Mozambique - Second Economic Recovery (SERC) Program

Dom -of The World Bank FM OMFCL USE ON Report No. P-6337-MZ REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECIUTIVE DIRECTORS ON A PROPOSED DEVELOPMNIT CREDIT IN AN AMOUNT EQUIVALENT TO US$200 MILLION TO THE REPUBILC OF MOZAMBIQUE FOR A SECOND ECONWMIC RECOVERY PROGRAM MAY 18, 1994 MICROGRAPHICS Report No: P- 6337 MZ Type: 140P This dcuent has a resticed distibuon and may be ased by recipiets ondy in the perfomanee of hdeir official daties. Its contents may not othevise be disclosed without World Bank authorization.  CURRENCYEQ T Currency Unit = Mozarnbique metical (Mt) 1975 27.24 1980 32.40 1985 43.18 1986 40.43 1987 289.44 1988 528.60 1989 819.71 1990 1,038.15 1991 1,435.00 1992 2,433.00 1993 3,723.00 ABULYIIVI 4,IOiS Agricom State Enterprise for Agricultural Marketing BFE Banco de Fomento e Exterior BM Banco de Mogambique/Bank of Mozambique BPD Banco Popular de Desenvolvimento/People's Development Bank BPA Banco Portugues do Atlantico BSTM Banco Standard Totta de Mogambique/Bank of Standard Totta (Mozambique) CFM Carainhos de Ferro de Mocambique (national railways) contc One thousand meticais CPI Consumer Price hidex EDI Economic Development Institute EFRMTA Economic and Financial Management Technical Assistance Credit EMOSE Empresa Mogambicana de Segui os e.e./State-owned insurance company ERP Economic RehabDitation Program FS CB Financial Sector Capacity Building GDP Gross Donestic Product GTZ Deutsche Gesellschaft Fur Technische Zusammenarbeit IFBM Instituto De Formacao Bancria de Mogambique MP International Monetary Fund LAM Linhas Aereas de Monambique (national airline) MoF Ministry of Finance Mt Metical/meticais - currency of Mozamoique NBFI Non-Bank Financial Institution OTC Over the Counter PPF Project Preparation Facility SAF Structura Adjustment Facility SERC Second Economic Recovery Credit SPA Special Program of Assistance SDC Swiss Development Cooperation SIDA Swedish International Development Authority SME Small and Medium Enterprise SOCIEF Sociedade de Investimentos e Estudos Financeiros TA Technical Assistance FISCALXEAR Govemment = January I to December 31  FOR OFMCIAL USE ONLY MOZAMBIQUE SECOND ECONOMIC RECOVERY CREDIT (SERC) TABLE OF CONTENTS PROGRAM SUMMYARY ........................................ i - i-n P4RT I: INTRODUCTION ....................................... 1 PART II: COUNTRY ASSISTANCE STRATEGY . .................... 2 A. Recent Economic and Social Performance .......................... 2 The Pre-Adjustennt Situation .......................... . 2 The First Economic Rehabilitation Program 1987-1989 ....... ... . 2 Economic Recovery Program 1990-93 ............ . 3 Structural Reform . ................................... 5 Stabilization ................... ................... 8 Recent Social Developments ............. .......... 8 B. External Envirownent ....................... 9 C. Mozambique's Development Objectives and PolicieL .10 D. Bank Group Country Assistance Strategy ......................... 11 Status of Policy Dialogue .............................. 11 Enhancing Goverment's Capacity .. . ..... 13 Other Areas of Special Operational Emphasis . . . 14 Portfolio Performance and Management .. 16 Level and Composition of IDA Assistance .... 19 Cooperation with Other Donors .... 20 IPC and MIGA Acdvities ... ... .................. 21 E. Agenda for Board Consideration ........ ............. 21 This report is based upon the findipgs of an apprasl misson which veM ique l in McWApril, 1994. The mision conssted of David Cook (Divison Chief), Luis de Azearate (Senior Advior), Rene Bonnel (Senior Economist), Kishor Uprety (Legal), Eric Brown (Disbursnement Officer), Simon Bell (Task rMager and Senior Fnadial Econo_t), and Carol Oost0l (Consutnt). The lead advisor was Lus de Azcarate and the peer reviewer was Hennina Mardnez. Secrtaril support was provided by Joyce Chins Mr. David Cook is the maagin Division Chief, and Mr. Stephen Denning Is the Department Director for the operation.  PART mU: SECOND ECONOMIC RECOVERY CREDEf ................... . 23 A. ObjectivesandSStraegy ........................ .......... 23 bB. PolicyAgendaoftheSERC ....................... 24 Macroeconomic Maagemen bic Expendt and External Aid ... 24 Monetuy Policy and Strengtenig the Centra Bank.25 The Financia Sector .29 Enterprise Sector Refom .34 C. Description of the Credit .39 Borrower and Credit Amount .39 Tranching .39 Disbursement and Procuremen .39 Program Management. Monitoring and Accounts .40 Key Actions that were Undertaken by Negotiationss .40 Monitorable Actons .............. 41 D. Benefits and Risks .43 PART IV: RECOMMENDATION .4  ANNEXES I. ANNEX I. Letter of Development Policy .................................... 46 U. ANNEXH. Policy Matrix - Actions to Support the Second Econonic Recovery Credit ...... 62 m. ANNEX m. Key Macroeconomic and Social Indicators ....... ..................... 69 IV. ANNEX IV. Previous Adjustmnt Operains in Mozambique ....................... 74 V. ANNEX V. IDA and IFC Lending Operations in Mozambique .................... 76 Vl. ANNEX VI. Matrix of Development Objectives and Instnrnts ...................... 81 VIL ANNEX V1. Mozambique: Lending and ESW Program .......................... 83 VI. ANNEX VU. SERC Supervision Plan ...................................... 84 LIST OF TABLES AND CHARTS IN THE TEXT Table 1: Key Macroeconomic Indicators ............................ 7 Table 2: Selected Indicators of Bank Portfolio Performance and Management .... 18 Table 3: Nominal and Real Lending Rates In Mozambique ................ 27 Table 4: Commercial Bank Share of Total Assets, Loans and Deposits .... ..... 30 Table 5: Ownership and Performance of the thirty Largest Banking System Clients . 35 Chart 1: Macroeconomic Data ................................... 4 Chart 2: UTRE Action Plan for 1994/96 ........................... 38  MOZAMBIQUE SECOND ECONOMIC RECOVERY CREDfT PROGRAM SUEMMARY BORROWER: Republic of Mozambique BENE:FICIARY: Republic of Mozambique AMOUNT: IDA Credit SDR 141.7 million (US$200 million) Switzerland CHF 10 million United Kingdom GBP