Mozambique - Third Economic Recovery Credit

 ICRR 10496 Report Number : ICRR10496 ICR Review Operations Evaluation Department 1. Project Data : OEDID : OEDID: CN010 Project ID : P035922 Project Name : Third Economic Recovery Credit Country : Mozambique Sector : Other Non-sector Specific L/C Number : CN010 Partners involved : Prepared by : Navin Girishankar, OEDCR Reviewed by : Anwar Shah, OEDCR Group Manager : Laurie Effron Date Posted : 08/16/1999 2. Project Objectives, Financing, Costs and Components : Objectives : The Third Economic Recovery Credit (TERC) was the fifth adjustment operation in a sequentially-deisgned program of assistance that has supported Mozambique's medium term economic reform objectives of sustained growth with poverty reduction and diminished aid dependency . The credit sought (i) to improve macroeconomic management through fiscal and financial sector reforms; and (ii) to encourage a rapid supply response through tariff rationalization and continued liberalization . Financing and Costs : The TERC, approved in February 1997, provided $100 million of an Interim Fund Credit on standard IDA terms and became effective in May 1997. Based in part on the principles of the High Impact Adjustment Lending (HIAL) Initiative, TERC conditionalities were simplified and front -loaded prior to effectiveness . The loan was to be disbursed in two tranches of $50 million each. While there were no co-financiers, the operation was designed in parallel with the new IMF Extended Structural Adjustment Facility (ESAF) under the rubric of the Policy Framework Paper for 1996-98. Components : The TERC supported the privatization of the two state -owned banks and improved monitoring of donor flows to enterprises. It also provided support for the introduction of VAT, monitoring the poverty impact of cashew sector liberalization, as well as the restructuring (and concessioning) of the state port and railways company . 3. Achievement of Relevant Objectives : The TERC achieved most of its objectives . Two state-owned banks were privatized . The largest state-owned commercial bank, BCM was privatized prior to the appraisal of the loan in July 1996. A second state-owned bank, PBD was privatized in September 1997. The government has established a system for complete reconciliation of all import duties due and paid and carried out reconciliation for six months . It has completed estimation of level of disbursement and debt service due under on -lending agreements with enterprises which are recipients of funds on-lent from donor sources and issued guidelines for setting terms and conditions for on -lending to commercial borrowers. The Value Added Tax (VAT) law was submitted to the Parliament. The evaluation of bids regarding the granting of concessions of the port services and railway lines of CFM (South) were also completed with minor delays. 4. Significant Achievements : . The focus on fiscal institutional reform issues such as the introduction of VAT and the development of medium term expenditure framework is likely to improve likelihood that the other achievements of the TERC will be consolidated and sustained over time . 5. Significant Shortcomings : There were no discernible shortcomings in this operation . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Highly Satisfactory Highly Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely Likely  Bank Performance : Highly Satisfactory Highly Satisfactory Borrower Perf .: Highly Satisfactory Highly Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : The Bank's experience with the TERC offers four lessons of broad applicability . First, the HIAL approach to simplifying and front-loading conditionalities prior to effectiveness does lock -in ownership and ensures flexibility . These approaches have already been applied to other HIAL countries in the AFR region . Second, a sequentially-designed program of assistance with serial operations allows the Bank and borrower to pursue a critical path of reform over long periods of time . Third, forging and sustaining a critical path will require institutional knowledge on the part of the Bank and borrower . This requires continuity of staffing in the Bank and counterpart agencies, as illustrated by the TERC . Finally, a high quality ESW (diagnostic) program helps identify points of entry (for microeconomic reforms) that could produce important gains in macroeconomic performance . 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : This is a well-argued self-evaluation, substantiated by quantitative and qualitative analysis . The ICR benefited from the clear definition of performance indicators at appraisal . In addition, the attached aide -memoire provided additional details that were cogent to the analysis . One limitation of this ICR is that contrary to the ICR guidelines, the 'future operation' section of the ICR focuses on future lending operations to the neglect of the future of this operation i.e. sustainability issues.