Mozambique - Country assistance strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15067-MOZ MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF MOZAMBIQUE NOVEMBER 7, 1995 Southern Africa Department Africa Region This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  The last Country Assistance Strategy was dated May 18, 1994 CURRENCY EQVALEITS (as of October 1995) Currency Unit = Metical (Mt) Mt 1,000 = US$O. 10 US $1.00 = Mt 9,948 ABBREVIATIONS AND ACRONYMS AGRICOM State Enterprise for Agricultural Marketing AEF Africa Enterprise Fund BCM Banco Comercial de Mocambique/Commercial Bank of Mozambique BM Banco de Mo9ambique/Bank of Mozambique BPD Banco Popular de Desenvolvimento/People's Development Bank CAS Country Assistance Strategy CEM Country Economic Memorandum CFM Caminhos de Ferro de Mocambique (national railways) CG Consultative Group CPPR Country Portfolio Performance Review ESAF Enhanced Structural Adjustment Facility ESP Environmental Support Program FIAS Foreign Investment Advisory Service FRELIMO Mozambique Liberation Front GDP Gross Domestic Product GEF Global Environment Facility GOM Govemment of Mozambique IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund LAM Linhas Aereas de Mogambique (national airline) LOMACO Lonhro of Mozambique Agriculture Company MIGA Multilateral Investment Guarantee Association MOF Ministry of Planning and Finance NEMP National Environmental Management Program NGO non-governmental organization PER Public Expenditure Review PFP Policy Framework Paper RENAMO Mozambique National Resistance SADC Southern Africa Development Community SCC Systematic Client Consultation SERC Second Economic Recovery Credit UNDP United Nations Development Programme UNOMOZ United Nations Operations in Mozambique GOVERNMIFISCALYEAR January 1 to December 31  FOR OFFICIAL USE ONLY MOZAMBIQUE COUNTRY ASSISTANCE STRATEGY TABLE OF CONTENTS A. Recent Economic and Social Performance .......................................................1 1. Historical Perspective ....................................................... l 2. Social and Economic Context .......................................................2 3. Economic Trends and Policy Reforms .......................................................3 B. External Environment .......................................................6 C. The Government of Mozambique's Development Objectives and Policies ............................................8 D. The Bank Group's Country Assistance Strategy ...................................................... 10 1. Objectives and Strategic Priorities ...................................................... 10 2. Increasing the Effectiveness of Development Assistance ...................................................... 14 3. Proposed Lending Program ...................................................... 16 4. IFC and MIGA Activities ...................................................... 19 5. IMF and Other Donors ...................................................... 19 E. Agenda for Board Consideration ...................................................... 20 Boxes Box I Mozambique Country Profile ......................................................I Box 2 Adjustment Operations .......................................................3 Box 3 Statistics: Availability and Accuracy .......................................................4 Box 4 Bank Poverty Reduction Strategy for Mozambique ...................................................... 10 Box 5 Primary Education for Most by 2001 ...................................................... 13 Box 6 Higher Impact Adjustment Lending in Mozambique ...................................................... 17 Box 7 The Proposed Lending Program FY96-00 ...................................................... 18 Tables Table I CAS Objectives and Actions ...................................................... 22 Table 2 Poverty Alleviation Strategy and Actions ...................................................... 23 Table 3 Macroeconomic Projections in the Base Case Scenario ...................................................... 24 Annex A Annex A I Selected Indicators of Portfolio Performance ...................................................... 25 Annex A 2 Bank Group Fact Sheet FY95-FY96 ...................................................... 26 Annex A 3 Summary of Economic and Sector Work ...................................................... 28 Annex A 4 Poverty and Social Development Indicators ...................................................... 29 Annex A 5 Key Economic Indicators ...................................................... 31 Annex A 6 Key Exposure Indicators ...................................................... 34 Annex A 7 Status of Bank Group Operations ...................................................... 35 Annex A 8 Map: Mozambique (Map # 27099) ...................................................... 37 | This document has a restricted distribution and may be used by recipients only in the performance of their Ioficial duties. Its contents may not otherwise be disclosed without World Bank authorization. l  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR MOZAMBIQUE A. Recent Economic and Social Performance 1. Historical Perspective 1. Background, After nearly two decades marked by poverty, drought, civil war, and, finally, peace and the establishment of democracy, Mozambique is ready for progress. Before independence from Portugal in 1975, Mozambique's government apparatus was highly centralized and foreign oriented. Investment went into infrastructure and export production, while the bulk of profits were repatriated to Portugal. Minimal resources were devoted to training or social services in Mozambique. With independence, the Government made an abrupt change, with a socialist agenda. A protracted civil war then plunged the economy and the nation into chaos. Overwhelming military expenditures, rigid central planning Box 1: Mazamkiuzi Country ProtfleU and extreme economic imbalances stifled economic Mozambique JS considered the poorest progress. Infrastructure was sabotaged or fell into coun the worldMeRoughlydone-third o disrepair, the export base eroded, large segments of the urba and two-thirds of rural Mozambicans population were displaced and the network of social live tin absolute poverty. It is a country that services was devastated. The war ended in 1992 with a is highly dependent on external assistance, General Peace Agreement signed by the FRELIMO with a debt stock that is 14 times export Government and the RENAMO rebels, paving the way for earnings. 7he predominantly agricultural democratic elections. Mozambique held its first multi- economy is now in transitionfrom reliance party elections in October 1994. The UN sponsored on central controls to market mechanisms. elections -- with an impressive 90 percent turnout of Income per capia (US$) 80 registered voters -- were deemed "free and fair." A smooth Iopei (millions) 1. . . . fPf~~~~~~~~~~~~~~oh.ato (millions) X 17.5 transition of power followed, and Mozambique launched Land area(thou. sq. ki) 802 the complex process of establishing democratic institutions. Pougrowth rate (%) 2.7 The present Government, installed in December of 1994, is Rura upopulation (Y) 80 headed by the FRELIMO party, with RENAMO holding Illiteracy rate (v) 67 about 45 percent of the total seats in the Legislative Female l rac l%) 79 Assembly. Since 1992, some 80,000 soldiers have been iLkfeextancy (ears) 48 demobilized under supervision of the United Nations nfnt mortality (per '000) :162:V peacekeeping body, UNOMOZ. A new army has been formed, integrating the previously opposing troops of FRELIMO and RENAMO. The restoration of peace has allowed the resettlement of 3.2 million displaced persons and the return of over 1.7 million ,efugees from neighboring countries. Repatriation was considered complete in July 1995, one year ahead of schedule. 2. A Critical Juncture. The war's end, transition to a multi-party state and reintegration of the country call for a reassessment of the pace and content of Mozambique's development and reform program. The reform program, begun during the war, was gradual and halting. Now, with peace, comes the challenge of pushing forward on reform, and doing so against a backdrop of some economic  -2- instability, crumbling infrastructure and severe human, institutional and financial capacity constraints. National reintegration and the demographic changes resulting from resettlement and demobilization will likely lead to shifts in the level of coverage and spatial priorities of development programs. The Government recognizes that its limited resources need to be focused on those activities to which it is uniquely suited, such as the provision of health care, education and basic infrastructure. Beyond this, a suitable environment to induce private sector and NGO efforts toward development is what is essential. Mozambique's donor partners are also examining their role and shifting emphasis from emergency and humanitarian assistance to supporting longer term priorities. 2. Social and Economic Context 3. Povery. The overwhelming majority of Mozambicans live in poverty. Available data are sparse, but poverty indicators for Mozambique are low by any measure, and are at the bottom for Sub- Saharan Africa or for the group of lowest-income countries (Box 1). Eighty percent of the total population lives in rural areas, two-thirds of them in absolute poverty. Rainfed subsistence agriculture leaves the rural poor particularly vulnerable to drought and natural disasters. This vulnerability had been compounded by the destruction and displacement of war. The average daily caloric intake in Mozambique is just 77 percent of the daily estimated requirement, while the average for Sub-Saharan Africa is 93 percent. Chronic malnutrition is estimated to affect 30 to 40 percent of Mozambique's children, with six percent believed to be acutely malnourished. Illiteracy rates are 25 percent higher than average for Sub-Saharan Africa. Meanwhile, the population growth of 2.7 percent per annum erodes improvements made in the standard of living. A Poverty Assessment is now being carried out by the Government (complemented by a Bank-assisted Participatory Poverty Assessment which will provide input on community needs), designed to clarify the depth and nature of rural and urban poverty in Mozambique. 4. Social Services, Mozambique's social services were decimated by war. One-third of all rural health units were destroyed or closed; today, an estimated 60 percent of the population lacks access to health services. Roughly three-quarters of the total population lacks access to safe water; in the rural areas less than 20 percent is served. Fifty percent of child deaths in Mozambique's hospitals are attributable to common, treatable diseases such as malaria, measles and acute respiratory infections. HIV infection is limited in Mozambique, but increasing rapidly. Infant mortality (162 per thousand live births), under five mortality (283 per thousand live births) and maternal mortality (1,100 per hundred thousand) are all over one-third higher than the average for sub-Saharan Africa. Nearly 70 percent of the primary school network has been closed down. 5. Progress on the Social Agenda. Since the end of the war, emergency programs have supported the resettlement and reintegration of displaced persons and demobilized soldiers in agriculture, primarily through provision of seeds and tools. These programs, in concert with rural infrastructure rehabilitation and market liberalization, have stimulated agricultural production, thereby improving food security and increasing rural incomes. The presence of land mines in some rural areas, however, continues to slow transport and agricultural expansion. This is becoming a less relevant factor as demining programs proceed. Emergency food distributions are now being phased out, and a Poverty Alleviation Unit has been established in the Ministry of Planning and Finance (MOF) to design and monitor poverty reduction measures. The Government has also begun a review of the safety net system to reorient efforts toward disaster preparedness and the establishment of a more permanent system for vulnerable rural groups. Education and health expenditures, rising between 1990 and 1993, declined in real terms by 15 percent during 1993-1994 as a result of the unexpectedly large shift in resources required to carry out elections, demobilization and resettlement programs. In 1995, social services expenditures are budgeted to  -3- increase by 43 percent in real terns. Per capita recurrent expenditures for social services nonetheless remain lower than their early 1980s level. 6. The Economy. Mozambique's economy is based primarily on small-scale agriculture. Significant economic potential lies in the country's vast and relatively untapped natural resource base. This affords opportunities for continued growth in the agriculture and energy sectors, if they are well managed. The country's transportation corridors and ports, serving numerous landlocked countries and the Transvaal, South Africa's rich agricultural region, hold great promise for growth in the transport sector. In the past, Mozambique's economic potential was constrained by central planning, a civil war in which infrastructure was routinely sabotaged, and an exodus of skilled labor. In 1987, when the Government's reform program was launched, GDP was only two-thirds its post-independence peak (1980), and exports were just one-third. The reform program has begun to transform the economy from one that was dominated by state enterprise toward a more private sector, market-oriented economy. Since the peace accords in 1992, economic growth has begun to rebound. Mozambique, however, has a particular vulnerability with its heavy external debt burden and its exceptionally high dependence on external assistance. 3. Economic Trends and Policy Reforms 7. The Adjustment Program. Mozambique began to introduce market-oriented reforms in the late 1980s, before the war was over. Early reform efforts, during 1987-1989, achieved significant fiscal improvements; inflation was reduced, the exchange rate depreciated, and prices were substantially liberalized. Enterprise reform was also initiated, large numbers of small and medium size state enterprises were privatized and budgetary subsidies to other state enterprises were significantly decreased. Since 1990, prices and trade have been further liberalized; a market-based foreign exchange system has been established; tax, tariff and financial sector Box 2:7 Adlust .0=t'7Qjjgra ioas reforms have begun; and public C; Ban has etended four a t rd t M The expenditure management has Rehabilitation Credit ( ficused on redtcing macroeconomic imbalances been improved. Significant and prie nd exchane* rate distortions. The filow-up Rehabilitation Credit liberal ization of the economy has (F90 sought to mprove: the allocation of secaoral expenditures,: tighten taken place, but institutional credit policy and begin trade rorms : and state enterprise restructuring. The reform has been slower and Economic: Recovery Creditr(FY92) focused on the foreign exchange market, capacity continues to be weak, privatization measures: and rehabilitation of the financial sector. The Second 'Economic Recovery Progrm (FY94), which is on-going, has emphasized while stabilization has remained comi ew 1 IWe hh sn-mgha empO" while tabiliationhas reainedpolicy and institutional reforms in fiscal plCY,cetabnkfcios elusive. monetary policy, the financial sector and enterprise reform. The IMF has also provided assistancxe: through, a Structural Adjustment Facility (1987-90) and 8. Economic Response. anncStructural,Adjustmen Facility (ESAF) which is ongoing. in The end of hostilities in 1992, June )99S he JMExeciive Directorspproved an exension of the ESAF to coupled with better weather and Deember 1995. continued reform, boosted GDP by 19.3 percent in 1993 and 5.4 percent in 1994. GDP has risen by one-third since 1990, while exports have grown nearly 50 percent. The bulk of growth has come from small scale agriculture spurred by resettlement, and the informal sector. Still, in 1994, manufacturing output continued to fall for the fifth consecutive year as negative effective protection to domestic industry, resulting from inadequate customs administration, severely undermines its capacity to compete against imports. 9. Fiscal and Monetary policy, The focus of fiscal policy is reduction of the fiscal deficit (before grants), which in 1994 rose from 22 to nearly 30 percent of GDP. The Government succeeded in  -4- eliminating net bank borrowing to finance the budget, while continuing to expand expenditures, mainly for investments. This, however, was done through external aid financing, which now accounts for 70 percent of the budget. Some progress was made in raising fiscal revenues, but fiscal imbalances worsened in 1994, reflecting increased expenditures associated with demobilization, elections, and the democratization process (5.7 percent of GDP); declining customs revenues (2 percent of GDP); and increased public investments (4.3 percent of GDP). Fiscal revenue generation continued to be weak over the first half of 1995 as well, falling 13 percent below the mid-year target. Efforts to increase fiscal revenues will include aggressive customs administration reform designed to increase customs collection and eliminate negative protection in the formal sector, and accelerated privatization that will convert loss-making enterprises into tax-paying private entities. Improvements in counterpart fund collection and management systems could also mitigate against unanticipated budget shortfalls. Yet, even given these prospective gains, the existing disequilibrium in fiscal balances will only be reduced gradually, with periodic macroeconomic crises likely to result from internal and external shocks. On the monetary side, increased spending for elections and demobilization, weak adherence to credit ceilings, and leakages from the banking sector resulted in monetary growth above programmed targets in 1994, but below 1993 rates. Money supply rose by 49 percent in 1994, against a target of 40 percent. Tighter credit ceiling controls and a rediscount policy (to control commercial bank borrowing from the central bank) were introduced in 1995 to further control Box 3. Statistics: Availabil6 and Accuracy monetary expansion. In the first six months of 1995, money supply increased by only 12.8 Mozambique's national economic and social statistics are percent, relative to a 15.8 percent target growth limited in scope and of suspect quality-- a consequence of rate agreed upon with the IMF. war and weak human resource and institutional capacity for data collection and statistical analysis. Inadequacies 10. Fiancial Sector. Mozambique's in data complicate planning exercises and comparative analyses. Much of the data appear inaccurate and financial sector stands in urgent need of reform. internally inconsistent. In particular, due to inadequacies In the late 1980s, the banking system was highly in national accounts, the recorded level of GDP is under-developed, effectively consisting of two believed to be significantly underestimated and investment state-owned banks, the Banco de Mo9ambique figures are likely to be over-estimated A revision ofGDP (BM) and the Banco Popular de Desenvolvimento accounts within the next year couald substantially alter Mozambique,s key macroeconomic indicators and the (BPD), and a smaller prvate bank. In 1987, losses assessment of macroeconomic prospects For example, Y, equivalent to over 14 percent of GDP were written as according to some preliminary indications, GDP were off by the state banking system. The BM, which actually 50 percent higher and 30 percent of public performed central banking functions as well as investment were reclassified as public consumption, then holding over two-thirds of all commercial loans, gross investment and gross domestic savings in 1994 acted primarily as a source of funding for would be about 35 and -2 percent of GDP respectively, compared to the current off.cial estimates ofabout 60 and parastatals. In 1992, the central and commercial 5 percent, respectively. Fiscal indicators would similarly banking functions and accounts of the BM were appear more viable, with total public expenditure and devolved to the Bank of Mozambique (BM) -- the public investment expenditure at approximately 21 and 11 central bank -- and the Commercial Bank of percent in 1994, in contrast to current official estimates of Mozambique (BCM) which accounts for over half about 47 and 24 percent. The revision of Mozambique 's the country's bank credits. Still, the 1992-1993 national accounts is an immediate priority being balance sheets for BCM revealed substantial addressed by the Government with assistance from the losses. At the time, immediate privatization was World Bank and others In the meantime, projections led ot be the bank'srexremelyioor Iusingofficial dfata should notobe taken asdefinitive. ruled out because of the bank's extremely poor financial situation and its importance in the nation's payments system. Instead, the Government chose to restructure BCM into a commercially viable entity that could later be privatized. The BCM restructuring strategy -- supported by the Bank's FY95 SERC -- included transferring losses from BCM's balance sheet, curtailing loans to uncreditworthy borrowers, creating a "twinning" arrangement with an external bank to improve  -5- management, and restructuring the largest non-performing parastatal borrowers. The impact of these actions is difficult to assess as BCM continues to receive qualified audit statements, and past bank losses are not available for comparison. There are, however, some improvements. Lending to loss-making borrowers has stopped, forcing many enterprises to close. "Other assets" (defined as items in process of collection and/or credit leakages) which were 47 percent of GDP in 1991 when BM and BCM accounts were first separated, have since declined and are programmed to reach nine percent of GDP by the end of 1995. Considerable -- but declining -- overdrafts with BM, however, persist. BCM's overdraft with BM at the end of 1994 stood at Mt496 billion (US$75 million), dropping to Mt268 billion (US$30 million) in July 1995. In March 1995, faced with the consequences of slow and partial banking reform, the Government decided to privatize both BCM and BPD as quickly as possible, with finalization of the BCM process by September 1996. The process of privatization involves the selection of a sales advisor, followed by a market valuation, preparation of a sales prospectus, and survey of potential eligible buyers by March 1996. Despite the entry of two new private banks into Mozambique over the last two years, BCM and BPD still account for about 70 percent of the banking system and an even higher proportion of bank branches outside Maputo. Given the dependency of the payments system on the two public banks, the process of privatization and subsequent restructuring of the banking sector is unlikely to be a smooth process. 11. Public Enterprise Sector. Public sector reform, and particularly privatization, have markedly accelerated in the past year. The privatization program is running ahead of the schedule agreed upon in the context of the SERC operation. Direct subsidies to state-owned enterprises, which represented 12 percent of GDP in 1987, are now estimated to be less than one percent of GDP, although implicit subsidies continue in the form of non-payment of counterpart funds, inter-enterprise debt, or bank credit. The estimated share of the gross value of industrial output produced by state-owned enterprises stood at close to two-thirds in 1990, dropping to just under one-third by August 1995. Rapid progress has been made in privatizing small and medium scale firms, with 504 privatized by the end of August 1995 out of an estimated 1,000. The privatization of large firms, after a slow starting period, is now moving more quickly than planned. In 1994, in connection with financial sector reforms taking place under the SERC, the Bank undertook a review of the 50 largest borrowers of the banking system. The 14 largest non- performing borrowers were all parastatals. Eleven of these were slated for immediate privatization, with seven to be privatized by the time of third tranche release (end of 1995). As of the end of August 1995, five had already been privatized. In addition, 27 other large enterprises have been sold or are in final negotiations for sale, with 19 of these privatized in the past year alone. The remaining three of the original 14 non-performing parastatals were selected for restructuring: the State Enterprise for Agricultural Marketing (AGRICOM); Linhas Aereas de Moqambique (LAM, the national airline); and Caminhos de Ferro de Moqambique (CEM, the national railways). AGRICOM's debt has been assumed by the Government. A restructuring plan is underway for LAM, which has already discontinued some routes and leased several aircraft. CFM is now working with key donors on a far reaching, comprehensive restructuring plan, including a significant increase of private sector involvement in the nation's ports and railways. 12. External Imbalances. Mozambique's large current account deficit reflects the country's high level of indebtedness and weak productive capacity, which in turn leads to both low export revenues and high import demands. External financing requirements have been met through substantial external aid in the form of import financing and debt rescheduling. In 1989, the current account deficit before grants was 59 percent of GDP. The deficit fell to 52 percent in 1991 as exports expanded in response to a more favorable exchange rate policy. Imports rose from 85 percent of GDP in 1991 to 96 percent in 1994, as drought, demobilization, reintegration and elections increased import needs. As a consequence, the deficit before grants rose in 1994 to 59 percent of GDP. Excluding special programs, the 1994 current  -6- account deficit before grants was 51 percent of GDP, down from 54 percent in 1993 and lower than programmed for the year. In 1995, the deficit before grants is projected to decline to 50 percent of GDP. 13. Prices, Exchange Rates and Trade. Substantial price and exchange rate liberalization has taken place. The share of prices subject to control is now only 5 percent of GDP, compared with 70 percent in 1986. Administered consumer prices are limited to two basic foodstuffs (wheat and wheat flour), rent, utilities and transport fares. Some price and marketing distortions still remain within the agricultural sector, especially in the markets for some important commodities such as cashew and maize. The cashew industry, for example, has been subject to pricing, licensing and export restrictions. These restrictions have encouraged the export of processed cashews despite evidence that domestic processing may produce negative value-added. To improve foreign exchange allocation, the various foreign exchange windows were unified -- including import support funds -- into a market-based system in April 1992. Under the system, the official exchange rate is deternined by market forces. Trade reforms have begun, including a rationalization and reduction of tariffs, but weak customs administration has led to ineffective collection of import taxes and widespread smuggling. Initial steps toward a comprehensive customs reform are being taken by the Government. There is also a need for further rationalization of the tax regime through the introduction of a value added tax system. 14. Lessons Learned and Assessment. During the war, the Government was hard pressed even to pursue a partial and relatively slow pace of economic reform. Its track record in sustaining policy reforms has been good, particularly considering these difficult circumstances, and considerable economic growth has taken place over the last years. Nonetheless, stabilization and structural reforms are far from complete. Immediate action is needed in a number of areas. Domestic inflation needs to be held down. Accelerating the privatization of state-owned enterprises and particularly the state banking system, along with more effective monetary control and banking supervision from the Central Bank, is critical. Customs reform and improved duty collection are also priorities to allow domestic industries to compete against imports and expand into export markets, thereby increasing revenues and improving fiscal balances. In addition, numerous other actions -- providing education, skills training and health care; reforming agriculture and land policy; and creating an environment conducive to private investment -- are needed. Consequently, although the emergency is over, the challenges confronting the Government are greater than ever. The current Government appears firmly committed to deepening the reform process, as suggested by the policy agenda it presented at the March 1995 Consultative Group meeting, and the extreme poverty the country faces suggests urgency. However, the Government's ability to implement its reform agenda will depend critically on consolidation of peace and political stability. Given the legacy of war -- and the need to safeguard stability and strengthen democratic institutions -- future interventions need to be carefully designed, mindful of capacity constraints and the democratic process just established. B. External Environment 15. External Financial Flows. Mozambique's dependence on high levels of external assistance leaves it extremely vulnerable to fluctuations in aid availability. Aid flows account for over half of GDP and about two-thirds of the Government budget. The last Consultative Group meeting held in March 1995 demonstrated that while donors' support for Mozambique remains strong, tangible progress in specific areas such as governance, budgetary transparency, and banking reforn are increasingly seen as prerequisites for continued assistance. For 1995, donors have committed roughly US$780 million for Mozambique, 23 percent of which is IDA funding. Some 55 percent of the total amount is earmarked for investment and other programs, 29 percent for import support, and 16 percent for food aid. These  -7.- amounts meet both the level and composition of Mozambique's financing requirements for the year. It will be important to continue to achieve an appropriate balance between import support and investment financing. 16. External Debt Structure and Management Strategy. At the end of 1994, Mozambique's disbursed external debt was estimated at US$5.5 billion, or 3.7 times GDP. Seventy-five percent of the debt was owed to official bilateral creditors; US$2.1 billion to Paris Club creditors and US$1.9 billion to other bilaterals -- US$400 million of which consisted of interest arrears. Less than 25 percent of Mozambique's debt was owed to multilateral creditors: US$714 million to IDA, US$207 million to the IMF and US$319 million to other multilaterals including the African Development Bank. Consequently, Mozambique faces essentially a bilateral debt burden. IDA debt service accounted for US$5 million or 5 percent of Mozambique's total debt service payments in 1994, equivalent to 1.3 percent of goods and services exports. The Government's strategy to manage its external debt has been aimed at: (i) obtaining debt relief to the maximum extent possible under existing practices from the Paris Club; (ii) negotiating comparable terms from non-Paris Club official bilateral creditors; and (iii) contracting all new external financing on highly concessional or grant terms. In October 1994, the Paris Club extended Mozambique's March 1993 agreement through June 1995. A further extension is under consideration. Mozambique has also begun restructuring efforts with its non-Paris Club creditors. 17. Debt Sustainability. Servicing Mozambique's accumulated external debt diverts significant resources from productive investments to debt service. At the end of 1994 the country's solvency ratio (the ratio of the present value of debt service to average exports for the last three years) was over 1,000 percent, five times what is considered a manageable debt service burden. An assessment of the liquidity situation, assuming the base case macroeconomic scenario, shows that projected liquidity ratios (debt service as a percentage of goods and services exports) would not reach manageable levels of 25 percent or less until the year 2003. The liquidity ratio is calculated assuming (i) restructuring of eligible Paris Club debt under Naples terms; (ii) comparable treatment of non-Paris Club bilateral debt; (iii) disbursements of IDA of roughly US$200 million a year until the year 2000 and US$210 annually thereafter; and (iv) no borrowing on non-concessional terms. While IDA's share in total debt service payments (after debt relief) will increase from 5 percent in the next few years to over 20 percent by the year 2004, total multilateral debt service (mainly to the IMF and the African Development Bank) will decline from its current 10 percent of exports of goods and services to just 5 percent of exports. 18. Regional Context. Mozambique is strategically important within a regional context. Mozambique's three international transit corridors and ports represent vital shipping routes (disrupted during the civil war) to South Africa, Malawi, Zimbabwe and other neighboring countries. Regional dynamics have also become prominent in the water sector. Recognizing that water problems are widespread in the region, most Southern African countries, including Mozambique, signed a Protocol in September 1995 on the management of transboundary watercourses. Bilaterally, Mozambique's economic performance is strongly influenced by changes in South Africa. On the positive side, the removal of economic sanctions against South Africa has opened up further opportunities for investment and trade. On the negative side, domestic unemployment in South Africa is likely to contribute to a continued reduction in workers' remittances from Mozambican laborers in the South African gold mines. 19. Natural Disasters. Periodic droughts, which in the past have occurred roughly on a cycle of seven to ten years, cyclones and other natural disasters will continue to affect Mozambique's economy. Food aid programs, now being phased out, enabled the Government to cope with emergency situations and avoid famine and rural devastation. There is now a need to encourage drought-resistant crop  -8- production and to establish and improve early-warning systems. The GOM, following a national review, anticipates a shift of safety net programs away from a focus on urban populations and food aid programs, toward a more rural-oriented system with an emphasis on disaster preparedness. In the future, improved collaboration among the GOM and neighboring countries has the potential to mitigate against drought situations by anticipating such events and managing water supplies accordingly. C. THE GOVERNMENT OF MOZAMBIQUE'S DEVELOPMENT OBJECTIVES AND POLICIES 20. Overview, The primary goal of the Government is to reduce poverty through economic and social development. The GOM has prepared a detailed national poverty reduction strategy that emphasizes the importance of improving rural livelihoods by encouraging agricultural growth through marketing reforms, rural infrastructure investment, and land policy reform. Investments in human capital and social infrastructure are equally essential elements. This poverty reduction strategy is highly complementary to the pursuit of macroeconomic stabilization and growth policies aimed at private sector development and tapping the potential of the Mozambican economy. The GOM intends to focus on five basic areas: (i) consolidation of democracy and improved governance; (ii) resettlement and reintegration; (iii) human resources development; (iv) reduction of macroeconomic imbalances; and (v) promotion of an aggressive growth policy. 21. Consolidation of Democracy and Improved Governance. The Government has pledged to: (i) develop democratic institutions; (ii) decentralize government; and (iii) strengthen legal institutions and processes. Democratic institutions, such as the Legislative Assembly, are to have their structures, roles and procedures clarified. A Code of Conduct is being prepared for civil servants. Customs administration will be reformed. A free press will be guaranteed. Decentralization will progressively shift administrative and financial management authority toward local govemments, while strengthening local governments' capacity. The Govemment also intends to reinforce legal processes through reform of the legal system; intensify financial accountability; and control corruption through targeted legislation, increased inspection authorities and the use of incentives. 22. Resettlement and Reintegration. Over four million displaced persons and refugees have resettled in Mozambique, with some support from government institutions, NGOs and United Nations agencies. To facilitate resettlement and restore agricultural production, the Govemment intends to focus on providing potable water to rural areas, improving agricultural productivity, and rehabilitating roads and other marketing infrastructure. The Government plans to develop vocational training programs for demobilized soldiers, and work with donor agencies to advance projects to promote employment. 23. Human Resources Development. The Govemment plans to increase the budget for recurrent real expenditures in the education and health sectors by a total of 43 percent in 1995. Improvements will be sought both in the coverage and quality of education services, and the sector will be opened to private initiatives over the next five years (Box 5). A coherent national health strategy has now been developed and is to be supported by an integrated sector investment program with funding from a consortium of donors, including IDA. The technical and management capacity of the Ministry of Health will be developed, the coverage of health infrastructure -- particularly basic health care facilities in rural areas -- will be expanded, additional health technicians will be recruited, and greater emphasis will be placed on the cost and quality of services, both preventative and curative. The program is designed to increase health coverage from 40 to 60 percent of the population by the year 2000, and to emphasize improvements in child and maternal health services.  -9- 24. Reduction of Macroeconomic Imbalances. The GOM is planning strong measures over the next year to stabilize the economy, particularly to reduce inflation. The Government's agenda for reducing inflation includes controlling monetary expansion and privatizing the two state-owned banks. Fiscal efforts will focus primarily on reducing the deficit, restructuring budgetary expenditures, and recovering revenue losses from customs. The military budget in 1993-1994 was cut nearly 25 percent in real terms, with another 37 percent reduction planned by end-1995. The GOM will also seek to improve transparency in budget allocation and control by publishing the government budget annually, and submitting to the Assembly the final result of the budget. 25. Promotion of an Aggressive Growth Policy. The Government plans to facilitate private sector development, particularly in exports and agriculture, and the rehabilitation of social and economic infrastructure. Private sector development will emphasize measures to reduce inflation, accelerate privatization of state enterprises, and reform the financial sector. Initial efforts to rehabilitate Mozambique's infrastructure will focus on rural roads and communication systems, the main national and international transit corridors, schools and health posts in rural areas and large cities, potable water supplies, sanitation in large urban centers, and environmental protection. A particularly important component of the reform agenda is customs and tax reform. 26. Constraints. The GOM has emphasized the need to continue a carefully sequenced approach to the reform process to ensure that social and political upheaval does not endanger the country's fragile peace. The transition to democracy has been relatively smooth and successful, but the newly formed democratic institutions are still in their infancy and the demobilized soldiers are not yet fully integrated, socially or economically. Security in rural areas remains tentative, and urban crime is escalating. The Government therefore underscores that stability and security present constraints on the timing of development initiatives. In addition, Mozambique faces absorptive capacity constraints. The decline of the education system and social displacement have severely diminished the supply of educated labor. Institutions are on the whole either new or weak. Domestic financial resources are minimal as a result of low income levels, lack of financial sector services and weak revenues. The country's basic infrastructure is aging and in disrepair, which affects all sectors, but takes a particularly heavy toll on the most immediately promising sector, agriculture. These constraints do not lend themselves to quick solutions and will necessarily slow the pace of economic growth and poverty reduction. 27. GOM/Bank Policy Dialogue. The Bank and the Government of Mozambique have a collaborative and highly productive dialogue. To better understand the directions and priorities proposed by the current Government, the Bank hosted a collaborative strategy retreat in Mozambique in February 1995, during which Government representatives and Bank staff were able to discuss the country's changing strategic priorities. The retreat helped stimulate dialogue between the GOM and the Bank, and within both groups, and provided input for this CAS. While the Bank and the GOM are in general agreement on strategic objectives, some differences exist, mostly with regard to the timing and priority of specific reforms. Given the immediate need to restore macroeconomic balance and sustain hiigh growth rates, the Bank tends to urge an acceleration in the reform process, i.e., in cashew export and pricing liberalization, privatization of large parastatals, and restructuring and increased private sector participation in the railways. The Bank is also encouraging the Government to increase social sector expenditures and make more rapid progress on land policy reform.  -10- D. The Bank Group's Country Assistance Strategy 1. Objectives and Strategic Priorities 28. Objectives. The objective of the Bank's assistance to Mozambique is to support the Government's program for poverty reduction through sustainable economic growth. A high proportion of Mozambique's population is poor by virtually any measure, and there is too little wealth to rely to any significant degree on redistributive policies for sustained poverty reduction. Economic growth is therefore an imperative. However, the pattern of growth and the targeting of social services can maximize the impact of growth on poverty reduction (Box 4). A poverty reducing growth pattern in Mozambique will involve a shift of resources and opportunities toward the rural areas where the poorest populations live. Fortunately, the greatest potential for immediate overall growth - and increasing rural incomes - lies in smallholder agriculture. Greater emphasis on human resources development will also be required, both to provide capacity for economic growth and to alleviate poverty. ... .. . ... MozstbjquB is c08drcd beXoocst wrntr ia1ie wol& s; n Economic grwth is ter.ef.ore: s. p.ad iiiaT fE4i;a i ruing pter ofgoth4, bysh aoiosua4nm m hv.lt Usn.i; Wil twm Strategic Elements Actions Poverty Impact Increasing the rate ofgrowth * Macroeconomic stabilization * Expanded economic opportunities and * Privatization increased productivity, employment * Support for high growth potential and incomes sectors * Increased government revenues and * Investment code, financial sector, reallocation of expenditures toward marketing and customs reform long-term poverty reduction efforts and * Targeted training and capacity pro-poor service delivery building in the public sector Fostering a poverty-reducing * Support for smallholder agriculture * Growth and sustainable development in pattern ofgrowth * Expansion and improvement of rural areas (where most of the poor social services and infrastructure, live) facilitated by a shift in resources i.e., roads and water in rural areas to those areas * Improved management of natural * Increased food security resources and environment * Expanded economic opportunities and * Promotion of foodgrain and cashew cash earnings production, and non-farm rural employment _ Developing human resources * lncreased provision and quality of * Improved health and higher quality of basic health care and primary life education --particularly for women * Provision of skills for increased and girls productivity and income * Lower rate of population growth, decreasing the dependency burden on communities and the resource burden on Government Improving safety nets * Assessment and analysis of the * Better targeted and more effective extent and depth of poverty interventions to reach the poorest * Support to rural community funds populations Strengthening partnership * Integrated sector programs * Increased coordination and * Aid coordination effectiveness of the range of poverty * NGO outreach reduction efforts * CG chairmanship * Consensus around a common understanding of poverty, and reinforcement of Government, NGO and donor commitment to poverty reduction  -Il1- 29. Strategy. The necessary elements for growth and poverty reduction in Mozambique fall into three basic categories: * restoration of a stable macroeconomic framework and removal of cross cutting impediments to growth * human resources development * promotion of high growth potential sectors Macroeconomic stability is fundamental to growth and private sector development throughout the economy. Actions to address other cross cutting impediments to growth, such as promoting private sector development, increasing absorptive capacity, improving public sector management, and more fully taking into account issues linked to gender, population and environment, would likewise facilitate economywide growth. To build greater potential, further efforts and investments are required in human resources development and high growth sectors, such as agriculture. The CAS thus focuses on a combination of priority programs in the above three areas, many of which are complementary. In addressing these priorities, emphasis will be placed on increasing the effectiveness of assistance, through improved portfolio management and implementation, high impact economic and sector work and new design features in lending operations; selective new lending; and aid coordination. Macroeconomic Stability And Other Cross Cutting Impediments To Growth' 30. Macroeconomic Stability. The maintenance of a satisfactory macroeconomic framework is a fundamental requirement of growth and poverty reduction. The immediate macroeconomic objectives are spelled out in agreed programs with the Bank and the Fund: (i) completing the privatization of state- owned banks and large parastatals (ii) continued strengthening of the central bank's regulatory and supervisory roles; (iii) maintaining an appropriate foreign exchange regime; (iv) initiating a comprehensive customs reform; (v) improving public investment and expenditure decision-making; and (vi) removing export constraints for key products such as raw cashews. Further trade and tax reforms, including the adoption of a simplified value-added tax, are also important over the medium term. The Bank is supporting these objectives through adjustment lending and economic and sector work such as public expenditure and fiscal management reviews. 31. Private Sector Development For the private sector to serve as the driving force for growth in the Mozambican economy, significant reforms and investments are needed to further the transition to a market oriented economy. In the near term, the strategic focus will be on customs reform and regulatory reforms to simplify licensing and investment procedures, labor regulations and land legislation, which appear to be the most powerful disincentives to the private sector. Marketing reforms in agriculture are crucial, as is the acceleration of the privatization of large parastatals, which still account for a considerable share of employment and output. Infrastructure rehabilitation and development of the energy and water sectors will also facilitate domestic and foreign private investment. Two large projects -- the ongoing rehabilitation of the Cahora Bassa hydroelectric project and the Pande gas development project -- are important vehicles for increasing private sector participation in the economy. Foreign direct investment currently accounts for some US$300 million of the US$900 million in investment applications that the Government authorized between 1986 and 1994. The Bank Group, including the IFC, is active in many aspects of private sector development, ranging from sponsoring private sector B Bank activities supporting each of the CAS' objectives are listed by objective in Table 1.  -12- development conferences, to economic and sector work in energy and tourism, to lending operations supporting privatization and infrastructure rehabilitation. 32. Absorptive Capacity Constraints. As a consequence of Mozambique's recent history, absorptive capacity constraints are prevalent in virtually every sphere of activity and will both limit and influence the pace and direction of growth. They include human resource constraints, institutional capacity constraints, financial constraints and infrastructure constraints. Most of the ongoing Bank-supported investments, in addition to supporting infrastructure rehabilitation, have specific measures built into their project designs to train staff and improve institutional capacity. Over the next years, removing capacity constraints will continue to be a key thrust of the numerous programs described in this CAS, particularly those related to macroeconomic stabilization, private sector development, improved public sector management and human resources development ( paras. 30, 31, 33 and 36 respectively). 33. Public Sector Management There is a need in Mozambique to increase public sector efficiency and transparency, both to improve governance and increase effectiveness. The Government has taken the lead on addressing governance issues, highlighting them as key priorities in their development strategy and establishing a GOM/donor working group. Civil service reform, decentralization, devolution and improved public sector management are also needed to increase pubic sector effectiveness. The Bank is assisting in the area of public sector management by providing support to help identify improvements in basic data collection and statistical analysis. Public sector capacity building is also being supported by the Bank through components of ongoing investment operations and several capacity-building, local government reform and technical assistance projects. 34. Gender Issues and Population. Mozambique's protracted civil war has left the country with an unusually high number of female-headed households and a quickly growing population with a shattered system of social services. The ongoing Participatory Poverty Assessment is examining constraints to women's economic activities and access to social services, and further study will likely be required to identify the unique challenges facing women and female-headed households. It is assumed, however, that while facing all of the general economic constraints women have less access to social services and are disproportionately burdened by responsibilities traditionally relegated to females, such as family health and education. To address gender differences in social services provision, the Bank-assisted projects in health, education, water and agriculture will target service delivery to women. 35. Environment Mozambique's economy is essentially reliant on its natural resource base. Its prospects for economic growth, as well as the productivity and quality of life of its population, are therefore closely tied to the natural environment. The environmental challenges facing the country include high urban population growth rates; increasing levels of pollution; inadequate access to clean water and sanitation; unchecked land clearing for urban fuelwood supply; decreasing soil productivity; and degradation of coastal environments, including damaged mangroves, erosion, and declining productivity of marine fisheries. As a first step in tackling these concerns, the Government has prepared a National Environmental Management Program (NEMP). The Government also recently created a Ministry for Coordination of Environmental Affairs, as well as a permanent Land Commission to address concerns related to property rights. The Bank's support for these efforts includes integration of environmental concerns into sectoral and macroeconomic policy dialogues and lending, direct support to environmental interventions including assistance for the preparation of an environmental support program, and collaborative programs (with FAO/CP and GEF) in forestry, wildlife, and coastal zone management. Human Resources Development  -13- 36. Human resources development is a crucial component of the CAS, with tremendous potential for direct poverty alleviation, improvement in the quality of life and sustainable economic growth. Inadequate social services aggravate poverty by limiting employment opportunities and human productivity. Immediate priorities in the CAS are provision of basic health and education services, training and clean water. An integrated sector program in health - presented to the Board with this CAS - is designed to support a broad range of sector policy reforms and investments, including the development of a strategy and implementation plan for AIDS control. A similar effort has begun in the education sector, where a restructured ongoing education program and economic and sector work are providing the groundwork for a planned integrated education sector investment program (Box 5). In addition, training is necessary for many already in the work force who are not in a position to return to formal education. Training components have been included in many of the ongoing investment operations. High Growth-Potential Sectors 37. Small-Scale Agriculture Small-scale agriculture merits primary focus among high potential Box 5: Primary Education for Most by 2001 Primary school enrolmentin Mozambique is presently about 55%, with a gross admission ratio of some 60%. The Government iscommttdto raisingteso ratios to:65% and86%, respectively, by the year 2001. The Government is also focusing efforts to increase the overall participation of girls in primary education by targeting programs in the northern and central 0regions of the country where girls' enrollment is relatively low (about 40%). The objective is to bring the national share:of girls; in the studentpopulation in line with that:of southem Mozambique (48%) by 2001. These are ambitious targets, e0pecially considering the present limited capacity of the Ministry of Education (MOE) and the pressures on the; basic edoo system resulting fronithe return of some7 1.7million refugees and 3.2 million internally displaced persons. :htheGoerme proposes to respond to thisrenormous challenge through massive (school construction(abourt 1,500 new clasrooms per yeara teacher training programs targeting the rural areas accompanied by a substtial xpanion of learningW mals for bth rural tand urban students. The resources required to achieve thes goals in prinW y dtionit anountooer US$150 million in development expDenditures alone for the period 1997- 2001. Recurrentxeitures,are, in ,tur,xcteto increaseby 10%eachyear over the same period (after initial increase of about 20%4an 10% in 1995 and 1996, respectively). Mechaisms are bewin ito complement the limit MOE Projct impeenain capacity. The pre ent strategy empaizes the use~ of commu:nity and NGO resourcea in the Rural Schools Construction Progxram. ~The n going EFucation II project spiloting:variousOic0*iy/NGO partershps in the construction:of some 750 rural claroom with uu0if success int firsflots built. Sintilarly,, a successful4distance education pilot 0for teachers wil be expandeinto a widerprogram totratlarge numbers ofteahers brequired by the ex ding system. The MOE and all major donorsto education in Mozambique have enthusiastically endorsed the development of an integrated program -the Education Sector Recovery Program -- to commnence in 1997(8. The program would be based on an Education: Sector Policy and Stra (ESP). The partners would abide by the following general principles: (i) that the ESP will serve asI th-raeork fo a contributions to the sector; (ii) based on the ESP the MOE will develop a five-year rollingtitntestmentlprogram and a'annual budget for recurrent costs that will be discussed and updated annually with all donors: (iii)) donorsupport for4 therecurrent udget will be channeled to the iprovinces using a single set of plan, eting, disur and accountig m0e0ch 3ims; and (v) procurement, monitoring and evaluation procedures willfbe coordinated and consolidatedgradually. private sector activities. The transition from subsistence farming to small-scale commercial agriculture  -14- will encourage poverty-reducing growth by providing resources and opportunities to the poorest segments of society, while tapping the country's greatest potential for immediate economic growth. The resettlement of displaced persons and demobilized soldiers in rural agricultural production has already produced a considerable supply response that can be sustained and built upon. To build on this momentum, export and marketing reforms -- particularly with regard to cashews and other export crops - - need to be undertaken to restore terms of trade that will encourage agricultural expansion. Disincentives to food production -- such as food subsidies -- should also be phased out, while providing adequate safety nets for the poorest segments of society. The rural road network should be rehabilitated; transparent and efficient processes for the equitable allocation of land should be established; agricultural research and extension programs should be strengthened; and access to social services for the rural population -- particularly women -- should be improved. These elements will be part of an IDA- supported sector policy and investment framework to rationalize Government and donor-financed investments, building on the findings of collaborative sector work and a series of follow-up seminars. Also as a part of this work, Bank-supported ongoing agricultural projects, which have suffered from lack of counterpart funds and clear policy directions, are being restructured. Associated with this preparation, the Bank is carrying out a series of marketing studies on major export crops (e.g., cashew and cotton) and will also be providing policy advice with respect to land tenure reform over the course of the coming year. Operations in other sectors are expected to have a positive impact on agricultural growth, particularly those in roads, education, health and water. Moreover, economywide measures, such as tax and pricing reforms, and export promotion, being supported under the structural adjustment operations, are expected to provide increased incentives to agricultural producers. 38. Other High Growth Sectors. Measures to encourage private sector and foreign participation in the Mozambican economy are priorities, as important sources of employment, foreign exchange earnings, technology transfer, training and economic dynamism. The energy and tourism sectors appear particularly promising for private sector development, while the transport sector is increasingly providing private sector opportunities, in addition to a potential increase in public sector revenues. The development of export capacity in energy generation, tourism promotion and the rehabilitation of transport corridors could provide a significant and steady stream of income that would help to fill the foreign exchange gap. To assist in exploiting these opportunities, the Bank is supporting ongoing operations in energy and infrastructure, and additional economic and sector work in energy and tourism. 2. Increasing the Effectiveness of Development Assistance Portfolio Performance and Management 39. Portfolio Description Mozambique's ongoing IDA portfolio consists of 24 operations totaling US$1,196 million. Some US$380 million, or 32 percent, are accounted for by two adjustment credits. The remaining investment portfolio is very diverse. It includes four operations in education, health and food security; three agricultural projects; one urban project; four railway and road projects; three energy projects; an industrial enterprise restructuring project and a small and medium enterprise project; and five capacity building and technical assistance projects in financial and economic management, local government reform, human resources, and legal affairs and public sector management. Just under half of the total portfolio amount has been approved since the beginning of FY93, and US$810 million, or 68 percent, remains undisbursed. The large size of Mozambique's portfolio is a reflection of the extreme poverty and almost unlimited needs of the country. Up until late 1992, the civil war was viewed as the principal constraint on investments in basic services and infrastructure. After the peace accord was signed, the international aid community, including the Bank, responded quickly with new investments.  -15- This response was based not only on the prevailing mood of post-war optimism; it also represented a conscious attempt to reinforce the peace by bringing tangible benefits as swiftly as possible. 40. Portfolio Performance. Implementation of IDA-supported projects, as reflected in the large undisbursed balances, met with very real absorptive capacity constraints, particularly with respect to the availability of trained staff, counterpart funding, and efficient administrative procedures. No new lending took place in FY95, in recognition of both the need to concentrate efforts on improving implementation and to allow the new Government the time to take stock and review priorities. Despite the large undisbursed balances and a continuing disbursement lag of about 20 percent (compared to appraisal estimates), there are signs that portfolio performance is improving. The FY95 disbursement ratio (13.2 percent) is 40 percent higher than that for FY94. FY95 disbursements for investment operations totaled over US$91 million, more than double the totals for FY94. Concrete benefits from the operations are beginning to materialize. Part of the supply response in agriculture over the past two years has been the result of seeds and tools distributed to small farmers under IDA-financed agricultural projects. Road rehabilitation has improved internal circulation, as well as increasing traffic on international routes to South Africa and Swaziland. Primary education and health facilities are rapidly increasing, although the need continues to be great. Capacity improvements are emerging in a number of sectors, including basic engineering services, urban planning, agricultural extension, health and education. In addition, previous efforts to improve financial accountability and auditing in IDA- supported projects are showing results. In FY95, 91 percent of audits due were received, 84 percent of which were unqualified. 41. Portfolio Strengthening Measures. A process of portfolio review and restructuring is underway, and several projects already have been restructured, for example, the Education 11 Project and the Household Energy Project. In some cases, the review, to be concluded in FY96, is expected to lead to project restructuring to accelerate preparation of a sector investment program (e.g., agriculture); in others, it may lead to partial or total cancellation of IDA resources. The bulk of the portfolio is not expected to undergo major restructuring, but the review is expected to result in a series of recommendations (e.g., regarding provision of counterpart funds and simplifying government procurement approval procedures) to accelerate implementation. In addition to the portfolio review, the introduction of integrated sector investment operations, along with the proposed FY96 Fiscal Management Review, is expected to ameliorate chronic problems associated with counterpart funding and recurrent cost financing. The Bank's Southern Africa Department's management arrangements are also geared toward improving portfolio performance. The Resident Mission is heavily involved through direct supervision of some operations, preliminary review of disbursement applications, participation in Government/donor sector working groups, and guidance to the Government on the portfolio review and restructuring. Increased attention to the portfolio has also been facilitated through the introduction in July 1994 of a division chief-level Country Operations Manager, who, as leader of the country team, is responsible for formulating the country assistance strategy and ensuring that the work program is consistent with that strategy. 42. High Impact Economic and Sector Work. Formal Economic and Sector Work is focused on both immediate and longer-term policy concerns of the Government. Examples of work focusing on issues of immediate priority are Impediments to Industrial Recovery (FY95) and the Fiscal Management Review to be undertaken in FY96, while the Energy and Tourism sector work proposed for FY97 and a PER (FY98) will address medium-term development opportunities. Sector work in Mozambique is increasingly carried out in a collaborative fashion and is being folded into the process of preparing integrated sector investment programs, as has been the case in the preparation of the integrated health and infrastructure projects. Resources for this type of work are gradually being reduced in favor of  -16- efforts referred to as "non-lending high-impact tasks". These are technical assistance, policy advice, and analytical tasks which do not necessarily result in formal Bank reports, but which are assisting the Government, on an as needed basis, in priority areas. The "products" of these tasks can be considered the Government decisions which later provide the policy framework for future investments. Examples of this type of work presently underway include: studies on pricing and marketing of export crops and a series of follow-up seminars; support to the Government in the preparation of an Education Master Plan; identification of measures and financing sources for immediate improvements in statistical infonnation related to macroeconomic management; and provision of policy advice (through Bank staff and visits of international specialists) on land tenure, environmental management and transit corridor policy. Bank support provided during preparation of the Government's Poverty Reduction Strategy, and continuing support to the Government's Poverty Assessment (an assessment of land tenure, safety net, social service, and other rural poverty-related issues) in the form of a Participatory Poverty Assessment (focusing on a demand-generated needs assessment), are further examples of this "demand-driven" type of non-lending task. 43. New Design Features. In order to enhance the impact of the Bank's development assistance, new design features are being introduced into the Bank's Mozambique portfolio, particularly with respect to new operations. The four most prominent features are: integrated sector investmnent operations, reduced long-term foreign technical assistance. higher impact adjustment operations, and systematic client consultation. Integrated sector investment operations are designed to bring the Government and all major donors together under a common sector policy framework and investment program. The Roads and Coastal Shipping [I (FY94) and proposed Health Sector Recovery (FY96) projects are examples of this approach, with similar operations planned for the agriculture, education and water sectors. In addition to rationalizing investment and establishing priorities for recurrent cost funding, these operations are particularly aimed at building Government capacity and ownership, thereby minimizing the need for long-term technical assistance. Progress has been made in reducing long-tern, foreign technical assistance in Mozambique, though because of severe capacity constraints, there is a real trade-off at times between doing this and rapidly implementing actions to reduce poverty and promote growth. Adjustment lending is being designed for higher impact (Box 6). Finally, systematic client consultation (SCC) is being built into all new operations, as well as many ongoing ones and some sector work. Using a variety of techniques, beneficiaries and clients are consulted during preparation and implementation to provide feedback used to enhance the "impact on the ground" of the respective operation or set of policy recommendations. To cite just two examples, SCC feedback was used in the restructuring of the Small and Medium Enterprise Project, and results from a multisectoral beneficiary assessment will be incorporated into the analysis and recommendations of the Participatory Poverty Assessment and the preparation of a variety of social programs, including the redesign of safety nets. 3. Proposed Lending Program 44. Base Case Scenario and Indicators. The base case scenario is one in which Mozambique continues to confront the enormous challenges involved in maintaining peace; reducing macroeconomic imbalances; and moving ahead with reforms and structural adjustment at a quick and steady pace. In the base case scenario, an average GDP growth rate of at least 6 percent would be achieved, which in part reflects recovery to previous levels of output. Initially growth and poverty reduction would be achieved through increased agricultural production and higher rural incomes; later in the period growth would be driven by other high potential sectors such as energy (gas and hydroelectricity), industry (agro- processing), transport, and tourism. This would also lead to a projected 11.5 percent per annum real increase in exports. However, the external gap would still remain large, and Mozambique would require  -17- significant external assistance, particularly in the form of debt relief and import financing. Indicators of the base case, all of which are necessary conditions, would include: * Privatization of BCM in accordance with the agreed timetable; specifically the preparation of a valuation analysis of BCM and an initial survey of eligible buyer interest by March 1996 * Customs reform, including new contracts for pre-shipment inspection (to reconcile taxes assessed versus taxes paid) by end-1995, and private management of key border posts by end-March 1996 * Cashew marketing, export and licensing liberalization * Sound macroeconomic policies, indicated by adherence to IMF targets * Achieving privatization targets under the SERC; privatizing the I I specified enterprises by end 1995 * Formulation of medium-term sector policy frameworks and investment programs (particularly in the agricultural and social sectors) * Improved budget management, in accordance with targets agreed in sector policy frameworks 45. Base Lending Program. The base case lending program -- in line with the strategic priorities of Box 6: Higher "mpact Adjustment Lending in Mozambiue Recognizing the need to get better results from adjustment measures in Mozanbique, higher-impact adjustment operations are being designed. I this effort, five areas of emphasis have been identified: * Demonstrated Borrower Commitment. The focus of each operation, as well as the design of conditionality, will be the result of a Bank/Govemment dialogue, initiated at a very early stage. The, dialog will include explicit discussion of the risksj and potential benefits of specific policy reforms. In addition, a set of actions linked to the base case indicators specified in this CAS will be carried out before Board Presentation. * Consultations with Stakeholders. A number of workshops and meetings with key stakeholders, including representatives of the private sector and NGOs, have already taken place in the context of economic and sector work precedig the next adjustment operation. These include workshops on the cashew industry and on impediments to private sector develpment. Further consultationsvwith representatives of the private sector and NGOs will take place rgularty dui preparation and implementation of the next adjustment operations. In addition, industrial sector surveys and intervieWs, cartied out over the6lasttwo years, and a Poverty Assessment currently underway, will be used :in the definiton of, esndthdiesign of proposed actions. Systematic Client Consultation, which will track the perOeived impuat of the adjustm operation on diftereit groups, will be built into each operation. * Polucy-Focused Condlloaiity.;1 Each. djustment operation will tbuild agreement on the key themes of this CAS, 0 ifocusing e0cspecially:' on macroeconomic stabiization, human resource development, and agriculture. Specific conditions will be few,and directly linked to progress in,polici refom. Complementary institutional measures and investments will be supported by technical assistance, sector lending, and other non-lending work. In this way, adjustment lending will be mutually supportive with the investment program and non-lending work. . A Focus oa Fisal Policy. FisclW reforns havei, figured prominendy: in the Governmentis program. The Government Xhas miovedto strengthen fiscal managenntSby''instituting three-year rolling expenditure programs, expanding the ibudget covrage,and0 begnning to rucemility expenditures 4in fvor of real increases in social sector budgets iDrawing on lessons of experience and tiscal management iand ;public expenditure reviews, explicit fiscal policy mesures and/or targets will be st. Better collection and management fof counterpart funds, and improved intersectoral and intrasectoral budgetary allocations are among the expected areas of focus. * Tranche Design. Smaller and more frequent adjustment operations are proposed in this CAS. The carrying out of a set of actions already underway and linked to the: base case indicators (c.g., customs reform to enhance revenue progress in privatization of state banks) prior to Board Presentation will narrow the scope of tranche conditionality. Other design options, such as one-tranche operations, or mini-tranches attached to individual conditions, are being Vconsderd Thoese options,could well, help, to, avoid situationswh there thefailure to meet one or two conditions holds up planned second and thlrd-tranche releases thereby places the entire economic reform program in jeopardy.  -18- removing cross-cutting impediments to growth, developing human resources, and stimulating high- growth potential sectors -- will focus IDA lending on macroeconomic stabilization, social services, agriculture, capacity building, and infrastructure. Lending will average roughly US$200 million in years with adjustment operations and US$100 million in those years without -- for a three-year total of about US$450-500 million, subject to IDA availability. This is less than the base case amounts projected in the FY94 CAS and is based on revised _ _ __ _ _ _ assumptions regarding absorptive Box7: The roped LendigProgram 1;Y96-OO capacity in the short-term and the resulting pace of implementation of both policy reform and investments. As P&iec s aG - : a result of this review, there will be a NV (US$ millions) maximum of two new investment > . ~~Adjustrnent -- 0: 45 -0 300 projects added to the portfolio each Socil services 70 30 170 200 year. Also, if disbursement 1u 40 60 Agriculture 1 a 4. 6 performance on the ongoing investment Capacity building 0 10 0 75 portfolio were to reverse its currently Infrastructure 13 5 30 30 positive trend and significantly worsen, new investment lending would be Total 240 665 curtailed towards the lower end of the range. Macroeconomic stabilization and structural adjustment, addressed through adjustment credits every eighteen months to two years, will account for nearly 45 percent of lending. Social services account for another 30 percent of the lending program, and include sector investment programs in health and education, and a rural action program designed to provide a range of basic social services to the rural poor. Projects focusing on capacity building in local government and public sector management comprise about 10 percent of the total. A key element of the program would be an integrated agricultural sector investment program (10 percent of the total program) which would establish a medium-term policy reform agenda and investment framework for the Government and all key donors in a sector with tremendous potential for poverty-reducing growth. An infrastructure project, providing water and sanitation services would account for the remaining five percent of the base case lending program. Mozambique is currently operating in the base case scenario. If policy reform, growth and industrial restructuring were more rapid than expected, additional investments would be made to support private sector and industrial development, and expand operations in education and environment. 46. Core Case Scenario and Indicators. A core (low) case scenario in Mozambique would result if there were a breakdown of civil society, a reversal in the reform program or excessive macroeconomic instability. Indicators of the core case, any one of which could trigger the scenario, include: * Serious civil strife * Failure to proceed with the privatization of BCM * Inaction on customs reform * Failure to liberalize cashew marketing, export and licensing * Reversal in exchange rate policy, resulting in significant, prolonged overvaluation * Deterioration in fiscal viability, resulting in persistent primary fiscal deficits * Ineffective monetary policies resulting in accelerated triple-digit inflation * Reversal in privatization policies such that private companies are nationalized 47. Core Lending Program. In the core lending program, no new adjustment operations would be supported, and other lending would be pared back to focus on basic human needs. The number of investment operations in social services and agriculture would remain unchanged, but the rural action program and the integrated agriculture sector investment project would be scaled down, while the  -19- integrated education investment program would be scaled back and designed simply as an education rehabilitation project. The local government capacity building and public sector management projects would be eliminated, and the education and water projects would be postponed. This would result in a decrease of some US$50-90 million in average annual lending, mostly derived from the suspension of adjustment lending. Investment lending would be even further reduced if performance of the existing portfolio flagged, as would be likely in a prolonged period of macroeconomic instability or civil strife. Lending would be curtailed entirely if Mozambique stopped servicing its IDA debt. In addition, a part of the supporting economic and sector work program would be scaled back. 4. IFC and MIGA Activities 48. IFC Activities, In response to an increase in investor interest and the on-going privatization program, IFC has broadened its technical assistance and financing activities in Mozambique. IFC's strategy is focused on (i) projects associated with the country's natural resources (e.g., mining and agricultural projects), particularly foreign exchange earning operations, (ii) privatized companies, (iii) promotion of the SME sector, and (iv) development and diversification of the financial sector. The Corporation's portfolio currently holds two flagship privatizations; LOMACO, a major agricultural company (FY87), and the Polana Hotel (FY92), with a total commitment amounting to US$4.5 million. IFC financing requests increased over the FY93-FY94 period, involving the IFC in seven projects including port facilities, tourism and privatized soft drink and bottling plants. Five of these projects were carried out through the Africa Enterprise Fund (AEF) -- IFC's small business program for local entrepreneurs. AEF is presently evaluating two more projects: an investment in the fishing in-dustry and a processing facility in the Port of Maputo. The Africa Project Development Facility (APDF), an advisory arm of the small and nmediumit-size enterprise (SME) sector, completed three projects helping local entrepreneurs propose feasibility studies and raise financing. In the ftinancial sector, the IFC has assisted the Government in its review of the regulatory framework for the leasing industry in order to diversify the country's sources of medium- and long-term financinig, and has helped set up a leasing company which is expected to be fully operational by the end of this year. FIAS, IFC's Foreign Investment Advisory Service, continues to help the Investment Promotion Center build capacity as a promoter of private sector investments, and to work with the GovenIment to revise current and implement new foreign investment legislation to make Mozambique more attractive to investors. 49. MIGA Activities. Mozambique joined the Multilateral Investment Guarantee Agency (MIGA) in late 1994. Interest in MIGA coverage has been expressed by various investors resulting in five preliminary applications for MIGA guarantees to date in tourism, agriculture, and natural resources. MIGA's Investment Marketing Services continues to promote mining investment throughout Africa, including Mozambique. 5. IMF and Other Donors 50. The IMF. The Bank and the IMF work in close cooperation in Mozambique, launching annual joint missions to review progress in structural adjustment and to develop, in collaboration with the GOM, Policy Framework Papers. The Bank's adjustment operations have run in parallel with the IMF's Structural Adjustment Facility and Enhanced Structural Adjustment Facility (ESAF). The IMF and the Bank are now collaborating in assisting the Government in other areas as well, such as financial sector reform, strengthening statistical capacity, and tax and customs reform. 51. Aid Coordination. There is a very active aid community supporting Mozambique. Numerous bilateral and multilateral development agencies and NGOs are present in all sectors. Besides the IMF  -20- and IDA, other significant multilateral donors in Mozambique include UNICEF and UNHCR, with bilateral donors also playing important roles. In the past, there have been both overlaps and gaps among the plethora of externally-funded programs, highlighting the importance of coordination. The Bank has taken a leading role in aid coordination, chairing the CG meetings in Paris and participating in other fora such as the Special Program for Africa. The Bank is also active at the sectoral level in Government/donor/NGO working groups established for health, education, transportation, agriculture, statistics, petroleum procurement and import support. The Bank's Resident Mission chairs periodic general donor coordination meetings in which the donor community reviews progress in aid coordination and discusses common problems. In addition, cross sectoral Government/donor working groups have been established on budget and governance. The Resident Mission closely coordinates with other UN agencies active in Mozambique. Finally, the Mission works with national and international NGOs, making economic and project information available, facilitating contacts with the Government and donor community, and providing technical assistance in communications and data base management. E. Agenda for Board Consideration 52. Major Issues, Poverty reduction and sustained economic growth can be achieved in Mozambique by a carefully prioritized and managed development strategy. Despite the enormous challenges and constraints it faces, the country holds great potential for immediate economic gains, particularly in smallholder agriculture and development of the private sector. To secure these gains, the Bank may best be able to assist Mozambique by participating in efforts to: (i) ease cross cutting impediments to growth that now constrain the economy, specifically by improving macroeconomic stability, absorptive capacity, public sector management, and the environment for private sector development; (ii) develop human resources; and (iii) promote high growth potential sectors. 53. Does the Proposed Strategy Strike an Adequate Balance Between What Mozambique Needs to Do and What Mozambique Can Do At This Stage? A delicate balance must be struck between moving ahead as quickly as possible with badly needed reforms -- privatization of state banks, customs reform, the sale of public enterprises, and agricultural policy reforms -- and ensuring that the speed and timing of reforms do not jeopardize the peace that has made accelerated economic growth possible. This CAS argues that the pace of reform must be significantly accelerated and urges action on a broad range of economic, social, and agricultural reforms. It acknowledges that the sensitive political situation and capacity limitations dictate the need to increase public awareness and understanding of the objectives of the reform program and to carefully prioritize reforms. It also recognizes that, even if accelerated, the reform process will be lengthy. Considering the complexities of the Mozambican situation, does the CAS strike the right balance regarding the pace of reform? Is it overly modest or too ambitious in the choice and number of priority reforns? 54. Is This Growth-Centered Strategy Appropriate? Mozambique is considered the poorest country in the world, and poverty reduction is at the core of the country strategy. Growth is necessary for poverty reduction precisely because the country is so poor. There is simply not enough wealth in the country to make redistributive strategies feasible. The CAS therefore recommends an aggressive private sector-led growth policy that emphasizes rural and human resources development in order to create a poverty reducing pattern of growth, rather than a slower growth approach that would allocate more resources to poverty intervention programs. Is this an acceptable balance? Given the limited resources of the country, are there better alternatives for poverty reduction?  -21- 55. Risks, Mozambique has made tremendous strides toward national reintegration, democracy, and structural reform. These achievements, however, are fragile. Democratic institutions are new and vulnerable, and security issues remain a concern in some areas. The risk that progress toward national reintegration could regress cannot be ignored. Mozambique's dependence on foreign assistance is part of this risk: badly needed aid might be curtailed if the Government's progress on governance and building democratic institutions is insufficient, or is seen as such by the donors. In addition, macroeconomic instability and vulnerability to external forces add elements of uncertainty to Mozambique's economic development. The reforms and investments proposed as part of this CAS are directed towards improving macroeconomic and external balances, and contributing to political stability through poverty reduction. The current Government is committed to reform. Nonetheless, the present situation in the country and the serious problems which it faces suggest a long and difficult road ahead.  -22- Table 1: Mozambique - CAS Objectives and Actions Objectives Actions/Goals Instruments/Sequencing Restoration of Foster macroeconomic Economic & Financial Management TA (FY90) macroeconomic stability stabilization Economic Recovery Credit II (FY94) and removal of cross Financial Sector Capacity Building (FY94) cutting impediments to Economic Recovery Credit III (FY96) growth Economic Recovery Credit IV (FY98) Economic Recovery Credit V (FY00) * Policy Framework Paper (annual) * Fiscal Management Review (FY96) * Public Expenditure Review (FY98) Promote private sector Industrial Enterprise Restructuring Project (FY90) development Sm/Med Scale Enterprise Development Project (FY90) Roads and Coastal Shipping (ROCS) I (FY92); 11 (FY94) O Private Sector Development Conference * Impediments to Industrial Recovery (FY95) Increase absorptive capacity Capacity Building, Human Resources (FY93) Capacity Building, Legal and Public Sector (FY93) O Statistics Capacity Building (FY96) Improve public sector Urban Rehabilitation Project (FY89) management Local Government Reform (FY93) Local Government Investment (FY98) Public Sector Management (FY99) * Public Sector Reform (FY96) More fully account for issues of Urban Household Energy (FY89) gender, population and Transfrontier Conservation Areas with GEF (FY96) environment * National Environmental Action Plan/ESP (FY95) Health Sector Recovery (FY96)* Smallholder Agriculture (FY97)* Human resources Rebuild the education sector, Food Security/SDA (FY93) development provide basic health services and Health I (FY89) access to safe water and Health Sector Recovery (FY96)* sanitation National Water Project (FY97)* Rural Action Program (FY98) Education I (FY88) Education 11 (FY91) Education Sector Investment Program (FY99)* O Poverty Reduction Strategy(FY95) & Assessment(FY96) O Environmental Management (FY96) O Education Master Plan (FY96) Promotion of high Support expansion in small-scale Agricultural Rehabilitation (FY91) growth potential sectors agriculture, energy and transport Agricultural Services Rehabilitation (FY92) sectors Rural Rehabilitation (FY93) Smallholder Agriculture (FY97)* Transportation Rehabilitation - Beira Corridor (FY90) Gas Engineering (FY94) Maputo Corridor Revitalization TA (FY93) * Energy Sector Work (FY97) * Tourism Sector Work (FY97) O Agric. Pricing & Marketing Study/Seminars (FY95-96) O Land Policy (FY96) O Transit Corridor Policy Reform (FY96) *=Sector Investment Program *=Economic and Sector Work O=Non-lending, high impact tasks  -23- Table 2: Mozambique--Poverty Alleviation Strategy and Actions Strategic Objectives Operations Poverty reducing growth Agricultural Rehabilitation (FY91) facilitate agricultural growth in rural areas to provide Agricultural Services Rehabilitation (FY92) livelihoods for the poorest populations, reintegrate displaced Rural Rehabilitation (FY93) persons and demobilized soldiers, and produce food -- Smallholder Agriculture (FY97)* through provision of agricultural services, infrastructure and Rural Action Program (FY98) water and sanitation 0 Land Policy (FY96) O Ag. Pricing & Marketing Study/Seminars (FY95-96) * stabilize the macroeconomic environment to facilitate Economic & Financial Management TA (FY90) economy-wide growth and increase employment opportunities Economic Recovery Credit II (FY94) -- through structural adjustments and economic reforms Financial Sector Capacity Building (FY94) Economic Recovery Credit III (FY96) Economic Recovery Credit IV (FY98) Economic Recovery Credit V (FY00) * Policy Framework Paper (annual) * Fiscal Management Review (FY96) * Public Expenditure Review (FY98) * facilitate growth in the private sector to expand Industrial Enterprise Restructuring Project (FY90) employment opportunities - through policy reformns, Sm/Med Scale Enterprise Development Project (FY90) privatization and provision of infrastructure Roads and Coastal Shipping (ROCS) I (FY92) Roads and Coastal Shipping (ROCS) 11 (FY94) National Water Project (FY97)* * Impediments to Industrial Recovery (FY95) * facilitate growth in high potential sectors such as energy 0 Private Sector Development Conference (FY96) and transport to generate employment, foreign exchange and Transportation Rehabilitation - Beira Corridor (FY90) Government revenues -- through policy reformns and Tansp rin R lo i d( investments Gas Engineering (FY94) Maputo Corridor Revitalization TA (FY93) * Energy Sector Work (FY97) * Tourism Sector Work (FY97) O Transit Corridor Policy Reform (FY96) Human Resources Development and Improvements in the Quality of Life Education I (FY88) Education 11 (FY91) * Provision of basic education to improve income earning Education Sector Investment Program (FY99)* potential 0 Education Master Plan (FY96) * Provision of basic health-related services to improve Health I (FY89) productivity and quality of life Health Sector Recovery (FY96)* National Water Project (FY97)* * Protection of the enviromnent to safeguard health and Urban Household Energy (FY91) enhance the quality of life Transfrontier Conservation Areas with GEF (FY96) * National Enviromnental Action Plan/ESP (FY95) O Environmental Management (FY96) * Targeted poverty interventions to mitigate hardship Food Security/SDA (FY93) O Poverty Reduction Strategy (FY96) O Poverty Assessment (FY96) *=Sector Investment Program * =Economic and Sector Work O = Non-lending, high impact task  -24- Table 3: Macroeconomic Projections in the Base Case Scenario 70 Investment/GDP (%) 10 PrImary Fiscal DeflciVGDP (%) - 60 5 50~~~~~~~~~~~~~ 40 0_ J 0 30 DoetcSavings/GDP (%) 20 - l....-2 10 -10 -10 ~~~~~~~~~~~-15 Current Account Deflct I ExportB 45 GDP per Capit of Goods and Services (%) (1987 prices) 350 40 30 I 250 I 35 - 200 150 30 100 2 50 2 Notes: I/ The current account deficit is before grants and inteest payments 2/ The fiscal deficit excludes interest payments  -25- CAS Annex Al Run Date: 11/2/95 Data as of 10/30/95 Mozambique - Selected Indicators of Bank Portfolio Performance and Management Indicator FY93 FY94 FY95 FY96 Portfolio Performance Number of projects under implementation 21 25 24 23 Average implementation period (years)' 2.6 3.1 4.0 4.8 Percent of problem projects rated U or HUO (for past years, rated 3 or 4) Development objectives' 9.5 8.0 8.3 8.7 Implementation progress (or overall 9.5 8.0 12.5 13.0 status for past years)d Canceled during FY in US$m 0.5 1.0 0.0 1.6 Disbursement ratio (%)' 11.3 9.2 13.2 3.9 Disbursement lag (%)r 18.5 22.4 19.9 20.8 Memorandum item: % completed projects rated unsatisfactory' Portfolio Management Supervision resources (total USS thousands) 789.5 948.1 1093.2 216.0 Average supervision (US$ thousands/project) 37.6 37.9 45.6 9.4 Supervision resources by location (in %) Percent headquarters 72.8 73.3 75.6 80.3 Percentresidentmission 27.2 26.7 24.4 19.7 Supervision resources by rating category (USS thousands/project) Projects rated HS orS 36.7 37.3 47.1 9.5 Projects rated I or HlI 46.0 45.7 34.9 8.8 Memorandum item: date of next CPPR: June 1996 a. Average age of projects in the Bank's country portfolio. b. Rating scale: "HS" denotes "Highly Satisfactory", "S" denotes "Satisfactory", "U" denotes "Unsatisfactory", and "HU" denotes "Highly Unsatisfactory". c. Extent to which the project will meet its development objectives (see OD 13.05, Annex D2, Preparation of Implementation Summary [Form 590]). d. Assessment of overall performance of the project based on the ratings given to individual aspects of project implementation (e.g., management, availability of funds, compliance with legal covenants) and to development objectives (see OD 13.05, Annex D2, Preparation oflmplementation Summary [Form 590]) . The overall status is not given a better rating than that given to project development objectives. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: investment projects only. f. For all projects comprising the Bank's country portfolio, the percentage difference between actual cumulative disbursements and the cumulative disbursement estimates as given in the "Original SAR/PR Forecast" or, if the loan amounts have been modified, in the "Revised Forecast." The country portfolio disbursement lag is effectively the weighted average of disbursement lags for projects comprising the Bank's country portfolio, where the weights used are the respective project shares in the total cumulative disbursement estimates. g. For projects rated in the FY only: from the OED database. This percentage refers to completed projects initialy evaluated by OED during the corresponding fiscal year. Note: Disbursement data is updated at the end ofthe first week ofthe month. Supervision resources include Salaries and Benefits for "BB" source of funds but excludes FAO staff and PCR task costs.  - 26 - CAS Annex A2 Mozambique - Bank Group Fact Sheet FY 1993-1999 IBRDAIDA Lending Program, FY 1993-1999 Past Current Planned0 Category FY93 FY94 FY95 FY96 FY97-99 Commitments (USSm) 122.9 427.0 0.0 200.0 365.0 Sector (%)b Agriculture 16.3 0.0 0.0 0.0 16.4 Education 52.2 0.0 0.0 0.0 27.4 Energy 0.0 7.0 0.0 0.0 0.0 Financial System Dev 0.0 2.1 0.0 0.0 0.0 Health 5.1 0.0 0.0 50.0 0.0 Non-sector 0.0 0.0 0.0 50.0 27.4 Other Finance 0.0 46.8 0.0 0.0 0.0 Transportation 7.6 44.0 0.0 0.0 0.0 Urban 18.9 0.0 0.0 0.0 20.5 Water Supply & Sewag 0.0 0.0 0.0 0.0 8.2 TOTAL 100.0 100.0 0.0 100.0 100.0 Lending instrument (%) Adjustment loans' 0.0 46.8 0.0 50.0 27.4 Specific investment loans and others 100.0 53.2 0.0 50.0 72.6 TOTAL 100.0 100.0 0.0 100.0 100.0 Disbursements (US$m) Adjustment loans' 81.5 63.1 105.8 7.9 140.0 Specific investment loans and others 46.7 44.4 91.2 18.1 292.7 Repayments (USSm) Interest (US$m) 2.9 3.7 5.0 0.1 0.0 a. Ranges that reflect the base-case (i.e., most likely) scenario. For IDA countries, planned commitments are not presented by FY but as a three-year-total range; the figures are shown in brackets. A footnote indicates if the pattem of IDA lending has unusual characteristics (e.g., a high degree of frontloading, backloading, or lumpiness). For blend countries, planned IBRD and IDA commitments are presented for each year as a combined total. b. For future lending, rounded to nearest 0 or 5%. To convey the thrust of country strategy more clearly, staff may aggregate sectors. c. Structural adjustment loans, sector adjustment loans, and debt service reduction loans.  -27- CAS Annex A2 Mozambique - IFC and MIGA Program FY93-95 Past Category FY93 FY94 FY95 IFC approvals (US$m) Sector (%) TOTAL 0.0 0.0 0.0 Investment instrument (%) Loans Equity Quasi-equity' Other TOTAL 0.0 0.0 0.0 MIGA guarantees (USSm) 0.0 0.0 0.0 MIGA commitments (USSm) 0.0 0.0 0.0 'Includes quasi-equity types of both loan and equity instruments. Note: In FY92 IFC made a US$3.5 million investment loan for the Hotel Polana, Maputo. In addition, in the FY93-95 period, the Africa Enterprise Fund, IFC's small business program for local entrepreneurs, was involved in five projects.  -28 - CAS Annex A3 Mozambique - Summary of Economic and Sector Work (US$ thousands) Last FY FY96 FY97 FY98 Category Actual a) Agriculture 11.4 0.0 0.0 0.0 Energy 0.0 0.0 80.0 50.0 Education 37.2 0.0 0.0 0.0 Environment 0.9 0.0 0.0 0.0 Non-sector 147.4 210.0 70.0 70.0 Other Population, Health and Nutrition 0.0 0.0 0.0 0.0 Population 3.5 0.0 0.0 0.0 Public Sector Management 26,9 85.0 0.0 140.0 Tourism 0.0 0.0 80.0 50.0 Water Supply & Sewage 34.4 0.0 0.0 0.0 Total 261.7 295.0 230.0 310.0 a) Excludes trust funds and travel costs, later years include these expenditures.  -29 - Annex A 4 Page I of 2 Mozambique Most Same regioWuixcome group Nct Latest single year recent Sub- higher Unit of esimate Saoarax Low- income I,sdicsor mweure 1970-75 1980-83 1988-93 Africa income group Priority Poverty Indicators POVERTY Upper poverty line local cuff. .. .. .. Headcount index %*ofpop. ,, ,, ,, ,, 19 Lower poverty line local curr. .. .. Headcount index % of pop. .. .. GNP per capita USS .. 140 90 520 380 1,590 SHORT TERM INCOME INDICATORS Unsukilled urban wages local curr. .. .. Unskilled rural wages " .. .. .. Rural tems of trade Consumer price index 1987=100 .. 27 851 Lower income Food Urban Rural SOCIAL INDICATORS Public expenditure on basic ocial servicea % of GDP .. .. 13.1 Graownollmet ratios Primary % school age pop. 47 86 60 67 108 104 Male ,, 97 69 74 116 Female ., 75 51 60 101 Morality Infent mortality per thou live birth, 168.0 155.0 145.6 93.1 63.1 39.0 Under 5 mortality .. .. 282.0 172.3 101.4 61.5 Immunizabon Measles % age group .. 39.0 23.0 49.9 87.3 77.6 DPT .. 29.0 19.0 51.9 89.9 82.2 Child malnutrition (under-5) .. ,, ., .. 40.3 Life expectancy Total yean 42 45 46 52 62 67 Female advmtage 3.2 3.3 3.1 3.3 2.1 5.9 Total fertility rate births per woman 6.5 6.5 6.4 6.2 3.6 2.9 Matenal morlity rate per 100,000 live births 300 .. Supplementary Poverty Indicators Expcnditures on ocial ecurity % of total govt exp. Social ecurity coverage % coo active pop. .. .. Accesstosafewater:total %ofpop. 14.1 21.6 .. 67.0 Urban 38.0 44.0 .. 78.7 Rural 2.0 9.0 17.1 .. 62.0 Acces to health cre .. 40.0 30.0 Population growth rate GNP per capita growth rate Development diamond' 6 (annul average, percent) 10 (annual average, percent) Life expctancy 2- G N P / ' 9 <Grou _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~~~per p m r capita/ enrollment 1970-75 1980-85 1988-93 1970-75 1980-85 1988-93 Acces to safe water E Mozambique - Mozambique - Low-income - Low-inoome a. The development diamond, based on four key indicators, shows the avcrage level of development in the country compared with its income group. See the introduction.  - 30 - Annex A 4 Page 2 of 2 Mozambique Mest Sam r gre go NWx L r sLxgkyr reex kigker Unit of egamee Saaa LO.- o In1&cator asarvn 19*70-75 198f14s 198U-93 Afico ncome grea Resources and Expenditurs HUMAN RESOURCES Population (mre-1993) thouunds 10,49S 13,541 15,102 553,973 3,091,764 1,096,665 Age dependcncy ratio ratio 0.S9 0.33 0.92 0.94 0.67 0.69 Urban %of pop. 8.6 19.4 31.2 29.3 27.6 54.7 Population growth rate annual % 2.2 2.3 1.4 2.9 1.9 1.6 Urban" 9.2 9.0 6.3 5.0 3.9 2.9 Labor roce (15-64) thouunds 5,531 7,671 8,957 229,480 1,442,452 459,196 Agriculture % of labor force 85 34 Industry 7 7 Female 50 49 47 36 33 31 Femalea per 100 males Urban number 83 Rural n 119 NATURAL RESOURCES Area thou. aq. km 801.59 S01.59 801.59 24,273.63 39,091.96 40,682.67 Denity pop. per sq. km 13.10 16.89 13.57 22.37 77.60 26.52 Agricultural bnd % of landam 60.04 60.06 60.17 52.54 52.32 39.61 Change in agricultural land annual % 0.00 0.02 0.11 0.06 0.03 -0.13 Agricultural land under irription % 0.03 0.20 0.25 0.S3 13.02 12.66 Foreab andwoodland thou. sq. km 0.19 0.17 5.32 7.15 5.95 Deforesation (not) annual % 0.75 INCOME Household income Shrc of top 20% of households % of incomnc Share of bottom 40% of households . Share of bottom 20% of households EXPENDITURE Food %ofGDP 29.3 StAples .. .. 3.7 Meat, fish, milk, cheese, eggr " 10.3 Cereal imports thou, metrictonnc 191 598 507 13,157 34,420 66,231 Food aid in cereas 34 379 953 5,079 3,334 5,477 Foodproductionpercapita 1987- 100 140 101 aS 101 113 101 Fertilizer consumption kg/ha 0.1 0.1 0.1 4.6 59.9 48.0 Share of agriculture in GDP %ofGDP 47.7 30.9 16.3 26.3 15.7 Housing %ofGDP 8.7 Average household size penons per household 4.3 Urban Fixed investment: housing %of GDP 3.2 Fuel and power %ofGDP 4.6 Enrgyconionpercapita kgofoilcquiv. 75 39 43 257 364 1,595 Houscholds with electricity Urban % of households Rural Trasport snd communication % of GDP 10.0 Fixed investment: transport equpment " 6.4 Total road length thou. km 39 35 35 INVESTMENT IN HUMAN CAPETAL Health Population per physician penonr 13,S65 43,534 3,277 Population per nurc" 4,231 5,715 Populationperhopitalbed 851 913 1,156 1,269 1,016 604 Oral rehydyration thespy (under-5) % of caser 60 37 3S Education Gro enrollment ratio Secondary %of chool-ge pop. 5 7 8 is 41 53 Female . 4 5 34 Pupil-teacher ratio: prinary pupils per teacher 69 62 53 40 39 Pupil-teacher ratio: seondary 22 40 40 20 Pupils raching grde 4 % of cohort 51 Repeater rate: primry % oftotl enroll 28 24 Illitccy % of pop. (age 15+) 72 67 50 41 19 Fenule %offem (age 15+) 34 79 62 53 Newupercirculation pethou. op. 6 5 12 74 Word Bnk ternatcrnal Econonuuc Depapnntl fi1995  -31- Annex A5 Page 1 of 3 Mozambique - Key Economic Indicators Actual Estimate Projected Indicator 1990 1991 1992 1993 1994 1995 1996 1997 National accounts (as % GDP at current market prices) Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture' 46.0 41.7 37.5 38.5 37.5 37.7 37.3 36.2 Industry' 13.5 14.0 13.4 10.6 9.5 9.3 9.4 9.8 Services' 40.6 44.4 49.1 50.9 53.0 53.0 53.3 54.0 Total Consumption 103.9 99.8 98.6 92.8 95.3 87.7 83.9 82.4 Gross domestic fixed 45.9 48.5 53.2 59.7 60.2 55.3 55.0 58.0 investment Government investment 24.2 22.6 22.0 20.1 24.4 22.8 21.3 19.5 Private investment 21.7 25.9 31.2 39.6 35.8 32.5 33.7 38.5 (includes increase in stocks) Exports (GNFS)b 15.9 21.6 23.6 21.3 23.2 23.0 23.4 25.4 Imports (GNFS) 65.7 69.8 75.5 73.8 78.7 66.0 62.3 65.8 Grossdomesticsavings -3.9 0.2 1.4 7.2 4.7 12.3 16.1 17.6 Gross national saviny' -7.2 -3.0 -4.3 3.5 0.9 5.7 9.9 11.7 Memorandum items Gross domestic product 1443 1433 1285 1467 1467 1496 1674 1904 (USS million at current prices) Gross national product per 87.1 85.0 70.6 78.9 73.4 71.3 78.2 87.9 capita (USS, Atlas method) Real annual growth rates (/o, calculated from 1987 prices) Gross domestic product at 1.0/V 4.9o/o -0.8% 19.3% 5.4% 4.3% 5.0% 7.4% market prices Gross Domestic Income 0.1% 4.6% -1.3% 19.4% 5.2% 7.3% 4.7% 7.2% Real annual per capita growth rates (Y., calculated from prices) Gross domestic product at -0.2% 2.9