Mozambique - Second Rehabilitation Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4608-Moz REPORT ANDI RECOMMENDATIONS OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCTATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CREDIT OF SDR 54.5 MILLION AND A PROPOSED AFRICAN FACILITY CREDIT OF SDR 14.5 MILLION TO THE PEOPLE'S REPUBLIC OF MOZAMBIQOUE FOR A SECOND REHABILITATION CREDIT July 16, 1987 This document bas 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.  CURRENCY EQUIVALENTS Currency Unit = Metical (pl. Meticais) US$1 = 200 Meticais (May, 1987) M1.00 = US$0.005 ABBREVIATIONS AND ACRONYMS AGRICOM - State Enterprise for Trade in Rural Areas BOM - Bank of Mozambique BOROR Agricultural Import Maketing Agency CG - Consultative Group CNP - National Planning Commission CNSP - National Wage and Price Commission ERP - Economic Rehabilitation Program FRELIMO - Front for the Liberation of Mozambique (National Governing Party) GDP - Gross Domestic Product IDA - International Development Association IFC - International Finance Corporation IMF - International Monetary Fund OE,D - Organization for Economic Coordination and Development OPEC - Organization of Petroleum Exporting Countries PAE - Economic Action Program, 1984-86 PFP - Policy Framework Paper PPF Project Preparation Facility SFA - Special Facility for Africa SJF - Special Joint Financing SRC - Second Rehabilitation Credit UNDP - United Nations Development Program FISCAL YEAR Government of Mozambique: January 1 - December 31  FOR OFFICiAL UME ONLY PEOPLE'S REPUBLIC OF MOZAMBIQUE SECOND REHABILITATION CREDIT CREDIT SUNMARY Borrower: People's Republic of Mozambique Amount: IDA Credit SDR 54.5 million (US$70.0 million equivalent). SFA Credit SDR 14.5 ....lion (US$18.6 million equivalent). SJF Swiss Grant SwF 16.9 million (US$11.4 million). Term: Standard for both IDA and African Facility Credits. Project Description: The proposed Second Rehabilitation Credit would support the Government's Economic Rehabilitation Program (ERP) which is designed to reverse the declining trend of the Mozambican economy. The Program involves the implementation of specific policy and institutional reforms in 1987 and studies to prepare the needed measures for 1988. The policy areas addressed include: (i) _he external sector. including the trade regime and foreign exchange allocation; (ii) pricing and distribution policies; (iii) fiscal policy including public expenditures; (iv) agricultural marketing and producer prices; (v) industrial pricing and efficiency; and (vi) transport sector efficiency. The foreign exchange W.o be provided under the Credit would be used to finance priority imports needed for the recovery of economic activity. The principal benefits of the ERP are expected to be the establishment of an economic framework in which growth may resume, and the reversal of the serious economic decline since 1980. The primary benefits will accrue to the rural sector, notably the family producer, as a result of the significant production response to the policy reforms. The ERP will also facilitate improvements in resource allocation and utilization throughout the economy through the strengthening of economic management and aid coordination. Risks: The ERP is subject to the usual political risks inherent in such a major policy initiative including the danger of increasing opposition from the general public as the inevitable short-term social costs of the program are felt, notably in the urban areas. Furthermore, the major changes in ie system of economic management, witn the relazation of the central direction and control of productive and 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 authorisation.  - ii - trading enterprises, may also meet intemnal resistance from interest groups which have previously benefitted. The additional risk is that continuing security problems will prevent an adequate and sufficiently rapid supply response, and erode political support for further reform. There are, however, a number of factors that will help to reduce the overall risk to the ERP. Firstly, the Government is strongly committed to the reforms, as witnessed by the number of important reforms already implemented. Furthermore, the provision of technical assistance by the Bank and by other donors will eane the management capacity constraints and assist the implementation process. Moreover, Bank staff will closely monitor the progress in execution of the program. Estimated Disbursements: A total of about US$100 million would be disbursed in two equal tranches. The first tranche of US$50 million would become available for disbursement as soon as the credit becomes effective. The second tranche would become available after a review of second tranche release conditions in November/December 1987. Rate of Returns Not applicable Appraisal Report: None IBRD-18436  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECONM2ENDATION OF THE PRESIDENT TO TEE EXECUTIVE DIRECTORS FOR A PROPOSED SECOND REHABILITATION CREDIT TO TES PEOPLE'S REPUBLIC OF NOZAMBIQUE 1. I submit the following report and recommendation on a proposed IDA Credit of SDR 54.5 million (US$70.0 million equivalent) and a proposed African Facility Credit of SDR 14.5 million (US$18.6 million equivalent) and a Special Joint Fin-ncing Swiss Grant of SwF 16.9 million (US$11.4 million equivalent) on standard terms to the People's Republic of Mozambique for a Second Rehabilitation Czedit. PART I - THE ECONOMY 2. The People's Republic of Mozambique became a member of the World Bank in September 1984. An economic report (Report No. 5610-MOZ) entitled: 'Mozambiques An Introductory Economic Survey,' was distributed to the Executive Directors on June 6, 1985. Subsequently, economic missions visited the country in November 1985, December 1986 and March 1987. The findings of these missions are reflected below. Background 3. Despite considerable natural potential, Mozambique at the time of Independence in 1975 was an economy beset by major problems attributable to the distorted structure of the economy, and to the effects of the prolonged struggle for Independence. During colonial times the country was developed primarily as a service economy for neighboring countries; receipts from the provision of transportation services and from the remittances of Mozambican workers employed in South Africa helped offset a persistent and chronic deficit on external trade. Hozambique exported a variety of agricultural products including prawns, cashew, tea, cotton, copra, sugar and wood but these came mostly from the estate sector while the traditional smallholder sector was largely neglected. The industrial sector was characterized by high cost activities dependent on imports of raw materials and spare parts and a steady supply of cheap credit. The level of human resource development was low, even compared with the rest of Sub-Saharan Africa. Life expectancy was well below the average for the rest of Sub-Saharan Africa and the literacy rate was only 7 percent compared to 28Z for Sub- Saharan Africa as a whole. The exclusion of most of the local population from education and training meant that non-Africans dominated modern sector employment. 4. These structural distortions meant that Mozambique was highly vulnerable to a series of exogenous shocks from which the economy has suffered in the post-Independence period. In addition to the climatic  -2 problems and shifting terms of trade that have affected many other countries in Africa, Mozambique was seriously affected by the mass exodus of 90Z of the Portuguese settlers which began just before independence and continued into the post-independence period. This exodus included plantation and factory owners, settler farmers, transport and industrial workers, shopkeepers, government administrators and professionals and created major disruptions throughout the economy. The country has also been severely affected by the increasing instability and turmoil in the Southern Africa Region. Between 1976 and 1980 Mozambique implemented United Nations sponsored sanctions against Rhodesia, at an estimated cost to the economy of US$150 million per year. In addition, the economy suffered substantial foreign exchange losses o. account of the reductions after 1976 in the number of Mozambicans working in South Africa; the diversion of South African transit freight from Mozambique in the period following Independence to the newly completed ports of Richards Bay and Saldanha Bay; and the expiration of the agreement with the South African Government under which a partial payment of expatriate miners' salaries was made to the Mozambican Government in gold at below-market prices. Finally, attacks by armed bands have caused insecurity and dislocations, disrupting production, marketing and transportation. 5. In the immediate years after Independence, the government was obliged to take over abandoned enterprises in agriculture, industry and services in order to ensure the basic functioning of the economy. Subsequently, followin.g the directives of the Third FRELIMO Party Congress of 1977, the government further developed and consolidated its role in the economy, and c onomic management became increasingly centralized. In agriculture, state farms were established and parastatals began to dominate agricultural marketing. Production targets were established for many enterprises and agricultural inputs and outputs were increasingly subject to administrative allocation. The Government continued the pre- Independence system in which prices were "fixed' at all stages of the prod\uction and distribution process, either by the Council of Ministers, the National Wage and Price Commission or the provincial Governments. But price changes were rare, and the structure became progressively divorced from the realities of the market. These rigidities in the pricing and marketing system, combined with a concentration of resources on the state farm sector, severely constrained agricultural, especially smaliholder, production. 6. In the industrial sector, state trading companies came to dominate foreign trade and parts of domestic trade and production. With the development of the National Planning Commission in 1978, and the subsequent moves towards centrally ditucted allocation, the autonomy of enterprises was greatly reduced and industry became increasingly constrained in its patterns of production and trading. Most industrial prices were "regulated"; (i.e., set by the enterprise but subject to specific parameters, provided by the sectoral ministries) and changed very infrequently. A strong emphasis on new investment at the expense of rehabilitation also contributed to poor industrial performance and to a severe deterioration in transport and othet infrastructure. In commerce, percentage mark-ups were established at all levels of transactions, as occurred in the Pre-Independence period, but marjins were adjusted very infrequently and the state became increasingly involved in administrative  allocation of goods and services. The state also became increasingly involved in external trade and in the administrative allocation of foreign exchange while maintaining the exchange rate at a level which severely undervalued foreign resources. The increasing role of administrative allocution throughout the economy and the extreme scarcity of skilled manpower led to much inefficiency in the use of resources. 7. The combination of structural weaknesses, severe exogenous shocks and the domestic factors noted above was disastrous for the Mozambique economy. After an initial deterioration the economy recovered a little between 1977 and 1981 but then deteriorated again and, by 1983, real GDP had fallen to around two-thirds of the 1973 level, and to around 50Z in per capita terms. Agricultural production stagnated throughout the period 1973-80 before falling at an average annual real rate of almost 10? between 1980-P^. Industrial production contracted dramatically up to 1976 to almost 50Z of its 1973 level, recovered a little between 1976-80, but subsequently fell heavily again at around 8 percent p.a. over 1980-83. Recent Developments 8. Prompted by the serious deterioration of the economy, the Fourth FRELIMO Party Congress initiated a reassessment of overall economic strategy and policy in 1983. In seeking to re-direct economic policy to stem the dramatic decline in production, the Congress decided that there should be an increased emphasis on the smallholder family subsector, and private commercial farmers. To replace the earlier, virtually exclusive, focus on the development of state farms and collectivization; that priority should be given to the rehabilitation of existing capacity and to increased efficiency in its use, rather than to new investment; and that the private sector should play an increasins role in the nation's economic development. 9. The Congress was followed by the adoption of an Economic Action Program embodying these objectives for 1984-86. In 1984, the Government introduced an export retention scheme whereby, on a case by case basis, export enterprises are allowed to retain a vAriable portion of their foreign exchange earnings for imports of needed inputs for export production; and enacted a new fesreign investment code to promote foreign direct investment. Subsequently. it liberalized the prices of fruits and vegetables in May 1985; issued a new labor law at the end of 1985 which gave autonomy to enterprise managers to lay off workers for economic reasons and reward higher productivity; and authorized some agricultural export enterprises to trade directly abroad. 10. These measures were important first steps in the effort to reform economic management, but, on their own, were insufficient to stimulate any significant economic turnaround. The fundamental system of centralized management and control continued, and the isolation of the economy from the forces of international and domestic markets only intensified. Fundamental problems were not addressed; notably those concerning the over-valuation of the exchange rate, the allocation of scarce resources including foreign exchange, the provision of incentives to agricultural producers, and the continuing rigid coatrols over distribution and pricing throughout the economy.  11. In addition, the exogenous influences on the economy became increasingly less fatvorable. Regional security deteriorated further, and, as a consequence, internal security worsened, taquiring 'ncreasingly higher budgetary expenditures devoted to defenses these now stand at 40? of total current expenditure. The disruption of all aspects of economic and social life has been severe. Even subsistence agricultural production has been seriously affected as people have been forced to flee their land, and the cumulative impact on economic infrastructure has become critical. Hostilities, coupled with a continuation of the natural disasters resulting from the adverse climatic conditions experienced by Mozambique, have left an estimated 4.5 milliou of the country's 14 million people suffering from dislocation and food shortages. 12. In consequence, the sericusness of diozambique's economic problems intensified and, until 1986, economic decline continued unabated. In 1986, however, there has already been a stabilization in the aggregate growth rate compared to the dramatic decline of 1983-85. While this may reflect a small response to the earlier general policy measures, it is largely attributable to specific crop oriented measures: notably, the provision of incentives to cashew and cotton producers. Agricultural production, in general, has continued to fall; and marketed grain production Jn 1986 fell to barely 10? of the total marketed food requirement, necessita ing grain imports of around 350,000 tons. In industry, firms have been operating at only 20-402 of capacity, resulting in mounting losses and increased dependence on easy bank credit. Transport and other services have declined dramatically. 13. The government's budgetary position has seen an erosion of the tax base due to declines in production and a shift towards parallel markets and continuing increases of expenditures, especially for defense. As a result, the current state budget has shifted from a modest surplus to a considerable deficit since the early 1980's, even without accounting for public enterprise losses. With these losses included, the current deficit exceeded 50X of current expenditure in 1986. The overall fiscal deficit in 1986, or a cash basis and including losses of public enterprises, amounted to 61? of total expenditures. The increased budget deficit and operating losses of state enterprises have led, as a counterpart, to substantial recourse to credit from the banking system, and external borrowing. As a result, the money supply stands at over 10OX of the estimated value of non-subsistence GDP. Credit policy has also been affected by the fact that commercial and central banking functions are both carried out by the Bank of Mozambique, without adequate separation of these functions. Despite some slowing of credit expansion in the past 2-3 years, non-performing loans make up the bulk of the banking system's portfolio. 14. Mozambique's balance of payments has become increasingly unsustainable. Between 1980 and 1986, foreign exchange eatnings from export and service receipts fell from about 502 of expenditure on imports of goods and services other than interest to 30?, reflecting the collapse of export receipts to 28? of the 1980 level. Non-agricultural exports declined to virtually nothing and within agriculture, only prawn export values were sustained, accounting for almost 50? of total agricultural exports by value in 1986. The rapid acceleration of external interest payment liabilities from US$6 million in 1980 to US$177 million in 1986  caused further pressure on the current account; the deficit reached almost US$600 million in 1986. Capital inflows fell dramatically, with official grant and net medium and long term inflows dropping from US$420 million in 1980 to US$130 million in 1986. Net MLT inflows were heavily negative over the period 1984-86. With inadequate finance to support the current deficit, and meet the scheduled debt service requirements, equal to 275 of exports of goods and services in 1986, arrears have accumulated rapidly. At the end of 1986, US$1.2 billion were in arrears. As a reflection of this deterioration of the country's balance of payments and its highly distorted price system, the domestic currency (metical) traded in the parallel market in 1906 at around 1,500 meticais per US$, while the official rate was 40 meticais per US$. 15. In 1986, Mozambique's outstanding public and publicly guaranteed external debt, including arrears, rose to US$3.2 billion. Of the outstanding stock of external debt, 402 is owed to OECD countries, about one third to centrally-planned economies, and the remainder to multilateral institutions and other countries, including tha oil producing countries. In 1984 and 1985, the Paris Club and OPEC countries, respectively, rescheduled arrears and current maturities totalling US$283 million and US$123 million. PART TT - THE ECONOMIC REHABILITATION PROGRAM Overview 16. In the face of such serious economic decline, the Government has recognized that it needs to accelerate the pace and significantly broaden the scope of institutional and policy changes if it is to correct the economy's financial imbalances, ease structural constraints and restore ec,nomic growth. While the adverse impact of existing exogenous factors will significantly dampen the prospective respo.nse o these reforms, the Government sees the changes as imperative if further decline is to be averced, and if the appropriate framework for future growth is to be established. Accordingly, it has formulated an Economic Rehabilitation Program (ERP) covering the period 1987-89, which has the objectives of stabilization, more efficient resource allocation and growth. 17. The overall objectives of the ERP are to: (i) reverse the decline in production and restore a minimal level of consumption and income for the population especially in rural areas; (ii) curtail domestic financial imbalances and strengthen the country's external payments position; and (iii) establish the conditions for more rapid and more efficient economic growth in the medium- to long-term, when the security situation and other exogenous constraints have eased. The ERP envisages that modest economic growth can be re-established in Mozambique in 1987, with an acceleration In the growth rate to between 3 percent and 4 percent being attainable in 1988 and 1989. The recovery woudi be centered on the agricultural sector, which would provide the needed increase in rural incomes and the foundations for a restoration of previous export levels. Export volumes should grow at over 8 percent, albeit from a low bass, with a strong responee anticipated from the family sector. While total real investment would stabilize, there  - 6 - would be a redistribution of the available resources towards rehabilitation and the completion of ongoing projects. The recovery of production and the external financing of essential imports should facilitate a relatively rapid growth in real consumption per capita averaginig in excess of 5 percent p.a. 18. In order to achieve the objectives of the ERP the Government intends to implement some major reforms in economic management. These reforms would: (i) progressively reduce centralized administrative controls and encourage more private sector participation; (ii) allow allocations based more on market-determined prices, credit policies, and other indirect means of guiding the economy, rather than on direct administrative intervention; (iii) establish more direct links between incomes and the performance of economic units and individuals; and (iv) improve the quality of planning and policy making, including ensuring that the public expenditu. program focuses on the economy s priority requir%ments. Because many of the reforms will take a considerable time to implement and have an effect, and because of the current domestic security problem, the Government will have to continue to rely on some administrative controls and allocation procedures at least for an interim period. 19. In line with the above objectives and strategy, the Government's actions will focus on key macroeconomic policy issues -- including the exchange rate and external trade policies, pricing and marketing policies, the budget, and credit; and will address policy and institutional issues in the key agricultural, industrial, transport, and energy sectors. Some major policy measures have already been undertaken in December, 1986, and in the first half of 1987. The local currency, the metical was devalued in two steps from 40 meticais to 400 meticais to US$1; and salaries and wages in both private and public sectors were increased by 50?, considerably less than the expected increases in official prices. Agricultutal and industrial prices were greatly increased (by up to 400Z in some cases); and most utility charges were raised substantially. Petroleum product prices were increased sixfold and electricity tariffs increased threefold. Road, sea, and air transport tariffs were also increased sharply by between 2002 and 4001. Several tax and expenditure measures have been introduced with the objective of reducing the Government's deficit. The key elements of the program that is now being pursued are outlined below, and suimarized in the matrix in Annex IV. External Policies 20. ExchanRe Rate. The Government recognizes that further adjustments in the exchange rate are critical to restoring economic incentives and integrating the official and parallel markets. Policy under the ERP is aimed at establishing a market-clearing exchange rate by the end of 1989, which will make it possible for the Government to rely much more on macroeccnomic management, rather than admdnistrative mechanisms, to manage the balance of payments. Accordilr31y, there will be adiustments in the exchange rate so that, by the end of 1987, the official rate will have attained 502 of the parallel market rate, and by mid-1988, the official rate will be at 70? of the parallel rate. The initial step in January 1987 (d2valuation from Mt.40 to Mt.200 to the US dollar) was followed by a  -7- significant reduction of the parallel rate from around Mt. 1500 to about Mt. 1000 to the UW dollar. Subsequently, on June 30, 1987, the official rate was further devalued to Mt. 400 to the US dollar. The Government, with the IMF will be reviewing exchange rate policy periodically and making further adjustrents as required. 21. Trade Regime. As the exchange rate realignment proceeds, the Government will progressively rcduce the scope of administrative allocations in the exchange and trade systems. To this end the Government will be reviewing the overall trade poll'y environment including the role of tariffs and quantitative resttictiont and will, by June 1988, prepare a program to increase progressively the number of imported products for which no administrative allocations will be made, and to define how the system would be managed. For these products, the Government will allow unrestricted purchases of foreign exchange through the banking system. In line with these changes, the Government will also be progressively reducing the number of product groups th_t must be traded through only one state trading corporation. Currently there are eleven such import product groups and three export product groups. By the end of 1987 the number of import product groups will be reduced to only five major ones (petroleum, pharmaceuticals, agrochemicals, cereals, electricity) and one export commodity (sugar). Further reductions will be made thereaft.-r. 22. Interim trade policy. Pending the attainment of a market-clearing exchange rate, the Government has adopted a number of interim measures for improving foreign exchange allocation. The export retention scheme was introduced in 1984 and has been steadily expanded to include, by end-1986, around 100 large producers that earn foreign exchange. In January, 1987, it was further broadened to include all exporters of non-traditional products. Recent revisions have also reduced the degree of discrimination in the system through the narrowing of the range of retention rates; and the danger of tying up scarce exchange in uneconomic uses is being diminished through the reductions in the average rate from 70? in 1984-86 to about 50? in 1987. In addition, purchases and sales of rights to import using foreign exchange retained under the scheme are now permitted through the banking system among participants in the scheme. In order to increase the availability of imports, the Government is also permitting the importation of goods whenever importers have their own source of foreign exchange and need no recourse to the banking system, subject to the following restrictions. For imports up to US$500, no licenses for importation are required; and for imports exceeding US$500, licenses are granted provided the goods are not for resale. The Government is now reviewing the export retention scheme with a view to making all exporters automatically eligible, reducing further the range of retent:'n rates, and increasing the transferability of retention proceeds. In addition, the Government is considering ways to permit designated wholesalers and retailers to import goods for resale at market prices. These improvements would be introduced in early 1988. 23. In this interim period, the Government also recognizes an urgent need to review its import program and to improve the efficiency of its current foreign exchange allocation system. For 1987 the import program has been discussed with the Bank, and is primarily oriented towards high  priority rehabil tation and production needs, as well as consumer goods as an incentive to :ral producers. The Government will establish aa improved foreign exchange allocation system, which will incorporate quarterly as well as annual, estimates of total foreign exchange availability and demand, and take into account the overall effici3ncy of operations of proposed users. Efforts to improve the use of tied donor financing for the purchasing of specific import needs will be undertaken. 24. Debt Policy. In view of Mozambique's acute external debt situation, the Government and the Bank of Mozambique do not intend to contract or guarantee external loans on nonconcessional terms of 1-12 years' maturity in excess of US$50 million during the period of the ERP. no more than US$20 million of which will be contracted in 1987. The Goverrment Is currently approaching all external creditors including those members of the London and Paris Clubs to obtain comprehensive debt relief over the duration of the program and beyond. Over the three years of the UP, the Government will refrain from accumulating new external arrears. except in the case of debt service payments subject to rescheduling. In addition, the management of esternal debt will be strengthened with the provision of technical assistance to the Bank of Mozambique. tricsla and Distribution Polities 25. The Government has decided as an integral part of the ERP to progressively dismantle the rigid system of pricing and allocative controls that currently prevails in most sectors of the economy. It does, however, consider it necessary to retain some limited controls in the following circumstances: for products that are considered strategic in light of the security problem; for essential products that are in very limited supply and for which an equitable regional distribution is necessary; and for products that are currently only traded by monopoly enterprises. 26. Pricing.1 Pricing policy is dtrected at reducing the number of products subject to direct price contr.ls and allowing market forces to guide price formation. Decontrol of pricing will be affected by transferring some goods from the fixed price list to either the regulated list or to be freely determined. As a result, the number of items with fixed prices2 will be reduced from 46 at present to 37 during 1987 and to 32 at the beginning of 1988; further reductions will be made during the ERP period. The system of regulated prices has been made more flexible by allowing managers to make pricing changes without prior approval, and 11 The precise definitions of 'fixed" and 'regulated" pricing are given in paragraphs 5 and 6. 21 These comprise: AJuriultural Droducts (26): maize, rice, beans, groundnuts, maize flour, sunflowers, sorghum, sesame, mafurra, wheat, wheat flour, marioc (dry), soya, copra, cashew, sugar, tea, cotton, meat, milk, fish, farelo, potatoes, goats, lamb, eggs; 8hermv yroducts (): electricity, hydrocarbons and derivatives, diesel oil, gasoline, coal; ILdusttrial products (14): cooking oil, tobacco, matches, batteries, soap, cement, packing materials, tyres, fertilizers, pesticides, bread, pasta, beer, salt; Services Uts rents.  9- subject only to z-post review (based on enterprise estimates of costs of production) by thi relevant sectoral ministry instead of the Ministry of Finance. As supply conditions improve, and competition increases, the system of regulated prices will gradually be phased out. For those products that will, at least initially, remain subject to control, the appropriate cost-price relationships will be restored, and, accordingly, the Government has already adjusted most fixed prices to at least reflect the January 1987 exchange rate change. Pricing policies for the agricultural, industrial, and transportation sectors are discussed in more detail below. 27. Distribution. In parallel with the changes in pricing policies, the Government will continue to open domestic trade, allowing increasing competition among trading corporations at all stages of the marketing system. Private and other enterprises are being permitted to buy an increasing number of products directly from state and other enterprises rather than through state wholesalers. The Government also intends to reduce progressively the number of domestic goods directly allocated, subject only to the limitations noted in paragraph 25, and to this end will be undertaking an overall review of the domestic allocation system and preparing an action program. It will also endeavor to improve the distribution of such goods still subject to administrative allocation and in particular to ensure that an increasing share reach rural areas. Of particular importance will be the administrative mechanisms for allocating food and other basic necessities to the 2-4 million people in rural areas that are currently unable to feed themselves. The Government will be maintaining a rationing system in Maputo and Beira, and extendinr.g t to other urban areas as an importast means of ensuring that the urban population is able to afford basic necessities at a time of major pricing, trade and other reforms. It will, however, be targetted in future on the most nutritionally vulnerable sections of the population. Fiscal Policy 28. Budget Deficit. The objective of fiscal policy in the ERP is to improve the overall fiscal position and reduce the Government's recourse to the domestic banking system. To this end, the authorities have developed a program with the IMF to reduce the current budget deficit (plus the transfers to cover enterprises losses) from in excess of 502 of current expenditure in 1986 to about 25Z in 1987. The overall fiscal deficit (on a cash basis and before grants) should fall from 612 of total expenditure in 1986 to 56? in 1987. The Goverament will be agreeing with the IMF later in 1987 on a specific program for the rest of the ERP period, aimed at further reducing the fiscal deficit. 29. Revenue Policy. Policy is focussed on increasing revenue throughout the ERP period. In 19e7, total revenue is projected to increase by almost 3002, following the major exchange rate and pricing adjustments that were introduced at the beginning of the year. These included: an increase in the turnover tax, substantial increases in various specific consumption and import taxes, increases in the base oC the companies and individual income taxes, and the collection of business profits tax on a  _ 10 - current basis ratter than with a one-year lag. A review of the tax system and its administration will be conducted in 1987 by the Government, with the assistance of the IMF, in order to study the effects of the tax reform, and if necessary, introduce additional measures in conjunction with the 1988 budget to further bolster revenue, increase efficiency, and adjust the tax code to maximize revenues without reducing incentives to producers. 30. Public Expenditure Policv. In accordance with the overall objective to restore budgetary balance, a program has been agreed with the IMF for 1987, and a further program will be agreed later for 1988 and 1989. Expenditure growth will be restrained in the ERP period to a rate below that for revenue growth, and net transfers to state enterprises will be eliminated by 1990. Total real expenditure will be little changed in 1987 from 1986, although current expenditure will fall slightly in real terms, reflecting the constraints imposed by the insecurity problem, and real investment expenditure will show a small increase. The Government is currently making substantial cuts in public sector employment, and this will facilitate the curbing of the nominal wage bill increase to around 120X. The increase in nominal wages will be considerably less than the increase in official prices, but should allow the maintenance of living standards for most key qualified personnel in the civil service and state enterprises, given stable or declining parallel market prices. Direct price subsidies, necessary to provide a safety net for the urban population which will be adversely affected by the program, will be limited in 1987 to *about 6 percent of current expenditure. The Government has already substantively revised its previous expeAiditure policy to give priority to operation and maintenance and rehabilitation expenditures, and then to ongoing projects capable of quickly yielding ot saving foreign exchange and showing a high rate of economic return. A comprehensive review of public recurrent and investment expenditure will be completed in conjunction with the Bank by June 1988 with a particular focus on the consistency of the expenditure program vis-&-vis the objectives of the ERP, and on the need to curtail the budget deficit. This review will be updated on an annual basis in subsequent years. 31. The Government will also be imposing a much stricter financial discipline o: the parastatal sector to increase the efficiency of their operations and to reduce the budgetary burden of their substantial losses. To this end, in 1987, transfers to cover parastatal enterprise losses will be limited to Nt.14 billion, about the same in nominal terms as the losses covered by bank credit in 1986, despite the impact of exchange rate and wage measures. in order to attain this goal, substantial increases in prices in the range of 200-400Z have largely been implemented, and cost and output xeductions of some state enterprises will also be required. The Review of Enterprises, which is discussed below, will also include many parastatals, and this will facilitate the formulation of further policy measures to improve the efficiency of this sector.  - 11 - Monetarl and Credit Policy 32. The principal objective of monetary and credit policy Is to reduce substantially the overhang of excess domestic liquidity through more moderate rates of credit expansion, and to promote domestic saving. The growth of domestic liquidity will be contained below that required to accommodate the increase in official market transactions at the new prices and exchange rate. Interest rate policy is aimed at achieving positive real interest rates by the end of the program period, and in January 1987 substantial initial readjustments were made to most rates. It is also the Government's intention to remedy the existing weaknesses in the structure of the banking system, which result in part from the undertaking of both commercial and central banking operations within the Bank of Mozambique. To assist in this process, technical assistance will be provided by both the Bank and the IMF to help lay the basis for a separation of the Bank of Mozambique's joint functions. Asricultural Policy 33. The recovery of production and exports, and the improvement of rural incomes depends critically on the performance of the agricultural sector. Consequently, this is one of the key areas of policy, and both pricing and marketing reforms are being developed and implemented to provide essential stimulation to private rural producers. By the end of the ERP period, private production and marketing should play the primary role in the sector, with support from the parastatal enterprises, and with fewer central controls over either pricing or trading. In view of the constraints faced by the Government, particularly its concern about the need to maintain a degree of administrative control due to the factors outlined in paragraph 25, a phased approach to the adjustment has been adopted. 34. Producer Prices. The Government is progressively making agricultural producer prices more responsive to international and domestic market forces. Fruit and vegetable prices were decontrolled in May 1985, along with some minor animal products, and other products that had been subject to national price fixing were made subject to provincial price setting. The Government will be reducing further the number of agricultural products subject to fixed pricing throughout the period of the ERP. In addition, for those products that remain subject to fixed pricing, prices will be adjusted to reflect exchange rate movements and the prices prevailing on international markets. In January 1987, this policy was put into effect with the raising of fixed prices by between 200Z and 400X. Over the program period, the Government aims to reform the system of fixed prices to allow greater price competition, while ensuring that farmers are guaranteed a minimum or floor price. 35. Marketing Structure. The Government is encouraging the increased participation of private traders at all levels of agricultural marketing. The private sector is already active at the primary and wholesale level, but most importation and exportation is currently carried out only through the parastatal sector. In addition, domestic trade is subject to rigid administrative allocation. However, the Government is reducing the extent of administrative control, and the recent decision to permit private  - 12 - participation in direct international trading constitutes a major improvement in this respect. The Government remains concerned, however, by the supply response of the private sector to the liberalization of prices and by the weakness of the marketing structures. Consequently, a review of the recently liberalized fruit and vegetable market is being initiated to better understand the impact and problems of price liberalization, and to improve the marketing system. To the extent that direct allocation continues, the Government will be increasing the flows of goods to private traders and cooperatives, and the flows of inputs to the family producer and efficient commercial farmer. 36. The Government is also undertaking a review of specific enterprises, including agricultural enterprises and state farms, and this is discussed further below in paragraph 39. Industrial Policy 37. The objective of the ERP in the industrial sector is to substantially improve the efficiency of resource use, and increase the autonomy and accountability of enterprises. The macroeconomic policy outlined above is specifically designed to facilitate these adjustments by providing strong incentives to all enterprises. In particular, more efficient resource utilization will be ensured in the short term by the new foreign exchange allocation provisions (see paragraph 23) that will be operative by October 1987, and by the credit and budgetary transfer restrictions. Moreover, the issuance of the rules on the implementation of the 1985 labor law will enhance enterprise autonomy. In the medium term, the progressive elimination of the currency overvaluation and the opening- up of trade should subject enterprises to increasing competition and ensure improved efficiency. Increasing autonomy in the trading decisions of enterprises both in domestic and international transactions over the program period is designed equally to enhance the efficiency of operations, and eliminate the operating losses of recent years. 38. In accordance with the Government overall pricing objective, a program of decontrol is being implemented. The number of products subject to fixed industrial pricing will be reduced in 1987, with further reductions thereafter. Those products on the regulated price list will be adjustable subject only to an ex-factory price ceiling or to an ex-post ministerial review. The ceiling will be set up using international prices as a guideline, and will be largely applied to firms with domestic monopolies. As supply and competitive conditions improve, the Government will initiate further reform and relaxation of controls. 39. As outlined above in paragraph 21, attention will be given to the broader industrial policy environment in due course, but the Government is currently taking a selective look at problems of the enterprise sector through the Review of Enterprises which is to be completed by October 1987. This review of 15 agricultural enterprises (including some state farms and two of the major trading parastatals, AGRICOM and BOROR), and 25 industrial  - 13 - enterprises is aimed at improving their performance and providing specific recommendations for their restructuring (rehabilitation, divestiture or closure). The review covers some of the largest enterprises in the economy, accounting for a large proportion of the domestic credit outstanding. The recomiendations will be implemented in late 1987 and early 1988, and analyses of additional enterprises will then be carried out, and a medium-term strategy for restructuring the overall industrial sector will be prepared. Trarsport Policy 40. The Government priority objectives in the transport sector are to eliminate the infrastructure bottlenecks that have hindered domestic agricultural trade, to improve the provision of long-haul cargo transport, to rehabilitate the major rail corridors in order to generate additional foreign exchange earnings from transit services, and to improve domestic trade in general. In order to achieve these goals, the Government is promoting the role of the private sector, by, for example, removing the licensing restrictions on cargo transport. Substantial tariff increases for road cargo and passenger transport of between 2002 and 400Z were also introduced in early 1987, and a Review of the Transport Tariff Structure (including road, rail, air and sea tariffs) will be undertaken by June 1988 with the aim of reducing administrative controls and ensuring adequate financial returns to enterprises. Further improvements in the efficiency of resource allocation will be encouraged through the increasing of vehicle license and registration fees, and the auction of little used or inoperative state-owned vehicles. The Impact of the Pro&ram 41. Growth and Financingt Needs. The impact of the reform program on economic growth is difficult to assess in quantitative terms, although the qualitative impact is more readily foreseen. Growth will be influenced by many factors in addition to the policy reform program; including the availability of external finance inflows and attainable import levels, and the evolution of the overall security situation in Southern Africa. In the projections reported here, it is assumed that the difficulties of policy implementation in some regions of the country due to the insecurity problem persist unchanged during the ERP period. 42. With the new policy reforms taking time to implement, and with an invevitable lag in the response to these changes, only modest GDP growth of around 1 percent can be expected in 1987, although both agricultural and industrial production should stabilize. In 1988 and 1989, however, GDP growth should increase significantly to an annual average rate of 3.5 percent, with a strong production response coming from those agricultural areas where the security problems are of minor importance. A substantial response to the pricing and marketing reforms and to the increased supply of incentive goods is assumed from the family sector, and this should be reflected by 1988 in increases in the output of domestic food crops and of the traditional export crops of cashew and copra. Renewed industrial growth is also anticipated as the availability of imported inputs improves, and as the increasing level of managerial autonomy and operational efficiency allows a more rapid response to increasing demand.  - 14 - 43. Following the recent major falls in real consumption, which have seen real per capita consumption reduced to only 50Z of its 1980 level, the ERP should faciliiate a substantial rise in real consumption allowing an annual average real per capita consumption growth rate of almost 6 percent in the 1987-1989 period. In the early part of the program, this would reflect the rapid growth of imports, but. as import growth moderates, the accelerated growth of domestic production should continue to support real per capita consumption of around 4 percent in 1989. T.is rapid growth in consumption is accompanied by a fall in domestic savings. The level of dissaving, which increases to 1989, is expected to decrease thereafter. Public investment trends begin to reflect the policy to initiate no new projects over the ERP period, and focus instead on the completion of ongoing and rehabilitation projects, the rapid real growth of 1986 would not be sustained. By the end of the period, investment should have stabilized. 44. The indicative balance of payments projections, described here and in the Annex, reflect a partial recovery of exports, but only to levels by the end of the ERP period that are far below those of the early 1980s. Growth in export volumes should accompany the recovery in production, and, given the low base at present, a significant growth of around 9 percent p.a. on average is anticipated over the period. Cashew, copra and citrus exports are assumed to increase rapidly, but there are obstacles, resulting largely from the security problems, to the expansion of the plantation crop exports of tea and sugar. The growth of imports by an average of 7 percent p.a. in rea'l terms over the 1987-89 period, is considered to be the minimum necessary to support economic recovery by providing consumer goods as incentives to stimulate agricultural production, by meeting the emergency food requirements, and by facilitating the required rehabilitation. The trade balance is projected to deteriorate throughout the period, despite import values growing at only half the rate for exports. To maintain the trade balance at its 1986 value throughout the period would require export value growth in excess of four times the growth in import values. In this projection, export receipts at the end of the period would still be only 20Z of the current account deficit, and only 161 of import payments. In addition, interest obligations are projected to rise significantly from US$177 million in 1986 to US$227 million in 1991. On this basis, the current account deficit before official transfers is expected to rise from US$599 million in 1986 to US$824 million in 1991. 45. In consequence, therefore, despite the anticipated growth in export and service receipts and the modest import growth that is assumed, the balance of payments will remain dependent on substantial resource flows from abroad in each year of the ERP period. Indeed, even by 1991, the external financial position will remain difficult, and heavily reliant on foreign assistance even by the standards of sub-Saharan Africa. These should be i,k the form of either grants or highly concessional credits. In 1987, the required external resource inflows appear to be achievable in view of the considerable increase anticipated in concessional external assistance, based on donor's current commitments and plans. This inflow should increase to US$631 million (compared with US$497 million in 1986), reflecting mainly increases in grants. In subsequent years, the growth in the gross capital inflows would need to exceed 5Z p.a. throughout the 1987- 91 period.  - i5 - 46. In addition to the flows of external assistance, Mozambique will also need to regularize relations with creditors and ease its immediate debt service burden. The Government is currently seeking from official and private creditors a consolidation of arrears outstanding at end-1986 (which amounted to US$1.2 billion) and a rescheduling of current maturities on terms at least as favorable as those agreed upon in 1984-85. In addition, in view of the country's exceptional circumstances, the Government will also be seeking the conversion of credits into grants, as has already been done by some official creditors in 1986. As a result, while moratorium interest payments would rise appreciably, all amortization and scheduled bilateral interest obligations for 1987 are assumed to be deferred. During the period, the Government is also aiming to progressively rebuild international reserves to a level equivalent to two months of imports by 1991. This would entail annual reserve accumulations averaging around US$15 million over the 1987-9'. period. In summary, the gross external financial inflow requirements, including anticipated debt relief, are expected to remain at around US$l billion per annum throughout the 1987-91 period. 47. Social Imnact. The country's improved growth performance should facilitate the stabilization and recovery of living standards, after continuous and substantial decline throughout the 1980's. The principal effect of the ERP will be seen in the reactivation of the rural economy, where substantial increases in income are anticipated as production increases and as the agricultural terms of trade improve. Even with adverse price effects stemming from the devaluations, particularly for consumer goods and imported inputs, rural purchasing power should increase significantly. While in some areas of the country this improvement will be tempered by the security difficulties, there will in general be a substantial redistribution of income in favor of the rural areas. 48. The quarter of the population living in the urban areas will be affected adversely in the short-term as urban unemployment is projected to increase significantly as a result of the rationalization of the public sector. Government employment will be cut by 20S in 1987, but for those remaining employed nominal wages should increase by at least 1002, which would allow living standards to be maintained for most personnel. The increase in official prices will be far in excess of 10O, but to the extent that individuals already trade in the parallel market, the adverse impact should be limited. The Government has also proposed measures to assist those made redundant by the new policies. These include compensation for a six month period in cash and kind, and the development near Maputo of pulblic works projects to absorb some of the surplus labor. 49. To cushion those sectors of society most affected by the adjustment measures, the Government has already introduced a safety net for staples and other essential goods in Maputo and Beira. Under the program, assistance will continue to be provided to the most vulnerable groups, through a targeted and subsidized rationing system. Until economic growth can be sustained, and the government financial position improved, the provision of social services is likely to be severely constrained. However, within the context of the Public Expenditure Review, the Government will be seeking to protect priority social expenditures, and preserve important projects with strong social benefits.  - 16 - 50. Conclusion. The Economic Rehabilitation Program constitutes a major intensification in the reform of both economic policy and economic management. While the conceptualization of the reforms is broadly in line with the proposals of the 1983 Congress, the detailed program differs substantively from the Economic Action Program of 1984-86 in that it addresses the critical macro and sectoral issues. The program is directed at the promotion of a more market-oriented economy, in which incentives and the drive for improved efficiency and productivity are central. This objective represents an acknowledgement that the extensive administrative control and allocation of most resources in the past is no longer appropriate. Despite the necessity for a degree of control while the security difficulties persist, it is accepted that a move away from rigid centralization is required, and that the transition to a reliance on indirect instruments of policy needs to be quickened. Inherent also in this policy is the recognition that the closer integration of the Mozambique economy into the international economy is essential, with domestic industrial and agricultural production being exposed both to the incentives and disciplines of international markets. 51. In view of the complex nature of the economic distortions and structural imbalances, the reform program is necessarily phased over several years. It is, however, essential that throughout the ERP period and beyond the momentum of policy reform is maintained, particularly: (i) Continuing the adjustment of the exchange rate to attain a market-clearing rate by the end of 1989; (ii) Pursuing the progressive elimination of administrative controls and allocative procedures in all sectors of the economy, and permitting both public and private enterprises to increasingly trade domestically and internationally without any central directive. This should encompass both the quantitative allocative aspects and the pricing mechanism; (iii) Increasing the degree of autonomy and accountability within the parastatal enterprises, and subjecting them to the same commercial and market disciplines as the private sector; and (iv) Ensuring that the public sector expenditure program is commensurate with the budgetary targets, and that the investment budget is directed towards economic rehabilitation and the priority sectoral requirements. 52. Since the economic adjustment process will take many years to complete, the implementation of substantive interim measures plays an important role in the ERP. Rather than delaying the establishment of more appropriate policy, these interim measures are aimed at enhancing the short-term economic response to reform and should therefore facilitate the next phase of adjustment. Indeed, the political support for the program rests heavily on a significant and conspicuous response accompanying the reforms. Without this, the attainment of the medium-term policy goals will be endangered.  -17- 53. In summary, the ERP is an appropriate package of macroeconomic and sectoral measures, which makes substantive initial progress towards policy reform in 1987, and by including the needed analytical work to define additional measures for 1988, ensures the momentum for sustained adjustment. The pace of reform is acceptable, and adequate to achieve the necessary impact, given the magnitude of the changes being introduced and the need to adopt an approach that is both politically and socially acceptable. A_RT III - THE PROPOSED SECOND REHABILITATION CREDIT Dackaround 54. The past year has seen substantial progress in the policy dialogue between the Government of Mozambique and the IMP and the Bank which began when Mozambique joined both institutions in 3eptember, 1984. In July, 1986 the Government presented a comprehensive economic reform program to the Bank and the IMP. Over the course of several subsequent missions the Bank and IMP assisted the Government in detailing these proposals, and in elaborating its Policy Framework Paper (PFP) and Economic Rehabilitation Program, 1987-89 (ERP). The IMP played a role in advising the Government on issues related to exchange rate adjustment, public finance management, monetary policy, credit and interest rate policy, and external debt management. The areas which the Bank has emphasized include: (i) the trade regime and foreign exchange allocation; (ii) pricing and distribution policies, (iii) domestic resource allocation and the public expenditure program; (iv) agricultural marketing and producer prices; (v) industrial pricing and efficiency; and (vi) transport sector efficiency. The result of this dialogue was a single program, to be supported by both institutions. 55. The Second Rehabilitation Credit (SRC) would form one of the main components of a broader effort by the international community to assist Mozambiquze's efforts to reform economic management and establish a basis for sustainable growth. In March, an emergency donor meeting was held in Geneva to provide food, clothing, and medical relief during 1987. In the coming months, a series of meetings are also planned between Mozambique and its creditors in an effort to secure adequate financing and debt relief to support the adjustment measures. The IMP approved a SAF for Mozambique, totalling SDR 28.67 million, on June 8, of which SDR 12.20 million is imediately available. The London Club and Paris Club have met and agreed on rescheduling Mozambique's arrears and current maturities. A Consultative Group Meeting was held July 9 and 10 to discuss the ERP with donors, review progress being made so far in 1987, and to firm up donor comuitments and support. The Bank intends to play an important role in mobilizing donor support for the program, and assisting the Government in developing a framework for foreign assistance which is consistent with the needs of the economy. 56. The SRC was appraised in the field in MarchlApril 1987, and negotiations were held in Washington June 22-26, 1987. The delegation of the People's Republic of Mozambique was led by Mr. Eneas Comiche, Governor  - 18 - of the Bank of Mozambique. Annex III contains a timetable of key events. The policy understandings are reflected in the Government's Letter of Development Policy (Annex V) and the main features of the policy reforms supported by this Credit are summarized in matrix form in Annex IV. Credit Obiectives and Description 57. The major objectives of the proposed Second Rehabilitation Credit are to: ti) support specific policy and institutional reforms ir. 1987 and preparation of subsequent adjustment measures for 1988; (ii) provide foreign exchange to finance essential imports needed for the rehabilitation of the economy; and (iii) assist the Government to develop an agenda for longer-term policy changes. The proposed credit would provide a total of US$1OO million equivalent in support of the ERP. Of this total, US$70 million equivalent would be provided through the IDA Credit, US$18.6 million equivalent through the Special Facility for Africa (SFA) in the form of an African Facility Credit and US$11.4 million equivalent through a Special Joint Financing Swiss Grant. The foreign exchange would finance high priority needs of the economy, in line with the agreed import program for 1987, and subsequently in accordance with the improved foreign exchange allocation mechanism to be introduced in 1988 (para. 23). 58. Actions already taken in the implementation of the ERP include both macroeconomic stabilization measures and structural adjustment measures. These actions, which are already mentioned in Part II are summarized here: (a) initial devaluation of the metical by 80 in foreign currency terms with subsequent devaluation by 502 in foreign currency terms (para. 20); (b) preparation of a 1907 foreign exchange allocation and import program in conformity with the priority requirements of the economy (para. 23); (c) permitting automatic importation of goods up to US$500 when importers have their own source of foreign exchange, and granting of licenses for imports over US$500 provided the goods are not for resale and which require no foreign exchange allocation from the banking system (para. 22); (d) expansion of the foreign exchange retention system to include non-traditional exporters, reductions in the average retention rate, and allowing transferability of retehtion rights among participants in the scheme (para. 22); (e) establishment of 1987 monetary and credit limits and introduction of a revised interest rate structure (para. 32); (f) establishment of 1987 public expenditure and revenue program, including postponement of new public investments and limitation on gross transfers to state enterprises; and overall fiscal deficit targets, and the introduction of new revenue measures (including shift of nominal tariffs to ad valorem) (paras. 28 and 30);  - 19 - (g) substantial upward adjustments of fixed prites for agriculture, industry, transport, and energy sectors (paras. 34, 3e, and 40); and, (h) allowing enterprises to adjust regulated prices suOject to only ex-post review by sectoral ministries (para. 26); Further Measures and Tranche Review 59. During the remainder of 1987, the Government will be introducing further reform measures and also prepare for the subsequent steps in the implementation of the ERP. Therefore, the program includes a set of reviews and studies on selected topics, as detailed in the previous section of the report, to be implemented during 1988. In November/December 1987 the Bank expects to review progress in the implementation of the ERP. In addition to continued satisfactory progress on macroeconomic stabilization, the following actions would be conditions for release of the second tranche of the SUr: ii) thiat the reduction in the number of product groups subjected to fixed pricing be confirmed at 37 down from the present 46 and that an additional five product groups be agreed with IDA, bringing the total number of groups to 32 by January 1988. (ii) that an improved foreign exchange allocation system has been established, which shall inter alia incorporate quarterly estimates of foreign exchange availability and demand and take into account the operating efficiency of the proposed users according to criteria agreed by the Government and IDA (para. 23); (iii) that the study of the Interim Trading Measures has been completed and a plan for the implementation of the recommendations has been agreed with IDA (para. 22); (iv) that the number of product groups which must be imported through only one trading corporation has been reduced from eleven to five and the number of export commodities from three to one (para. 21); (v) that the study of the domestic allocation system have been initiated, based on Terms of Reference and a schedule agreed with IDA (para. 27); (vi) that the study of Fruit and Vegetable Marketing has been completed (para. 35); and, (vii) that the study of Enterprises has been corapleted, and that an action program be agreed with IDA (para. 39).  - 20 - Procurement ArranLements 60. Procurement under the IDA Credit would be limited to eligible imports on the basis of a negative list in accordance with Bank/IDA Guidelines. Procurement under the African Facility Credit and Swiss Grant would be for the same imports but would be limited to Part II member countries of IDA and any country meeting procurement criteria in the Resolution establishing the Special Facility for Sub-Saharan Africa. Purchases under contracts of more than US$2 million equivalent would be procured through international competitive bidding. Purchases under contracts of less than US$2 million equiva2ent would follow normal procedures of the Borrower. Expenditures for goods covered by contracts of less than US$5,000 equivalent would not be eligible for financing. Disbursement Arrangements 61. The total of US$100 million from IDA and the Special African Facility would be disbursed in two tranches. The first tranche would amount to US$50 million equivalert, of which US$20 million would be available for retroactive financing from the beginning of 1987. The second tranche would be available for disbursement following a review of performance in NovemberlDecember 1987 and subject to the conditions outlined in para. 59. 62. The Bank of Mozambique (B0M) would open a Special Account in U.S. dollars in a commercial bank on terms and conditions satisfactory to IDA, for the IDA financing, and a separate Special Account for the African Facility Credit and Swiss Grant, satisfactory to IDA. The initial deposits into each of the the Special Accounts would be US$15 million and US$5 million respectively. Disbursements for expenditures over US$250,000 will be fully documented; all other expenditures will be reimbursed on the basis of statements of expenditures certified by BOM. No reimbursement would be made for imports financed from other sources. It is estimated that eligible imports in 1987 will total about US$160 million equivalent. The first tranche of the proposed credit would finance about 31Z of this amount, thus permitting rapid disbursement. Disbursenients should be completed by end 1988. ImPlementation 63. The primary responsibility for the coordination of the ERP is with the National Commission of Planning (CNP) chaired by the Minister of Planning. At the policy making level, the Minister of Planning, Minister of Finance, Minister of Trade, and Governor of the Bank of Mozambique meet regularly to determine the key issues to be resolved. A high level working group, which is comprised of officials from the Bank of Mozambique, Ministry of Trade, CNP, Courncil on Wages and Prices and other sectoral technical staff as necessary, working under the guidance of the Finance Minister, serves to ensure adequate coordination in the design of policies and execution of measures related to the ERP. In addition, progress in the implementation of the ERP is regularly reviewed by the Prime Minister.  - 21 - 64. Successful implementation of the ERP will involve not only changes in existing policies but also fundamental alterations in the system and style of economic management. In particular, the shift in emphasis from physical targetting to financial control will place an increased burden on the financial and economic coordinating institutions - primarily the Ministry of Finance, CNP, and the Bank of Mozambique. The Ministry of Finance will need to develop an enhanced capacity in macro-economic analysis and financial policy making, as well as develop more efficient methods of expenditure budgeting and control (including its traditional functions of government accountant and auditor). To accomplish this, it has already established a new Directorate of the Treasury which will complement the existing Budget and Taxation and Audit Directorates and which will be responsible for the formulation and analysis of economic and financial policy integrating recurrent and investment needs. The Ministry will also be receiving technical assistance from a number of donors. UNDP and Bank assistance will involve senior policy advisors on macroeconomic policy, the budget and pricing policy as well as short-term consulting support. Several of the senior advisors have been identified and all are expected to be in the field by the end of August. Dutch and Swedish assistance will involve middle-level and operational staff to assist in budget preparation and control, and the integration of external finance in the state budget. 65. The shift from direct to indirect controls will greatly increase the importance of monetary control. The Bank of Mozambique which acts as both the central bank and the major commercial bank, and proposes credit, interest rate and exchange rate policies for government approval, will need to develop a capacity to carry out economic research and policy evaluation. To assist the BOM in economic policy formulation and research, debt management and accounting two advisors are being provided by the IMF, and two advisors are financed under an IDA PPF for preparation of an Economic and Financial Management Technical Assistance Credit. There will also be some short-term consulting support. of the four advisors, two are already in the field, and two have been identified. 66. The shift in emphasis from physical targetting and centralized allocation to a more market-based economy will also have important implications for the nature of planning and for the role of the CNP. The CNP will still play a major role in helping guide the country's overall development but it will need to be concerned much more with policy formulation rather than physical outputs. This in turn will require development and strengthening of the National Statistics Office (within the Planning Commission) to evaluate the existing state of the economy, and monitor program implementation. To assist the CNP in all of its activities the UNDP and the Bank will be providing high level advisors on macro- economic policy, investment planning, and statistics. Short-term consultants would be provided to carry out training activities, and to assist in coordination between the planning commission and other state organizations. 67. The assistance being provided to the core agencies will substantially improve their ability to implement the ERP and is expected to be available in line with the Government's needs. Coordination between the  - 22 - different assistence efforts is beirg provided by the Government, through the high-level worming group and through consultation between the donor agencies. There is no overlap or conflict between the present programs. Monitorina 68. A comprehensive review of the implementation of the ERP is planned for November/December 1987, to consider, in particular, compliance with the conditions for secoid tranche release as set out in para. 59. In addition, frequent supervision missions are planned, including an early supervision mission to assist the Government in getting the scheduled reviews underway and in addressing the bottlenecks to implementation. Close collaboration with the IMP would continue in assessing the progress in implementation of the program. Benefits and Risks 69. The principal benefits of the SRC are expected to be tha establishment of an economic framework in which growth may resume, and the reversal of the serious economic decline since 1980. The acerual of these benefits will be facilitated through the SRC support of policy and institutional reform, and througi the provision of foreign exchange to finance essential rehabilitation imports. The primary benefits will accrue to the rural sector, notably the family producer, as a result of the significant production response to the ERP. More generally, the operation will lead to improvements in resource allocation and utilization through the strengthening of economic management and rid coordination. 70. The main risks to the SRC, and the ERP which it supports, relate to the limited implementation capacity of the Government and the negative impact of the security situation on production. Firstly, the very limited supply of skilled manpower in the Government service and in the country at large makes the development and implementation of a comprehensive reform program a major task. Secondly, while the senior levels of Government are unquestionably supportive of the program, the reforms do necessitate a fundamental revision in the system and style of economic management which affects all levels in the productive structure. Successful reform tharefore requires the support of the entire managerial system, despite the vested interests in the prevailing highly interventionist and controlled environment. The first factor is mitigated by the overall efforts being undertaken by donors to provide the necessary technical assistance to the key Government agencies responsible for the implementation of the program. The second factor is mitigated by the broad support the ERP has from the highest level of the Government, and by the extensive efforts which have been undertaken to disseminate the basic ideas, costs, and benefits of the ERP throughout all levels of public administration. This has included, for example, visits of cabinet officials to discuss the ERP with provincial administrators and other social and economic groups. 71. The impact of the security situation on production is a further critical factor, creating additional uncertainty concerning both the ability to implement the program as intended and the prospective responsiveness of the economy to the reform. With the continuation of domestic insecurity, the need to maintain elements of a command economy in a war situation and  - 23 - the disrupt'on to economic activity and administration will dampen the impact of the reforms. Nonetheless, the initiation of a program to create a more appropriate framework within which more rapid growth is attainable is an important and substantive step, which is expected to result in significant, albeit small, turnaround in the drastic economic decline of the 1980's, even if the security problems remain. There is evidence that such a response can occur. In 1986 cashew and cotton production both increased substantially, in part because of specific incentive programs designed to stimulate production of those crops. The liberalization of fruits and vegetables prices, undertaken in 1985, has also resulted in increased availability of these goods in local markets. These experiences have convinced the Government that accelerating the pace and broadening the scope of economic reform, by allowing markets to play an important role in the formation of prices, can yield significant economic results even under the current difficult circumstances. 72. Finally, The success of the ERP will also depend on the response of the international community. As the projections of this report indicate, the gross external financial inflow requirement to support the program of recovery and structural change is anticipated to remain at around US$1 billion per annum throughout the ERP period. To help ensure that this support is forthcoming, meetings of the Paris Club and Consultative Group are scheduled for 1987. It is expected that future meetings of donors will also be called to..help obtain the needed financing. PART IV - BANK GROUP OPERATIONS 73. In June 1985, a first IDA Credit of SDR 45.5 million was approved to help meet Mozambique's priority needs in the industrial, transport, and agricultural sectors. Performance under the Credit has been satisfactory, with about US$22.0 million disbursed by end March 1987. The Credit has provided the Ministry of Trade with an improved procurement capability, and has allowed enterprises benefittin,g from the financing to produce more efficiently through provision of spare parts, raw materials and technical assistance at the managerial level. The Norwegian and Italian Governments have recently provided an additional US$22 million in co-financing with the Credit. A second IDA credit, of US$20 million to support an Energy Rehabilitation and Technical Assistance Project, designed to bring about quickly a substantial improvement in the supply and distribution of electricity and petroleum products to the main trade and processing areas, was approved by the Executive Directors on May 26, 1987. On May 29, 1986, IFC provided about US$2.5 million in financing for the LOMACO company, which is a major commercial agricultural producer. The project is proceeding satisfactorily, with the exception of one unirrigated farm where drought has hindered production. 74. Bank assistance to Mozambique will be focussed primarily on supporting the implementation of the ERP through the economic and sector work and lending programs. The level and pace of Bank support for Mozambique will need to take into account the progress made in the improvement of the economic policy framework as well as the feasibility of specific operations in light of the security situation.  - 24 - 75. Ecekomic and Sector Work will be oriented towards supporting the Government's efforts to implement its adjustment program, while also deepening our knowledge of specific sectors of the economy. The selection of tasks will follow closely the analytical problems identified by the adjustment program, as well efforts to evaluate medium and longer term issues of importance for Mozambique's economic development. 76. Our lending operations would consist of both general rehabilitation efforts, along the lines of the SRC, and specific sectoral rehabilitation programs, In the transport sector, the focus will initially be on the rehabilitation of the key export corridors, which play an important role in the economy's foreign exchange service earnings, and on improving domestic cargo transport. Sector work on the Beira Corridor is nearing completion. In agriculture, four sub-sectoral studies (covering cashew nuts, cotton, irrigation, and forestry) were financed using the Special Project Preparats.on Facility in FY87, and have been completed. The results of these studies will be used to develop a pipeline of operations to support rehabilitation of the agricultural sector. Sector work and lending operations in the industrial sector will build on the results of the Enterprise Study (para. 39) and assist the Government in developing a strategy to rationalize the industrial sector in Mozambique. Sector work in health and education is also underway, and an education project, oriented mainly towards primary education is under preparation. 77. Provision of Technical Assistance will also be an important element of the Bank's program in Mozambique. Technical assistance support would first be sought from grant sources, mainly bilateral agencide. Bank funded technical assistance where necessary, would be provided in two modes. Technical assistance for economic and financial management would be provided by separate credits designed to support key policy making entities of the Government, including the Ministry of Finance, Bank of Mozambique, and the National Planning Commission. The first such credit is under preparation. EDI and other training activities would supplement the TA efforts. The second mode to provide TA would be through special components of sectoral rehabilitation operations, as planned in both the agricultural and transportation sectors, for example. 78. Over the next years we will also expand our efforts at aid coordination, reflecting the increased role of the Bank in assisting the definition of economic policies. Our efforts in this area will be directed at helping ensure that both the amount and composition of donor assistance are appropriate to Mozambique's circumstances. A first Consultative Group Meeting has been planned for July, 1987. PART V - LEGAL INSTRUMENTS AND AUTHORITY 79. I am satisfied that the proposed IDA Credit would comply with the Articles of Agreement of the Association. I am also satisfied that the proposed African Facility Credit would comply with the provisions of Resolution No. IDA 85-1 of May 21, 1985. 1 am also satisfied that the proposed Special Joint Financing Grant Agreement for the non-reimbursable contribution from Switzerland would comply with the Agreement between the Government of Switzerland and the Association for cooperation in the Cofinancing of Programs of the Special Facility for Sub-Saharan Africa dated  ^ 25 - September 11, 1985. I recommend that the Executive Directors approve the proposed Development Credit and the proposed African Facility Credit, and that the Association act as administrator of the proposed Swiss Special Joint Financing. Barber Conable President Attachments Washington, D.C. July , 1987  - 26 - ANNEX 1. Tablo 1. MOZAMBIQUE : KEY INDICATORS. t1] I~~~ I I. Actual. I Eatimatel Projection. i I I . , 1 1980 1981 1982 1983 1984 198 196$ 1987 1988 1989 * - ~I I I- CDP growth rate 1 4.7 0.3 -3.6 -15.6 -18.3 -13.0 I 0.5 I 1.2 3.0 3.9 GOP/capita growth rate J -0.7 -B.1 -17.8 -20.8 -16.2 I -2.0 1 -1.3 0.4 1.2 Consus/capita Sr. rate I -0.2 -8.0 -11.8 -28.8 -17.6 I -4.8 6.9 8.5 4.2 Debt service 146.0 846.1 889.6 S84.7 418.7 881.7 644.2 5 603.9 465.4 382.4 Debt service/XGS 82.4 76.4 98.8 1a1.o 199.7 207.8 I 274.8 I 237.7 204.0 152.3 Debt service/GOP I 8.0 15.0 15.9 17.0 18.3 11.2 I 12.1 24.4 28.0 23.2 Gross Investment/G1P 18.8 20.1 19.8 10.0 10.5 S.9 1 9.8 17.5 19.1 17.2 Domestic Saving/GOP | 0.4 -0.1 -8.4 -10.7 -8.2 -3.1 -0.6 I -9.0 -15.8 -19.0 National Saving/GDP I 1.8 -0.1 -4.8 -12.3 -8.3 -5.6 I -4.0 I -18.6 -25.0 -29.5 Marginal Net Saving Ratel n.s. n.e. n.e. n.a. n.s. n.a. | n.a. I n.e. n.s. n.a. Public investment/GOP 5 n.a. n.a. n.e. n.P. n.a. n.a. I n.u. " n.n. n.a. n.a. Public saving/GoP I n.a. n.u. n.a. n.a. n.a. n.a. | n.a. I h.a. n.a. n.e. Private investment/GOP I n.a. n.n. n.a. n.e. n.s. n.s. I n.s. I n.a. n.a. n.a. Private saving/GDP I n.a. n.e. n.e. n.e. n.e. n.a. n.a. I n.a. n.a. n.a. Ratio of pub/priv Investi n.a. n.a. n.a. n.s. n.a. n.a. I n.a. I n.a. n.a. n.e. Govern. revenues/GOP I 19.9 23.2 27.9 26.1 20.6 12.9 5 11.2 | 13.8 17.6 17.0 Govern. expendit./CD? I 29.8 86.1 88.4 41.2 86.6 20.8 1 20.7 | 33.9 87.2 32.7 Deficit/GOP I -9.4 -11.9 -10.5 -16.2 -16.1 -8.0 I -9.4 i -20.3 -19.7 -16.7 Export growth rate i n.e. -7.3 10.9 -40.4 -38.4 -3.6 i 8.9 8.9 8.1 10.1 Exports/CDP 5 16.8 16.8 13.8 9.7 6.1 4.2 1 3.3 1 8.2 11.1 12.6 Import growth rate 5 n.a. 0.8 9.7 -19.6 -14.2 -16.1 I 28.6 1 14.6 2.9 8.2 Imports/CDP I 84.8 87.0 38.8 80.8 22.8 14.1 1 18.3 1 84.7 45.8 48.9 Current account 5 -422.5 -468.2 -576.9 -506.3 -480.2 -428.0 I -599.0 I -705.8 -732.2 -769.5 Current account/GDP i -17.6 -20.2 -28.6 -22.8 -18.7 -12.6 I -13.3 1 -34.2 -44.0 -46.7 Notes: GOP growth rate Constant Mt. (1 Govern. revenues/GDP Current Mt. %] COP/capita growth rate Constant Mt. (] Govern. expendit./GDP Current Mt. [X Consum/capita gr. rate Constant Mt.(%] Deficit/GOP Current Mt.-%] Debt service Current US S. Export growth rate Constant US S.-t] Debt service/XGS Current US 8.(XI Import growth rate Constant US S-t%] Debt service/GDP Current US $.[(1 Exports/GDP Current US S.C%] Gross investment/GDP Current Mt.[%] Imports/GOP Current US $.[%I Domestic Saving/GDP Current Mt.E%] Current account Current US 345%] National Saving/GDP Current Mt.[p] Current account/GDP Current US S.(aq t1]. It should be noted that the national accounts data are, In general, inadequate, and that the estimates made and utilized here are purely indicative.  ANllEX 1. MOZAMBIqUE : BALANCE OF PAYMENTS. Table 2. US S mill;on [current]. .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I Aktual. I Estimatol Prejoction. I I . 1980 1981 1982 1983 1984 1986 I 1985 I 1987 1988 1989 1990 1991 Trade balanea -519.3 -520.3 -608.7 -504.8 -444.0 -347.2 I -408.0 I -584.3 -602.1 -824.9 -631.8 ^041.8 Exports (fob) 280.8 280.8 229.2 131.6 96.7 78.8 I 79.0 8S.7 97.9 115.1 138.4 168.2 Imports (cif) 80J0.1 801.1 835.9 638.4 b39.7 423.8 647.0 650.0 700.0 740.0 770.0 I10.0 Sorvices I I Receipts 167.0 171.1 166.2 100.0 114.0 107.1 I 119.0 I 126.3 130.2 138.1 142.6 147.1 Transportation 92.6 82.0 63.4 66.4 34.5 39.4 45.0 I 67.7 60.8 65.4 70.7 74.2 Workers romitt. 53.4 64.6 81.7 71.9 63.0 40.8 50.0 j 43.0 43.0 43.0 43.0 43.0 Other 21.0 24.8 20.1 21.7 28.6 28.9 f 24.0 25.8 28.0 27.7 28.8 29.9 Interest paymonts 8.1 35.9 60.3 88.2 80.9 103.2 I 177.0 | 174.9 171.4 187.6 205.0 227.0 Scheduled 6.1 3S.9 60.3 88.2 80.9 103.2 I 118.0 I 88.0 66.0 43.0 34.0 34.0 On financing .. .. .. .. ,. .. I 67.0 I 74.0 94,0 112.0 128.0 139.0 On new debt .. .. .. .. .. .. 1 4.0 12.9 22.4 32.6 43.0 64.0 Othor paymonts 64.1 81.1 76.1 72.3 69.3 82.7 I 73.0 f 92.9 88.9 93.3 98.0 102.9 Transportation 25.8 27.4 28.3 32.8 24.6 38.7 34.0 I 43.9 37.4 39.3 41.2 43.3 Workors ronitt. 25.3 29.4 23.6 19.9 25.7 25.0 23.0 25.3 28.6 27.9 29.3 30.8 Other 13.2 24.3 23.3 19.8 19.1 19.0 I 18.0 1 23.7 24.9 20.1 27.4 28.8 Current account -422.5 -468.2 -576.9 -505.3 -480.2 -420.0 I -599.0 I -705., -732.2 -789.5 -792.1 -824.6 Official grants 56.0 67.S 79.6 89.8 187.7 139.0 I 213.0 I 321.2 337.3 354.1 371.8 390.4 VLT (not inflow) 364.2 409.0 395.3 42.8 -73.0 -39.7 -83.2 -19.0 31.5 146.8 100.9 177.8 Inflow 503.1 718.2 724.8 339.8 264.8 238.8 I 284.0 310.0 325.5 341.8 358.9 378.8 Outflow 138.9 309.2 329.3 298.6 337.8 278.5 1 367.2 329.0 204.0 195.0 198.0 199.0 Short-term capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 I 0.0 0.0 0.0 0.0 0.0 (net inflow) Errors/om;ssions(not) -30.1 -68.8 -40.8 44.3 23.2 -38.9 I -73.0 1 0.0 0.0 0.0 0.0 0.0 Ovorall balance -32.4 -68.5 -142.9 -328.8 -362.3 -305.8 I -542.2 | -403.8 -363.4 -268.8 -259.4 -256.3 _ _ _ _ _ _ _ _ _ _ _ _ _ __._ _ _ __._ I _ _ _ I .,__ _ _ _ _ _.___ _  Table 2. (cont) US S million [current). Actual. I Estimatol Projoction. 1980 1981 1982 1983 1984 1986 I 1988 I 1987 1988 1989 1990 1991 _ _ _ _ _ _ __..._ .._ _ ._ _ _ _ _ _ _ ___ I _ _ _ I _ _ _ _ _ _ _ _ _ _ _ _ Financing | Change in roservos (increase: -vo) 32.4 68.7 148.5 46.8 -54.2 18,9 I 8.0 -18.7 -16.1 -15.1 -18.0 -15.7 Doebt relief 0.0 0.0 0.0 0.0 213.1 193.0 I 0.0 I 407.8 321.4 207.5 197.6 197.6 Change in arrears J (increase: .ve) 0.0 0.0 0.0 285.3 205.6 152.7 I 538.2 j 0.0 0.0 0.0 0.0 0.0 IMF (net inflow) 0.0 0.0 0.0 0.0 0.0 0.0 I 0.0 I 14.6 9.8 9.8 0.0 0.0 Bilateral agreemonts 0.0 -2.2 -6.6 -3.4 -2.3 3.0 I 0.0 j 0.0 0.0 0.0 0.0 0.0 Financing gap 0.0 0.0 0.0 0.0 0.0 0.0 0.0 j 0.0 47.3 66.4 77.9 74.6 (requirement: -vo) Ia Uomorandum Cross international reserves 287.2 218.6 70.0 23.2 77.4 60.6 6 64.6 I 73.2 88.3 103.3 119.4 135.0 Outstanding dobt in arrears 750.7 838.2 | 1216.2 | Dobt sorvice (as % of XCS) 32.4 78.4 98.8 131.9 199.7 207.8 1 274.8 I 237.7 204.0 lS2.2 143.6 135.1 Gross int. rosorvos (as I I X of imports) 34.4 25Mb 8.9 1.8 12.1 11.4 I 10.0 I 11.3 12.6 14.0 15.S 16.7 I I- Source: Data to 1988 : Uozambican Authorities. Prooectod data : Bank staff ostimatos. Notos. The intorest and amortization data shown hero are the scheduled paymonts.  - 29 - ANNEX 1, UOZAU8I`UE : PROJECTED EXTERNAL FINANCE DIS'URSEVENTS. Table 3. US 3 millions Ecurrent]. 1988 1987 1988 1989 1990 1991 Current account 599.0 705.8 732.2 769.S 792.1 824.5 Eexcluding official transfers] Amortization. 367.2 329.0 294.0 195.0 198.0 199.0 Change in arrears. -538.2 0.0 0.0 0.0 0.0 0.0 Changes in net reserves. -8.0 18.7 15.1 15.1 18.0 15.7 (increase *ve3 IMF Repurchases 0.0 0.0 0.0 0.0 0.0 0.0 Net errors / omissions 73.0 0.0 0.0 0.0 0.0 0.0 TOTAL FINANCING REQUIREMENT. 497.0 1053.5 1041.3 979.6 1008.1 1039.2 From Existing Commitments: Grants. 213.0 321.2 0.0 0.0 0.0 0.0 Loans. Multilateral creditors. 36.9 71.3 0.0 0.0 0.0 0.0 Of which : IDA 29.2 21.8 0.0 0.0 0.0 0.0 Bilateral creditors. 247.1 192.2 o.0. 0.0 0.0 0.0 Private creditors. 0.0 0.0 0.0 0.0 0.0 0.0 IMf purchases 0.0 0.0 0.0 0.0 0.0 0.0 Total disbursements. 497.0 584.7 0.0 0.0 0.0 0.0 From Projected Commitments: Grants. 0.0 0.0 337.3 354.1 371.8 390.4 Loans. Multilateral creditors. 0.0 46.5 123.7 129.9 138.4 143.2 Of which : IDA 0.0 48.5 88.0 94.0 90.0 90.0 Bilateral creditors. 0.0 0.0 201.8 211.9 222.5 233.6 Private creditors. 0.0 0.0 0.0 0.0 0.0 0.0 IMF purchases 0.0 0.0 0.0 0.0 0.0 0.0 SAF. 0.0 14.5 9.8 9.8 0.0 0.0 Total disbursements. 0.0 81.0 872.6 705.7 730.7 787.2 TOTAL IDENTIFIED FINANCINC. 497.0 645.7 672.8 705.7 730.7 767.2 Prospective debt relief : 536.2 07.8 321.4 207.5 197.5 197.5 Financing gap : 0.0 0.0 47.3 66.4 77.9 74.5 Notes: 1. The grant and lo3a disbursements from existing commitments are not known for 1988-91. .onsequently, they are assumed to be zero for illustrative purposes. 2. The distribution of loan inflows for 1988-91 between multilateral and bilateral sources is assumed to be as in 1987. t i.e. Multilateral : 38% , and bilateral : 2%.  - 30 - ANNEX II Page 1 or 2 STATUS OF BANK GROUP OPERATIONS IN MOZAMBIQUE A. STATEMENT OF BANK LOANS AND IDA CREDITS AS OF MARCH 31, 1987 (USS million) Fiscal Amount less cancellation Ln.JCr.No. Year Borrower Purpose Bank IDA Undisbursed Cr.1610-MOZ 85 Mozambique Rehab. 45.0 17.6 Program Total 45.0 17.6 of which has been repaid - _ Total now outstanding 45.0 17.6 Amount sold --- Total now held by Bank and IDA 45.0 17.6 Total Undisbursed 22.8 17.6  - 31 - ANNEX II Page 2 of 2 B. STATEMENT OF IFC INVEST.ENTS IN MOZiNNHIQUE (as of march 31, 1987) Fiscal Amount in US$ Mtiillion Year Obligor Type of Business Loan Equity Total 87 LO4aCO Food and Food Processing 2.5 - 2.5 Total Gross Commitments 2.5 - 2.5 Less cancellations, terminations, repayments and sales Total commitments now held by IFC 2.5 - 2.5 Total undisbursed .5 - .5  - 32 - A3NEX III Page I of 1 PEOPLE'S REPUBLIC OF MOZAMBIQUE PROPOSED SECOND REHABILITATION CREDIT SuRplementary Data Sheet Section I. Timetable of Key Events (a) Appraisal: March/April 1987 (b) Negotiations: June 1987 (c) Planned Date of Effectiveness: August 1987 Section II. Special Bank Implementation Actions The Association would support the Government in implementing the second rehabilitation credit through an early supervision mission and ongoing monitoring of progress. Close collaboration with IMF staff would continue. Section *III. Special Conditions Review of progress and fulfillment of second tranche conditions is scheduled for November/December 1987. Release of the second tranche of US$50 million, would be dependent on the Government's making satisfactory progress in carrying out commitments undertaken in its Letter of Development Policy, executing its rehabilitation program and fulfilling the specific release conditions detailed in paragraph 59.  ANNEX IV Page 1 of 16 Table 1: Mozambique - Summary and Timeframe for Implementation of Strticttaral Adjtustment Pol icies, I987-8'3 Phasing and Issues Objectives and Policies. Strategies and Meastures Implementation I. Economic and Financial Management A. Public Establislh a process for Undertake a detailed Review to be Expenditures preparation, review and review of the public completed by Jutne adjustment of public expenditures (including 1988 with assistance expenditures, to ensure ongoing and planned from donor countries that resources are investments). The size, and the World Bank. allocated efficiently and composition and phasing to the highest priority over time will also be sectors of the economy. reviewed annually in the context of the country's priority needs. B. Financial 1. Improve monetary and Revision of accounts and New plan of accounts Management credit controls. monetary data to improve devised in December accuracy and timeliness, 1986, to be including separation of implemented by June accounts of commercial and 1987. central banking functions of the Bank of Mozambique.  ANNEX IV Page 2 of 16 Table 1: (Continued) Mozambique - Summary and Timeframe for Implementation of Macroeconomic Structural-Adjustment Policies, 1987-89 . ~~~~~~~~~~~~~~~~~~~~~~Phasing and Issues Objectives and Policies Strategies atnd Measures Implementattion 2. Improve debt Improve quality and 1987/88 with support management. accessibility 'of from the World Bank. information on external debt, debt service and foreign assistance; establish an ongoing monitoring scheme. C. Enterprise Management 1. Assess performance of Carry out enterprise Before 2nd Tranche, key agricultural and review covering 25 complete review and industrial enterprises. industrial and 15 agree on agricultural enterprises. implementation Implement recommendations. program with Bank. 2. Reduce redundant labor a. Issue regulations of Regulations issued in and reward productive December 1985 labor January 1987. labor. Given enterprises legislation. autonomy to hire and fire workers. b. Allow enterprises Implemented in autonomy to develop and January 1987. implement their own incentive plans to retain skilled personnel.  ANNEX IV Page 3 of 16 Table 1: (Continued) Mozambique - Summary and Timeframe for Implementation of Macroeconomic Structural Adjustment Policies, 1987-89 . ~~~~~~~~~~~~~~~~~~~~~~Phasing and Issues Objectives and Policies Strategies and Measures Implementation II. External Policies A. Exchange Rate Establish a realistic rate a. Initial devaluation of First adjustment that will allow a 80 percent in foreign implemented in reduction in the scope of currency terms to January 1987. administrative allocations Mt. 200 = US$1. in the exchange rate and trade systems. b. Flexible exchange rate Further adjustments policy that is aimed at to be assessed in the establishing a market context of the annual clearing system. programs and consultations with the IMF. B. Trade and Reduce scope of a. Continue the process Before second Foreign Exchange administrative allocations of opening marketing tranche, reduce the Management. in the external trade and channels by allowing number of products exchange system. enterprises to import and which must be export directly as well as imp2rted through only through trading companies. ore trading corporatlon from eleven to five and the number of export commodities from three to one.  ANNEX IV Page 4 of 16 Table 1: (Continued) Mozambique - Summary and Timeframe for Implementation of Macroeconomic Structural Adjustment Policies, 1987-89 v ~~~~~~~~~~~~~~~~~~~~~~~Phasing and Issues Objectives and Policies Strategies and Measures Implementation b. Establish a program to Action program June increase progressively the 1988 for number of imported implementation products for which no thereafter. administrative allocations are made. c. Review of the export Before 2nd. TrancheL retentlon scheme and other complete study of Interim measures to Interim Tradingt improve the flexibility of Measures, and agree trade. Implementation