Mozambique - Third Rehabilitation Credit Project

Document of The World Bank FOR OMCIAL USE ONLY Report No. P-5035-MDZ REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CREDIT OF SDR 68.2 MILLION TO THE PEOPLE'S REPUBLTC OF MOZAMBIQUE FOR A THIRD REHABILITATION CREDIT APRIL 24, 1989 This document has a restricted distribution and may be used by recipieuts only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY RqUIVALENTS Currency Unit M Metical (pl. Meticaim) US$ - 682.00 Meticais (March 1989) M1.00 - US$0.00146 ABBREVIATIONS AND ACRONTHS AGRICOM - State Enterprise for Trade in Rural Areas BOK - Bank of Mcvambique BOROR - Agricultural Import Marketing Agency CG - Consultative Group CP - National Planning Commission CNSP - National Wage and Price Commission UP - Economic Rehabilitation Program PRELIMO - Front for the Liberation of Mozambique (National Governing Party) GDP - Gross Domestic Product IDA - International Development Association IPC - International Finance Corporation IMF - International Monetary Fund OECD - Organization for Economic Cooperation and Development OPEC - Organization of Petroleum Exporting Countries PAZ - Economic Action Program, 1984-86 PP - Policy Framework Paper PPF - Project Preparation Facility SEA - Special Facility for Africa SJF - Special Joint Financing SRC - Second Rehabilitation Credit UNDP - United Nations Development Program UNRCR - United Nations High Commission for Refugees MOF - Ministry of Finance SPA - Special Program of Assistance for Debt Distressed Low Income Countries in Sub-Saharan Africa TRC - Third Rehabilitation Credit UCPI - Unit to Coordinate Import Program, Ministry of Trade FISCAL YEAR Government of Mozambique: January 1 - December 31 IOR OFFICIAL USE ONLY ECONONIC REBABILITATION PROGRAn - TRIRD -EABMIMTAION CREDIT TABLE OF CONTENTS Eame .No. CREDIT AND PROGRAM SUefRY i PART I - THE ECONONY Introduction .................................................. 1 Background 1975 - 1983 ........................................ 2 Consensus for Change 1983 - 1986 .............................. 3 PART zz - THE ECONOMIC REHABILITATION PROGRAM =ERP) Objectives of the ERP . * ............... .............. ....... . .4 Progress in Policy Reform Under the ERP .......................5 Impact of the ERP since 1987 .................................. 5 External Sector Policy ................. * .................. 8 Exchange Rate ............................................ a Foreign Exchange Allocation .............................. a Trade and Tariff Policies . ................................... 9 Pricing and Distribution Policy ............................... Pricing Policy ............ ......... ...................1 Distribution Policy . ......................................... 11 Fiscal and Monetary Policy ................................................ 11 Fiscal Policy .............................. . ...........1 The Public Expenditure Review ............................ 12 Monetary and Credit Policy ............................... 13 External Debt Management ...... ........ ...... 13 Sectoral Policy ........Set............................... 14 Agricultural Sector Policy ............................ 1 Industrial Sector Policy .......................... .0. ...... 14 Transport Policy ......... ................................ 15 PART III - CONSTRAMNS TO GROWTM AND ECONOMIC PROSPECTS The Overall Strategy ....... ............ ....................... 16 Releasing Constraints to Production .. ........................ 17 Admiistrative Limitations ................ .............. 0 .. ... . 19 Addressing the Social Impact of Adjustment ..................... 20 Environment ........* *.. ... ............. ... .... ... ........ ..... 21 Economic Prospects and External Finance Requirements .......... 21 Growth Prospects . . . ................. .. . .. ... . .. ..... . .. .. . .. 21 Balance of Payments . ... .. ....... ... . ... . .. .. .. .. . .. . ... 22 Financing the ERP .........*............................... 24 The Rationale for Bank Support ......... .... .. .. .. .. .. .. . ... #* . 25 Collaboration with the DW ................ .. . .. .. .. . .. ... .... 26 This document has a restricted distribution and may be used by reciplents only in the pertormance of their official duties. its contents may not otherwise be disclosed without World Bank audthoiton. Papne No. maR IV - Tas PRoeB THRD REABILITATION CREIT (TC) History ...................................................... 27 Relationship Between the Proposed Operation and the ERP ....... 27 The System for Nan-Administrative Allocation of Foreign Exchange ........................ ............. 28 Improving the Public Expenditure Program ...................... 29 Pricing Policies ............................................... 30 Distribution Policy .... ....0...*.0...... *..... ............. 30 Tariff Policy ............ 0.........0......................... . 31 Proposed Financing .................... ............ 31 Disbursement, Procurement, Administration and Auditing ........ 31 Tranche Release and Monitoring ................................ 32 Benefits and Risks ............................................ 34 PART V - BANK GROUP OPERATIONS ............................... 34 PART VI - E ES . . . . . 35 Annex I s Economic Indicators ............................ Key Macroeconomic Indicators .............. 36 Balance of Payments ....................... 37 External Financing Requirements 1988-90 ... 38 Annex II s Pixed.Prices ................................... 39 Annex Ills Letter of Development Policy ................... 40 Annex IV s WR Policy Reform Matrix............. 53 Annex V s Status of Bank Group Operations ................ 60 Annez VI : Supplementary Data Sheet ....................... 62 Annex VIIs Social Indicators .............................. 63 PEDPLE'S RBPUBLIC OP MDamexqu ECOUNIC REBABILITATION POGRAt - THIRD REHABILITATIOR CREDIT CREDIT AND PROGRAM 8tAfARY Borrower : People's Republic of Mozambique : IDA Credit SDR 68.2 million (US$90 million) Switzerland SvF 20 million (US$12.8 million) Finland Ffte. 40 million (US$8.9 million) P.R. of Germany Mks- 20 million (US$10.9 million) United Kingdom LStg. 10 million (US$17.5 million) Sweden SKr. 60 milion (US$9.4 million) The operation is supported under the Special Program of Assistance to Debt-Distressed Low-Income Countries in Sub-Saharan Africa. Tems a Standard IDA Terms, 40 years maturity. Program Objectives and Descriptions The proposed Credit would support the Economic Rehabilitation Program (ERP), initiated in 1987. The ERP is a broad based program of economic policy reform designed to restore Mozambique to a sustainable growth path. The Third Rehabilitation Credit (TRC) supports the deepening of the ERP by focusing on the key elements of policy adjustment needed to deepen and sustain the economic recovery. In addition to the continued support for appropriate fiscal and exchange rate adjustment, the TRC supports policy action in three key areas. These policy elements includes (i) initiation of trade policy reform through phased reduction in the administrative allocation of foreign exchange, through the establisbment of a mechanism for non-administrative allocation of foreign exchange and reform of the trade tariff structure; (ii) improvements in the use of public expenditures; and, (iii) completion of the first phase of pricing and distribution reform. The quick-disbursing proceeds of the Credit would contribute to all sectors in the economy in the context of economic policies which provide appropriate signals for increased production and productivity. Benefits s The main benefits of the proposed operation are expected to be the continued strengthening of the macroeconomic framework, through consolidation of the policy and institutional framework which was initiated under the ERP and which resulted in an economic turnaround since 1987. The primary economic benefits will accrue to the rural sector of society, notably family producers, as a result of their capacity to respond quickly to the new production Incentives as well as the local and international demand for their production. In addition, further efficiency gains in the industrial and transportation sectors should occur, as a result of changes induced to relative prices by external sector policies. Risks I The main risks to the ERP and the proposed Credit arise first, from the ongoing security situation and second, from the administrative weaknesses in key economic institutions. The impact of the security situation on economic performance continues to be of great importance in the countryside. With the continuation of the security situation there is also a need to maintain some elements of a command economy. Nonetheless, evidence shows that the economic reforms are having a positive Impact on production, especially in agriculture. The issue of the managerial and technical capacity of key economic agencies of the Government is a more complex and long term one, and not subject to short terms solution. Strong and continuing Government commitment to the implementation of the program, as well as design of policy elements to minimize administrative complexity are helping to overcome some of the administrative limitations. In addition, externally provided technical assistance is helping to overcome some of the bottlenecks in critical areas of Government. Estimated Disbursements : The Credit would be released in two equal tranches over a 24 month period. The first tranche would be released at the time of effectiveness. The second tranche would be released upon fulfillment of specific conditions, expected in March, 1990. Staff Appraisal Rport Not applicable. INTERNATIONAL DEVELOPNT ASSOCIATION SEPORT AND REOMDTION OF T88 PRSIERV TO THE EXECUTIVE DIRECTORS OR A PROPOSED THIRD REBABILITATION CREDIT TO THE PEOPLE'S REPUBLIC o NBIQU 1. I submit the following reort and recommendation on a proposed IDA Credit of SDR 68.2 million (US$.:0.0 million -quivalent), and that the Association act as administrator of proposed grant from Switzerland (US$12.8 million equivalent), and a Credit from Finland (US$8.9 million equivalent). PART I - THE ECONOMY Introduction 2. The People's Republic of Mosambique became a member of the World Bank in September, 1984. An economic report (Report No. 5610-MOZ) entitled OMosambiques An Introductory Economic Survey," was distributed to the Executive Directors on June 6, 1985, and a report (Report No. 7094-MOZ) entitled "Mozambiquet Agricultural Sector Survey," was distributed on May 12, 1988. Economic missions have visited the country regularly since 1986. 3. Mozambique is among the poorest nations of Sub-Saharan Africa despite economic potential in agriculture, transport services, fisheries, and minerals that is among the best in Africa. Its per capita income level (estimated at US$150) is amoub the lowest in the world, infant mortality rates and life expectancy are among the worst in Sub-Saharan Africa, 85 percent of marketed foodgrains is foreign supplied, and exports less than one-fifth of imports. Since the early 1980s, Mozambique has also suffered the consequences of a difficult and continuing security situation, which currently affects about 40 percent of the population. By 1986, GDP had declined by about 40 percent as compared to 1980, with an even higher decline in per capita consumption. The contrast between economic potential and actual performance is striking, and the rehabilitation of the economy will require many years. In 1987, the Government initiated this effort, through the Economic Rehabilitation Program (ERP) designed to enable the country to reverse the economic decline and establish a sustainable growth path. The initial phase of the EP has concentrated on reducing major distortions in the economy, providing a more stable macroeconomic context for investment, and reintegrating product markets. Since initiation of the ERP, GDP growth has resumed at about 4 percent per annum. The next phase of the ERP will continue to support strengthening of the macroeconomic -2- framework, but also focus on improving foreign exchange allocation and trade policy and the composition of investment to help ensure the sustainability of the recovery. 4. This turnaround in the economy was supported by substantial concessional external financing. Continuation of this progress requires sustained commitment of the Government to macroeconomic stability and policy reform, and mea,ures to improve the country's physical and human capital. In view of the likely continuation of security problems and the severity of the economy's structural problems, high levels of concessional resource transfers from the international community to Mozambique will need to be maintained for the foreseeable future. Background 1975 - 1983 5. Despite considerable natural potential, Mozambique's economy was beset by major problems attributable to the distorted structure of the economy and to the effects of the prolonged struggle for Independence, achieved in 1975. During colonial times the country was developed primarily as a service economy for neighboring countries; and 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. Mozambique exported a variety of agricultural products including prawns, cashew, tea, cotton, copra, sugar and wood. 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, with low life expectancy and a literacy rate of only 7 percent. Furthermore, the exclusion of most of the local population from education and training meant that non-Africans dominated modern sector employmnt. This colonial legacy was further aggravated by the mass exodus of 90 percent of Portuguese settlers between 1974-76. The problems created by the radical loss of human capital was compounded by regional instability caused by political turmoil in Rhodesia and South Africa that spread into Mozambique, and caused extensive damage to economic and social infrastructure. 6. The effect of these exogenous factors was aggravated by inappropriate economic policies. Although initially the Government took control over abandoned enterprises to koep them running, policies increasingly emphasized centralized management and administrative control over resources. Quantitative targets for production and allocation of output were set according to a state plan. Prices were either fixed or *conditioned" (set by the enterprises but subject to specific parameters and sectoral ministry oversight) and changed very infrequently, leading to a price structure that became divorced from market realities. The exchange rate remained unchanged and became progressively more overvalued. The state increasingly monopolized internal and external trade. Foreign exchange was directly allocated as it became more scarce. Development policy in agriculture emphasized state fame while in industry and transport emphasis on new investment at the expense of rehabilitation and -3- maintenance all contributed to poor performance and deterioration of infrastructure. Domestically, as production fell, a ration system was established to provide urban consumers with essential goods at subsidized prices. 7. The combination of structural weaknesses, severe exogenoue shocks, and the domestic factors noted above was disastrous for the economy. After an initial deterioration the economy recovered a little between 1977-81. By end-1983, however, real GDP had fallen to around two- thirds of the 1973 level and to around 50 percent in per capita term., Agricultural production stagnated throughout the period 1973-80, but fell at an average annual real rate of almost 10 percent between 1980-83. Industrial production was below 50 percent of its 1973 level by the end of 1983. Consensus for Chaue. 1983 - 1986 8. Prompted by the serious deterioration of the economy, the Fourth FRELIND Party Congress initiated a reassessment of overall economic strategy and policy in 1983. Greater emphasis was placed on the smallholder family sector and private commercial farmers to replace the earlier, virtually exclusive, focus on the development of capital intensive state farms. It was also considered important that the pri*ate sector should. play an increasing role in the nation's economic development. 9. The Congress was followed by the adoption of an Economic Action Plan embodying these objectives for 1984-86. Reforms introduced during the period.included introduction of an expo.t retention scheme whereby, on a case by case basis, export enterprises were allowed to retain a variable portion of their foreign exchange earnt;js; enactment of a new foreign investment code to promote foreign direct investmentl freeing of the prices of fruits and vegetablest issuance of a new labor law giving enterprise managers greater autonomy in the hiring, firing, and reward of labor; and a thorization of some agricultural enterprises to trade directly abroad. I Ale these measures were important first steps in the effort to reform economic management .hey were insufficient to stimulate any significant economic-turnaround. They did not address fundamental distortions in prices, notably the overvaluation of the exchange rate, or the need to improve substantistlly the incentives to agricultural producers. The system of centralized management and control continued and the economy grew more isolated from the forces of international and domestic markets. 10. In addition, the exogenous influences on the economy became increasingly less favorable. Regional political instability deteriorated, and as a conseqence, Mozambique's expenditures on defense grew to about 40 percent of current expenditure. The disruption of all aspects of economic .. nd social life has been severe, with significant disruption to subsistence agriculture. By the end of 1986, an estimated 4.5 million people were suffering from dislocation and food shortages. 11. In consequence, Mosambique's economic decline continued unabated, prompting a greater consensus for more rapid adjustment of economic policies. Agricultural production had fallen dramatically, with marketed grain production reaching barely 10 percent of the total marketed food requirement. In industry, firms operated between 20-40 percent of capacity, resulting in mounting losses and increased dependence on easy bank credit. Exports fell by nearly 75 percent. imports were only about two-thirds the 1980 level, and external arrears had accumulated to over US$700 million. Widespread parallel markets for foreign exchange and products also emerged, where prices exceeded by 20 to 40 times official prices. The fiscal budget reflected the fall in production and deterioration of the external account with the overall deficit reaching about 58 percent of expenditure before grants. By 1986 GDP had declined by 27 percent from its 1980 level, and consumption per capita had fallen by 30 percent. PART II - THE ECONOMIC REAILITATIOV PROGRAN 12. In January, 1987, the Government initiated the Economic Rehabilitation Program (ERP), a comprehensive set of economic policy adjustments to respond to the drastic declines in production and living standards that had taken place in the first half of the decade. The ERP has been designed to establish a realistic macroeconomic framework which is consistent with the needs for rehabilitation of the economy under a continuing and very difficult security situation and which can establish a basis for more rapid growth when the security problem subsides. The objectives of the ERP were first set out in a Policy Framework Paper (PFP) for 1987-89, and have been reaffirmed in a Second PFP for 1988-90. A Third PPP covering the 1989-91 period, guided by the same underlying strategy, has been prepared. The ERP has received the strong support of the international commnity, including IDA through the Second Rehabilitation Credit (SRC), approved in August, 1987, and the DW, through a first and second year Structural Adjustment Facility (SAF). Objectives of the ERP 13. The objectives of the ERP are: (a) to reverse the decline in production and restore a minimu level of consumption and income for all the population, particularly in the rural areas; (b) to substantially reduce the domestic financial imbalances and strengthen the external accounts and reserves; (c) to enhance efficiency and establish the conditions for a return to higher levels of economic growth once the security situation and other exogenous constraints have eased; (d) to reintegrate official and parallel markets; and, (e) to restore orderly financial relationships with trading partners aid creditors. The achievement of these objectives is being supported by major reforms in economic management, building on the measures introduced since the beginning of 1987. These reforms would: (i) progressively reduce centralised administrative controls in the economy and encourage private sector participation; (ii) allow resource allocation based on more 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 performance of economic units and individuals; and, (iv) improve the quality of planning and policy making, -5- Including ensuring that the public expenditure program focuses on the priority requirements of the economy. The implementation of these reforms will be constrained by the security situation, which itself requires the maintenance of some administrative controls over the allocation of resources. Nonetheless, the Government strategy is to pursue these reform on a broad front and, in those areas of the economy where reform remains cor-trained by security, to lay the foundations for a rapid transition when circumstances permit. Poaress Jo Policy RefoM Under the ERP 14. Since the introduction of the ERP the Government has taken numerous significant policy decisions in key areas of economic policy to achieve the objectives of the ERP. Substantial progress has been made to reduce macroeconomic distortions while introducing reforms to pricing and marketing policies to support increased production and productivity. The following sections of this chapter summarize first, the overall impact of the ERP since its introduction and second, describe the measures which have been taken and which are planned. Xmact of the ERP since 1987 15. Since the initiation of the ERP, significant progress has been made in establishing a more appropriate macroeconomic framework for economic growth, in removing the severe distortions due to a grossly overvalued exchange rate and in reintegrating official and parallel markets. Fiscal adjustment reflects the strategy of the ERP, and has been schieved, through restrained wage policies and reductions in subsidies, such that the current deficit has declined from over 10 percent of GDP in 1985186 to about 6 percent by 1988. Investment has been financed externally so that domestic bank financing of the budget has fallen from over 10 percent of GDP to about 3 percent over the same period. Restraint on the fiscal side has permitted a greater proportion of domestic credit to be directed towards productive sectors, while maintaining a lower growth in the money supply. Although the overall fiscal deficit (after grants) remains relatively high at about 10 percent of GDP estimated for 1989, this reflects largely the size of. the investment component of the Public Expenditure Program, financed almost entirely from external concessional loans. The current deficit on the balance of payments reflects this, and increased substantially from about 14 percent of GDP in 1985186 to about 67 percent in 1988. Although a significant portion of the increase is the result of exchange rate adjustments, the increase in the deficit also reflects the growth of investment and rehabilitation expenditures financed by external resources. Measured inflation has tended downwards over the 1987-88 period, after a substanti.al increase in 1987 as compared with 1986. This increase, however, largely reflected the reintegration of parallel and official markets, through the major exchange rate and domestic price increases introduced in 1987. -6- Table 1: NaocnmcDvlpet (percentage changos) Average Est. For. 1985-86 1987 1988 1989 GDP (per annum) -6.2 4.0 4.1 5.0 Consumption (per capita) -14.5 0.3 5.9 3.8 ]Iance of Paymeta Current deficit/GDP 13.9 45.5 67.3 86.9 Debt Service Ratio after debt relief 179.0- 20.9 31.5 50.5 Grants/Grants + MLT 41.0 50.0 59.0 54.0 Fiscal Current deficit/GDP 10.7 5.2 5.7 4.7 Bank finance to budget/GDP 10.7 3.9 3.3 1.8 Overall deficit after .grants/GDP 13.2 11.8 14.2 10.2 Money Supply Growth n.a. 50.0 43.0 30.0 Memo Items imports (volume, goods) 12.0 7.1 6.4 8.5 Export (volume, goods) -10.0 15.0 1.9 )J 16.8 Inflation (CPI) - - 34.0 163.0 50.0 30.0 16. Complementary structural policy changes aimed at increasing production have been introduced, focused on pricing and marketing reform. Pricing policies have focused on the reduction of price controls in order to improve the market signals transmitted to producers. The major thrust of the policy has been to eliminate or reduce controls over products which account for about 70 percent of C,9 in the agricultural and industrial sectors. -The remaining fixed prices have been adjusted regularly. 17. The impact of pricing and distribution policies has been felt mostly in the agricultural sector, particularly family producers. Agriculture accounts for 40-50 percent of GDP, employs over 80 percent of the labor force and generates around 80 percent of the country's export earnings. The family sector is dominant, accounting for over 90 percent of value-added in agriculture and about 75 percent of marketed production, 1/ Export growth in 1988 was below target levels as a result of climatic and security factors, especially affecting cashew production. The 1988/89 production levels are forecast to return to normal levels. - 7 - more than half of which is for export. The productive response is being further stimulated by strengthening the impact of the terms of trade shift and developing agricultural support services. As is apparent from Table 2, producer prices, which had lost touch with international prices during the early 1980s, have been sharply increased (column 1). This helped bring food crop prices closer (or even above, in the case of maize) to international prices at the exchange rate of Mt. 400 to the US dollar, prevailing when the prices for the 1988 agricultural season were announced in June 1987 (column 2). The price increase has been most substantial for cashew. However, long-standing distortions were so important that, even after-such a dramatic increase, the cashew price was still far below its international parity price, undercutting the incentive for production recovery. -The same applies for copra. The table also shows that producer prices have only partially compensated the exchange rate adjustments which have taken place between their announcement and the harvesting season. Pricing policy is being made more credible and effective in stimulating a productive response by introducing more flexible pricing mechanisms and more regular and timely adjustments to fixed producer prices to reflect exchange rate changes. Table 2: Selected Agricultural Producer Prices --ee-meseemmees**---------------------------------------------------------- Price Increase Ratio of Actual producer price 1986 to 1988 to Border price i] ------------------------------------------------------------------ June, 1987 January,1989 (Mt. 400 per $) (Mt. 650 per $) (1) (2) (3) ------------------------------------------------------------------ Copra 445 46 71* Cotton 550 80 93* Cashew 950 39 54* Maize 400 228 169 Rice 369 149 130 Beans 538 83 66 Groundnuts 650 95 105* Sunflower 400 75 77* *---------------------------------------------------------- * Minimum Price System 18. While the improvement of producer prices is the most obvious contributor to the improved internal terms of trade, the larger availability of consumer goods has reinforced it. Although the 2/ Adjusted for internal transportation and processing costs. decontrolled prices of inputs and consumer goods are now higher than the former fixed official prices, these goods were previously not available at official prices. The terms of trade improvement is therefore even greater if the extraordinarily high price which prevailed on the parallel market is used as the basis for comparison. 19. The combination of the measures designed to improve the macroeconomic framework and the accompanying structural, growth oriented measures has resulted in GDP growth of about 4 percent per annum, reversing the decline experienced in the first half of this decade. It is important to note, however, that the recovery of the economy remains substantially constrained by the ongoing security situation, and the rates of growth among regions of the country vary across an extremely wide range. The recovery, therefore, remains fragile. Continued effort to establish a sustainable macroeconomic framework will remain an objective of the ERP, while at the same time intensifying measures to improve sectoral economic performance and resource allocation in the economy. The following sections of this report present a summary of the key measures which have been taken since 1987 and the policies which will be carried out in the coming years. External Sector Policy 20. ExchanRe Rate. The objectives of exchange rate policy under the ERP are to attain a realistic and flexibly managed exchange rate by the end of 1989 which will allow a significant reduction in the scope of administrative allocations in the exchange and trade system, and permit greater reliance on appropriate macroeconomic policies rather than administrative controls to manage the balance of payments. To that effect, the adjustment of the exchange rate over the past 24 months has been one of the key elements of the program, with the official rate being devalued by 94 percent in foreign currency terms (1450 percent in local currency terms). Six step adjustments to the exchange rate have been made, taking the rate from Mt.40 to the US dollar at the beginning of 1987 to Mt. 645, with the recent adjustment of January, 1989. In consequence, the official rate has been reduced from between 2-3 percent of the parallel rate in 1986 to around 50 percent by October, 1988, the real effective exchange rate is below the level prevailing in 1980. The Government recognizes that continuing adjustments of the exchange rate, to effect a further depreciation in real effective terms, will be an integral part of the program in order to establish and then maintain a competitive rate. Specific further adjustments to the rate are based on an ongoing assessment of the appropriate pace for realignment of the real exchange rate, taking into account actual price developments in Mozambique and abroad, the role of the exchange rate in foreign exchange allocation under a more open trading system and improvement in the net official international reserves. In addition, policy will ensure that the real rate is subsequently maintained through a flexible exchange rate policy. Since January, 1989, two successive devaluations have taken place, to Mt. 682 in March, 1989. 21. Foreian Exchante Allocation. As the exchange rate moves more closely into alignment with a market determined rate, there is some scope for a shift towards a more open trade regime in which the effective price of foreign exchange would serve as the main allocative instrument. During 1987 and 1988, supported by the IDA Second Rehabilitation Credit (IDA Credit 1841-MOZ or SRC), policy has stressed the adjustment of the exchange rate and greater flexibility and efficiency in the foreign exchange allocation system. Measures which have been taken includet (a) expansion of the export retention scheme to cover both traditional and non- traditional exports, and reductions to the average and range of retention rates to reduce discrimination in the system; (b) the introduction of semi- annual reviews to estimate the availability of and demand for foreign exchknge; (c) the establishment of a Unit to Coordinate Import Programs (UCPI) in the Ministry of Commerce to enhance the matching of the substantial inflows of foreign assistance with the priority needs of the ERP and to coordinate the complex procurement procedures required by donors; (d) establishment, in August, 1988, of a I Market Fund* and a Small and Medium Enterprises Fund", which provided for additional flexibility in the allocation system. The Market Fund allows selected enterprises to import for resale any products in which they are licensed to trade, and the Small and Medium Enterprise Fund to import inputs for production. The Government also continues to permit imports of goods costing less than US$500 without a license, or subject to the granting of an automatic license if the value exceeds US$500, whenever importers need no recourse to the banking system. 22. Given the very heavy reliance of the economy on external aid, much of which is tied either to specific projects or tied to specific comodities from specific origins, centralized administration and coordination of donor aid will remain an important feature of the exchange allocation system. In 1987, for example, about 75 percent of total uses of foreign exchange were determined by existing commitments (including tied import support, project aid, debt service, export retention obligations and other service payments). Of the remaining 25 percent over one third was devoted to essential import needs (including medical supplies, baby foods and security) that were not met from tied aid. In consequence, only about 15 percent could be considered as 'free' foreign exchange. In line with the adjustments made to the exchange rate and the objective of establishing a more open trade regime, the Government intends to initiate a system for limited non-administrative allocation of foreign exchange during 1989. The system will cover initially key inputs for the productive sectors, and will be initiated in April, 1989, by defining a narrow range of imported inputs for which foreign exchange and import licenses will be available on request. The range of goods will be progressively expanded, beginning in early 1990, as experience with the system is gained and as more flexibility in foreign exchange availability permits. 23. Trade and Tariff Policies, The realignment of the currency and the progressive opening of foreign exchange allocation will now permit the price of foreign exchange to play a more important allocative role. Consequently, the appropriateness of trade and tariff policies for the allocation of resources and fiscal revenue is being reviewed and reformed. A number of measures have already been taken, supported by the SRC. The Government has reduced the number of product groups that could only be traded through one monopoly trading corporation from 14 (11 import groups, three export groups) at the end of 1986 to 5 import groups (petroleum products, pharmaceutical, agrochemicals, cereals, and electricity); and one - 10 - export group (sugar) by end-1988. In addition, the Government has initiated a review of the tariff system in two stages. The first stage, has concentrated on simplifying the legislation and conversion of specific rates to ad valorem rates. In addition, the rate stracture is being simplified through the consolidation of product categories and reduction in the number and range of rates. Priority is also being given to strengthening the administrative capacities of the Customs Administration. These would lay the groundwork for the second stage, to be completed by June, 1989, which would focus on improving the economic role of tariffs and harmonizing the tariff nomenclature with international conventions. The determination of the new rates would take into account economic considerations including, tax revenue needs, the impact on production and consumption incentives, industrial priorities and protection and interrelationships with other aspects of the trade regime (such as the system for non-administrative allocation of foreign exchange). Finally, exemptions for products and importers would be eliminated wherever it is deemed desirable and possible, in order to reduce the degree of discrimination in the system. PricinR and Distribution Policy 24. PricinaR PolfSnL Pricing policy has been aimed at restoring the role of the price mecnanism in the allocative process by allowing prices to reflect real resource costs and by progressively diminishing the degree of administrative controls over domestic price setting. During 1987, significant progress has been made towards limiting price control to only those cases where controls are justified on equity or efficiency grounds. Under the SRC, the number of products subject to fixed pricing has been reduced from 46 to 28, of which 10 were transferred to the conditioned price list and the remaining 8 were freed from any control. For those products that continued to be submitted to a degree of control, the price setting mechanisms were improved to establish a more appropriate relationship between fixed and international prices. Producer prices were increased by between 100-500 percent in January, 1987, by 50-100 percent in June, 1987, and by 40-60 percent in October, 1988. Prices of goods sold through the ration system were raised by between 19-420 percent in May 1988, and housing rents were sharply increased in May, 1988. 25. Further policy reform will continue to focus on the continued relaxation of price controls through removing products from the fixed price list; on the establishment of greater flexibility in the price structure, through the use of minimum prices on a selected basis in agriculture and through the maintenance of only ex post price reviews for those goods subject to conditioned prices; and, on the continued realignment of fixed prices to reflect those prevailing on international markets and exchange rate adjustments. As regards the removal of items from the fixed price list, further progress will concentrate on agricultural products (only three industrial products, cigarettes, beer, and soap, are on the fixed price list). By late 1988 the number of products subject to fixed pricing was reduced from 28 to 25, and to 20 in early 1989. The total impact of these measures has been to decontrol about 70 percent of GDP based on rough estimates. A minimum price system covering cashew, copra, cotton, groundnuts, mafurra and sunflower has been initiated for the harvest - 11 - starting in 1989. Further decontrol will necessarily be limited in scope as the remaining products on the fixed price list will mainly be those products that are largely supplied through external assistance, or are essential products sold through the ration system, or are energy products traded through state monopolies. In these cases, continuing controls are envisaged for some time to come. The price of other products removed from the fixed price list (fresh and dried fish, chicken and manioc) will be freed completely. For those products that will remain subject to fixed pricing, the policy adjustments will focus on the continued and timely realignment of the official prices to international levels. To that end, agricultural producer prices for the 1988/1989 agricultural season have been increased by 50 to 90 percent compared to 1987/1988. 26. Distribution Policy. Distribution policy aims at creating a trading structure which provides flexibility to producers and traders and in which administrative controls are restricted only to essential goods in very scarce supply. As in the case of pricing policy, the present security problem necessitates control over some key commodities in the economy to help maintain a degree of equity in the regional distribution of these products. Since the introduction of the ERP, and supported by the SRC, steps have been taken to diminish the degree of central control over distribution, both in international trade (para.23) and in domestic trade. During 1987 and 1988, the number of final products whose inter-regional wholesale trade has been subject to centralized administrative control has been reduced from 43 to 30. Distributive controls have been maintained in only two important areas of the economy. First, the allocation of essential goods (including food, consumer incentive goods, and inputs) to rural areas has received a high priority for both regional equity considerations and the need for broad distribution of incentive goods for agricultural production. Second, the ration system in Maputo and Beira has been effectively continued for the combined population of 1.3 million, to ensure a minimum supply of necessities. In pursuance of the same broad policy of increasing the flexibility of producers and traders, the Government will decontrol the inter-regional wholesale trade of a further 15 products by early 1989, leaving only 15 products subject to controls. Further changes will depend on the availability of key products and on the evolution of the emergency situation. Fiscal and onetary Policy 27. Fiscal Policy. Fiscal policy is aimed at a continued strengthening of the public sector's financial position over the medium term, which will improve the public savings performance and reduce public sector recourse to domestic bank financing. Budgetary financing will avoid crowding out the legitimate credit demand of the rest of the economy for recovery and rehabilitation. Specific fiscal measures will be concentrated in the following key areas: improving the buoyancy and efficiency of the revenue structure, restoring financial discipline and profitability to public enterprises, containing the growth of current expenditures, prioritizing capital outlays, and improving the coordination and utilization of external assistance. Fiscal policy targets during 1987 and 1988 were directed toward achieving the medium-term objectives. As a percentage of current expenditure, the current account deficit declined - 12 - from 50 percent in 1986 to 25 percent in 1987, and is estimated to decline to about 22 percent in 1988. In particular, public sector wages had been restrained and subsidies to enterprises were sharply reduced. As a percentage of total expenditure the overall deficit (before grants) fell from 60 percent in 1986 to 56 percent in 1987. Also as a share of total expenditures, Government recourse to domestic bank financing over the same period fell from 40 percent to 14 percent, and is expected to fall to about 7 percent in 1988. Budgetary performance was consistent with achievement of the targets (set under the Second Year IMF SAF). Fiscal policy in the coming years will continue to emphasize the objectives which ha e underpinned the ERP so far, in part through a review of public expenditures. 28. The Public Exmenditure Review (PER). Public expenditure policy under the ERP gives priority to the completion of the most productive ongoing projects, rehabilitation and maintenance expenditures, and to projects capable of quickly yielding or saving foreign exchange. As part of the effort to ensure that these priorities are reflected in the actual pattern of public expenditures, the Government initiated in April, 1988, a Public Expenditure Review (PER). The process of the PER is expected to continue for a number of years. The first phase is examining: (a) the evolution of overall revenues and expenditures in relation to other macroeconomic aggregates, (b) the government's overall 1988-89 investments and expenditures in four key sectors, (c) public enterprise finances and, (d) the planning, budgeting and control of public expenditures. 29. . The PER identified a number of problems related to the composition and management of public expenditures. With respect to the composition of investment, there are a number of large and complex projects included which may have low economic returns and unrealistic phasing in light of the security constraint. Selective review of these projects by the Government is getting underway. Prom a management standpoint, two key difficulties were identified. First, the number of projects is very high, and hence quite difficult to manage, especially in light of the limited administrative capacity of the Government. Second, the process of budget preparation does not permit a clear assessment of the trade-offs between investment and recurrent expenditures, particularly important given the compression of recurrent expenditures which has.already occurred and the need to ensure that vital maintenance activitiei are not sacrificed for short-term gains. 30. In 1988, the Government has begun to address some of these difficulties. Technical assistance has been contracted in both the Ministry of Finance (MOP) and National Planning Commission (CNP) to strengthen budgetary formulation and implementation, and the phasing of the investment and recurrent budgets were merged for the preparation of the 1989 budget. Preparation of a three year rolling budget is in process, in order to allow for a more careful analysis of the composition and evolution of expenditures. In addition, a review at Cabinet level for new projects has been instituted to help exercise greater control over the evolution of the composition and size of investments. And, the Government will be re- evaluating some ongoing investments to determine their economic feasibility and phasing given the current security situation, as well as their - 13 - implications for future recurrent expenditures. These efforts are expected to continue and to grow in the coming years. 31. Monetary and Credit Policy. Financial policies under the ERP have been formulated so that they are consistent with the likely flow of financial savings through the banking system and with strengthening the external accounts and reducing the inflation rate. Honey and c:edit targets in 1987 and 1988 were aimed at reducing the overhang of excess domestic liquidity in the economy; in 1988 credit expansion was constrained to Mt. 74 billion, equivalent to 43 percent of the stock of broad money at the start of the year. This implies a substantial reduction in real terms given the expected inflation rate for 1988 of about 50 percent. In addition, structural reforms were initiated with a view to improving the efficiency of the credit system. In contrast with previous practice the payment of interest charges by the Government and by enterprises to the banking system at due date has been institutionalized. Interest rates were raised sharply in January, 1987 from a range of 0-6 percent for deposits and 3-10 percent for loans, to 3-20 percent for deposits and 12-35 percent for loans. A new system of accounts for the banking system is being introduced, emphasizing the separation of central and commercial functions of the Bank of Mozambique. A review of bank portfolios has been undertaken and actions are being developed to eliminate non-performing loans. Finally, together with the interest rate adjustments, extension of new credit is based on commercial principles, although this process is hampered by the lack of equipment and skilled manpower. The structural reforms that have been initiated in the financial sector will be pursued during the coming years, and interest rates will be adjusted taking into account the ezpected decline in inflation, aiming for real positive rates by the early 1990s. External Debt Management 32. With regard to external debt management, the Government aims to regularize its relations with creditors and severely limit new commitments on non-concessional terms. Debt rescheduling agreements, covering end-1986 arrears, which amounted to around US$711 million, as well as 1987 and 1988 maturities, were reached with the London Club in May 1987, and with the Paris Club in June of the same year. Definitive agreements with commercial banks in the London Club are under negotiation. The same is true for bilateral agreements with members of the Paris Club. With regard to new commitments, a global limit of US$50 million has been set on non- concessional external borrowing, as well as an annual sub-ceiling of US$25 million for 1988. Despite these efforts and the sizable international support mobilized through foreign aid, the Government will need to seek additional debt relief from external creditors beyond existing commitments, throughout the rest of the program. The Government will seek further comprehensive debt relief from all official creditors on concessional terms -- through modalities such as the conversion of credits into grants and the introduction of concessional interest rates on non-concessional loans. Futhermore, with the assistance of the Bank and the Fund, the Government will explore possible schemes to reducing its debt burden with commercial and private creditors to enhance further the prospects of early attainment of medium-term balance of paymnts :viability. - 14. Sectoral Policy 33. Agricultural Sector Policy. In the agricultural sector, the Government's objective is to provide greater incentives to producers, particularly in the efficient commercial and family sectors, to restore production, and to traders to improve competition and efficiency in the marketing system. While progressively retrenching from direct intervention in production and distribution, the Government will increasingly focus on the key support activities, such as the provision of essential infrastructure, credit facilities and research and extension services. 34. During 1987 and 1988, and supported by the SRC, the number of agricultural products subject to fixed pricing was reduced from 26 at the end of 1986 to 18. Those removed from the fixed price list have all been freed. In addition, the adjustment of fixed prices has taken place at the beginning of each agricultural season and, for most of the crops, changes are now determined taking into account the prevailing international price and domestic processing and distribution costs. Consequently, substantial progress towards realigning domestic prices with those prevailing on international markets has been made, resulting in sharp increases in the absolute price levels of agricultural products and in significant changes in the relative price structure. 35. The Government has also sougNt to introduce policies which complement the increased incentives to production resulting from the price adjustments. The supply of credit to traders and farmers is being increased through the establishment of a special credit fund (Caixa do Credito Agraria, CCA) for small farmers and traders. The process of restructuring the state farms is another aspect of the broader policy of improving resource utilization, with the breakup of some state farms during 1988. The process of review of the financial status of remaining agricultural state enterprises is continuing during 1989. 36. Industrial Sector Policy. In the industrial sector, policy has been directed at establishing a more appropriate business environment to restore efficiency and productivity, and to make enterprises responsive to commercial pressures. This has been achieved in part through the macroeconomic policies described above, especially through the exchange rate adjustments, the reduction of price subsidies from the budget, the restriction of credit and implementation of commercial criteria in lending and in debt service, and in the provision of increased managerial freedom in the hiring and dismissal of labor. Pricing policy (para. 24) has been a key element to improve the operating environment by reducing the incidence of fixed pricing and by replacing ex-ante authorization for conditioned price changes. The relaxation of distributive controls provides a further degree of freedom to enterprises. 37. In addition, the Govarnment is reviewing selected enterprises which are significant burdens on the budget. A first stage of the Enterprise Review was completed in 1987 to assess the status and prospects for 40 enterprises, supported by the SRC. A newly established Technical Unit in the Ministry of Finance is carrying out the second phase of the - 15 - Review, and will prepare, supervise and monitor plans for restructuring, divesting or closing of specific enterprisest arrange technical assistance in the fields of management and finance to those that are considered viablet and, ensure the application of economic efficiency criteria in the assessment of rehabilitation and new investment projects. The initial phase of the Unit's work will focus on the design and implementation of rehabilitation programs for 15 key enterprises. 38. Transport Policy- The Government's first objective in the transport sector is to stimulate domestic trade, in particular agricultural trade, by eliminating infrastructure bottlenecks and Improving long-haul cargo transport. In order to achieve this goal, the Government took measures in 1987 to promote private sector participation, including the removal of licencing restriction on cargo transport and substantial tariff increases. Efficient use of the existing fleet has been promoted through the increase of vehicle licence and registration fees. A second objective is to generate additional foreign exchange revenues from transit services by rehabilitating the major rail corridors. Social Policy 39. The Government's chief concern in the social sector is to buffer the transitional impact of the ERP on the poor and those who are dislocated while redirecting social policy towards efficiently promoting the rehabilitation of the country. Its objective vis-a-vis those who are displaced is to avoid as much as possible their permanent settling in urban areas and to encourage their return to rural areas where they could benefit from the improved conditions for agriculture. 40. Several steps have already been taken towards achieving these objectives. International support from the donors has been mobilized to help the country deal with the emergency situation through appeals by the UNHCR in 1987 and 1988. At the same time, the Government has adjusted agricultural producer prices to increase domestic production of food crops and to limit the attraction of migrants to urban areas as a result of food aid. To that end, consumer price subsidies for food sold through the ration system were reduced. The impact of the consequent price increase in the ration system, enacted in April 1988, on the population of Maputo and Beira was partially offset by a wage compensation extended to formal sector earners. In addition, free distribution of food aid has been limited to displaced populations in rural areas until they become self-sufficient in food production. For those displaced, the Government is also offering land for cultivation in Oaccommodation areas' interspersed among existing villages and is providing basic goods, including agricultural inputs. Furthermore, the Government is embarking upon a program of reconstruction and rehabilitation of social services with donor support. 41. To alleviate the pressure on the urban population, the Government intends to introduce new buffering measures, including stepping up the use of labor intensive rehabilitation works for the unemployed through a Food Bank sponsored by the World Food Program; improving the surveillance of the most vulnerable groups, expanding the school feeding program to include all schools in Maputo, improving workers canteen - 1 - facilities and initiating a review of the Linimum wage to determine whether it should be adjusted. As noted earlier, the ration system will be maintained in Maputo and Beira. Finally, the Government has established a high level commission, with the participation of UN agencies, to monitor the impact of the ERP on the poor, to monitor the policy response in the field of health, education, food security and nutrition, housing, sanitation and water, and make recommendations to the Council of Ministers for actions to buffer the negative effect of the program on vulnerable groups. The monitoring of nutritional standards i being assisted by undertaking rapid status surveys. These surveys will be used in the formulation of a food security strategy. In the medium-term, the Government is considexing developing a greater capacity to monitor the impact of the ERP through the initiation of the Social Dimensions of Adjustment (SDA) project. PART III - CONSTRAINTS TO GROWT! AND ECONOMIC PROSPECTS The overall Strategy 42. The Government's objectives, and the strategy outlined for the attainment of these objectives, are both well conceived and appropriate in the present circumstances of Mozambique. The strategy seeks to lift constraints to increased production and productivity despite the security problem, and correctly emphasizes the agricultural sector, which is consistent with the economic potential of the country and will benefit directly the majority of the population. Greater reliance on the role of the market and on indirect instruments of economic control is consistent with the need to improve productive efficiency, to utilize more effectively the limited administrative capacities of the public sector and with the security situation. The strategy also appropriately embodies an important role for the international community, in view of the external financing requirements of the ERP, and that long term sustainability of economic growth depends crucially on a lasting commitment from both the Government and the international community. 43. The measures which have been taken under the ERP are restoring the role of market determined prices in the transmission of incentives to economic agents and in the allocation of resources, and the role of indirect instruments, such as credit, exchange rate and fiscal policies, in guiding the economy. The reduction of centralized controls is also consistent with the limited administrative capacity of the Government, which has been overtaxed by the involvement of state agencies at every level of economic activities. Finally, equally important is the fact that relying on price signals is the appropriate way to bring about economic recovery despite the present insecurity. These signals are likely to reach individual producers more easily than any state agency could do and thereby indirectly influence their behavior. The initial phase of the ERP has concentrated on reducing major macroeconomic distortions, providing a more stable and appropriate macroeconomic context for investment, and reintegrating product markets. Continued attention to the consolidation of macroeconomic policy is needed, bqt the next phase of the ERP will also - 17 - focus on the realignment of investment and foreign exchange allocation to help ensure the longer run sustainability of the recovery. 44. The integration of substantial external assistance within the overall strategy is an important and necessary step in two respects. Not only is it important to reinforce the policy adjustments through making the necessary resources available, but it is essential that the management of the heavy financial imbalances should itself be made an element of the strategy. This has been taken into account through the concomitant restrictive public saving and credit policies, which reduce the potentially destabilizing effect of these imbalances, and through the restriction of external finance to that obtainable on highly concessional terms. 45. In the long term, the ERP strategy is designed to improve the external account through export expansion of both traditional and non- traditional products, through the encouragement of efficient import substitution, and through a reduced debt service burden. The internal counterpart of this trend would be increased domestic savings out of higher income, resulting from higher production levels, better resource mobilization by the financial system, and more buoyant tax revenues. At the same time, the bulk of capital expenditure would move to the productive and social sector as rehabilitation needs are reduced and the private sector increases its role in investment. The immediate prospect is, however, more problematic, and the Government strategy calls for a major inflow of external financial resources to complement the policy adjustments and to achieve the growth targets. The internal financial imbalance is necessarily reflected in the external imbalance, with the high level of domestic dis-saving and investment being reflected in the high level of foreign savings. Substantial and persisting imbalances are, therefore, anticipated for an extended transitional period and, consequently, the management of these potentially distabilizing flows has itself been integrated into the strategy. Releasing Constraints to Production 46. The most critical problem to be faced by the ERP in the coming years is the alleviation of the principal constraints to the productive response in the economy. These constraints are,particularly serious in the fields of pricing, marketing, and resource allocation. Efforts by the Government and the donor community focus on alleviating these constraints and on sustaining tie ongoing recovery. 47. Insecurity continues to be a constraining factor in the responsiveness of the economy, and a major obstacle to the restoration of production. Population displacement and disruption to economic activity, administration, infrastructure as well as commercial services prevent the improved set of incentives from having their full potential impact on marketable production in agriculture. Moreover, defense expsnditure diverts scarce resources much needed elsewhere, while destruction by armed bandits adds to the rehabilitation requirement. The resulting constrained budget situation threatens the commendable progress the country has made in developing its human resources. In addition, the insecurity puts an extremely high risk premium on investment by the private sector where the - 18 - expansion of productive capacities is expected to concentrate, thereby lowering the long-term growth path of the economy. Despite the inhibiting impact of the insecurity problem, there are, nonetheless, several constraints on the responsiveness of the economy over which the Government is able to exert considerable influence. It is to these concerns that policy is being directed. 48. Promoting increased investment in both fixed and working capital out of improved rural real incomes is necessary if production recovery is to be sustained. However several factors encourage spending on consumption rather than productive assets. First, after so many years of pent-up demand for basic consumer goods, it can be expected that the immediate reaction of producers to higher income and greater availability of these goods will be to increase consumption. Second, as most of the investment goods are imported, while the consumption basket is made up of a mix of imported goods, locally produced tradable and nontradables, the average price of the investment goods may be more affected by exchange rate adjustment than the latter. Third, the effective cost of capital bears an extremely high risk premium due partly to capital goods carrying a higher risk of being destroyed by armed bandits in the present security situation, and, partly to the volatility of relative prices making the expected return on investment harder to predict. 49. Government policies will help surmount some of these obstacles to investment by providing producers with a more stable environment and developing agricultural support services. The more stable and predictable price structure which is emerging should expand;the time horizon of producers' economic decisions. However, agricultural support services, which could play a crucial role in supporting production recovery are still underdeveloped. In the short run, small amounts of agricultural credit, possibly through informal networks such as credit-in-kind provided by traders, can help restart cultivation on lands which had been abandoned. They may also enable family producers to shift gradually from their current farming practices (which have very low-productivity) to simple improved practices. These will permit higher yields but rely more heavily on purchased inputs such as improved seeds, fertilizers and pesticides. Developing agricultural services will remain a high priority for the futare. 50. Several other factors still affect the productive response in the agro-industrial and industrial sectors. In addition to the need to maintain the flow of imported inputs, there remains a widespread need for physical rehabilitation of existing capacity which has been rendered inoperative or obsolete for lack of spare parts and investment. Efforts made by the Government and the donors during the first years of the ERP to address this physical bottleneck and secure productive capacities have to be .continued. 51. Industrial producers also have to adapt to their new business environment, in particular to market constraints on supply and demand which are transmitted through price signals. Under the conditions of excess demand which prevailed prior to the RP, producers did not need to develop marketing networks for their production. Moreover, prevailing price - 19 - distortions resulted in an income distribution increasingly skewed towards urban areas, which, combined with the security situation, further undercut the incentives to develop marketing outlets in the rural areas. In addition, it is likely that the remaining private traders increasingly specialized in commercializing imported goods for which pent-up demand was highest given the extreme scarcity of foreign exchange, and thereby benefitted from the overvaluation of the exchange rate. As the effect of the program is to shift income from urban to rural areas, the lack of an adequate distribution network (particularly for domestically produced goods) to reach rural consumers is being felt. This factor compounds the difficulties noted earlier caused by the lack of transport infrastructure and equipment. 52. Continued improvement in credit and tradelexchange rate policies should facilitate the flow of resources to efficient industrial uses and stimulate the supply response in parts of this sector, by increasing efficiency of existing producers and encouraging the establishment of new enterprises. To that end, interest and exchange rates are playing a growing role in the allocation of resources, proUressively superseding direct allocation mechanisms. In a context where price distortions are being removed, structural reforms in the banking sector are a major vehicle for industrial restructuring as they shift resources to higher profitability uses and prevent the use of scarce resources by inefficient or distressed borrowers. The same argument applies in the field of trade and foreign exchange policy, where the realignment of the exchange rate permits the establishment of a more open trade regime where the effective price of foreign exchange can play an increasingly important role as an allocative instrument. Moreover, the increased accountability of all enterprises and the financial restraints being brought on their operations enhances the sensitivity of demand to the effective price of resources and thereby the potential benefits of trade and banking refo4ms in terms of efficiency gains. These reforms would additionally give easier access to resources to all enterprises, including those that might otherwise be precluded through the administrative mechanism because, for example, of their small size. 53. As the process of opening-up trade proceeds, tariffs will play a more influential role. The ongoing reassessment of tariff level and structure is therefore needed. While the initial steps towards the opening-up of trade are modest, a reasonable objective is to increase the flexibility in the allocation of most untied aid. This depends obviously on the willingness of the donors to untie their assistance. Nonetheless, since a sizeable amount of foreign exchange might remain tied and thus not available for market allocation, the improvement of the direct allocation procedures will continue to be important. In particular, the role of the Unit for the Coordination of Import Programmes (UCPI) will be central in further enhancing the matching of donor finance and the priority needs of the country. Administrative Limitations 54. The implementation of the adjustment program is critically affected by the severe shortage of human resources in key sectors of the * 20 - economy. This lack of resources in the Government is reflected in the fact that no more than 3 percent of the civil servants in the core economic agencies in Maputo have a university degree. Moreover as the reform program necessitates a fundamental revision in the system and style of economic management, the development of new skills is required at all levels of the administration. These same concerns are paralleled in the enterprise sector, where inadequate ski?led management capability presents a serious constraint on the responsiveness of industry and agro-industry. The restoration and development of new commercial skills, including marketing and improved accounting, will take time in these circumstances. Furthermore, the absorptive capacity of the enterprise sector is limited, and the process of adapting to the immense changes and uncertainty that has arisen in the business environment will certainly create lags in the recovery process. While the reform program has so far proceeded without notable delays, its current pace has probably stretched existing capacities to the extreme. AddressinR the Social lipact of Adjustment 55. Assessments of the social impact of the ERP are quite difficult to make in Mozambique because of the direct suffering caused by the security situation and the resulting rural-urban migration which is occurring. Under these conditions, the benefits from the ERP are reduced, and some of the short term negative effects of the program in urban areas are prolonged. However, the country's improved growth performance should facilitate the stabilization and recovery of living standards, especially after the continuous and substantial decline in the first half of the 1980s. The principal effect of the ERP will be seen in the reactivation of the rural economy, where substantial increases in income are expected as production increases and as the agricultural terms of trade improve. 56. This shift in the domestic terms of trade will adversely affect the urban areas, in particular the urban poor. In the longer run, pressure on the urban poor should ease, as the increased rural purchasing power stimulates demand for domestic goods and services, pulling up urban incomes and employment. During the transitory period, the combined effect of wage restraint, increases in the prices of consumer goods, especially basic food provided under the ration system and rents, growing unemployment resulting from layoffs in civil service and public enterprises will sharply reduce the urban purchasing power and increase urban poverty. The tnemployment problem is made even more acute by the inflow of mine workers repatriated from South Africa and of those displaced from insecure areas. 57. The Government is seeking to address the negative impacts of the SR in urban areas through selected and targeted buffering measures (para. 41). However, the Government also recognizes that these measures may be administratively difficult to implement, and has therefore sought to improve its capacity to evaluate the impact of the EP. Hence, a commission was established to monitor the health and nutritional impact of the ERP on the urban population, and includes representatives from both the Ministry of Commerce (responsible for food security) and the Ministry of Health. The Government is also moving forward with the preparation of an SDA project to help both identify further short-term remedial measures as - 21 - veil as to help develop a longer term approach to the issues raised by the adjustment process. Environment 58. The Government recognizes that long term economic growth can be sustained only if Mozambique's environmental resources are appropriately managed and conserved. However, establishing a broad based national approach is extremely difficult given the security situation. In this context, the Government is seeking to take selective actions to manage the environmental impact of development efforts. In particular, adverse environmental effects on forest resources are taking place because of increased consumption of fuelvood and intensifying population pressures in secure areas. The Government has initiated, with World Bank assistance, a household energy program to replace consumption of fuelwood with other more efficient sources of energy, including kerosene, charcoal, LPG and electricity, especially in and around urban areas. It is expected that the shift from fuelvood to other energy sources will substantially reduce the rate of deforestation in the most affected areas. Rehabilitation programs for ports and urban areas contain specific actions and investments designed to manage coastal erosion and discharge of sewage wastes. Over time, a more comprehensive approach to environmental management will need to be developed but this will have to await a more stable security situation in the rural areas. 3conomic Prospects and External Finance Requiremente 59. It is difficult to assess the impact on the economy of the program in quantitative terms, although the qualitative impact is more readily foreseen. The likely magnitude of the supply response to such far-reaching changes is a function of many key determinants in addition to the policy reform program including the evolution of the security situation in Southern Africa, the availability of external financial inflows and the attainable import levels. The indicative growth scenario presented here assumes most importantly that the ERP continues according to the envisaged timetable, and that the insecurity does not deteriorate during the projection period. To the extent that the insecurity ameliorates, the response would of course be more substantial. 60. Growth Prosmects. Despite the inevitable lag in response to policy changes, growth is anticipated to be maintained at an average annual rate of 4-5 percent mainly from agriculture and especially export crops. Such a growth rate remains quite modest relative to the dramatic declines of the early 1980s, and directly reflects the dampening effect of the security situation. Growth rates twice as high would be possible, albeit from a low base, were the insecurity to subside. Nonetheless, in the prevailing circumstances in Mozambique, the projected growth rate is substantial and reflects a major, if partial and constrained, upturn. In particular, output from the agricultural sector should continue to increase, especially from the private commercial and family sectors, wherever security permits. In industry too, indications are that the increased supply of imported inputs combined with the policy reforms - 22 - outlined above, can contribute to a significant increase in capacity utilization. Table 3. Composition of Growth, 1989 - 1991 (percent) Sector 1288 1989 1990 1991 Industry 5.1 11.0 8.0 6.0 Agriculture 4.0 4.0 4.0 4.0 Services 4.0 4.3 4.5 4.0 Consumption 8.5 6.4 5.9 5.4 Investment 13.6 20.7 4.0 1.3 Exports (goods) 1.9 16.8 13.9 11.7 Imports (goods) 6.4 8.5 6.6 4.8 GDP 4.1 5.0 4.7 4.3 61. Increased production should be reflected in continuing export recovery. Again this will be heavily dependent on the crop production in the family sector, since the production of plantation export crops are more seriously affected by the security situation, and prawn production has neared the limit of efficient exploitation. Were the insecurity to markedly decline, the rate of export expansion could increase, hastening the return to peak levels that prevailed in the early 1980s. 62. Because of the deteriorated state of the economy, the provision of imports to provide the necessary inputs and incentive goods to stimulate agricultural production, to meet the emergency requirements and to facilitate the rehabilitation of the economy, is essential to achieve the growth of production and exports. Consequently, in the economic projections, non-food real Imports are set to grow at an annual average rate of about 8 percent, with the most rapid growth in the early part of the period to reflect the need for large initial inflows of consumer goods and rehabilitation inputs. Thereafter, the import intensity of domestic productive activities is assumed to decline, but still remain at relatively high levels. The projected level of imports will continue to permit a considerable expansion of consumption per capita, albeit from an extremely low level, until 1990. The rate of per capita consumption growth is then anticipated to moderate along with that for import volumes to a more sustainable medium-term level. 63. Balance of Payments. Mozambique's balance of payments will remain precarious for the foreseeable future. In 1988, external assistance provided through concessional loans and grants and through debt relief will account for around 85 percent of the aggregate foreign exchange available to the country. Furthermore, export revenues will be barely 14 percent of import costs, and service receipts will be only 70 percent of service - 23 - payments exclusive of interest payments.. Against this background the balance of payments would be sustainable only with the massive support of the international community well into the 1990s. The mobilization of the external financing, to manage this substantial external imbalance, is an integral element in the ERP. Without it, the requisite flow of real resources to facilitate the rehabilitation and the capital development on which the program is predicated, including the supplies of key raw materials and consumer goods would be jeopardized. In this eventuality, the policy reforms would provoke only a minimal response from the economy, and the transitional costs of the adjustment process could well prove to be insupportable. 64. The projection embodies a partial recovery of exports and the increase in imports deemed essential to the program. Export volumes are estimated to grow at around 9 percent per annum over the 1989-93 period, and imports of goods (including food) at around 5 percent per annum. This implies that export values would increase to around 17 percent of import values by 1992. In absolute terms, there is therefore a widening of the trade gap over the projection period despite the relatively higher export growth rate. 65. The growth in exports is expected to be concentrated in crops that are predominantly produced by the family sector, including cashew, cotton and copra. Growth in each of these crops was achieved in the 1987188 harvest and substantial increases are expected for the 1988/89 harvest. Even at the current level of exports, considerable further growth would be needed just to achieve the average of the 1980-82 level. In addition, exports will remain concentrated on a few commodities. Prawn exports will continue to be a major source of foreign exchange. In 1980- 82, they contributed around 16 percent of export revenues, but this rose dramatically to 42 percent in 1987. This contrasts with the pattern of exports in 1980-82, when no export accounted for more than 20 percent of revenue. This undesirable trend has been a direct reflection of the collapse of other traditional export crops, and of the other exchange generating products (notably, petroleum products re-exports which contributed 20 percent of the foreign exchange on average in the 1980-82 period). While some of the non-traditional exports have recently increased, and have the potential to make a significant contribution in the long-term, they will remain relatively insignificant for the foreseeable future. 66. The projection reflects a more stable outlook for net service payments, with a net outflow of US$195 million in 1988 rising to around US$235 million in 1992. While the interest burden increases over the period, there is a small net improvement in the other components, notably from the transportation receipts (from the rehabilitated corridors to the neighboring countries), and by the modest declines in the investment service payments. Consequently, while the current account deteriorates between 1989-93, it is almost entirely a reflection of the growing disparity between the nominal values of exports and imports that emerges despite the relatively higher export growth rate. - 24 - 67. Financi the ERP. After taking account of the scheduled amortization requirements, which average almost US$300 million per annum over the 1989-93 period, the gross external financing requirement is expected to remain at around US$1350 million per annum. -------------------------------------------------------------- Table 4. Mozabiques External Finance Requirements (US$ million) (est.) (Projected) 1988 1989 1990 1991 Total Financing Requirement 1131.6 1238.9 1337.4 1359.3 (of which Current Account) 789.5 957.2 1009.6 1063.9 Total Identified Financing 705.9 814.8 865.8 931.6 Prospective Debt Relief 425.7 372.6 374.3 323.3 Additional Financing 51.5 Financing Gap 0 97.3 104.4 68. The initial requirement for the ERP to be satisfactorily financed is for the real levels of both multilateral and bilateral support in 1987 and 1988 to be maintained throughout the 1989-92 period. The assumed inflows of an average US$473 million per annum in grant finance and of US$398 million per annum in concessional MLT finance reflect this. However, there still remains an exceptional requirement of around US$420 million per annum. This will need to be financed through either debt relief or through additional commitments by bilateral and multilateral donors. 69. In 1987 and 1988, Mozambique has made important progress in regularizing its relations with creditors and in negotiating rescheduling agreements (para. 32). In the coming years, further debt relief will be imperative if external financial relations are to remain on an orderly basis, and if the ERP is to be sustained. In this indicative projection, the annual debt relief is assumed to be around US$330 million over the 1989-93 period. 70. Given the precarious nature of the Mozambique external account, this finance will necessarily need to be supplied on the most concessional terms, preferably on grant terms. Furthermore, it should be in the form of quick-disbursing balance of payments or commodity support. The need for import support rather than additional project support is underlined by an analysis of the external cash flow position. This shows that the existing inflow of exchange from exports and net services falls well short of the levels required to meet the unfunded import needs and service the debt obligations after debt relief. Thus, while the maximization of export - 25 - flows and service receipts, and the efficient utilization of the import flows are top priorities for the Government, complementary donor support is of equal importance. 71. Finally, it is important to take account of the administrative burden being placed on the Government by the aid programmes. While it is clear that substantial inflows are essential, it is, nonetheless, important to minimize the complexities of the assistance and facilicate the efficient and timely deployment of the funds. In this regard, the appeal made by the Bank under the auspices of the Special Program of Assistance for Debt- Distressed Low Income Sub-Saharan African Countries is particularly notable. This appeal called for the donor community to accelerate the pace of untying their aid and, in particular, to start by focussing on one recipient country, namely, Mozambique. Not only would this reduce the administration costs by allowing a greater standardization of the procurement and disbursement procedures, but it would quicken the flow of essential imports. In addition, it would be a major contribution to the ERP itself, and, in particular, to the efforts to introduce greater flexibility in the trade regime. Notably, the reductions in the administrative allocation of foreign exchange would be significantly bolstered by the provision of finance on the most flexible terms. Without such flexibility, trade reform will necessarily be hampered, and complex allocation procedures will need to continue. It is therefore important to emphasize that while an adequate flow of external resources is of fundamental importance to the ERP, so too is the quality and simplicity of the funding. The Rationale for Bank Support 72. Bank assistance is directed towards as6isting the Government in its efforts to rehabilitate the economy by reducing and eliminating macroeconomic distortions and addressing structural constraints to economic growth. At the same time, the Bank recognizes that Government efforts to rehabilitate the economy are significantly influenced by the requirements of the security situation. Under the ERP, economic management relies increasingly on economic incentives and market signals to improve resource allocation and to enhance economic efficiency. The basic outlines of the policy and institutional adjustments are set out in the PFP, which serves as-the umbrella for Bank operations in the country. Within this broad framework of an economy undergoing a dramatic and long-term transition, Bank assistance is justified, and will need to meet a variety of related objectives. 73. Because of the deteriorated state of the Mozambican economy, substantial funding will be required in the coming years for general import support. Policy based lending operations, to support specific reforms in key areas of policy within the framework of the PFP, would provide a portion of the financing requirements. The proposed Third Rehabilitation Credit is one such operation, and is likely to be followed by further proposed operations as the ERP continues. Policy based lending would be supported by appropriate external, fiscal, and monetary policies. Reforms to foreign exchange and trade management, pricing and distribution, and public expenditure and investment policies would continue as important - 26 - areas of focus for policy lending. It would also be directed towards improving the efficiency of agriculture, supporting the restructuring of industry, and stimulating the growth of marketing and transport services. Strengthening of the domestic financial system would also be a key objective of policy lending, given the increasing importance of the domestic currency and the limited coverage currently provided by the banking system. 74. The changes to the macroeconomic framework would also imply that the profile of economically feasible investments is undergoing change, and a second objective of Bank assistance will be to assist the Government in developing and carrying out project investments in high priority economic and social infrastructure. Investment operations would be designed to support increased production and productivity, especially for export; to strengthen rural-urban market links, and to undertake essential maintenance works in order to avoid incurring substantially higher costs in future years. Social sector lending, designed to assist in remedying a severe long-tern constraint in human resources, will be geared towards rehabilitating and eventually expanding the coverage of health and education services, especially given the extremely high rate of illiteracy and infant mortality in the t-ountry. Measures to provide assistance to those groups which are most negatively affected by the ERP will also be included in social sector operations. 75. Under the ERP a shift is also occurring in the institutional roles and information requirements of key economic institutions. As economic management relies more heavily on the use of price data and financial aggregates, and as the public expenditure program becomes increasingly constrained by the availability of resources and sectoral requirements, key economic institutions will need to develop a greater capacity to collect and analyze basic data for decision making. The Bank will seek to support this process of institutional development, both directly and through collaboration with other key multilateral and bilateral agencies. 76. Finally, obtaining the volumes of financing required for the success of the ERP, and managing financial flows effectively, will require that the process of aid coordination be greatly improved. The Bank would seek to support Government efforts to obtain the required financing on terms and conditions consistent with the economic prospects of the country. As such, cofinancing of Bank operations, as well as efforts to mobilize donors to provide the additional funds which are needed on an annual basis, would form a part of the Bank's assistance to Mozambique. Collaboration with the IM? 77. Discussions of the RP were initiated with the Bank and the IMF by the Government in mid-1986. The IW? and the Bank have worked very closely together with the Government to define macroeconomic and sectoral policy objectives, within the framework of the PFP. Because the PFP was initiated at the beginning of the reform process, consistency between the policy instruments which were selected, and the achievement of the objectives of stability, economic restructuring, and growth was necessary from the start. This has been particularly important because of the policy constraints - 27 - imposed by the security problem in Mozambique. Monitoring of the ERP has been carried out by both the Bank and the IMP. In particular, the IMF has followed the evolution of exchange rate policy, monetary and credit policy, and fiscal policy. Close collaboration between the respective staff of both institutions has continued throughout the period, including on occasion participation of IMF staff in Bank missions and vice-versa. This collaboration is expected to continue. PART IV - THE PROPOSED THRD REBABILITATION CREDIT (TRC) History 78. The Third Rehabilitation Credit (TRC) has been designed to support the process of economic rehabilitation which is underway under very difficult security conditions, as described above. Discussions of the scope and content of the credit were begun in late 1987, in the context of the discussions of the PFP that were taking place. 79. The TRC builds on the experience and progress made in the implementation of the SRC. The key policy elements supported by the SRC have already been summarized in Part II. The implementation of the policy reforms was consistent with the original timetable, and the second-tranche of the SRC was released in February, 1988 as planned. As of end-February, 1989, disbursements of the SRC total about US$70.0 million, of a total US$110.0 million (including cofinancing). The remaining balance of the SRC has been fully allocated to enterprises and commitments are proceeding at about US$7.0 millionimonth. Additional funding for imp,-rts is likely to be required during the third quarter of 1989. 80. The TRC was appraised during July-November, 1988, and negotiations were held in Washington on March 13 -17, 1989. The delegation of the People's Republic of Mozambique was led by Governor Eneas Comiche. Annex V contains a timetable of key events. The policy understandings for the TRC are reflected in the Government's Letter of Development Policy (Annex III) and the main features of the policy reforms supported by the TRC are summarized in Matrix form in Annex IV. Relationship Between the Proposed Operation and the ER? 81. The Third Rehabilitation Credit supports the strengthening of the macroeconomic framework, consistent with the targets set in the ERP. The TRC has two principal objectivess first, to support the consolidation of the progress made in macroeconomic stabilization and, second, to initiate reforms in key aspects of resource allocation required to sustain the recovery which has begun. The Credit supports consolidation of the framework for pricing and distribution policies, and initiates key reforms in foreign exchange allocation and tariff mechanisms, and in reorienting public expenditures towards higher return social and economic investments. The Credit focusses on specific structural issues within the broad policy framework for 1989 and deepens the process of economic reform underway. In addition to the policy areas noted above, other key components of the ERP * 28 - are already being monitored and addressed by the IMF. In particular, the IMF is monitoring the evolution of exchange rate policy, monetary and credit policy, and budgetary policy both with respect to the broad policy framework of the PFP and through more detailed agreements under the SAF. 82. Under the Credit, the broad implementation of the WRP will be monitored and assessed, although the emphasis will be on five principal policy goalst (a) the establishment of a system for the non-administrative allocation of foreign exchange (para. 21); (b) enhancement to the efficiency of public expenditures (paras. 28-30); (c) the improvement of the framework for the pricing system (para. 24); (d) improvement of the framework for the distribution system (para. 26); and, (e) review and reform of the trade tariff structure (para. 23). The System for Non-Administrative Allocation of Foreign Exchange 83. Under the TRC the Government would introduce a mechanism for the non-administrative allocation of foreign exchange (para. 21). The key objectives of the mechanism are (i) to provide key productive inputs, in accord with the priorities of the ERP, in a more flexible and efficient manner to productive enterprises, (ii) to begin eliminating quantitative restrictions to imports. and diminish the need for Ministerial identification of demand and the administrative allocation of foreign exchange, and, (iii) to promote the achievement of the overall objectives of external policies. 84. The mechanism will be managed by the Ministry of Commerce. All productive enterprises would be considered as eligible for foreign exchange under the mechanism, provided that the financial and legal affairs of the enterprise are in order, and that the enterprise is registere4 to produce and trade in products requiring the products included under the system. Three product groups have been identified, from which the initial list of eligible products would be selected. These have been chosen on the basis that they are inputs which would contribute to the growth objectives of the ERP and would have a relatively short-term impact on production. None of the products to be included would be subject to domestic price controls. The groups are: spare parts for cargo and collective passenger transportation, key inputs for garment production, and key inputs for shoe production. 85. Demand for foreign exchange under the mechanism would be principally managed through exchange rate and tariff policies, and possible import surcharges. Because no other similar mechanism exists within the foreign exchange allocation system in Mozambique, and because little is therefore known about unsatisfied demand for foreign exchange, some safeguards would initially apply to enterprises participating in the mechanism to smooth the introduction of the mechanism and ensure its longer-term sustainability. These would apply during the first year of operation of the mechanism, and would include a uniform ceiling per applicant. In the second year of operation, these safeguards would be removed. Although the exact amount of foreign exchange passing through the system would depend on the number of enterprises that actually apply and the size of applications, US$25 million is estimated to pass through the - 29 - system in its first twelve mouth period, or about 20 percent of projected efreeo exchange for imports during 1989.* 86. In order to prepare for the broadening of the system during 1989, a review and evaluation of the system would be carried out during the end of the first year of its operation, focusing on: i. the efficiency of the operation of the system, highlighting any unforseen administrative problems and remedial measurest ii. the evolution of disbursements made through the system as compared with the initial targeted value of disbursements, and the actual versus estimated enterprise use of funds and usage by product groups; iii. a comparison of applications by product under the non- administered system with applications by product under the administrative system to provide inputs for broadening the coverage of the system; and, iv. the implications of expansion of the mechanism for other existing mechanisms, including the foreign exchange retention scheme. Improvin the Public Expenditure Prora 87. The TRC will also support the Government's efforts to improve the planning and execution of the Public Expenditure Program, and in particular the sectoral allocation of expenditures. In general, capital outlays will continue to give priority to the completion of the most productive ongoing projects, rehabilitation or maintenance expenditure and to projects which are capable of quickly yielding or saving foreign exchange and showing high rates of economic return. The Government will undertake needed institutional reforms, and specific project reviews in order to ensure that project selection and phasing will be based primarily on these criteria, and on the capacity to implement, operate, and maintain investments, rather than the availability of finance. 88. Several steps will be taken to improve the sectoral allocation of expenditures. In agriculture, priority will be given to the provision of support services to promote the production of family farms, rather than to investment in the productive activities of the state sector. Irrigation policy is being reassessed, and a Master Plan will be developed by mid- 1990, with a heightened focus on the development of small-scale low cost methods of irrigation rather than large-scale projects. For existing irrigation schemes, a system of water user charges will be introduced. In transport, more emphasis will be given to the improvement of airports and roads, and the appropriateness of the phasing of the rehabilitation of the rail corridors will be closely monitored. 89. In order to improve public sector management, the institutional capability of the Government will be strengthened. During 1989, all new major projects will be evaluated and screened by the Cabinet, to ensure - 30 - consistency with the objectives of the ERP. In addition, the Ministry of Finance (MO) and the National Planning Commission (CNP) will initiate preparation of a three year investment program of core projects, and establish a database for ongoing projects to improve its monitoring and control capability. Core projects will be those which are economically justified, financially feasible, and manageable with human resources constraints. The Ministry of Finance and CNP will jointly initiate the design of a rolling medium-term financial plan for the Government which will help to discriminate between priorities between operation, maintenance, and rehabilitation expenditures and new capital investments. Pricing Policies 90. Following the considerable steps towards price decontrol which have already been taken, the scope for further decontrol is limited by the exceptional circumstances prevailing in the country, notably the security situation (para. 24). Consequently, policy will focus on the maintenance of the minimum controls needed under the current circumstances and the introduction of more flexible mechanisms wherever possible. The Government has therefore reduced the number of products subject to fixed pricing from 25 to 20, thereby limiting the product groups subject to fixed prices to those which are justified as a result of the exceptional circumstances which now prevail. 91. In addition, the Government will continue to make agricultural prices more responsive to international and domestic market forces. A minimum price system, to be initiated for the 1988/89 agricultural season, will govern producer prices for groundnuts, sunflower, mafurra, cashew, copra, and cotton. 92. Finally, the Government will continue to improve the mechanism for the setting of prices for those products which remain subject to fixed pricing. In particular, the Directorate of Agricultural Economics in the Ministry of Agriculture will develop simple models to estimate farmgate prices based on world prices, which would be used as a guide for the setting of future price adjustments. This should further strengthen the linkage of domestic producer prices with international relative prices. Distribution Policy 93. In pursuit of the same broad policy of increasing the flexibility of producers and traders, the Government will continue to open up both domestic and international trade. Consequently, the Government will be decontrolling the inter-regional wholesale trade of a further 15 final products in early 1989, thereby leaving only 15 groups of essential products still subject to controls. All enterprises will continue to be permitted to trade directly with other enterprises, rather than through a wholesaling intermediary, both domestically and internationally. Centralized administrative controls over the allocation of some essential products will be continued in two prime respects. First, distribution to rural areas will continue to be emphasized and second, the ration system in Maputo and Beira will be maintained. - 31 - Tariff Policy 94. As a result of the realignment of the currency, progressive opening of the exchange allocation system, and opening of domestic and international trade, the appropriateness of the tariff structure is being re-evaluated (para. 23). Rate simplifications will be introduced through the consolidation of product categories and the reduction in the number and range of rates, and new rates would take into account economic considerations including tax revenue needs, industrial priorities and protection needed to promote efficient sectors and the impact on consumption incentives. The interrelationship of the tariff system with other aspects of the exchange and trade regime will be evaluated, in particular as it relates to the system for non-administrative allocation of foreign exchange. ProNosed Financina 95. The TRC would support the aforementioned objectives of economic policy, and would provide financing for imports necessary to promote economic growth in the context of the improved policy environment. The financing would total about US$149 million, including an 11A Credit of US$90 million. The remaining financing would be provided through resources mobilized by the Special Program of Assistance for Debt Distressed Low Income Countries in Sub-Saharan Africa (SPA). This includes US$12.8 million from Switzerland and US$8.9 million from Finland, both of which would be IDA administered. An additional US$10.9 million (from the Federal Republic of Germany), US$17.5 million (from the United Kingdom), and US$9.4 million (from the Kingdom of Sweden) is being provided through the SPA, on a coordinated basis. Diehrements. Procurement. Administration and Auditimn 96. The proposed Credit would be released in two tranches and disbursed over a 24 month period. At effectiveness, half of the IDA Credit would become available, both for the non-administrative mechanism for foreign exchange allocation and for eligible goods and services under other foreign exchange allocation mechanisms. The second tranche would be expected to be released after about twelve months if satisfactory progress had been made in the overall implementation of the ERP and the specific conditions for tranche release have been fulfilled (para. 104). The closing date of the proposed Credit is April 30, 1991. The proceeds of the Credit would finance 100 percent of the foreign exchange cost of eligible imports and a limited amount of consultant services. Consultant services will be used for technical and engineering services, and studies needed for implementation of the ERP. 97. The Bank of Mozambique would open a Special Account in US dollars in a commercial bank on terms and conditions satisfactory to IDA, for the IDA Credit and the cofinancing contributions administered by IDA. The initial deposit into the Special Account would total US$27.8 million, including funds from IDA administered cofinancing. The level of the initial deposit is warranted because there is a long lag between order and delivery of goods to Mozambique. Unless there is sufficient head room in - 32 - the Special Accounts to allow commitments of funds to continue, the import process can be disrupted. 98. Statements of Expenditure, prepared by the Bank of Mozambique, would be used against contracts valued at less than US$500,000 for goods and US$100,000 for services; all disbursements for contracts over this amount would be fully documented. The appropriate documentation for disbursements under SOE's would be retained by the Bank of Mozambique for review in the field. 99. Procurement would be limite to goods from the Bank's member countries, Switzerland and Taiwan. Both private and public sector imports would be eligible for financing except for luxury goods and goods intended for military purposes. Contracts for the procurement of goods less than US$2.0 million would follow normal commercial practices (if through the private sector) and Mozambican Government practice (if through the public sector). Contracts for goods over US$2.0 million would be through ICB. Expenditures for goods for invoices of less than US$5,000 would not be eligible for financing. Consultants would be employed according to IDA guidelines. 100. The Bank of Mozambique would be responsible for monitoring credit accounts and for arranging and annual audit of the Special Accounts by independent auditors acceptable to the Bank. The audit of the Special Accounts and of the supporting documentation of the SOEs would be submitted to IDA within six months of the end of the fiscal year. 101. IDA would also monitor the disbursement of funds which it would administer on behalf of cofinanciers. This wvuld be done through the normal supervision missions, and reports to cofinanciers would be submitted upon their requests. It is also expected that some cofinanciers will join IDA supervision missions from time to time in order to make their own - assessment of progress under the TRC. Tranche Release and Monitorn 102. The Bank will monitor the implementation of the overall ERP and the specific action plans outlined in the Letter of Development Policy through regular supervision missions and exchange of views with Government. The Bank will continue to coordinate closely with the IMF on the monitoring of key macroeconomic indicators and policies, including the exchange rate, fiscal and monetary targets. 103. Actions which have recently been taken in the context of the ERP and TRC include: (a) further devaluation of the metical from Mt. 645 to Mt. 682 per US dollar in March, 1989, bringing the total level of devaluation since the initiation of the ERP to over 1600 percent; (b) reduction of the number of products subject to fixed pricing from 25 to 20, including announcement of the - 33 - minimum price policy for cashew, cotton, copra, groundnuts, sunflowier and ma rra, adjustments in fixed prices; (c) reduction of the number of products subject to administered distribution from 30 to 15; and, (d) initiation of the tariff review. 104. In addition to the overall implementation of the ERP and associated policies, the release of the second tranche would be contingent upon the following specific actions: (a) that the system for non-administrative allocation of foreign exchange has been approved and is under implementation, an analysis of its initial effectiveness carried out, as per para. 86, and agreement reached on the dismantling of the first year safeguards and the timing and scope of expansion of the mechanism starting in April, 1990; (b) that adequate progress has been made in the review of the Public Expenditure Program, includings (i) that a three year investment program of core projects starting in 1990, has been prepared by the CNPIMOF, according to criteria set out in pares. 23 and 24 of the Letter of Development Policy; - (11) that a three year financial plan has been prepared by the CNP/MOF, according to criteria set out in pares. 23and 24 of the Letter of Development Policy, and (iii) a review of ongoing, capital intensive projects has been carried out, and an action plan to prioritize said projects has been prepared. (c) that the minimum pricing system for selected agricultural products has been functioning and a review of its results carried out; and that fixed prices have been adjusted, taking account of adjustments tn the exchange rate and c.anges In internationa. order prices; and, (d) that the tariff review has been completed and measures for tariff simplification agreed for implementation during 1990. - 34 - Benefits sand Risks 105. The main benefits of the proposed operation are expected to be the consolidation of the policy and institutional framework which were initiated under the ERP and which have resulted in an economic turnaround since 1987. The primary economic benefits will accrue to the rural sector of society, notably family producers, as a result of their capacity to respond quickly to the new production incentives as well as the local and international demand for their production. In addition, further efficiency gains in the industrial and transportation sectors should occur, as a result of the shifts in relative prices which place . rket constraints on costs. 106. The main risks to the ERP and the proposed Credit arise first, from the ongoing security situation and second, from the administrative weaknesses in key economic institutions. As has been noted earlier, the impact of the security situation on economic performance continues to be of great importance in the countryside, and may reduce the benefits to the rural sector. With the continuation of the security situation there is also a need to maintain some elements of a command economy. Nonetheless, evidence shows that the economic reforms are having a positive impact on production, especially in agriculture. 107. The issue of the managerial and technical capacity of key economic agencies of the Government is a more complex and long term one, and not subject to short terms solution. Implementation of the ZRP puts a strain on key managers, many of which have few qualified staff on whom they can rely for technical and financial analysis. Greater reliance on market forces does enable managers to focus more carefully on key policy tools rather than micro decisions. At the same time, sectoral ministries are beginning to feel the need for better financial and economic data as a basis for decisions on proposed expenditure levels and priorities. Although the availability of such data remains limited, improvements are being made through the use of technical assistance from IDA and other donors. It is expected that the ERP will continue to require the use of technical assistance. However, care will need to be taken that the pacing of the UP and the introduction of new measures does not exceed the limited capacity of the Government to monitor their impact and formulate further actions. PART V - BANK GROUP OPERATIONS 108. 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$42 million disbursed by end March 1989. The Credit has provided the Ministry of Trade with an improved procurement capability, and has allowed enterprises beneficting from the financing to produce more efficiently through provision of spare parts, raw materials, and managerial technical assistance. The Norwegian and Italian Governments have recently provided an additional US$22 million in co-financing with the Credit. A - 35 - second IDA credit, of US$20 million to support an Energy Rehabilitation and Technical Assistance Project, designed to bring about quickly a substantial improvement in the supply and distribution of electricity and petroleum products to the main trade and processing areas, was approved by the Executive Directors in May, 1987 and about US$ 2.0 million have been disbursed by end March 1989. In August, 1987, the Executive Directors approved a Second Rehabilitation Credit, consisting of an IDA Credit of SDR 54.5 million, an Africa Facility Credit of SDR 14.5 million, and for which IDA will be administrator for a Swiss Special Joint Financing Grant of SW 16.9 million, all in support of the ERP. Performance has been satisfactory, and the second tranche was released on February 4, 1988. Disbursements total US$ 70.0 million as of end-March 1989. A First Education Credit of SDR 11.7 million was approved last May, an Urban Rehabilitation Credit of SDR 44 million, in August, 1988 and a Health Credit of SDR 21.0 million last March. 109. 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. On July 28, 1987, IC provided equity of up to US$7.75 million in a Xai-Xai oil exploration project. PART VI - RECOMMEND&TION 110. I an satisfied that the proposed IDA Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit and that the Association act as administrator of the Swiss and Finnish contributions. Barber B. 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O.. n... n.. n.*.. .. c.c. h.*. n.*. a.& n.* Ofvern. revnues/P j 19.9 20.4 12.8 12.9 16.1 I 16.7 19.9 I 22.0 28.0 24.0 24.0 24.0 GOvern. expendil./W 29.3 38.8 20.7 22.4 87.2 l 44.8 49.0 1 89.1 80.4 47.8 46.8 46.0 Bud~e6 Dafleit/WP I 9.4 18.1 7.9 9.8 21.1 I 28.1 29.2 81.1 27.4 28.7 22.8 22.0 Expor6 gr~h raee( l) valu. X~ i h.. -M.S -.8 8.6 18.1 I 22.8 X.9 g 18.7 7.8 9.9 8.4 8.8 volum* XP ".%. -40.0 -8.2 -1.4 10.0 i O.a. -0.8 I 9.2 8.6 8.6 7.9 7.0 volus good. c n.c. -8.7 -18.2 -2.8 18.0 c n.c. 1.9| 18.8 18.9 11.7 9.4 9.8 fEport/®P 16.8 6.1 4.2 8.5 15.7 I 14.1 20.8 1 25.0 28.4 25.7 2.0 26.2 tKperl grama rsl.O86) III valne N~S Ø.*. -18.0 -17.8 28.1 14.8 I 18.1 22.8 I 11.0 9.8 7.2 6.0 8.1 el~a. l@S m.. -14.7 -18.0 8.9 6.8 1 O.a. 7.7 I 7.8 8.8 4.6 8.6 8.9 volume aod. I n.s. -18.7 -18. 88.1 7.1 n.a. 6.4 3 8.8 l.l 4.8 3.7 4.0 zepor/P I as.0 22.7 14.1 14.2 47.8 62.8 73.9 Ø 8r.4 90.6 8.& 88.4 89.0 Ourrenl accounl I -426.0 -478.2 -440.1 -M22.2 -7.0 I -96.8 -78.S -9M7.1 -1009.8 -1088.7 -1099.2 -1168.9 Oscrenl seesunl/CP I -17.$ -18.8 -12.9 -14.9 -48.8 - 47.8 -87.8 - 48.9 -81.1 84.0 -0.9 -0.1 Com prite deflator I n.&. 30.8 29.2 88.7 188.0 I n.*. 80.0 1 .. .. Re"I echant. rat I 100.0 111.8 250.2 48.7 148.1 I n.a. 74.8 I .. .. Nles: [1]. I6 should be*noled n that *e flatlional ae~u dat ar. in geneal. inadequato duo to th. liaited ~eaalty to e lech and analye date. "wh esimat~es made ad "lilme d her. er* thpeeorm indieslive. The taees... in 1987-8 in ratie, to IP ø variablen git laro onternal components. retlee mainly valuation affects øf major exh~ng rat edjussto. . æP is at market prics. exop sihen expresed ase gr~mIh rate using fster sam. The bude6 defble i u la he beere grant 0.11 service ia reported pre-de6 relief. [83. G Ov~rnsa expenditure le reporled exelusiveo enterp~ri* lea for 1980.88, but inaluelve øf ~ac leo~em fre. 1987 sard . Thi* is rufteded In tb r*portød defleit. In 1985 and 1988. th. cofparable data for expanditure and ~e defici6 ( as 2 f P vare, for 1985. 2.48 Gad 140 repe61vely; end, for 1988, 82.6% ad 19 roeps~livel7. [4}. Real efeeive exhange rate is ortlffie anul everagm (smurce : ~1). [M). Sure : N~aebiqu* A~trl**.e and B~nk Stwft es~w~ates. - 37 - ANNEK I Page 2 of 3 *e1. u *e hela of s, 198i~52 15~-e-88 (n rillban of .. dolarn> Freetas st. r- 1M 191 lø f fm l9 ifi 1993 Traibae 4616 28.0 •65.3 421.9 -81.4 -851.6 -92.9 -54. > 7f.o.b. 9.1 97.0 98.3 121.1 139.6 157.4 177.9 291.0 (Li.f.) -Mi -M. 9 -763.6 -5.0 -90.0 -012.0 1070.0 -1155.6 Services (net) -159. -14.0 -129.2 -228.3 -209.2 -M9.3 -1.0 -191.? kepts 119.0 137.0 16.9 161.5 169.0 16.1 19.5 201.6 frartati 6.0 5.1 8.0 I 4.0 5.6 S.2 66.9 73.6 lårbrs' r~ittsces S.0 .0 65.0 73.5 69.6 0.3 73.1 76.0 t sev,iceruelipts 29.0 119 40.9 .0 46.0 47.6 49.5 S2.0 trs-2M.? -2L -M.1 -Kg, -M.2 -B.I +3K6 -3Mi -154.7 -.4 -19.6 -2.? -21.2 -221.7 -6.2 -28.9 ed -112.1 45.1 -127.2 -141.3 -109.0 A4 -68.5 -59.9 en refø~min -39.0 -19.5 -8.0 -L8 -91.3 -109.0 -111.3 -114.9 aeh mb~-3.6 -3. -4.4 -13.5 -22.9 -.4 -6. -59.1 tif 3.0 - -3.9 -2.7 -4.0 -48.9 -5.8 -52.9 -5.0 iriers' tte -2.0 -5. -.9 -29.6 A.8 -.0 -.3 -3.6 I ~fsiat arce -9.0 -51.7 -2.6 -.1 -.5 -3.5 -I34 -4.9 tbar sr s tre ~ce0 -A.0 -131.3 -. -3. -38.3 -9 -41.4 torrat acaut -622.3 46.0 89.S -V.2 1011.6 -163.9 -088.1 -11%.9 ~ tetald ffiual trsfer 213.0 4.2 16.3 6.3 46.4 511.3 561.3 589.4 a ccomi - -1.5 -8. -715 101.8 8.6 111.9 169.2 175.9 289.0 30.1 289.6 378.5 397.4 417.3 418.2 460.1 hør5. -5 -389.1 -3.1 -6.7 -312. -25.4 28.9 -2 9.2 kSd~ 1/ -5.5 -9.1 - 1 6.7 -2.8 -25. -51.1 -28.5 b refdt~zet 0.9 8.0 0.L e.0 '.0 0.0 -17. -13.7 rrrs ad miso t> -n.2 18.1 9.0 .0 0.0 0. 0.0 .0 Guerell blace -488.8 -.7 -397.7 -419.1 -456.5 -407.7 -7.5 -386.1 ~8.0 43. 7.? 419.1 46. 40.7 57.5 386.1 et asseta 5. 46.8 -28.0 -5.0 -15.0 -20.0 4.0 -10.0 61ts 4R -19.0 -62.2 8.0 4.0 -15. -20.0 -20.0 -10.0 es assets -23.5 -6.2 -28.0 -5.0 -15.0 -20.0 -20.0 -0.0 Uiateral pnntsarea .9 7.9 0.0 .0 0.0 0.0 0.0 0.0 -ir •0.4 6.1 0.0 .O 8.0 L O L .0 0.0 Ibilities 24.8 15. 0.0 0.0 0.0 .0 0.0 0.0 wue ofirdit(nt) 0.0 0.0 .0 .0 .0 0.0 0.0 .0 tu in arre«stn~rse B2.2 -88.2 .0 .0 .0 .0 .0 .0 Dm inncing/fii 0.0 1367.7 15.7 I9.1 71.5 27.? 377.S 396.1 åtreef 2/ 0.0 1M7.7 25.? 372.6 379.3 323.3 271.1 269.6 fddittuulfincing 51.5 0.0 .0 8.0 .0 Oiual gap 8.0 q.0 L.0 L.0 97.2 109.9 103.4 131.5 Nm~radm itm: rass iutertiaal re~rs 72.0 19.2 17.2 181.2 1.2 216.2 236.2 2.2 (inoathsof updorts) 1.5 2.6 2.6 2.4 2.4 2.5 2.5 2.4 om dot ai the at frmace 11.3 8.0 Stak f dt in res 711.2 0.0 0.0 0.0 .0 0.0 .Ø 0.0 Ødt rice u ati) 8.0 9.0 77.0 112.8 159.7 18.8 221.0 2.5 Det service o Before debt relief 247.4 27.5 206.9 182.4 175.9 151.2 134.7 127.4 ~tter debt relef 247.4 20.9 31.5 0.5 52.6 54.2 6.1 61.7 lia~ en self-ftaucq •29.8 30.7 27.3 26.2 27.8 2.S 29.9 I.5 Ipartu/Id M 109.2 10L3 101.8 99.7 102.6 100.5 97.3 101.0 DM serce pa~uets aeal) ... ... 498.3 418.0 416.8 365.8 319.6 30.3 wrces n et noam .ue m la start æsustes. 1/ b~ ST dadop are equde fw h u terf ib fit v rm p lud. 21 ImIldas IOU at raft~kIÉl Pamu Club, OM.C adJ ~jm co~tr dMl Plus c~vrly md et - 38 - Page 3 of 3 4 0060 gr«otg# 0.0ET 0.0e.FDaBMAIBfs w R~f~a 0,80. 1 - 55 8 es t0. ilene tean3. Astee t iumete 9 Peeecin e . KOM94~. ~i M.I 197 c lm48 w 18 19II 18.1 1k2 1U.s 9 9 OCerrent eeegnl 878.0 5 788.8 5 987-9 10.8 1088.9 1to.1 1148.4 Or mImdIes offlelet Iee 9 Ase6D4361e. 084.1 . 81 4 118.7 012.8 218.4 268.9 28.4 Genes lm ~ ~resve.(nee -0 84.9 1 0.0 l 0.0 0.0 0.0 0.0 0.0 hemne.1 l e omeiee.(Iner e 48.8 9 2.0 9 8.0 15.0 8.0 81.0 15.0 ' Reparchee 0.0 0.0 l 0.0 0.0 0.0 0.0 0.0 tEer.s...lmie (ma6 emttie. .) •1U.1 I4.0 1 1.0 0.0 0.0 0.0 0.0 9-9 1 9 1G~U8. PDWGnC Em3e. 1978.0 9 1181.8 9 1288.0 187.4 11. 1-7a.0 1440.4 9 1 Liebreent.: 1aieinesiament. l l 9 9 0r4. 304.9 418.3 1 430.0 0.0 10.9 M.s m. SIi..Ites. 199.4 9 98.49 088s. 0.0 0.0 0.0 0.0 tikil #. 0.8 0 .1 Ps.0 1.8 1.J 1.8 1.J 0f lekt : 10w i0.0 i m. .09 w.& 18.8 14.9 18.8 18.1 O which % qdj~eem leadif. 40.0 5 0.0 9 40.0 80.0 60.0 0.0 10.0 Privats ~reditore. 0.0 1 0.0 9 0.0 0.0 0.0 0.0 0.0 gS DU~huama. 0.0 1 0.0 1 0.0 0.0 0.0 0.0 0.0 11. 18.4 1 20.1 9 11.4 0.0 0.0 0.0 0.0 9-' 1 5 Tomet diaberent. 0.01 708.9 57 8.5 180.0 18.1 1.8 1.1 i *1imbareet.: s comIitmete. 9 9 9 O~nt#. 0.0 e 0.0 = 0.0 4n.4 814.3 s1. M84.4 Leens: 9 9 SiteimraS. a0.0 0.0 9 0.0 28. 08.0 2ea.8 0.8 itf ifteotet. 0.0 0 0.0 07.8 141.9 1~0.8 -1.4 1M.8 Of l hih : DA 0.0 0.0 o 87.8 9.0 116.0 12.0 9. Of whimhi 9 adjsment eding. 0.0 n 0.0 m 40.0 0.0 g* .0 80.0 ~ . Pri §e bredit ra. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 DC suechae.e. 0.0 9 0.0 9 0.0 0.0 0.0 0.0 0.0 82. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5 1 7.1.t diaburemsam. 0.0 w 0.0 87.8 849.0 915.4 *84.0 1mag.4 * 9 TOTAt. 10ETir1 PIeSUCPIO. 605.3 9 708.9 5 014.8 068.8 931.8 998.8 1044.5 9 9 Prese.lie de66 ielief : 1367.7 426.7 372.8 874.3 328.8 274.1 186.6 Addilione sinenin : 0.0 0.0 8X.5 0.0 0.0 0.0 0.0 Pineneing gas : 0.0 0.0 0.0 -97.8 -104.4 -108.4 -181.8 1. The divialnm et the 18 aen nd §Oo n diaber~emente beimea thee fee eeu§ a me. emteente ls nob kamma, exumpi In the cseo 10A. The non-IDA diebursemente see therefor. •••••••e, fer ii Iuatelve purpoes, to be free esialing easIitente. 2. The grean ad leen dlebureemeate from esletlng cmmitemnt. see not kamma for 1990-8, essesi l ihe emae et 101. Consqueoty the non-10 dlmbursmenste see seumud t. be zer. lmee ii t,taIve pureem. 8. The distributimo een iniese for 1980-93 betinme. s.tteret mod blieterel efareee •. am~e to be s in 180 (fultlöterat 40 : bilateral 01). 4. Ilource t t~eban A~Mthoritien and %Man Staf e*tWI ate. - 39 - ANNEX II Page 1 of 1 MOZAMBIqUE PRODUCT OUPS SUBJECT TO FIMED PRICING. Rationale for Control. * I 6 I c I d I e I f Fixed prices as of January 1989 Tax 1 Food I Ration | State I revenues Aid I System eonopeles Raw mts. Other Tobaco x I I I I leer x 1 I I Mel:.I x 1 x RI0* I X I ( I I meate flour I I wheat flour I x Milk Bread II x i I II aeans I I x I I I n I : I II Electricity I I j x Nydrocarbon and derivatives II x I Diesel 0i I I Rents _ _ I I x soya I ______I I I I_____ Sorghum Ix meat IIx TOTAL NiMBE OF PRODUC GROUPSIIII REMAININ SUBECT TO FIME PRICE REGULATIONS : t0 2 8I 4 I 8 1 1 2I Note: 1. Fros January 1989, a minimum price system Is operating for the following products a cashew, copra, cotton, mefurre, sunflower and groundnuts. 2. Soya is used as an Input for the production of cooking olI. 8. Of the met products, only beef and pork remain subject to fixed price controls. 4. AlI other Industrial products are subject to the conditioned price legislation, and all other agricultural products are free of controls. -40- ANNEX III Page 1 of 13 March 17, 1989 Mr. Barber Conable President The World Bank 1818 OHO St. N.Y. Washington, D.C. 20433 U.S.A. Dear Mr. Conables Res Letter of Development Policy 1. In June, 1987 we wrote to you to request the World Bank's support for our ongoing Economic Rehabilitation Program (ERP) in the form of a Second Rohabilitaion Credit (SRC) totalling US$90.0 million, which was approved by the Board of the World Bank in August of the same year. The funds which were made available through the SRC, as well as the cofirancing which was subsequently provided, are almost fully committed. The purpose of this letter is to request IDA to provide a further Credit, totalling US$90 million, to support further efforts in the implementation of the ERP. Backround 2. The Mozambican economy experienced a marked and sustained decline in output and an aggravation of economic distortions and financial imbalances during the first half of the 1980s. These developments resulted from a combination of adverse exogenous developments, disruptions and insecurity spread by armed bandits in various parts of the countryside, and economic policies that proved inappropriate to deal with the economy's problems. Between 1980 and 1986, overall production fell by about 30 percent and exports fell by nearly 75 percent, while imports were compressed by more than one third from their 1980 level by 1985, before recovering somewhat in 1986. External imbalances, aggravated by an increasingly overvalued exchange rate, led to the rapid accumulation of external debt service arrears. Internally, due to large fiscal deficits and unconstrained bank financing of enterprise losses, the money stock tripled despite shrinking output. Administrative controls on prices and allocation proved inimical to the efficient allocation of resources. As shortages increased, barter, inflation, and parallel markets for goods and foreign exchange became widespread. In response to the growing internal and external imbalances, attempts were made to implement corrective policy measures during.1984-86; however, these measures proved insufficient to reverse the economic decline. It became clear that even though the security situation would continue-to hamper economic activity, more far-reaching economic policy measures were needed in order to stimulate any significant economic turnaround. - 41 - ANNEX III Page 2 of 13 3. In January 1987, the Mozambique Government launched a comprehensive Economic Rehabilitation Program (ERP) intended to deal with the structural problems and widespread distortions in the economy. The 1987-88 program focused on measures to improve price incentives and increase reliance on market signals relative to centralized administrative controls. Parallel measures sought to strengthen demand management through appropriate fiscal and monetary policies; to initiate structural reforms in the key sectors of agriculture, industry, banking, and transport, as well as public enterprises generally; to increase and redirect external assistance to support the rehabilitation of the economic infrastructure and provide for the population displaced by drought and disturbances; and to ease the external debt burden and resume debt service payments at a feasible level. 4. The implementation of the foregoing measures had a significant impact on the economy in 1987-88, despite the continuing dislocations in the countryside. In 1987, a modest recovery in gross domestic output of around 4 percent was recorded. This positive growth rate reflected a substantial rise in the agricultural production of the family and private commercial sectors resulting from the improved pricing incentives and the increased flow of consumer goods, and a pick-up in light industrial activity as a result of increased imports of inputs and spare parts. In 1988, GDP growth is again estimated at about 4 percent. In those areas unaffected by the problems of drought and insecurity, agricultural marketed output grew substantially, while elsewhere, production was severely hampered. For the country as a whole, marketed output of food crops grew by 15 percent, while aggregate agricultural marketed production grew by more than 5 percent. Industrial recovery was adversely affected in early 1988 by the inadequate flow of spare parts and productive inputs, but, in the latter half of the year, production revived, allowing a modest growth to be recorded for the year as a whole. The picture was mixed in transport over the two years, with a reduction in traffic from South Africa only partially offset by increases from Zimbabwe, Malawi and Zambia. Increased aid flows, meanwhile, made possible a rise in per capita consumption and the maintenance of investment levels. As a result of the exchange rate adjustments, together with the freeing of many product prices and the adjustment of fixed prices, consumer prices increased sharply in 1987 by 163 percent, but the rate of price adjustment decelerated considerably in 1988 to about 50 percent. 5. During the first two years of the ERP, the implementation of the reform has proceeded largely as planned. While there have been some modest delays in the implementation of exchange and trade liberalization measures, and public enterprise reforms, the program is on track despite the Government's staffing and institutional capacity limitations. The Government remains firmly committed to the next phase of the reform. Dverview of the Economic Rehabilitation Program 6. The overall objectives of the Economic Rehabilitation Program have remained fundamentally unchanged since the initiation of the program in January 1987. They ares (a) to reverse the decline in production and ANNEX III -42- Page3of 13 restore a minimum level of consumption and income for all the population, particularly in the rural areas; (b) to reduce substantially the domestic financial imbalances and strengthen the external accounts and reserves; (c) to enhance efficiency and establish the conditions for a return to higher levels of economic growth once the security situation and other exogenous constraints have eased; (d) to reintegrate official and parallel markets; and (e) to restore orderly financial relationships with trading partners and creditors. 7. In order to achieve these objectives, the Government will continue to implement major policy and institutional reforms throughout the 1989-91 program period. The successful implementation of this program also depends crucially on the sustained support of the international community through the provision of increasing financial aid on the most concessional terms, with an emphasis on quick-disbursing import support, and through substantial assistance in relieving the debt service burden. It also continues to require the maintenance of a supporting consensus in Hozambique through measures that address the uneven impact of the burden of adjustment and help offset the transitional costs that bear hardest on the poorest. 8. Over the course of 1989-91, the reforms woulds (a) progressively reduce centralized administrative controls and encourage more private sector participation; (b) allow resource allocation based more on market-determined prices, credit policies and other indirect means of guiding the economy rather than on direct adrinistrative intervention; (c) establish more direct links between incce s and the performance of economic units and individuals, and (d) imi ove the quality of planning and policy-making, including ensuring that the public expenditure program focuses on the priority requirements of the economy. Eternal policy 9. The Government recognizes that continuing flexible management of the exchange rate will be central to restoring adequate economic incentives and strengthening the external accounts. Policies will be aimed at attaining an exchange rate by the end of 1989 that will allow a further reduction in the scope of administrative allocations in the exchange and trade system, and permit greater reliance on appropriate macroeconomic policies rather than administrative controls to manage the balance of payments. The policy of flexible exchange rate management is designed to effect a further, but gradual, depreciation in the rate in real effective terms in order to achieve a level consistent with the objectives of the program. The Government believes that this policy is consistent with narrowing the large gap that remains between the official and the parallel market exchange rates. The path of exchange rate adjustment will be reviewed quarterly in the light of actual price developments in Mozambique and abroad to ensure that the desired real depreciation is being achieved and will modify the pace of adjustment of the exchange rate if and as necessary to achieve the program's objectives. 10. The substantial realignment of the exchange rate during 1987 and 1988 now provides scope for a shift towards a more open trade regime. The - 43 - ANNEX III Page 4 of 13 Government will, therefore, introduce in April 1989 a system for the non- administrative allocations of foreign exchange (SNAAD). This will aim at providing key inputs in accord with the priorities of the ERP in a more flexible manner. In the first year of operation, a narrow range of imported inputs (comprising spare parts for cargo and collective transport, and key inputs to the garment and shoe industries) will be selected for which foreign exchange and import licenses will be automatically made available on request. These products are not currently bound by any domestic price control legislation. All productive enterprises will be eligible for the system 1) and will be able to import any eligible products that are inputs to the productive process in which they are registered to operate, subject, in the first year of operation of the SNAAD, only to a maximum uniform allocation per enterprise of US$250,000 per three month period. 2/ The number of applications made per applicant would not be restricted. The estimated value of exchange to be dedicated to the SNAAD would be US$25 million, but the import value would be determined by the actual number of enterprises applying and the value demanded. The effective implementation of the SNAAD would begin with the availability of funds under the Third Rehabilitation Credit. During the second year of operation, the ceiling allocations per applicant would be removed, with the indirect management of demand being undertaken through the price system. 11. The Government is intending to review the operation of the system during the first year with a view to making adjustments to the system in the second year of operation. In particular, the Government will monitor the enterprises that are both accepted into the rejected from the system; and the import license applications that are both issued to and rejectted from applicants within the SNAAD. In addition, the Government will take note of the Bank's suggestion that the other sources of funds used for the import of selected product range should be monitored. 12. Adjustments to the system for the second year of operation will be made in three principal respects. Firstly, the list of products eligible for importation under the system will be specified in accordance with the Brussels Trade Nomenclature (BTN) classification (or other international trade classification system); secondly, the Government will review the product range in the light of the first year's operation, and determine the phasing of the expansion of the product groups to be included in the SNAAD; and, thirdly, the Government will specify the phasing of the dismantling of the first-year ceilings per applicant to be implemented in the second year of operations of the SNAAD. 1/ Subject only to meeting certain pre-requisites with respect to legal registration to having their tax and accounting affairs in order, and baking references. 2/ Exceptionally, allocations in excess of the US$250,000 million might be permitted, but still subject to the overall annual ceiling per enterprise of US$1.0 million. - 44 - ANNEX III Page 5 of 13 13. The heavy reliance on external assistance, much of which is provided only on a tied basis, requires the continued use of a system for the centrally administered direct allocation of foreign exchange. While such a system is necessary, the Government will seek to enhance the operation and efficiency of the allocative mechanisms. Semi-annual reviews to estimate exchange availability and demand will again be carried out in the coming years, and measures to improve the matching of donor assistance with the priority needs of the country will be taken. In addition, the use of qualitative and quantitative efficiency criteria in the allocative decision-making process will be continued. Other interim measures, including the Market Frad, the export retention scheme, and the system allowing importation when no recourse to the banking system for foreign exchange is required, will continue to operate. The Government will, however, be seeking to reduce the export retention rates as the scope of the non-administered allocation system is expanded, and, with this objective, will review the rate structure in 1989. 14. The realignment of the currency and the progressive opening of foreign exchange allocation will now permit the price of foreign exchange to play a more important allocative role. Consequently, the appropriateness of the tariff structure is a major concern, and the Government is, therefore, implementing a two-stage reform of the structure. The first stage, to be completed by early 1989, will concentrate on rationalizing the legislation, and converting specific rates to ad-valorem rates. In addition the rate structure will be simplified through the consolidation of product categories and the reduction in the number and range of rates. The determination of the new rates would take into account economic considerations, including tax revenue needs, industrial priorities and protection to promote efficient sectors, and the impact on consumption incentives. The interrelationships with other aspects of the trade regime including the system for the non-administrative allocation of foreign exchange will also be taken into consideration. Finally, tariff exemptions for products and importers will be eliminated wherever it is deemed desirable and possible. Furthermore, steps will be initiated to strengthen the administrative capacities of the Customs Administration. These measures will lay the groundwork for the second stage, to be completed by end-1989, which will continue the process of simplifying the system, and focus on harmonizing the tariff nomenclature with international conventions, and improving the economic role of tariffs as outlined above. 15. In light of Mozambique's acute external debt situation the Government intends to strictly limit the contracting of new loans on nonconcessional terms and to explore all potential avenues to reduce the present debt burden. The Government will seek further comprehensive debt relief from all official creditors on concessional terms--through modalities such as the conversion of credits into grants and the introduction of concessional interest rates on nonconcessional loans. Furthermore, with the assistance of the World Bank and the Fund, the Government will explore possible schemes to reducing its debt burden with commercial and private creditors in order to enhance further the prospects of early attainment of medium-term balance-of-payments viability. The Government will refrain from accumulating new external payments arrears, ANNEX III 45 Page 6 of 13 excluding arrears arising from debt service payments pending conclusion of the rescheduling agreements. Priclag and distribution policy 16. The objective of pricing and distribution policies remains the establishment of a market structure that is more responsive to the pressures of supply and demand and is, therefore, better able to provide incentives to producers and traders. To that end, the decontrol of the price mechanism and distribution channels remains the principal policy objective. However, following the considerable steps towards decontrol that have already been taken, the scope for further decontrol is limited at present by the exceptional circumstances prevailing in the country, notably the emergency situation. Consequently, selected controls will be retained for the immediate future for some of the following productst those considered strategic in the light of the security problem; those in very limited supply and for which an equitable regional distribution is necessary (including products distributed through the ration system); those widely distributed free through the external emergency assistance program; those of critical importance to the Government's tax revenue policy; those traded in markets dominated by monopolistic forces; and those subject to the conditions of grant and loan agreements. As changing circumstances permit, decontrol of these products will be pursued. 17. Pricing policy will continue to focus on the same three areas as in 1987 and 1988: firstly, on the continued relaxation of price controls through removing a number of products from the fixed price list, albeit subject to the constraints outlined abovel secondly, on the establishment of greater flexibility in the price structure, through the initiation of minimum pricing on a selected basis in agriculture, and through the maintenance of only ex post ministerial price reviews for those goods subject to the conditioned price legislation; and thirdly, on the continued and timely realignment of fixed prices to those prevailing on international markets and, in particular, to reflect exchange rate adjustments. To this end, substantial increases in producer prices for the 1988/89 season of between 50 percent and 90 percent compared to the previous season were announced in October 1988. 18. In pursuance of the same broad policy of increasing the flexibility of producers and traders, the Government will continue to open up both domestic and international trade. Consequently, the Government will be decontrolling the inter-regional wholesale trade of a further 15 final products by early 1989. This will leave only 15 groups of essential products still subject to controls. Further changes will depend on the availability of key products and on the evolution of the emergency situation. All enterprises will continue to be permitted to trade directly with other enterprises, rather than through a wholesaling intermediary, both in domestic and international trading. Centralized administrative controls over the allocation of some essential products will be continued in two prime respects. Firstly, distribution to rural areas will be emphasized and, secondly, the ration system in Maputo and Beira will be maintained. -46- ANNEX III Page 7 of 13 Fiscal policy 19. Fiscal policy during 1989 and in the medium term vill aim at a continued strengthening of the public sector's financial position, which will improve the public savings performance and reduce the sector's recourse to domestic bank financing. Budgetary financing will avoid crowding out the legitimate credit demand of the rest of the economy for recovery and rehabilition. Specific fiscal measures will be concentrated in the following key areas: improving the buoyancy and efficiency of the revenue structure, restoring financial discipline and profitability to public enterprises, containing the growth of current expenditures, prioritizing capital outlays, and improving the coordination and utilization of external assistance. The principal recommendations of the public expenditure review (PER), conducted in 1988, will be a major element in the formulation of policy to strengthen the fiscal position. 20. With respect to revenues, besides continuing the reforms in domestic taxation, the Government intends to move quickly during 1989 in the implementation of a package of domestic tax measures, aimed at a significant strengthening of the domestic revenue system. These measures mark the introduction of a tax policy that aims at lowering disincentives to work and save and moving away from the present dependence on sales tax, while broadening the revenue base. Measures to improve customs administration including the transfer of responsibility for customs to the Ministry of Finance were taken in 1988. Also, during 1988, a first-round customs tariff reform was prepared, aimed at substantial simplification and at merging the numbers and rates of import duties; this phase will be implemented-in 1989.-Although conceived as essentially revenue-neutral, the reform should facilitate collections. 21. The containment of current expenditures requires a restrained wage policy, and especially a reduction in budgetary subsidies. To this end, the civil service wage bill in 1989 is expected to increase from the 1988 level by no more than the anticipated average inflation rate. As in 1988, the wage policy has been adapted to the particular requirements of lower income workers who are affected the most by the upward adjustment in administered prices of essential commodities. The Government is cognizant of the need to formulate a wage and employment structure that, within the continuing budgetary constraint, will allow wage levels that adequately compensate for higher skills and performance. In this regard, a Civil Service Pay Review will be conducted in 1989, with a view to formulating a more appropriate salary and employment structure. In the interim, the foregoing wage measures will permit differential salary increases, while broadly compensating for the increase in the cost of living. 22. While many of the subsidies to state enterprises that are attributable to the security problem will have to be continued for the time being, those attributable largely to inappropriate pricing or tariff policy, or to inefficiency will begin to be significantly scaled down. In order to accomplish this, the following policies will be pursueds (i) price adjustments as indicated by changes to underlying costs, particularly those resulting from exchange rate movements, will be established immediately; (ii) formulation by mid-1990 of a program aimed at ANNEX III - 47 - Page 8 of 13 reducing or eliminating some subsidized, capital intensive rehabilitation programs and (iii) announce a program by mid-1990 to mobilize private participation in public enterprises which are active in the productive sector. To maintain sound financial management all domestic interest will be paid by the Government when due. 23. An important area in which the Government is seeking improvements is the planning and execution of the investment program, and, in this respect, the recommendations of the PER will be taken into account. In particular, the Government will undertake several steps to improve the sectoral allocation of expenditures. In agriculture, priority will be given to the provision of support services to promote the production of family farms, rather than to investment in the productive activities of the state sector. Irrigation policy is also being reassessed and a Master Plan will be developed by mid-1990. Investment will be redirected to the development of small-scale low-cost methods of irrigation rather than large-scale projects. In particular, the economic justification for the construction of large scale irrigation projects will be re-examined, and the decirion to proceed with implementation will then be reassessed. The State Secretariat of Hydraulics will introduce a system of water user charges for existing irrigation schemes. In transport, more emphasis will be given to the improvement of airports and roads, and the appropriateness of the phasing of the rehabilitation of the rail corridors will be closely monitored. In general, capital outlays will give priority to the completion of the most productive ongoing projects, rehabilitation and maintenance expenditure and to projects capable of quickly yielding or saving foreign exchange and showing a high rate of economic return. Hence, project selection and phasing will be based primarily on these criteria and on the capacity to implement, operate and maintain investments, rather than the availability of finance. 24. A major requirement in improving public sector managemcnt is the strengthening of the institutional capability of the Government to enhance policy implementation. In 1989, the Government is reviewing major ongoing projects (covering a majority of the total value of the investment program) and all new major projects will be evaluated and subject to the scrutiny of the Cabinet. In addition, the Planning Commission (CNP) will initiate in 1989 the preparation of a three-year investment program of core projects, and will establish a database for ongoing projects to improve its monitoring and control capability. The Ministry of Finance and CNP will also prepare for early 1990 a rolling medium-term financial plan for the Government which will establish priorities between expenditures on operation, maintenance, and rehabilitation on the one hand, and new capital investment on the other hand. This initial financial plan will be completed by July 1990, and the Ministry of Finance and CNP will then assume responsibility for monitoring its implementation, and for its periodic updating. To assist in the preparation and monitoring of both the investment program and the financial plan, an Investment Technical Unit within the Ministry of Finance will also be created by the end of 1989, and the planning and budgetting departments of sectoral ministries will be strengthened. -48 - ANNEX III Page 9 of 1? Metary policy and financial sector reforms 25. Over the next three years, the Government will implement a credit policy consistent with the likely flow of financial savings through the banking system and with strengthening the external accounts and reducing the inflation rate. In addition, within the overall domestic credit limits, the Government will reduce its borrowing requirement from the banking system to allow sufficient credit for the rest of the economy. Credit policy for the time being will continue to be implemented through direct ceilings on aggregate bank credit and on credit to Government. However, in the course of the program period, the Government will take steps to develop indirect monetary and credit control instruments, including the use of reserve requirements. 26. Financial sector policies will continue to strengthen structural reforms in the financial sector. Initial efforts to put the extension of credit on a sound commercial basis, including the prompt payment of interest charges on new bank loans and to separate the commercial from the central banking functions of the Bank of Mozambique will be completed. A revamped plan of accounts has been initiated for the banking system since the beginning of 1988, and implementation will continue in 1989, together with a program to enhance the training of bank personnel and to provide new equipment. 27. The Government is committed to continue the reforms in the levels and structure of interest rates to encourage domestic financial savings and to enhance the efficiency of the financial system's resource allocation. Major adjustments were made in interest rates in 1987, with time deposits (six-months and over) yielding 16-20 percent on an annual basis and maximum lending rates ranging from 22-35 percent for different sectors, according to priority. Also a major simplification of the interest rate structure was introduced at the outset of 1989. Moreover, term deposits with banks will become a more attractive vehicle for mobilizing household savings as interest becomes payable quarterly rather than at deposit maturity. The Government believes that with the present level of interest rates and the steady and rapid deceleration of inflation in Mozambique, positive interest rates will be achieved by end 1989/early 1990. Agricultural policy 28. In pursuing the objectives of the ERP, the government will continue to make agricultural prices more responsive to international and domestic market forces. For many of the crops (groundnuts, sunflower, mafurra, cashew, copra and cotton) to be removed from the fixed price list, the Government has decided to establish a minimum price system, to be initiated during the 1988/89 agricultural season. In the case of cashew, only a minimum producer price will be announced. State enterprises would compete in the market alongside other traders, but would still, however, act as a buyer of last resort at the farmgate, guaranteeing to buy any cashew offered at the minimum price. For the other crops, a single purchase price, reflecting the export or import border price, will be announced at the processing factory gate. The collection of these products - 49 - AUNEX III Page 10 of 13 and their transportation to the processing factories or directly for export will be carried out on a competitive basis by the state and private traders or by the producers themselves. In addition, state enterprises will guarantee a minimum price to the family sector producers and will commit themselves to buy any quantity that is offered at that price. 29. Three further products [fish (fresh and dried), chicken and manioc] were removed from the fixed price list at the end of 1988 and are now completely free. Pricing policy for sorghum, soya and for meat products still subject to control will be studied in the course of 1989. The scope for further decontrol is, however, limited and attention will increasingly be focused on the methodology for the setting of fixed prices. The Government intends to use international border prices as the main reference for setting domestic producer prices. Producer prices will be announced at the beginning of the planting season and would be based on the exchange rate expected to prevail during the marketing season. 30. While pricing reform is necessary to bring about a significant supply response in agriculture, it is by no means sufficient. Consequently, the Government will be improving the supply of inputs and consumer goods, and the provision of basic agricultural services such as marketing, research, extension and credit. Substantial imports of vehicles, spares and fuel together with investment in rural road rehabilitation and maintenance facilities are also essential. Furthermore, to the extent that inputs and key consumer goods remain subject to administrative allocation, the Government is committed to ensuring that an increasing share reaches rural areas. 31. Efforts will continue to be directed at making state farms more efficient and profitable. It is now Government policy that those state farms that continue to have large deficits will be restructured, or, in some cases, closed and their land and other assets distributed to more efficient producers. The first stages of this policy were implemented in 1988. To further this end, the Ministry of Agriculture has carried out a review of the financial status of all the remaining agricultural state enterprises and by mid-1989 will prepare an action plan for each enterprise, spelling out further changes or reforms necessary for financial viability or the steps to be taken to redistribute the land to more efficient producers. The MOA will also explore ways to encourage increased participation by foreign investors in agricultural production in Mozambique, including facilitating access to suitable land. Industrial policy 32. The policy changes outlined in the foregoing sections will all play a crucial role in the revival of industrial production. These adjustments in the business environment are introducing enterprises to the full range of commercial pressures, but they equally provide a considerable increase in managerial autonomy which is essential if the enterprises are to adapt rapidly to these substantial changes. 33. The Government is also taking measures to normalize the business environment through addressing the.problem of enterprise debt overhang, ANNEX III - 50 - Page 11 of 13 which results from the previous price controls and credit policy, and the ambiguity of ownership that followed the disruptions of the Independence era. The transfer of enterprises' bad debt from the banking system to the Government, combined with price decontrol, is designed to eliminate the former problem, while a case by case approach to the latter is being pursued. Future restructuring policy, including the possibility of attracting private sector and foreign investors, will depend heavily on the completion of this preliminary reform. The newly established Enterprise Technical Unit in the Ministry of Finance is now operational, and the initial phase of the work will be completed in January 1989 with the detailed programs for the rehabilitation of the first five enterprises being finalized. The implementation of the rehabilitation will then commence, and the design of the detailed rehabilitation programs for a further ten enterprises will be completed by June 1989. As funding permits, additional programs for the restructuring, divesting or closing of other key enterprises will be drawn up. 34. While there is little scope at present for further decontrol of industrial pricing, the conditioned pricing system, which effectively sets a ceiling on the permissible price, will continue to be operated with the same degree of flexibility as was first introduced in 1987. Thus, price changes will only require the ex post review of the appropriate sectoral ministry, rather than an ex ante approval. As supply conditions and competition improve, the conditioned pricing system will be phased out. Transport policy 35. The Government's main objectives in the transportation sector continue to be twofold: the elimination of the bottlenecks affecting domestic agricultural trade; and the rehabilitation of the transit corridors to neighboring countries. Priority will be given to major rehabilitation rather than to new investment, and to the creation of a maintenance structure capable of preserving existing and new infrastructure and equipment. In addition to the existing rehabilitation of the rail corridors, the Government will focus more on airport infrastructure and aviation, roads and road transport. In particular, as the security situation permits, feeder road programs will be resumed, and the rehabilitation of the truck fleet will continue through improving access to spare parts and strengthening of the repair facilities. The Government will also establish a policy of cost recovery in all public transport enterprises, with periodic tariff reviews being implemented to allow cost changes, and especially devaluation, to be reflected rapidly in the price structure. In addition, the Government will be strengthening the accounting and financial management of public transport enterprises, and, once reliable costing systems are in place and as the security situation permits, tariff deregulation will be pursued. Private participation in the sector will continue to be encouraged and incentives programs to increase labor productivity, especially in ports, are planned. 1 ANNEX III 51 - Page 12 of 13 Energy poaer 36. Following the completion of a Joint UNDP/World Bank Energy Assessment report in January 1987, the Government has established the following priorities and objectives in the energy sector: to increase the reliability of energy supplies; to increase the availability of wood fuels, coal, LPG, kerosene and electricity to urban households; to strengthen the institutional capabilities of the energy supply agencies; to prepare sound least-cost investment programs with emphasis on rehabilitation; and to establish priorities among proposed large export-oriented projects based on indigenous energy resources. The Government has decided to implement a high priority household energy program, financed principally by the donor community, aimed at bringing substantial quantities of commercial fuels to urban householders. The program will significantly reduce the cost of household fuel and curtail the destruction of the country's forests, with important benefits also accruing to domestic industry. The program focusses primarily on the indigenous fuels, electricity and coal, together with;,improved efficiency in traditional fuels; LPG and kerosene would be supplied as an interim measure to bring quick relief to householders. Social Policy 37. The initial impact of the program has been to reverse the strong downward trend in average per capita consumption that existed prior to 1987. The largest benefits have so far been felt in the rural areas, where the standard of living had been most severely affected. The implementation of the program is, however, having an adverse short-term effect on the welfare of some sectors of the population, in particular in the urban areas, where further contractions in real wages and employment have taken place in 1987 and 1988. In 1988, the Government has taken steps to improve its monitoring of those groups of the population which are most affected by the adjustment program, as well as by insecurity and repatriation, and whose living standards were already extremely low. To this end, a commission has been established, with the participation of UN agencies, to evaluate the impact of the ERP and of these other advexte pressures on the poor, and its recommendations for mitigating the detrimental repercussions will be outlined in a report by March 1989. The Government has also already conducted a rapid status survey of households in Maputo and Tete, whose results have shown a substantial decline in real income, together with a large increase in the share of household expenditure devoted to food and a decline in nutritional standards, especially in large families. The possible introduction of a Social Dimensions of Adjustment Project, which would provide a more permanent capability to monitor household living standards, and assist in the development of specific poverty-oriented programs, is now under consideration. In addition, the Government, in conjunction with the Bank and other UN agencies (FAO, WP, and UNICEF), will formulate in 1989 a Food Security Strategy for Nozambique, and identify cost effective interventions to address the problems of food insecurity. 38. The Government has already taken a number of measures to assist those sections of the population most affected by the transitional costs of the ERP and by the security situation. To ensure the availability of - 52 - ANNEX III Page 13 of 13 essential products, the ration system in Maputo and Beira is being maintained, together with the distribution of free food for displaced people under the Emergency Program, and distribution in rural areas affected by the insecurity situation is being selectively controlled. To relieve the situation of displaced persons, land for cultivation and basic inputs are also being allocated in strategic, safe rural areas. Furthermore, the Government is expanding a pilot program that provides meals in primary schools, and has started a pilot program aimed at improving meals in factories in Maputo. However, in the preparation of the Food Security Strategy, the possibilities of providing assistance to nutritionally vulnerable groups (such as very young children, and pregnant and lactating mothers) using supplemental feeding programs through health posts and clinics, would be examined. Similarly, the provision of targeted food subsidies for the poorest hou3eholds, possibly by encouraging self-selection by subsidizing only less preferred but nutritious foods, or by limiting supplies to specific residential zones, would be analysed. Targeting these measures to the most vulnerable groups should limit their short-run budgetary impact, while, in the medium term, it is anticipated that the need for this type of assistance will decline as the benefits of the recovery become more widespread. Conclusion 39. As is evident from the above, the Government has been instttuting far reaching changes in economic policy to address the major constraints to the resumption of growth and sustainable econmic growth in the future. These measures have already started to have a positive impact on the econmoy, despite the difficult short-term social costs involved. We remain committed to the ERP, but its success will depend on the provision of quick disbursing financinal assistance to meet the needs of the economy. In this context the Government is counting on the support of the World Bank. Yours sincerely, Authorized Representative on behalf of the People's Republic of Mozambique UREMSISE ai and Tiais en0 Ike k|ani. swnet --go Utmtrl A~Z le., 1 1 ~ 911 eg. Rees6ive. and Fii.e. Stretese end Nameares Prugrees throug 19W easeng and 811pmttatesn I. omerlt "bjective. t min obje ~avee of te program are to raptemen te aorocenele end 19ta-91. a~tIn an nn1ro an epite strurItu#ral acdlustbn6 sse detatled lnoe to r~d ~ flmaciøl bei~e: fleso e mo the inbalsnoes and strengteon the egternet eschange rat. reduci ons in ecope of andonld st4i te "b"d ma m ~dmese W1nsatel frbi~ ør~m and to r~dc lhe pol14116, iefo~m In priom and sn~1et inflatien rate (vwege) free 80 dlaribalion polites. as eti s a the in 198 to 80 *ren la 198, fiane19l eete. and pwbiM e i ekter 1per~en l " 4.d to 1em he 10 ro~re F~"msa.Rcu h per~ nl %991. O~,r~9st' ~ten tb* *Opicæltore ector trouh reotion f produers end isrovements lndistriblboln ad 1Z. Ext1el Pele* 1. laa exhng e he ill 0. ~e~ fr~ adjuste toiv ve d,Iatio ølffi 117, 19". e~l t f~e a f~.ier gre~e de~elutim, t~te l la 94 polcet la U.li. dol l*r af Iftl lv* l reel effeeiv lere, in gder to tarm. 4rhr devluetlon to Hh.om s the.....»ne Trad ......d p.re6 .% .v.. et .n.tent wIth te f «d Kø,.19. greeter reTlance l aeroeconeste obje«tives of the progrem. pol tle, to ee ge the balane of pejumente. b. ~eel.e dth the nand sff the tRules erfled M4 In 1987 end 198a. duty 198M. i I ~bø:t aa: e pole l sdjust..no of . e.e.ng. .t. If ad. a~@* ..ry s e t. progra... obje"tive.i 2. Trade and foreign e~hange onemen R~dadce the e øpeof 8dlnistrelve e. tatrodue esfor the non- Xsprovea;nte nodeed to the re April 19 . and tl aising he fund. eltoatne le th. exuernel trade adinietretlve e leton af f~nven af foveign esemøeretmnin ee. mde evalltble under the proposed World ear~.g en1~pv Ile~es an r*~es laGtUdMOG redetle Inse »4d w*~eg 9"n credtit bo gme 4ere ~et for and eGhnge * ~et. o af Ir~ r a re, t r d eringtn teeeprmto m erica and M~e;eGl& and ~sere parte. s6etme.* eetrucilon en npute for graet and Ise tndustries. Pi r er Frde to be dismeted by APIr1990. i1ible predudi reage lo be expanded, begin eg April 19^0.es b. Caetlaus praese, of opening up Xapiamsnted 198? and 198.. selepe6 lbne lootandespt direty -ed.'...be..4'.,,.due..tha uset le traded throug mnepolies leo mport and 1 mert produt. rew the effiiency øf Ile a. Carry mut s~i-nnual revist lemented tinoe 198, effflo eang Progre perlod, e ~l" pivsor~cedures øf foregn estleet. foe"g. exchng. eavalabllty erte agreed dth $e l 197.e exIchange t b te spstem of and demad, ; vove the Mthingof dno adele1etretive lomatien 04 foreign sfsiwtonce ml the prority neede of te exeheage le in pie. tø a t elene U,o*119~ln of fomeian exckage. 8. eFortm thøriff etructure e. FIrs6 etage: ratIonel me mnd-March 199. tfltioin, G~ert *~flar tol ad struture trugh CeeIlidalofn a caeo. knd reo o rege tt -tee 4~ 6 ens. ecae rettenm iC~udltote r~vnu b. en etg:cO~let haruIelmn af4 plifylog ~ d nrpvto e ~ ~ ~ ~ ~ ~ ø Ielets ~tato ndto 4te~UMtlø~oo cmedit 9* Kø4e1ts tht l*tei m"nimto *m JIe DIh rd »*I ltae G"ed% U qr anud Tim Ph~L~itle rlMm aol udiM - t Meiele u tb ~ e 19m1d~me 7e.. Sjstee -. u ale. 8-.ess - i..-- Pr..- r..gh SU fsei.. a.d o.e..ate. 4. Externl det and reserve Reduce t* de6 aervice burden and . Lait te canmtring of le-m an Ualte asmiled in 19M-M. ilinea øf Uet mill ion during 19p-1, lopr . . profi . .,..t. I d. n.n-..n. lenm tr. . 1-12 ,.are. , .h, no m, the. U .l l n n .turity rung.. 1989. b Z:ore powito 1 to r~ Re~eI IpKo 199-91. t" t b~ *;tbeOficil mw n private r~he ul hv8an m l greditor th~ onvreion øf lans to in 197. erant Mad % rel *ef tb cocesina nerseand 0 ean~. a. To resch and inteln a einimum level 1991. øf gr- remere u to to~ møsw~ af tst. ada d poel es1. 1. Pricing meure Alle price to adjust to refleIc reel 0. lgulor djutent af fied price. to rpriate djustment mde in 1987 and Parther odjustment af producer pri~e for resurce ceste. with progrteily lesm refle6 acN rat. and mer coet 1 e incree; e. r fiv roa 10-00 1988/59 agriculturøl mea~n *e adminitrive control, o that price. change. and tolig the. more glomly ‡.roentin Jnuary, 100 percent announced cnemer food price t b. came to mre s the primary tmide to w%h in *taienal pricee. e19" peroend i n *dusted app riatly in ril 189. and reaurce le lolaton. Specifio ceatrolo eOtsbr. 1ed.pef cd t bIn dut to rei.n here prodct. are etratege, appropriatei treughout . v e er . «ic t t. To continu* trough program perid. =oen.at.b.hne,6.e e...e.t moopllec for~e. tadfor ms b. educe nu er of products with flued R ~duced from 46 i January 1M? to M by Cantinut revief f o p = perod of price., eubjach to pcifle acnm~rat. end 19.c conrol r r . "i fur@er decastro circumatance. prit. a. Po en %ondi6cened price leb. loplemented 1907.. Program period. :l ..p:c.ch:ge:r.'t.rp,r."to6 ith4 u prior offromul. grmte to b. %haed aut. m% upply and cmpeitivt condition. persil. d. bitlaMan et iIMUM prie m Jauary *98.e fer meleute pgrlcoitural er~p <e ~eIon VI.I>. f. Distrlbution emeure* R~aduce administrativ. icabien and a. Complete review ef damt tic ~ørvi., el~ueted end-1%?. inreae offie~ e dam tic rud.; alleetian peo e. but with =pefic cont,l, to remin for producte t re eraegi , ør ecare or traded by inopelle.. b. øetabish progrme impiementation afMer reduced from 48 to 30 In Døm~ to reduc progree.ivey ts nuder at 1987.s and to 18 by January 19^0..ø final product sobjec to dInitrativ4 allou"ton. Kner«»em avilabilito eonaumar goede *nløeres aøaf, of ali~d øted goødf gAnual revi. ef i~cuains. end l~pt In ruamt ar~u. d~erbutød to rural ureoo comper"d with PrWid* & øety nøbe lor stapie and a. tnitial *AM to ler a ple. ~Ied he.viy from Con~ u~d blne 1Ply *liginted n.t.ibonalti, vulroble..c~ n ot the .t t.n..d. ef p.e. ., th We i ad Aprl ..M9. end .ft.. pepulation. to bo financed trough the budget. p*rtially by pay incree . 04 b. Oter buffering meamures to b. 19, and for traneloienal period a deOl for vulnerable group. (eee eaoesry. ~lanie X). *o~ nd w4 Tiom F~ %r om~rn t m*m^ oe ~ Bomme % =~Seubvt Jte. Mø~9 eu, Jfut* end Ptselen g *rategies ad suree P. eee tsah 19 Peeing and rulmente~eo lV. PleuelPelly I. Overalli taprove Publio Seter reture . 16e traø of te currnt *C Tor d In GFP M*A chieved in 1919. managemen and brenliten "e public deficlt to MP, uhib Was 8.7 percene nd98u . .ec.r'.,n..ci.l position. x.,r.ve t. i.~ le .,e.d to b. de.d by llv e nIe per and eng poat Mo 198--- - lb al --..r. to d.enS e d U f . .le v Itnanciug. 14.» W4rcm1t 0fw,P SFt 96. I.~c. to c.» by 4 e g pite m ...ii~Id.l 1990-91. b. taduce te da.s.ie bank #Inacing to 1987 md 1988 I lt~te obeerved. 1990-91. Mb. la billiom tn 19 9 nd reduci ~ i ~I edly "hreeft~ wt a v ov tø elimWn*tø 4 by 19M. R. R...n u...r.. . . the ~ .n ,n.--en t .d...e .. Pre pre and llimeen palø aget "m ne j- I taol refore .oacted "a the tbnumry 18*. rew~ut bme. mod ;W1I tim mk* tag = =.. mmtr%. W4d Iffroveent* In t** lo 1*b"aget. r U0 mr bum td eielønt In iniaration to Yeld about . 17 providing inentlvea to n,r , d sve. billion. gith te 199 budge. b. The ~aio of reveome to MP thbeb R~evenue targeto ~ greed wit 11P SAP 199. Ineresed frow 16.1 p in 97 to achieved In 1917 and 1918. 19.9 percen in to bo increed y 2 percmntege pointe o 19*. c. Further ncreae to the tjo of 1990-91. revenue to GOP at et 4set 2 percenag. pointe in røainder of progra perlod. d. Cnvrt ut reing eelfic19-90. ~~tngio" dutte. to ad valoig bem. e. lilnalilalieoo et eiplfioen of 1919. tariff e reog :lllt:ion .t set ..e..6i.n..wIthin Ce.to...dr r.ble. ,.ef.,,.d to duIable ICport cøtegorlea. riatio of -nte in 1988 * enue g o cutam~ *nd 1990-91. E~theo tM~rai;trtlo 8. aspenditur.e masu Contein e.peoditure uithin agreed late. a. Averag. civil eervanl gage tncreas.. Real mage tncreses contalned in 197 nd 199. In 19%9 would net lemd to * reel ^ IreM~e 1918. to the au~regat b i in i" l ffl, Mi CO~dc 9 Civil SeGøc 0"y revl" to ratinali e the mediu~tere civil ervice eslary ønd empleme etrugture. b. Rdce the rato øf bu~dgetry SubIdies reduced in 1987 and 19i8. eubides to CUP In 19* by the *w,tvalot øf eb%u 0.8 per~ tloe levet øf abu X.9 Percet ep . e. Reduce f#rer tbe ralo of budgetary 19I0-91. eubsidtes to CDP. d. Pa,Mnrcal obligae loetuding 19w9-91. debt mg. en ti~e ønd 1ilt1oter epepditum to monte Gønsltet wit the filoul tørg~. S'-- iMitutionel C~ Ity øf a. Na, majr tnvomt pro eo to bo Baginning 1919... Oenuo,to tuWrove plamnatg mffd oeanted mod reøvlge byinlt ti".**.t edulaietrattenof xavstemt Progrem. b. S-year Invetmsnl ram foe cre Oj and-1969.ee project to b. pmpred by P. 3 ,~ S)esiles and 1M1e~v M Strategle md mShare P,eres 6 Sih tao and ImDB ca c. s ~ of engoing projoct to beo.k end-198. sen~t by CNP. d. PdIedm-tere finnaslt plan to be Uital plan to be completed by July p.. bly n w i.y of Pinans., 199... .. rav .t..n sani.f~ c.. .n-18, ~rated Ilthin wt r of Pinance, to a*sel la properIng md monitorIng Invetueni program end financial plan. f. Imrv secuntin pro~dres18-1 ~pe9lmily for externa#lty funded itemo. 4. 4~p al lonaten of Ihmmma fon~a. sapit-int.m.ve 19-1.00 *~Iudlturon pro~t In lp h ofb n prioriten s Imprmve perforn~e of etate enterpriom m. R~dusm finani teba lues by 1909-t. 811ComAG automa to In este. V. Ibunetry Policy and Financial Setor 1. CredltNlelles liketery and Crd1 Pol lew to be ade L te m~ enf ln web domos 190? «nd 198 6redi UlDito cbrved. Gurbene n r esamtabliahed for Ca4e~% v;l ebn calng *h* eurce bank 6~1d4 to 01. 66 blimo of I98,. ~~*1na Deoff~ aWd ~1d09n wh hich the ~hro af the ~ ern t vill bo ipfi*blof tate. Hltaled tob ~lmm of M. 1S billIcn. R. Ineeel Roten: wnsrage domtic finn1ai nevingand O . Simpllfy Me e,uctore of intre6 ZaItial alplifismtln inöroduted li rivly 19M. ank~ the efficimnc of the fiMancial retas. 1911. ~ 1et9S's r~r«urel stocehlan. b. Review inte~s6 mate etru~tre wtb Jul-d"gumi l9t. Pund Stoff *4 th~ en of Ccosmultatlön discussions. s. Und*rtake fure Glop$lfi tion of 19m0-t. the* at~tr of k ~eve ~ae. J-dns *:d:.i the Affer.iel. bet.." mbidled and othMr lending rate nd intr~duse fleibility In the deteraination of Intermeb rmtim. 8. Fiamncal Setor Reforms = the sanss of the finansial m. Can«lnum effort to 9u the *uenoso Ii61sted 1987. 198041. ine6M bin änd lgrove the ffiMiency of Crdi4 en a cound finanmel boelo of the dellvery of finemlat oervicen. ineluding the profft p9aen of Intere~ cherge. b. Comlete the i;plemnatmlsn of the 2 11t.1ed 1988 198. ne. ..eubing e.. for the b . . late the esmargble of the mi6imted 198S. 1990. OreI aig apera ..on . fromt ~oau*ique. d. Cntinu oe review of bank lan nlatlted 1I8. l19%. which ar* oms-perförming dMwelop pr~ r. for dme 6~tiat al mof Iceno ba~e m tMe v*riod of del Iftcowecy ...e",*:et T..i. .r to ~ lm*"'" m*~oun the non-perfemlng loe0n. mSUmmmm= Ga mad Tim esme har Kmetaoin of Ober heeae Bhannle and Stratleki Jdi -m: t tet., 198-191 amams 5.eUi and Po teis StrategIes and 1111mren Pg e 1-NI Phaing and ~GpBm~n in Vt. Sctmrøl P0lir AttrIcutral %IlI 1. Prien4 Pollc Zne~r I ~nclIvøs for aaricularsi m. Rdc numbor of produ~s fubjeG%o s eloen MZ.1 Rducd øigniflenty (~c. ~etlon crodoslien nd partelpat en ln mrke4ng fled pricing. Nr). F arther adjuatomes m by priat ear, ediioe prlt. b. n o..ftm et flged prod~e Mjuetontm mode of ED-400 peret in Prher ødjum teso rquirød m.~do t n m skrie. , .87,. 80-7 r " In 1 å d --" * ~tør. <edj~ma for Internet dt1~lbulan and porcont for 1111. pr mag ..) oncrted preailin .mapla. mIt-tevel pries fl*ing Zalroducd for cahe, Iora atn ø m sint e alnns pnf price ener ed iw#wra et,nd for ~cr~p to, Inc~.c #iøulbilIa "11. I.. prising ond embing mrgin. 2. Agrloilturol srvice Iprøe prmlsion c# basie ggrialturol a. Cralien of Agrarian Pund to finane Fund. erasted in 1988. rvle ~ d mraeting. marth. *~%,on gd rural =ilng *"~mn$on end ~reit. Infram ro. CPrtimof .1oXlcolturDI Crodih Pund to prwidø mdiu ~it to famliy nd a1 M , privat. farmr mnd b. Prior$*& for ~taigd r~c.cré Th #rm p«ri*4 t-uløe on i of I font eoty~ . 8. Giuttural e~ovrimm WM» 911"an9 e agrislitorgl 8. enøsøp md lemn program for Rdiørlbion inlieted 1987. Iplsmntatin thr.uglhoub progrm period. r40m9~m reart~ring at»bofe~ ØM roditrib"lng land nd other al,t to famlly and priva produwcr here indlad on øfflilne grund. 4. Disisecd opulaon a m .t priipt* In Al e1on of Ind In gress a nd Throu~out program perlod. OViGsturøt activites. b. As.istan4~ for voluntry Thrmugh program period. rusIiean ":10o mf* aren el high ufficultarlpomll MI. MJIITIL 1. PrPoingtollte Rds dor-tmrm finonoIal labolmaso .. R1leab echang rote and othe mma hie %"loen ZZ. Thrughoul #rogram perlod. nd $~re~.. ma Influmno* In prie. adjumnts 1n ffted priof. døtrmislaon. b. ai~ntain fleibliltyø l condb i revilus Isanted n 1987 and Progra Period. prie. , alleing ørle to rcelt %W t es to. m.d .bJ. to .-,.st minI al reviOW anly. 9. R~hablit*hIon . Edtrtk nterpri@ Revim. C=p d 1i. c liab Etrprio Tebhlml Vit o7 #gni~ of Finne to prdu.e det led th. mtabilhed ln 198 . Firs~ refebsily tp di** to bo r .trin pog,m førrtr., diu 0e rølnrffl cm. e «Wmlsc .hur 1onor5clmplm Sn= IUEa Sa marad Ti.. Piram. fe.atentble et itano Uesmie Esanie and St.eturat Ad,j mmiaes IIW-300 l«~ eetiva and hlowie. Strategies and immrmm Pøenm t U 4e ng and ~peae m Bosand Phass pre-ftamibll; studie for 10 furher *trpri*»s oe t .saieted by July 1989. P4rther p~ trw~ progra perlad. b. Transfer ment rime bad dub frm -. bonking spete to e nn~. vm1. 1RMPUi POLMC 1. Prising ero thik priem reflest esensmie cst . Adj*sk >wlodieally %ransporb tariffe Further adjust~alt ab needed. of tranmpert. in lin. Wth dange in asange rote and other sats. b. Adjust poriodially vehile IIensI ng Intlated Otaber 1987. Sael-minual revlef. storting Mwrch 198. and regitraion fe. t. Tariff dereuleOion to be purmued, mm Program perod. søcurity øltiu on permite. R. Sle of privat. mster funhanse private mestor rle in ø. Rame. liceneing restristiens en Zptemmnted 187. tranlportaen. erge tranmr. b. Inlisees ser lan In proviln ef Program perlod. lantenanse ser, ses. e. A~on of unui 1Isd or insperaiv* tegular avetine taking piavi, and to be publie mster fle~. nlnued % netemary. 3. ftehabiiitablen Elløinaion at bttienee aff~eing a. Rts feeder red program mm Program periad. dastis trade. «~surity øltumt;mn prWils. b . "roe rabiltaon and Program perlod. abn~e f trusk fle. &. Em»ine smspests for rehubiitblon Progra period. and *pnsion at girporte and ovlation. itehabliltetin of transit ærridore to Priority to reh1abilian and Program period. n r.inoenin eteisbing ral and pIr IX. omMCL. 1. Xn«re~me the reiublilty otenergy tehaRbiliteton operaing fali ile and Throughou tho program period. uppiles prepare turther lefeø-s09f investmet programe 2. Shrengthen tho initutinal a. Pinnel adeuaqyeo eloeriity Throughout the program period. ~epebIlity and finansial pslain of tariffe and p tleum prd prics to enrgy a egne. Im revled k ep pe i in ine gt iteaintprisa~ adj~aa for local distributian aea. 6. peÆn C to fond lgenificant F Ing of g0 pent of Invøstmont proportion of their Investmant prsgrora program in Fm9 and at leseS 30 per~et trm not inoes after debt gervi, gre F90. EM targe to be e tbiehed during 1m9. a. E to k maurmo t restere 19. financial position (Øris nosr.s, estblimla~t of otrimy and reseceduling or iotvenem e de6f mervise). Deal~ad at ~e 1 "a ie _~. m o . Tiga4 F~lom j= E~e 3eses. jevm a Pmiatlelm 1e11~I and 91m~ Pgw~s meud IU as md p4a1~6«4 d. om nd PUMEC no to redu belor 1999. 1.8 the mal* of äh reveue to debb ervioe remir b. .. ID...,,.rt.d 4.e.nic.al.Itan.. iI. precured. 8. -1eshotd Berg Knrease aemlombmll~ t Nbe e$tv ofeSl 19ch and for pogram period. Progrm f...': , mal. L r..m :. nd order to re~e Meld' ependiture e.d .entu. te d.ee .on, f f.reet. X. scIm PL=Y 1. Impofeenitoring of living hmIab cmleien to eIuae oen iebed In 198m. Pbior stanard. Iqa et gi. d09 March St~t b.Crre rapidtains Iweehold C~ap ~§c nl 18 IM. T tohn 4. rntroduce Sotal Ofinf of -M.ring 190. Mjalteeb Prje6. 2. fNamsrem to ieele6 me wujnerable a. Mplntaln ftbIen ofgte ln urban orea Threughou program perIod. grouse. and free lemd 4rmir~6ubten for diepa per0e. alas program la åie and fuel. b. Provido chemper energ for urban Seginning In I9M. hueholdg. i 4. ftal iniam mage. In April lm8. d. Develep labor intenive ombik serke n1%1te in 19t. program. e. Alleacn of land to daoed sniWaed In 19m. Pk014In m~ e md "f*. *moo at f. Al6billlm of etsupplemntal In It. dering prparabion of fånd 2 1 hfproean6 and 1~ta"ing mamn merity .rey. and mmt. and proielon of tergeted loud ouldlen to peoreet. 04 Aln V -60 - Pag Iof 2 STATUS OF 8AK GROUP OPERATIONS IN MOZANDIGUE SPNRO25 - SUMARY STATEMENT OF LOANS AND IDA CREDITS (LOA DATA AS OF 3130189 - HIS DATA AS OF 04/18/89) Amount in US$ sillion Iless cancellations) Loan or Fiscal Undis- Closing Credit No. Year Borrower Purpose Bank IA horsed Date Credits 0 Credits(s) closed C16100-OZ 1985 KOZANBIQUE REHABILITATION PROOR 45.00 2.17 03/31189(R) C18060-OZ 1987 MOZANDIOUE ENERGY TA & REHAB. 20.00 17.68 12/31/92 CA0330-NO 1989 HOZAMBI0UE REHAB.II 18.60 7.18 12/31/9(R) C18410-OZ 1988 NOZANBIGUE REHA.11 70.00 9.58 12/31/89(R) C19070-M0Z 19898 MOZARBIGUE EDUC. I 15.90 14.07 12/31/95 C19490-l 1989 HOIAMBIUE URBAN REHAB 60.00 49.10 12131/95 C19890-N0 1989 HOZARBIGUE HEALTH & NUTRITION 27.00 27.13 12/31/94 TOTAL number Credits - 1 256.50 126.90 TOTAL111 256.50 of which repaid TOTAL held by Bank & IDA 256.50 Amount sold of which repaid TOTAL undisbursed 126.90 NOTES: I *ot yet effective 8 Not yet signed 88 Total Approved, Repayments, and Outstanding balance represent both active and inactive Loans and Credits. (R) indicates formally revised Closing Date. The Net Approved and Bank Repayments are historical value, all others are earket value. The Sining, Effective and Closing dates are based upon the Loan Department offical data and are not taken from the Task Budget file. - 61 - ANX V 04/20/89 Page 2 of 2 IICIANIBIUE Statement of IFC Investments as of March 31, 1989 Invest Type of Nuber FY Obligor Business Loan Equity Total -----------------------ISS ilion--- 864-NOI 1987 LO1ACC Food & Food Proc 2.5 2.5 979-H10 1988 Iai lai Oil Che & Petroches 7.9 7.8 Total 6ross Commitments 2.5 7.8 10.3 Less: Cancellations, terminations, exchange adjustments, repayents, write-offs, and sales 1.2 1.2 Total commitments held by IFC 2.5 6.6 9.1 Total Undisbursed 5.3 5.3 Total Disbursed 2.5 1.3 3.9 - 62 - A-E VI Page 1 of 1 PEOPL'S REPUBLIC OF XUABIQUE PROPOSED THIRD RERABILITATION CREDIT Suplemntary Data Sheet Section I. Timetable of Rey Events (a) Appraisals July-November 1988 (b) Negotiations s March 1989 (c) Planned Date of Effectiveneses August 1989 Section II. Special Bank Implementation Actions The Association would support the Government in implementing the Third Rehabilitation Credit through an early supervision mission and ongoing monitoring of progress. Close collaboration with Inf staff would continue. Section III. Special Conditione Review of progress and fulfillment of second tranche conditions is scheduled for February 1990. Release of the second tranche of US$45 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 104. - 63 - AlNEX VII 1988 SOCIAL INDICATOR DATA SHEET Page 1 of 2 MOZAMBIQUE Ref rence Group (MRE) Most Recent Lover nid 1965 1975 Estlate LoW-incoame Incom LASOR FORCE Total Labor Force (thou) 4.318 5.532 7.824 Female (M) 50 50 48 34 29 Agriculture (%) 87 86 85 66 55 Industry(%) 6 7 7 14 16 Partioipation rate (M): Total se 57 e7 47 37 Male 60 8 58 5 51 Female 59 56 6 35 23 ags apendency (%) 81.4 88.4 96.3 71.6 82.7 Average aiza of houschold: Total .. .. Urban .. .. Rural .. .. Percentaga of dwel vige uith electrtetty: Total .. .. Urban .. .. Rural .. .. £WCATICM Enrollment rates: Primary: Total 37 87 84 99 104 mae 48 104 94 110 1%9 Female 26 70 74 87 99 Secondary: Total 3 3 7 34 42 dale 3 4 9 41 47 Female 2 2 4 25 36 PupI-Teache ratio: Primary 7 .. 62 39 31 Secondary 15 .. 32 .. 23 Pupils reaching gradft () .. .. .. .. 72 lCE CONSUfIFim. amO POVTY Energy consumption per cap. (kg of 011 aquivalent) .. .. .. 327 351 Percentage of privata 1rioe received by: Highest 10% of houscholds Highest 20. Lowest 20% Lowest 40% Est. absoluta poverty incoma level (US per capita): Urban .. Rural .. Est. pop. below absolute poverty Incom laval (%) Urban Rural Passanger care/thou pop. 6. 9.1. Newspaper cirulation (per thousand population) 4.6 7.4 3.4 32.0 43.5 1EcsE August 1988 nt -"a-is %at: ~usi 'men~ ~~dmutes et Poped n ead Per 1apite es t tal estees ouhs un a tid. c:e.w aeSU ese esptaden wgt~huad. ö~uny cas du~ende en data s,-n.aety sa Is at galer.. Ummuas etbuwise oeted. IMta seier ta say vast huasuen ted t ts bmwen tIll snd ta a mee m ntluate ektwee Ita amd Ios. 167 -64 - ANNEX VII 1988 SOCIAL INDICATOR DATA SHEET Page 2 of 2 MOZAMBIQUE Reference Groups (Mg) Most Recent Lower aid 1981 1978 Estimate Low-inCoMe Income AREA Total land area (thou aq ke) 80t.6 80f.6 80.6 Agricultural ( of total) 56.2 58.7 6.7 ONP PER CAPITA (current US) .. .. ISO 280 720 POPULATION AND VITAL STATISTICS Total population (thou) 8.405 10.60 14,51 Urban pop. (M of total) 8 9 20 28 38 Population growth rate(%): Totat 2.4 2.7 1.9 2.5 Urban 9.1 11.2 9.7 4.2 Life expect. at birth (yrs) 36 43 48 61 19 Population projections: Pop. In 2000 (thou) 21.03 Stationary pop. (thou) 67,461 Population density per sq km of agricultural land 18 23 29 349 404 Pop. age structure (M): 0-4 yrs 42 44 46 37 42 15-64 yrs s 53 51 59 55 OS and above 3 3 3 4 3 Crude birth rate (per thou) 49 47 45 30 35 Crude death rate (per thou) 27 21 Is 10 10 Total fertility rate 6.8 6.5 6.3 3.9 4.7 Infant mort. rate (per thou) I66 144 120 72 76 Child death rate (per thou) 31 .. 22 9 11 Family planning: Acceptors. annual (thou) .. .. Users (M of married women) .. .. FOOD. HEALTH AND MITRITION Index of food prodction per capita (979-61 * 100) 131 118 85 fie too Per capita supply of: Calort6s (per day) 1.962 1.908 i1.e? 2.327 2.507 Proteins (grams per day) 39 25 26 115 s Pop. per physician (thou) 18.0 .. 37.0 9.8 7.5 Pop. per nurse (thou) 5.4 .. 5.6 4.0 *Pop. per hospital bed (thou) .. .. 0.9 1.1 1.1 Access to safe water (% of population): Total .. 10 9 Urban .. 62 82 Rural .. 2 2 Population Growth infant Mortality Primary School Enrollment 33* 4 4* ag a. am esr ast emote a 166