Mozambique - Consultative Group Meeting in Paris, March 14-15, 1995 : chairman's report of proceedings

International Bank for Reconstruction and Development FOR OFFICIAL USE ONLY 33298 CG 95-53 FROM: VicePresidentandSecretary June 29, 1995 CONSULTATIVE GROUP FOR MOZAMBIQUE Paris, March 14-15, 1995 CHAIRMAN'S REPORT OF PROCEEDINGS Attached is the Chairperson's Report of Proceedings of the Meeting of the Consultative Group for Mozambique held inParis, March 14-15, 1995. Distribution: For Information: Executive Directors for: European Office Austria Mozambique Tokyo Office Brazil The Netherlands Resident Mission, Mozambique Canada Norway Denmark Portugal Finland Spain France Sweden Germany Switzerland Ireland United Kingdom Italy United States Japan AfricanDevelopment Bank European Investment Bank European Union International Finance Corporation International Fund for Agricultural Development International Monetary Fund Organization for Economic Cooperation and Development United Nations Children's Fund United Nations DevelopmentProgram United Nations High Commissionerfor Refugees World Food Program This document has a restricted distribution and may be used by recipients only in the performance of their officialduties. Its contents may not otherwise be disclosed without World Bank authorization. l  TABLE OF CONTENTS Page No. Chairman's Report .................................................................................................... 1 Attachment External Debt Structure................................................. 9 Annex I Agenda............................................... 13 Annex II List of Participants................................................ 14 Annex III Chair's Opening Statement................................................ 28 Ms. Katherine Marshall, AFI Director, World Bank Delegation Annex IV Statement by the Mozambican Delegation.................................... 34 HE Pascoal Mocumbi, Prime Minister Annex V Statement by the IMF ................................................ 39 Mr. Sergio Pereira Leite, IMF Representative Annex VI UNDP Statement................................................ 43 Mr. Erik de Mul, UNDP Representative Annex VII Establishingthe Basis for Economic and Social Development....... 52 Statement by HE Tomaz Salomao Minister of Finance and Planning Annex VIII Statement on FinancingRequirements.......................................... 65 HE Adriano Maleiane, Governor, Bank of Mozambique Annex IX Statement on FinancingRequirements.......................................... 71 Ms. Rocio Castro, Economist, World Bank Delegation Annex X Chair's ClosingStatement................................................ 77 Annex XI Press Release................................................ 83  CONSULTATIVE GROUP FOR MOZAMBIQUE Paris, March 14-15, 1995 Chairman's Report of Proceedings Background 1. The Consultative Group for Mozambique held its eighth meeting at the World Bank's European OfficeinParis on March 14 and 15, 1995. The meeting was chaired by Ms. Katherine Marshall,Director of the Southem AfricaDepartment of the World Bank. The World Bank's Alternate Executive Director for the group of countries that includes Mozambique also attended. The Mozambican delegation was led by HE the Prime MinisterPascoal Mocumbi, and includedHE Tomaz Augusto Salomao, Minister of Planning andFinance, HE Oldemiro Baloi, Minister of Commerce, Industry and Tourism, and HE AdrianoMaleiane, Govemor of the Bank of Mozambique. The Mozambique delegation also included seniorGovemment officialsand Mozambique's ambassadorsto France and to the United States. The meeting was attended by delegations from Austria, Brazil, Canada, Denmark, Finland,France, Gemnany,Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland,United Kingdom, United States. Also represented were the AfricanDevelopment Bank, European Investment Bank, European Union, International Finance Corporation, Intemational Fund for AgriculturalDevelopment, Intemational Monetary Fund, Organization for Economic Cooperation and Development, United Nations Children's Fund, United Nations Development Program, United Nations High Commissionerfor Refugees, and World Food Program. A representative from South Africa attended as an observer. 2. The following documents were distributed for the meeting: Mozambique Government: * "Establishingthe Basis for Economic and SocialDevelopment: Key Policies" * "The Poverty Reduction Strategy for Mozambique" The World Bank: * "Impediments to Industrial Sector Recovery" Opening Statement by the Chair 3. In her opening statement (AnnexIII), Ms. Marshall highlightedMozambique's achievementssincethe previous CG meeting. She noted that inDecember 1993 the central challenge was to complete the peaceprocess, a prerequisite for longer-term development. In 1995, she said,Mozambiquewas again at another crucial moment in its history. Whilepeace and new democratic institutionshad been established,these needed  2 to be strengthened. Equally important, Mozambique long standing challenges,related to growth and poverty reduction, needed to be addressed. 4. Ms. Marshall complimentedthe Government on the documentation prepared for the meeting. As mentioned inthe government document, she reiterated that the immediate priority was to restore productive livelihoodsin rural areas, where the majority of the poor are, through (a) active support for the resettlement of households and the economic reintegration of demobilized soldiers;(b) aggressive and determined efforts to ensure the provision of basic social services; (c) improved security in rural areas; and (d) active support of agricultural production, focusing on the rehabilitationof rural roads and the restoration of the marketing network. 5. Turning to the means to achieve the proposed Government's objectives, Ms. Marshall saidthat, in the medium-term,poverty reduction will depend on a profound transformation of the agricultural sector, moving from subsistence to a more commercial orientation; and on the rapid development of human resources, increasingcurrent budgetary allocations for the social sectors, followed by a restructuring of the investment budget to ensure fundingof priority programs. In the longer-term, the strategy for reducing poverty would be based on an aggressive growth policy and would require macroeconomic stability,clear priorities for public expenditures, an enablingpolicy environmentfor growth, and export promotion. Finally, she suggested that in focusing the discussions on poverty and economic growth strategies, two central and related themes be kept in mind: the need for capacity development and the vital importance of information as a basis for decision-making and to assess progress. 6. To conclude, Ms. Marshall suggested four objectivesfor the meeting, asking participants to: (a) review the strategy statements and issues and consider the plans put forward by Government; (b) agree on the financingneeds and likelyfinancingavailablefor 1995, set in the context of longer term programs and projections; (c) focus attention on aid modalities, or the how beyond the how much; and (d) consider more broadly the nature of this partnership and the role to be played by the Consultative Group. Statement by the Mozambican Delegation 7. In his opening statement (Annex IV) the Prime Minister, HE Pascoal Mocumbi, thanked the donor communityfor its continued assistance to Mozambique. He highlighted recent politicalachievementsby Mozambique, namelythe first free presidential elections with a high voter turn out, and the demobilizationof soldiers,for which he particularly acknowledged and expressed appreciationfor the role played by the United Nations (ONUMOZ). 8. He noted that in additionto the priority task of preserving the peace and consolidating national unity, the Government's immediateprioritieswere: (a) strengtheninggovernance; (b) poverty reduction; (c) health and education improvements, r l X~~~  3 particularlyin rural areas; and (d) regional cooperation and integration within the Southern AfricaDevelopment Community(SADC). 9. The Prime Minister emphasizedthat inMozambique institutions were stillyoung and undergoing reorganization and development. He concludedby encouraging the international donor communityto maintainits support for the consolidation of democracy and improvements in the economy in Mozambique. Statement by the IMF 10. Mr. Leite fromthe IMF (Annex V) noted that although adjustment efforts have been made, the objectives of the initialstructural adjustment program, the 1987-89 Economic RehabilitationProgram (ERP), were stillrelevant and would be easier to attain under peace. He then described the macroeconomic developments in 1994 and the Government's 1995 program discussed during a recent IMF mission. The 1995 program was still subject to approval by the Fund's Executive Board and involved an extension of the ongoing ESAF arrangement through end-1995. Mr. Leite welcomed the Government's new approach of making availableto the CG meeting participants the substance of its program andthe draft 1995 budget. 11. Mr. Leite pointed out that the key objectives of the 1995program were a sharp reduction in the inflationrate, enhanced support for education and health, and a reduction inMozambique's dependence on foreign assistance. Thiswould require a reduction inthe overallgovernment deficitbefore grants; atight monetary policy stance backed by penalties on financialinstitutionsthat do not comply with banking regulations; the continuation of a market-determined exchangerate policy, coupled with a strengthening of the net foreign asset position; and greater transparency and accountabilityin public matters. 12. Based on the Government's determination in putting together the 1995 program and on the measures alreadytaken, Mr. Leite made a strong plea for support for the program to the participants. He pointed out that the program requires foreign assistance, which should be timely and supportive of the priorities of the program. In conclusion, Mr. Leite stressed the need to enhance economic and social statistics in Mozambique, asking the donor communityto support the Government through technical assistance and financial support for field surveys in criticalareas. Minister Salomao's Presentation 13. Minister Salomao presented the main government document "Establishingthe Basis for Economic and Social Development" (Annex VII). He began by acknowledging the donor community's past financialcontribution to the peace and democratization processes inMozambique, adding that it was necessaryto consolidate what had been achieved in terms of peace, democracy, andnational reconciliation. Minister Salomao then spoke of two challengesfacing the new Government. The firstis the creation of an  4 environmentconducive to the participation of all citizensand in which civilrights willbe protected. He noted that earning public confidence in governmental institutions would alsorequire greater transparency in public administration. The second challenge was to lay down the foundations for economic and social development in Mozambique. 14. Minister Salomao discussed at length the four fundamental areas on whichthe Government strategy for increasinggrowth was based. These included: (a) development of human capital through the increase and improvement of education and health services; (b) rehabilitation of basic infrastructure; (c) strengthening of the agricultural sector as a means to alleviate poverty; and (d) creation of incentivesfor private investment through the implementationof economic measures aimed at reducing inflation and achieving balance of payments equilibriumin the mediumterm. 15. He then turned to a detailed discussion of the budget, seen as a fundamental instrument inthe management of public resources and guaranteeing execution of the government priorities mentioned above. The Minister also presented the major reforms to be carried out by the Government, includingmacroeconomic stabilization, customs reform, restructuring of the financialsector, decentralization, privatization, and institutional capacity building inthe public sector. To conclude, he expressed his wish for the open dialogue with the donor communityto continue. Plenary Discussion 16. In the ensuingdiscussion, participants congratulated the Government on the first free elections inMozambique and the manner inwhich they were carried out, praisingits leaders for the steps being taken towards the adoption of a more open and participatory political system.Participants commented favorably on the Government's documentation for the meeting and on the initiativeto hold preparatory meetingsinMaputo, thus initiatingthe dialoguebetween the Government and the donors prior to the Paris meeting. 17. Participants urged the Government to keep working toward consolidation of the peace, national reconciliation,and the eliminationof corruption. More specifically,it was noted that peace and prosperity would depend on the Government taking immediate measures to reduce corruption; to set the right framework for increasedprivate sector enterprise and privatization, particularlyin the banking sector; to cut military and security expenditures; and to reconstruct social infrastructure. Most participants noted that an acceleration of the reform process and measurable progress over the next months were now essential,and that the donor communitywould be closelymonitoring the implementationof the Government's actions. 18. Overall, participants welcomed the strategy and implementationplan put forth in the government document. In discussingthe current economic situation, participants stressed the need to: (i) reduce inflationas a major source of macroeconomic instability; (ii) accelerate the reform of the financial sector, includingthe privatization of the state  5 banks; (iii) strive for transparency andaccountability inthe budgetary process; (iv) reform the area of tax and customs, stepping up the fight against tax evasion and corruption; (v) improve the business climateand earn the confidence of foreign and domestic investors; (vi) promote the security of land access, rights, and tenure; and (vii)increase efforts at decentralization whichwould bringthe Government closer to the people, increase the participationof allMozambicans inthe Government, and provide a greater role for local communitiesand structures. 19. Followingthe donor representatives' statements, the government delegation responded by addressingthe main concerns raised. It was pointed out that the 1995 budget had been made public after submissionto Parliament and that budget items had been discussed with donors inthe budget working group meetingsinMaputo. The Governor of the Bank of Mozambique clarifiedthat reform of the financialsector had includethree phases: (a) bringing the legislationup to date; (b) completing the audits of the state banks; and (c) adjusting capital requirements for the Commercial(BCM) andthe Development (BPD) banks. He added that the privatization of BCM had started and hopefullywould be completed by end-1995, andthat BPD's privatization was expected by 1996. Minister Salomao concludedby sayingthat the Government sharedthe donor community's concerns on the issues of corruption, reduction in military spending,freedom of the press, customs reform, andthe need for coherent and integrated sector strategies and investment frameworks. 20. The Chair expressed her appreciationto the participants for the open andfrank discussion of important issues, noting that the issue of Mozambique's external debt remained to be addressed. It was agreed that a note on the debt situationwould be prepared by the Bank as an attachment to this report. Special Sessions 21. Specialsessionswere then held to discusstwo documents which had been prepared for the meeting. One was "The Poverty Reduction Strategy for Mozambique", presented by Ms. Yolanda Fortes from the Ministryof Planning and Finance, and the other was "Impedimentsto Industrial Sector Recovery", presented by Ms. Rocio Castro, from the Bank. 22. In her discussion of the poverty paper Ms. Fortes recalled a similarpaper prepared for the CG meeting in 1990. She noted that although there had been progress in implementingthe objectivesrecommended in that paper (i.e.,job creation, improvement in basic social services, safety netsfor the poor), much remainedto be accomplished. With the advent of peace the Government would have more opportunities to concentrate on the reduction of poverty, which can onlybe attained through economic growth. She added that as the poor inMozambique are more concentrated in the rural areas, the government poverty strategy emphasizedthe rural poor, although the urban poor will not be neglected. She mentioned the creation of aPoverty AlleviationUnit (UAP: Unidade de Alivioda Pobreza) within the Ministry of Finance, which would create a data base, propose and  6 coordinate a strategy for the alleviationof poverty, and advise the Government on this matter. 23. Ms. Ribe, from the World Bank noted that the strategy presented was built on lessons from experience sincethe 1990 CG meeting. She then highlightedthe main elements of the strategy, whichinclude improving rural livelihoods,developinghuman resources, reorienting the safety net, and policy formulation and monitoring. Finally, Ms. Ribe emphasizedthat the next step would be to define a specificaction plan and move forward towards implementation,with agriculture, health and education as priority sectors and focusing on developingan integrated approach inthose sectors. 24. A general discussion on poverty followed. It was reiterated that the reduction of poverty would depend on economic growth, especiallyinthe agricultural sector, and on an increase in health, education, and social services expenditures. Related issues were raised includingthe importance of secure land tenure, the role of women, decentralization, and participation of local governments. Ms. Fortes noted that the participation of women in education is still low. As a result, the Government would further emphasizerural education and extension programs for women. On the landtenure issue, she said that an inter-ministerialcommissionhad been formed to define policy inthat area. Government decentralizationplans and the need to continue NGO involvementat the grassroots level were also mentioned. 25. During the second specialsession, Ms. Castro presented the Bank paper on impedimentsto industrial recovery. She pointed out that the industrialsector in Mozambique has been decliningsteadilysince 1990, and highlightedfour main constraints to private sector development: (a) the existence of negative protection which hinders domestic competition against imports; (b) trade constraints on export firms,making it difficultfor them to compete ininternational markets; (c) the generallyunfavorable business environment that undermines firms' abilityto compete; and (d) the large share of state firmswhich have been slow in privatizing,thus delayingthe restructuring of half of the industrial output. 26. Minister Baloi acknowledgedthe merit of the paper prepared by the Bank in specificallyidentifyingthe constraints to industrialrecovery and in providing a good basis for government action with which to address those problems. With reference to the part of the report dealingwith the cashew sector issue, he saidthat it was his intention to hold a seminar in Maputo with all interested parties (the growers, the processors, the buyers) to discusswhat the Government's policy should be in this case. External Financing Requirements 27. Total external financingrequirements in 1995 are estimated to be about US1.1 billionAnnex IX). Ms. Castro, who made the statement on external financing requirements, pointed out that the levelof external assistance was expected to be lower than that required in 1994, which had been an exceptional year in terms of special  7 programs (demobilization,reintegration of soldiers,elections). At the end of the meeting, the Chair indicated that the external financingrequirements hadbeen met with donor pledges of US$780 millionand debt reliefof US$327 million. Half of the total expected debt reliefwould be secured with the eventual extension of the 1993 Paris Club Agreement through end-1995. Total donor financingwas pledged in the form of balance of payments support (30 percent) and food aid (16 percent), as well as investment finance and other programs (54 percent). ClosingRemarks 28. In his closing statement, the Prime Minister noted that the meeting had provided participants with the opportunity to engage in a constructive dialogue on Mozambique's Economic and Social Program and to discuss the role of the donor community in implementingthat program. He reaffirmedthat the 1995 program will emphasizethe consolidation of democracy and national reconciliation,transparency ingovemment, poverty reduction and improvement of basic services in health and education, enterprise restructuring and privatization, monetary and fiscal reforms. The Prime Minister thanked all of the participating delegations for their support, cooperation and valuable advice. 29. In the Chair's closing statement (Annex X), Ms. Marshall paid tribute to the breadth and highcaliber of the Government delegation. She noted that the Government had shown itself firmlyinstalled inthe "driver's seat". She congratulated all participants for the depth of their participation inthe discussions,their presentations and interventions, all of which contributed decisivelyto the meeting's success. She then reviewed the main themes of discussion at the meeting: recognizing major achievements;nurturing the democratic process; accelerating economic reforms; and strengthening the aid partnership. 30. While noting the achievementsof demobilization,resettlement of several million refugees and the elections over the last twelve months,Ms. Marshall emphasizedthat further actions were needed to consolidate peace and democracy. Free debate within the National Assembly,ensuring a role for the opposition, freedom of the press, decentralization, maintainingan independentjudiciary, and measures to improve governance allmerited the Government's attention. On the economic front, the consensus of the meetingwas that muchmore forceful action was needed. Reducing the fiscal deficit, increasingbudget transparency, tightening monetary policy and reducing inflation, privatizingthe state banks and the strategic service parastatals, reforming customs, liberalizingcashewmarketing and exports, and streamliningregulations to improve the business climatewere key reforms on which progress needed to be made. Implementing an effectivepoverty reduction strategy based on promoting growth, improving social services and restructuring safetynets; ensuringland tenure security;and improving statisticalinformationwere also priorities. Finally,Ms. Marshall noted that three actions -- designingand implementingintegrated sector programs; continuingthe donor/Government working groups; and the agreement that periodicmeetings between the Government and aid partners would be held in Maputo to discuss progress on the reform agenda -- were important for strengtheningthe aid partnership.  8 31. After expressingsatisfaction that the donor communityhad met the bulk of the financingrequirement for Mozambique for 1995, the Chair declared the meeting closed. l l~~~~~~~~~~~~~~~~~~-  9 Attachment MOZAMBIQUE EXTERNAL DEBT STRUCTURE 1. Mozambique's indebtednessincreased sharplyin the early 1980's while increasing domestic insecurity led to a collapseof export earnings and import capacity. In aggregate, the external debt rose from US$2.7 billionin 1985 to US$5.5 billion in 1994. At the end of 1994, Mozambique's external debt amounted therefore to an estimated 3.7 times its GDP and its scheduled debt service payments (without debt relief) would equal 119 percent of its exports of goods and services. In effect, the debt service ratio over the last five years or so would have exceeded exports by about 30 percent inthe absence of debt relief This places Mozambique as one of the most highlyindebted, low incomecountries in ihe world. 2. Mozambique's externaldebt is predominantlyfrom bilateral sources. Of the total stock of debt (US$5.5 millionat end-1994), 75.4 percent was owed to officialbilateral creditors (US$4.1 billion). Ofthis, US$2.1 billionwas owed to Paris Club creditors (mainlyFrance, Italy, Portugal, the UK, the USA and Japan) andUS$2 billionto other bilateral creditors, mainlythe Former SovietUnion (FSU), OPEC countries (Algeria, Iraq, Libya and Kuwait) and Brazil. About 41 percent of the bilateral debt consisted of arrears owed essentiallyto the FSU and other OPEC countries. Less than 23% of Mozambique's debt (US$1.2 billion) was owed to multilateralcreditors (US$714 millionto IDA, US$207 millionto the IMIFand US$319 millionto other multilateral creditors includingthe African Development Bank). Debt to privatecreditors accounted for less than 2 percent of total debt. COMPOSITIONOFDEBT(%) Other Private MultilateralCreditors Institutions 1.9% ParisClub IDA 9.6% Creditors 13.0% 39.1% Other Bilateral Creditors 36.4%  10 3. In 1994 bilateral debt accounted for 92 percent of the 1994 scheduled debt service with the remaining attributable to multilateral debt (7.8 percent, with IDA alone representing 1.3 percent) and to commercial debt (0.2 percent). 4. As a result of the reschedulingagreement with the Paris Clubcurrently in effect and the nonpaymentof the debt owed to the Former Soviet Union (FSU) and OPEC countries, actual debt service payments in 1994 amounted to 23.8 percent (US$ 94 million) of exports of goods and services. Of that total a little under 60 percent was paid to bilateral creditors and 40 percent to multilateralinstitutions, of which 13.5 percent to IDA, 33 percent to the IMF, and 53.5 percent to other multilaterals. 5. To improve the balance of payments, the Government is implementinga series of measures aimedat macroeconomic stabilization and export promotion, including importantly a drastic reform of the exchangerate regime. A more specificcomponent of the government's debt strategy has been debt rescheduling. However, while the 1984 and 1987 debt reschedulingswith the Paris Club improved Mozambique's external financial situation inthe short-term, payment obligationsinthe subsequent years exceeded the country's paymentcapacity and arrears accumulated in 1988 and 1989. Successive reschedulings on more favorableterms in 1990 and again in 1993 (on Toronto terms) gave the country much needed breathing space. Several donors provided debt relief inthe form of debt cancellation,and nearly all donors shifted their external assistance from loans to grants. As a result,the bilateraldebt owed to Paris Club creditors declinedby about US$540 millionfrom 1989to 1993 and arrears to this group were eliminated. 6. Mozambiquealso reduced its commercial debt arrears duringthe 1992-94 period. In 1991, a buy-backoperation financedentirely by donor grants (US$13 million), including a grant from the World Bank (US$10 million),eliminatedUS$204 millionor over 60 percent of Mozambique's commercial debt. In mid-1992, agreement was reached to rescheduleMozambique's commercialand officialdebt with Brazil, one of its large non-Paris Clubcreditors. However, little progress has been made inreaching an agreement concerningthe debt owed to the former Soviet Union and OPEC countries. Most of it is inarrears. A Mozambican team visited Russia in September 1994, but no agreement was concluded. Further rounds of discussionsare planned. 7. Despite the very real efforts made by the donor community andMozambique's much improvedpolicy stance, the debt problem remains. Scenarios for the future that assume reasonablyrapid growth of GDP (6.6 % p.a.) and no more than parallel import growth, combinedwith exports increasingvigorously at 13% p.a., still show large financing gaps over a projected 10 year period. Beyond the particular numbers involved, the exercise, andvariations thereon, simplylead to the conclusion that in the absence of unusually strong support from the internationalcommunity, only under highlyimplausible growth assumptionswould the country be able to extract itself from the morass of its external debt.  I1 8. It would appear, in summary,that for Mozambique to achieve sustained economic growth with external viabilityfour criticalelements are necessary: (i) strengthening macroeconomic policy to reduce internalimbalances and contain imports, particularly through restrictive credit policy;(ii) a policy environmentincluding exchangerate, export promotion, and customs reform that provides adequate incentivesfor exports and for efficientimport substitution; (iii) continuedhigh levels of fresh external financingon highly concessionalterms, and (iv) substantialdebt relief l  12 ANNEXES --  ANNEXI 13 Page 1of 1 Agenda Mozambique:EighthConsultativeGroupMeeting March14-15,1995 Tuesday,March 14 08:00-09:00 Registration 09:00-10:30 OpeningStatements OpeningStatementby theChair GovernmentStatement(Prime Minister) IMFStatement UNDPStatement 10:30-10:45 CoffeeBreak 10:45-12:30 GovernmentStrategyfora NewMozambique GovernmentPresentation GeneralDiscussion 12:30-14:00 Buffet Luncheon for all participantsatParisOffice 14:00-15:00 Continuationof Discussion 15:00-16:30 SpecialSession:"PovertyReductionStrategy" GovernmentPresentation Commentsby Bank 16:30-16:45 CoffeeBreak 16:45-18:15 SpecialSession:"Private SectorDevelopment" Bank Presentation Commentsby Government 18:15-19:00 ExternalFinancingRequirements GovernmentStatement Bank Statement CocktailReceptionhostedby Govemmentfor all participantsat ParisOffice Wednesday.March 15 08:30-10:30 Donor Statements 10:30-11:30 CoffeeBreak/WorkingDiscussions 11:30-11:45 Considerationof PressRelease 11:45-12:30 ClosingStatements Statementby Governmentof Mozambique StatementbytheChair 12:30p.m. Meetingadjourns l  14 ANNEXII Page1 of 14 March 15,1995:11.00 MOZAMBIQUE CONSULTATIVE GROUPMEETING Paris,March14-15,1995 Chair Ms.KatherineMarshall Director,SouthernAfricaDepartment(AFI) ListofParticipants AUSTRIA Mr. KonstantinHuber SeniorAdvisorfor Small ScaleEnterpriseDevelopment FederalChancellery BBAZIL Mr. Flavio H. Macieira Counsellor(Commercial) Embassyof Brazil, Paris CANADA Mr. Arthur Saper Head of Delegation DirectorGeneral Southem Africa Division Mr. George Saibel Counsellor (Development) CanadianHigh Commission,Harare DENlIARK Mr. PeterLysholt Hansen Head of Delegation Head of Department (SouthernAfrica) Ministry of Foreign Affairs Mr. BoJensen Head of Section Ministryof Foreign Affairs  MozambiqueConsultativeGrouopMewig, I I Paris.March14-15,1995 Page 2 of 14 15 DENMARK (cont'd) Mr. Johnny Flinto First Secretary The Royal Danish Embassy Maputo FINLAND Mr. Jorma Paukku Head of Delegation DeputyDirector-General Deparqmn for International DevelopmentCo-operation Ministryfor ForeignAffairs Mr. Karl Alanko ProgrammeOfficer Department forlntenational Development Co-operation Ministry for Foreign Affairs Mr. Jarmo Kuuttila ProgrammeOfficer Department for International DevelopmentCo-operation Ministry for Foreign Affairs Mr. Matti KUariainen Chargdd'Affaires Embassyof Finland,Maputo FRANCE M.Nacer Meddah Head of Delegation Adjoint au Chefdu BureauAfrique Subsaharienneet Ocean Indien (F2) Directiondu Tresor Ministere de l'Economie M. HaroldValentin Charge de Mission Ministere des Affaires Etrangeres M.Chastenet de Castaing Chefdu poste d'expansion 6conomique Maputo  MozamnbiqueConsultativeGrouopMeeting, ANNEX I1 Paris. March 14-15.1995 16 Page 3 of 14 FRANCE (cont'd) Mme. Danielle Robin Chargeede Missiongeographique DivisionFEC Ministerede laCooperation M. Jean-YvesClavel Directeur CaisseFran;aise de Developpement(CFD) M. PhilippeCizerou Chef deDivision CFD M. P. Lecrinier Chargede Mission Caisse Fran;aise de Developpement(CFD) GERIMANY Dr. HubertLinhart Headof Delegation DirectorGeneral,Africa Division FederalMinistry ofEconomic Cooperation & Development(BMZ) Ms. PetraHippman DeputvHead of Division,SouthernAfrica Africa Department BMZ Mr. Hans-JoachimDaerr Head, SouithernAfricaDepartment Ministryof Foreign Affairs Dr. RenatePollvogt Head of Section(Mozambique) DeutscheGesellschaftfur TechnischeZusammenarbeit(GTZ) Dr. WolfgangVoss Chief, SouthernAfricaDivision Kreditanstaltfur Wiederaufbau(KfW) T _  MozambiqueConsultativeGrouopMeeting, ANNEX II Paris,March14-15,1995 17 ~~~Page 14 __________________________________ 4 of IELAND Mr. John Hoy Head of Delegation Rural DevelopmentAdvisor Irish Aid Department of Foreign Affairs Ms. Maire Flanagan Third Secretary Development CooperationDivision ITALY Counsellor GianiucaCortese Head of Delegation Head, SouthernAfrica Desk DirectorateGeneral for DevelopmentCooperation Ministry of ForeignAffairs H.E. Mr. Ugo de Mohr Ambassador Embassy of Italy, Maputo Ms. DonatellaProcesi Expert, SouthernAfrica Desk Directorate Generalfor DevelopmentCooperation Ministry of Foreign Affairs Mr. A. Di Carluccio Attache Ministry of Treasury JAPAN Mr. Kenichiro Matsui Head of Delegation Special Assistant Japanese Embassy,France Mr. Takemichi Shirai Representative Japanese InternationalCooperationAgency(JICA) Paris Mr. Tomoko Kurata Assistant OverseasEconomic CooperationFund(OECF) Paris  MozambiqueConsultativeGrouop Meeting. ANNEX Paris. March 14-15, 1995 18 PageS5ofl14 THE NETHERLANDS Mr. Arie van der Wiel Head of Delegation Head, SouthernAfrica Desk DirectorateGeneral for InternationalCooperation Ministryof Foreign Affairs Mr. C.G.J.van Honk Counsellor Embassyof The Netherlands,Maputo Mr. Remco van Wijngaarden SouthernAfrica Desk DirectorateGeneral for PoliticalAffairs Ministry of Foreign Affairs Ms. P.W.M.Beelen-vanHorrik SouthernAfrica Desk DirectorateGeneral for DevelopmentCooperation Ministryof Foreign Affairs NQRWAY Mr. Haakon B. Hjeide Head of Delegation Director General Departmentof BilateralDevelopmentCooperation Royal Ministry of Foreign Affairs Mrs. EldbjorgHaug SeniorExecutive Officer Department of Bilateral DevelopmentCo-operation Royal Ministry of Foreign Affairs Mr. Arthur Sydnes Adviser,Africa Department Norwegian Agency for IntemationalDevelopment(NORAD) Mr. Tore W. Kiosterud First Secretary(Economic) RoyalNorwegian Embassy,Harare T  MozamnbiqueConsultativeGrouopMeeting, ANNEX2II ParisLMarch14-15,1995 19 Page6of14 pORTIUGAL Mr. Jose 1.Toscano Head of Delegation DeputyDirectorGeneral Departmentof Treasury Ministry of Finance Dr. Almeida Lima Minister-Counsellor Embassy of Portugal, Maputo Dr. Cristina Sampaio Head, Bilateral CooperationDivision InternationalCooperationServices Department of Treasury Dr.Carla AmorosoLopes Expert, MultilateralDepartment PortugueseCooperationInstitute Ministry of Foreign Affairs Ms. Helena Cordeiro Alternate ExecutiveDirector The World Bank SPAIN Mr. Inigo Fernandezde Mesa Head of Delegation SeniorAdvisor General Directorateof International Economy Ministry of Economy and Finance Ms. Maria Jose Hernando-Minguela Information& International RelationsDepartment CESCE (ExportAgency) Mr. F. Javier Jimenez'de Gregorio Deputy DirectorGeneralfor SouthernAfrica Spanish Agency for International Cooperation Ms. Vega BoutherlierMartinez SpanishAgency for International Cooperation  MozambiqueConsulmative Grouop Meeting, ANNEXI Paris. March 14.15, 1995 Page 7 of 14 20 SWFDEN H.E. Mr. Jan Cedergren Head of Delegation Ambassador InternationalDevelopmentCooperation Ministry of Foreign Affairs H.E. Mrs.BirgittaJohansson .mbassador Embassyof Sweden,Maputo Mr. Per Orneus First Secretary InternationalDevelopmentCooperation Ministry for ForeignAffairs Ms. AnnikaMagnusson Desk Officerfor Mozambique RegionalDepartmentfor SouthernAfrica Swedish InternationalDevelopmentAuthority(SIDA) Ms. Anne St6dberg Counsellor (DevelopmentCooperation) Embassyof Sweden,Maputo Ms. Helena Bouremialm First Secretary InternationalDevelopmentCooperation Ministry of Foreign Affairs SWITZERLAND Mrs. UrsulaFunk Head of Delegation Program Officer for Mozambique Africa & Latin America Section SwissDevelopmentCooperation(SDC) Federal Departmentof Foreign EconomicAffairs Mr. GeorgeBinker Head.CoordinationOffice SDC.Maputo  MozambiqueConsultativeGrouopMeeting, ANNEXII Paris.March14-15,1995 Page 8 of 14 21 UNITEDYINGDOM Mr. A. Coverdale Head of Delegation Head, British DevelopmentDivision in CentralAfrica Lilongwe H.E. Mr. Richard J.S. Edis Ambassador British Embassy,Maputo Mr. David Keeling Africa Department(South) Foreign & CommonwealthOffice UNITFD STATES Ms. Carol Peasley Head of Delegation Deputy AssistantAdministratorfor Africa U.S. Agency for International Development(USAID) H.E. Mr. Dennis Jett Ambassador United States Embassy,Maputo Mr. Roger Carlson Director, MozambiqueMission USAID,Maputo Ms. Margie Rauch Economist African Nations Department Department of the Treasury AFRCA FwIBOM-N ANK (AmB) Mr. Cheikh I. 7'll Head of Delegation Director Country Programme .iepartrnent(South) Mr. OladunjoyeFajana Princ;^l Economist Country ProgrammesDepartment I  Mozambique ConsultativeGrouopMeeting, ANNEX.I Paris.March14-15,1995 Page 9 of 14 ____ ____ ___ ___ ____ ___ ___22 EUROPEAN INVESTMENT BANK (EIB) Mr. Justin Loasby Head of Delegation Head SouthernAfrica &Indian Ocean Division Mr. ManuelFontes Country Officer SouthernAfrica Division Ms. ShireenKanji Economist Africa EconomicsDepartment EUROPEAN UNION (EU) Mr. GiovanniLivi Head of Delegation Director Eastern & SouthernAfrica Department Mr. AlexanderDijckmeester Head of SouthernAfricaDivision Mr. AlvaroNevesda Silva Head of EC Delegation Maputo Mr. Paul Malin Desk Officer for Mozambique DirectorateGeneralfor Development Mr. Jose Leandro Economist DepartmentVlll/3 Mr. Jeremy Stickings Expert - SocialDevelopment DepartmentVllI/AJl INTERNATIONAL FlINANCFCORPORATION (IFC) Mr. Takuro Kimura Head of Delegation InvestmentOfficer,Division2 Sub-SaharanAfrica Department  Mozaznbique ConsultativeGrouopMeeting. ANNEX I Paris.March 1415, 1995 23 Page 10 of 14 INTERNATIONALFINANCECORPORATION(IFC)(cont'd) Mr. SidneyEdelmann InvestmentOfficer,Division2 Sub-SaharanAfrica Department INTERNATIONAL FUND FOR AGRICULTURAL DEVFLOPMENT (TFAD) Mr. Erik Martens ProjectController, Mozambique INTERNATIONALMONETARYFIUD aME Mr. Sergio Pereira Leite DivisionChief SouthernAfrican11Division AfricanDepartment ORGANISATION FOR ECONOMICCO-OPERATION& DEVELOPMENT(OECD) Development Co-operationDirectorate Mr. RichardCarey Head of Delegation DeputyDirector Development Co-operationDirectorate Ms. Elisabeth Thioleron Administrator Aid ManagementDivision Development Co-operationDirectorate UNITED NATIONS CHILDREN'SFUND (UNICEF! Mr. BoudewynMohr Head of Delegation Senior Programme/PlanningOfficer Maputo Mr. Leonard deVos SeniorOfficer New York  Mozambique ConsultativeGrouopMeeting. FANNX 11 Paus.March14-15,1995 24Page 11 of 14 UNITED NATIONSDEVE-LOPMENTPROGRAMME(UNDPb-eddelegation Mr. Ericde Mul Head of Delegation Resident Representative,Maputo Ms. Petra Lantz Deputy ResidentRepresentative Ms. Daphne Casey Deputy Chief(Personnel) Deputy ResidentRepresentativeDesignate Mr. Carlos PicardoHorta Senior Economist,Mozambique Mr. Nikolaus Schultze UNESCO,Paris UNITEDNATIONS HIGHCOMMISSIONER REFUGEESUNCR) Mr. Omar Bakhet Head of Delegation DeputyDirector, ExternalRelations Mr. del Rio Court ResidentRepresentative,Maputo Mr. Peter de Clercq Senior DeskOfficer WOPRL FOOT)PROG-RAMME(WFPI Mr. Philip J. Clarke Country Director,Maputo MOZAMB[Q1E H.E. Dr. PascoalMocumbi Head of Delegation Prime Minister H.E Mr. TomazAugusto Salomao Minister of Finance H.E. Mr.Hipolito Z. Patricio Embassyof Mozambique,Washington  MozambiqueConsultative GrouopMeeing. ANNEX I Puis.March14-15.1995 25 Page 12 of 14 MOZAMRIQUE(cont'd) H.E. Dr.Oldemiro Baloi Ministerof Commerce, Industry& Tourism H.E. Mrs. LuisaDiogo Vice Minister of Plan & Finance H.E. Mrs.Frances Rodrigues ViceMinister of Foreign Affairs&Cooperation H.E. Dr. AfonsoMaleiane Governor Bank of Mozambique Mrs. Maria Virginia Videira National Directorof Plan Mr. Ricardo David NationalDirector of theTreasury Mr. ManuelChang National Directorof the Budget Mrs.Yolanda Fortes, Directorof Finance Mr. Carlos Taju Directorof Prime Minister's Cabinet Mr. SamuelCannor Administrator Bank of Mozambique Mr. SalvadorNamburete Director Ministry of Commerce Mr. Munguambe Director Ministryof Foreign Affairs & Cooperation Mr. Antonio Macheve Third Secretary Embassyof Mozambique,Paris  MozambiqueConsultative GrouopMeeting. 26 ANNEXII Paris. March 14-15, 1995 26 ANNEX Page 13 of 14 EXECUTIVE DIRECTOR Mr. Joaquim Carvalho Alternative ExecutiveDirector The World Bank WORLD BANK Ms. KatherineMarshall Chair Director, SouthernAfricaDepartment(AFI) Ms. PhyllisPomerantz Country OperationsManager,Mozambique Mr. Luis de Azcarate SeniorAdvisor Ms. Judith Edstrom - Operations Advisor Mr. Roger Grawe Division Chief, AFIHR Mr. Jean-PaulChausse Acting Division Chief.AFIAE Mr. RobertoChavez Resident Representative,Maputo Mr. Simon Bell Senior Financial Economist Resident Mission, Maputo Mrs. Helena Ribe Principal Poverty/HREconomist Mr. Rene Bonnel Senior Economist Ms. Rocio Castro Economist Ms. Carolina Machado Operations Analyst Mr. Arnold Sowa PSD Specialist  MozambiqueConsultative Grouop Meeting. ANNEX I Page 14 of 14 Paris. March 14-15, 1995 27 OBSERERS SOUTHAFRICA H.E. Mrs. B.J.M.Masekeia Head of Delegation Ambassador Embassyof South Africa, Paris Mr. David J. Wiid First Secretary Embassy of SouthAfrica, Paris Mr. Brian Bench Senior Advisor International FinancialAffairs International Development CooperationCommittee Department of Finance Ms. Elsa Dry Counsellor for Economic& MultilateralAffairs Embassy of SouthAfrica, Paris  28 ANNEXJII Page 1 of 6 MOZAMBIQUE CONSULTATIVE GROUP MEETING PARIS, MARCH 14-15, 1995 CHAIRMAN'S OPENING STATEMENT KATHERINE MARSHALL DIRECTOR, SOUTHERN AFRICA DEPARTMENT LadiesandGentlemen, I amdelightedto welcomeallofyoutothe eighthmeetingofthe Consultative GroupforMozambique.I wouldlikeparticularlyto extenda warmwelcometo the distinguishedGovernmentdelegation,ledbyHisExcellencythePrimeMinisterof Mozambique,andincludingtheMinisterof PlanningandFinance,AmbassadorPatricio, the MinisterofCommerce,IndustryandTourism,andtheGovernorofthe Bankof Mozambique.Thebreadthandhighcaliberofyourrepresentationhere,withso manyold andnewparticipants,is a measureofthe strengthofthispartnershipanditskeeninterest inMozambique'sdevelopment. Whenthe ConsultativeGrouplastmetformally,inDecember1993,my predecessorandcolleague,SteveDenning,tookspecialnoteofboththe historic dimensionsofthe momentfacingMozambiqueandthe vitalimportanceof solidifying peace. He alsounderscored,asdidallparticipants,theextraordinaryandoftenunique challengesalongMozambique'sfuturedevelopmentpath. Thechallengeputforwardwas to moveaheadto completethepeaceprocess,asa prerequisiteforlong-term development. Aswemeetnow,againat anothercrucialmomentinMozambique'shistory,we canlookwithsatisfactionto developmentssincewelastmet. Manyachievements,to whichallparticipantsherehavecontributed,nowliebehindus,andthe newGovernment isreadytopresentto ustheirnewdevelopmentvisionsandpriorities.Theseachievements fallinthepoliticaldomain,withnationalelectionsconcludedandnewinstitutionsand leadershipinplace,inpeacekeeping,withdemobilizationandmassivereturnofpeopleto a morenormallife,andineconomicandsocialrefomi,the centralfocusofourmeeting here. Thesearekeyelementsthathavesetthe stagefora newphaseinMozambique's history. Themagnitudeoftheseaccomplishments shouldnotbeunderestimated,andwe heartilycongratulatethe Govemmentforitsachievements.Forthemillionsof Mozambicanswhohaveexperiencedso muchhardship,peacebringsrenewedhope. Their hopeisthatnationalreconciliationwilllast,thatnomWallifewillreturnto ruralareas,and thattheycanhelpbuildthebasicsocialandeconomicinfrastructurethatwillspellfuture progress. Aswelookto thismeeting,inMarch1995,the centralchallengebeforeus allis firmlyanchoredinthe goalof improvinghumanwelfareandsecurity.Wehavetaken muchhopefromthe Government'sstrongpolicycommitmenttothenationalgoalof  29 ANNEX1II Page2 of e poverty reductionthrougheconomicand socialdevelopment. How to meetthisgoal is a formidablechallenge. I hopethat duringthis meetingof the ConsultativeGroupwe can have a far-reachingdiscussion,andif possible,reach agreement on the specificsteps that both the Govenmmentanddonors can take overthe next monthsto assistthe Mozambican people in improvingtheir economicand socialconditions. At this criticaljuncture, the keyissue is how to improve human welfare, and tackle the enormous problems of poverty facing Mozambique. The strategytherefore, is to focus on the imperativeof economicgrowth, because plainlyredistributivepolicies alone willoffer littlebenefitor hopeto of a better lifefor the two-thirdsof the population whom we must considerpoor by anyintemationalstandard. We willno doubtbe remindedoften of the socialindicatorsthat set Mozambiquein a specialifnot unique category of internationalpoverty. This helpsbringa sharp focus to the specificchallenge of investinginpeople, most directlythrough a focuson educationand health. These two facets of the challenge:poverty andpeople, andthe push to speedeconomicgrowth, are thus the focal themes, the basiccompassfor our meeting. The Government's objectivesare setout withparticular clarityin the documents prepared for this meeting,andthe participantshaveendorsed,withringingclarity,their essentialagreement on the underlyingstrategy andobjectives. The specificchallenge before us is thereforeto focus on HOW to translategoalsinto action,andthenceinto practicalachievements. What this means,for example,is that an immediatepriorityis to restore productivelivelihoodsinrural areas, becausethisis where the majorityof the poor are. As stressed by the Government,thisis to be achievedthrough (i)supportingactively the resettlementof householdsandthe economicreintegrationof demobilizedsoldiers;(ii) aggressiveand determinedeffortsto ensurethe provisionof basic socialservices;(iii) improved security inrural areas; and(iv) activesupport of agriculturalproduction, focusing on the rehabilitationof ruralroads andthe restoration of the marketingnetwork. Over the medium-term,poverty reductionwilldependon a more profound transformation of the agriculturalsector andon the rapid developmentof the nation's human resources. In agriculture,the issueis howto movefrom subsistenceto a more commercialorientation. Thiswillrequirereformsin pricingand marketing-- particularly for cashewand other export crops -- inlandtenure, andin agriculturalsupport services. The Government has indicatedits interestinworkingtogether withits aid partnersin establishinga comprehensivepolicyframeworkandmedium-terminvestmentprogram to revitalizethe agriculturesector. I hopethat togetherwe can discusswaysto facilitatethis process. Regardingthe developmentof humanresources,programsto restore at least the most basic servicescannot be postponedin Mozambique. The first step- increasing current budgetary allocationsfor the socialsectors-- has been taken. Thisnow needsto be followed by a restructuringof the investmentbudget to ensurethat priorityprograms are adequately funded. Creativeeffortsto enhancequalityandto harnessthe energiesof all interested partners are essential. The intensecollaborationamongthe manyinstitutions I I _ __  30 ANNEX II Page 3 of 6 involvedinlaunchinga new, sector-wideprogramfor the healthsector is a very encouragingdevelopment. The poverty challenge,andthe legacyof delayeddevelopmentfor Mozambique both callclearlyfor an aggressivegrowthpolicy. Unlesswe allsucceed inthis effort, it will simplybe impossibleto ensurethe productiveemploymentopportunitiesneeded to improve welfareover the long-term. Already,improvedsecurityandthe resettlement of households in rural areas are resultinginconcreteincreasesineconomicactivity. But these need to be sustainedoverthe longer-termthrough a solidandcrediblepolicy frameworkaimedat growth. Someof the keycomponentsof this frameworkare: (i) First and foremostcomesmacroeconomicstability. While Mozambiquehasmade progressin establishingthe necessary conditionsfor amarketeconomy,manydestabilizingforces persist, as evidencedby a continuinghighlevelof inflation. Because the efficiencyof the fiscaland monetaryinstrumentsare closely linked to structuralreforms,macroeconomicstabilizationwillhave to be pursuedin the contextof fiscal,enterpriseand financialsector reform. (ii) A secondimperativeis to set clearprioritiesfor publicexpenditure. to ensurethe rehabilitationof the keyeconomicand social infrastructureneededfor the recoveryof production andtrade. (iii) A third challengeis to ensurean enablingpolicy environmentfor growth, whichwouldinclude(i) reformingthe systemof incentives related to customspolicyandtaxation;(ii) acceleratingfinancial sector reform;(iii)speedingup the process of privatizationfor large state enterprises;and(iv)stimulatingbothlocal andforeign private investment; (iv) A finalcomponentof a pro-growth policyframeworkwould be exportpromotion throughthe establishmentof a neutral trade regimefor exporters,whichwould allowaccess to inputsand exports at world marketprices. We willhave an opportunity to discusssomeof thesethemes in greater detail this afternoon ina specialsessionon privatesectordevelopmentand impedimentsto industrial recovery. The gamut of issues facingMozambique,andthus beforeits partners, is long, and we also willneed a keen sense of priorityas we pursue our discussions. I would suggest, nonetheless,that as we focus on the centralthemesof povertyand humandevelopment, and economicgrowth strategies,we bear inmindtwo central andrelated themes: the imperativeof capacity development,andthe vital importanceof information.  31 ANN-EXII Page 4 of 6 Mozambiquefaces momentouschallengesinbuildinginstitutionsthat can achievethe objectivesdefined. Ajudicious blend of realism,creativity,determinationto solve problems,focus on priorities,and carefulplanningof next step are vitallyneeded.As we focus on the issuesof how, we needto keepthe issuesof institutionaldevelopmentand capacityneedsverymuch inmind. Second,the themesof information,transparency,and accountabilitywil emergeoftenhere, andthey arelinked. Informationoffersthe compass to guide our work, the threads that allowus to linkissues(povertyto environment,budget to schoolenrollmenttrends, trainingto employment),andtojudge what we have achieved. It is alsovitalto the commonunderstandingof the challengesandthe objectives of developmentstrategies,insideandoutside Government. It maybeuseful for us all to focus on both the what:what informationis needs,andthe how: how can it best be obtainedand disseminated? Turning specificallyto this meetingandto the challengesfacingthe Consultative Group for Mozambique,I would suggest that we set ourselvesfour objectives: * First, as we reviewthe strategystatementsand issues,and considerthe plansput forwardby the Govermnent,we willhave an opportunityto comment on andreach abetter understandingof objectives,priorities,constraints, and specifictargets andlandmarksalongthe way.Thisbroad and common understandingof the Govermnent's visionandprogramis an essentialaim of our meeting. The dual focus on povertyand growth issues shouldoffer beaconsthat willallow us to translatethe broad goalsto more specificactions. I would therefore encourageall ofus to focusour discussionon identifyingthe highestpriority actions that couldfeasiblybe implementedover the course of 1995concerninggovernance,economicdevelopmentandsocial policies. * Second, we will aim to emergewitha clearpictureof the financing needs and likely financing availablefor 1995,set in the context of longer term programsand projections. Mozambique'sfinancingneeds are extraordinary, and they are particularlycomplex,andeffortsto give clearindicationsof plans and issuesfor decision-makingwillbeusefulfor us all. * Third, we should focus attentionon aid modalities:the howbeyond the how much. Aswe have discussedon variousoccasions,there is a need to find new ways to delivermore efficientlythe substantialamounts of external assistancestillneeded by Mozambique. Thesenew mechanismsincludethe important andambitiousgoal of workingtogetherunder a coherentprogram for sector development(the "integratedsector approach"), withthe living examplesof workin the transport andhealthsectors. I hopethat through our discussions,we willidentifyadditionalsteps to improvethe qualityand efficiencyof externalassistance. Managementof technicalassistancesupport is anothervital issue on the agenda.  32 ANNEXi Page5of6 Fourth,I hopethatwecanconsidermorebroadlythenatureof our partnership,andspecificallytherolethatyoulookto fortheConsultative Group.Preparationsforthismeetinghaveentaileda longperiodof active collaboration,overmanymonths,involvingmanyparticipantshere.This collaborationismostvividlyillustratedbythe spiritof partnershipthat has characterizedthedonors'workinggroupsinMaputo. Thismeetingisthusthe culmnination of a longprocess,morethananeventperse. TheGovernment, andI amsure,allofus, hopethatthesamecollaborativeprocesswillextendto the implementation ofthe agreedpolicyagenda.I wouldwelcomesuggestions onhowto improveandexpandthe existingmechanismsofcooperationand collaboration. Onthetenorandtoneofthemeeting,Ibelieveallparticipantswillneedlittle urgingtopursuediscussionsinthefrank,openandpositivetraditionthatthisGrouphas longestablished,andwhichwereexemplified inthe richdiscussionwewereprivilegedto haveyesterdayevening. I wouldliketo turnbrieflytothe practicalissuesoftheagendaforthemeeting andlogisticarrangements: * Wewillbeginthediscussionwitha statementfromHisExcellencythePrime Minister.Thiswillbefollowedbycommentsonthe economicsituationbyMr. LeiteoftheIMFanda statementbytheUTNDP. * Followinga coffeebreak,MinisterSalomaowillgive usa presentationof the Government'seconomicanddevelopmentstrategy,andwewillthenopen meetingfora plenarydiscussionoftheseissues. * We wouldlikethen to inviteyouto aninformallunch, outsidethisroom, beginningat 12:30. Againthisyear,weplantodesignatesometablesfor discussionoftopicsof particularinterestto participants.Pleaseletmembersof theBankdelegationknow,duringthe coffeebreak,ifyouhavesuggestions. Tentatively,the intentisto organizethesearoundthethemesof agricultural developmentandprojectimplementation (broadly),governanceissues,poverty reduction,fiscalpolicy,andprivatesectordevelopment.Sometableswillbe reservedforgeneraldiscussion. * Wewillcontinueourgeneraldiscussionof economicandsocialdevelopment afterlunch. * Wewillthenturnto discussionontwospecialtopics,takinga coffeebreakat anappropriatemoment.Wewillbeginthissegmentwitha Government presentationof its"PovertyReductionStrategy"followedbycommentsbythe WorldBank. Followinga briefdiscussion,wewillturnto a secondsessionon  33 ANNEXJm Page 6 of 6 "Impedimentsto IndustrialRecovery"with a presentationby the World Bank, commentsby the Government,and a generaldiscussion. * At about 6:00 p.m.,we willturnto the issuesaroundfinancingrequirements, opening with a statementfromHisExcellencyGovernor Maleiane,followedby Ms. Rocio Castro of the WorldBank. * I would liketo confirmthat the MozambicanGovernmenthas kindlyinvitedus to a cocktail receptiontonight on the Bankpremises,beginningat 7:30 p.m. * Tomorrow morning(Wednesday),we willconveneat 8:30, moving immediatelyto statementson the externalfinancingby participants.After coffee, we willturn to a summaryof the financingposition andto the draft of our press statement. Afterclosingremarks,we needto concludethe meeting at 12:30p.m. If these arrangementsare satisfactoryto you, I would propose thatwe launchthe meetingby callingon the PrimeMinisterfor his statement.  Page 1 of 5 RepublicadeMotambique 8TH CG MEETING S;TATE:ME:NT BY THE: PR IME: MINI STE:R DR. PASCOALI MOCUMB I PARIS, MARCH 1995 l l  35 ANNEXIVY 13 March 17:50 Page 2 of 5 MS. CHAIR, DISTINGUISHED REPRESENTATIVES OF THE DONOR COMMUNITY, LADIES AND GENTLEMEN, On behalf of my Government, and on my own behalf, I would like to take this opportunity to welcome you to this important meeting. I would also like to express the great appreciation of the Mozambican people and its government, for the comprehension and assistance it has received from the international community in recent years. The last Consultative Group meeting was held in December 1993. At that time, the Government was facing great challenges: - to ensure the continuity of the peace process so that elections could take place on the planned dates; and * to pursue the implementation of the Economic and Social Rehabilitation Programme. General multiparty elections have been held successfully, a fact closely linked to the substantial bilateral and multilateral assistance provided by the international community. Some 85 to 90% of the electorate participated in the elections and the results were accepted by all the political forces which took part. The elected President of the Republic and the multiparty Assembly have taken office and the democratic institutions have started to function. We have successfully concluded the demobilization of about 80,000 men and the new non-party army has been formed. The whole process illustrated the maturity of the Mozambican people, a fact which imbues us with the necessary confidence to continue to fight for a better future for all. In this regard, we would also like to reiterate our appreciation of the role played by the United Nations, through ONUMUZ, in the successful outcome - the participation and democratization of Mozambique - of which we can all be proud. LADIES AND GENTLEMEN The elections marked an unparalleled moment, when the Mozambican people reaffirmed their commitment to peace, stability and national reconciliation.  36 ANNEXIV Page3 of 5 Duly recognizedby the internationalcommunityas free anddemocratic,theseelectionsresulted in a multipartyAssemblyand the new Government,which we have the honor to represent for the firsttime in this meeting. It is a Governmentwith the priority taskof preservingpeace andconsolidatingnational unity, gettingthe country's life backto normal,and creatingthe foundationsfor economicand social development. The transformationswhich have takenplace in the country withthe advent of peace, together with the favourableconditionsestablishedin the region by the democraticprocesses in South Africa and Malawi,enableus to facethe futurewith optimism. LADIESAND GENTLEMEN, Immediatelyafter the formationof the Government,it concentratedon preparing its five-year programme,whichwassubmittedfor approvalbythe Assemblyof theRepublic. The Economic and Social Plan and the State Budgetfor 1995, now awaitingAssemblyapproval, were also prepared. The Government's economic agenda for 1995 also includes, among other matters, special attentionto the mechanismsfor facilitatinga favourableclimatefor attractingand developing nationaland foreignprivate investment. I would also like to provide the ConsultativeGroup with a generaloutline of the immediate priorities in the Governmentprogramme. CONSOLIDATIONOF PEACE, DEMOCRACYAND NATIONALRECONCILIATION The new legaland institutionalframeworkinthe countryis characterisedby politicalpluralism, and hence complete freedom of expressionfor all citizens and civil societyin general. The resultingpoliticaldialoguemustbe preservedanddeveloped. In this respect, the Governmenthas takenthe followingmeasures: * to includein the State Budgetproposal,financial resourcesfor the functioningof the Assemblyof the Republicandto supportthe politicalpartieswhichhave parliamentary seats; until the approvalof the State Budget,to continueto supportthe currentexpenditureof Renamowhichresult fromthe GeneralPeace Agreement; * to financeimprovementsintheeffectivenessof thejudicialsystem,namelythecourtsand the Attorney General's Office, institutionswhich guaranteethe rights of citizens and control administrativeacts; to define the statusand establishprivilegesfor the leaderof Renamo; - to createthe PresidentialConsultativeForum, withthe aim of soundingoutthe opinions of personalitiesfrom varioussectorsin society.  ANNEXIV Page 4 of 5 These are some of the measures aimed at reconciliation and strengthening national unity. STRENGTHENING GOVERNANCE The Government has already introduced significant alterations into the organization, competence, and functioning of the Public Administration bodies, in order to improve their efficiency and effectiveness. The Government is determined to fight corruption. In this regard, the following measures are being taken: * the institutionalization of procedures and operating criteria which ensure greater transparency and effectiveness in administrative activity; * the professionalization of the civil service, such that technico-professional merit and the rigorous observance of ethical and professional rules are demanded of civil servants; * heightened morality within society and among public administration officials, inculcating in the citizen and the civil servant a culture of respect for and rigorous observance of the law; * the decentralization of administration, within the context of local government reform. On the basis of the Municipalities Law, already approved by the Assembly of the Republic, local authorities will have administrative, financial and patrimonial authority; * the creation of a permanent institution for electoral administration, so as to ensure that local elections are held in 1996; * approval of the Code of Conduct for Public Officials and improvements in the procedures which guarantee independent monitoring of the property declarations by senior State leaders. POVERTY REDUCTION The Government will continue the programme for the resettlement and reintegration of refugees, displaced and demobilized populations in their home areas or in areas of their choice. With the support of the donor community, we shall continue to give priority to the provision of tools and seeds in order to reactivate production in rural areas and rehabilitate the commercial network, including improvements in access routes. HEALTH AND EDUCATION The Government is promoting improvements in basic health and education services, particularly in rural areas. We intend to ensure immediate improvements in the basic conditions for the provision of health services, and to ensure that more school-age children can have access to basic education.  38 ANNEXIV Page5 of5 The Governmentconsidershealth and educationto be essentialfor the developmentof human capital, a determiningfactor in any economicand socialdevelopmentproject. In this respect, and given the scarce budgetaryresources,the Governmentas proposed to the Assemblyof Republicthat military expenditurebe reduced, in order to free resources for the social sectors. REGIONALCOOPERATION Giventhe country'sgeographicallocationanditseconomicpotential,andalsoitsresponsibilities inthe region,theGovernmentshallremaincommittedto thedevelopmentof regionalcooperation and integrationwithinSouthernAfrica DevelopmentCommunity(SADC). We shallcontinueto promotemutuallyadvantageouseconomicrelationswiththe countriesof the region, based on complementarityof interests. The Government will attribute particular importancetotherail-portcorridorsandtotakingadvantageofenergyresources,namely,Cahora Bassahydroelectricpower and Pandegas. LADIESAND GENTLEMEN The Republicof Mozambiqueis still a youngcountry,andits state andnon-stateinstitutionsare goingthrougha phaseof reorganizationand development. The successeswe achievedin the applicationof the GeneralPeace Agreementbenefitted from the contributionof the internationalcommunity,whichmade availablesubstantialresources. Our hopefor thisConsultativeGroup is that the commitmentdemonstratedby-theinternational communitythroughoutthese years, in particular by the governmentsand institutionswhich represent, willbe maintainedduringthe consolidationof democracyandthe relaunchingof our country's economy. Thankyou. r  39 ANNEX V Page1of4 Statementof the Staff Representative of the InternationalMonetary Fund at the MozambiqueConsultativeGroup Meeting Paris. March 13-15. 1995 In lookingback at early Fund documentson Mozambique'sinitial structuraladjustmentprogram, the 1987-89 EconomicRehabilitationProgram, I was reminded that its overallobjectiveswere to "(a) reverse the decline in production; (b) curtaildomesticfinancialimbalances;and (c) establish the conditionsfor more rapid and more efficienteconomic growth in the medium and longer term when the securitysituationand other exogenous constraintshave eased.' Despiteimpressiveadjustmentefforts and economic recoverysince 1987, these objectivesremain relevanttoday. Under peace, it shouldbe possible for Mozambiqueto make visible andaccelerated progresstoward these goals now. This is why this ConsultativeGroup meeting is not "businessas usual"but a specialoccasion for Mozambique and its developmentpartners to renew their commitmentto high-qualitygrowth in a stablemacroeconomicenvironment. Let me thereforeprovidea brief overviewof macroeconomicdevelopments in 1994 and of the program for 1995 discussedbetween the authoritiesand our mission last month. As you know, the program for 1994,supportedby an ESAF arrangement,sought to reduce financialimbalancesunder rather exceptionalcircumstances. These includedmajor transitionalexpenditures for demobilization,resettlementand elections,as well as the presence of a large U.N. peacekeepingforce. Despitegood-faithefforts, program implementationwas not altogethersuccessful,and by Septemberit was evidentthat the key quantitativefinancialtargetshad been missed. In response,the authoritiestightenedfinancialpolicies late in the year, notablyby imposing sanctionson overextendedbanks. As a result, credit expansionwas brought closer to target by year-end,and the net foreign assets target wasobserved. It should also be noted that all structural benchmarksunder the program exceptone--the quest for timely monetary statistics--weremet during the year. Still, and despite containmentof currentexpenditures,the budget deficitturned out larger than sought--ata level, 30 percentof GDP, that-underscoresthe extent of aid-dependence--and governmentrepaymentto the bankingsystem fell below target. Monetary expansionreached 49 percent,as againsta targeted40 percent. Although economic recoverycontinued,with GDP growingby an estimated5.4 percent, consumerprices in Maputo increasedby 71 percentin 1994, far in excess of the 30 percent sought. The 1995 program,which is still subjectto acceptanceby Fund managementand approvalby the ExecutiveBoard,would involvean extension of the ongoingESAF arrangementthroughthe end of 1995. In the interestof transparencyand of informingthe participantsin this meeting, the Governmenthas made public the substanceof its program, as well as the draft 1995 budget, and has circulatedto you a policy matrix that summarizes the measures envisaged. The increasein transparencyand the invitationto -~ -  40 ANNEX V Page2 of4 public debate of the budget are, in themselves,a welcome break with the past. The key objectivesof the 1995 programare a sharp reduction in the inflationrate, enhancedsupport for educationand health, and a reduction in Mozambique'sdependenceon foreignassistance. The 1995 targetsfor inflationand growth are 24 percent and 4 percent,respectively. The program entails (i) a major reductionin the overall governmentdeficit before grants; (ii) a tight monetarypolicy stance backed by penaltieson financialinstitutionsthat are found to be in noncompliancewith sector regulations;(iii) the continuationof a market-determinedexchangerate policy, coupledwith a strengtheningof the net foreign asset position;and (iv) closer monitoringof foreignaid flows and uses and of counterpart funds generation. Structuralmeasures focus on privatization,public administrationand financialsector reforms,export promotion,and greater transparencyand accountabilityin public matters. Net foreignassets of the banking systemare targetedto increaseby at least US$40 million in 1995, and net domesticassets by no more than 24 percent, with broadmoney expansiontargetedat 26.5 percent, or slightly above the projected inflationrate. Within the overall credit limit, net credit outstandingto Governmentwill be reducedby 3 percentagepoints of GDP, allowingcredit to the economy to expandat a rate substantiallyin excess of nominal GDPgrowth. In additionto the phasing out of special programs related to demobilizationand election,the reductionin the budget deficit--by8 percentagepoints of GDP--willbe accomplishedmostly by cuttingmilitary expenditures,prioritizinginvestmentoutlays, restoring taxes on petroleumproducts and improvingcustomsrevenues,throughmajor customs reformsthat have been agreedwith an IMF technicalassistance mission. The Governmenthas undertaken to implementa number of measures early in the year. These actions includeincreasesin prices of petroleum products,energy tariffs and rents on state-ownedproperty;hiring of expertsto help the Treasury monitorcounterpartfund generation;abrogation of the decree permittingad hoc tariff exemptions;strict enforcementof bank regulations;linking the interestrates on all Bank of Mozambique credit to the rediscountrate; and ensuringthe timely approval and disseminationof the 1995 budget. A timetablefor the introductionof a value added tax, basedon the recommendationsof a recent IMF technical assistancemission has also been agreed on. Of particular importanceto donors supportingthe investmentprogram is the Government'sintentionto reassess the existing investmentprogram with a view to prioritizingall projects and identifyingthe domestic resources availablefor each project. Present and futurerecurrentexpenditures associatedwith each project will also be clearly identified. Both these recurrentcosts and the type of foreign financing(grantsor concessional loans) availablewill be taken into accountin the selectionprocess. We  41 ANNEX V Page3 of4 would expect all projectsto come under scrutiny in this process,and we hope that all parties will work cooperativelyto establisha more focused, efficient,and affordableinvestmentprogram. I am very impressedwith the seriousnessand determinationthat the new Governmenthas shown in putting togetherthis program, and I am encouraged by the measures alreadytaken. I believe that this is a strong program that deservesyour support. But the programrequiresforeign assistanceto be doable. To withhold assistanceuntil the program proves to be a success is to ensure that it will fail. Foreignassistance,to be really useful,needs to have a degree of predictabilityand continuity;it shouldbe timely and supportive in achievingthe prioritiesof the program; it should seek to minimize the short-termburden of the measures that are being taken; and it shouldbe transparent. This last point, transparency,requiresthe compilationof meaningful fiscal and balance of payments statistics,and is critical to a better understandingof economicdevelopmentsin Mozambique. The Mozambican authoritieshave been trying for some time to set up and maintain a database on foreign aid inflowsand uses. Enhancementsof this databaseare needed to permit the Governmentto reportwith more transparencyand accuracyon the breakdownbetween investmentand currentexpendituresand on public expendituresby sector. To carry out these improvements,the Government will need the collaborationof the donor communityin regularlyproviding detailed informationon foreignaid flows and uses. Please make your best effortsto collaborate. It is important. Another matter associatedwith foreignassistancethat I would like to mention is counterpartfunds,which play an importantrole in the financing of the budget deficit. With the help of the EuropeanUnion, the Government is reinforcingits proceduresto monitor and account for these resources. This is a crucial initiative. We encouragedonors not to earmark counterpartfunds, as earmarkingis inefficient. The desire to ensure local currency funding for one's particularproject is understandable,but it denies the Government the ability--andresponsibility--forsetting priorities,which it ultimatelymust retain. Also, shiftingforeign assistance from uses that generatecounterpartfunds, such as import-support facilities,to other uses--aproblem faced by the 1994 program--oftenhas seriousmacroeconomicimplications,and shouldbe avoided in the middle of an adjustmentprogram. The financialrequirementsof the 1995 programare clearly spelledout in the documentscirculatedby the Government. The currentaccountdeficit plus amortizationis expectedto declineby about US$80 million in 1995, a step toward reducingMozambique'sfinancingneeds. Except for the phasing out of the specialprograms,the amountsthat have been assumed for official transfersand concessionalloans are broadly in line with donors'past contributionsto Mozambique'sdevelopmentefforts. The remainingfinancing gap could be coveredby the extensionof the 1993 Paris Club Agreement  ANNEXY 42 Page4of4 throughend-1995. As I mentionedbefore,Mozambiquestill faces a heavy debt serviceburden. Although futurereschedulingunder 'Naplesterms' would help reduce this burden,additionaldebt forgivenesswould facilitate the achievementof externalviabilityby Mozambique. I would like to end by emphasizingthe needto enhanceeconomic and social statisticsin Mozambique. The Governmentis fully aware of the importanceof adequate statisticsfor policy making and intends to make substantialprogress in this area. I hope the donor communitywill provide strong support to this effort,throughnot only technicalassistancebut also financialsupport for field surveys in criticalareas. Key priorities includenational accounts,price, trade, monetary,and fiscal statistics,as well as social indicators. Without a major effort in this area, the Governmentwill continue to be navigatingwithouta compass, in still- dangerousseas, as it sets course for sustainableeconomic growth and social equity.  43 ANNEXYV CONSULTATIVEGROUP MEETING FOR MOZAMIBIQUE Page1of9 Paris, March14-15, 1995 STATEMENT by Erick de Mul ResidentRepresentative,Mozambique United Nations DevelopmentProgramme 1. Mr. Chairman, Honorable Ministers, DistinguishedMembers of the Mozambican Delegation,Ladiesand Gentlemen:it is a greatpleasurefor me to representthe Directorof the RegionalBureaufor AfricaandparticipateinthisConsultativeGroupMeetingfor Mozambique. I would also like to commendthe Governmentof Mozambiqueand the World Bank for the insightful documentationprepared for this meeting. Mr. Chairman, allow me to seize this opportunity to highlight some UNDP's views on the requirementsof the present stage of Mozambique'sdevelopment. The Challenes Ahead 2. Mr. Chairman, Mozambiqueis to be praisedfor the successfulimplementationof the General Peace Agreement, which culminated with the holding of free and fair multi-party elections. Nonetheless, the short- and longer-termchallenges facing the country are still formidable. 3. The future effectivenessof the Government'seconomicpolicies will depend first and foremostonthe country'sabilitytoensuretheprevalenceof a stable,predictableand supportive climatefromthe political,socialand macroeconomicstandpoints.Suchclimateis a prerequisite for restoringproductiveactivities,attractingforeigninvestment,exploitingthe country's natural resources, and generallyprovidingthe basisfor muchneededhighereconomicgrowth. 4. Conversely,rapid, sustainedand equitableeconomicgrowthbasedon the privatesector, agriculture, labor-intensiveactivities and exports is in turn essential forreducing poverty, strengtheningthe market-driveneconomy,regainingexternalviability,andgenerallyestablishing a solidfoundationfor reconstruction,humandevelopmentand the consolidationof democracy. 5. Furthermore,givenMozambique'slimiteddomesticmarket,itsnegativedomesticsavings and enormous current account deficit before grants, another obvious inference is that reconstruction, growth and balance-of-paymentsviabilitywill have to rely significantlyon export-orientedindustries,foreigndirectinvestmentand, for yearsto come,on sizeableinflows of developmentaid. 6. However, the magnitudeand diversity of the requirementsfor managingthe changes  44 ANNEX VI Page 2 of 9 associatedwith such a complex developmentprocess contrastsharply with the Government's overstretchedand weakeningmanagementand implementationcapacities.The difficultiesare exacerbatedby a situationof structuraland widespreadabsolutepoverty, afflicting more than 60 per centof the populationand exhibitingsomeof the lowesthumandevelopmentindicatores in Sub-SaharanAfrica, as well as by other deep-rootedstructuralproblems that can only be overcomein the long-run. In particular,there is an acute scarcityof sldlledhuman resources in all sectors and at all levels,which maywell representthe major bottleneckto sustainable growth, developmentand capacitybuilding;the moderndomesticprivate sector is embryonic and indigenousentrepreneurialcapacityis scarce, lackingcapitaland managerialexpertise;and the country is extremely dependenton extemalaid, whichamountsto around 70 per cent of GDP. Moreover,the combinationof a limitedsupplyof skilledlabor witha weakGovernment capacityhas given rise to massiveinflowsof technicalassistance,accountingfor an averageof 25 per cent of total officialdevelopmentaid. 7. The hugeand mountingdebtburden,alreadyat nearly4 timesGDP, is another serious handicap on the road to extemal viabilityand development,for it diverts to debt service a substantialandincreasingamountof themeagerforeignexchangeresourcesgeneratedbyexports of goods and services. At present, debt service before debt relief stands at about 1.5 times exportearnings,whichis clearlyuntenable.It followsthatthedrasticreductionof the negotiable debt on the most favorable terms available and the restructuring of loan portfolios with intemationalfinancinginstitutionsoughtto be addressedmore aggressively. 8. Mr. Chairman, I wouldnow like to briefly elaborateon a numberof issues that arise fromthe precedingintroductoryremarks,namely:consolidationof thedemocraticprocess;good governanceandpublicsectormanagement;economicpolicyand sustainablehumandevelopment; aid coordinationand management;andtechnicalcooperationand capacitybuildingpolicy. Consolidation of the Democratic Process 9. Confidenceof privateinvestorsand othereconomicagentsto stimulateeconomicgrowth requires politicaland socialstabilityandthe respect for the ruleof law. The donorcommunity is lookinginto ways to help Mozambiquestrengthenits new-borndemocracyand preserve a climate of internal peace and security. These are key elements for deepening national reconciliationand sustainingthe rehabilitationand developmentefforts by the civil societyat large. We, therefore,stronglyendorsetheemergingand wide-rangingdonorinitiativesdirected toward democraticinstitution-building,whichenvisagesupportto such importantareas as the Assemblyof the Republic,a permanentelectoralstructure,the 1996localgovernmentelections, the civilianpolice, humanand civilrightsprotection,independentmedia,and civic education, especially at the grassroots level. The donor communityhas asked UNDP to coordinate programmingand resource mobilizationin this broad area.  45 ANNEXVI GoodGovernanceand PublicSectorManagement Page3 of 9 10. Mr. Chairman, recently,there havebeen encouragingsignsthat the Governmenthas a renewedcommitmentto greater transparencyand accountabilityin public finance and public sectormanagement.In preparationfor thisConsultativeGroupMeeting,the Governmenthasmet with donors since September 1994under the Bank's leadershipin two working groups, one dealing with Budget process and analysis, and another with civil service reform, local governmentreform, and ways to clampdown onofficialor bureaucraticcorruption. 11. These mechanismsfor local consultationsare especiallyimportantin a environmentof limiteddomesticresourcesandwhereover50per centof totalbudgetexpenditureand morethan 70 per cent of public investmentare directly financedby externalaid. The donor community legitimatelywants to be assured thatdevelopmentaid does contributeto developmentbybeing efficientlyallocated to the stated Governmentpriorities,and in particular that the health and educationsectorsreceivea rising shareof budgetaryresources. 12. As this principlewillincreasinglytendto becomea conditionfor furtherbudgetaryaid, local consultationsbetween Governmentand donors should be followed up on the basis of concreteactionplansandrealisticperformancebenchmarks,tobeestablishedbythe Government in cooperationwith its developmentpartners.Areasof specialconcern for the donors that are also tied to the need for curbingcorruptionincludecustomsadministrationreform, rigorous managementof counterpartfunds, revenuecollection,and monitoringof Budgetexecution. 13. Mr. Chairman, we believe that the role of the Governmentin Mozambique,which alreadyunderwent substantivetransformation,oughtto be further readjustedin order for it to respondmore effectivelyto the demandsassociatedwiththe managementof a peace, market- basedeconomyand of a democraticand decentralizedstate.The Governmentshouldgradually confine its role to that of guarantor of democraticpublic order; regulator of the economic system;promoterof development;providerof basiceconomicinfrastructureand socialservices; and responsibleand rigorous managerof publicfinancesand external aid. 14. Nonetheless,it is also apparent that Mozambiqueneeds a strong Government,albeit redefinedand streamlined,if the country is to be capableof effectinga smoothtransitionto a full marketeconomy, decentralizedstate, and democraticsociety.It is, therefore, of special concem to witnessthe decliningcapacityof the Governmentto managethe multipleand far- reaching economic,public sector, decentralizationand localgovernmentreforms it intendsto pursue. 15. Togetherwiththe Governmentwe mustsearchfor innovativemodalitiesto supportcivil serviceand organizationaldevelopmentreformsthataimat arrestingthe "braindrain" fromthe publicsector, at attaininga criticalmassof skilledcivilservantsand at improvingitsefficiency and managerialcapacity.This mightimplya reviewof currentinternationalcooperationpolicy and aid priorities,a rationalizationof technicalcooperation,and especiallya concertedeffortto reallocatepart of the technicaland capitalassistanceto publicsectorpay and humanresource - l  46 ANNEXVI and managementdevelopmentat the centraland local levels. Page4 of9 Economic PolicyReform and Sustainable Human Development 16. Mr. Chairman,despitethe war and drought,Mozambiquehas maderemarkablestrides towardeconomicliberalizationand the establishmentof a market-basedeconomicsystem. The Government intends to pursue vigorouslythe stabilizationpoliciesand structural adjustment reforms initiatedin 1987with the Economicand SocialRehabilitationProgramme. 17. In 1993,just one year after the signatureof the GeneralPeace Agreement,economic activityreboundedsharplyand GDPgrew at the recordand impressiverate of 19.2 per cent as a result of the strong recovery experiencedby agriculturalproduction, transport and trade services.However,preliminaryestimatesindicatethatGDPgrowthin 1994dropped to 5.3 per cent and projected growth for 1995 is only 4.3 per cent. Althoughfair by international standards, thesegrowthrates appear to be too modestto makea tangiblecontributionto, or to sustain, the goalsof povertyreduction,socialsectordevelopment,resettfement,reconstruction, and restorationof externalbalances.In sum, suchlevelsof growthare likely to be insufficient to propel the countrydecisivelyforwardalong the relief-to-developmentcontinuum. 18. Mr. Chairman,if the Governmentis to achieveits goals, there seetnsto be a clear need for a sharply-focusedand implementablestrategyfor speedingupeconomicgrowth in the short run that is coherent with a longer-termdevelopmentperspective.This is a tall order for the Government since ensuring consistencybetween higher economic growth and tight fiscal, monetaryand inflationtargetsmay turn out to be very problematicto obtain. 19. Povertyalleviationis oneof the basicdimensionsof the sustainablehumandevelopment paradigm, which contendsthat developmentmustbe people's centered,equitable and socially and environmentallysustainable,hence that developmentmust give priority to the poor, the creation of jobs, the advancementof women,and the protectionof the environment. 20. In Mozambique,a povertyreductionstrategymustof necessitybegroundedon economic growth withas muchequityas possible.Andgrowthhingescriticallyuponthe revitalizationand developmentof the rural economy, especiallyof the family-farmagriculture and marketing network, which constitutethe foundationfor betteringrural livelihoodsand the main sources employmentand incomefor theresettledpopulationand demobilizedmilitarypersonnel. Having assigned the highest of immediate priorities to agricultural and rural development at the community level, the Government deserves our full support in this area of fundamental importancefor socialstabilization. 21. Restoringsmallholderagricultureispartof thebroaderstrategyfordevelopingtheprivate sector, whichis tobecomethe primaryengineof growthin Mozambique.Since the adoptionof the structural adjustmentprogramme in 1987the environmentfor businessdevelopmenthas improved markedlyas a result of the gradual liberalizationof prices, exchangerate, foreign T __ _  47 ANNEX-VI Page 5 of 9 exchange market and credit, the introductionof a new foreign investment code, and the privatizationof state enterprises. 22. Nonetheless,greatereffortswillhavetobe madetoenhanceeconomicfreedom,through more effectivepolicies targetedat the promotionof domesticand foreign private investment, competitiveexports and import substitutionas wellas at closerintegrationwith regional and world markets, in particular to take advantageof Mozambique'sabundantnaturaland energy resources- such as cashcrops, fisheries,agro-industry,miningproducts, hydroelectricpower, and natural gas). Key elementsof the current Government'sstrategy for a more conducive environmentfor promotingprivateinvestmentand exports,which point to the right direction, include: removing the bureaucraticobstaclesthat still constrainindustrial, export and private investmentgrowth;revisingthestructureofexportandinvestmentincentives;furthersimplifying the investmentapprovalprocess;and expandingthe reformof the financialservicessector. A recoveryand modernizationstrategyis especiallyrequiredfor the manufacturingsector, which, unlikethe agriculture, transportand trade sectors, has been miredin a depressionthat has its roots in a host of interrelated factors: lack of capital, weak managerial and technological capacity, low productivity,and generallackof competitivenessin open, liberalizedmarkets. 23. Mr. Chairman, a country'sdevelopmentpotentialdependsprincipallyon the sizeof its qualified human resources. As we already argued, the major obstacle to fast growth, developmentand capacity building is likely to be the severe shortage of skilled personnel. Althoughsince independenceMozambiquehas madeconsiderableprogress towardincreasing literacy,secondaryschooling,andthenumberof universitygraduates,the supplyof skilledlabor stillfalls far short of requirements.For instance,adultliteracyis a low 34per cent,enrollment in secondary-leveleducationis onlyabout8 per cent, and there are fewerthan4,000 university graduates which, for a population estimated at 16.6 million in 1994 and the daunting developmentchallenges confronting Mozambique,represent an extremely modest stock of nationalhigher-levelprofessionals. 24. Wethuswelcomethe Government'spriorityto increasebudgetaryspendingin realterms in the socialsectors- education,health,watersupplyandsanitation- whichare centraltohuman developmentand higherproductivity.Thispriorityisalreadyclearlyreflectedinthe draftBudget for 1995.Withinthe contextof verytightfiscalpolicyconstraints,the Governmentis proposing, mainlythroughexpenditurereallocations(in particularfrom defense),a significantrise of the shareof educationand healthintotalrecurrentexpenditures.Buttoensuresustainabilityof these efforts Mozambiquewill probablynecessitatefuturebudgetsupport. 25. Environmentalpreservationis anotherbasicvectorof sustainablehumandevelopment. In the new peace situation there is a recognizedneed for incorporating environmentally sustainable policies into developmentplanning, notably with respect to natural resources managementand the likelyenvironmentalimpactof the resettlementof millionsof people. In order to minimizethe impactof resettlementon the environment,the short-termstrategyis to assign high priority to the implementationof sanitation,water supply and alternative energy projectsin rural areas. Wecommendthe Governmentfor its attemptsto developenvironment  48 - ANNFXVI Page 6 of 9 and naturalresourcesmanagementin a coherentfashionthroughthe formulationof a National EnvironmentalManagementProgramme. Aid Coordinationand Management 26. Mr. Chairman,confrontedwitha probablescenarioof stagnatingor decliningexternal aid inflows, it becomes vitally important for Mozambiqueto improve the managementof extemal resourcesand the effectivenessof aid. In regard to aid management,this implies, in particular:(i)defininga coherentinternationalcooperationpolicy, a processalreadyinitiatedby the Government,as well as reinforcingaid coordinationmechanismsbothbetweenGovemment institutionsand betweenGovernmentand donors;(ii) makingdonors' approaches to capacity building and technical cooperation modalities more effective; and (iii) systematicallyand periodicallytrackingall aid flows from donors,in order to enablethe Govemmentto exercise effectivecontrol over Budgetand Balance-of-Payments financing. 27. In ourjudgement,to improveaid coordinationacrossinstitutionsthe Governmentshould undertake to review the operational effectivenessof the National System for International Cooperation; clarify the roles of the system's central ministries dealing with financial and technicalaid; assessthedecision-makingandcoordinatingarrangementsbetweentheseministries (and with other sectoral ministriesand the provinces),includingthe interfacewith the inter- ministerial Commissionfor External EconomicRelations;and strengthenthe capabilities for negotiation,monitoringand evaluationof internationalcooperation. 28. To improvecoordinationwithdonors,apartfromthe ConsultativeGroupprocess and ad hoc fora, in-countrysectoraland thematicconsultationsshouldbe strengthenedand expanded, especially by means of Govemment-donorworking groups. This mechanism, which has functionedwithvaryingdegreesof successina fewsectors,providesa potentiallyeffectivelocal forum forinformationexchange;joint reviewof issuesof policy, programming,monitoringand evaluationof projectsand programmes;overlappingactivities;and allocationand mobilization of financialand technicalcooperationresources. 29. We are pleased toacknowledgethatcoordinationand cooperationwithinthe localdonor communityhas movedsignificantlyforward.Donorshavebeenmeetingregularlyto collaborate onissuesof commoninterestsuchas emergencyreliefandhumanitarianassistance,resettlement and infrastructurerehabilitation,demobilizationand reintegration, demining, support to the electoralprocess,consolidationof the democraticprocess,and so forth.In the aftermathof the implementationof the PeaceAgreementand as the countryprogressivelymakesthe transition from a humanitarianassistanceand resettlementfootingto reconstructionand development,it is our belief that donors' collaborativeefforts shouldbe extendedtoencompassother areas of mutualconcern, concentratingmoreon supportto long-termdevelopmentstrategies. 30. However,carryingout mineclearancemoreeffectivelyremainsa majorGovernmentand donor concern. We wish to annouce that recently an agreementhas been reached with the  49 ANNEXVI Page 7 of 9 Govemmenton the course of action to speedup the process througha financingarrangement that will allow proper transfer of responsibilitiesfor deminingoperations from the United Nationssystemto the Government. 31. Withrespectto theUnitedNationssystem,the ResidentCoordinatorchairsregular local inter-agencymeetingstoexamine,coordinateandmakecollectivedecisionson mattersof policy, programmingand management.In thiscontext,a draftCountryStrategyNote for Mozambique is now underconsiderationby the Government.Weexpectthatthe CountryStrategyNote will increasethe effectivenessof agency cooperationand the impactof interventionsby gradually putting into practice a concerted team approach in responding to national priorities and programmes,especiallythroughharmonizationof planningcyclesandjoint programming. Technical Cooperation and Capacity Building Policy 32. Mr. Chairman, it is already Governmentpolicy that technicalcooperation should be programmed, with donor interventionscoordinatedand rationalizedto deliver the required assistanceefficientlyincostandoperationalterms.Butsuchcoordinatedassistanceshouldensure that institutionalcapacityis strengthenedon a sustainablebasis.To contributeto sustainability, technicalcooperationmustbe a processof transferringskillsand know-howthat is primarily concernedwiththedevelopmentof humanresourcesandinstitution-buildingandonlysecondarily withdirectlycarryingout specifictasksin the form of "gap-filling".Thisentails, in particular, that technical cooperation management must place greater emphasis on training and organizational development plans. Furthermore, future capacity building and technical cooperationinitiativesshould be shapedin the light of a redefinedrole for the Government withina marketeconomy,democraticsocietyand decentralizedpublic management. 33. Under the NaTCAPexercise, the Governmentproducedso far three rolling triennial National Technical CooperationProgrammes. However, there is a need for refining their methodologyso as to convert themintoa more solidprogrammingand budgetinginstrument. As it nstands, the TechnicalCooperationProgrammeremainsessentiallyan incompletesurvey of ongoingand some foreseentechnicalcooperation,linkedprimarilyto the Triennial Public InvestmentPlan. Programmingof technicalcooperationrequirementsoughtto rely on in-depth capacityandhumanresourceassessmentsinthelightof institutionalroles,nationalprioritiesand strategies, and the relatively inelastic supply of local skilled labor. Technical cooperation programmingis essentialforthe comprehensivenessand transparencyof theBudgetand Balance of Payments;hence, it shouldbe part of the overall resourceallocationprocess from both nationaland external sources,that is, part of the planningand budgetingprocess. 34. We urge the Governmentto examineand follow up on recommendationsmadein the issues paper, "TechnicalCooperationand the Labor Market in Mozambique", which was distributed at the 1993 CG. In particular, the Government should revise the Technical CooperationPolicyFrameworkPaper,approvedin 1990,andtostrengthentechnicalcooperation programmingwith a view to: reducecompetitionamongdonorsfor local skilled labor; cut  50 ANNEX VI Page8 of 9 aggregatedemand for technicalassistance,thus allowingfor the releaseof aid funds to other priorityneeds, suchas supporttopublicsectorpay; improvetechnicalcooperationmanagement and efficiency,namelythroughgreateruseof morecost-effectivetechnicalassistancemodalities as "cooperantes", volunteers,and regionaland nationalexpertise; and fully reflect technical cooperationcosts in the Budgetand Balanceof Payments. 35. Mr. Chairman,a wideruse of the programmeapproachor programme-basedassistance, while enhancing Government ownership of donor-funded support, its ability to develop homegrownpoliciesand nationalexecution,wouldalso contributeto improvingcoordinationof aid, technical cooperationincluded,and wouldhelp Mozambiquebuild capacityand allocate resources more efficientlyto attainingnationaldevelopmentobjectives.Becausethe approach requires joint programming with donors, it would also imply reinforcing or setting up coordinatingmechanismssuchas the advocatedGovernment-donorworkinggroups. 36. Of special concern are the capacity developmentneeds in the area of economic management,which is of central importanceto the Governmentfor managingits extensive economic and financial reforms. It is also an area where supportfrom donors is somewhat disjointand showssignificantgaps.Weare thereforeencouragedbythe Government'sintention to approve an Economic ManagementCapacity Building Programme, in short, Economic Management Programme, which builds on the work initiated in 1992by the Inter-Agency Programming Mission and has been prepared with UNDP assistance. The Economic ManagementProgrammeisa prioritizedplanof actionaimedat strengtheningnationalcapacities on a sustainablebasisfor effectiveperformanceof essentialeconomicmanagementfunctionsby key Government institutions from the viewpoints of human resources and management development,organizationalstructures,processes,systemsandtechnicalcooperationneeds.Core featuresof theprogrammeare thesupporttocapacityassessmentsandpreparationof institutional developmentplans as well as the promotionof enablingconditionsfor retainingand recruiting skilled civil servants. Five functionalareas or major componentsare contemplatedin its first phase, spanning 1995-1997:economicpolicyandplanning,includingsub-nationaldevelopment planning; publicfinancemanagem-ent;monetarypolicyandfinancialsector; aid management; publicsectormanagementanddecentralization;and statisticalsystem.Theprogrammeis meant to be a rolling programme and to serve as the focal reference for donor assistance and cooperationinthe areaof economicmanagement.TofacilitatecoordinationbetweenGovernment and donors it is envisagedto establishan EconomicManagementor MacroeconomicWorking Group. ClosingRemark 37. Mr. Chairman, to consolidatenationalreconciliation,carry out reconstruction,enter a sustainablegrowth and humandevelopmentpath, and ingeneralstrengthennationalcapacities, Mozambiquewill continueto need significantinflowsof financiaiand technicalassistancefor yearsto come. We thus urgethe donorcommunityto extendthe supportwhichMozambiqueis requesting.We allrealize, however,thataid mustbe mademoreeffectiveby allocatingextemal  51 ANNEXVI Page 9 of 9 resources,thatare expectedto becomemorescarce,to the useslikelyto yieldthe highestsocial and economicretums. This, in turn, will require a higherdegree of joint programming and coordinationby Governmentand donorsas well as improvedaid managementmachinery. Thankyou, Mr. Chairman. \95COGSTA.I\PHM06.03.95  52 ANNEXVI Page 1 of 13 Repubica de Moqambique 8TH CG MEETING ESTABL.ISHING THE BASIS FOR ECONOMIC AND SOCIAL- DEVErLsOPMENT STATEMENT BY THE MINISTRY OF PLANNING AND FINANCE DR. TOMAZ SALOMAO PARIS, MARCH 1995  ANNEX VII Page2 of13 ESTABLISHING THE BASIS FOR ECONOMIC AND SOCIAL DEVELOPMENT MR. CHAIRMAN, DISTINGUISHED REPRESENTATIVES OF THE DONOR COMMUNITY, LADIES AND GENTLEMEN, I have the pleasure and the responsibility of presenting, on behalf of the Government, its document "Establishing the Basis for Economic and Social Development". But first, I would like to welcome you and express ourgratitude for your continued attentionand cooperation,the firm expression of the solidarity of people's and the international community with the Mozambican people. As the Prime Minister as already said, 1994 was decisive for the establishment and development of a society in Mozambique, based on: - peace; - national reconciliation; and - multiparty democracy. In this context, it should be noted that the international community contributed about 500million American Dollars for the pacification and democratization process in Mozambique. The heavy responsibility we now bear towards our society, the donor community and the world in general is to preserve whathas been achieved with this great investment. MR. CHAIRMAN, LADIES AND GENTLEMEN, There are new challenges in 1995, as difficult, or even more so,  54 ANINEXVII then those in the previous years. Page30fl3 One of the fundamental objectives to be achieved this year is the consolidation of the democracy and the proper functioning of the democratic institutions. The structuring of Assembly of the Republic - the establishment of its commissions, the revision of its regulation, and the definition of the status of deputies - is vital step in assuring democratic stability. ,, National reconciliation must be consolidated. Consequently mechanisms are being developed which promote the participation of civil society in national life. Public information as an important role to play in the consolidation of democracy. It is thus the Government's intention to guarantee of the freedom of the press. The rights of each citizen within society must be protected, and those who break the law must be rigorously punished. The Government is intent on strengtheningthe climate of legality and judicial system trough: * the allocation of more budgetary resources; * revision and updating of legislation; * the development of training programs for judiciary officials; * strengthening the Attorney General's office and the Administrative Court. Swifter and more effective applicationof the law is an essential precondition for restoring society's confidence in its institutions. The establishment of the new non-party army was one of the important objectives achieved in 1994. It is currently less than  ss ANINEXYI Page 4 of 13 nalf the size originally anticipated. Given the budgetary restrictions faced by the Government, its strategy is that, if necessary, the army should Qnly grow in the medium to long term and on the basis of voluntary recruitment. However, there is an urgent need to guarantee the means for the effective operation of existing manpower, promoting order and discipline within the Armed Forces, and their participation in national reconstruction. ., In addition, the creation of propitious conditions for economic activity means ensuring tranquillity and security for citizens and their property. The Government willtherefore strengthen the role of the police force, and provide it with the necessary professional training and logistical support. The aim is to create a disciplined and respectedbody of police, which know its rights and duties, and where corruption will receive exemplary punishment. The re-establishmentof citizen'sconfidence in institutions also requires greater transparency in all Public Administration activities. The Government is already promoting the dissemination of the major economic and social policy options to be implemented in 19995. With regard to corruption, in addition to the measures already announced, the Government believes that civil society should be involved, since this is a phenomenon which appears and develops among various segments of society, both public and private. Discussions with civil society will enable us to decide whether or not we should move towards the establishment of a High Authority against corruption,or whether there might be a better way of ensuring transparency. We are completely open to any of these solutions.  56 ANNEX VII LADIES AND GENTLEM4EN, Page50ofl13 All the measures announced by the Government illustrate its firm intention to consolidate democracy on solid foundations, to promote national reconciliationand National Unity, and to create a favourable environment for the exercise of economic activity. But this is not theonly one challenge facing the new Government. Laying the foundations for economic and social development in Mozaw,bique is a complex task, one which the future of all mozambicans depends. The Government's development strategy is based in four fundamental areas: * to develophuman capital, by improving the quality and quantity of public education and health services; * to rehabilitatebasic infrastructuresso as to promote the growth of economicactivity particularly roads and ports; * to support the family agriculture sector, the main vector for economic recovery and poverty alleviation; * to create a good business climate for private investment, through the implementation of economic policy measures aimed at reducing inflation and achieving balance of payments equilibrium in the medium term. The growth of family sector production is fundamental to the reduction of the country's food dependency. The Government therefore intends to promote the essential conditions for the resettlement of population and develop activities aimed at expanding the network of basiceducation and  57 ANNEXV11 health services and potable water. Page6of13 Another fundamental activity insupport of the familia sector is ensuring the supply of seeds and agricultural tools. We request the attention and assistance of the donor community in this respect, while internal efforts are being made to established the capacity to provide such means of production. Road rehabilitation is another key item in the strategy for agricultural growth. Only when the roadshave been repaired will it be profitable for the country's traders to buy agricultural crops. Emergency grants should gradually decline and be substituted by means of production which enable the family sector to undertake its activities, and to increase the productivity of the areas cultivated. LADIES AND GENTLEMEN, I am convinced that the only way to promote the country's development in the medium term is by investing in humancapital. Education will receive additional resources in 1995 in order to open 1.500 classrooms and contract 6.500 teachers. The teachers are the main agents in thestrategy for improving the quality of education. The Government intends to invest in improving their training, working conditions and housing. In exchange, it will demand grater professionalism and dedication, which will be duly controlled. Health is another key to the development of human capital. This sector will also receive additional resources in 1995, aimed essentially at improving the quality of primary health care and  58 AqNNEXVI[ Page7 of13 its expansion to priority rural resettlement areas. Donor community participation in the provision of drugs and medical supplies is particularly necessary, since the country's resources are insufficient to meet requirements. Efforts have also begun, albeit tentatively, to stimulate community participation in supporting health and education expenditure. However, only economic growth will permit any substantial increase in this participation. Since the budget is the fundamental instrument forthe management of public resources, in 1995, it reflects all the priorities I have announced. The Government worked with the donor community in analysing requirements, and also in mediating betweenpriorities, given the limited resources available. We reaffirm our intention to carry on promoting this way of working together ona regular basis, and to extend it to other sectors of Mozambican society. MR CHAIRMAN, LADIES ANIDGENTLEMEN, Achieving all that foreseen under the 1995 budget, will require a tremendous effort on the part of the State, which will have to improve its efficiency and revenues collection by 3.4 percentage points of GDP. Currentexpenditure should fall by 3.3. percentage points of GDP, resulting in an annual per capita expenditure of 16.8 dollars, compared to 20 dollars in 1993 and 1994. As a result of this adjustment efforts, for the first time the balance of current account will have a surplus of 187 million contos, or 7% of current revenues. -T-  59 AZNNEXVII Page 8 of 13 In this adjustment context, available resources have been redirected in accordance with the fundamental priorities. Expenditure on education and health will grow 44% in real terms, its share of current expenditure increasing for 19.2% in 1994 to 22.5% in 1995. Expenditure for the operation of democratic institutionshas also increased substantially, and they now require additional p_udgetaryresources. In the 1995 budget, expenditures on the Asse.bly of the Republic and subsidies for political parties correspond to 3% of total expenditure, whereas last year they were only 0.2%. In order to redirect resources in this manner, military expenditure has been reduced by 1.5 percentage points of GDP. These efforts form part of a strategy aimed at promoting _Austained, non-inflationary economic growth. Activities in this context will include the following: * the creation of favourable macroeconomic environment for the expansion of private investment,both national and foreign; * the careful selection of public investment projects, so as to ensure that resources are allocated to priority development areas; * the promotion of activities aimed at the export of goods and services, in order to reduce the country's external dependency in the medium term; * accelerationof the privatization process, in order to motivate private investment and the growth of economic activity. We are aware that budget resources for reconstructionare meager,  60 AiNNEXYU Page9 of13 given the extensive destruction of the country's basic infrastructures. We are conscious of the fact that we cannot do everything at once. The sacrifices requestedin terms of public expenditure are aimed at creating space for growth in credit to the private sector. With the negative adjustment in the budget the State will not resort to bank credit to finance its expenditure.Indeed, it will make payments of 391 million contos to the banking system, equivalent to 15 % of fiscal revenue. This effort will enable the banking system to expand its credit to the private sector by 84% in nominal terms, without creating inflationary pressures on the economy. In 1995 conditions will be-particularly favourable for dampening down inflation, with the conclusion of the special programmes, there will be a contraction in demand. Monetary policy will be particularly restrictive, in order to ensure the conditions for slowing down inflation by about 46 percentage points of the inflation rate. Consequently, money will only grow by 26.5%, compared with a nominal rise in GDP of more than 50%. Illegal competition from importswhich enter the country without paying customs duties has been one of the major obstacles to the viability of national industry. In 1995 the Governmentwill take energetic action to fightfiscal evasion, particularly in the cust'ss field. The customs service will be strengthened and a company will be contracted the guarantee more efficient pre-shipment inspection and to assist in customs management, particularly with regard to the - ~1_ - 1  61ANEVI Page 100of13 reconciliation of accounts. LADIES AND GENTLEMEN, Restructuringthe financial system isanotherof the Government's priorities in its strategy of creating a favourable climate for private investment. Last week the Governmentapproved a package of measures aimed at restructuring the State banks - the Commercial Bank of Mozambique, the Popular Development Bank. This will be implemented immediately. The aim is to increase competitiveness in the financial market and to promote greaterefficiency both in mobilising savings and in providing services to the economy. The creation of new financial instruments,namely the launching of Treasury bonds, will be another development this year. The portfolio of public projects will have to reanalysed the light of the limited resources available. In 1995 domestic financing in the investment budget is only 5% of GDP, a little over 4 dollars pre capita per year. The projects which will receive priority are those in areas already mentioned as being fundamental, and cover health, education, roads and water. The other area which will warrant special attention is the enhancement of public administration capacity, particularly at local level. This capacitation, forms part of the current decentralisation process aimed at creating the necessary conditions for deconcentration of functions within the State apparatus, from central to provincial level. The growth of Mozambican exports of goods and services is rn~~~~~~~~~~~~~~~~~~~~  62 ANUEXYI Page11of13 essential for the country's increased self-sufficiency. In 1995 the strategy of providing facilities for exporters, both fiscal and customs, as well as financial and exchange, will continue. Various investmentprojects are being implementedwhich will help increase our exports substantially from 1997 onwards. These include power lines to South Africa and Zimbabwe and the export of Pande gas. The'rehabilitation of the mining and agricultural sectors, by private sector, especially sugar, cashew, tea,cotton, copra, and more efficient railways and ports services will also contribute to this objective. We are convinced that these and other projects will enable the country to achieve exports of around 800 million dollars within 7 to 10 years. The privatisation of companies, which has been underway since 1989, was intensified in 1994 when more than 119 companies were privatised. Following this new thrust the percentage of public companies in industrial production fell from 58% in 1992 to 34% in 1994. In 1995 the Governmentaims to finalise the privatisation of more than 40 companies, 10 of which are of medium or large size. The Government has also decided to begin restructuringMozambique Airlines. MR CHAIRMAN, LADIES AND GENTLEMEN,. In short, during 1995 Government activity will establish the foundations for relaunching the economy, promoting the consolidation of democracy and tackling problems of corruption and lack of transparency. _~~ V ~  A6NNEXYIU 63 Page 12 of 13 This is the complicated and delicate agenda which the Government has before it. This agenda illustrates our unequivocal desire to introduce significant changes in fundamentalaspects of management; it also illustrates our commitment to face up to problems and to deal with them in the best way possible. A newly elected Government cannot be expected to resolve all prob.ems simultaneousiy,in addition to correcting past mistakes. We must have a strategy which enable us to advance soundly step by step on the road to development, which we all want in Mozambique. We are aware that our commitment is a very important factor in resolving problems; but we are also convinced that without the assistance of the donor community, it will not be possible to achieve our objectives in 1995. Your assistance in support of the activities we intend to undertake is essential. We must be more and more efficient in using the aid which is provided to us, trying to orient it towards fundamental areas, so that it can truly support our development efforts. The areas with the highest priority within the strategy outlines above are: * support for imports, without which there can be no productive activity; + demining; * support for the sectors of fundamental importance for resettlement of the population: education, health, water and roads. The support should cover investment  ANiNEXXVI 64 Page 13 of 13 projects and the essential goods which the State cannot import for lack of funds, such as drugs, school materials etc. * commercial food aid, which will generate counterpart funds to finance the budget and which is a way of increasingthe supply of essential goods and reducing inflationarypressures; '^ * access to more favourable conditions for external debt rescheduling. Improving the technical and professional capacity of public administration, particularly in the provinces and districts is another area which requires help. However, we would request that, when providing this assistance, every attempt be made to use technical potential which already exists in the country, so as to make the projects cheaper and expand their coverage. We shall continue to articulate with the donor representatives located in Maputo, in the hope that they will provide adequate linkage and dialogue with the donor community. LADIES AND GENTLEMEN, I cannot close without a word of thanks to the multilateral and bilateral institutions for their assistance. It is our desire that open dialogue with donor community should continue, so that it can participate closely in the discussion and resolution on our problems. Only in this way we can coordinate our effortsto achieveour common aims and to face the future with greater optimism. Thank You.  65 ANNEXYVI Page1 of 6 CONSULTATIVEGROUPMEETINGFOR MOZAMBIQUE EIGHTHMEETING Paris, March 1995 Speech by His Excellencythe Governorof the Bank of Mozambique Speech by His Excellencythe Governorof the Bankof Mozambique Ms. Chair Distinguishedmembers of the donor community Ladies and Gentlemen I am honored to have this opportunityto addressthis importantEighth Meeting of the ConsultativeGroupfor Mozambique. Permit me to expressto all those presenthere todaymy profoundrecognitionof the unambiguouscomnuitmentwithwhichthe internationaldonor communityhas been supportingand followingMozambique'sstructuraladjustmientprogram. During the current phase,in whichMozambiqueis making the difficulttransition to a market economry, it is gratifying to note the encouragement of the internationaldonor community.I amcertainthattheConsultativeGroupwillonce again agree to share with us the difficult road towards reconstruction and development, nowunder the new conditionsof peace and democracy. The current politico-institutionalframeworkopens up new perspectivesfor re- launching economicactivity overall, an aim that requires increasedcoordination of efforts in orderto concretisein the short andmediumterm the actions set out in the Economic and Social RehabilitationProgrammeinitiatedin 1987. Ms Chair Ladies and Gentlemen, The reform of the financialsystemthat beganin 1992with the separationof the then Bankof Mozambique'sfunctions, hasproceeded at a notable rate.Despite various constraints,visibleprogresshas alreadybeenmade towardsstrengthening the role and institutionalcapacity of the central bank as one of the institutions managing the nationaleconomy. Within the Bankof Mozambiqueour programmaticactionhas been inaccordance with the followingguidelines: Improving handling of the instruments of monetary and exchange management,adaptedto the current stageof liberalizationof the national financialsystemand taking its specificitiesinto account; r-T  66 ANNEXXIII Page2 of 6 Improvingthe process of gathering, treatmentand appraisalof statistical information, which has enabled the Bank to expand its communication channelswith itspartnersandwiththe generalpublic,throughthe regular publicationof statisticsand the productionof internaldocuments; Bringing human resources into line with the institution's structure and profile to ensure the ability to respond to the increasingdemands of the market; Deepening financial reforms with the aim of improving the services provided by financial systemoperators. In my opinion these actions are graduallystrengtheningthe role of the Bank of Mozambiqueas the monetary and exchange authority and supervisor of the fiancial system. Monetary policy has been consistent with the objectivesof reducing domestic inflationand improvingthe externalaccounts.If on the onehandthe countryhas had extremelypositivegrowth in productionover thelast two years, on the other the economy continues to live with an inflationrate that has exceeded forecasts and has been an objectof major concern for the centralbank. The 1994 inflation rate reflected essentially the costs of the peace and democratizationprocesses, and was closely correlated to the reorientation of external assistance and a significant portion of budget expenditure that the Governmentwas obliged to undertakeby the need to support the activitieslaid down in the General Peace Agreement.Domestic demand, which is extremely dependenton imports, was thus penalized. In saying this we do not mean to underestimatethe importanceof the negative impactof successivepublic deficitsover the foregoingperiods, and still less to minimise the structural imbalances and lack of competitivitythat the national economy, seriouslyaffectedby the war, continuesto face. Controlof the net domesticassetsof the bankingsystemcontinuesto be the main instrumentfor monetarycontrol. In 1994the Bankof Mozambiqueintroduceda setof measuresaimed at granting increased autonomy to the commercial banks in the distribution of monetary aggregates, conserving the principles of financial and accounting discipline required for the credibilityof a balancedfmancialsystem. The total liberalizationof interestrates for loansanddepositoperations, put into effect in June 1994,falls withinthis context, the only responsibilityretained by the Central Bank being the fixing of the rediscount rate. Implementing this measure in a year of considerable uneasinessreflects the Bank's responsible position with regard to asset portfolio managementand the implicitrisk of the commercialbanks, whichthus began to negotiatewiththeir clients the financial costs of the loans granted and the depositsobtained. In 1994, we introduceda new methodologyfor distributionand control of net -- H~~  67 ANNEXYII Page3 of 6 domesticassets to the banking system,more consistentwith the current stageof liberalizationandtechnicallymore coherentand transparent. The results of the first six months of using this methodology have been encouraging, with the banking system responding positively to its guiding principles - an increasein financial savings, both via depositsin local currency and by improving net foreign assets and strengtheningaccountingand financial discipline. In 1994 credit of policy continuedto prioritisethe rehabilitatinginfrastructures damagedduring the war, job creation,projects generatingincreasedaddedvalue and programsto improvethe valueof traditionaland non-traditionalexports.The central bank has also guaranteed specialcredit mechanismsfor the agricultural marketing campaignsand the programmes for creating and developingmicro- businesses. The credit availableto the economy is far below the needs, so we have been working to find alternative ways of financingthe State Budget and promoting domestic savings. The 1994exchangepolicy and managementof net foreign assets was guidedby the principles of free functioningof themarket and increasedlinksbetween the monetary and externalsectors. Contrary to themore pessimisticexpectationsconcerningpoliticaldevelopments expressed by someon the fringe of the market, there was considerablecurrency stability in 1994. The estimateoutlinedinthe monetaryprogrammewereobserved,withthe Bank's exchange rate fluctuatingon averagein the bandof 1-2% of the marketrate, and the gap with the averagerate in the parallelmarket not exceeding 10%/ Transparency inmanagingforeign aid funds,withinthe frameworkof the import support programmejoint working group made up of donors and creditors and chaired by theBankof Mozambique,andan activemonetarypolicy, contributed towards the objectiveof exchangestability. The improvementin managing net foreign assets enabledthe 1994target to be exceeded by around 10 million dollars, for the first time since the beginning of the Economic RehabilitationProgramme. Financial sector reform has been accompaniedby the approval of important regulations, with 1994 seeing increased activity in this field. In this context, prudential normswereadopteddefiningratiosfor solvency,fixedassets, financial shareholdingsandexchangerisks. I should additionallymentionthe fact that the banking system's accountsbegan to be audited by specializedfirms of internationalrepute in 1994, which will enable increasedtransparencyin bankmanagement.  68 ANNEXYIII Page 4 of 6 Legislationwas alsointroducedto regulatethecreation andoperationof financial leasing companies and foreign exchange houses. This will be important in facilitating the expansion of the financial sector and the diversificationof its products. Today we have a financialsystemcomprisingfivecommercialbanksin operation and two that are in the process of starting up, two financial institutions, two insurance companies and sixteen foreign exchangeoperators, a situationthat is both quantitivelyand qualitativelydifferentfrom that of 1987, when there were only three banks operating, one of which accumulating the functions of the Central Bank. Financialsystemreform is intrinsicallylinkedto theprogrammefor strengthening the CentralBank's institutionalcapacity.Particularattentionhas been givento the selection,recruitrnentand trainingof qualifiedtechnicalstafffor the bank's most sensitive areas, such as banking supervision,economic and statistical studies, foreign operations, credit operationsandthe area of organizationsand methods. *We have been relying on the support of the IMF/WB and other institutions to carry out these activities,whichhavecontributedto the technicalupgrading and capacity-buildingof the Bankof Mozambique. Ms. Chair, Ladies and gentlemen In 1995the Bank of Mozambiquewill continueto adopt a monetarypolicy that is consistentwiththe Government'seconomicpolicyobjectivesandthat facilitates the development and consolidationof the market. Priority will be given to measuresthat stimulatethe GDP growth,strengthenthefightagainstinflationand improvebalance of paymentsperformance. . Withinthisframework, measureswillbe introducedthat enablethe use of indirect instruments of monetary control and forms of non-monetaryfinancing, for the state throughthe launchingof Treasurybonds. Exchange policy will be orientated towards improving the mechanisms for liberalizing, decentralizing and sirnplifying current invisible operations and respective procedures. Increasing exports and creating incentives for exporters will also be a high priority on our agenda. In this field, the Bank of Mozambiquerecently authorized the retention by exportersof 35% of theirincomein accountsinthe nationalbankingsystem, with a viewto stimulatingthe exporter andfacilitatingthe rapid restockingof factors of production.Further measuresweretakentoeasetheproceduresfor registration of current invisibleoperations,benefittingthe exchangemarketoperatorsand the generalpublic. Action in the field of financialsectorreform anddevelopmentwill be orientated in such a way as to facilitate theentry of new banks and financial institutions, stimulating increased geographic coverage and the diversificationof banking products, and thus attractingthe financialsavingsneeded for public and private XTI _ _ __ _  69 ANNEXYI investment. Page5 of 6 Thisyear the CentralBankwill introducefinancialmechanismsthat guaranteethe balance of liquidity between the institutions,and a risk information center for providing the banking systemwith informationaboutclients. Within the framework of credit policy, the Central Bank will pay particular attentionto the banking systemsupportto financerural developmentprojects and private sector investmentprojects. Ms. Chair, Ladies and Gentlemen, Privatizationhas been seenas necessaryto re-institutingtherules of competitivity and maximizingof the allocationof resources. In this perspective, following a meticulousanalysisof the financial sector, we have decidedthat the timehas comefor privatizationtoextend to the state owned banks. To thisextent, theprivatizationof theBCMwilltake intoaccountthe conclusions of theevaluationcarriedoutby technicalassistance,the finalreport of which will be presented in March, and the evaluationof patrimonyto be done in April by independentconsultants. On the basis of these assessments and current legislation, the Bank of Mozambiquewill formulate the conditionsfor offeringthe first batch of shares. We believe that this process will be completedby the end of the year at which point the full privatization of the CommercialBank of Mozambiquewill take place. With regard to the People's DevelopmentBank, by the end of this month its statueswill have been altered to convert intoa joint stockcompany, in order to facilitateprivatization. Preparatory work willbe concludedby the end of 1995, and it is hoped to launch the first share offer in mid-1996 and complete privatizationby the end of that year. We believethat privatizing the Stateownedbankswill give new dynamismto the financial sector, contributing to greater market competitivity and increased assistanceto nationaleconomicdevelopment. Mrs. Chair, Ladies and Gentlemen, The foreign debt has been a serious obstacleto our country's self-reliant development. In fact, the debtserviceresultingfrombilateralagreements continuesto absorb a significantportion of our internationalreservesand constitutesa heavy burden for the Governmentaccounts. Thoughin recent years the reschedulingobtainedwiththe Paris Club have been on more favorableterms, they are still not appropriateto our reality. r---- - -- r----T I  70 ANNEX II Page 6of 6 In Mozambique'scurrent conditions, we renew our appealfor large scale forgivenessof our foreign debt or the channellingof externalresources towardsoperationsthat lead to theeffectivereductionofdebtstock,as the most realistic way in which to deal with this problem and improve the profile of our balanceof payments. In the medium term, sustainability of the balance of payments will continue to require an additional effort by the international donor communityrepresentedhere. The balance of payments financing requirements for 1995 total 1,105 milliondollars, of which375 million for investment- projectsanda part of services; 327millionfor debtrelief; 302 millionfor the importsupport fund, whichaccordingtoreplies to the survey givenby donors inMaputo has an unfinancedgapof 87 million; 8 millionfor specialprogrammesfor reintegratingdemobilizedsoldiersandsupportingpopulationresettlement; and the remaining91 million in the form of food aid and agricultural tools. It is myhope that Mozambiquewill continueto deservetheindispensable support of the international donor community, so that the structural adjustmentprogramme can achieve its objective. Ms. Chair, Ladies and gentlemen, In conclusion I would like to reiterate my sincere thanks to the internationaldonorcommunityfor itscontinuedsupporttoMozambique's economicreconstruction,particularlyin thisphaseof consolidatingpeace anddemocracy. I Extend my thanks in particular to the Bretton Wood institutions,for their valuable contribution and support to our Economic and Social RehabilitationProgramme. Thank you very much. 1F - - _  71 ANNEX IX Page1 of 6 MOZAMBIQUE CONSULTATIVE GROUP MEETING PARIS, MARCH 14-15 1995 STATEMENT ON FINANCING REQUIREMENTS BY THE WORLD BANK Ladies and Gentlemen, Mozambique is indeed moving into a new phase of its history. The successful completion of the Peace Agreement has set the stage for lasting peace and political stability. Over four million people have been resettled in rural areas. Agricultural production is recovering.Transport and constructionactivitieshave picked up. Now, the new Government facesthe challengeto transformthis short-term recovery into sustainable economicgrowth. As stated in earlier presentations, the establishment of sustainable growth underpinsthe Government's strategy for poverty reductionand external financialviability. The policy agenda to attain this goal is vast. In this new phase five areas appear particularly essential.First, the preservation of peace andinternal security; second, the V ~ -~ -- I I, - --  72 ANNEXIX Page2 of 6 restoration of macro-economic stability;third, the support for small-holder agriculture; fourth, the promotion of private sector and exports; and fifth, increasingthe efficiencyof externalassistance. As mentioned elsewhere, the preservationof internalsecurity and politicalstability is an essential pre-condition for the attainment of sustainable economic growth and poverty reduction. In this regard, efforts to strengthen governance, consolidate democratic institutions, and promote decentralization, deserve our full support. At the same time, visibleprogress in reducing poverty through an aggressivegrowth policy will be required to help secufe future politicalstability The restoration of macroeconomicstabilityis another key pre-condition to achieve sustainabledevelopment. The poor are the ones who suffer the most in periods of high inflation.It is therefore urgent that currentlyhighlevelsof inflationbe drastically curtailed in the coming years. Meeting the inflationtarget of 24 percent in 1995 will require a drastic cut in credit expansion, continued fiscal restraint, and increased revenues, particularly from customs. In addition to keeping a tight rein on fiscal and monetary targets, further progress inenterpriseandfinancialsector reforn willplay a criticalrole in supporting stabilizationefforts. To build-on the on-going recovery in small-holderagriculture and fully capitalize the growth potential of this sector, a more aggressivepolicystance needs to be articulated V_ I _ __ ___ _ . ____  73 ANNEXI Page3 of 6 and adopted. First, there is a need to accelerate the formulation of a sector investment program to guide the re-orientation of the emergencyand development programs toward sectoral priorities. Second, remainingprice and marketing distortions on essential crops such as cashew and maize need to be removed as soon as possible.Finally, land tenure issues need also to be addressedwithin the context of on-goinglegislativechanges . In this new phase, the creation of an enablingbusiness environment to promote private sector development and exports, is another central component of the Government's strategy. Building on the progress made so far, the restructuring of the state-owned banks and the privatization of large enterprises need to be accelerated. Another critical area concerns customs and tax reform and the provision of exemption regimes for exporters. Finally, regulations and procedures affecting private investment will needto be greatlysimplified. If the Government is to move forward on this ambitious agenda, substantial external assistance will continue to be required to finance the rehabilitationof the economy and the expansionof productive activities.Total externalfinancingrequirements in 1995 amount to US$1.105 billion. Of this total, US$852 million will come from existing and proposed commitments,includingUS$434 millionin grants, US$255 million in loans, and US$163 million in agreed debt relief Therefore, new commitments of US$87 million are needed in 1995 as well as an extensionof the Paris Club Agreement until the end of this year to obtain a furtherUS$163 millionin debt relief Overall, the F~ T  74 ANNEXIX Page 4 of 6 level of external assistance is similarto thatobtained in 1993 and is significantlylower than that of 1994 which was an exceptional year. As special programs related to the demobilization,elections, and reintegrationprocess have essentiallybeen concluded, no extraordinaryfinancingneedsare anticipatedfor 1995. While securingadequate levelsof external assistance isvery important to support the Government's economic program, perhaps equally or more important is the form in which this assistanceis granted and the manner it is disbursed. The efficiencyof external assistanceneeds to be raised, as the overalllevel,excludingthe exceptionalyear of 1994, is not increasing in real terms. The composition of external assistance must therefore correspond to the country's emergingneeds. In this new phase,this means(i) phasing out food aid in line with agriculturalrecovery;(ii) providing import support funds to finance increasingprivate sector imports;(iii) financingthe rehabilitationof priority economic and social infrastructure; and (iv) rationalizing and decreasing long-tern foreign technical assistance. Provided that the effects of the regional drought remain moderate for Mozambique,food aid requirementsare projected to remainat the 1994 level, which was alreadywell below 1993. However, 1994saw a shiftin aid flows fromimport support to investment financing which is a source of concern. In 1994, grant disbursements for import support amounted to only US$71 millioncompared to US$140 million in 1993. On the other hand, investmentfinancing to support the reconstruction program rose by  75 ANEXIX Page5 of6 about US$100 millionthat year, largelyreflectingincreasedtechnicalassistance. Clearly, a shortfall in import support funds has a negative impact both on private sector imports and counterpart fiind collections. Moreover, the rapid increase in investment creates additional pressures on the already stretched recurrent budget. It is therefore, essential that investment and import support financingbe better balanced. This will require raising the level of import support financing and rationalizing investment financing, including technicalassistance, inline withsectoral priorities. In order to enhancethe disbursementmechanismsfor import support funds, it is important that all finds be channeled through the banking system, so as to ensure appropriate monitoring, with increased relianceon private commercialbanks. Overall, the systems to monitor the execution of external flows - including investment, import support and counterpart funds - need to be improvedas a matter of priority. By doing so, Mozambique's ability to manage the macroeconomic program will be greatly enhanced. On the basis of the elements outlined above, namely improved security, a significant deepening of the reforn program, and increased efficiency of external assistance, Mozambique could be expected to set a sustainable path of growth and poverty reduction. F - _ _ _ - - - - l-. _ _ .  76 ANNEX.IX Page 6 of 6 Finally, let me say a few words about Mozambique's medium term prospects to achieveexternalfinancialviability. Imports are expected to increaseonly slowly over time in line with the anticipated recovery in domestic production. However, because of Mozambique's small export base, substantial external imbalances will remain in the mediumterm, even assuming a rapid GDP and export growth. Hence, the gap between exports and imports (excluding financial services) will narrow only gradually from 65 percent in 1995 to 40 percent by the year 2,000. This gap will need to be closed by external resources. While private capital flows, namely foreign investment, are likely to play an increasing role in meeting this gap, Mozambiquewill continue to depend on externalaid overthe mediumterm. It is also be important that a radical solution to Mozambique's debt problem be found. Despite the on-going reschedulingof Mozambique's officialbilateral debt, under generous terms, the debt service ratio, after debt relief, will remain high at around 30 percent of total exports. This compares with a regional average of 15 percent. In addition, a large proportion of the Government's recurrent budget will continue to be devoted to servicethe externaldebt. A debt stock cancellation,along the terms agreed in Naples,willbe a more effectiveway to reduce Mozambique'sdebt burden, and therefore an importantstep for the country to achievegrowth andpoverty reduction. Thank you verymuch.  77 ANNEX Page 1 of 6 MOZAMBIQUECONSULTATIVEGROUPMEETING CHAIR'S CLOSINGSTATEMENT Ms. KatherineMarshall Director,SouthernAfricaDepartment Paris, March 14-15,1995 Ladiesand Gentlemen, I said at the openingof this Eighth ConsultativeGroupmeeting forMozambique that we were privilegedto welcome"the breadth and highcaliber"of the GovernmentDelegation led by His Excellencythe Prime Minister of Mozambique,and includingthe Minister of Planning and Finance, AmbassadorPatricio, the Minister of Commerce,Industryand Tourism,and the Governorof Bancode Mo,ambique. We have heardthe presentationsor comments, at thedinner and in these sessions, of the Vice Ministerof Finance (andformer colleague of the World Bank)Luisa Diogoand Iolande Fortes, Head of the Poverty Unit in the Ministry of Finance and Planning. We have indeedgained immenselyfrom the participation of so manymembersof the delegations. Participants have notedalso the intensity of the preparationfor this meeting in Maputo through the variousjoint working groups operatingthereover the past five months, and they have notedthe highquality of the documentationpresented by the Mozambique Delegation. In otherwords, as my predecessor StephenDenninghad wished and predicted and several of you have echoed, theGovernment has shownitself firmly installed inthe Driver's Seat! This in itselfis a sourceof satisfaction,and one decisive reasonwhy this meetinghas been a success. The other reason isthe width and depth of your participationin the discussions. I also saidthatthe last meeting of this group,in December 1993,occurredat a historic moment, followingon theRome Peace Accord--and the enormouschallenges which then faced the Governmentin itsefforts to solidifythe peace process. In fact, many doubtedthe future and manyfearedthat the challenge wouldbetoo great .... However, as virtually every delegatehas notedwith admirationthe challenge has beenmet. The national electionstook place, as planned,in October 1994,and they were"free and fair". And thuswe meet again at another historicmoment -- a watershed-- in thewords of the Canadian delegation. So many, and so rich were thepresentations, interventions,and comments that, as you realize, wewere continuallyshort of time. My fearwas, as youwere all takingturns to speak, that it would be impossibleto summarize, or synthesize,all your contributions. But I foundthe task reasonably easyas we preparedthese remarks. Indeed, I found, to my profoundsatisfaction, thatthe sumtotal of interventionsamount ultimatelyto a consistent, strong, and harmonious message. This iswhy, I suppose,the referenceto a symphony, sprung to my mindyesterday. From that point,the differentthemes and rhythmstook on a specially harmonious and musical quality. A symphony as a rule, hasfour movements. Let me then try and convey to you my impressionsand my conclusionsin fourparts. F-- ---- TI-  78 ANNX X Page 2 of 6 I. RECOGNIZING MAJOR ACHIEVEMENTS. Unquestionably,there was unanimityin recognizingthe tremendousachievementssince the last ConsultativeGroup meeting. Everydelegation,starting with France as current President of the European Unionand includingourselves,hasjustly congratulatedthe Govemment for the first successful elections of October 1994,which resulted in a smoothtransitionto a new govemment --and contributedthereby to consolidatingpeace and stability. This remarkable process of reconciliationnow seemswell on the roadto completion. The demobilization is completeand several million persons havereturnedto their homes including 1.6million retuming fromneighboring countries, as the UNHCRResident Representativetold us yesterday. That this has been accomplishedwithoutmajor incidents isin itself remarkable and is a tribute to the aspirations and willingnessof the people ofMozambiqueto achieve a lastingpeace for their country. At the sametime as the Govemment has movedtowards peace and stability it has endeavoredto continuethe structuraladjustment program launched in 1987even in the faceof enormousdifficulties. However, unavoidablythe process of democratization and consolidation is stillfragileand economic policy performancehas been lessthan perfect. II. NURTURING THE DEMOCRATIC PROCESS The democratic process needs to be nurturedand taken careof both carefully and forcefully. Let me highlight six re-occurringthemesthat we have heard fromyou related to this issue: (1) National Assembly. Most participants,as well as the Govemmentdelegation, noted that it was essential for growth and povertyalleviationto have workingdemocratic institutions and stable socio political processes inplace in Mozambique. It is thusessential to see anactive National Assembly where issuesof national importance, includingthe budget, arefreely debated. This impliesthatthere are long sessions and appropriate rules and procedures. We note that the Govemmentis inthe process of having such rules and procedures finalizedby experts. The upcomingdebate on the budget, startingthis month, will have special importanceinMozambique,as in all democratic countries. (2) Opposition. In a democratic system,the oppositionmusthave a role. It is necessary that the Govemmenttalk to the oppositionand theopposition needsto have a status. In this respect some delegatescommented withsome apprehensionthat the dialogue betweenthe Government andthe opposition seemedweakerthan it should be. At the same timemost participantsexpressed satisfactionat the statementsgivenby the MozambicanDelegation relatingto the status,finance and generaltreatmentof the opposition(notablythe treatment of its leader). (3) A Free Press. Donorsfurther stressedthe need for a free press --as a vital institution within a democratic system. We havealso heard the Govemment's reply on this theme: an unequivocalcommitmentto totally free expression and debate in the new Mozambique. Some participants suggestedthat a greatereffort shouldbe made by the Govemment to enliventhe political and economicdebatewithin the mediaand the society. Thiswould certainlybe seen as a welcomedevelopment. (4) Decentralizationand Civil Society. Givingmore authority and financialpowers to localauthorities is anarea where the Govemmentassured the aid partnersthat it intendedto moveboldly. The Govemment gave a veryclear promisethatthings are movingin the right direction culminatein nationwide localelections in 1996. Differentfrom, but complementaryto decentralization, is theneed to give spaceto the full involvementof the  ANNEX X 79 Page 3 of 6 Non GovernmentalBodies in public life,such asNGOs, unions, church groups,peasant associations, indaily life. This aspectwas rightlyemphasizedby several delegates including Canada,theNetherlands, andtheNordic countries. (5) Good Governance, as the Dutch delegate indicated,means an efficient,transparent, and accountableadministrationwhere corrupt practicesare moredifficultand riskier to undertakeand where they will be uncoveredand appropriatelysanctioned if they are undertaken. Herethe main objective isnot to deploy enormousresourcesto act ex post to providepunishmentbut the effort shouldgo insteadto creatingconditions whereby mal practice isdifficultand highly risky. Most participants,withMozambique inthe lead, highlightedthis issueand the need for action. In thatrespectthe participantsnoted with satisfactionsome of themeasures being implementedby theGovernment including a significantlystronger AdministrativeInspectorate. Anotheraspectof GoodGovernance while highlydesirable, isunderstandablydifficultto implement.Thisis the much needed overallCivil Service Reform includingenhanced remunerationfor public servants. Nonetheless,several participantsinsistedthat a broad based Civil ServiceReform was a high priority, not only as an instrumentof democratic-Governancebut also as an indispensable instrumentof good economicmanagement. (6) An Independent Judiciary -- several speakersmentionedthat, inherent in any ddemocraticstructure is an independentjudiciary. The Groupnotedwith satisfaction several actions, includingtraining and review of the legalframework,that the Government had undertaken. While virtually all of the interventionsby the aid partnersstressedsome of the above componentsin nurturing democracy,there weresome differencesin approach. We heard that theAmericandelegation wouldwish to see agreedspecificbenchmarks in order to monitor progress. On the other hand, the Danish Representativesaid,"This isnot the time (in this areaof political processes) for rigid conditionalities". Nonetheless,whatemerged loudand clear fromthe interventionsand the debate isthat theaid partners as a whole hope, and do expectto see, measurable progress on several frontsby the timeof the next ConsultativeGroup meeting. MII. ACCELERA TING ECONOMIC REFORMS While, as I have noted in some detail, that there was generalsatisfactionwith the beginnings of the democraticprocess everybody-- the Bank and theIMF included-- noted with some regret that progress on the implementationof the macrostabilizationprogram had been less than satisfactory. In varyingdegrees, the participants,stressedtheneed for much more forcefulaction on the following issues lest the programwith theIMF (and the Bank) goes off-track. (1) Fiscal Policy. This inturn has several dimensions. * THEDEFICIT. The fiscal deficit clearly has to bereduced from itsvery high, and unsustainablelevel(close to 30 percent of GDP before grantsin 1994). * REVENUESdeclined, as the French delegatenoted, fromover20 percent of GDP to around 17percent, a situation which calls for forceful actionon four fronts (a) Customs Reform(including the possible use of a privatecompanyto support/substitutethe current CustomsAdministrationfor a period of time) and (b) bettercollectionof existing taxes; (c) at the sametime, while accepting that the introductionof VATis a long term F~ l  ANNEX 80 Page 4 of 6 proposition,mostparticipantsencouragedthe Government,for preciselythat reason,to initiatethat processwithoutdelay; (d) finallythere isclearly a needto ensurethat counter part fundsfrom balanceof payments supportand other donor programsareadequately collected to fully impacton the budget. This isparticularly important,as the German Delegate and others remarked, since30 percentof budget revenues now come from counterpart funds. EXPENDITURE. Virtuallyall participantsnoted with great concern thatsocial expenditures in 1994declined in realterms, contraryto commitmentsmade tothe donors. At the same time it was notedwith hopethatthese expendituresare budgetedto increase by 40 percent inrealterms in 1995. Itwould be sad if,at the next CG meeting, any shortfall in expendituresinthese two crucial sectorsisobserved.On the contrary,one wouldwish to see furtherreal increasesin expendituresin the 1996. Althoughit was noted that militaryand security expenditureswereon the decline, mostdelegates feltthat they were still too high. (I believethat the American,British, and Germandelegations, among others,were of that opinion). * TRANSPARENCY. The call fortransparency,particularly as regardsbudgetary processes and operationswas another universal theme. This in turn, refersto the need for an opendebateon the budget inParliamentand also incivil society at large,to the extent possible. This in turn impliesthat a muchgreatereffort be made by Government in providing information to the generalpublic. Inthis regard, many participants expressedtheir satisfactionat the activity inthe Budget Working Groupwhich has been operating in Maputooverthe past six monthsveryuseful ideassurfaced here on how to elaborate and extendthe work of this group. Equally importantin the above debate, isthe issue of informationon budget execution. (2) Monetary Policy and the Financial Sector. Possibly the mostnegative, and most general, comments weremade regarding the untenablerateof inflation (71 percentin 1994). Although high inflationhas been attributed to some exogenousfactors (most importantlythe demobilization andthe elections)which occurred lastyear, the structural underpinningsof the phenomenon areto befound in weaknessesof monetarypolicy andthe workings --or rather non-working-- of the financialsector. In this respect, the participantsnotedwith a great deal of enthusiasm GovernorMaleiane' s announcementsconcerningthe planned, rapid privatizationof BCMin 1995and of BPDin 1996. 1am sure that progress inmeeting these objectiveswill be keenly awaited by the aid partners,and closely monitored in the interveningperiod. Indeed,drasticreform of the financialsector is needed in orderto permit efficient monetary policyand, inthe long term, inorder for the legitimatefinancingneeds of a growingmoderneconomyto bemet. (3) Privatization. Manydelegates notedthe good progress made on privatizationto date, and look forwardto evenmore substantial actionover the coming year: about40 enterprises are to beprivatized in 1995,of which 10mediumto large ones. More specifically, I notedwith interestthat the focusof the debateamong the participantsis now turning from the privatizationof the industrialparastatalsto the issue of privatizingthe group of strategic service parastatals-- including,not only the banks,but alsothe railways (CFM), the airlines(LAM),the insurancecompany (EMOSE), and eventhe utility companies(for example, thetelecommunicationscorporation - TDM, and theelectricity authority- EDM). (4) Business Environment. I hopethat, despitethe rush, the participantsfoundthe presentation " Impedimentsto Industrial Sector Recovery"of interest. I note with satisfaction, that the Minister of Industry and the Ministerof Planning and Finance indicated r  ANNEX X 81 Page 5 of 6 that this type of analysis would be usefulfor the design of policies. And therepresentative of the EuropeanUnion indicatedthat such studiescould be an inputinto their own thinking as part of their own analyses of industrialissues. Two points inparticular emerged from that sessionon industry.The first was thepressing need to reformthe regulatory environment and the secondwas the no less urgentneed to make progresswith respect to the liberalizationof the cashewnut sector. We agreed, at the sametime, to continue thedialogue on these complexissues. (5) Poverty. Mozambique's past circumstancesso far have clearly created an environmentof disruption wherean effectivepovertyreduction strategycould hardly be debated,much less pursued. Therefore,in light of the newcircumstances,the participants keenlywelcomed the strategyfor the future presented by the Government. This strategy has essentiallythree simultaneouscomponents: growth promotion particularlycoming from agriculture(as there is virtually no scopefor redistributepolicies); improved supplyof social services-- namelyprimary health careand primary education,and waterand sanitation facilities;and targeted safety nets,includinga disaster protectionscheme --still to be designed-- for the rural population..Meanwhile,the existing urban safety nets are being reviewedand will be adapted,within availableresources, as required. Some participants notedthat gender issues werenot prominent in the Strategy. We wereglad therefore to hear the Minister's assurancesthat this was not by design andthat genderissues were the subject of an established ad hoc commission. There is a strong expectationfor actiqn to define meaningful activities to givewomenthe central role they deserve. This includes most importantlyincreasedaccess of girlsto education. (6) Land Tenure. The landtenure securityquestionwas raisedwithin several contexts, includingagricultural production,equity, women's access to assets, and poverty. We are particularlygrateful for the Swissrepresentative's elaborationon this important issue. Again, this isan area where expectationsfromaid partnersare high. (7) Statistics. The Governmenthas indicatedthat it plans to undertakea concerted effort to improvethe statisticalinformationbaseand several donorsare either already involved, or are ready to offertheir services-- includingthe World Bank which is prepared to take a key role inthis endeavor. I understandthat it isthe generalhope and expectation of this groupthat improvementin statisticswill materialize gradually, but beginning inthe very near future. In short, relatingto economicmatters, the variouspartieswere concernedaboutthe danger of the economicprogram drifting away fromthe path agreedwith the International Monetary Fund and the World Bank . The danger of a derive bugetaire was noted,with manyothers, by therepresentative of the African DevelopmentBank .On the otherhand, there was general and strong support for the Government's Strategy for the Futureso brilliantly illustrated by the Minister of Planning and Finance. In particular, theaid partnersapplauded the emphasis on macroeconomic stability as an absoluteprerequisite,and the fourpronged strategy consistingof infrastructurerehabilitation,restorationof agriculturalproduction,enhanced emphasis on human resources,and creationof an enabling businessenvironment. IV. STRENGTHENING THE AID PAR TNERSHIP I sense that both the donors and theGovernmentare reasonablyhappywith the existing aid arrangements,includingthe formal annualCG meeting(such as this one), although we can certainlywork on improvingthe format,and the numerousand variedforms of cooperation inthe field -- in particular the specializedworking groupswhich are nowactive. 7r~ l  82 ANNEXX Page 6 of 6 We highlightedthree forms inwhich cooperation can be significantlystrengthened. One has been mentionedrepeatedly,with approval, which isthe designand implementationof integratedsector programs, such as the Government's program inthe health sector - which needs to bereplicated inthe education and agriculturesector. The second is a continuation and a strengtheningof the donor working groupswhich havebeen so successful in preparing us all for this CG meeting. The last one wouldbe followup periodic meetings (every six weeks or so) of theGovernment and the donors in Maputo,inwhich the Government would report on progress of thebroad fronton the issues discussedoverthe past few days. This could be a useful instrumentfor monitoring progresson a more regular basis. We agree,as the UTNDP Coordinator remindedus, thatwe the donor communitymust continue thinkingor rather re-thinkingthe most appropriateforms of technical assistance, of which there may well bean excess supplyand which iscertainlynot used in anoptimal fashion. We must learnto ration this super-abundant good ina way that best servesthe interests of the recipient, notjust those of some of ourbureaucracies,whether bilateral or multilateral. A further usefulsuggestion, made by the Swedishrepresentative,was the establishmentof an analytical workinggroup on External Debt. This proposalrespondsto a real need in view of both the size and the peculiaritiesof the debt problemin Mozambique. This isconsequently an areawhere we, at the WorldBank, would be happyto eithertake a lead or to serve as an active participant.As a first step I proposedthat, withtheIMF,we prepare an information note on thestructure of the debt and debt service and circulateit withthe Chairman's report on this meeting. x x x All in all, the aid partnershave expressedtheir satisfactionin morethan words, as the donors have met the bulk of the financingrequirement for Mozambiquefor 1995. In total, the aid community has pledged aroundUS$780 million-- of whichapproximately30 percent is balanceof payments support, 16percent is food aid, and theremaining 54 percent is investment financeand "other" programs. The remainingfinancinggap couldbe coveredby the extension of the 1993Paris Clubagreementthrough end 1995. Despite whatI saidat the verybeginning of this address,I realizethat I have not donejustice to the full richness of ourdiscussions over the pasttwo days. The excellent preparation and presentation by the Governmentdelegation,headed by His Excellency,the Prime Minister of Mozambique,has provided a clear vision and a candidreview of the issues, accomplishments,and short comings. We hopethatthe MozambicanDelegation has found the responsefromthe aid partners commensuratewiththe challenge -- the 'formidable agenda' as the OECD expressedit - that they have put to us - and to themselves. I declarethis eighthmeetingof the ConsultativeGroup forMozambique closed, and I wish you BonVoyage and Boa Viagem ............... Marcn i , 1995 Paris  WorldBank 83 Eumrop Office: 66avd' 1a, 75116 Pans, France- Telephone(I) 40 69 30 00 ANNEX XI Page 1 of 2 PRESSRELEASE For ImmediatePublication CONSULTATIVEGROUPSUPPORTSMOZAMBIQUF'S POLITICALAND ECONOMICREFORMPROGRAM PARIS,March 15, 1995. The ConsultativeGroupfor Mozambiqueheldits eighthmeetingin Paris on March14and 15,underthe chairmanshipof Ms. KatherineMarshall,Director of the SouthemAfricaDepartmentof the WorldBank. The MozambicanDelegationwas led by His ExcellencyPascoalMocumbi,thePrimeMinister. With the completionof the peace agreement,the successfulfirstmultipartyelection and the establishmentof a new govemment,the meetingtook placeat a watershedfor Mozambique. Peace and democracyoffer the country a fresh possibilityof acceleratingeconomic growth over the medium term and thus reducingthe severe poverty in which the majority of the Mozambicanpeople still live. The ConsultativeGroup focused on the reforms the Governmentproposes to undertake to consolidate peace, revitalize the economy and reduce poverty. It was recognized that strengtheningdemocraticinstitutions,increasingtransparency,and promotingnational unity andreconciliationare a vitalpart of the peaceconsolidationprocess. On the economic front, the Government delegation stated its intention to restore macroeconomicbalance and to pursue economic development by rehabilitating infrastructure, restoring agricultural productivity,developinghumanresources,andprioritizingpublic sectorinvestments.Specific reforms includeincreasingexpendituresin health and education,whilereducing the defense budget to 2.4 % of GDP. The Governmentalso plansa widerange of measuresto promote an enablingenvironmentfor privateinvestmentand to encourageprivatesectordevelopment. These include firm effortsto fight corruption and deepen the financial sector reforms. The Governmentstressedthat, in orderfor the programto succeed,aid partnersmust do their part to increase coordination through integrated sector programs, pooling arrangements and balance of payment and budgetary support, as well as by providing timely information regardingplannedcommitmentsanddisbursements. The participantscommendedthe Governmentfor the successfulway in which the elections were held in October 1994 and for its proposed reform program. They expressed their satisfactionwiththe in-depthdialoguewhichtranspiredwiththe Governmentprior to the CG meeting, and expressedappreciationfor the quality of the Government'spresentation. The Governmenwwasalso commendedfor havingpreparedandpresentedthecurrentyear'sbudget priorto the meetingandfor havingincreasedthe educationandhealthbudgetsby about 44%, in light of thecriticalimportanceall seeto develophumanresourcesinthe nextperiod. r -- r X  84 ANNEXXI Page 2 of 2 While participants applaudedthe Government's initial steps and proposed reform agenda, they alsoagreed that it is importantfor continuedinternationalsupportthat tangibleactionsto achieve agreed objectives be undertakenduring the course of 1995. They noted that the emergencyprogram, includingthe reintegrationof displacedpersonsand the demobilization anddeminingprograms,hadmade verysignificantachievementsduringthe lastyear,but still needed to be completed. Participants stressed the importance of maintaining the overall macroeconomicstabilizationprogram on track, while making progress on decentralization, strengthening democratic institutions, good governance, budget transparency and accountability. Otherpriorityareasfor reformincludedrestructuringthe state ownedbanking sector, acceleratingthe privatizationprogram,improvingland tenure security,reformingthe civilservice,revampingthe customsadministrationandfurtherreducingmilitaryandsecurity expenditures. The ConsultativeGroup alsofocusedon two keydevelopmentissues - povertyreductionand private sector development.Insightfulpresentationsand discussions took place during the meeting on the Government's strategy for reducing poverty and on the constraints to industrialrecovery. The full amnountof extemalfinancingfor creditsandgrants(includingfoodaid andexcluding debt relief) of about US$780million was committedat the meeting. Of this amount, 55% was for investmentsandothergrants,29% wasfor import support,and 16%was for food aid. In this regard,participantsnotedthat continuedimprovementsinthe managementof external aid would enable funds to be provided in a more flexible manner, thereby facilitatingthe implementationof the Government'sreform program.Participantsagreed with the need for improved aid coordination and to work closely with the Government to harmonizetheir procedureson procurementandassuremoretimelydisbursement. They alsoagreedthat more joint work was needed on preparing integrated sector strategies. All participants also recognizedthe magnitudeof Mozambique'sexternaldebt. Analysis of the debt and possible optionswill be a major challengeoverthe comingyear. Membersof the ConsultativeGroup also agreed to continuethe successfuldialogue established in the budget and govemance working groups. The Govemmentexpressedits gratitude for the continuedsupport by the intemational community for its efforts to attain a lasting peace, the consolidation of democracyand sustainablesocialandeconomicdevelopment. The meeting was attended by delegations of Austria, Brazil, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, South Africa, Sweden, Switzerland,the UnitedKingdomand the United States. Also represented were the African DevelopmentBank, the EuropeanInvestmentBank, the EuropeanUnion, the IntemationalFinanceCorporation,the IntemationalMonetaryFund,the Organizationfor Economic Co-operationand Development,the United Nations Children's Fund, the United Nations Development Programme,the United Nations High Commissionfor Refugeesand theWorld FoodProgram. SouthAfricaattendedas an observer. T 7--