Mozambique - Public expenditure review (Vol. 2 of 2) : Main report

Report No. 7615-MOZ Mozambique: Public Expenditure Review (In Two Volumes) Volume 11 September 5, 1989 Africa Regioni Country Operations Division Southern Africa Department FOR OFFICIAL USE ONLY Dowm of th wod Bank -~ , - _~~~~~~~~~~~~~ C. ~~~~~ . '- 1.~~~~~ This document has a restricted distribution 'pnd may be tused by recipients onvly in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. \ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'I '  CURRENCY EQUIVALENTS Currency Unit The Mozambican Metical (Meticais) (Mt,) Exchange Rates 1975 US$1 Mt 25.55 1980 US31 = Mt 32.40 1981 US$1 M Mt 35.35 1982 US$1 8 Mt 37.77 1983 US$1 M Mt 40.18 1984 US$1 = Mt 42.44 1985 US$1 - Mt 43.18 1986 US$1 = Mt 40.43 1987 (Feb) US$1 8 Mt 202.00 1987 (July) US$1 m Mt 404.00 1988 (Jan) US$l Mt 454.50 1988 (July) US$l 8 Mt 585.80 1988 (Oct) US$1 , Mt 620.00 1989 (Jan) US$l , Mt 651.00 Fiscal Year Januar. 1 - December 31  FOR OFFCIAL USE ONLY Mozuabloue Public limenditure Review Table of Contents Volume II: Main Renort Pase No. Part I. Public Expenditures Chapter I. Macroeconomic and Fiscal Context ..................... 1 A) Introduction . .......... 1 B) Macro and Fiscal trends, 1980-88 ..................... 1 C) Objectives and prospects for 1989-92 . .5 D) Public Expenditure Policy . . .....8 Chapter II. Public Investment and Recurrent Expenditures ....... .. 9 A) Introduction ......................................... 9 B) Evolution of Investment Policies & Priorities ........ 9 C) Sectoral Composition of Investment . . 9 D) Investment Issues and Screening Criteria ............. 1S E) Balance betveen Investment and Current Expenditures.. 17 Chapter III. Planning, Budgeting & Control of Public Expenditures. 20 A) Introduction .. 70 B) The Budgetary Process ................................ _0 C) Shortcomings in Budgetary Management ................. 21 D) Recommendations .. 25 Chapter IV. Public Enterprise Finances ........................... 30 A) Introduction and Scope of the analyeis ......is . ....... 30 B) Enterprise Subsidiess Recent Trends and Patterns .... 30 C) Key Issues and Recommendations . . 34 D) Analysis & Recommendations on Individual Enterprises .. 36 Chapter V. Cross-Sectoral Issues ........... 40 A) Cost Recovery Policies .. 40 B) Public Sector Employment and Salary Policy . . 41 C) Local Government Finance . . . 41 D) Agenda for Further Work .. 50 Part II. Sectoral Expenditure ProQrams Chapter VI. The Agriculture Sector . . 51 Chapter VII. The Transport Sector ................... . 65 Chapter VIII. The Health Sector ........................ 77 Chapter IX. The Education Sector ..................... 85 This document has a restricted distribution and may be used by recipients only in the performance of their oMcial duties. Its contents may not otherwise be disclosd without World Bank authorization.  ANNEXES Annex A. Fiscal Development and Policies Annex B. Problems and Issues in Data Interpretation Statistical Appendix I I  LIST OF TEXT TABLES Paxe No. Chanter I 1.1 Summary of Government Finance, 1980-1989 ...................... 4 Chanter II 2.1 Expenditures on Investment Financed by the Budget, 1975-1988.. 11 2.2 State Budget: Public Investment by Sectors, 1975-88 ........... 12 2.3 Summary of Public Investment by Sectors, 1988189 .............. 14 2.4 Summary of Public Investment by Sectors, 1989 ................. 15 Chapter IV 4.1 Subsidies to Enterprises, 1984-88 ............................. 31 4.2 Composition of Subsidies by Enterprise and Sector, 1987-88 .... 32 4.3 Use of Credit and Domestic Resources by Selected Enterprises. 33 4.4 Subsidies to the Sugar Industry .. ............................. 36 Chapter V 5.1 Principal Sources of Receipts. Maputo, 1983-1987 .............. 44 5.2 Current Expenditure Transfers to Province from Central State Budget ............ 45 Chapter VI 6.1 List of Agricultural Projects financed by the State Budget and Banking System .............................................. 55 6.2 List of Agricultural Projects financed by the State Budget and Banking System ......... . 56 Chanter VII 7.1 Transport and Telecom Sector, Composition of Planned Expenditures, By Financing Source .. . . 68 7.2 Transport and Telecomm Sector, Composition of Planned Expenditures, by Financing Source ........................... 68 7.3 List of Ministry of Transport Projects Financed by the Budget and Banking System ........................................ 69 7.4 List of Ministry of Transport Projects Financed by the Budget and Banking System ................................... 70 Chapter VIII 8.1 Recurrent Government Expenditure on Health .................... 79 Chanter IX 9.1 Budgetary Expenditures in Education ........................... 88 9.2 Education Financing Requirements .............................. 93  ANNEXES Annex A. Fiscal Development and Policies Annex B. Problems and Issues in Data Interpretation Statistical Appendix  Chapter I. MACROECONOMIC AND FISCAL CONTEXT A. Introduction 1.01 The context for the present review of public expenditures was provided by the economic, fiscal, and external resources framework set forth in the agreed Policy Framework Papers (PFP) for 1988-90 and 1989-91. The relevant elements and underlying assumptions of that framework are drawn upon in this reportil. Public resource management will be increasingly important for the successful implementation of the ERP currently underway in Mozambique. The government clearly recognizes the required contribution of the public sector to its stabilization and development efforts and has taken steps to reduce overall fiscal imbalance. The government is also concerned with the effectiveness with which public resources (either generated internally or mobilized externally) are being utilized. In view of the importance of good public resource management, this review of public expenditures identifies key issues which the government is facing or is likely to confront and provides recommendations for dealing with some of these issues. The review examined (a) the evolution of overall revenues and expenditures in relation to other macroeconomic aggregates, (b) the government's overall 1988-89 investment program, and expenditures in four key sectors, (c) public enterprise finances and, (d) the planning, budgeting and control of public expenditures. Data limitations and uncertainties, particularly with regard to investment and recurrent expenditures, made the analysis of expenditure trade-offs and issues quite difficult, and in a number of areas questions rema n which will require further clarification or additional information. B. Macroeconomic and Fiscal trends. 1980-88 1.02 Developments during the early to mid-1980s in government finances, as in overall production and investment, reflected the disruptive effects of sabotage and terrorism in various parts of the country, the heavy burden of i defense outlays, and distortions due to the prevailing administrative allocation mochanisms. As real and financial imbalances deepened, scarcities and unofficial markets became pervasive. With the tax base shrinking, revenues stagnated in the early to mid 1980s. Despite increasingly stringent measures to hold down recurrent expenditures (especially those for goods and services and, to a lesser extent, the civil service wage bill) these doubled in nominal terms between 1980 and 1986, as defense outlays nearly tripled and as a result, the current budget surplus disappeared. Meanwhile, bank credit was provided not only for general budgetary support but also to finance mounting enterprise losses caused by physical destruction, shortages of inputs, and inflexible pricing; by 1986, such subsidies are estimated to have exceeded defense expenditures. High levels of investment were maintained into the early 19809, with support from substantial external borrowing, but proluction and export levels fell rather 1, Annex A, entitle "Fiscal Developments and Policies", provides a more detailed discussion of fiscal trends and prospects. Annex B discusses problems and issues in the interpretation of the available economic and fiscal data.  - 2 - than contLinuing upward as expected and debt service proved unmanageable; loan inflows fell sharply during 1983-85, and both budgetary and extrabudgetary investments were drastically reduced at mid-decade. 1.03 The comprehensive Economic Rehabilitation Program tERP) introduced in 1987, substantially altered the macroeconomic and fiscal environment in Mozambique. Since the ERP is described in detail in the PFP, this Chapter concentrates on the fiscal policy context for the analysis of public expenditures. Government fiscal policy under the ERP (discussed more fully in Annex A) is pursuing the following objectives: first, the progressive elimination of the current account deficit; second, the limitation of capital expenditures to that level which can be fully financed from external resources and is economically justifiable in the context of the ERP; and third, the consequent restriction of domestic bank financing to the Government. The strategy to attain these objectives has five key components: the strengthening of the revenue base resulting from increased tax buoyancy and efficiency in the administration and collection of taxes; rationalization and restoration of financial discipline to public enterprises; containment of recurrent expenditures; prioritizing capital expenditures; and improving the coordination and utilization of external resources. 1.04 The central thrust of fiscal policy in 1987 and again in 1988 was the improvement of the current and overall fiscal imbalances and the reduction in the Government's recourse to the banking system. In 1987, the specific targets of policy were, first, the reduction of the current account deficit from around 50Z of current expenditure in 1986 to about 252; second, the reduction in the overall defici* from alaost 602 of total expenditure in 1986 to no more than 56?; and, third, the maintenance in nominal terms of domestic bank financing to the Government, implying a fall from around 402 of total expenditure in 1986 to about 14?. These targets were closely adhered to, reflecting the successful implementation of the programmed revenue and expenditure reforms. 1.05 The major package of revenue measures introduced at the start of 1987,2/ together with considerable reintegration of markets and the price structure, led to renewed buoyancy in revenues. Total revenues tripled in 1987, and revenue increased as a share of GDP from 13? in 1986 to about 16? in 1987. Recurrent expenditures were contained mainly through the control of wages and salaries and transfer payments. The former were held roughly constant in real terms, and transfers to enterprises, which were targeted to be held constant in nominal terms, in fact fell by 302. Consumption subsidies were limited to about 6Z of current expenditure. Through these measures the current budget deficit (excluding grants) as a share of GDP was reduced sharply while the overall deficit increased modestly as a result of 2/ Revenue measures included simplification of the tax code, substantial increases in the main revenue raising taxes (the consumption tax, im,)ort duties, the turnover tax), the broadening of the tax base, the accelerated payment of corporate tax, and the introduction of a windfall tax on profits.  - 3 - tne impact of the exchange rate changes on capital expenditure. The Govet-ment's recourse to bank credit fell substantially in 1987 and 1988. 1.06 Budgetary investment expenditures, reflecting mainly the effect of the exchange rate but also a considerable real increment, have increased significantly in nominal terms. External grant and loan receipts more than fully covered the rise in capital outlays, so that recourse to domestic bank financing was held to a very small nominal increase. Thus, although the size and composition of investment expenditures raise a number of issues that are discussed in subsequent Chapters of this report, there have been no immediate detrimental repercussions on the level of domestic bank financing, and hence on other monetary and credit indicators. 1.07 The fiscal program for 1988 continued to pursue the same objectives that have underpinned fiscal policy so far under the ERP. In order to attain global targets, further revenue and expenditure measures were implemented. On the revenue side, although the Government was still consolidating the 1987 changes, minor adjustments were made and administrative improvements to the customs and tax services further improved the efficiency of collections. The containment of recurrent expenditures was again being pursued through a restrained wage policy, continued i austerity in the purchases of goods and services, and erpecially through the reduction of budgetary subsidies. A major step wa3 tat.en in April 1988 to curtctl consumer subsidies and preclude their becoming a structural burden to the budget. The prices of key staples distributed at subsidized prices ! through the ration system were increased sharply and only partially compensating wage increases were approved. In general, the objective of wage policy is to limit wage adjustments to no more than the antici;ated increase in the cost of living. Capital expenditures in 1988 continued to be closely linked to the availability of donor capital inflows, and a substantial increase was budgeted in real capital expenditures in 1988. Based on the availabie information, budgetary investment in 1988 wao about Mt. 140 billion, which represented a significant real increase over 1987 and constituted about 49Z of overall government expenditures, which rose to 43Z of GDP in 1988.31 3/ As discussed in Chapter 2, estimates of budgetary and aggregate investment levels continue to be uncertain and are subject to a considerable margin of error due to ambiguities regarding timing, coverage and implementation rates.  - 4 - Table 1.1. Mozambique: Summary of Government Finance 1980-198? A: sdi C':.