Mozambique - Economic and Financial Management Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-5148-MOZ MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 16.5 MILLION TO THE PEOPLE'S REPUBLIC OF MOZAMBIQUE FOR AN ECONOMIC AND FINANCIAL MANAGEMENT TECHNICAL ASSISTANCE PROJECT SEPTEMBER 18, 1989 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  THE PEOPLE'S REPIBLIC OF MOZAMBIQUE ECONOMIC AND FINANCIAL MANAGEMENT TECHNICAL ASSISTANCE PROJECT CURRENCY EQUIVALENTS Currency Unit . Metical (plursl Meticais) US$1 X 715 Meticais (Appraisal) MEASURES AND EQUIVALENTS 1 Meter (m) 3.28 Feet 1 Square Meter (m. sq) . 10.76 Square Feet ABBREVIATIONS AND ACRONYMS MOF: Ministry of Finance BOM: Bank of Mozambique DDR: German Democratic Republic ERPt Economic Rehabilitation Program NATCAP: National Technical Cooperation Assessment and Programs SOEs State-Owned Enterprise UNDP: United Nations Development Program USAID: United States Agency for International Development CTPU: Central Technical Project Unit FISCAL YEAR Government of Mozambique: January 1 - December 31  FOR OFFICIAL USE ONLY THE PEOPLE'S REPUBLIC OF MOZAMBIQUE ECONOMIC AND FINANCIAL MANAGEMENT TECHNICAL ASSISTANCE PROJECT CREDIT SUMMARY Borrower: The People's Republic of Mozambique Amountt SDR 16.5 million (US$21.0 million equivalent) Terms: Standard with 40 years maturity Onlending Term: Not Applicable Financing Plan: Local Foreign Total (USS million) Government 2.0 0.0 2.0 IDA 0.0 21.0 21.0 Total 2.0 21.0 23.0 Economic Rate of Return: Not applicable Staff Appraisal Report: None k!!2s IBRD 20704 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF MOZAMBIQUE FOR AN ECONOMIC AND FTNANCIAL MANAGEMENT TECHNICAL ASSISTANCE PROJECT 1. The following memorandum and recommendation on a proposed credit to the People's Republic of Mozambique for SDR 16.5 million (US$21.0 million equivalent) is submitted for approval. The propnsed credit would be on standard IDA terms with a maturity of 40 years, and would help finance a project of institutional support for key economic decision-making agencies involved in the implementation of the Government's Economic Rehabilitation Program (ERP), which is concurrently being supported by the International Monetary Fund (IMF) and the Association. 2. Background. Achieving independence in 1975, Mozambique has experienced a dramatic decline in its economy over the past decade, particularly in the past five years, with GDP falling by about 8 percent per year between 1981 and 1986. However, in 1987 and 1988 GDP has grown at an average of four percent per annum. Agricultural production is only about 50 percent of Lts 1981 level while industry is operating at 20-40 percent of capacity and exports have fallen to about 28 percent of their 1981 level. This decline is the result of a combination of factors, including in particular: the exodus of Portuguese settlers following independence and the wide-spread security problems now confronting the country, especially in the rural areas. These latter factors have exacerbated the weaknesses of the country's overall institutional bases Mozambique has a level of human resource development, in terms of literacy, basic education, and qualified manpower that is low even compared to the rest of Sub-Saharan Africa. According to a recent National Technical Cooperation Assessment and Programs (NATCAP) survey, conducted and financed by the UNDP, less than three percent of total staff in core economic agencies had university training while 50 percent of total staff had less than nine years of basic education. 3. The Government recognizes that renewed growth will depend on its efforts to change economic policies, re-establish domestic stability, and increase the flow of external assistance to finance the adjustment process as well as tackle the fundamental development issues facing the country. On the policy front, the process of reform has been initiated with the launching of the ERP which is being supported by IMF Structural Adjustment Facility Credits and IDA Rehabilitation Credits. These measures, designed to stabilize the fiscal and external situation, establish a realistic foreign exchange value, reduce administrative controls over foreign exchange and trade management, are all important steps to eliminate economic distortions and structural imbalances. However, many of these measures have been hampered by the lack of technical support for policy analysis and execution in the form of data gathering, projections, mcnitoring and evaluation of policy impact. Moreover, institutions that are vital to the successful implementation of the ERP require significant strengthening. Ensuring that the basic systems of government function more efficiently is a requirement for adjustment and future growth.  -2- 4. Overcoming the institutional weaknesses that confront Mozambique is a long-term objective that requires deliberate and concerted efforts on a wide number of fronts by Government and the donor community. Given the paucity of qualified manpower and the lack of resources, there are daunting needs in virtually all aspects of economic and financial management as reflected in the conclusions of studies conducted by several donors. The Dutch, Swedish and Swiss Governments, through their respective technical cooperation programs, have undertaken diagnostic studies of Mozambique's national economic management institutions and by and large have confirmed IDA's evaluation of the country's needs in this area. Furthermore, the NATCAP studies also highlighted the severe shortage of skilled government staff in the economic and financial policy making area; needs which were confirmed during IDA's appraisal missions. The selective and focused approach adopted by this project complements the efforts being undertaken by donors, such as Brazil, Switzerland, Sweden and the IMF. 5. Proiect Obiectives. In light of the needs discussed above, this first effort to provide institutional support by IDA sets modest goals, limiting this initiative to those activities that are vital to two priority institutions: the Ministry of Finance (MOF) and the Bank of Mozambique (BOH). Project objectives are to provide support to these two priority institutions to: (i) carry out technical analyses in the areas of economic policy formulation, capital budgeting (to include selection, analysis, programming and monitoring of projects), and banking operations; (ii) define specific needs and prepare programs of institutional support as the basis for immediate action as well as subsequent follow-up; (iii) increase the stock of qualified professionals needed in two essential areas (accounting and economic analysis); and (iv) increase the productivity and effectiveness of the two priority institutions, by furnishing them with the basic systems and equipment needed for their day-to-day operations, particularly in financial systems and production of basic economic information. 6. Proiect Description. The project will consist of two main components. The first component is for MOF to provide assistance to: (i) the Economic Analysis and Price Department in the National Treasury Directorate to improve the collection and analysis of economic information for economic policy formulation; (ii) the National Budget Directorate to improve capital budgeting, and (iii) the carrying out of an accounting training program. The second component is for BOH to provide assistance to: (i) strengthe.. the Economic Research Department to improve data collection, economic analysis and policy formulation including the establishment of a Documentation Center; (ii) improve banking operations by computerizing banking systems and introducing modern equipment; and (iii) strengthen the legal advisory services provided within BOM, especially regarding external financing and negotiations with creditors. Financing would be provided for advisors, consultants, training, as well as computer and other equipment. 7. The proposed project is expected to be completed by June 30, 1997 and is estimated to cost US$23.0 million equivalent, including a foreign exchange component of US$21.0 million. An advance from the Project Preparation Facility of US$1,267,000 has financed preparation and start-up activities and will be refinanced under the proposed credit. The break-  -3- down of costs and the financing plan are shown in Schedule A and details of procurement and disbursements are given in Schedule B. A timetable of key processing events and the status of Bank Group operations in Mozambique aze given in Schedules C and D, respectively. More detailed information on the project is provided in Annex 1. 8. Rationale for IDA Involvement. This project is an essential part of IDA's strategy to help Mozambique continue to carry out the ERP as well as lay the basis for improving economic management. Immediate assistance to improve the flow of economic information as well as in financial analysis and policy formulation is critical for the successful implementation of the ERP, which IDA is also supporting. In the longer run, i; is important that the organizational units responsible for these functions be strengthened to enable the Government to manage the economy more effectively and conduct a meaningful policy dialogue on economic issues. 9. Main agreements reached. (a) During negotiations, the Borrower agreed: 'i) that the project will be implemented in accordance with the timetable contained in Annex 1, Schedule 1 'Implementation Plan); (ii) that annual project implementation reviews would be carried out not later than November 30 of each year; and (iii) that a management structure to carry out the execution of the project would be effected. (b) As conditions of credit effectiveness: (i) that the management committee for BOM component has been duly established; and (ii) that the Project Coordination Assistant has been selected and contracted. (c) As conditions of disbursements: (i) Credit funds to finance the accounting training program for the public sector and staff of publi, enterprises will be conditioned on the Association approving a proposal for the training program, including a detailed budget and implementation plan. The Borrower should also define the eligibility conditions to enroll in the accounting training program as well as arrangements for course facilities and educational accreditation; and (ii) Credit funds to finance training and acquisition of equipment for the Central Technical Project Unit (CTPU) will be conditioned on the establishment and operation of CTPU on terms and conditions acceptable to IDA.  -4- 10. Justification. At present, two key agencies of the Government, MOF and BOH require substantial support to monitor and implement more effectively the ERP. In the long run, these institutions need to improve their capacity to shape policies in a changing economic environment. The proposed project, in addressing these problems, is expected to provide the support needed for implementation of the ERP. More generally, the project will improve the basic operating systems and initiate a process of institutional improvement in areas that constitute critical underpinnings to the economy, particularly in the financial sector and key policy functions of Government. 11. Risks. The major risk affecting the proposed project is the existing weak institutional base which hampers the implementation of development projects more widely in Mozambique: decision-makers are overworked; there is no middle management level to which to delegate; inadequate inter-agency coordination; and limited experience in working with international agencies. These factors combine to make project implementation difficult. Phased implementation schedules; well-defined tasks; substantial support by IDA during the course of implementation and carefully selected residential advisors supported by short-term consultants are vital to minimize this risk and constitute measures incorporated into the project. 12. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of IDA and recommend that the Executive Directors approve the proposed credir. Barber B. Conable President Washington, D.C. September 1989  Schedule A THE PEOPLE'S REPUBLIC OF MOZAMBIQUE ECONOMIC AND FINANCIAL MANAGEMENT TECHNICAL ASSISTANCE -------------_------------------------_--------------- Estimated Costs Local Foreign Total ---------------USS million------------- A. Assistance to Ministry of Finance 1. Economic Analysis and Policy Formulation 0.8 1.24 1.30 2. Budgeting O.96 1.19 1.26 8. Accounting In SOEs and Other Agencies O.10 1.9O 1.16 0.22 3.48 3.70 S. Assistance to Bank of Mozambique 1. Econ. Analysis and Policy Formul./Doc. Center 0.37 1.76 2.12 2. Banking Operations 0.76 11.42 12.18 S. Legal Advisory Services 9.30 0.43 @.73 1.43 13.66 16.03 C. Project Organization rnd Managment .003 0.71 0.74 Base Costs 1.68 17.79 19.47 Physical Contingencies O.O7 0.70 0.77 Price Contingencies 0.24 2.63 2.77 Total Project Costs 1.9 21.02 23.01 Financing Plan -------------- Local Foreign Total ------------US million--------- - Government 2.0 - 2.0 IDA 21.0 21.0 Total 2.0 21.0 23.0  -6- Schedule S THE PEOPLE'S REPUBLIC OF MOZAMIBJUE Pe o 2 ----------------------------------- ECONOMIC AND FINANCIAL MANAGEMENT TECHNICAL ASSISTANCE -_---------,-----_-_--------.--------_---___-__.--_--- ----------------------__--------------------------__-.--_.-.--_----_---_---_-__----_------- Procurment Mothods Project Element ---______________________________-_ ICa LCB Other NA Total Cost ----------------------USB million