Mozambique - Third Economic Recovery Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 19503 IMPLEMENTATION COMPLETION REPORT MOZAMBIQUE THIRD ECONOMIC RECOVERY CREDIT (Credit N-0100-MOZ) June 29, 1999 Macroeconomics I Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.f  CURRENCY EQUIVALENTS Currency Unit: Metical (Mt); plural: Meticais 1996 US$1 = Mt 11,294 1997 US$1 = Mt 11,546 1998 US$1 = Mt 11,856 FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS BCM Banco Comercial de Mo,ambique BPD Banco Popular de Desenvolvimento CAS Country Assistance Strategy CFM Caminhos de Ferro de Mogambique EMRO Economic Management Reform Operation ERC Economic Recovery Project ESAF Extended Structural Adjustment Facility ESW Economic and Sector Work FMR Financial Management Review GDP Gross Domestic Product HIAL Higher Impact Adjustment Lending HIPC Heavily Indebted Poor Country ICR Implementation Completion Report IDA International Development Association IERP Industrial Enterprise Restructuring Project IISR Impediments to Industrial Sector Recovery study IMF International Monetary Fund INE National Institute of Statistics MoU Memorandum of Understanding MPF Ministry of Planning and Finance RPRP Railways and Port Restructuring Project SERC Second Economic Recovery Project SPA Special Program for Africa TERC Third Economic Recovery Credit VAT Value Added Tax Vice President: Callisto E. Madavo, AFRVP Country Director Phyllis Pomerantz, AFC02 Sector Manager: Sudhir Shetty, AFTMI Team Leader: Manuela Ferro, AFTMI  FOR OFFICIAL USE ONLY MOZAMBIQUE IMPLEMENTATION COMPLETION REPORT THIRD ECONOMIC RECOVERY CREDIT (Credit N-0100-MOZ) Table of Contents Page No. PREFACE EVALUATION SUMMARY.i-iii PART I: PROJECT IMPLEMENTATION ASSESSMENT .................................. 1-13 A. Background ...................................................... I B. Statement and Evaluation of Objectives ................................................ 1 C. Achievement of Program Objectives and Assessment of Outcomes ............... 4 D. Major Factors Affecting the Program .................................................. 8 E. Program Sustainability ........................... ............................ 8 F. Bank Performance. 9 G. Borrower Performance ...................................................... 10 H. Future Operations ...................................................... 10 I. Key Lessons Learnt ...................................................... 11 PART II: STATISTICAL ANNEXES ................................. ..................... 14-22 Tablel: Summary of Assessments ........................ .............................. 14 Table 2: Related Bank Operations .......................... ............................ 15 Table 3: Project Timetable ...................................................... . 16 Table 4: Credit Disbursements: Cumulative Estimated and Actual . . 16 Table 5: Key Indicators, Actual and Projected, 1996-99 .................. . 17 Table 6: Updated Matrix of Actions Supported by the TERC ........................ 18-20 Table 7: Status of Legal Covenants ......................................... 21 Table 8: Bank Resources: Actual Staff Inputs ................................. 22 Table 9: Bank Resources: Missions ........................................ 22 APPENDICES A. ICR MISSION AIDE-MEMOIRE B. BORROWER EVALUATION REPORT C. BORROWER COMMENTS ON ICR This document has a restricted distribution and may be used by recipients only in tie performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MOZAMBIQUE THIRD ECONOMIC RECOVERY CREDIT (TERC) (Credit No. NO1O-MOZ) IMPLEMENTATION COMPLETION REPORT Preface This is the Implementation Completion Report (ICR) for the Third Economic Recovery Credit (TERC) in Mozambique for which an Interim Fund Credit (NO I 0-MOZ), in an amount of SDR 69.1 million (US$100 million equivalent), on standard IDA terms, was approved on February 4, 1997 and made effective on May 21, 1997. The Credit was a two-tranche operation. The first tranche, released upon effectiveness, was fully disbursed by June 10, 1997. The second tranche was released on March 31, 1998. The Credit closed on December 31, 1998, as envisaged in the original Board documentation. This ICR was prepared by David Bruns, Economist, AFTMI, under the supervision of Manuela Ferro, Economist and Task Team Leader, AFTM1, and reviewed by Sudhir Shetty, Sector Manager, AFTMI, and Phyllis Pomerantz, Country Director for Mozambique. The Borrower contributed to the preparation of the ICR with its own evaluation of the program and their contribution is included. Preparation of this ICR began in March, 1999. It is based on discussions with Bank staff, Government officials, private sector, and on the President's Report, the Credit Agreement, and other materials in the project files.  THIRD ECONOMIC RECOVERY CREDIT (TERC) (Credit No. N010-MOZ) Evaluation Summary i. Background In 1987, with the economy virtually paralyzed by civil war and by a failed experiment with central planning, the Government of Mozambique initiated a wide-ranging economic reform program that involved a shift towards market-oriented policies and a redefinition and reduction of the role of the state in the economy. Since then and with substantial assistance from the international community, a peace agreement was reached in 1992 and the Government has successfully steered the resettlement of the displaced population, the demobilization of 80,000 troops, the return to democracy, and the recovery of Mozambique's economy. Four IDA adjustment operations have supported the Government's economic reform efforts until 1995. These credits have supported the Government's reform program in key areas: price decontrols; liberalization of the foreign exchange market; budgetary reallocations toward the social sectors; and privatization of enterprises and financial sector reform. ii. The results of the economic transition were good, with real GDP growth averaging 7 percent annually between 1987 and 1995. However, growth was uneven and the industrial sector continued to contract until 1995. Furthermore, difficulties in controlling quasi-fiscal deficits associated to the state-owned banks caused inflation to remain high, threatening the sustainability of Mozambique's growth path. iii. Program Design and Objectives. The TERC was the Bank's fifth adjustment credit to Mozambique. Like the Second Economic Recovery Credit (SERC) before it and the Economic Management Reform Operation (EMRO) after it, the TERC was conceived as part of a sequentially-designed program of support-with important elements being built upon and developed over the course of previous operations. TERC design also benefited from Economic and Sector Work (ESW) and from close collaboration with IMF staff. The TERC reform program focused on two main areas: (i) macroeconomic management and (ii) supply response measures. Macroeconomic management measures included the privatization of majority shares in the two state-owned banks, Banco Comercial de Mogambique (BCM) and Banco Popular de Desenvolvimento (BPD), strengthening of banking supervision, the adoption of a budget reforn program, and measures to limit indirect subsidies to enterprises. Supply response measures included the rationalization of the tariff and indirect tax system, monitoring of the impact of cashew sector liberalization, and the restructuring of Caminhos de Ferro de Mogambique (CFM), the state port and railways company. iv. Preparation, appraisal, and supervision of the TERC were strongly influenced by the Africa Region's Higher Impact Adjustment Lending (HIAL) Initiative. The HIAL encourages fewer and relatively simple formulations of policy conditionality. The need for greater selectivity was also a lesson learned in Mozambique's previous adjustment operations. As a result, the TERC had only five conditions for second tranche release, and relied instead on key policy decisions and measures that were implemented up-front, prior to negotiations.  v. Results of the TERC Program. Overall the TERC was highly successful in achieving its twin objectives of improving macroeconomic management and generating a greater and broader supply response. From 1996 throughout 1998, economic indicators portrayed strong growth with increased macroeconomic stability. Growth accelerated and became more broad-based, with industry, agriculture and services, all growing on average at 9 percent annually or above. vi. In the specific policy areas that the TERC supported, the outcomes were also generally successful. Privatization of BCM and BPD improved control of monetary policy and was instrumental in reducing inflation from over 50 percent in 1994 and 1995 to the single digits in 1997 and 1998. It also resulted in a more competitive financial sector offering increasingly diversified banking services. vii. Coupled with an overhaul of customs administration, the simplification and rationalization of the import tariff and indirect tax regime led to a broadening of the tax base, increased access to raw materials and capital goods, and increased trade flows with the region and the rest of the world. Coupled with the acceleration of the privatization program, these reforms contributed to the recovery of the industrial sector, which grew at an average rate of 20 percent between 1996 and 1998. The foundation for the introduction of a broad-based VAT has been set and implementation initiated in June 1999. viii. The TERC supported the Government's initial efforts to develop a more comprehensive and transparent budget. In 1997, a new Budget Law was passed defining the scope and procedures for preparation and approval of the budget, and the 1998 budget was formulated in accordance with it. Among the changes in the 1998 budget were the implementation of a new system of classification of expenditures and the development of a medium-term expenditure framework. The result has been an increase in transparency that permits improved budget programming. ix. The process of concessioning CFM's port terminals, port services and railways to the private sector is ongoing. The evaluation of bids for the port services, terminals and rail lines in the Maputo Corridor was completed in 1998 and separate Memoranda of Understanding (MoU) were signed with private sector parties, but negotiations have yet to be concluded. It is expected that the proposed IDA Railway and Port Restructuring Project (RPRP) that was successfully negotiated in April 1999 will support the conclusion of the concessioning of all ports and railways and the restructuring of CFM. x. Summary Ratings. A key feature for the overall positive outcome of the TERC was the Government's strong ownership and commitment to the implementation of the reform program and the continuity of both Government and Bank staff involved in implementing the reforms. The summary ratings (Table 1) are: Achievement of objectives: highly satisfactory Program sustainability: likely Bank performance: highly satisfactory Borrower performance: highly satisfactory Assessment of outcome: highly satisfactory ii  xi. Main conclusions and lessons are: * Few, but selective conditions result in greater impact. Excessive conditionality often contributes to the failure of adjustment programs in Africa. The TERC contained only 5 second tranche conditions. Fewer, more selective conditions enabled both the Government and the Bank to focus on those measures that were critical to sustain and further the adjustment effort. * Borrower commitment to the adjustment program is critical for success. The main element in the success of the TERC program was the Government's strong commitment to the overall reform program and the TERC program in particular. Ownership was built early on through ESW, relatively lengthy project preparation that included consultations with the private sector, and fewer and selective objectives and conditions . 4 A gradual approach allows for consensus building and sustainability of reforms. Strong borrower commitment does not imply that there were not disagreements between the Government and the Bank on the pace or sequence of reform. However, the slower pace that was advocated by the Government generated greater ownership and no backtracking and, in the end, a very rapid and sustained transition.