Mozambique - Economic Management and Private Sector Operation Project

Report No. PID9792 Project Name Mozambique-Economic Management and Private (@) Sector Operation Region Africa Sector Economic Management Project ID MZPE49878 Borrower Republic of Mozambique Implementing Agency Ministry of Planning and Finance Environment Category C Date this PID prepared August 6, 2002 Projected Appraisal Date April 23, 2002 Projected Board Date August 29, 2002 Country and Sector Background 1. The structural reforms that the Government of Mozambique implemented since the peace accords of 1992 included reform of the financial sector, privatization of public enterprises, tax and trade reforms, and strengthening of public administration. These were aimed at supporting macroeconomic stabilization and structural adjustment to achieve sustained growth with poverty reduction. Following privatization of two banks, inflation fell from 54t in 1995 to 17t in 1996 and was in single digits until 2000, when the 12-month rate rose to 11t as a result of the floods. Since 1994, GDP has grown at an average annual rate of 8.4 percent driven by agriculture, commerce, manufacturing, construction and electricity. Exports of goods and services grew at 7.4k annually between 1994 and 1999. 2. The floods and cyclone disaster of March 2000 resulted in sharply lower growth perspectives: GDP growth is predicted to be only 3.8 percent in 2000, albeit with an anticipated recovery to 10 percent in 2001. The treasury bill rate (90 days) rose from 12 percent in January 2000 to 17 percent in August 2000. Monetary policy is being tightened in order to fight inflationary expectations. 3. Mozambique's strong performance has been supported by considerable foreign assistance. Since 1986, the Government has received US$ 8 billion in external aid, or almost US$ 600 million per annum about 17 percent of GDP or 50 percent of Government spending. The Country's Reform Program 4. The main objectives of the Government's reform program are to regain macroeconomic stability as indicated by single-digit inflation, maintain high growth rates (the Government's aim as stated in the PRSP is 8t GDP growth p.a.), reduce its aid dependency and ensure increasing social expenditures in order to achieve educational and health goals. To this effect, the government is committed to maintaining its prudent macroeconomic policy stance, while continuing to deepen the comprehensive systemic reforms already under way. The authorities  recognize that continued progress in privatization, liberalization and financial sector reform are necessary underpinnings to continued economic growth. At the same time, they are firmly committed to ensuring that the benefits received through the HIPC and the Extended HIPC are spent on effective education and health programs and on combating HIV/AIDS. The Proposed Credit Objectives 6. The primary objective of the Economic Management and Private Sector Operation is to support the Government's program to consolidate macroeconomic stability and to lay the foundations for sustained private sector-led growth over the medium term. The program includes measures to: (a) extend budget coverage to include all fees charged by sector ministries and selected donor development funding, (b) do a public expenditure review, (c) resolve the financial difficulties of two of the banks, strengthen licensing and supervision in the financial sector, and dilute further government ownership in the financial sector, (d) liberalize telecommunications by revising the legislation and issuing two new cellular licenses with gateway access, (e) initiate the privatization of the incumbent telecommunications firm, (f) liberalize air transport and (g) make progress with the privatization of the petroleum company PETROMOC. Project Implementation 7. The proposed Economic Management and Private Sector Operation (EMPSO) credit will be made to the Republic of Mozambique, represented by the Ministry of Planning and Finance. The proposed Credit will be released in two tranches: the first on effectiveness and the second on fulfillment of the specific tranche release conditions, if general progress on implementation of the Letter of Development Policy (including attainment of its macroeconomic stability objectives) is also satisfactory. A task force drawn from the central and line agencies, and coordinated by the Ministry of Finance, will be established to monitor implementation of the program. 7. A Telecommunications and Air Transport Technical Assistance Project has been set up in parallel in order to ensure that the Government will have the resources it requires to effect the needed reforms in these areas. Poverty Category 8. The proposed Economic Management and Private Sector Operation (EMPSO) will support the Government's overall poverty reduction efforts as described in the Poverty Reduction Strategy Paper. To achieve these it will be essential to attain GDP growth of at least 5% per annum, which will reduce the poverty headcount from 69% (as of 1997) to 52% in 2005. It will do this by helping improve the allocation of government expenditures through extending budget coverage, and by promoting private sector development through liberalization of infrastructure and other measures. 9. Lessons learned from past operations in the country/sector (a) Limited human capital resources are a feature of most of the countries of southern Africa. Hence the focus will be on practicable - 2 -  measures, backed up by technical assistance (e.g. the parallel technical assistance project for telecoms and air transport). (b) The previous adjustment operation, the Economic Management Reform Operation (1998-99), included acceleration of the import process through simplification of the approval process. Despite an initial improvement in the import lag time, matters appear to have deteriorated. The problem was in the design: the reform was reversible at no or low cost. Hence this operation will seek out reforms which are near-irreversible. (c) Long, complex lists of actions to be done by the second tranche are not credible and induce the Bank staff to seek waivers. Hence this operation will have a small number of conditions which will be carefully selected and clearly enunciated. Environmental Aspects 9. The proposed credit will have no direct impact on the environment. For the purposes of OD 4.01, the proposed credit has been placed in Category C which does not require an environmental assessment. Program Objective Categories 10. The proposed project would contribute to the development of Mozambique through its impact on the efficiency of public management and through its impact on private sector growth. The assistance in improving the allocation of state resources, through extending budget coverage and thereby accumulating information essential for rational decision-making, will have a growth-stimulating and poverty-reducing impact. Liberalization of essential items of infrastructure (telecommunications, air transport) will help create the conditions of sustained growth. Contact Point: Peter G. Moll, Task Team Leader The World Bank 1818 H Street N.W. Washington, DC 20433 Telephone No.: (202) 458-0479 This PID was processed by the InfoShop during the week ending August 16, 2002. -3-