and determinants in whethera nation is able and sustainequitable opportunitiesfor all its people'. to create In this regard, UNDP in conjunction with other Donors, is committed gove:rnment of Mozambique in its efforts to decentralise,hold local elections,in assisting the legal sector and carry out public sector strengthen the reform. UNDP recognises that Public Reform is a decisiveissue to ensure effective. Sector being at the same time, a complexissue involving and efficient management of resources, while insdtutional restrncring and access to not just wagesand career paths, but also new approaches and information. UNDP prepared to continue to facilita the determined parnmehip, between Government is donors in this area. We believe that this is more and needednow, since the already overstretched and umderstrength capacityexistent in Government, risks becoming even weaker. ECONOMICPOUCY Madam Chair, UNDP is very pleased pursue its present economiccourse given the to note the Government'sde ination to performancealready registered, especially * tems of growth and economicpolicy. We in now feel that thesegains need to be consolidated in order to assist the developmentof a strong private sector, througha frve front approacb- 1) Ibe county needs to continue with its stabiisation control, deflationarymeasures and to see policy focused on monetary through the process of privatisation. However, UNDP also feels that the Governmentshould aimfor higher growt figures,aimin for 8% aS a minimum, while striving for double digits figure. 2) In termsof increased support to rural areas -and the promodonof Mozambiqueis still the heart of Mozambique's rural tade, rural private sector in the form of small farmers, artisans and partcularly commercial traders. We therefore supportthe Govemnment'sfocus on rural areas and the promotionof the rural commercialnetwork, paricularly roads to link producers to markets, thugh the rehabiitation of infrastrucsnre, expand the concessionof credit and protect and improve the benefits to the rights of local producers. Let me take this opportunity to congratulate master plans being developed.We look forward the Governmenton the new strategic to concludingdisussions on PROAGRI. 3) Wbetherin rural or urban areas, employment to micro and small business,many of which creation in Mozambiqueis closely tied operate in the informalsector. We recognise the role of the informalsector as an employment creator and UNDPstands ready to assist ~1vi1  50 the Government's efforts through the Ministry of Labour sector to establisha nationalpolicy to promote small-scale in partaership with the private Such a policy can increase accss to credit, to advice industryand vocational training. and informationas well as vocational taiing. 4) Equitable growth relies to a large extent on the revenues to the needy, which is most of the population Government's ability to reallocate in Mozambiqueand to create equal opporunities. While economic growth through a well performingprivate sector will be the key to bolsteringstate revenues in the long-run, we also look forwardto a swift streamlining of the nadonal tax systemand customs administration in the short to middlerun. 5) Mozambique'sintegration in the global economic market requires serious susmined policy and managementin order to maximise gains. Mozambiquewill need strategic master plans for areas such as the transport sector, particularly at regional level, promotion of exports, industry, investmentand tourism, especially eco-tourism.UNDP avails itself of the oppomunityand is at the disposal of all present to assist with the establishment of a permanent mechanismto foster increased public/private sector debate on policies linked to Mozambique'sgrowingeconomy as it moves into the internationalarena. Madam Chairperson, the country's continuing high indebtednessis a major handicap to development. UNDP is concerned at the growing size of the debt problem: Total debt srvice is now four times GDP, while debt service represents 116% of exports. Debt sevice for 1997 is higher than the total wage bill for the civil service. Net debt service increased from S69 million in 1995 to a scheduled S110 million in 1997. We agree with the Government that the benefits of liberalisation ought to have a swifter impact on people's cveryday life and that the debt problem prevents this to an extent that it reduces the Government's already scarce resources at a time when we are encouragingthe Government to reallocate resourcesto ensure equitable growth for poverty alleviation. The recent debt rescheduling on the Naples terms developmentand provided the Government with an already represents a positive additionalresourcesfor its 1997 budget. We now hope that Mozambiquequalifies for HIPC status. SOCIAL DEVELOPMENT Madame Chairperson,the social dimension of economic in terms of quality of life for the people, but growth is decisive not only also in terms of improving national developmental opportunities. A World Bank study highlighted that 64% of growth is attributed to human and social capital as opposed to physical or natural capital. In other words, not only are investmentsin the social sector fundamentalfor poverty alleviation and improved opportunities,but they are crucial to the emergenceof a strong private sector. 7rl r_ -  51 We do welcome the Government's financialand policyeffortsoverthe last few in health and education sectorsas well as in mattersrelaing to populadon years figt against HrV/AIDS.At the sametime, policy and the we look forwardto sweing educationand health as the basis for a poverty major spendingin formulation alleviationstrategy.We also expect the of a NationalPopulationstrategyand a National FoodSecuityStrategy. UNDPalso looksforward to a strongalliancebetweenthe Ministiesof Sports, Labourand SocialActionCo-ordination Culture,Youthand alleviatdon to revitalisethe frmulation of a poverty network. Finally, UNDP encouages the donor community Alleviadon to support the Government'sDebt Fund as a meansto fosterreal public spending healthand water.Inthis regard,we also in the key sectorsof education, hope that the n w lTNSpeial litiative on Afica will lend to the effortsof the Government in thesekey priorityareas. I hni you. -v ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~..  52 Annex VII Rep0iblicade Moaambique GROUP TENTH CONSULTATIVE MEETINGFOR MOZAMBIQUE AHEAD THE CHALLENGES Speechof His Excellencythe Ministerof Planningand Finance Dr TomazAugustoSalomAo Paris,May 1997 r--  53 MR CHAIRMAN REPRESENTATIVES OF THE DONORCOMMUNITY LADIESANDGENTLEMEN I would like to start by greetingall thosepresent gratitude at thisforum,and expressmy for the continued interestin supportingthedevelopment of my country. Implementation of economic, socialand political been underwayfor ten years. We have reformin Mozambique has now come through difficult moments, persistingwith structuraladjustmentpolicies imposed despTte the adverse conditions bythewar. [Transparency 1] Lookingbackto the mediumterm strategy, whichwe havebeen pursuingsince 1995,thefundamentalareasare: A rehabilitation of infra-structure; B. developing humancapital; C. promoting growthof agricultural production; D. creatinga favorableinvestment climate. it is withthis strategythat we havebeenworking that our effortshavehad positiveresultsin and I am pleasedto announce 1996.Indeed, for the first time, we were able to simultaneously achieve strong reductionin inflation alongside satisfactory economic growth. Transparency 2] I will go throughthe essential pointsof theseresults. The inflationrate fell by 38 percentagepointsin relation 17%.Thus it was possible to 1995,reachingonly to achievea rate 5% belowthe targetestablished the economic program. in This result reflects,essentially, the restrictivestancemaintainedin monetary policies,as wellas the effectsof the goodagricltural year. fiscal and [Transparency 3] The mainobjectiveoffiscalpolicycontinued to be orderto achievethis, a part of the resources the deceleration of inflation.In available to the state,to be exact  54 1.9%of GDP,weredeposited withthe bankingsystem. This permitted expansion of credit to the private sector within the context of marked decelerationin inflation. Anotherimportant elementin the fiscalpolicystrategyadopted for 1996was to pursueactionsdesigned to improvethe allocationof resources.With this end, the processof revisingthe investmentportfoliowas started,beginningwith the WorldBank Another path pursuedwithin this strategycan be seen in the way resource allocation was managed,givingpriorityto the socialsectors. The strategy just described,which was substantiallyfulfilled in 1996, did however, have some negative results. Expenditure cuts, after several consecutiveyears of reductions, had a negative impact in several sectors. Economic growthitselfdependsto a greatextenton the existence of a properly functioningpublicsector, andon publicinvestmentin infrastructure. [Transparency 4] However,growth in expenditures dependsfirst and foremost on growth in receipts.Meanwhile, in the shortrun, increases in revenuesmustbe achieved not throughraisingtaxes,butthroughreducing fraudand evasion. The objective of stimulatinggrowthin privateinvestment mustbe complemented by measures on the fiscal side. This meansthat the tax burdenshould be light and fair, in order to ensureincentives for the investor.Thus,not only is it not advisableto increase taxes,but in somespecific areasthey shouldbe reduced. [Transparency 5] It thereforebecomes essentialto balancereductions in sometaxesby increased efficiencyin tax collection. Thiswaswhatwas donein 1996. Proceedingwith effortsto createa goodinvestment climate, tariffswere revised. Average import duties were reduced from 17.7% to 10.8%. Likewise, consumptiontaxesweredrastically reduced, nowcoveringonlyluxurygoodsand itemsconsidered badfor health. We hopethat,fromthe pointofviewof receiptsthesereductions in tax levelscan be balancedby broadeningthefiscalbase,eitherbecauseincentivesfor evasion and fraud have been reduced, or becausemeasureshave been taken to increasecontrol. Amongstthe measures adoptedto increaseefficiencyof collection, as already mentioned on previous occasions, a pre-shipmentinspection firm was contracted,with a mandateto reconciletaxes due and paid. In Customs management, a companywas hired which, over the next three years, will F- _ V  55 modemize the systemandtrain Mozambican staff.Actionsto reduceevasionof intemaltaxeswereintensified. [Transparency 6] Also of note was the rise in the tax on fuel, which had two importanteffects- increasingrevenues and contributing to the equalizingof consumer neighboring priceswith countries. Anotherprinciplethatwas followedwas that of adjusting taxesfixed in valueto reflect past inflation. Finally,I wouldmention that the preparatory workfor the introduction underway. of VAT is This is an extremely complextask, which will requirethe complete modemizationof the tax collection system. However,we are confident of success. [Transparency 7] The quantitativeresultof the actionsjust described was real growthin revenues of 5.6%.This resultwas achievedexclusively throughincreases in internaltax receipts,which rose by 10%.Taxes on intemational trade did not reach the target plannedfor the year,and in fact fell in real termsby 4%. revenuesmaintained Overall,fiscal aboutthe samelevelsachievedin 1995 relativeto GDP, despitetaxeson intemational tradehavingfallenby 1%as a proportion to 5%. of GDP, [Transparency 8] The lack of growthin receiptsrelativeto GDP provedto be incompatiblewith rising expenditure needs,resultingin the necessityto makecutsin progranmned expenditures.These reductions were selectivewhereverpossible,conditioned by the responsibilities assumed by the state in terms of ensuringpaymentof salaries,supportingthesocialsectoranddebtservicing. [Transparency 9] Compared to 1995,current expenditures asa percentage of GDPfell by closeto one percentagepoint, andoverallexpenditures by morethan3%. [Transparency 10] In this adjustmentprocessi was attempted to maintainthe resourceallocation priorities definedin the budget, which meant that the social prioritized.The resources sectors were allocatedto these sectorsfor current expenditures grewin realtermsbycloseto 3%, equalingIntotal4% of GDP. [Transparency 11] 11v  56 Overall,this adjustmentprocesshas resultedin a reductionin the fiscal before grantsof 3.8 percentage deficit pointsof GDP relativeto 1995. Thus it was possibleto ensurepublicsavingin the banking sectorof 1.9%of GDP,whichis consistentwiththe aimof reducinginflation. [Transparency 12) In terms of monetarypolicy,the strategyfollowed reducinginflation.To achieve had the main objectiveof this aim,the program followed was of a markedly restrictivenature, with great attentionplayed to reinforcingdiscipline in the bankingsystem and improving theinstruments of monetary policymanagement [Transparency 13] Amongstthe measuresadoptedin 1996,of chief importance is the privatization of the largeststate bank,dealingwith the majority of operations on the market. Anothermeasureadoptedwas the creation of the interbankexchangemarket, whichhad stabilizing effectson Metical depreciation by permittinggreaterfluidity in foreignexchange flowsfinancingimports. In order to reinforcedisciplinein the bankingsystem, the rediscountrate was more activelyused to penalizeshortfallsin legal reserves. supervision, In terms of bank majorstepsweretaken withthe sameobjective. The credibilityof the market,whichis consolidating, was reflectedby the entry intothe market of a newbankanda newinsurance firm. [Transparency 14] With regardto the quantitative goalssetfor monetary policyin 1996,it shouldbe notedthatthey were all met The process of strengthening was continued, internationalreserves with a positiveflow of US$ 158million.The numberof monthsof importcovered by reserves rosefrom2.7 in 1995to 4.4 in 1996. Net domestic assetsfell by 45%,a decrease that was compatible creditto the privatesectorof 43%. with a rise in [Transparency 15] The quantityof moneyrose by22%,as opposed to growthin the previous 55%. year of For the first time since the liberalization of the exchangemarket, 1996 saw marked stability in the Metical,with depreciation against the dollar barely reaching 5%over the year. 11r- 1 _  57 This result,alongwith rapidgrowthin exportsand the positiveinfluenceof the introduction exchange of the interbank market,reflectsgrowingconfidence in the Meticalamongst economic agents. One of the measures adopted whichreinforced this confidencewasthe increase in the proportionof export revenues which it is permittedto retain in foreign currency.It wasfirst raisedto 65%,andthenagain,to 100%, in January 1997. 16] [Transparency With regard to economicgrowth,the resultsin 1996were also very positive. GrossDomestic rose Product growthin all sectorsof the by 6.4%,withsignificant economy. Agriculture,impelledby a goodyear,registered growthof 9%. Industryshowed remarkable growthoverall, of 13%,despite in the fact thatthis was concentrated only a few branches.In all other sectorsof the economy,includingservices, growthwas between 7% and8%. LADIESAND GENTLEMEN, 17] [Transparency As well as fiscaland monetary actionsin otherdomains policies, continued,with the the aim of restructuring economy and achieving a solid,competitivebase. In this context,the continuingprivatizationprocessshouldbe highlighted;22 large companies were alienated. by the privatesector of the barriersto investment Followingthe identification growth existent in Mozambique,a studywas commissioned to more precisely procedures identify the bureaucratic that are most onerous for This investors. of concrete study haslead to the undertaking actionsto remove thesebarrers. In the area of prices,automatic revisionsin line with inflationand depreciation were extended to water services,and nowcover almostall the public utilities. Also noteworthy werethe six-monthlyrevision in rentson state-owned houses. 18] [Transparency The favorableclimatecreatedbythe reforms was reflected I havejust described in the volume of new approved investments in 1996. These reacheda total of 557 milliondollars,morethandoublethetotalin 1995. These investments with greateremphasis activity, coverall areasof economic on agriculture wheremorethanhalf of the authorized and industry, are investments concentrated.  58 19] [Transparency In termsof extemaldisequilibria, positiveresultscan also be reportedfor 1996. Exports of goodsincreased by almost30%,as opposed to an increasein imports of 10%.The currentaccountdeficitfell to 665 millions.Dueto greaterborrowing from publicand private sectorsand the increasedinflowof foreign capital,the overall deficit fell to it's lowest level since the beginningof the adjustment process, totalingonly 90 milliondollars.This is equivalent to a fall of 166million dollarsrelative to 1995. Modemizationand capacity building in the public administrationconstitute objectives important thatGovernment hasbeenpursuing for a numberof years. This is a complextask,which,in orderto be properlyexecuted,hasto beginwith the establishmentof adequateflowsof informationin orderto manage the state's human properly. resources I would like to cite only the key steps taken in 1996 in the direction of decentralizationwith the submission Assembly to the National of the Framework Lawfor Localgovernment whichwill permitthe functioning andthe legislation of the municipalities. AJsoworth emphasizing are the actionsundertaken to combatcorruptionand in whichthe stateis involved makeall the processes moretransparent The elimination of corruption is a processwhichmust be based,clearly,on two main pillars; (1) the re-establishment amongstpublic servantsof professional ethics;and(2) increases in salaries and are to levelsthat valuetheircontribution consistent with the cost of living.Additionalto thesetwo precepts, I wouldadd a third one that is the easiestto execute;the implementation of preventiveand punitiveanti-corruption legislation. In 1996somepositivestepsweretakenin thislast respect withthe submissionto the NationalAssemblyof the Lawof the HighAuthorityAgainstCorruptionand the Law of GovernmentEthics. With regard to training, the Maputo Public AdministrationInstitutewas created,and courses were given nationwidefor specifictargetgroupsofpublicservants. 20] [Transparency in publicresources he prioritization for the socialsectorsresultedin a allocation positiveimpactin the abilityto meetthe population'basicneeds. stepswere taken in 1996.Despitethe fact that In the area of health,important infectiousdiseases still predominate,declines were registeredin both the numberof casesand in the mortalityratesassociated with them. The coverage -r r  59 rates for the vaccinationprogramrose, reaching82% of the target group for tuberculosis.The matemal and child health and family planning program extendedit's coverage, with an averageincreasein consultancies of 47%.The construction and rehabilitation of the healthnetworkcontinued, with 110 new healthpostsandcentres beingcompleted, as well as fifteenmatemitywardsand two hospitals. [Transparency 21] The educationsectoralsoshowed positive results. The grossadmissions ratefor primaryeducationrosefrom 67% in 1995to 75% in 1996. Likewisethe gross enrollment ratefor schoolyearsoneto five rosefrom57 to 62%. The increasein demand for educationservicescontnuedto makeitselffelt with an increase in the of number studentsin thegeneraleducation systemof 15.7%. To meetthis new demand, the numberof schoolsroseby 11%and the number of teachers by 7%. Withthe objective of improvingthe qualityof schooling, 4,200 teachers received training.In an effort to improve leaming conditions, schoolbooks werefreelydistributedthroughout the country,covering92%of total needs in the first and secondyearsof school,and 70% of thosefor the third to the seventh years. LADIESAND GENTLEMEN, To summarize, 1996was noteworthy for positivedevelopments in all areas of national life, with major steps having been taken in the reforms currently underway. This surelyconstitutes a reasonto congratulate ourselves. However, we arefully awarethat the roadaheadinvolveschallenges, as greator greater,than those we are leavingbehindus. [Transparency 221 Wthout doubt Mozambique has enormouspotentialfor development I believe thatthe policiesthatweare implementing arethe mostlikelyto tumthis potential *ntreality. But, at the presenttime,we still have the lowestper capitaincomein the world, with morethanhalfthe population livingin absolute poverty. Efforts havebeenmadeto rehabilitate socialand economic infrastructure.But given the dimensions of the countrythereis still a great deal to be done. The rhythmof rehabilitationis stronglyconditioned by the availabilityof resources. It Is urgentfor the countryto receivesignificant supportin the area of extemaldebt alleviation, without whichMozambique's development potentialwill be strangled.  60 [Transparency23] the successes andbroaden policywill seekto consolidate During1997economic alreadyachieved. The Govemment of policies in four on the implementation will concentrate areas: fundamental A aimed at a further reduction in the rate of macro-economic, inflation; B. privateinvestment; of increased promotion C. and policies; throughredistributive of socialequity, promotion D. of the publicadministration. strengthening 24] [Transparency The Government's primaryobjectivein 1997 is to further reducethe rate of inflationto 14%by December 1997. Economic growthprojections pointingto a GDPgrowthrate higher areoptimistic, than 7%. Nevertheless,as a we precaution, haveadopted a targetgrowthrate of 6% includingthe energysector. Our fiscalandmonetary policies a are basedon theseobjectives.Consequently, restrictivestancewill be maintained, as muchas whilst seekingto accommodate possiblethe needs arising from thetargeteconomic growthrate. 25] [Transparency Fiscalpolicywill seekto increase points by 1.4 percentage revenues of GDP. Taxes on intemational tradewill contribute to this objective, with an increasein revenuesequivalent to one percentof GDP, reachingthe equivalent of 6% of GDP. This target should be possible given the measurestaken in 1996to improve controls and the management of Customs. Growthshouldbe equivalentto 0.4% of GDPfor tax revenues frominternaleconomic activity. In this case,the reductionsin revenuesin certainareas aimed at promoting investment will be compensated by more efficienttax collection,in order that these targets can be met. 26] [Transparency T r~  61 The fiscalreformunderway will continueduring1997. In the area of Customs, severalCustoms Officeswill be rehabilitatedand theprocess of reassigning training of nationalpersonnel and will begin. Changes in legislation, makingfiscal fraud a civilcrime,will be oneof the othermeasures taken. In the area of internaltaxes, we will continueto lay the foundations introduction for the of VAT,includingthe trainingof personneland computerization. To increaseefficiencychanges willbe madein collection procedures of turnovertax Taxesfixed in absolute valueandthe tax scalefor income tax will be revisedto reflect inflation. In those areas where it is recognised that current levels of taxationaretoo high,as is the casewith thebusiness profittax,reductions will be made. [Transparency 27] Currentexpenditures will increaseby the equivalent of 2.5%of GDP in relationto 1995. Of this increase, 1.1 % percentage pointsis a consequence of contractual obligationsassumed with the companymanaging Customs and the additional financingprovided fromcounterpart fundsfromthe debtalleviation fund. The needsfor domestically-financed investment, principally in the area of roads, explainan increaseof 0.6%percentof GDPin capitalexpenditures in 1997. The inclusionof creditandgrantfinancing for publicenterprises in the budgetfor the first time in 1997,accounts for an increase in expendituresequivalent percentof GDP. to 2.1 The financingis for the programscontracted betweengovemment and some publicenterprisesprovidingessential services. [Transparency 28] In summary,total public expenditures, including capital transfers to public enterprises, will growby5.8 percentof GDPin 1997. This will be financedby an increasein revenues, from grantsand credits and from a decrease,compared to 1996, of 0.9 percentagepointsof GDP in net publicsavings. [Transparency 29] The socialsectorswill continueto be prioritizedin the allocationof publicfunds during 1997. Togetherhealth and educationwill receive,in real terms, a 4 percent increasein financingfor recurrentexpenditures funded with internal resources. In addition,they will receivethe equivalent of 0.5 percent of GDP financedfromcounterpart fundsfromthe Extemal DebtAlleviation Fund. [11r _  62 It is currentlyprogrammed replacethis additional to progressively financingwith domesticresources, until an optimallevelfor the financingof the social sectors has been reached. Consequently, should the country continueto receive resources for debt alleviation it should be possible to annually expand expenditure in the social sectorsby the equivalent to 0.5 percentof GDP and successively replacethisfinancing withdomestic resources. 30] [Transparency This programshouldbe seen in the contextof our effortsto create a medium term budgetframework which is indispensable to rationalizingthe needs and capacity for financing. In the pastten years,Mozambique has lived exclusively on annual programmes, which result in an economic management geared entirelyto short-termstabilization.It hasnow become imperative, that we create a medium termframework thatshows the pathtowardsdevelopment This framework will have to reflectthe equilibrium betweenresolvingthe basic problemsconstrainingdevelopment and a progressive reduction of extemal dependence.The creationof this framework will require a commitment of all parts - the Govemment,the intemationalcommunityand the multilateral - as to priorities, institutions financing and the procedures to be followedin the future. 31] [Transparency We are currenty preparing necessary the instruments for this task In 1996the Budget FrameworkLaw and the Law regulatingauditing proceduresfor the publicaccountswereapproved. Bothlawswill guarantee transparency in the allocationand use of publicfunds. The BudgetReform Strategy hasalready beendecided. The mainobjectives are efficiency to increase in the useof resources andensuregreatertransparency in the budget. 32] [Transparency This strategycovers all the actionswhich will be developedover the short to medium term. In 1997 improvement in programming, execution and control of the budget in order to increasetransparency and coveragewill be priorities.Strengthening management capacitywithinthe Ministryof Planningand Financewill also be a priorityaimingat guaranteeing of the currentreforms. the sustainability that the medium It is in this context termexpenditurescenariowill be elaborated withinthe framework of macro-economicandsectoralpolicies. -I ff - - - - r~~~  63 [Transparency 33] Monetarypolicywill haveessentially the same objectives of those followed 1996, contributing for the reductionin the rate of inflationand increasing in efficiencyin the money the andfinancial markets. Thus, to build internationalreservesremains a centralobjective. achievea furtherincrease The target is to of 108 milliondollars.The moneysupplywill expand by 15.5 percent and a negative flow of net credit corresponding to the Govemment, to a rateof reductionof 62%,is expected. LADIESANDGENTLEMEN, [Transparency 34] The creationof favourable conditions for the growthof privatesectorinvestment has a centralplace in the Govemment's agenda. After identification administrative of the barriersto investment the actionprogram for their elimination underway.In this context,the procedures is for the registrationof companies, tradersandimporters will be simplifiedandthe Lawon PrivateCommerce revised. The revision will be ofthe commercial codewill begin. [Transparency 35] With the objective of widening andmodernising the financialsystemthe process of privatisingthe last sate bankwill be completed, together with the revisionof monetaryandfinancial legislation.Improved efficiency of the banks,reflectedin a reductionof the difference betweenthe depositand lendingrates, constitutes anotherobjective for 1997. To achievethis objective, interbank moneymarket operations will beginin 1997,this will, moreover, prepare a moreindirect the banking system for management ofmonetary policy. [Transparency 36] The rehabilitation of economic and socialinfrastructures hasan important impact on private investment. In this context,30 percent of the public investment programme will be assigned to the rehabilitation of roads. In the area of social services,education will receive9% of resources, health 18%andwater supply 8%. The agriculture and fisheriessectorwill also be given prioritywith 9% total resources.In thisprogramme of specialattention is givento the strengthening of capacityinthe publicsector whichwill absorb12%of resources. [Transparency 37] "111  64 The creationof businessopportunitiesthat can attractinvestment is one of the Government's objectives.Inthis context 16 largeenterprises will be privatised in 1997,includingtheAirlinesof Mozambique. The Maputocorridoris anotherof theseopportunities.This is a large project, which, we have the pleasure to announce,will begin implementation in 1997. An agreement with the consortium that will build the highwayfrom Maputoto Wtbank was recently signed by the govemments of Mozambique and South Africa. Thiswill create7,900jobsdirectlyand,indirectly, a further19,900. By the grantingof concessions for the privatemanagement of MaputoPort and the railways-South conditionswill be createdfor Mozambiqueto assumean importantrole in the transporting of goods from hinterlandcountries. The excellentgeographical positionof this projectwill, we are convinced, makeit a pole of attraction for investorsgivingthemeasyaccessto a very largemarket. [Transparency 38] I will now pass to an expositionof the Govemment's programme in the area of policiesthat promotesocialequity. The principleof this social equitycannotbe basedin a WelfareStatethatprovides the meansof subsistence. Nevertheless,the State cannotignoreits fundamental role in the promotionof social and regional equilibrium. We are clear that the future stability of the countrydepends,in large measure, on the successwith which we are able to address theseissuestoday. Amongthe concernsin this area,the needto improvethe standardof living of agricultural familysectoris the priority.This sectorrepresentsabout65% of the population. If we are to reducepovertysignificantly we must createconditions forthis sector to develop.The Govemment has taken steps to achieve this objective,givingpriority in publicexpendituresto health,education, water and roads. There also are smallcreditprogrammes for the rehabilitation of rural shops. [Transparency 39] Our evaluationof progress achievedso far is that these programmesae insufficient In a situationwherethe whole incomeof the agriculturalworker derivesfromwhat he manages to produce,it is essentialthat he shouldbe able to market hisproduction.This is not happening. Producerots in the hands of farmersbecause tradersdo not go to fetch it We believethatit is important to changethis situationquickly. We will increasethe amountof money availableto financethe rehabilitation of roads, as I already mentioned. But we also need to increasethe concessionof credit for the rehabilitation of ruralshops. Theseare, at the national$cale,the only structure 111~-I 1 -I1  65 which can ensure the purchaseof agricultural surpluses;they are an important instrumentfor the monetarization of the economy; and, finally,they are a point fromwhichto disseminate newtechniques that increase productivity in the family sector. Basedon this analysiswe requestadditional supportfromthe donorcommunity for a largerprogrammefor the financingof rural shops. Giventhe small amount involved for eachshop, we believethat 10 milliondollarscouldhavea significant Impact on the commercial network REPRESENTATIVES OFTHEDONORCOMMUNITY LADIESANDGENTLEMEN [Transparency 40] The developmentof small and medium size business,aside from creating employmentis aboveall a wayto promote nationalentrepreneurs. The govemment has beenpromoting start ups for small businesses.Given the importance of this objective netrevenuesfromprivatization havebeendirectedto the EconomicRehabilitation Fundwhich aims at supporting small businessin agriculture, fishing,smallindustry andrural stores. [Transparency 41] Howeverthe availableresources are insufficient to have the necessaryimpact We requestthe supportof the Intemational Community in the amountof US$ 5 millionsfor thisend. [Transparency 42] We are open to discussion on the best ways of implementing these support mechanismsin orderto achievethe desiredresult Another problemthat concems the Govemment and the privatesectorare the debtsvith banksimputed to the war. The clean-upof publicenterprises' has beenaccomplished debt withthe CommercialBankof Mozambique privatization. However,theseare notthe onlycompanies thatsufferedlossesduringthe war. Many private companiessaw their installations destroyed and activities paralysed. Thesebankdebtspreventthe companies from new borrowingand leavethemin a difficult financial position. [Transparency 43] 1 111_ _ _ 1_ ' - - ~ _ _ ,- - - - -  66 The govemment believesit shouldact in this area by creatinga fund for the liquidationof thesedebts. We requestthe support of the donorcommunity in the financing of US$10millionfor this purpose. Finally,I will brieflyreferto ourrequests in the areaof the DebtAlleviationFund. This fund receivedthe support of Denmarkand the Netherlandsin 1996, generatingthe counterpart funds that will financeadditionalresourcesfor the socialsectorsandin futureyearswill be absorbed bythe budget. In 1997,public extemaldebt service will amount to 22% oftotal revenues, equivalentto USS80 million. The supportof donorsfor the reduction of this burdenwouldenablethe govemment to reallocateintemalresources, eitherfor the social sectorsor for the strengthening of the civilservice. I believethatthereis a sharedunderstanding between the donorcommunity and the Govemment that the sustainabilityof the reformof the civil servicedepends on the creationof a just salarystructure for publicservantsthatwill permittheir retentionin the civil service. This is an objective thatwill take severalyearsto achieve. civilservicesalarystructurein three Our proposalin this area is to decompress successiveyears, beginningin 1997. To do this, the support of the Donor Communityis indispensablein the relation to debt service. The intemal resources that couldbe freedwouldbe allocated in accordancewith a calendar to be agreed. 44] [Transparency the govemment Summarizing, will give continuity in 1997to the policieswhich Thesepolicies have beenimplemented. will aim at A. reducingmacro-economic imbalances; B. creatinga goodbusiness to promote climate growth; investment C. reducingpoverty and promoting balancedeconomicand social development; D. in the publicadministration. capacity management strengthening I would like to endby thankingyou firstlyfor yourpatiencein listeningto me. As you can see, there are still many problemsto resolve which make up the Govemments agendafor 1997. Fromour part,we guarantee with thetaskswe haveproposed.We to persevere hope that the intemationalcommunity will sharein the effortsand enthusiasm required to developMozambique. for the challenge Thankyou. || ~ ~~~~~~~~~~~~~ . _7-_ I~~~~~~~~~ I SIINEI11HO H_gIH zNa AON i no 8 Ott ,nr Nnr lF n NVr w mow wyv #%W -- .*I . -- O.. ,.,I .. ... . .. . Ix iir cn .... :::!t.. 9... .. _,,,,... . . ........... . ................................ *-lesL--s;sv*-- ....... .. *0e . . ................................................. R 1NX1SANI J.VAW bInSO: ±N3W~NOMIIAN3 9NI1SVN3 39~~~ ~~~~~9 s NOIJ.zflaOEid -- 89~~~~~~0 AOuLVSi1 iN3/<dO1As dOHJ.  69 FISCAL POLICY STRATEGY IN 1996 *300 to improve allocation of resources; U0 to increase revenues; to decelerate inflation; 0000*' mui~ to increase public saving to expand credit to the private sector. 3 STRATEGY TO INCREASE REVENUES g Reduce tax rates in selected areas; ¢ Combat fraud and tax evasion. 1111'F7 -T  70 REVENUES: STEPSIN 1996TO INCREASE TRADE TAXES ON INTERNATIONAL REVISIONOF CUSTOMSCODE 17.7% to 10.8 %; - Average duty tax reducedfrom to 5%; - Duties on capital goods reduced by half. - Average consumption tax reduced MEASURES TO REDUCEFRAUDAND TAX EVASION with reconciliation - New pre-shipment inspection of duties due and paid; to manage customs - Contracting of a private firm management. 5 REVENUES: STEPSIN 1996TO INCREASE TAXES ON DOMESTIC ACTIVITY TAXES E REVISION OF ALL FIXEDVALUE IN LINE WITH INFLATION; 1: INCREASE IN FUEL TAX; PREPARATION FORTHE INTRODUCTION OF VAT IN 1998. 6 - - - - - -- - - - - - _ --- -,--  71 TAX REVENUES IN 1996 REAL GROWTH RATE: +5.6% Taxes on domestic activity: +10% * Taxes on international trade: - 3.8% AS A PER'..ES TAGE OF GDP: _ _ _1 1995 1996 T. on Domestic Activity 6.1 5.0- T.ointIfiernational Trade 10.6 11.5 OT A 16516 7OTA1 7 CURRENTEXPENDITURES ... vi?rAS PERCENTAGE OF.GDP•. 2s; /'i- -* ------.- w..2.---- ......... .... I-- . .................................. _.._._.._. 2@, > .......... _._ ...... .... .._........ _._.._ 22 / _ _~~~~~~~._. _M7........ .~__ ... 2- _._ .......... . ...._........... % ...... t *- / ___r; .. ___ 20 1@4_ 1 ,,_ ,,_ _._ .................... .. . _.. ..... 011~~~~~ 11 F~7 ./_________ L. 1990 1991 t1992 1993 1994 less lose  72 TOTAL EXPENDITURE OF GDP AS PERCENTAGE 2 4 ........ 4 1- . ... . . ... ...... _.................. 40 / 4.p...#7a;,; liR . . . . . .. . . . . . . . ............ . . . .. ..... .. . .... ................ . .. . .. . 42- 40 ..... 6.... ...... ......... ........ .. .s . ... .. ....... 38 109 1991oo 1992 1993 1394 1995 1996 EXPENDITURE IN SOCIAL SECTORS IN 1996: RATE: REALGROWTH =- HEALTH AND EDUCATION.... +2.8% EXPENDITURE IN PERCENTAGE OF GDP: HEALTH AND EDUCATION.... 4.0 % 10  73 DEFICIT BEFORE GRANTS AS % OF GDP -~a . 26- 24- L 1 I 20- 1590 1581 1992 1 953 1994. 1 056 1596 MONETARYPOLICY IN 1996 MAIN OBJECTIVES cb DECELERATION IN INFLATION; Eo INCREASEINTERNATIONAL RESERVES; Kt IMPROVEEFFICIENCYOF MONETARY INSTRUMENTS; F2 IMPROVEEFFICIENCYIN THE FINANCIALSECTOR. 12  74 MONETARYPOLICYIN 1996 MAIN POLICYMEASURES E;> PRIVATIZATIONOF THE LARGEST STATE-OWNED BANK; o LAUNCHINGOF THE INTER-BANK FOREIGNEXCHANGE MARKET; E¢ MORE ACTIVE USE OF THE REDISCOUNT RATE AND PENALTIES TO ENFORCEDISCIPLINEIN THE MARKET; E: EXPANSION OF FINANCIAL MARKET. MONETARYPOLICYIN 1996 TARGETSACHIEVED: ALL QUANTITATIVE In percent of opening stock: Progr. Actual Net Foreign Assets 47.0 85.4 Net DomesticAssets -25.1 -44.6 Creditto Government 144.3 160.1 14 I ,, . _ ___ . __. .  75 MONEYAND QUASI-MONEY Growth rates * e- 40- ; :jfl--- -*-- - 2n _ ~~~~~~~~~~1 9 96 _ 45 ECONOMIC GROWTH IN 1996: !~ Real growth rates Agriculture ....................... 9.4 Industry and Fishing ........... 11.6 Construction .................... 8.0 Transport and Comm. ......... 7.6 Services ... ............... 7.4 Total Production .......... 8.7 7' ..  76 POLICY MEASURES TO IMPROVEBUSINESSCLIMATE PRIVATIZATION OF 22 LARGE AND 'i 162 SMA1.L COMPANIES FIR.T :'&;(EPS TO REMOVE A W-AHICn!TRATIVEBARRIERS TO INVESTMENT; ADMINISTERED PRICES REVISED IN LINE WITH INFLATION. 17 NEW INVESTMENT AUTHORIZEr4I 1996 Millions of US$ Agriculture, Fishing andAgro- industry ........................... 128 Industry............................ 165 Construction.................... 73 Transport and Commun ...... 33 Hotels and tourism ............... 35 Financialsector ................... 3 Others .................... g....... 20 TOTAL 557 18 i F'l ;' ;.  77 EXTERNAL SECTOR DEVELOPMENTS IN 1996 Value G. Rate US$ m. % Exports 226 30 Im ports 802 10 Grants 283 -1 7 Credits (Public S.) 271 15 Direct Investment 73 61 Overall balance 90-65 19 HEALTHIN 1996 1995- M199 VACCINATION PROGRAM (% coverage) T uberculosis 77 52 Measles 66 66 Diptheria,whooping cough and tetanus 57 58 Polio 57 58 MATtRNALAND CHILD HEALTH FROGRAM (Vo coverage) ire-natal consultancies 54 73 Attended births 26 29 tXPANSION OU THE HtALTH NETWORK(ri"of unitsJ _Health posts and centres 126 110 20  78 EDUCATIONIN 1996 1995 1996 AdmissiorsRate (ofsixyears 0/d old, 67 75 Gross Gross rate Errolin-ert ele\enwar old,0/4 57 62 (sixiD 57 59 Pupillacher rado School corstction: Years 11D5 4465 5434 Pdn-eryard secordary 4174 5085 21 MOZAMBIQUE: CURRENT SITUATION ONE OF THE LOWEST MORETHAN 50% OF PER CAPITA INCOMES THE POPULATIONIS IN THE WORLD ABSOLUTE 4 s; POVERTY UNSUSTAINABLy "Zi DEBT SERVICE LARGE NEEDS REQUIREMENTS FOR SOCIAL AND OVER THE COMING ECONOMIC INFR- YEARS STRUCTURE AND CAPACITYBUILDING -r  79 KEY AREAS OF GOVERNMENT ACTION IN 1997 MACROECONOMIC POLICIESTO REDUCE INFLATIONAND CORRECT STRUCTURAL IMBALANCES POLICIESTO REDISTRIBUTIVE PROMOTE POLICIESTO GROWTHIN PROMOTE PRIVATE SOCIALEQUIT SECTOR POLICIESTO INVESTMENT STRENGTHEN PUBLIC ADMINISTRATION 23 MACRO-ECONOMIC POLICIES FOR 1997 MAINOBJECTIVE: REDUCE INFLATION TO 14% IN DECEMBER1997 RESTRICTIVE FISCAL AND MONETARY POLICIES WILL BE PURSUED TO ATTAIN THIS OBJECTIVE 24  80 FISCAL POLICY IN 1997 OBJECTIVE:INCREASEFISCAL REVENUEBY 1.4 PERCENTAGE POINTSOF GDP CONTRIBUTING TOTHISRESULTIN% POINTS OF GDP: TAXESON TAXESON DOMESTIC a INTERNATIONAL ACTIVITY: _Wr TRADE: +0.4 +1.0 25 REVENUE MEASURESFOR 1997: IMPLEMENTCUSTOMSREFORM PROGRAM; CONTINUEPREPARATION FORTHE INTRODUCTIONOF VAT; MODIFYTURNOVERTAX TO INCREASE EFFICIENCY IN COLLECTION; q« INCREASEALL TAXES IN VALUE IN LINEWITH INFLATION; .g REVISEINCOMETAX SCALE. nlT~~~~~~~~~~~~~~~~' I  81 CURRENTEXPENDITURE 5-s IN1997: . ,PERCENTAGEOF GDP: IT EXP;END RREN 2ITUR Wages 4.2 Goods and Services 4.5 Defense and Security 3.7 Interest payments 2.6 Other 3.4 of which: Pre-shipment inspection 0.7 Customs management 0.7 Expenditure financed by Debt Fund 0.5 CHANGES AND FINANCING: EXPENDITURE OFGDP: POINTS IN 1997,PERCENTAGE TOTAL EXPENDITURE: .............. +5.8% REVENUES ................. +1.3% GRANTS ................ % 13.5 CREDITS ................. ............ +0.1% NET CREDITTO GOVERNMENT.. +0.9% III 5F, -r  82 EXPENDITUREIN SOCIAL SECTORS IN 1997: RATES, REALGROWTH EXPENDITURE EXCLUDING FUNDEDBY DEBTFUND: X EDUCATION AND HEALTH..... +4.0% DEBTFUND: INCLUDING OFGDP, INPERCENTAGE C; EDUCATION AND HEALTH ..... 4.3% 29 EXPENDITIUREMANAGEMENT REFORM _ STRATEGY Improve efficiency in the use of public resources; MI Increase the scope and transparency of the budget system; MI Ensure greater consistency between the budget and the economic and social policy. ,---- .-_____ -.  83 EXPENDITUREMANAGEMENTREFORM STRATEGY _~AREAS OF INTERVENTION: Budget preparation and execution; Management of the public debt; Accounting; Auditing; EXPENDITURE MANAGEMENT REFORM STRATEGY S~_PRIORITIES LAID OUT BY THE REFORM: Improvement of mechanisms for program- ming, execution and control of the budget; Development of a medium term expendi- ture framework by integrating sector expenditure programs with macro- economic program; Strengthen institutional capacity within MPF to ensure progress and sustainability of the reforms. 7W - _~~~~~~~~~~~~~~~~3  84 MONETARYPOLICYIN 1997: MAINTAINRESTRICTIVESTANCE: o NET FOREIGNASSETS: US$ 108 Millions In percent of opening stocks: o NET DOMESTICASSETS: -14% o CREDITTO GOVERNMENT: -62% o MONEYAND QUASI-MONEY: -16% 33 PRIVATE SECTOR ...... INVESTMENTPROMOTION j2 REMOVINGADMINISTRATIVE BARRIERS: Action plan drawn for 1997-2000.In 1997: - simplification of company registration; - revision of private commerce law; - simplification of traders and importers licencing. I J$REVISIONOFTHECOMMERCIALCODE: - timetable for revision will be aproved; - revision will begin. -ID I I~~~~~~~~~~~~~~~~3  85 PRIVATESECTOR INVESTMENTPROMOTION J MODERNIZING THE BANKINGSYSTEM: 1 Ammendments to the Financial Law and the Law of Checks will be submitted to N. Assembly; Interbank money market will begin operations; .~J Privatization of the last state-owned bank. PRIVATE SECTOR INVESTMENTPROMOTION =, REHABEL5TATING INFRA-STRUCTURE: Allocation of resources of the public investment program for 1997: l% of total] 0 Education .......9% o Water ............ 8% Health .......... 18% 0 Agriculture and C)Roas...... 3lO ~Fishing .... *....... 9% ° 0 ~~~~Capacity Building ......... 12°/ 36  86 PRIVATESECTOR INVESTMENTPROMOTION DEVELOPING NEW BUSINESS: -P Privatizationof 16 large enterprises 1; Maputo Corridor launched: s Contract signed for Maputo-Witbank highway. Privatesector will participate with 65%of total financing. Management of the port of Maputoand the railways of CFM-south will be ceded to private joint venture. 37 EQUITY SOCIAL PROMOTE TO FAMILY SUPPORT SECTOR IN AG.3PRICULTURE * More current and capital expendituresin education,health and rural water; * Promotion of agricultural trade: * Road rehabilitation; * Credit for rural stores and commercialization; * Liberalizationof producer prices. 38 L ,  87 PROMOTE SOCIAL EQUITY SUPPORT TO FAMILY SECTOR /\|A IN AGRICULTURE FURTHERSTEPSIN 1997: X Enlargethe rural store rehabilitation program. More resources are needed for credit in this area. Mozambique requires U%SS iis 10"rm-i' o f fiunding from the ; ''t i r-'ty forthis objective. * |Create a rural financial network for Icapturing small savings.l 39 PROMOTE SOCIAL EQUITY SUPPORTDEVELOPMENT OF NATIONALSMALL-SCALEBUSINESS ACTIONSBEINGDEVELOPED: Government institutions providing training in different skills; Credit programs to support small and medium size business; The Economic RehabilitationSupport Fund, financed from privatizations, supporting agriculture, fishing, small industry and rural commerce. 4U  88 PROMOTE SOCIAL EQUITY SUPPORT DEVELOPMENT OF NATIONAL SMALL-SCALE BUSINESS |The impact of these efforts is insufficient:| Donor Commlnity support is required to design an-. kp-ur,iArt additional programs with tl;is oAV; . . mong thle possible meci .; .c , , , 1" C.., 41 OFTHEFUND A.ENLARGETHEACTION FOR THE SUPPORTOF ECONOMIC REHABILITATION(FARE)TO COVER THE WHOLE COUNTRY; B.CREATE A FUNDTO CLEAN-UP NATIONALENTERPRISESDEBT CAUSED BY THE WAR. 42 _ __ _ _ __ _ _ -- _ _-~ - ---- - IL  89 SUPPORTDEVELOPMENT OF NATIONALSMALL-SCALEBUSINESS DONOR COMMUNITY SUPPORT REQUIREDFORTHESE OBJECTIVES IS: A. US$ 5 MILLION B. US$ 10 MILLION 43 MAIN ACTIONS FOR 1997. S REDUCEINFLATIONAND STRUCTURAL IMBALANCES; * PROMOTEPRIVATESECTOR INVESTMENT; * REDUCEPOVERTYAND PROMOTE ECONOMIC AND SOCIAL DEVELOPMENT; * STRENGTHEN CAPACITYWITHINTHE CIVIL SERVICE. 44  The ChalengesAhead Errata 90 Table 3: External Financin Requirements (USSmillion)- Page 24 1996 1997 Trade Balance Deficit -575,6 -65623 Exports (f.o.b.) 225,9 237,3 Imports (c.i.£) -801,5 -893,6 CurrentAccount Deficitplus Amortization -860,5 -959,2 FinancingRequired 1/ ForeignBorrowing 347.4 306,6 Public Sector: 271,1 225,0 Balanceof PaymentsSupport 128,4 50,0 Investment 73,0 89,6 Services 69,7 85,4 Private Sector 76,3 81,6 ForeignGrants: 282,9 334,9 Food Aid 39,4 36,3 Balance of PaymentSupport 60,6 91,2 Non-foodEmergency 1,3 1,5 Investment 150,0 185,0 SpecialPrograms(demingnand elections) 10,0 10,7 ExternalDebt SupportFund 21,6 Supportto CustomsManagementContract 10,2 Debt Relief 2/ 309,7 193,5 1/Excludes direct foreigninvestment, changesin net foreign assets, net changesin arrears and errors and omissions. 2/ Includesonly concludedagreements ]FT~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~_  92 Annex VIII TENTHMEETING CONSULTATIVE GROUP FOR MOZABIQUE FINANCING REQUIREMENTS SPEECH BY H.E. THE GOVERNOR OF THE BANK OFMOZAMBIQUE PARIS, 15TH MAY, 1997  93 MR. CHAIRMAN DISTINGUISHED MEMBERS OF THE DONOR COMMUNITY DISTINGUISHED GUESTS LADIES AND GENTLEMEN In participating in this Tenth Meeting of the Consultative Group for Mozambique I would like to express my gratitudeto the World bank, to the other multilateralinstitutionsand to the Governmentsof the countries here represented, for the continuous support that they have been providing to Mozambiquethroughout this decade which has permitted the implementationof the economic and social progrmme designed by our Government. During the ConsultativeGroup Meeting held last year, our Government informed the International Community about the main goals of its economic policy for the year 1996, which refer to the macro-economic stabilisation and structuralreforms geared towards the strengtheningof the favourable environment for business development. It is with satisfactionand honour that we wish to give your excellenciesthe news that the results achieved in our economic and social programmefor the last year were globallypositive. In effect, the total output grew by nearly 9%, which represents almost more than a half of the envisagedtarget. The Gross Domestic Product grew by 6.4%, which is higher than the minimum target established of 4%. For the success achieved, it is worth highlightingthe strong dynamism shown in the export sector which achieved a growth rate of about 30%. Actually, this significant performancein exports, allied to 61% growth recorded in direct foreign investment, has contributed towards the recovering of Net Foreign Assets by nearly USD 160 million which, though is still modest for the country's requirements,representalmost a double of the envisagedtarget. The observed inflationrate of 16.6%was 5 percentagepoints below the envisagedtarget. 1111 1 X _. _ . _ _ 1~~~~~~-  94 The positive results attained last year and which I have previously referred to, were possible because of various factors, namely: * the close co-ordination of policies among the different Mozambican institutions, particularly at the fiscal and monetary domains, while the Goverranent Budget and monetary policy were managed within the framework of the established Programme. * the good agricultural output achieved in 1996; * a significant growth of confidence shown by foreign investors on the reforms embarked upon and the coherence of the policies adopted; * the consolidation of peace and stability in Mozambique and in the Southern Africa region; * the increase in the volume of credit allocated to the economy, thanks to the upsurge in the State savings deposited in the Banking System, and due to a better liquidity management by the commercial banks. The confidence of the economic agents is also visible with respect to their expectations regarding exchange rates. We can notice that there is a sustained exchange rate stability and an increase in the domestic savings in local currency. In 1996 we proceeded with the financial system reform, especially through the privatisation of the Banco Comercial de Mo9ambique within the principles established in co-ordination with the World Bank. In addition, we embarked upon a process leading to the privatisation of BPD (Banco Popular de Desenvolvimento) expected to be finalised by June this year. The Government strategy conceming the privatisation of banking institutions is to allow the private initiative get involved in those activities and institutions which do not require direct involvement of the State, and to guarantee its presence in financial activities related to the collection of savings and allocation of development funds in regions where the private initiative is not represented due to the social costs involved.  95 In relation to the monetary policy instruments, in mid 1996, the InterbankForeign ExchangeMarket was guaranteemore fluidityin channelingto establishedas a mechanismto the economyexternalresources injected into the MozambicanBanking Sector, and allow the Central Bank to closely monitor the evolution of the exchangerates set by the market forces, taking into account the need to accumulatenet external reserves. From the second term, the Bank of Mozambique rediscountrate in a more flexible way, started to establish its keeping and adjusting it systematically in accordance it positive in real terms reductionof the inflationrate. with the indicators of As a result of these efforts,there is an increasing the institutions within the financial competitiveness among system, and a more significant observance of the prudential management rules. In effect, competition has been obvious throughthe introduction of new financialproductsand through fixingmore competitiveinterest rates, whichhave contributedin efficiency of services rendered, starting from the organisationof joint operations between banks for the financing importancesuch as agriculturaltrade and of activities of high fuel import. Ladies and Gentlemen In 1996 1 had the opportunityto call upon the Internationalcommunity throughthe ConsultativeGroup, for the donors the new and more efficientsystemof allocating and creditorsto adhere to encompassesmore rapid disbursementprocedures, externalresources,which the commercialbanks of external resources recording and sale to well as the generation of counterpart injected into our country as funds and their allocation to the Government Budget, besides the rules of procurement, auditing and monitoring. It is with unique satisfaction adherence of more donors to this that we have witness the system as well as the changes introduced in the procedures applied to facilitating the management of foreign the World Bank funds thus currency by the Bank of Mozambique, enablingthe fostering of the InterbankForeign Exchange Market in an environmentof more transparency assistance. in the use of foreign  96 In that same period, we embarkedupon an initiative to establishing the Fund for the relief of ExternalDebt to be supportedby the donors, with the objective of making the concessional assistance in the form of donations more effective in the development of social programmes directed to eradicating poverty and the promotion, of the most disadvantaged layers of the society through the use of additional counterpart funds generated for the government Budget in health, education,water and sanitationprojects. I shall, at this point, highlightthat this request was immediatelyaccepted by the Governments of Denmark and Netherlands, whose additional donations were used to partially repay the debt with the International Monetary Fund. The counterpart funds which resulted from this operationhave alreadybeen deposited in an accountopened in the Bank of Mozambiqueon behalf of the Ministry of Planning and Finance. In January this year, the Government and the IMF established a Technical Memorandum of Understanding on the budgetary operation and treatment of the Fund for the relief of external debt, which states the basic agreements on the procedures regarding the debt assumed by the Bank of Mozambiqueand and the one assumed by the Government, as well as the principle of periodical information report to the donors involved and to the IW Resident Mission, regarding the details of the expendituresmade resorting to these financial resourcesenvisaged to be used in a three-yearperiod. The first instalment of the counterpart funds previously referred to, which correspond to about 30% of the amount foreseen for 1997, was disbursed in late April. The amount in Meticais is equivalent to USD 3 million, 42% of which went to education, 31% to water and the remaining 27% to health projects. With the growing confidence of our international bilateral and multilateral partners in relationto the challengesthat we have embarked upon with considerable success, I believe that in 1997 there will be an increasing adherence of the creditors and donors to the mechanism of channelling external assistance through the Interbak Foreign Exchange Market and to the Fund for the relief of the external debt.  97 Mr Chairnan Ladies and Gentlemen In November last year, we completed the fifth rescheduling of the external debt with the Paris Club on the basis of Naples Terms with respect to flows. Notwithstanding the fact that these conditions are the most concessional provided by the Paris Club, they are still not sufficient and they are seem to be inadequate in relation to the Mozambican reality despite that, the external debt still represents a major burden in the fiscal and external accounts, with impact in the maintenance of some major structural imbalances, such as, inter alia, the unsustainable levels of poverty, a situation which represents a risk for the sustainability of macro-economic stabilisation that we are implementing. Our strategy in this field suggests that Mozambique should urgently be selected to benefit from the HIPC initiative, but still includes the domestic reforms towards the economic and social development of the country. We are confident, and that is the message we bring to this Tenth Meeting, that in the process of development of Mozambique, the private sector, both domestic and foreign, play a fiundamentalrole. In this context, all the reforms that we have been introducing throughout this decade and to be continued, aim at creating and consolidating the necessary conditions for the establishment and expansion of the private sector as the driving force for the development of Mozambique. In actual fact, we have been introducing in a co-ordinated manner, financial, fiscal and exchange policies with the aim of revitalising the private sector. We have been implementing actions in an attempt to find the appropriate financing mechanisms to the profile of the Mozambican business sector. In order to attain this objective, the Caisse Francaise de Development has provided funds to support the rehabilitation of rural shops in some regions of our country. In the same spirit, last year, we established the Fund for the Rehabilitation of the Economy which is supported by domestic State resources resulting from the ongoing privatisation process.  98 This Fund will be used for the financing of small scale projects in the fields of agriculture, fisheries, development of skills and trade, and at this moment, it covers four provinces, namely, Manica, Sofala, Tete and Niassa. The rehabilitationof the rural commercialnetwork,particularlyshops, is of great importancefor the transportationof agriculturalsurpluses and in the revitalisation of financial intermediation and monetary-mercantile exchanges outside the major cities. Thus, we wish to encourage the participationof the IntemationalCommunityin these initiativestaken by our Government through the joining of efforts in the establishment of adequate financial mechanisms. The Goverment and the business community which operates in Mozambiquefeel that one of the priority initiatives in this process is the establishment of a Fund for the Financial clean-up of the Private National Business Sector in order to assist in solving the serious structural problems of decapitalization faced by the enterprises, as a result of the destruction that they directly endured during the war that devastatedMozambique. The Government supports this initiative and the Bank of Mozambique expresses its availabilityto be involved in the managementof the Fund togetherwith other partners.I am sure that this financialmechanism will be effective in solving the problems faced by the national business community. We, therefore, rely on additional contributions from the Donor Community. Mr. Chairman Ladies and Gentlemen For the 1996 economic year we submitted our financial requirements estimatedat USD 870 million, of which 315 million were for debt relief and the remaining USD 555 million were for current funding of the economyand for investment.It is with grate satisfactionthat I note that our request was positively responded: the country benefitedfrom a total amount of USD 940 million, of which 310 million injected in the form of debt relief, 10 million were earmarked for special programmes in the area of demining and elections and 22 million for the Fund of external debt relief. The remainingUSD 598 million were basicallyto finance the current functioningand investment. Lr -: r~~  99 Our Economic Programme for 1997 envisages an economic growth comparableto that achieved in 1996, continuous reduction of inflation rate and the improvementof the externalaccounts. With regard to the management of monetary policy instruments, the interbank foreign exchange market shall be consolidated and an interbankmonetary market shall be established with the view to move towards the system of indirectcontrol mechanism. As for the external debt, we shall continue with the negotiations and completion of bilateral agreementsfor the rescheduling the Paris Club creditors and other official creditors. of the debt with We shall continueto take actionswith the bilateraland multilateralcreditors in order to obtain conditions for the relief of the external debt which shall lead to the reduction of the large burden the debt has on the external accounts and the budgetin a short and longterm. Despite the internal efforts that we envisage to make and which its implementation has been taking place during these first months we still require financialsupport from the International of 1997, Community. Thus, for the 1997 economic programme, the total financing requirementsto be supportedby official extemal aid flows, amount USD 596 million,USD 36 million of which are IMF credits. remaining amount of USD 560 million, will be supported We hope that the by grants and concessional credits to finance the current functioning, special programmes,namely, demining and elections, and public investments. We hope the private sector will contract foreign credits and finance its own investments in an total amount of USD 165. For debt relief, our projectionsassume an amount of USD 194 million. In addition,the Governmentwould like to obtain from the International Community financial resources for the Fund for the debt, rehabilitationof the rural commercialnetwork, relief of external the cleaning-upof the private national business sector and support to economic rehabilitation,in an amount of USD 50 million, to be managed through adequate financial mechanisms, involving the private sector and our partners.  This Tenth Meeting is a historic milestone due to its coincidence with the tenth year of the implementation of economic reforms in Mozambique. Consequently, I am confidente that in this meeting new initiatives may be taken on the basis of the experience of fruitful relationship that now lasts for a decade as well as on the mutual confidence that we have been able to consolidate. In conclusion, I would like to express my gratitude to the Bretton Woods institutions for their valuable contribution towards the holding of this important meeting and for the efforts that we have been jointly making throughout this decade, successfully involving the Donor Community in the Mozambique economic and social recovery. Thank You Very Much. ---- - - r  102 Annex IX MOZA1MBIQUE Consultative Group Meeting Paris, 15-16May, 1997 Statement on Financing Requirements by The World Bank Ladies and Gentlemen, As stated in earlierinterventions,Mozambiquehas come a long way in the past decade, and especially in recent years. The economy as a wholeis growing,inflationis down, and somekey social indicatorsare beginningto improve.Also, in the contextof continued economnic recovery, externalimbalances are graduallynarrowing. In 1996, Mozambique'sbalanceof payments position strengthened considerably. Strongexportgrowthallowed account deficit before grants,and higher a reductionin the current than expectedofficialand private capitalflows contributed to a substantialincreasein foreign reserves. These positivedevelopments helped to maintaina stable nominal exchangerate throughout the year, and the premiumbetween the market and the parallelrate remained around 5 percent. In 1997,the Mozambican economyshould rapidly, with anothergood cerealcropforecast continueto grow central region. Also, it is envisagedthat despitefloods in the electricityexportswill be initiated this year. However,exportgrowth is expectedto slow down as irregularrainfallin the northof the country production of export crops. Withtotal will affectthe imports growingfaster than exports and given the need to continue buildinginternational reserves, the balanceof paymentsexternalfinancing debt relief, will increase by nearlyUS$40 requirements,excluding millionthis year to US$761 million. As can be expected,the composition changingas a result of the country'snew of externalfinancingis economicrealities and developmentneeds. A particularly encouragingnote is that private capital flows continueto increaseand will contributeto cover around US$165 millionof financingneeds. Official US$596 million,more or less maintaining aid flows are projectedat the levels of 1996.Of this Twi i' '--' -_ _  total, it is anticipatedthat officialgrantswill amountto US$335 millionand multilateral creditsto US$260million, includingthe IMF. It is notable that aid for investmentfinancing will increaseby about US$70millionto US$360million,accounting for half of total aid flows,while balanceof paymentssupportis programmed to decline by US$30millionto US$141million. Food aid willremainbasically unchangedat US$40million. As you are aware,the Governmenthas madeimportantstrides in improvingthe management of externalaid funds. This is particularlytrue regardingthe accounting,monitoring, and reporting systemsof balanceof paymentsfunds. In part,this has been facilitatedby the fact that most of these fundsare now being channeled throughthe centralbank. At the same time, manydonors are providing"untied"funds and are simplifying disbursements procedures. Theseimprovements, have no doubthelped to develop the foreignexchangemarket, and thus have contributed to improve the allocationof foreignexchangeand to the stabilization of the exchange rate. More flexibleconditionsfor the disbursement of balance of paymentsfunds have also helped to improvethe availabilityof counterpartsfundsfor the budget. We stronglyencouragedonors who have not yet done so, to adopt these moreliberalizedprocedures. The Government has also made goodprogressin strengthening the managementsystemsfor project assistance. The coverageof the publicinvesanentprogram(PTIP)has expandedconsiderablyin the past years, and integratedsector investmentare being adopted in severalkey sectors. Nevertheless,to ensurethe efficiencyand sustainabilityof publicresourcesthe budgetaryand planningsystems need to be furtherdeveloped. For this reason,withsupportfrom the FiscalManagementReview,the Governmenthas begunto implement its Expenditure Management Reform Strategy. A fundamental componentof this strategyis to better integrateaid financed investmentin the budgetaryand planningprocess. In particular, all grant-financed projectsshouldbe includedin the budgetand their executionshouldbe regularlymonitored. Another priority of the Reform,as mentionedin the Government'spresentation, is the need to developa expenditure frameworkto matchavailable public resources, both domesticand extemal,with expenditureneedsover the medium term. Donorshave an importantrole in supporting the Expenditure Management Reformspecifically by providingthe Governmentwith timely and regular informationon project disbursementsand by adopting mediumterm financingplans throughmechanismssuch as integrated sector programs.  106 Annex X MOZAMBIQUE CONSULTATIVE GROUP MEETING Paris, May 15-16,1997 Statement Chair's Closing MsL PhvllisPomerantz CountryDirector,Mozambique 1. It is time to bring the 10th Consultative Group meetingfor Mozambique to a close. I would like to thank all of you for participating. On behalf of all participants, I especially want to thankPrimeMinisterMocumbiand his team for their contributions. The success of this meetingis duein large part to their lucidpresentations and thoughtfulresponsesto issues raised. And I must say, I thinkit is a measureof the maturityof our partnershipthat we have had one of the most frank and technically substantiveCG meetingsI have attended. 2. Last year we concludedthat the 1995CGhad beena meetingof good intentionsand that the 1996meetingwas one of accountability. In the samespirit,I believewe can call this year's meetingthe CG of accomplishments. Allparticipants paid tribute to Mozambique's truly impressivelist of achievementsover the past year: GDP growth of over 6% in 1996,exportgrowth of 30%, inflationdownmorerecentlyto singledigits,abd further significantprogresson one of the most far-reaching privatization programsin Africa. As Mr. Coplandput it, last year's debateover whetherdecreasedinflationor increasedgrowthis moreimportantnow looksfutile. Mozambique has shownthat it is possibleto have both lower inflationand highergrowth. 3. Mozambique'ssuccesshas wider implications for the rest of Africa. In the ongoing debateover Africa's growthprospects,Mozambique providesa good examplethat persistentefforton structuraladjustmentdoesbear fruit. Andin the debateover the role of externalaid,Mozambique'sstrong growth over severalyearsand its ongoingtransitionto peace, democracy, and politicalstabilityshowsthe importance of externalsupportfor committedeconomicreformers. Moreover,becauseof its strategiclocationas the natural outlet to the sea for landlockedneighbors,as well as its naturalresources,Mozarnbique stands to makean importantcontributionto the growth of the entire SouthernAfrica region. Successin improving the efficiencyof all three of its major transport corridorsand in developing its naturalresourceswill raise the growthrate of Mozambique and its neighborsalike. 4. Despite recent accomplishments, Mozambique rernzinsone of the poorest countries in the world. Most of our discussion over the past two days, therefore, looked down the road aheadrather than dwellingupon past success. A strikingfeature of this year's CG meetingin comparison to those of the recentpast, was the shiftin emphasisfrom emergency and short-termstabilization to medium-term development issues. We shared our visionsof whereMozambique couldbe goingin the next ten years. And whilethere was activedebateover how to get there, our visionsof whereMozambiqueneedsto go were remarkably similar. Let me take up the mainthemesof our discussions under four headings:agricultureand rural development; privatesectordevelopment; capacitybuilding; and the future of the relationshipbetweenMozambique andits externalpartners. ~ ~ Ih ff-X- ~~~~~~~~~ r-  107 AGRICULTURE AND RURAL DEVELOPMENT 5. Allof the participantsagreedthat the agricultural of growthand povertyalleviation sector willprovidethe mainsource forMozambique.Of particularimportance development of the familyor smaUlholder is the of the population. Whilethere was sectorwhich still accountsfor overthree-quarters agreementon the relevanceof agriculture basedgrowth andpovertyalleviation, for broad- there abouthow to promote thisagricultural was less agreement,and muchdiscussion, growthand associatedrural development. 6. The externalpartnersexpressed the launchingof the PROAGRIprogram. importanceof completing the preparationand Mr. Lowcock noted that PROAGRI moreattentionto the problemsof women. needs to pay Participantsalso stressedthe importance This concern was echoed by many participants. of clarifying to ensuringlandtenure securityfor traditional land issues,particularly with respect competitive sinallholderfamilyfarmersandpromoting land markets. 7. The meetingagreedthat marketdevelopment development in generaland the associated of rural financialservices,is critical. The Government'sproposed supportfor further cantina development program of was Otherparticipantsstresseda view,which questionedby severalof the participants. adopt a multifaceted I personallyfind appealing, that there is a need to approach by increasing work on feeder roads and microand smallscalefinancial services- and I am sure that at least the development of participantswilltake up the Government'ssuggestion some of the ensuringgreateraccess to creditand of offeringalternative proposalsfor marketsfor smallfarmers. The Government rest assuredthat we all are fullyin accord should buddinggrowthin agriculture that there is an urgent need to support with a functioningrural infrastructure. the PRIVATE SECTOR DEVELOPMENT 8. This Consultative Grouphas beenunanimous privatesector development in its recognitionof the importanceof for achieving sustainedeconomic growthin Mozambique.The beginnings of a stablemacro-economic that it be nurtured,consolidated environment have been established, and sustained.Mozambique but it is critical growthover a long periodof timeto needs to maintainhigh have a tangibleimpact on its people poverty. The messageis clear, as andon reducing the representativefrom the Netherlands the EuropeanUnion,"Therecan be no said,on behalfof slippages". 9. In additionto a stablemacro economicenvironment, supportive the privatesector infrastructure.This meanshavingroads requiresa physicaland institutional an efficientand broad based telecommunications that function; internally andinternationally system which allows easyaccess both at competitive power supply;access to cleanand reliable prices;an uninterruptedandreasonably priced water supplies;and supportfromdependable transportservices. And the legalenvironmnent businesspractices. In thisregardwe needs to be up-to-dateandreflectmodern look forwardto the earlyreformof the code. Lastly,Government bureaucracy commercial shouldnot stand in the way. Manyparticipants 111 j -- Th  108 have rightlypraisedthe red tape report for identifyingand documenting the labyrinththat privatebusinesses negotiatewhen they establishan enterprise in Mozambique.We look forwardto a report back from the Government, at the September Private Sector Conference, on progressto simplify this bureaucracy. 10. Manyspeakershave also rightlypraisedthe Government's privatization program. The fact that the privatizationagenciesare now talkingaboutclosingtheir doors in mid- 1998is a testamentto how far the Government has comefromthe days,not so verylong ago,when Mozambique's economy was almost completely dominated by the publicsector. But the Government has not privatizedfor privatization sake. The impactin terms of significantlyimproved industrialperformance over the pasttwo years,after five years of steadydecline,showsthat the economyis now reapingthe benefitsof its far-sightedand far-reaching program. And importantsteps stillremain- amongthem quicklyfinalizing the privatizationof BPD; finalizing the privatizationof LAM;and movingquicklyon the privateconcessioning of CFM South during 1997,andthe remainder of the rail system shortlythereafter. In addition, the increasingrelevanceof telecommunications for overall businessdevelopment arguesfor greater privatesector involvement and competitionin this sector. 11. An emerging themeis to ensurethat Mozambicans participateto the filllestextent in the development of the economy. A long historyof statedominance, and a lack of financialresourcesand entrepreneurial skillshave hinderedlocalentrepreneurs, whether they be involvedin micro, small,or mediumscaleenterprises. The need for credit facilities to supportviableeconomicactivities; the need to providelocalbusinesspeoplewith technicalknow-how;and the need for a supportivelegal andregulatoryenvironment -- are allissueswhichrequireour urgent attention. For me, this includesnotjust the larger Mozambican businessman, but the artisancarpenter,the back room tailor sewingshirts, and the villagewomanengagedin tradingactivities. Anyonewho has walked the streets of Maputo will quicklyrecognizethat Mozambicans have theirfair share of entrepreneurial talent, and we must be surethat they can exploittheirtalents. Suchprojectswill have a direct impactupon povertyalleviation throughoutthe country. 12. Finally,as we privatizeand simplify the regulatorystructure,severalparticipants pointedto the need to ensurethat Mozambique'senvironment is protectedand its natural resources carefullymanaged. I want to add myvoice in strong supportto theirs. This is especiallyimportantas the potentialfor largemineral,gas, hydro-electric, forestryand industrialdevelopments becomea reality. Adequateenvironmental institutionsas well as effectiveenvironmental impact studyprocedures,safeguards, andmitigationmeasuresare essentialso the county'sresourcesare protectednotjust for this generationof Mozambicans, but for theirchildrenand their children'schildren. CAPACITY BUILDING 13. Buildingcapacitywas anotherrecurringtheme,and our discussion ranged well beyondthe customaryboundsof primaryand secondaryeducation, fundamental though these are. Centralto our discussionwas capacitywithinthe publicsector. Minister Gamito's presentationon the Government'spublicsectorreformprogramwas a useful T- ~1~ -- __________ _-  109 teginaing to what will undoubtedly be a rich discussionoverthe comingmonths. If uccessful,the sort of reformthe Ministerenvisages, whichincludessimplification of the careerandremunerationstructureas well as a considerable decompression of civilservice wages,willimprovethe Government's abilityto attract and keep qualified civilservants. It is alsoa way,alongwith a simplification of bureaucratic processes,to reducethe temptations of corruption. I noticeda numberof participantsshudder,including myself, whenthe ministerspoke of the infamous"carimbo"or rubberstamp. And an effective publicsectoris not only essential to provideessential servicesespecially to the poor and vulnerable,but is alsopart andparcelof developing the privatesector. The questionsthat followedthe Minister'spresentation not onlydemonstrated the timeliness of this initiative, but alsothe complexity of the enterprise. Detailsstill need to be worked out. Mozambique's aidpartnershave clearlyindicatedtheir willingness to supporta radical reform,andwere particularlyencouraged by the structuredapproachof the programand the planned phasingout of donor support. As the Vice-Minister noted, if the strategyis to qe sustainable, donor aid must play onlyan interimrole. But we as Mozambique's partners must alsodo our part, by phasingout our topping-upof civilservants'salaries,and our luringaway- through better pay - of some of the public sector's own "best and brightest". 14, Clearlyit will take time and concertedeffortby all of us to buildthe capacityof peopleandinstitutions. In the interim,we shouldall considerwhat may be done to ease the burdensonMozambique'slimitedpublicsector capacity. Mr. Friedenof Switzerland warnedthat providinglocal servicesat the presentlevel is not sustainableeitherfinancially or in termsof centraladlministrative capability.Sharingthe responsibilityfor the financing and operationof suchservicesempowerslocalcommunities, and adds to Mozambique's precioussupplyof capacity. And of course,also on the subjectof capacity,manyof Mozambique's partners emphasized the need to do moreto take full advantage of the capacityof Mozambican women,by empowering them, securingtheir rightsand incorporating themmore fullyinto the economy. 15. As part of the publicsectorreform,Mozambique's partnersall applaudedthe Government on its progressin enactingthe legislation for holdinglocalelectionsand decentralizingresponsibilitiesto the provinciallevel. Thiswillnot onlyhave a powerful efTectof deepeningdemocracy,a good in its own right,but, by helpingto createthe political supportfor change,it is alsoan importantcomponentof buildingcapacity. Local electionsareplannedin 33 municipalities for December1997or shordythereafter. The delegates welcomedthe commitment by the PrimeMinisterto extendlocal elections countrywidein the foreseeablefuture. 16. Finally, to returnto the subjectof corruption,as manyparticipants did,we all recognized that corruptionstrikesat the heart of effectiveness.Mozambique's aid partners commended the Government for the anti-corruption legislationsubmittedto the National Assembly.Thisis a first step, but it will be importantfor the Government to showits commnitment to makinganti-corruption a reality,by creatingthe necessaryinstitutions,and by takingrapidactionin pendingcases. 11w - I§  110 FUTURE OF THE RELATIONSHIP: MOVING TOWARD REDUCED AID DEPENDENCY 17. As we began to focus together on the longer-term future for Mozambique at this CG, there was a common recognition, both among Government and many of its partners, that Mozambique will need to reduce aid dependency. As Ms. Garcia Jauregui of Spain put it, "we must make the transition from emergency to sustainable development." This implies a need for both the building of local capacity and the mobilization of domestic resources to substitute for gradually decliningaid. To move toward fiscal sustainabilitywill call, first and foremost, for a rapid and substantial increase in fiscal revenues. In this respect, an increase in internationaltrade taxes arising from the private management of customs will be particularly important. The Government will also have to move forward rapidly in preparing and implementingits Value Added Tax system by mid-1998. Exemptions on duties, tariffs, and taxes willhave to be minimized. And the Governmentwill need to tap the planned mega projects for fiscal benefits while maintainingMozambique's competitiveness as a destination for foreign investment. 18. Sound and strategic expenditure management will also be pivotal to ensuring that Mozambique attain its developmentobjectives in the face of scarce resources. To this end, I have noted considerable support from participants for the Government in its implementation of its Expenditure Management Reform Strategy. Here is an area where we hope to see increased Government leadership in our renewed partnership. Noteworthy are the efforts underway to improve the transparency and coverage of the budget, and, as suggested by more than one participant, we donors should work with Government to ensure that our projects are included and tracked through the budgetary process. As indicated by the Minister of Finance, moreover, a key component of the strategy will be the development of a medium tern expenditure framework. This should link the macroeconomic framework with sector programs so as to make appropriate inter-sectoral allocations, given availableresources. A better planning mechanismwill give the Government greater budgetary control and will help ensure the implementation of Government driven priorities. We, as external partners, also have a role to play in improving the effectivenessof public investment financed by our resources. Efforts such as those mentioned by several of you, including Ms. Storn, the Norwegian delegate, to increasinglymove toward sector program financing, will reduce the number of disparate projects and ease the demands on investment management capacity of Government. This may take time, however. As Mr. Toivonen of Finland warned, SIPs are not for those in a hurry. 19. Many participants supported Mr. Hansen's declaration that this CG meeting should send a clear signal to the outside world that Mozambique should be allowed to participate in the HEPC. I can assure you that your message has been heard and, as Mr. Leite and I explained yesterday, we are working toward having Mozambique declared eligible as soon as possible, even if all the details cannot be worked out immediately. 20. Turning briefly to financing, I am pleased to report that this year's projected financing needs of $560 millionhave been met. Let me add my thanks to that of the Government for your continued support. Recent studies have shown that aid effectiveness is greatest in countries who are implementing sound economic policies. I am sure that if iFT I - -  ill the Government of Mozambique continueson its currentpath; the international community will continueto play its part. 21. Let me also expressour appreciationof the supportteam, includingthe interpreters here,for the smoothadministration of our meeting. I wouldlike to thankall participants for theirrich contributions to thesediscussions.I alsowant to take specialnote of the contribution of the Mozambique CountryTeam andotherBank staff, including from our Paris office,who workedtirelesslybehindthe sceneson this CG. 22. In concluding, permitmeto make an-all-toobriefmentionof some changes in Maputofor the WorldBank. As manyof you mayknow,this will be RobertoChavez' last CG as our ResidentRepresentative in Mozambique.Afterfour years in Maputo,we need himback in Washington.Under Roberto,the ResidentMissionhas beentransformed.The richnessand franknessof our partnershipis in no smallpart due to Roberto's exceptional abilities:at earningtrust, at listeningwell,at representingthe Bank viewspersuasively and clearly. For those of us travelingthere, it is withoutdoubtthe best run ResidentMissionin Africa. And certainlythe most culturally active- as you know,the ResidentMission periodically doublesas a galleryfor local artists! His warmth,immense knowledgeand sensitivity for Mozambique, and histhoughtfulness willbe sorelymissed. In manyways this tenth CG, markedby the kind of spiriteddebateof Mozambique's medium-term agendathat would havebeen unthinkable fouryears ago, bears the stampof his legacy. For all of us, thankyou Roberto. 23. And as I closethis tenth Consultative Group meetingfor Mozambique andbid you farewell, Mr. Cedergren'sapt words cameto mind. To all of you, I say,"very good, very impressive,good luck!" Aid aproxima. -rv _--  112 Annex XI 11Dl]'Sellslivi IU ENI DIN0.CgW The World Bank 4 European Office: 66, avenue d'Iena, 75116 Paris, France Contact:RaymondToye (33) 1 40693028 Eric Chinje(]) 202-473-4467 SUCCESSFULECONOMIC REFORMS BEAR FRUTTIN MOZAMBIQUE PARIS, May 16, 1997. The ConsultativeGroup for Mozambique held its tenth meeting on May 15 and 16, 1997, under the chairmanshipof Ms. Phyllis Pomerantz, Country Director for Mozambique of the World Bank. The Mozambican Delegation was led by H.E. Dr. Pascoal Mocumbi, the Prime Minister, and included H.E. Tomaz Salornmo, Minister of Plan and Finance, H.E. Oldemiro Baloi, Minister of Industry, Trade and Tourism, H.E. Alfredo Gamito, Minister of State Administration,H.E. Luisa Diogo, Deputy Minister of Plan and Finance, H.E. Adriano Maleiane,Governor of the Bank of Mozambique, and other senior officials. The CG Meeting brought together over 30 bilateral and multilateral agencies to discuss Mozambique's developmentprograrn and future plans, and external support for these. Participants Laud Mozambique's Commitment to Reform Participants congratulated the Government for Mozarnbique's strong economic performance in 1996. The economy grew by 6.4% last year. Inflation has come down from over 70% in 1994 to less than 17% last year. The 1996 grain harvest was the largest in two decades which, together with the ongoing industrial sector recovery, resulted in a 30% increase in exports. Exports totaled $225 million in 1996. Participants recognized that Mozambique's success in 1996 was underpinnedby the Government's solid macroeconomicmanagement, coupled with one of Africa's largestprivatization programs, including the privatization of the largest state owned bank. Early results for 1997 indicate that another good year lies ahead. High, sustained growth over a decade or more is needed for substantial poverty reduction in Mozambique. A number of participants emphasized that "there can be no slippage" if Mozambique's poor are to benefit from reform efforts. The improvement in economicperformance, together with a successful transition from war to peace and democracy, has led to increased private investor interest. The signing of the accords by South Africa and Mozambique for the private construction and operation of a toll road along the Maputo DevelopmentCorridor and the Government's plans for private concessioning of the nation's ports and railways will offer benefits beyond Mozambique to the entire Southem African region. To further spur private sector led growth, participants noted the importance of strengtheningthe Goverment's regulatory capacity, including removing bureaucratic obstacles and modernizing the commercial code. Participants also noted the importance of strengtheningenvironrnental assessments and safeguards to ensure the optimal use of Mozambique's natural resources in the nation's development. -17- -I  113 Challenges Remain for the Coming Years Progress on the macroeconomic front allowed the meeting to focus on the challenges of sustainable growth and poverty reduction over the medium term. Participants agreed that rural development is a central priority. Debate focused on concreteactions to help small farmers and traders boost food production and rural incomes. Rebuildingrural infrastructure, safeguarding the land rights of smallholders and the importantrole of women in the rural economy were highlighted in the discussion. Participants lookedforward to the launch of PROAGRI, the Government's new agricultural sector programto promote smallholder agriculture and stressed the need to better define the role of the Governmentand the private sector, particularly in the areas of marketing and rural finance. PROAGRIis slated to receive support from Consultative Group members. In the area of govemance, participants supported the Government's goals to reform the civil service, including the career and remuneration system; concreteplans will be worked out over the coming months. They also applauded the Governrment'sdecision to hold local elections in 1997 and to increase local participation in civic affairs and developmentprograms. In order to further promote decentralization, the need to extend local electionsto the whole of Mozambique was recognized, and the Government indicatedits intentionsto prepare concrete proposals to implement this. Participants also commendedthe Governmentfor the anti- corruption legislation submitted to the National Assembly and urged the Govermmentto go further in combating corruption. Even with recent successes, Mozambique remains the world's most aid dependent nation, a concem echoed by various participants. Progress on this front was noted: the proportion of the budget financed by aid declined from 65% to 50% in the past two years. Efforts underway to reduce the level of aid dependency include enhancingrevenue generation through customs and fiscal reform, coupled with public sectorreform and capacity building to increase efficiency. A central concern of participants was Mozambique's debt burden. The Government of Mozambique's initiative to address the debt problem through a multilateral debt fund was recognized. Participants expressed strong support for Mozambique's participationin the HIPC debt reduction initiative and urged the Bretton Woods institutions to take the necessary measures to ensure that Mozambique is declaredeligible for the HIPC initiative at the earliest possible moment. Mozambique's Financing Needs Met Mozambique came to Paris seeking external financing (excludingdebt relief) in credits and grants of about US $560 million. Indications from the participants at the meeting were that Mozambique's 1997 financing needs would be met through a combinationof investments (55%), balanceof payments support (28%), food aid (6%), and otherprogramss(11%). The Government expressed its gratitude for the continued support of the international community. Members of the Consultative Group attending the meeting were Australia, Austria, Brazil, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom and the United States. Also represented were the African Development Bank, the European Commission, the European Investment Bank, the Food and Agriculture Organization, the Intemational Fund for Agricultural Development, the International Monetary Fund, the Islamic Developmcnt Bank, the Kuwait Fund for Arab Economic Development, the Organization for Economic Co-operation and Development, the United Nations Children's Fund, the United Nations Development Program, the World Bank, the World Food Programnand the WorldHealth Organization. South Africa and Russia attended as observers.