Mozambique - Country assistance strategy

Document of The World Bank For Official Use Only Report No. 20327 MOZ MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF MOZAMBIQUE May 8, 2000 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  The last Country Assistance Strategy was dated November 21, 1997 Currency Equivalents Currency Unit= Metical (Mt) US $1 = 15,717Mt (as of April 2000) Abbreviations and Acronyms AAA Analytic and Advisory Activities AMSCO Africa Management Services Company APDF Africa Project Development Facility APL Adjustable Project Loan CAR Country Assistance Review CAS Country Assistance Strategy CDF Comprehensive Development Framework DPT Diphtheria, Pertussis, Tetanus EMPSO Economic Management and Private Sector Operation ESAF Enhanced Structural Adjustment Facility ESSP Education Sector Strategic Program ESW Economic and Sector Work FDI Foreign Direct Investment FIAS Foreign Investment Advisory Service FRELIMO Frente de Libertacao de Mocambique GDP Gross Domestic Product GEF Global Environment Facility HIPC Highly Indebted Poor Countries IDA International Development Association TFC International Finance Corporation IMF International Monetary Fund JSA Joint Staff Assessment M&E Monitoring and Evaluation MIGA Multilateral Investment Guarantee Agency NGO Non-Governmental Organization NPV Net Present Value PARPA Action Plan for the Reduction of Absolute Poverty OED Operations Evaluation Department PER Public Expenditure Review PODE Enterprise Development Program PRGF Poverty Reduction and Growth Facility PROAGRI Programa Nacional Para o Desenvolvimento Agricola PRSP Poverty Reduction Strategy Paper RENAMO Resistencia Nacional de Mocambique SADC Southem African Development Comnunity SME Small- and Medium-sized Enterprise SWAP Sector Wide Approach TA Technical Assistance UN United Nations UNAIDS United Nations AIDS Program UNDP United Nations Development Programme WBI World Bank Institute IDA IFC Vice Presidents: Callisto Madavo Assaad Jabre Director: Michael Sarris Cesare Calari Task Manager: Jehan Arulpragasam James Emery  FOR OMCUL USE ONLY MOZAMBIQUE COUNTRY ASSISTANCE STRATEGY TABLE OF CONTENTS Executive Summary i Introduction 1 I. Social, Political, and Economic Context 1 A. Historical and Political Context I B. Poverty, Social Context and Issues 2 C. Economic Context and Issues 4 D. Governance 6 E. Medium-Term Economic Outlook and External Environment 7 II. Developing the Bank Group's Country Assistance Strategy 8 A. The Context for Developing this CAS 8 B. Performance Under the Previous CAS 9 C. Portfolio Management 10 D. Lessons Learned 12 E. Strategic Orientation 13 III. Mozambique's Development Agenda and the Bank Group's CAS 15 A. Increasing Economic Opportunities through Private Sector Led Growth 16 1. Strengthening the Private Sector Environment and the Financial Sector 16 2. Developing Infrastructure 17 3. Promoting Rural Development and Agriculture 18 4. Ensuring Sound Environmental Management_ 19 5. Promoting Innovation, Competitiveness and Employment 20 B. Improving Governance and Empowerment_ 21 1. Reforming the Public Sector 21 2. Improving the Rule of Law 22 C. Increasing Human Capabilities 22 1. Preventing and Reducing the Impact of HIV/AIDS 23 2. Improving Health 23 3. Improving Education 24 4. Social Protection 24 IV. The Bank Group's Country Assistance Strategy: Implementation 25 A. Alternative Scenarios for the Lending Program and Non-Lending Services 25 B. Development Partnerships_ 27 C. Program Monitoring and Evaluation 28 D. Risks and Risk Management 28 Conclusion 29 This document has a restricted distriution and may be used by recipients only in the pfIormance of thei official duties. Its contents may not othewise be disclosed without World Bank authoriation.   MOZAMBIQUE COUNTRY ASSISTANCE STRATEGY Table of Contents TEXT TABLES Table 1 Mozambique: Social Indicators Table 2 Outcomes Under the Last CAS TEXT BOXES Box 1 HIV/AIDS in Mozambique Box 2 Sources of Mozambique's Recent Growth Box 3 Mozambique's Program of Liberalization and Economic Reform Box 4 Sector Wide Approaches (SWAPs) and Development Partnerships in Mozambique Box 5 Mozambique: Country Assistance Review (CAR) 1998 Box 6 CAS Non-lending Activities ANNEXES Annex A2: Mozambique at a Glance Annex B 1: Mozambique: Summary of Proposed IDA Program, FY2001-2003, by Case Annex B2: Mozambique: Selected Indicators of Bank Portfolio Performance and Management Annex B3: Mozambique: Bank Group Program Summary Mozambique: IFC and MIGA Program, FY97-00 Annex B4: Mozambique: Summary of Non-lending Services Annex B5: Mozambique: Poverty and Social Development Indicators Annex B6: Mozambique: Key Economic Indicators Annex B7: Mozambique: Key Exposure Indicators Annex B8: Mozambique: Status of Bank Group Operations (Operations Portfolio) Mozambique: Statement of IFC Held and Disbursed Portfolio Annex B9: Mozambique: Country Assistance Strategy Matrix FYO1-03 Annex B1O: Mozambique: CAS Summary of Development Priorities Annex C: Mozambique: The Government's Program, its Poverty Reduction Strategy and the CAS Annex D: Mozambique: CAS Consultations Annex E: Mozambique: A Framework for Development Partnership Map: Mozambique   MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF MOZAMBIQUE EXECUTIVE SUMMARY The last World Bank Country Assistance Strategy (CAS) for Mozambique, covering fiscal years 1998 through 2000, was discussed by the World Bank Board in December 1997. The World Bank Group CAS presented herewith covers the fiscal years 2001 to 2003. It supports the Government of Mozambique's Five-Year Program and its interim Poverty Reduction Strategy Paper (PRSP). In April 2000, the interim PRSP, which included the Government's Action Plan for the Reduction ofAbsolute Poverty ( PARPA), was considered by the World Bank Board to be an adequate framework for the enhanced HIPC Initiative decision point and a sound basis for the future development of a full PRSP, scheduled for completion in March 2001. Mozambique reached the completion point under the original HIPC framework in June 1999. Mozambique has made enormous strides since the end of the war in 1992, when it was still heavily reliant on food aid and its economy was centrally planned. Today the country is at peace, a market economy is in place, and substantial progress has been made on a challenging reform agenda, all leading to a growth rate among the highest in the world. Even so, the lives of most Mozambicans continue to be characterized by poverty, illiteracy, and disease, in a country which continues to be one of the poorest in the world. The challenge for Mozambique today - and the focus of the Government's program and emerging poverty reduction strategy - is to sustain broad-based, private sector led growth and ensure that its benefits are broadly distributed and reach the poor. For the implementation of an effective anti-poverty strategy, institutions, norms and attitudes need to change so that governance is improved and people are empowered to initiate and control the actions that affect their lives. Public sector capacity to deliver basic services and enforce a consistent legal and regulatory framework supportive of private sector development remains limited; physical infrastructure is inadequate; and the financial sector is still developing. The domestic private sector also faces significant challenges in acquiring the skills, experience, and innovation needed to exploit new sources of growth and to compete successfully in the world economy. Despite progress on many fronts, more needs to be done to increase private sector skills, productivity, and competitiveness; to strengthen and diversify foreign direct investment; to integrate under-served areas with high growth potential into the national economy; to continue to improve economic management; and to create economic opportunities for all, including the poor. Action is also needed to control HTV/AIDS, which now constitutes the greatest single threat to development. Preparations of this CAS involved extensive consultations with a wide variety of groups, including government officials, donors, NGOs, trade unions, religious leaders, academics, joumalists, the private sector, and the rural poor. These groups largely agreed that the highest priorities on Mozambique's development agenda over the next few years should be to improve the quality of human resources (especially linked to labor needs), expand capacity in public administration, increase support to rural development, better assist the private sector, expand infrastructure (including roads, electricity and telecommunications), and improve health care.  - 11 - These are long-term goals with short-term implications for Mozambique's policies and public spending choices and for this CAS. Poverty reduction is the overall goal of the Government and of the Bank Group in Mozambique. In supporting the Government's program, the CAS is designed to help (i) increase economic opportunifies, (ii) improve governance and empowerment, and (iii) improve human capabilities. These are the pillars of the Government's new Five Year Program (2000-2004) and of this CAS. A key objective of this CAS is to improve the focus, effectiveness, and monitoring of poverty reduction efforts, especially by helping the Government to operationalize its poverty reduction strategy. Most new IDA lending, as well as IFC investments and advisory services, will focus on increasing economic opportunities which, through growth promotion and participation, is likely to have the greatest impact on reducing poverty, even in the short-term. IDA lending will contribute to developing infrastructure (particularly in the rural areas), improving the environment for private sector activities, and promoting investment, innovation, competitiveness and employment. In support of this agenda IFC will provide advisory assistance, capacity building, and financing to develop private infrastructure, build the financial sector, and support small and medium-scale enterprises (SMEs), as well as foreign investors, in developing key sectors where Mozambique is competitive. New IDA lending under this CAS will also be directed to improving governance and empowerment, as limited administrative capacity and effectiveness is currently a primary constraint to reform, growth, and development. Operations in this area will focus on improving public sector management and capacity as well as strengthening the Government's decentralization efforts; this will promote empowerment as well as the effectiveness of programs addressing poverty reduction. Support will also be given to improving the legal and judicial system, with a view to facilitating private sector led growth. New IDA lending in support of improving human capabilities will be limited, because there already is substantial IDA support from ongoing programs (particularly in delivering basic health and education) as well as from planned Bank analytical services. IFC will support private providers of health and education services. The Bank will also provide support to the Government's new program to fight HIV/AIDS. Lending under the base case over FYO 1-03 will range up to the indicative IDA allocation of US$540 million but is likely to be below this allocation as a consequence of IDA's strategic decision to match lending with the country's absorptive capacity and the availability of grant funds from other donors. Lending under the high case will range up to US$655 million and is contingent primarily on increased absorptive capacity, implementation of related public sector reforms, and progress in implementing the poverty reduction strategy. The low case, which would result from significant deterioration in governance, economic management, or implementation of the poverty reduction strategy, would involve lending at about one-third of the indicative IDA allocation. The Bank Group's business strategy presented in this CAS is complemented by an extensive complement of advisory and analytical activities to Mozambique. Triggers include performance with respect to the portfolio, the poverty reduction strategy, the public sector reform program, the HIV/AIDS program, and various economic reforms (including demonopolization of the energy, transport, and telecommunication sectors for the high case, and policy reversals in the areas of privatization, the financial sector, and trade policy for the low case). IFC's investments, with a current portfolio of about US$150 million, are expected to increase substantially over the CAS period, so that Mozambique will remain one of the Corporation's largest portfolios in Africa. Mozambique is a high-reward country, but the strategy also carries several medium-term risks. There is a political risk that the opposition's dissatisfaction with the 1999 election results, drawing on a feeling among some groups of civil society that popular participation in decision-  - iii - making is unduly limited, could lead to political paralysis and possibly civil strife. The perception that growth is not sufficiently benefiting most people, or not sufficiently benefiting Mozambican businesses and workers, could result in protectionist and distortive regulations and a more general backsliding on reform. The growth of HIV/AIDS could substantially increase poverty. Efforts to improve public sector capacity may not yield results quickly enough to improve absorptive capacity and program implementation. Adverse developments in neighboring countries, which are increasingly linked to Mozambique, can dampen growth prospects. In addition, climatic variations and natural disasters can adversely affect agricultural productivity and growth and limit poverty reduction. The Bank recognizes these risks and is working to mitigate them. To this end, it is supporting decentralization and good governance, supporting the participatory development of a poverty reduction strategy, improving awareness of Government work on poverty reduction and its achievements, and better disseminating analytical work on the Bank's own poverty-reduction activities, the impact of policy choices, and the benefits of strategic thinking on competitiveness. The Bank is also supporting implementation of the Government's HIV/AIDS Plan to help limit the spread of the disease. Trade diversification and active participation in regional organizations will help mitigate the risk that regional crises will impede Mozambique's growth; and efforts to identify, reduce and transfer risks associated with hydro-meteorological hazards should provide better protection against natural disasters. The following issues are suggested for Board discussion: - Is the World Bank Group's proposed support to the Government's evolving poverty reduction strategy appropriate and adequate? - Is the evolving division of labor appropriate among the Government, the Bank and Mozambique's other external partners?   MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF MOZAMBIQUE INTRODUCrION 1. Mozambique has made tremendous strides in the past few years. A sound economic reform program has been implemented, with substantial support from external partners. The transition from war to peace and from a central planning system to a market economy is reaping results. Mozambique's growth rate has accelerated and last year was among the highest in the world. Heavily reliant on food aid just a decade ago, the country now produces almost enough food to feed itself. Mozambique ranks first among 20 countries on the "optimism index" in a survey of business people active in Africa. 2. But alongside this good news are daunting challenges which face the nation, its people, and its partners. Mozambique is still one of the poorest countries in the world. Poverty, isolation, illiteracy, and disease characterize the everyday life of most Mozambicans, who often feel that the benefits of growth are not reaching them. The country is also vulnerable to floods and droughts. Most recently, in February and March 2000, devastating floods killed 700 people, displaced 250,000 and put about two million people into severe economic difficulties. Mozambique's growth and poverty reduction strategy is based on environmentally sustainable and inclusive private sector growth. But the public administration remains weak, despite significant reform and improvement, and it continues to face challenges of capacity and resources to deliver basic infrastructure and services and to properly enforce a consistent legal and regulatory framework essential for private sector development. The emerging domestic private sector needs access to infrastructure and financing, and must also acquire the skills, experience, and innovation required to exploit new sources of growth and to compete successfully in the new world economy. Finally, Mozambique's young democracy remains fragile, and underlying political tensions continue to task nation building and threaten national stability. 3. The challenge facing Mozambique today is how to sustain growth and reduce poverty. Many important economic reforms have been completed, but others are needed to increase private sector skills, productivity, and competitiveness and create economic opportunities for all, including the poor. Infrastructure has been built to support service delivery and the growth of markets, but more needs to be done to integrate under-served areas with high growth potential. Institutions as well as norms and attitudes need to change so that governance is improved and people are empowered to initiate and control the actions that affect their lives. These are long- term goals with short-term implications for Mozambique and for this CAS. Increasing economic opportunities, enhancing governance and improving human capabilities are key actions for reducing poverty in Mozambique, and this CAS outlines the Bank Group's contribution to this enormous endeavor. I. SoCIAL, POLITICAL, AND ECONOMIC CONTEXT A. Historical and Political Context 4. Since the end of the civil war, Mozambicans have made tremendous progress in reforming their country. The transition from a socialist command economy to a democratic market economy is largely complete. The Frente de LibertaVao de Mogambique (Frelimo),  - 2 - which governed Mozambique during the war, retained control of government through national elections in 1994 and 1999, transforming itself in the process from a socialist to a market-oriented democratic party. The main opposition party, Resistencia Nacional de Mo9ambique (Renamo), which came close to winning the December 1999 elections, has generally supported Mozambique's political and economic transition, though there continues to be political tension. Government policies are under intense scrutiny and often the subject of contentious public debate. B. Poverty, Social Context and Issues 5. Per capita income in Mozambique, at $230 in 1999, is below the average for sub-Saharan Africa ($480) and the low income group ($520). The Human Development Index, an index of income, education and life expectancy, ranks Mozambique 169th out of 174 countries. Key social indicators for Mozambique continue to be below the averages of Sub-Saharan Africa and those of low-income countries as a whole (see Table 1). Table 1.: Mozambique: Social Indicators Mozambique Sub Saharan Africa Low Income GNP per capita (atlas method, US$) 230 480 520 Poverty: national headcount index 69 Life expectancy (at birth, years) 47 51 63 Infant mortality (per 1,000 live births) 134 91 69 Child malnutrition (% of children under 5) 41 Access to safe water (% of population) 24 47 74 Illiteracy (% of population age 15+) 60 42 32 Gross primary enrollment 71 77 108 Male 79 84 113 Female 60 69 103 HIV/AIDS prevalence rate 14.5 7 6. A 1996-97 Household Survey on Living Conditions, the first integrated survey undertaken nationally, shows that poverty is pervasive. About seven in ten Mozambicans reported consumption below the national poverty line (US$0.40 per day). One-third of the population is considered to be 'ultra poor', with consumption expenditure 60 percent or less of the poverty line. 7. About 80 percent of Mozambique's poor live in rural areas; about 70 percent of the rural population is poor; and over 90 percent of rural adults work in agriculture. There is significant regional variation in poverty. Sofala, Tete, and Inhambane have the highest poverty incidences, but 40 percent of the poor live in densely populated Nampula and Zambezia. Rural households, poor or non-poor, typically have low access to services. In 1996-97, the mean distance of rural households to a market was 16 km and to a health center 29 km. Poor households are also larger and have higher dependency ratios than the non-poor. Nearly all rural households have land, but land per capita is higher for the non-poor, chiefly because household size is lower. In urban areas, the non-poor tend to be wage-laborers employed in commerce, services, and the public sector, whereas the poor declare themselves to be self-employed or unemployed. 8. Widespread poverty is reflected in Mozambique's social indicators (see Table 1). The poor and ultra-poor tend to miss more days of work from illness than the non-poor, and are less likely to seek treatment. Lack of health care, hygiene, and access to safe water and sanitation allows preventable disease to flourish. Malaria, measles, diarrhea, and acute respiratory infections remain leading killers of children. HIV/AIDS, having already infected about 14.5 percent of the adult population, has serious implications for Mozambique's development  - 3 - prospects (see Box 1). Though poverty explains some of the differences in health and education outcomes, these differences correlate more closely with gender and rural-urban divisions. Box I.: HIVIAIDS in Mozambique The civil war ended in 1992, but the war againstAIDS continues, and now constitutes the greatest single threat to Mozambique 's development. In Africa most carriers oftheAIDS virus will die of AIDS-related illness within ten years. In Mozambique, as elsewhere, the HIVprevalence rate is rising exponentially, and has already reached about 14.5 percent in the adult population. The virus is no longer localized in high-riskgroups but affects the whole population. The overall picture is bleak. Health services are beginning to be overloaded with AIDS-related cases, diverting resources away from other serious illnesses. As a result, hard-won gains in life expectancy and infant and child mortality are being reversed AIDS-related deaths are now projected to make as many as 800,000 Mozambican children orphans by 2002. Moreover, adults die ofAIDS-related illnesses such as tuberculosis during what should be their most productiveyears. Multi-country evidence suggests that at HlVprevalence rates of 15 percent, GDP growth per capita is reduced by about 0.8 percent per annum, and at 25 percent, as in Zimbabwe, growth per capita is reduced by 1.5 percent. In Botswana, for example, despite rapid growth, HIVIAIDS has brought poverty back to levels last seen ten years ago. Mozambique is vulnerable to similar reversals. Action is needed now, at all levels of society, to prevent and control the spread of HIV. 9. Food insecurity, prevalent during the war, continues to contribute to malnutrition. Though Mozambique has nearly achieved food self-sufficiency, the average rural household still suffers through a pre-harvest hungry period of several months per year, and malnutrition remains widespread. In 1996-97, with 64 percent of Mozambicans living in food-insecure households, 43 percent of children were stunted and 6 percent wasted. Even though the degree of market participation has increased since 1993, in 1996 only half of all agricultural households sold any part of their output. 10. Mozambican girls and women continue to do less well than boys and men. The maternal mortality rate, at 1,100, is high. There is poor access to health services in general and poor quality of services directed specifically to women. Literacy rates among women (particularly in rural areas) are much lower than among men, with negative implications for agricultural productivity and child health and nutrition. While access to education is increasing, the gross primary enrollment rate among females (60 percent) is still much lower than among males (79 percent). One in five households is headed by a female; these households have less adult labor and consequently cultivate less land, and they participate less frequently in paid employment. Although remittances from absent family members make these households on average no worse- off than male headed households, households without remittances are typically worse-off. Households with male adults working elsewhere are also more at risk of HIV/AIDS. Family law in Mozambique also discriminates against women. A married woman has limited rights to make independent economic decisions or enjoy full ownership of assets, and a widow's rights to inheritance are secondary to males in the family. Finally, domestic violence against women is a hidden issue, which requires a legal response. To address these issues, the Government, in coordination with civil society, is implementing the National Post-Beijing Plan of Action (NBPA), and key sector ministries have included gender in their sector plans. 11. The national poverty assessment, recent analytical work, and the interim Poverty Reduction Strategy Paper (PRSP) highlight important policy implications for a poverty reduction strategy based on an analysis of the determinants of poverty:  - 4 - * Accelerate economic growth, particularly in agriculture and rural areas. * Improve educational levels, particularly among girls and women. * Improve the productivity of small-holder agriculture, through simple technology and input improvements. * Generate off-farm employment opportunities. * Increase the market integration of small-holder households, mainly through increasing infrastructure. C. Economic Context and Issues 12. Economic Performance and Policies. Mozambique's recent economic performance, buoyed by good agricultural seasons, has been impressive, though it represents a recovery from very low base levels. GDP growth averaged 5.5 percent annually between 1987 and 1996 and 11 percent annually between 1997 and 1999. Inflation dropped sharply from almost 50 percent in 1996 to low single digits today. At the same time, investor confidence has grown. Between 1996 and 1998, consumption grew by an average of 9 percent annually, and investment by 13 percent annually. Merchandise exports increased by 42 percent from 1996 to 1998 as a result of increased export volumes and higher commodity prices for prawns, cashews and cotton. Foreign direct investment (FDI) has also increased, and, as a result of large investment associated with the Mozal aluminum smelter, it reached US$213 million in 1998. At about 3.3 percent of GDP over 1996-98, FDI is high relative both to the size of the economy and to other African countries. These are indications that foreign investor confidence is growing rapidly and FDI sources are becoming more diverse. Box 2.: Sources of Mozambique's Recent Growth Mozambique 's economic growth has been led by smallholder agriculture. Value added in the agriculture and livestock sectorgrew at more than 9 percent peryear after 1996, fueled by expansion in land under cultivation. Agricultural growth has been particularly strong in the north and center. The services sector has also grown well, at 6 percent per annum on average, buoyed by revival in transport, tourism, and the financial sector. Slower to recover have been large-scale commercial agriculture and industry. Many companies have gone through protracted privatization and restructuring processes and have suffered market losses. However, a firm survey undertaken in 1997 showed that manufacturing, concentrated in a few sectors (food, drinks, and tobacco; chemicals; and minerals), experienced robust growth of almost 40 percent annually between 1995 and 1997. In terms of sales growth, firms outside Maputo appear to be growing as rapidly as firms in the capital, despite lower quality infrastructure. This growth is mostly due to increased capacity utilization, which averaged about 50 percent (compared to 10 to 30 percent in 1989), rather than expansion. Employment levels in aggregate have remained stable. All three types offirms surveyed (private firms founded before 1991, new entrants, and privatizedfirms) had strong average growth rates in sales, but employment growth in privatizedfirms had stagnated or declined It is the new entrants that have been creating most of the new jobs in manufacturing; new firms recorded a 6 percent average rate of employment growth from 1992 through 1997. 13. Mozambique's strong performance has been, and continues to be, supported by substantial foreign assistance. Since 1986, the Government has received US$8 billion in external aid, or almost US$600 million per annum (currently about 17 percent of GDP). In recent years, 50 percent of government spending and 75 percent of public investments were financed by external aid. These aid flows allowed Mozambique to maintain consumption levels while increasing public investments needed to expand the economy in a post-war period where financial demands for reconstruction exceeded potential revenues from a debilitated economy. High levels of aid have allowed Mozambique to focus its fiscal policy on stimulating growth while reducing domestic financial imbalances only gradually. From 1987 to 1998, expenditures increased by four percent annually, with revenues growing slightly more.  14. A sound program of economic reform and management - based on privatization, financial sector reform, investment promotion, trade and price liberalization, sound macroeconomic management and substantial public investment - has underpinned Mozambique's ongoing economic transformation and growth record (see Box 3). While Mozambique's recent accomplishments have been impressive, this success is fragile: the local private sector has limited market experience and has yet to find avenues for sustained growth; the financial sector remains inefficient with limited ability to finance investment; employment creation needs to be accelerated; public sector institutions are weak, including in their capacity to enforce and regulate the new market economy; the country remains dependent on aid and vulnerable to external and weather-related shocks; and the reform program is subject to protectionist sentiment within segments of civil society, particularly in urban areas. Box 3.: Mozambique's Program of Liberalzation and Econonic Reform Privatization: Government has restructured orprivatized over 1,200 companies. Financial sector reform: The Government created a central bank; adopted regulations on licensing, capital adequacy, and exposure limits; and sold the two state-owned banks. The private financial sector now includes eleven banks, a leasing company, and seven otherfinancial institutions. Investment promotion. The Government established a progressive investment regime, promotedfree trade zones to encourage manufactured exports, transformed the Investment Promotion Center from a regulatory to a promotion agency, and reduced administrative red tape for investors. Sound macroeconomic management: Monetary control, and the sale of the two state banks, brought macroeconomic stability. In 1996, the Government transferred customs management to a private company; in 1999 it introduced a value added tax (VAT); and it is now implementing a new budget framework law and a rolling medium-term expenditure framework (fMTEF). Exchange, trade, and price reforms: Mozambique today has one of the most open trade regimes in southern Africa. The exchange rate regime has been liberalized and import licenses abolished Prices have been liberalized except for afew consumer goods. Public expenditure: Gradualfiscal adjustment in a context of improved revenues and sustained aid has enabled Mozambique to increase spending on roads, health and education. Today 55 percent of the 27,000 km road network is in good or fair condition, and only 10 percent sometimes impassable, compared to 10 and 30 percent respectively in 1992. From 1994 to 1998, the Government nearly doubled its share of current expenditure on health (from 10 to 18 percent) and education (from 5 to I 0 percent). Health care has improved as over 300 first-levelfacilities have been rehabilitated or constructed, often in remote rural areas, and about nine in ten reliably carry essential drugs and medical supplies, In addition, over 3, 000 lower primary schools have been rehabilitated or constructed over the 1990s, doubling the number that existed at the end of the war. 15. Economic Prospects: Mozambique benefits from a variety of agroecological and other natural resources which, if sustainably managed, provide a good basis for growth. Agricultural growth is key to ensuring that growth translates directly into poverty reduction. Short and medium term prospects for agricultural growth are good: only 15 percent of arable land is currently cultivated. Other sources can also be exploited. The 2,700 km coastal zone has many unique habitats, offering opportunities for wildlife and tourism developments. Large perennial rivers offer significant prospects for irrigating agriculture and developing hydroelectric power. Substantial gas and coal reserves have been found, and prospecting continues for petroleum and mining. Tourism, mining, agroprocessing, and light manufacturing can generate significant employment. Attracting foreign investment will be important to this effort. Large investments exploiting the transportation corridors or exporting energy (gas, coal or electricity) or energy- intensive manufactured products (iron, steel and aluminum) are under active consideration by large international companies. Here the challenge will be to develop linkages, especially to the growing service sector, to maximize the benefits for the poor; this is likely to occur primarily through spin-off effects, such as employee training, connected infrastructure developments, and improved Government tax revenues that can subsequently be channeled into poverty-reducing  - 6 - activities. Substantial and permanent poverty reduction will also require sustained growth in value added and in jobs created within the Mozambican economy. To grow, over the medium- to long-term Mozambican firms will need to become increasingly competitive in evolving world markets, capitalizing on knowledge and innovation. D. Governance 16. Mozambique has consolidated some gains in governance in recent years. An active multiparty parliament debates national policy; freedom of the press is respected; and core labor standards, which include the rights to free association and collective bargaining and prohibit discrimination, are protected in the labor law. National elections were held in December 1999 as planned, and though the opposition initially denounced the results as fraudulent, the elections were declared free and fair by international observers. 17. Red tape and associated corruption continue to impede business. A 1996 study by IFC and the Foreign Investment Advisory Service of the Bank Group (FIAS) detailed the administrative red tape facing investors. An inter-ministerial working group established to address those problems has since achieved significant improvements; however, obstacles remain. A recent firm-level survey found that governance problems - primarily related to onerous regulations, weak enforcement, and bureaucratic burden - were the most important problems faced by businesses. Excessive bureaucracy and poor enforcement related to a weak judiciary branch create incentive and opportunity for corruption. This is exacerbated by low levels of pay among public sector staff, who may therefore seek additional sources of income, as well as low levels of training, which hinder their ability to efficiently administer government systems. Firms acknowledge that, at least in customs, progress has been made in this regard through introducing private management. With regard to public sector accountability, the Administrative Tribunal (the supreme audit body) is constitutionally independent but, like the Inspector General (the Government's internal auditor), lacks the resources to be an effective monitor. Reform and capacity building efforts in the areas of budget management, accounting, and auditing are aiming to address the areas of economic governance, and implementation of a recent budget law has resulted in some improvements in the transparency and management of the budgetary process. 18. Taking a broader view of the governance area, the Government is refocusing its activities on the core areas of public sector responsibility and moving from being a direct provider of services to a facilitator in areas where private initiative is likely to improve efficiency. The Government has started to decentralize public functions, most notably in 1998 by establishing 33 municipal governments, to improve public services by bringing political accountability down to the local level. It is also deconcentrating decision-making responsibility to make government bodies more responsive to local needs. It has undertaken civil service reform, decompressing salaries in 1998, implementing a revised career stream and remuneration system in 1999, and initiating various capacity-building programs. The emphasis now is on broadening and deepening the reforms required to manage a market economy. This is necessarily a medium and long term agenda. 19. Much remains to be done. Changes in institutions continue to lag legislative changes, and changes in the norms and attitudes of civil servants lag further. Although the civil service is learning that its role in a market economy is to assist the private sector in every way that it can without impeding competition, its capacity to fulfil this role is constrained by low education, limited private sector experience, and low morale resulting from poor wages and the uncertainty that reform inevitably engenders. The size of Mozambique's civil service relative to population is low by African standards; hence the state is thinly spread and has difficulty in delivering services and enforcing legislation in every district. Ancillary functions remain weak (e.g. there  - 7 - are only 500 legal practitioners and no internationally certified accountants in the country). Continued weakness in the public sector and an expansion in corruption could compromise economic growth and constrain service delivery by creating bureaucratic bottlenecks, deterring private investment, and undermining public confidence in the reform process. Thus, improving governance is an important part of Mozambique's poverty reduction strategy. E. Medium-Term Economic Outlook and External Environment 20. Medium-Term Economic Outlook: Sustaining the current level of broad-based economic growth while, simultaneously, keeping inflation low and improving the delivery of social services, are central elements of the Government's strategy to reduce poverty in the medium term. Although the growth target for 2000 has been revised down as a result of the recent floods, prospects remain sound that Government can achieve its objectives of annual GDP growth rates in excess of 7 percent and inflation rates below 5 to 7 percent over the medium-term (200 1- 2003), assuming no further adverse exogenous shocks and continued satisfactory implementation of the reform program (Annex B6). Achieving these growth objectives is expected to reduce the national poverty headcount index from 69 percent in 1997 to about 60 percent in 2004, as targeted in the Government's interim PRSP. Success will require Government to continue to maintain a prudent monetary and fiscal stance, improve the environment for the expansion of private sector activities and investment, and foster the development of a strong export base through liberal investment and trade policies. Domestic fiscal balances will gradually be reduced, but improvements in revenues in the context of a growing economy, together with sustained external aid, will permit continued expenditures in support of poverty reduction efforts. While external aid will remain necessary, Mozambique should be able to reduce its aid dependency in the coming years. Under this base case economic scenario, it is expected that small-holder agriculture will expand, large-scale commercial agriculture will begin to revive, and manufacturing will grow across all sectors and in non-traditional areas, increasing employment. At the same time, deeper regulatory reform should encourage further investment in energy, transportation, and telecommunications; and megaprojects such as Mozal should remain on track to begin productive activities, further increasing and diversifying the export base. Mozambique's medium-term prospects, while favorable, are subject to risks; these are discussed in paragraph 79. 21. External Debt, Debt Sustainability, and the HIPC Initiative: In December 1998 Mozambique's external public debt totaled about US$6 billion (US$2.7 billion in net present value (NPV) terms). Of this, 49 percent was owed to Paris Club bilateral creditors, 37 percent to multilateral creditors (of which 55 percent was owed to IDA), and 14 percent to non-Paris Club and commercial creditors. Debt service payments amounted to about 20 percent of export earnings on average. The NPV of debt-to-export ratio was 538 at end-1998. In June 1999, Mozambique reached the HIPC completion point and received debt relief amounting to about US$3.7 billion (US$1.716 billion in NPV terms), with IDA granting relief amounting to US$975 million (US$381 million in NPV terms). Enhanced HIPC debt relief, which Mozambique is expected to obtain at the completion point in 2001 (the decision point was reached in April 2000), will amount to about US$254 million more in NPV terms, bringing the cumulative assistance under the HIPC Initiative to US$1.97 billion in NPV terms and lowering the NPV of debt-to- export ratio to 150 and the debt service-to-export ratio to below 5 percent from 2002 onward. In NPV terms, the debt remaining after relief is about one-fourth of the US$2.7 billion that would have been owed without HIPC Initiative assistance. This will substantially improve Mozambique's external viability and sustainability and, as debt service savings are directed to poverty reduction, it will also bring benefits to the poor. 22. External Financing: Continued and stable support in the form of bilateral and multilateral grants and credits, with debt relief, will be important in enabling Mozambique to  - 8 - meet its medium-term development objectives. At an international donors' conference in Rome in May 2000, Mozambique's external partners pledged US$453 million to finance the costs of emergency reconstruction following the severe floods in February and March. Financing needs for the Government's new five-year program will be discussed at a Consultative Group meeting planned for June 2000. Reliance on aid flows is projected to decline gradually over the next decade, as strong economic growth and increased levels of private sector financing diminish aid's share of GDP and of the budget. 23. Regional Context: Though its economy is more inwardly oriented than its neighbors', Mozambique's dependence on regional trade and investment flows is high, and developments in the region can significantly influence the pace and sustainability of its development. Trade flows with South Africa are the most important, representing 15 percent of total exports and 53 percent of imports in 1997. Mozambique in December 1999 ratified the SADC trade protocol, which aims to gradually establish a regional free trade area. Mozambique is also likely to join a regional trade guarantee facility covering Eastern and Southern Africa. With political stability and greater investor confidence, Mozambique has also become an attractive destination for South African and more recently other regional investors, such as Mauritius. 24. Regional cooperation is slowly emerging in energy, transportation, and water resource management. FDI concentrated around the Maputo corridor, and rail and port rehabilitation in the Beira and Nampula corridors, will increase economic interdependence between Mozambique and its westerly neighbors. Energy reserves near Cahora Bassa and planned megaprojects based on coal and hydroelectricity can result in further integration as the energy is sold directly to foreign markets (particularly South Africa and Zimbabwe). Mozambique is a central member of the South African Power Pool, as a key supplier of electricity and owner of the main trunk transmission line, and interconnection with Malawi and Tanzania is currently under consideration. Regional approaches to water resource management are also needed. Since the 1 970s, upstream riparians have diverted much of the yield of several cross-border rivers for irrigation and other uses, creating a need for Mozambique to negotiate a more equitable water distribution to satisfy its own requirements. Regional cooperation on watershed management and hydrologic and climatic monitoring is also essential for natural disaster mitigation. II. DEVELOPING THE BANK GROUP'S COUNTRY ASSISTANCE STRATEGY A. The Context for Developing this CAS 25. Mozambique stands at an important juncture in its development. Its first elected post-war Govemment has completed its term and much of the economic reform agenda, set out in its five- year plan, has been completed. Over the period in which this CAS was developed, the new Govemrnment formulated and presented to the National Assembly a new five-year Government Program (2000-2004), focused on the reduction of poverty, and published its accompanying Action Plan for the Reduction of Absolute Poverty (PARPA) as part of its interim PRSP. The PARPA is expected to evolve, through extensive consultation, into a full PRSP. (See Annex C). 26. This CAS is designed to support the Government program and the emerging national dialogue on Mozambique's priorities for poverty reduction. It was developed through an extensive consultative process, fully described in Annex D. The CAS process was designed to initiate a wider Government-led dialogue to forge a common long-term vision and development framework for Mozambique. There is an emerging consensus regarding the importance of defining the country's development agenda, increasing government ownership, and fostering strong partnerships among government, donors, civil society, and the private sector. These are some of the principles of the Comprehensive Development Framework (CDF), and they are  - 9 - critical to achieving Mozambique's poverty reduction goals. They have been discussed with Mozambique's key development partners with a view to jointly articulating Government priorities and mapping out the current development activities of the Government, donors, NGOs and the private sector (see Annex E) so as to improve coordination and coverage of the country's development agenda in the future. Further steps in this process will build on Mozambique's accumulated experience with four ongoing sector wide approaches (SWAPs) to strengthen existing partnerships (Box 4). Box 4.: Sector Wide Approaches (SWAPs) and Development Partnerships in Mozanbique A SWAP is an agreement between the Government and its development partners concerning sector policies and strategies, resource projections to support strategy implementation, and common management arrangements using national administrative systems to the fullest extent possible. Implementation of IDA-supportedprojects in health, education, agriculture and roads has been, or soon will be, integrated into SWAPs. With fourteen or more donors represented in each SWAP, most large donors have moved away from supporting discrete free-standing projects in these sectors. This has resulted in greater organization and complementarity in each sector, lesser demands on Government capacity, and improvedfiscal management (as the approach enables the Government to incorporate allfundingfor each sector into the national budget). Moreover, by consolidating accounting, auditing and monitoring procedures, SWAPs allow donors to distance themselves from day-to-day operational issues and enhance Government leadership, transparency and accountability. IDA has been heavily involved in developing SWAPs, including in identifying sector strategies and appropriate procurement, disbursement, management and monitoring systems. Joining forces behind a common strategy has been relatively easy. The main difficulties have resultedfrom the SWAP s heavy reliance on relatively weak national administrative systems andfrom the centralizing effect of a single nati onalfunding system. To improve performance, current efforts are focused on strengthening financial management capabilities for sectoral ministries in Maputo and the provinces. Decentralized planning mechanisms, combined with greater, predictable and consistentfundingfor sectoral programs, are being used to drive the provincial agenda and increase regional responsiveness. Although Mozambique is not a CDFpilot country, SWAPs give effective operational implementation, at the sectoral level, to the CDF principles of shared vision, Government ownership, and partnership. This approach has worked particularly well in expanding infrastructure. With about US$475 million or 55 percent of the IDA portfolio programmed in SWAPs sectors, the Bank has made a large investment in this approach, which is already providing returns. B. Performance Under the Previous CAS 27. The previous CAS defined three strategic priorities: promoting rapid broad-based private-sector-led growth; building capacity and developing human resources; and strengthening development partnerships. Throughout the CAS period the Bank operated broadly in the base case, with new lending concentrated on infrastructure and on sector programs in water, agriculture and education. Lending, at US$521 million, was slightly above the projected base case total of US$480 million. Although two projects were postponed due to implementation delays in predecessor projects, the resulting decline in lending was more than offset by increased lending in other operations including an adjustment operation, which was delivered as an IDA grant in the form of HIPC interim assistance, and an unprogrammed flood emergency recovery project. IFC's portfolio increased substantially to about US$150 million; it is now among the largest IFC portfolios in Africa. IFC invested US$120 million in the Mozal aluminum smelter, the Corporation's largest single committed investment anywhere in the world, and played a key role in mobilizing other commercial finance for this US$1.3 billion project. MIGA also supported Mozal with a US$40 million guarantee, and is working on a possible US$75 million guarantee to support investments on power transmission lines to Mozal. IFC supported the establishment of a  - 10- foreign bank that has established a wide branch network, created an investment banking affiliate, and brought new levels of service and competition to the sector. Other IFC investments, including SMEs, were concentrated in agribusiness, which helped re-establish cormmercial agriculture in rural areas, and in tourism. Overall, under the previous CAS, progress was made against stated development objectives and most country performance indicators and benchmarks were met, though sometimes with delay (see Table 2), generally resulting from capacity problems. 28. The Government's program, coupled with continued stability, good weather for several years, and support from external partners, is contributing to welfare gains in Mozambique. There is no definitive data on income/expenditure trends at the household level and many service delivery indicators are monitored with a lag. Yet all available data point to continued improvements. Since 1994, per capita consumption has grown by about 6.4 percent per annum, and per capita agricultural GDP by about 8.4 percent per annum, while cereals production by smallholders has doubled. Survey data suggest that poverty in the provincial capitals fell from 73 percent in 1992/93 to 65 percent in 1996197. Access and coverage of education and health services has improved. Between 1996 and 1998, an index measuring health service delivery per person increased by 38 percent; DPT immunization rose from 63 percent to 77 percent; geographical disparities in service delivery fell; and quality indicators (such as the proportion of health units with basic drugs and trained personnel) improved. Over this period, the gross primary enrolment rate increased from 62 percent to 71 percent, and the number of students in primary schools from 1.6 million to 2.1 million. C. Portfolio Management 29. As of May 1, 2000, there were 15 projects in the portfolio totaling US$813 million, compared to 18 projects totaling about US$840 million at the start of the last CAS (November 1997). About 38 percent of this portfolio has been disbursed, and the disbursement ratio is now about 20 percent, at about the same level as at the beginning of the last CAS. Disbursement lags have fallen, with earlier delays partly resulting from increased Bank involvement in relatively slow disbursing SWAPs. Portfolio performance has improved dramatically and is still improving. At present, there are no problem projects and no projects at risk, compared to one problem project and six projects at risk in early 1998. Improvement in risk indicators has resulted in large part through proactive portfolio management and the removal, through continued progress on economic policies, of the economic management risk, which applied to all IDA-assisted projects in Mozambique at the beginning of the last CAS. 30. Efforts continue to be made to improve portfolio management. There is closer coordination with the principal donors through the SWAPs. IDA lending is being limited to fit the Government's absorptive capacity. Portfolio management has been devolved to the Country Office to ensure that emerging issues are promptly and satisfactorily resolved. Monitoring now includes both a formal annual review to check portfolio status and review progress (next scheduled for June 2000) and weekly meetings between the Resident Representative and the Governor of the Central Bank. The Country Office has recruited a financial management specialist and local project officers now cover most sectors, permitting more realistic project preparation that is sensitive to local conditions as well as closer monitoring of project implementation and quicker resolution of emerging problems. Local staff are also being trained in procurement and disbursement procedures with a view to accelerating implementation. Within Govemnment, progress in public sector reform is addressing capacity constraints. In addition, technical assistance in accounting and budget execution, to be strengthened under the new CAS, is improving financial management, and public procurement issues are to be addressed through diagnostic work on the public sector. A financial assessment and procurement review will also be an integral part of the work to be done under a public expenditure review in FY01.  Tablel.: OWome6sUnder:theELAstCAS': : .-.. .. - -.e rm n o. : -:.-:. ::.-Outcorme-: - : :::. .Performiance Indiators O7tTom A. Pttote broadbas'e4 7rivate-sectoFk.ro;edh __:--.____.___:____ :__ --_ * Maintain real growth of non-energy GDP at an annual * Non-energy GDP grew 11.3% in 1997, 9.2% in rate of at least 5%. 1998 and 9.3% in 1999. * Maintain single digit inflation. * Achieved: inflation 1.5% in 1999. * Value added tax in place by mid-1998. * Value added tax was introduced in June 1999. * HIPC completion point reached by mid-1999. * HIPC completion point reached in June 1999. * Agricultural SWAP (PROAGRI) implemented by 1999. * PROAGRI implemented in August 1999. * Satisfactory progress on ROCS program, including * ROCS progress satisfactory, 3,800 km roads maintenance of 15,000 km of road by 2000. rehabilitated and 15,000 km being maintained. * Comprehensive restructuring plan for CFM, the national * In progress: CFM will concession main ports and railway, including private concessioning of all three railway systems; five main port terminal ports and railway lines by end-I 998. concessions already operational and several small concessions/leases have been awarded. * Liberalization of telecommunications sector * Cellphone market to be liberalized in north and commencing in 1998. center, TDM seeking 30% strategic equity partner. * Private management contracts in place for five major * Water companies serving the five major cities were urban water companies by 1999. leased to the private sector in September 1999. * Sale by 1999 of all companies currently on the * 90 large enterprises and over 1,100 small and privatization rolls under the privatization program. medium enterprises privatized or restructured; majority public share retained in 33 companies. * Role of the Center for Investment Promotion (CPI) * Achieved. modified to enhance its investment promotion functions. * In progress. * Commercial Code revised by mid-2000. * Regulations for the Land Law of 1997 were * New land law passed in 1997. Regulatory framework to approved in December 1998. be implemented. U R.B dcapad-yaaddeve.op .hwnw Sre ceS * Budgetary Framework Law implemented; budgetary * Law adopted in September 1998. Medium-term scenarios for the medium-term developed; rules and expenditure framework elaborated for 1998-99 procedures for budgetary execution simplified. budget. * Local elections held in 1998 in 23 cities and 10 towns. * Elections held in June 1998. * Increase health coverage under the Health Sector * In progress: health coverage rose from 40% in 1995 Recovery Program from 40% of the population currently to 50% in early 1999; vaccination coverage rose to 60% in the year 2000; increase DPT vaccination from 63% in 1997 to 77% in 1998. coverage from 55% to 80%. * Infant mortality rate fell from 162 to 134 over the * Improved health outcomes; significant reductions in 1990s. maternal and infant mortality rates. * Increased education coverage; primary school * Primary admission rate increased to 79% in 1999. admissions rate up to 80-86% by 2000 (from 75% in Special programs for improving female access to 1996). Special programs implemented for girls and education implemented. provinces with lowest coverage. * Improvement education quality indicators: repetition and * Repetition rate still at 24% but dropout rate drop-out rates in primary education to fall to 14-17% decreased to 8.4% in 1998. and 10-12% (down from 24% and 14% respectively). * National poverty assessment and poverty action plan * Poverty assessment published in December 1998; completed by end-l 998. action plan published in April 1999. C. &renegh1enparfnesheps ._ - : _'': * IDA portfolio management responsibility to be * Achieved. delegated to Resident Representative by end FY98. * Increased Government commitment to and ownership of * Government ministers acknowledged increased reform program. ownership during CAS consultations. * SWAPs in roads, education, health, and agriculture by * Achieved. 1999. * Strengthen partnerships. * Done through Consultative Group, Development Partners Group meetings, as well as meetings on SWAPs and topical issues (HIPC, PRSP process, UNDAF, and HIV/AIDS).  - 12 - D. Lessons Learned 31. As the CAS consultations confirmed (see Annex D), the key challenge for Mozambique and for this CAS is sustaining rapid poverty-reducing growth and accelerating the delivery of tangible economic and social benefits to the poor, particularly in rural areas. Participants in the CAS consultations acknowledged that much has been accomplished recently, including maintaining peace and stability; increasing food security; constructing roads, schools, and clinics; consolidating democratic freedoms; reducing inflation; and developing a more vibrant market economy. At the same time, they also expressed concern about the sustainability of growth and the participation of the poor in the benefits of growth, reinforcing many of the issues raised by the Bank's ongoing analytical work on Mozambique's growth prospects: * The ability of the Government to absorb aid, to implement policies, and to do so accountably and transparently, is weak, particularly in understaffed remote regions. * Investment in primary health care and education needs to increase, especially in rural areas. * The single most important investment area for growth and poverty reduction remains infrastructure. Investment in roads, energy, water, and telecommunications will need to be directed to the rural areas to reduce poverty, integrate the nation, and bring densely populated areas with high agricultural potential into the market network. * Mozambicans agree that reform is necessary for growth, but disagree about the scope and substance of reform. Some favor further liberalization, particularly in key cross-cutting sectors (energy and telecommunications) and regulatory areas (visas, customs, licensing, land law, and labor law). Others, feeling that domestic firms cannot adjust so quickly to international competition, are calling for subsidies or increased protection. * The rule of law is critical to Mozambique's development. A weak legal and judicial administration needs to be strengthened, to serve an expanding and increasingly complex business environment, stimulate investment, and secure individual rights. * Many Mozambicans feel that they lack the skills required to benefit from or contribute to growth. Many Mozambican businesses seem to be trapped in low-growth traditional industries. The few that are innovative, competitive, and high-growth frequently hire foreign labor into technical and managerial posts. Hence, many Mozambicans sense an urgent need to improve skills through higher education, vocational training, and other strategies to enhance knowledge transfer. * Many Mozambicans feel that they are not sufficiently empowered to participate in the development process or consulted in the decisions that affect them. * Most Mozambicans do not speak openly of HIV/AIDS, but many recognize that it has emerged as a major threat to their security and well-being and that it can easily reverse hard-won social and economic gains. 32. The CAS consultations, the 1999 Client Survey, the 1998 OED Country Assistance Review (see Box 5), and IFC experience indicate what worked well and what worked less well in Bank Group operations during the previous CAS periods. What worked well: The Bank has done well in working with the Government, which is constrained by limited capacity, to effectively sequence reform efforts in response to evolving development priorities over the past years. The Bank continues to demonstrate comparative advantage in delivering analytical inputs to guide policy dialogue. In particular, client and partners value the Bank's work on economic management, both for its technical competence and its sharing of international experience. The Bank is also able to leverage financial assistance by capitalizing on partnerships with bilateral and multilateral donors, and it has taken important first steps in widening partnership and consultations to include civil society and the private sector.  - 13 - Box 5: Mozambique: Country Assistance Review (CAR) 1998 The 1998 CountryAssistanceReview was completed asthe 1997CASwas beingfinalized. The CAR concluded that the Bank played a critical role in Mozambique 's recovery process by helping to assess problems and opportunities, design the evolving policy agenda, and mobilize IDA and other resources, thereby providing financial, administrative and analytical contributions to Mozambique 's transition process. The CAR noted that partners continue to look to the Bank to deliver advisory and analytical servicesfor sectoral and thematic programs and to provide leadership in the dialogue on economic management and sector strategies, particularly in the area of economic governance (e.g. fiscal management, public sector reform, trade policy andfinancial sector development). The CAR also found that the availability of grant financing in some sectors, and the Government 's preference not to incur debt, may limit the scope for IDA financing. Development effectiveness has also been limited by weaknesses in aid coordination and excessive focus on traditional investment and technical assistance projects rather than results-based sectorwide programs. On the basis of these findings, the CAR recommended that the Bank be more selective and cede leadership to other donors where they have a comparative advantage or substantialfinancial presence; use country dialogue and aid coordination mechanisms to nurture policy reform and capacity building; enhance partnerships among donors and civil society to improve resultsfor sector programs; support Mozambican authorities' increased leadership in development and aid coordination; and increase the responsiveness and effectiveness of Bank assistance by further decentralizing authority to the field. These recommendations have begun to be observed in the Bank 's practices over the last CAS period and are also reflected in the current CAS. 33. What worked less well: While many recognize Bank efforts to share information, develop common understandings, and improve coordination, the Bank needs to be more systematic and inclusive in reaching out to civil society and the private sector and in disseminating its analytical work. The link between the Bank's policy and lending program and poverty reduction, as well as the Bank's important role in many of the social sectors, is poorly understood. Although the Bank's analytical products are valued, the Bank needs to do more in this area, and it needs to better follow-through in applying upstream ESW to inform project identification and improve quality of entry. At times, the scale and complexity of Bank projects have not been appropriately tailored to match government's implementation capacity. Simpler project design, involving more local expertise, could result in higher levels of client ownership and participation and in more flexible project structures that would better allow for effective mid-course corrections. Given the escalating HIV/AIDS crisis and its likely repercussions on the entire development effort, the Bank should have acted sooner and been more systematic in joining the battle against this pandemic. The fact that IFC's objective of financing SME investments with local sponsors has only been partially met also indicates a need for the Bank Group to do more to develop the local private sector. Finally, with respect to infrastructure, the recent flood emergency has indicated a need to improve Bank evaluation of hazard exposure, to reassess or develop standards, and to help the Government incorporate appropriate measures for reducing or transferring the risks of future loss or damage. E. Strategic Orientation 34. Bank support will aim to improve the effectiveness of Mozambique's overall poverty reduction effort, taking into account the special needs for partnership in a country with weak capacity and substantial access to grant financing. The orientation of this support recognizes a dual role for the Bank: one as a catalyzing, strategic, and analytical partner to the Government's development efforts, and the other as a financing partner. In the first role, the Bank will continue to draw on its comparative advantage - as recognized in the CAR, ICRs, and the Client Survey - in aid coordination and in analytical services, especially in sector analysis and policy and program design. In particular, the Bank will continue to assist the Government in the critically  - 14- important tasks of selecting the areas where reform is strategically needed, formulating and sequencing appropriate programs, and coordinating development assistance. This is particularly needed in the Mozambican context where public sector capacity to undertake these tasks is limited. In its financing role, the Bank will be more selective, recognizing that other partners have a comparative advantage in project implementation and are able to provide grant financing. For example, IDA will provide no financing in telecommunications; limited financing in the environment sector; and secondary financing behind other lead donors in the education and agriculture sectors. Moreover, even in sectors where the Bank leads, IDA financing will continue to constitute only a share of total sectoral financing (e.g., up to or about a fifth of total financing in the health and roads sectors). 35. The focus of the ongoing program and the previous CAS are in accordance with the strategic principles presented above. The lessons learned during the previous CAS and the CAS consultations imply that the focus of the ongoing program has been appropriate and effective. These efforts should be continued, but they will now need to be deepened in certain areas. Specifically the Bank will need to: * Redouble efforts to accelerate growth, diversify its sources, and increase economic opportunities for the poor, particularly in rural areas. To this end, investments in transportation will continue, together with deeper regulatory reform and private participation with IFC support in the key cross-cutting sectors of energy and telecommunications. Efforts to promote pro-poor rural development and agricultural growth will need to be strengthened. Further improvements are needed in the basic enabling environment, in the performance of the financial sector, and in the development of SMEs. X Continue to support service delivery to improve human capabilities, with emphasis on improving quality while continuing service expansion in basic health and education. The Bank will also need to continue to provide advice in the area of social protection, including to reduce vulnerability through improving the Government's capacity for disaster prevention and mitigation. * Continue to improve our development effectiveness through enhanced partnerships, particularly among the donors and civil society. To this end, working with Government and donors in supporting the PRSP and possibly a CDF provides a means to defining joint priorities, assessing comparative advantages, and making strategic selections within strengthened development partnerships. 36. With this CAS, the Bank Group will also strategically address newly binding constraints in Mozambique and new imperatives among Mozambicans. These are areas that require action, particularly in the development and design of new programs. As such, the Bank can apply its comparative advantage in a timely manner, especially to provide analytical inputs, support program design, and act as an aid coordinator. Specifically, the Bank Group will need to: * Improve the focus, effectiveness, and monitoring of poverty reduction efforts. The Government's commitment to design and implement a Poverty Reduction Strategy, as noted in the Joint Staff Assessment (JSA) of the interim PRSP, provides a basis for the Bank, with other partners, to support its work in poverty analysis, policy formulation, and monitoring progress against objectives. * Increase emphasis on improving governance. Good governance and the rule of law are critical for private sector led growth, and advantageous for the poor. Capacity constraints urgently need to be addressed so that they do not stall Mozambique's ability to grow. * Increase emphasis on preventing HIV/AIDS. Having learned from global experience that HIV/AIDS negates growth and poverty reduction, and seeing that the epidemic is reaching  - 15 - crisis proportions in Mozambique, the Bank will make the fight against HIV/AIDS a critical component of its work in the country. Increase emphasis on promoting innovation, competitiveness, and employment. Skills shortages are constraining growth and employment and undermining support for reform by constraining the participation of Mozambicans in growth opportunities. There is a need for Mozambican workers to improve their skills through technical, vocational, and higher education and for Mozambican firms to address the challenges of competing in a global economy that rewards high-quality innovation. III. MOZAMBIQuE'S DEVELOPMENT AGENDA AND TBE BANK GRouP's CAS 37. The Government aims to promote growth to reduce poverty and improve the well-being of the Mozambican people. Its medium-term development strategy (as stated in its Five-Year Government Program (2000-2004)) and its emerging Poverty Reduction Strategy (as stated in its interim PRSP) include efforts to increase economic opportunities by generating poverty- reducing and employment-creating growth through the private sector; improve governance and empowerment, through a more effective public sector, improved rule of law, and greater transparency and accountability; and improve human capabilities. Annex C outlines these documents and their link to the CAS. 38. Poverty reduction is the overall goal of the Bank Group in Mozambique and there are no major disagreements between the Bank and the Govemrnent on Mozambique's development objectives and strategies. Differences do exist sometimes on the specific instruments or scope and timing of reform. The Government favors protection in certain industries and restrictions in the labor market. The Bank Group would like the Government to lower trade taxes and surcharges and to proceed more quickly in demonopolizing sectors such as air transport and telecommunications. The Bank also thinks that tax exemptions or other types of fiscal incentives for internationally financed megaprojects or regional development schemes generally prove to be more costly (in relation to benefits) and should be avoided where possible. These issues have been the subject of continuing dialogue, and their debate has contributed to the increasingly candid and open relationship between the Government and the Bank. The Bank is providing technical and analytical inputs to inform the debate. In addition, the Bank is also supporting the Government's efforts in developing the full PRSP, an integral part of which would be the broader participation of civil society in discussing such issues and evaluating trade-offs. 39. The three pillars of this CAS are supported by new lending as well as a strong existing lending program. (See Annex B9). Most new IDA and IFC activities will focus on increasing economic opportunity which, through growth promotion, is likely to have the maximum impact in reducing poverty in Mozambique even in the short-term. Ongoing work in this area will be consolidated with a view to ensuring that the benefits of growth are distributed as broadly as possible. This CAS will also direct increased IDA support to improving governance and empowerment, as limited administrative capacity and effectiveness is currently a primary and binding constraint to reform, growth, and development. Finally, this CAS will continue to support improving human capabilities, with limited new lending but substantial ongoing programs and continued strong analytical products. To the extent that other partners have a strong presence and comparative advantage and are willing to finance activities on a grant basis, the Bank will scale back IDA's financing contribution. The Bank will structure new lending to maximize synergies and complementarities and maintain an overall focus on promoting poverty- reducing private-sector-led growth; IFC will provide direct support to the private sector to help generate that growth.  - 16 - A. Increasing Economic Opportunities through Private Sector Led Growth 40. To promote growth and poverty reduction in Mozambique, the Government aims to create an environment which will enable the private sector to expand its activities and generate employment, especially among the rural poor. In the interim PRSP, the Government aims to achieve real GDP growth of 7 to 10 percent per annum and limit inflation to 5 to 7 percent per annum, thereby reducing the poverty headcount index to 60 percent in 2004 from 69 percent in 1997. Whereas growth and inflation targets may be compromised in 2000 because of the flood emergency, they could be achieved in general by strengthening the private sector environment and financial sector, investing in infrastructure, promoting agriculture and rural development, ensuring sound environmental management, and improving innovation and competitiveness to promote employment. 1. Strengthening the Private Sector Environment and the Financial Sector 41. Issues and Government strategy: Macroeconomic stability has been achieved and needs to be maintained: low inflation provides a stable environment for private sector growth and benefits the poor. This will require continued financial discipline. A key outstanding issue is reducing fiscal imbalances, which the Government hopes to achieve gradually through expenditure efficiency, HIPC debt relief, and increased revenues (accrued by broadening the tax base, simplifying tax structures, and limiting exemptions). Continued external aid will permit fiscal adjustment to be gradual and allow for expansion in spending on key poverty-reducing programs. Another issue is expenditure control, which the Government will address with reforms in accounting and budget execution. To help develop a more diversified export base, liberal trade and investment policies will need to be strengthened, while addressing other constraints in infrastructure, access to finance, and business capacity. To remove red tape, simplify the business environment, and ensure the fair and efficient operation of newly privatized companies, the Government will also undertake legal and regulatory reform. To this end, a new Commercial Code and new urban land use regulations are being prepared, while regulations in the energy, transportation, and telecommunications sectors are being revised to encourage entry, private participation and competition. The Govermment will continue to strengthen its capacities of poverty analysis, policy-formulation, and monitoring to improve the impact of policy on poverty reduction. 42. In thefinancial sector, further work is required to effectively mobilize savings so as to finance growth and to improve supervision of the expanding private financial sector. Despite improvements in regulation, privatization, and the entry of new banks, access to financial services remains limited in rural areas and among the poor, real interest rates and lending margins remain high, and medium and long term finance is limited. Government policies are aimed at encouraging lowering financial intermediation costs by enhancing competition, including encouraging the development of non-bank financial intermediaries, as well as by addressing systemic problems that constrain the financial sector, such as the poor enforceability of contracts, lack of accounting standards, and legal obstacles to effective use of collateral. The Central Bank aims to enhance pro-active supervision of the banking system to ensure financial stability. 43. Bank Group support: The Bank will continue actively to support areas of economic management, as this answers to its comparative advantage. The Bank will provide policy advice to the Government for improving fiscal management and strengthening the poverty focus of its programs, most notably through assisting in preparing and implementing the PRSP, and will help Mozambique to attain debt relief under the enhanced HIPC framework. A public expenditure review (PER) will be undertaken to identify spending strategies for reducing poverty, and there will be studies of the linkages between economic growth and poverty reduction as well as of  - 17- targets for effective public service delivery. In addition to analytical contributions, in support of the PRSP, Bank projects and studies will contribute to strengthening poverty analysis as well as systems of poverty and program monitoring and statistical strengthening. An IDA proposed Economic Management and Private Sector adjustment operation (EMPSO), as well as TA to be included under a new public sector operation, will focus on private sector development and on improving fiscal management (accounting, executing expenditures, developing consolidated accounts, and reforming the pension system). The Bank, possibly with participation from FIAS, will also support further work on improving and simplifying the regulatory framework, including in the labor market, through a new study on constraints to private sector development. In addition to ongoing work in the water and transportation sectors, the Bank Group will support improving the regulatory and legal frameworks in the energy and mining sectors. Bank and IFC support to the annual private sector conferences will continue. IFC is expanding its financing and advisory support for SMEs, and will continue its focus on agribusiness to raise rural incomes. As the investment environment improves, MIGA will support the Investment Promotion Center and make guarantees available to attract increased foreign investment. 44. In the financial sector, the Bank will complete a diagnostic study and continue to provide advice to improve banking supervision and financial intermediation, particularly by analyzing the causes of high interest rates, by advising on financial sector efficiency and implementation of contract law, and by strengthening bank supervision in accord with the Basle Core Principles. The Bank Group will continue to work with the IMF to assist the Government in monitoring the stability of the financial sector, particularly in the wake of the recent floods. To promote competition in the banking sector, IFC will seek to expand its involvement with additional equity investments, term resources, and institution building. IFC will work to spur increased competition and intermediation through the establishment of new non-bank financial institutions, particularly in leasing, insurance, housing finance, and microfinance, which will help increase access to financial services for the poor. IFC will also provide advisory and technical assistance on regulatory and institutional issues. 2. Developing Infrastructure 45. Issues and Government strategy: To promote growth, generate off-farm jobs, and increase rural access to markets, the Government is upgrading infrastructure, particularly in areas of high growth potential and population density. In the short-term, the Government is prioritizing the rehabilitation of critical infrastructure damaged by the February 2000 floods with a view to improving siting and construction standards so as to reduce damage from such events in the future. Over the medium- to long-term, the key issues addressed by the Government's roads program include incomplete road systems, limited funding for maintenance, and limited involvement of national contractors in road construction. Work on the three major port-and- railway systems aims to reduce transport costs, expand traffic, and increase earnings to ensure sustainability. Government actions include concessioning operations to the private sector, restructuring Caminhos de Ferro de Mofambique (CFM), and establishing an appropriate regulatory framework. In energy, the principal issues are expanding household access and sustainably exploiting resources for maximum macroeconomic and development impacts while ensuring sound environmental management. To these ends, the Government is undertaking structural and pricing reforms to encourage expanded private sector provision of electricity as well as defining strategies for exporting energy and energy-intensive products. In telecommunications, monopolization remains the key issue, but the Government is now opening the cellular market to free entry and seeking a private sector equity partner for the state telecommunications company as first steps towards liberalization. It is also trying to expand entry into the international telecommunications market and improve access to services such as  - 18- satellite connectivity and the internet. To improve the quality, reliability and sustainability of urban water services, in September 1999 the Government placed water services in five major cities under private management supervised by a new regulatory agency. It is also taking measures to increase access to safe water in rural areas and small towns, aiming to raise rural access from 12 percent in 1998 to 40 percent by 2004. Improving household access to markets, energy, and safe water are key aims of the Government's strategy to reduce poverty, lower household costs, improve the productivity and welfare of women and girls (who are responsible for collecting water and fuel wood), and also improve the welfare of children (who benefit from greater time allocated to child care). 46. Bank Group support: The Bank Group has considerable experience and comparative advantage in infrastructure and will remain active, in partnership with the major bilateral donors and alongside private investors. A proposed Roads and Bridges (APL) project (FY01) will help rehabilitate trunk roads and bridges, support rural road rehabilitation and maintenance, develop institutional capacity for managing the network, reduce vulnerability of transport infrastructure to flood and storm hazards, and increase the participation of local contractors in implementing works. The recently approved Railways and Ports Restructuring project will help to restructure CFM, develop a policy and regulatory framework, and place port and railway management in private hands. IDA will also continue to provide policy advice on the development of the transport corridors. An Energy Reform project will provide TA for structural and pricing reforms; test financing and delivery options for electrification in small towns; and promote the sustainable urban use of traditional fuels. IDA will also assist in developing strategies for exporting energy and energy-intensive products and establishing a market-based regulatory framework for the gas and power subsectors. IFC, together with IDA and MIGA, will selectively review megaprojects for their viability and potential support from the Bank Group; IFC will examine further financing of Mozal for its expansion. In telecommunications, IDA will help to assess the new law and support a national policy workshop; IFC has been in discussions with the national telecommunications company to support its privatization. The national water program will be supported in three ways: National Water Development (NWD) I will continue to focus on reforming rural water supply and sanitation and managing regional and national water resources; NWD II will continue to support concessioning of urban water services; and a new Municipal Development project will help to strengthen the ability of Mozambique's 33 new municipalities to provide basic urban services, including sanitation and drainage. IFC is also seeking opportunities to finance private infrastructure projects across sectors, with other potential projects in industrial park development and investments arising from the development of the transport corridors. IFC will also sponsor a workshop on best practice in private participation in infrastructure at the request of the government. 3. Promoting Rural Development and Agriculture 47. Issues and Government strategy: As most of the poor are subsistence farmers, promoting agricultural growth and rural development is critical to reducing poverty over the short to medium term. Key issues include improving access to land, increasing productivity, expanding off-farm employment, facilitating rural trade, arresting land degradation, and improving management of climate variability and extremes. To address these issues, the Government's rural development strategy includes adopting and enforcing land tenure regulations, developing rural roads, and creating rural market incentives. The agriculture SWAP, PROAGRI, supports agricultural extension services, with a special focus on reaching female farmers to disseminate information on farming practices and gender-specific legislation, and is establishing a regulatory framework (for land markets, land tenure, and forest and wildlife management) that will promote an efficient and environmentally sustainable use of resources.  -19- 48. Bank Group support: The Bank will remain active in this area. The IDA-supported Agricultural Sector Public Expenditure Program, a 15 -year APL in its first phase, supports PROAGRI to strengthen the institutions needed to provide a core set of services in agriculture and natural resource management. A Rural Action project will bring resources down to the community level and strengthen the capacity of local authorities through supporting small-scale community-driven investments in rural infrastructure and services. The Roads and Bridges project will support efforts to rehabilitate and maintain rural feeder roads. New lending, combined with large existing programs in health, education, and water, contribute to IDA's significant support to improving infrastructure and service delivery in rural areas. IFC's SME program is concentrating in agribusiness and tourism to expand opportunities for rural development and off-farm employment. Finally, a rural development study underway, which focuses on key elements in the state's role in facilitating rural development, will inform the PRSP and enhance the design of Bank operations. 4. Ensuring Sound Environmental Management 49. Issues and Government strategy: Agriculture, fisheries, mining and tourism-activities based on exploiting the environment-contribute about 45 percent of GDP and 70 percent of total exports. Ensuring that resource exploitation is sustainable is critical to long-term prospects for growth and poverty reduction. Although Govemment policy in this area is fluid and capacity limited, there is general movement towards integrating environmental aspects into all major policies and strategies, implementing programs for environmental management, and subjecting major economic activities to environmental impact studies. The Government will also participate in regional efforts to manage the environment, particularly in tourism, transportation, and water and wildlife conservation. Over the past five years, the Government has adopted an Environment Framework Law, a new Land Law, and a new Forestry and Wildlife Law. At present, key Government objectives include increasing capacity to ensure that regulations are properly implemented, formulating cross-sectoral approaches, and encouraging environmentally and socially sustainable private sector investment. 50. Bank Group support: IDA will support a study aiming to identify critical environmental pressures, including climatic hazards, and appropriate responses, in a context of rapid growth and weak institutions. With GEF support, and in partnership with the private sector, IDA is helping to develop a framework for forestry and wildlife management through the Transfrontier Conservation Areas project and will test and refine mechanisms to promote environmentally and socially sustainable development through the proposed Coastal and Marine Biodiversity Management Project accompanying this CAS. The Transfrontier project will also address issues of watershed management that will mitigate flood risk. Through its presence on the Maputo Corridor working groups for environment, tourism, and biodiversity, the Bank will continue to provide advice on environmental management as well as support to the development of a Strategic Environmental Management Framework for the corridor. IDA's sectoral programs (particularly health, PROAGRI, National Water I, and Municipal Development) will also provide support. In addition, a Natural Resources Management project will develop an environmental information system as well as build capacity within Government to enforce environmental regulations and address mining-related environmental challenges. Through the projects it finances, IFC will bring Bank Group environmental standards to the private sector, including financial intermediaries' assessment of environmental risk.  - 20 - 5. Promoting Innovation, Competitiveness and Employment 51. Issues and Government strategy: Creating on- and off-farm employment is a key objective of the Government's poverty reduction strategy. This requires a response both to build the capacity and competitiveness of Mozambican firms so they expand and create jobs, as well as to enhance skills in the workforce and professions to fill the technical positions in an expanding local economy. To sustain growth and employment at levels high enough to reduce poverty permanently, Mozambican firms will need to adopt new technologies and individuals to develop new skills, so that Mozambican businesses will become increasingly able to compete in extemal markets. To do so requires exposure to competition and competitive practices, access to information, increased capacity, and financing. In addition, the shortage of skilled personnel is constraining growth and limiting the distribution of its benefits among Mozambicans. To address this problem, the Government in January 2000 created a new Ministry of Higher Education, Science and Technology to focus on higher education, technical and vocational training as part of its growth and employment strategy. The Government is also developing a strategy aimed at improving opportunities for Mozambicans to participate in the labor market by strengthening the quality and improving the relevance to market demand of vocational and higher education, while strengthening the sustainability of these institutions and programs through fostering appropriate private-public partnerships in financing and service provision. Special efforts are aimed at promoting employment among women by targeting them for delivery of small and medium enterprise credits, tool kits, and training for informal sector employment. With NGOs, the Government is also supporting women's associations that assist women household,heads with weak economic capacity. 52. Bank Group support: The Bank will study labor costs, market policies and regulations to complement Government efforts to develop a strategy for higher education and vocational training. While the Bank is already supporting a large and fully-subscribed basic education program (see paragraph 63), under this CAS IDA will also support a Skills Development project focusing on tertiary, technical and vocational education and aiming to infuse, in Mozambique's labor market, the skills, practices, and attitudes required to create value-adding knowledge and innovation in production. The project, like the strategy upon which it will be based, is to be developed through a strategic partnership among Government, academic institutions, and the private sector. It will support comprehensive reform in the sector to enable the most effective delivery of the training and skills being demanded in the context of Mozambique's evolving labor market. IFC will support private education, focusing on the tertiary level, and has an initial project under development for a technical college. IDA's recently approved Enterprise Development project (PODE), as well as technical assistance and policy advice in the areas of private sector development and competitiveness, will expose local entrepreneurs to best-practice business techniques, management systems, and technological innovations and support knowledge transfer by promoting inter-company linkages. IDA is also prepared to provide small credits to support Mozambique's participation in the Regional Trade Facility (a facility permitting entrepreneurs to insure productive activities against political risk) as well as consultancy-led assistance to improve the competitiveness of one or more major Mozambican industries. IFC support facilities, including the Africa Project Development Facility (APDF) and the Africa Management Services Company (AMSCO) will be expanded to provide assistance to the local private sector, complementing the PODE. Through these facilities and outreach efforts, IFC will seek to involve more Mozambican businesspeople as sponsors in the SME projects it finances, and expand the number of those investments. AMSCO will provide training and capacity building for local firms, as well as management assistance. In addition, WBI's World Links program is introducing information technology and communication infrastructure into secondary schools outside of Maputo to improve student and teacher familiarity with this new technology: over the next few years, the program will be expanded to cover up to 100 schools.  - 21 - B. Improving Governance and Empowerment 53. This CAS will support efforts to develop a public administration that is responsive to its constituents and that effectively supports the country's poverty-reduction efforts. Limited administrative capacity and effectiveness is currently one of the primary constraints to growth, development, implementation of reform, and service delivery to the poor. Government efforts have been aimed at bolstering the civil service, reforming the institutional framework, including decentralization and deconcentration, and simplifying and increasing the transparency of administrative procedures and improving accountability. Under the governance pillar, the Bank will not be involved in providing support in the areas of peace, public safety, and personal and human rights, given the Bank's lack of comparative advantage and the support of other development partners in these areas. 1. Reforming the Public Sector 54. Issues and Government strategy: Public administration until very recently was highly centralized in Mozambique. Quality is also a concern: 80 percent of staff have no more than a 6t grade education and only 3 percent have higher degrees. To attract and retain qualified staff, the Government has decompressed salaries and instituted a new career stream system; it will also implement a medium-term pay policy and merit-based reward system, as well as a training program to reorient existing staff. In 1998, the Government's decentralization program created 33 elected autonomous municipalities and devolved to them the responsibility for urban management within their jurisdictions. The Government intends to increase the number of municipalities with each election cycle, and gradually transfer responsibility for other services. It is also exploring ways to deconcentrate responsibility for local development to provincial authorities and to encourage development planning at the district level. Further reforms, being developed by an interministerial group supported by a technical group, will develop a more results- and service-oriented public sector by redefining the sector's role and restructuring it accordingly. The Government will continue its efforts to improve budget and expenditure management and control to ensure that resource allocations are in accordance with national poverty-reducing priorities. Upon reelection, Mozambique's President has reiterated Government's commitment to fight corruption; Mozambique is one of the eleven countries which drafted and approved the 25 Principles to Combat Corruption under the auspices of the Global Coalition for Africa. 55. Bank Group support Support to the public sector reform program is threefold, with an emphasis on capacity building, including at the local level. First, the Bank will provide support to the technical group and initiate a Public Sector and Legal Reform project to assist the Government in implementing reforms in system-wide areas such as wages, decentralization, financial and personnel management. A public sector study, including an assessment of governance and of public procurement, will provide the diagnostic underpinnings for design of a program of reform. Second, given decentralization's role in improving service delivery while also empowering citizens, including the rural poor, this will be a principal focus of new Bank lending. IDA's Municipal Development project will assist in developing a framework for fiscal, financial and human resource management for the new municipalities and include a capacity- building component linked to the new National Institute for Public Administration, which will play a key role in wider public sector reform. IDA's Rural Action project will use small-scale community-driven rural infrastructure investments to strengthen the capacity of communities and local governments to plan and manage local infrastructure and services. Through WBI's pan- African Municipal Development Program and AFRICITIES conference series, the Bank is also strengthening capacity in the areas of inter-governmental fiscal relations and financial management as well as community participation in local government. Third, to help the  - 22 - Government improve economic management as well as transparency and accountability in its budget system, the Economic Management and Private Sector operation will help to strengthen budgetary execution, accounting, and auditing. The Bank will also continue to provide policy advice in support of reforms in customs administration. In the area of corporate governance, the Public Sector and Legal Reform project will help to strengthen capacity in accounting and establish a professional accountants group. IFC (through AMSCO) is providing training to selected firms in the area of corporate governance, and strengthening capacity in accounting in the private sector. 2. Improving the Rule of Law 56. Issues and Government strategy: In Mozambique, the legal and judicial system is outdated, inefficient and poorly equipped to ensure the rule of law. Dissemination and enforcement of current laws is poor, particularly outside the main cities, and weakness in the legal sector is impeding progress in other sectors as well as the development of the private sector. Commercial law, family law, and the criminal code are critically in need of reform. These are all on the Government's agenda. A strategic plan for the justice system should be completed in 2000, and a legal reform commission has been established. The plan is expected to address key legislative reforms, capacity-building needs, and institutional reform in the Ministry of Justice, Supreme Court, Attomey General's Office and Administrative Tribunal. To increase capacity, a Center for Judicial Studies and Training is being opened and efforts are being made to disseminate legal texts throughout the country to legal professionals. The Government has prioritized the adoption of legislation that will foster private sector activity, and work is continuing on revising the Commercial Code. To help secure women's rights, the Government is expected to revise the Penal Code to include provisions for prosecuting domestic and sexual violence and Family and Succession Laws to guarantee women's rights to succession and to independent economic activity. The Government is also working with NGOs to combat violence against women, and female officers are being recruited into the police force. 57. Bank Group support The Bank's Legal Sector Capacity Building project has supported the training of legal professionals, strengthening of the Faculty of Law, developing legal code reform, and disseminating knowledge of the law. The Bank is also supporting revision of the Commercial Code. After the Government finalizes its strategic plan, the Bank expects to renew its support in this area. An assessment of the legal and judicial sector will be undertaken. It will direct the development of a legal component in the Public Sector and Legal Reform project, which will aim at improving the legal environment and judicial system witlh a view to promoting private sector growth. IDA's work in the judicial sector will be undertaken in coordination with other external partners, some of whom have extensive previous involvement in this sector, and IDA's financial support to the sector will be scaled accordingly. C. Increasing Human Capabilities 58. The short-term urgency of improving low living standards and the longer term objectives of improving human capabilities, increasing growth, and reducing poverty motivate the Bank's continued support of efforts to improve human capabilities. Most of the Bank's financial support under this pillar, chiefly in the area of primary health and primary education, will continue to be delivered through ongoing operations.  - 23 - 1. Preventing and Reducing the Impact of HIVWAIDS 59. Issues and Government strategy: About one in seven adult Mozambicans carries the AIDS virus, which is now the largest single threat to Mozambique's prospects (see Box 1). To date, resources directed to the fight against HIV/AIDS has not reflected the magnitude of the risk that it poses to the nation's development effort (as is evident in Annex E). In September 1999 the Government adopted a National Strategic Plan (2000-2002) for Fighting STDs/HIV/AIDS at a national workshop presided by the President. The Plan aims to provide essential services to prevent infection and reduce the impact of AIDS, targeting some 1.6 million people with high- risk sex partners as well as 15,000 people and their families living with HI-V/AIDS along the main transport corridors. Given the cross-cutting developmental implications of the HIV/AIDS epidemic, the Government has recognized that effective H1V/AIDS prevention, care, and control strategies require a multisectoral response. To this end an Interministerial Committee for AIDS, involving eight ministries, is being created to have general oversight responsibilities for implementing the National Plan, and a National AIDS Commission is being established with more direct national management responsibilities. 60. Bank Group support: The existing IDA portfolio and pipeline are being reviewed and revised to include appropriate HIV/AIDS prevention and care activities wherever possible. The ongoing Enterprise Development project and the roads program already include components with this objective. Through an IDF grant, IDA is supporting the establishment of the National AIDS Commission, which will define objectives and strategies in priority areas for HIV/AIDS prevention and control; integrate these strategies into government sectoral plans; and establish workplans, budgets, management, and monitoring mechanisms for their implementation. The Bank also supports UNAIDS and, in its capacity as an aid coordinator, will play an active role in increasing HIV/AIDS awareness in Mozambique. Because Mozambique and some of its external partners are expected to finance the US$40 million National Strategic Plan through grants, no IDA operation in support of this Plan is currently anticipated. However, IDA is prepared to expedite new lending should any financing gap emerge. 2. Improving Health 61. Issues and Government strategy: Despite increased Govemment spending, health outcomes continue to be poor and health resources inequitably distributed, with per capita spending on health being four to five times greater in Maputo city than in Zambezia and Nampula. The Government's health program aims to improve access and quality, particularly in rural areas, with a view to reducing morbidity and mortality and increasing economic productivity. The program is oriented toward primary care, which will benefit the poor, and targets reductions in infant, child, and maternal mortality and increases in DPT coverage. It also focuses on improving health service coverage in rural areas. The program includes capacity building and training of traditional birth attendants in rural areas with a view to reducing levels of maternal mortality, consolidating preventative programs for women's health, and reviewing staff recruitment methods and training to incorporate gender concems. The Government is now formulating a new sector strategy in consultation with its partners, who will be reorganizing their support to the sector in the form of an expanded SWAP. 62. Bank Group support: The Government has asked the Bank to help facilitate the transition from a sector program to a full SWAP and coordinate donor support of the new strategy. The Bank will continue to support the sector through its existing Health Sector Recovery program (HSRP), which aims to increase access to health services through improved service delivery and institutional development. IDA will also develop a new Health (SWAP) credit to support the new program, but because many external partners are channeling grant  - 24 - money into this sector, new lending is likely to be limited. The Bank is also prepared to support the Government's Roll Back Malaria campaign with advisory services and financial support. IFC will support the expansion of private medical services. 3. Improving Education 63. Issues and Government strategy: Improving access and quality, particularly for primary education, remain key objectives. In launching its Education Sector Strategic Program (ESSP) in 1998, the Government placed education at the center of its efforts to boost economic and social development. The fully subscribed program of over US$700 million aims to improve quality (through increasing teacher training, improving learning materials, and revising the curriculum) and access (through constructing classrooms and improving internal efficiency); it also aims to strengthen institutional capacity for management, policy development, monitoring and evaluation. To mitigate regional and rural-urban disparities, the Government is further decentralizing education management and shifting budget allocations. In the effort to reduce the gender gap in schools, provinces with highest gender disparities have been targeted, and a program is in place to sensitize communities and reform curricula and texts to demonstrate the issues and benefits of girls' education. To improve adult education, literacy programs, which target women and include courses on domestic violence, women's rights, and land access, are being provided outside schools. 64. Bank Group support: The Bank assisted, with 18 other partners, in developing the education sector program and will continue to support its implementation with the ongoing ESSP project, focused on strengthening quality, access, and institutional capacity. The Bank is also assisting the Government in an ongoing study to explore alternative models for financing the education sector and it will initiate a Skills Development project under this CAS (see paragraph 52). IFC support for private education will be expanded. 4. Social Protection 65. Issues and Government strategy: The Government's Integrated Program of Social Action, Employment and Youth includes safety net programs to protect the vulnerable and the chronically poor, and training and job-creating programs to assist the able-bodied poor; social assistance and psycho-social rehabilitation are also covered. Currently targeted groups include female heads of households, malnourished pregnant women, the elderly disabled, and the chronically ill. The PARPA calls for improving the quality of social protection programs which will require assessing appropriate targeting, eligibility criteria, and coverage levels as a step to developing programs for marginalized groups currently not covered. Pension schemes are also a matter of Government interest; to ensure the sustainability and efficacy of these schemes, the Government is developing regulations for private schemes and undertaking a study on the main national schemes. In restructuring and resizing public institutions, such as customs and the railways, the Government is putting into place programs that will support the transition of workers to other productive activities, including through retraining. Disaster mitigation and management form part of the Government's social protection programs. Three govermnent agencies, the National Water Directorate, the National Meteorological Institute, and the National Institute for Disaster Management share direct responsibility for anticipating hazard events to prevent and prepare for disasters; existing capacity to perform these functions is to be strengthened, including with respect to local, regional and sectoral linkages. The advancement of women is also a stated objective of the new Government, and responsibility for gender issues was recently given to the Ministry of Social Action and Women.  - 25 - 66. Bank Group support Given the substantial scope for grant financing in the area of social protection, the Bank's support here will be principally in the form of analytical work and policy advice. In particular, the Bank will provide informal policy advice on social protection and safety net issues as part of its overall assistance to the Govermnent in developing its Poverty Reduction Strategy. WBI will also play a role in providing training and capacity building in this area. Through the Railways and Ports Restructuring project, support is to be provided for the retraining and redeployment of workers resulting from the restructuring of CFM. In addition, the Bank will assist the Government in undertaking diagnostic work on its pension system through this project and will provide further support in this area, if required, through the next programmed adjustment operation. The Bank will also provide informal policy advice and technical assistance in the area of institutional capacity building for disaster prevention and preparedness. In addition to related measures being implemented through the Bank's National Water Development Project (NWDI), should the need arise, a small, free-standing technical assistance operation will be considered to support efforts in disaster prevention, preparedness, and management. IV. THE BANK GROUP'S COUNTRY ASSISTANCE STRATEGY: IMPLEMENTATION A. Alternative Scenarios for the Lending Program and Non-Lending Services 67. The Base Case: Base case lending over the three-year CAS period (FY0 I-FY03) would range from US$455 million up to the IDA authorized lending envelope of US$540 million. (See Annex Bl). Lending levels in the base case are likely to be below the authorized envelope to take into account the country's absorptive capacity, the availability of grant funds from other donors, the Government's debt management strategy, and a recognition that in Mozambique's current political environment some time is needed to ensure adequate public information and debate about new reforms. Adjustment lending (the US$100 million Economic Management and Private Sector operation programmed for FY02) would decline relative to the previous CAS and represent about one-fifth of total lending. The base case lending program (described in Section III above) aims to help Mozambique sustain high, broad-based and inclusive growth, and to ensure that the benefits of growth are equitably distributed, particularly to the poor. Capitalizing on the Bank's comparative advantage, a substantial non-lending work-program is designed to contribute to developing the PRSP and to provide analytical foundations for the design of Government programs as well as the Bank's lending program (see Box 6). The number and volume of IFC investments, which will depend on demand from private investors, is expected to expand significantly during the CAS period given the expansion of infrastructure, and the potential for further large projects. 68. The triggers for the proposed base case lending program will be monitored on an ongoing basis by the Bank's Country Team and will include: * Formulation by end 2001 and implementation thereafter of a comprehensive public sector reform and governance program, that includes specific government actions to improve public sector capacity and fiscal management and to contain and reduce corruption. * Substantial adherence to the agreed timetable for developing a poverty reduction strategy paper (PRSP) with monitorable indicators through a consultative process; and subsequent satisfactory implementation of the PRSP, including satisfactory progress in achieving targets under programs in health, education, water, and roads. * Substantial progress in implementing the National Strategic Plan to Fight STDs/HIV/AIDS. * Continued satisfactory portfolio performance, including continued high disbursement ratio (around 20 percent) and low percentage of problem projects (around 10 percent or less).  - 26 - 69. The High Case. The high case will materialize principally on the basis of an increase in absorptive capacity. Absorptive capacity would be improved through progress in reforming public administration, strengthening public and private sector governance and capacity, and expanding skills and knowledge, thereby also improving portfolio performance. Under the high case scenario, economic growth would be close to or in excess of seven percent per annum for 2001 and beyond, based on successful and timely implementation of Government programs as well as increased investor confidence and private investment. This would result in continued expansion of the agricultural, manufacturing, and tourism sectors, as well as faster growth in exports, including from megaprojects. 70. With strong growth, improving social indicators, and improved participation through decentralization, political support for the reform program would broaden and reforms in the energy, transport, and Box 6: CASNon-LendihgAdivities telecommunications sectors would be accelerated. The Energy Reform project would be advanced into FY01, and, if Public Sector Reform Study deregulation of the energy sector is substantially completed in the a Public Expenditure Review next two years, an Energy Development project (not in the base e Legal and Judicial Study case lending program) would be brought into FY03. If public * Poverty and Growth Linkages sector reform accelerates, and there is substantial adherence to D Constrapnts to Private Sector agreed pay reform, training systems, and career stream systems, * Environment: Critical Pressures work on the Public Sector Reform Strategy and on the Legal and Judicial study would be expedited, permitting the Public Sector Policy Advce and TA and Legal Reform project to be advanced into FY02. With * PRSP Support * Enhanced HIPC Initiative relevant sectoral progress and adequate upstream AAA, the E HIV VA IDS second phase of support to the Health SWAP could be advanced * Private Sector/Competitiveness into FY02 and a second adjustment operation, to be focused on Advice private sector development, could be brought into the current * Maputo Corridor Advice CAS period. Lending volumes under the Rural Action and a Disaster Prevention and Energy Reform projects would be increased. Depending on a Mitigation and Management number of factors, including overall economic performance, the * Regional Energy and degree of political consensus, the pace of reforms in the various MegaprojectsAdwce sectors, the extent of Bank preparedness as demonstrated in * Financial SectorAdvice relevant and high-quality upstream ESW, and Government * Global Distance Learning Network, Schoolnet World Links capacity-and willingness-to absorb higher levels of for Development; Municipal indebtedness, lending could increase up to US$655 million in the Development/AFRICITIES (WBI) high case. IFC * Technical assistance tofinancial 71. Triggers for the high case would include all indicators institutions for the base case plus: * FIAS work on investment red tape * Advisory assistance to SMEs * Formulation by end 2000, as well as satisfactory and * Infrastructure advisory work accelerated implementation thereafter, of a * Megaprojects advice comprehensive public sector reform and governance program, including progress specifically in actions to improve public sector capacity and fiscal management. * A full PRSP endorsed by the Bank's Executive Directors, together with a record of timely and substantial implementation, achieving or exceeding key targets on or ahead of schedule. * Significant progress toward demonopolization of the energy, transport, and telecommunications sectors.  - 27 - Strong portfolio performance (with the share of problem projects remaining below 10 percent and disbursement ratios exceeding 20 percent). 72. The Low Case. The low case scenario for Mozambique would result if political instability led to government paralysis or to civil strife, or if Mozambique were to become entangled in regional conflicts, or if governance problems severely impede the delivery of services and the continuation of economic reform efforts. Other possible triggers of the low case include a major crisis in the financial sector; substantial shifts in economic policy towards reasserting state control over productive activities; or major distortions in price, trade, or exchange policies that impede the development of markets. Whatever the cause, the low case would likely be characterized by recession, increasing and ultimately high inflation, decreased investor confidence, and an extended and pronounced decline in balance of payments support. This in time would result in real declines in social sector spending and a reversal of gains in social indicators. 73. Triggers for the low case include: * Significant deviation from poverty-reducing policies outlined in the agreed PRSP (including reductions in the share of spending allocated to priority poverty-alleviating activities such as primaiy education and primary health care). * Significant reversals in economic reform policies, especially related to overall macroeconomic management, the financial sector, privatization and trade policy, leading to a more closed and centrally-controlled economic environment. * Civil strife, war, or governance practices which cause the external development partners to significantly reduce their level of support for an extended period. * Significant deterioration in portfolio performance (with problem projects significantly greater than 10 percent and disbursement ratio significantly less than 20 percent for an extended period of time). 74. In the low case, new IDA lending will be constrained to US$170 million over the CAS period. Beyond a self-standing emergency operations in health, IDA will proceed only with the Roads and Bridges project, the Municipal Development project, and a scaled-down Rural Action project aimed at improving governance and basic service delivery in urban and rural areas. The Roads and Bridges project would experience delays in achieving effectiveness due to slower than expected completion of the existing roads project. In the low case, non-lending work would also be scaled back and reoriented to assess the Government's commitment to its poverty reduction strategy and to advise the Government on managing the economy. Completion of the proposed Public Expenditure Review and the PRSP would remain important in this context. B. Development Partnerships 75. Mozambique receives almost US$600 million in aid each year, making aid coordination a key concern. The bilateral donors are most active in infrastructure, rural development and agriculture, health, and education (see Annex B9 and Annex E). Political governance, peace, social protection and human rights-areas where the Bank is not active-also receive strong bilateral support. Multilateral activity covers many areas, including political governance. Under the Development Assistance Framework (UNDAF), the UN system is concentrating on governance, health and education, empowerment and the environment. The European Union has been active in infrastructure, civil service reform, agriculture, health and education; and the African Development Bank, besides providing balance of payments support, has been active in infrastructure, education and the environment. There is also significant NGO involvement in the  - 28 - social sectors and private sector involvement in infrastructure (e.g. upgrading the N4 road link between the port of Maputo and South Africa). 76. A large part of the Bank's work in Mozambique consists in developing and participating in development partnerships. Short-term aid coordination is one area of priority. In addition to the Consultative Group Meetings, which the Bank chairs, there are also monthly meetings of Heads of Mission and Heads of Development in Maputo, chaired by the UNDP. Mozambique's external partners look to the Bank for briefings, coordination, economic policy guidance, and sectoral leadership. Regular consultative meetings are held by the Country Office with the NGO Working Group, which is being expanded to include academic institutions. Over the longer term, the Bank will continue to play an important role in coordinating aid in the delivery of support to Mozamibique's overall and sectoral reform programs. Continued coordination through the SWAPs and further work on the PRSP will help to consolidate the partnership and enhance Government leadership and accountability. 77. A second area of priority concerns partnership within the Bank Group and with the IMF. Joint Bank and Fund work on the HIPC Initiative and PFPs has already brought the two institutions closer together. Ongoing work on the PRSP and the Enhanced HIPC Initiative will further consolidate this close relationship. Within the Bank Group, the Country Team structure has encouraged sharing information and improving coordination. IDA and the IFC work together closely. This CAS is an IDA-IFC product and IDA and IFC are housed jointly in the World Bank Group's office in Maputo. Improvements in the economy are likely to increase demand for MIGA guarantees. With the Bank Group's new emphases on governance, innovation, competitiveness, and knowledge management, there will be an increased role for WBI in delivering the Bank's strategy. WBI is also expected to play a role in the Bank Group's delivery of policy advice and training to assist Mozambique in formulating and implementing its Poverty Reduction Strategy. C. Program Monitoring and Evaluation 78. The Bank will monitor its program utilizing the indicators outlined in the program matrix (see Annex B9). These indicators and targets will be revised and updated to link more directly with the indicators in the full PRSP once it is completed, including a revision of sectoral targets, as necessary, to fully account for the impact of the floods. Critical systems for overall program monitoring and evaluation will be the M&E systems associated with SWAPs as well as several household surveys to be undertaken regularly by the Government. The Bank, in joint missions with the Fund, will monitor program implementation and performance under the PRSP and HIPC. In addition, another OED Country Assistance Review is expected to be undertaken prior to the next CAS to evaluate the overall program, and Client Surveys will continue to be undertaken to gauge responsiveness to client needs. The portfolio will be managed closely by the Country Office with annual portfolio reviews held with Government (see paragraph 30) and the Country Team will continue to use the ICR process, and OED reviews, as important inputs in improving the portfolio and its management. D. Risks and Risk Management 79. Mozambique continues to be a medium-risk high-reward country. The program faces six major risks over the next few years. First, there is the political risk that the opposition's dissatisfaction with the 1999 election results and limited participation in government may lead to political paralysis and possibly civil strife, drawing on dissatisfaction among some groups of civil society that believe that popular participation in decision-making is unduly limited. Second, the widespread perception that growth is not sufficiently benefiting most people, or not sufficiently  - 29 - benefiting Mozambican businesses and workers, could result in protectionist and distortive regulations on trade, labor, and capital as well as more general backsliding on reform. This would slow growth and employment creation, increase poverty, and concurrently reduce Mozambique's external financing prospects, particularly from foreign investment. Third, HIV/AIDS, if unchecked, could substantially increase poverty and compromise or reverse Mozambique's development, even in the short term. Fourth, despite efforts to strengthen public administration, capacity, and governance, gains in these areas may not materialize quickly enough to improve absorptive capacity and program implementation, particularly where this concerns assisting private sector initiative. Fifth, Mozambique's economic prospects are increasingly linked to those of the sub-region, such that adverse economic developments in neighboring countries, particularly South Africa and Zimbabwe, will dampen prospects for Mozambique. Sixth, Mozambique is extremely vulnerable to climatic variations, including drought and floods, that can adversely affect agricultural productivity and growth, water supplies, health, economic development, and progress towards alleviating poverty. 80. The Bank Group recognizes these risks and, where possible, will work to mitigate them. This CAS aims chiefly to increase the impact of growth throughout the country, and especially among the poor. With added emphasis on decentralization, IDA will work to ensure that development processes and institutions are more inclusive, increasing popular participation in the program. The Bank will support the PRSP process, which will include Government-led consultations to inform the design of policy while also improving awareness of Government work on poverty reduction and its achievements. The Bank Group will also improve dissemination of its analytical work, such as its ongoing growth prospects paper, to raise awareness of its poverty- reduction activities, the impact of policy choices, and the benefits of strategic thinking on competitiveness. The Government's National HIV/AIDS Plan is a critical step toward limiting the spread of the disease, and the Bank will be playing an important role in supporting that program, including galvanizing increased resources and offering new lending, if necessary, to step-up the program. The Bank will also help to improve public sector administration and governance. Where capacity and institutional constraints in strategic areas compromise growth and poverty reduction, alternative institutional arrangements will be explored (e.g. as occurred in temporarily contracting customs to the private sector). With regard to the potential for regional crises, the Country Team is working closely with Country Teams for the rest of Southern Africa to understand and to support efforts to mitigate regional crises and their spill-over effects. Mozambique's gradual diversification of trade with other countries in the region and the world, along with its active participation in regional organizations, will also mitigate this risk. Finally, the Bank will support Mozambique's efforts at the local, national and regional levels to identify, reduce and transfer risks associated with hydro-meteorological hazards. CONCLUSION 81. Mozambique is an extremely poor country which, unlike many other impoverished countries, has significant and real potential for growth and poverty reduction in the relative near term. Just as important, its Government has to date shown serious commitment to the objectives of poverty reduction, manifested by a sound reform program and, most recently, by its interim Poverty Reduction Strategy Paper. The country's potential, coupled with its commitment and programs, are yielding results. Yet there are daunting challenges and risks to be confronted if Mozambique's potential is to be realized. The Bank has played an important role in supporting Mozambique's impressive progress over the past decade. Selecting the right development constraints to address at the right time - in an enviromnent of significant commitment but limited capacity - has, in large part, been key to the success of the Government and of the Bank in Mozambique. This CAS proposes that the Bank Group, with some shifts in focus, continue its strong support to Mozambique over the next three years. Increasing economic opportunities,  - 30 - enhancing govemance, and improving human capabilities are all part of the long-term agenda for poverty reduction in Mozambique. With its program under this CAS, the Bank Group proposes to continue its partnership with the Government and all of its development partners in this endeavor. James D. Wolfensohn President By: Shengman Zhang Peter L. Woicke Washington, D.C. May 8, 2000  - 31 - Annex A2 Page 1 of 2 Mozambique at a glance 5/9'00 Sub- POVERTY and SOCIAL Saharan Low- Mozambique Africa income Development diamond 1999 Population, mid-year (milNlons) 17.3 628 3.515 Life expectancy GNP per capita (Alias method, US$) 230 480 520 GNP (Atlas method US$ bilblons) 4.0 304 1.844 Avera annual growth, 1993-99 Population %)- 2.2 2.6 1.7 G Gr-. Labor force (%) 2.4 2.6 1.9 GNP Gpnmary Most recent estimate (latest year available, 1993.99) capita enrollment Poverty (% of population below natonal poverty line) 69 Urban popultion (% of total population) 38 33 31 Life expectancy at birth (years) 47 51 63 Infant mortality (per 1,000 lIve births) 134 91 69 Child malnutriton (% of children under 5) 41 Access to safe water Access to safe water (% of Popu/ation) 24 47 74 literacy (% of populahion age 15+) 60 42 32 Gross ptimary enrollment (% ofschool-age poWatIon) 71 77 108 Mozambique Male 79 84 113 Low-income grup Female 60 69 103 _ _ KEY ECONOMIC RATIOS and LONG-TERM TRENDS 197t 1988 199S 1999I_ Economic ratios GDP (US$ billions) .. 2.1 3.9 4.2 Gross domestic investment/GDP 15.1 20.4 35.5 Trade Expofts of goods and serviceslGDP 8 a1. 11.7 13.4 Gross domestk savings/GDP -14.1 1.7 11.0 Gross rational savings/GDP 1/ -5.8 0.8 12,8 Current account balance/GDP 11 -31.4 -20.5 -31.7 Domestic Interest payments paid after reschedulin/GDP 21 1.2 1.5 1.5 Savings i Investment Total debt after rescheduling/GDP 200.7: 204.1 1022 Si Total debt service after rescheduling/exports 2. 21.6 29.0 28.0 Present value of debt after reschedulinglexports 3/ 41 538.0 202.0 Indebtedness 197848 1989-99 1998 1999 2000-04 (average annual growth) GDP -2.2 5.7 12.0 9.0 75 - Mozambique GNP per capita -5.0 3.6 9.3 6.4 5.S Low-income group Exports of goods and services -11.5 14.2 6,5 8.3 26.0 ____ STRUCTURE of the ECONOMY 1978 1988 1998 1999 Growth rates of output and investment (%) (% of GDP) 100 Agriculture 42.9 34.3 31.6 so0 Industry 25.4 20.8 24.1 so.- Manufacturing 10.5 12.6 40- Services 31.7 44.9 44.3 20 0* Private consumption 103.6 89.0 78.8 .20 94 9s 96 97 99 99 General govemment consumption 10.5 9.3 10.2 GDI GDP Imnports of goods and services 37.3 30,5 37.9 O 197848 1989-99 1998 1999 Growth rates of exports and imports (%) (average annual gnwth) AgricuRure 4.2 7.0 5.4 '0 Industry 8.0 22.9 12.6 40 Manufacturing 16.4 7.5 16.0 20 Services 5.7 9.9 7.9 0 Private consumption -3.6 3.2 11.8 8.7 se 97 9s 99 General govemment consumption -4.1 -5.1 32.2 9.3 Gross domestic investment 2.2 11.5 29.4 83.9 -40 Imports of goods and services -5.7 2.2 24.2 55.3 -Exports -Imports Gross national product -3.1 5.9 11.8 8.6 Note: 1999 data are preliminary estimates. GNP per capita Atlas method for 1999 is not official. 1/ Exduding capital official grants. 21 Including private debt. 3/ Excluding private debt. 4/ As percent of three year moving average of exports of goods and non-factor services. The diamonds show four key indicators in the country (in bold) compared with Rs income-group average. If data are missing, the diamond vwll be incomplete.  -32 - Annex A2 Page 2 of 2 Mozambique PRICES and GOVERNMENT FINANCE Domestic prices 1978 1988 1998 1999 Inflation (%) (% change) s0 Consumer prices .. 58.5 0.6 2.0 s0 Implicit GDP deflator .3248.3 3.8 5.2 40 Government finance 201 (%6 of GDP, includes current grants) o Currentrevenue .. 15.9 15.7 17.6 94 95 98 97 98 99 Current budget balance .. 2.3 4.3 5.4 - GDP deflator - cPI Overall surplusldeficat .. -11.0 -6.5 -6.2 1 TRADE (US$ miions) '1978 1988 1998 1999 Export and Import levels (US$ millions) Total exports (fob) .. 103 248 260 1 soo Cashew 49 27 41 35 1,400 Prawn 16 44 73 75 1.200 Manufactures .. 0 14 20 1,000 Total imports (cif 658 868 1,346 sW Food . .. 32 39 40 Fuel and energy 84 86 200 _____|| _ ||| ||__ __ Capital goods . .. 211 307 0 93 94 9s 06 97 9 599 Export price index (1995=100) . 99 95 97 Import price index (1995=f100) . 82 88 89 D Exports D Imports Termsof trade (1995=100) . 120 108 108 I_ BALANCE of PAYMENTS (USS millions) 1978 1988 1998 1999 Current account balance to GDP ratio (%) Exportsofgoodsandservices .. 188 534 559 0