Statement by Ilkka Niemi at the Board meeting of December 18, 1997

International Bank for Reconstruction and Development 86863 International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS97-483 December 17, 1997 Board Meeting of December 18, 1997 Statement by Ilkka Niemi Mozambique - Country Assistance Strategy The Country Assistance Strategy for Mozambique has been intensively studied and discussed by involved stakeholders since it was distributed a few weeks ago. As part of this process, the embassies of my authorities have been engaged in discussions in Maputo, and other bilateral donors represented in Maputo have taken part in the discussions. On the basis of these discussions, a common understanding and position on the CAS has developed. The points raised in this statement are partly based on the common position of this group of donor representatives in Maputo. Main Points 1. Analysis and Objective: We are in overall agreement with the analysis and strategy considerations presented in the CAS. The CAS states that the overarching objective of the Bank's assistance to Mozambique is, "to support the Government's program for poverty reduction through sustainable economic growth". This is also the primary objective of development cooperation between countries in our constituency and Mozambique. 2. Strategic Priorities: We support the three strategic priorities of the CAS (para. 41) being (i) the promotion of rapid, broad-based, private sector-led growth, (ii) capacity building and development of human resources and (iii) strengthening development partnerships. 3. Rural Focus: We welcome the reinforced emphasis on poverty-reducing growth. We fully agree that this requires greater focus on rural areas and more funds allocated to rural development, in particular to the central and northern parts of the country which have a high concentration of poverty and a great agricultural potential. Poverty alleviation must focus on raising production levels in smallholder agriculture as well as improving access to rural credits. Immediate emphasis should be given to improving the rural road and rural transport network, and on promoting commerce and marketing and small scale and micro-enterprises (ref. para. 9 and 10 below). The electronic version of the document is provided for convenience. (The official record is the version printed by the Corporate Secretariat). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned.  2 4. Size of the Bank’s Lending Program - the Bank as the Lender of Last Resort: We find that, for a country as indebted as Mozambique, loan financing, even on non-concessional terms, should be avoided for programs that cannot be expected to have a rapid economic return, provided that grant funding is available (e.g., investments in decentralization, rural infrastructure and social sectors). The Bank should play an important role in these areas through policy dialogue and provision of non-lending assistance, and it should act as a "lender of last resort" when grant funding is inadequate. We find that the CAS should have deliberated more on the likely availability of grant assistance and if possible, private financing within the prioritized investment areas as a basis for determining the role of the Bank and the proposed lending volume. Consequently, we find that the proposed lending in the base case scenario of USD 480 million (compared to USD 200 million in the previous period) should be regarded as a potential financial frame rather than a fixed target. 5. Economic and Sector Work: We welcome the ongoing close coordination between the World Bank and IMF on macro-economic analysis and support. We recommend further studies on Mozambique’s absorptive capacity in the various sectors, both from a sectoral perspective as well as from a macro-economic perspective. We regard the Bank as being particularly well placed to combine macro-economic and sectoral analysis and to provide realistic estimates of the level of donor support that Mozambique can absorb over the coming years. This should include calculations of the recurrent cost implications of investments, which we consider of critical importance. 6. Good Governance: Issues of governance and corruption have not been dealt with as systematically as desirable. Corruption is only indirectly addressed in the CAS, although the implications on e.g. concessions and logging are seen as a problem. In view of the Bank having recently adopted new guidelines on the Bank’s anti-corruption policy we would have expected a discussion on the role of the Bank in these areas, and a more direct handling of the issue of corruption. 7. Democratic Development: Would find that greater attention should be drawn to Mozambique’s achievements in the area of democratic development and peace building. Achievements in these areas have been no less impressive than the country’s macro-economic accomplishments. Positive performance on democratization and peace building is a basis for economic and social development and should be commended and encouraged. This will stimulate active political participation by the civil society, including discussions on the country’s development strategy and cooperation with partners such as the World Bank. This should not be regarded as a disturbing factor, but as a sign of building ownership and support from the Mozambican Government’s constituency to its policy programs. Entrenchment of democratic norms and promotion of the rule of law will also be a necessary and complementary element in accountable governance and continued economic development. In this connection we would appreciate to learn the Bank’s view on to which extent the upcoming local election in 1998 may influence the Bank’s cooperation with the Mozambique. The electronic version of the document is provided for convenience. (The official record is the version printed by the Corporate Secretariat). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned.  3 Other Points 8. Mega-projects: We share the concerns regarding the social and environmental impacts and wider economic benefits of the "mega-projects", such as the MOZAL aluminium smelter. We recommend that the Bank supports Mozambique in better linking private investments to the overall economy, in order to clearly pursue the objectives of the Bank's assistance strategy in the country. 9. Micro-enterprises: Simplification of regulations, currently impeding micro-enterprises, should have high priority. Similarly, priority should be given to the promotion of micro-credits, preferably from the private sector, for agriculture as well as for non-agricultural micro-enterprises. 10. Roads Program: An extended road program should be given high priority. However, the program should have a profile different from the present Bank-funded ROCS program, and should focus on secondary and tertiary roads. In addition, the road program should make use of more labor-intensive techniques in order to provide rural employment and income, lay the basis for low-cost maintenance, and facilitate participation by Mozambican contractors. 11. Small Contracts: Increased participation by the local private sector in public investment programs should be encouraged. As Mozambican companies have limited capacity, contracts for tender should generally be smaller than they have so far been under Bank-funded investment programs. 12. Capacity Building: To reach the overarching development objective of the CAS, long-term investments, as well as reforms, are required in the public as well as the private sector in order to build capacity and develop human resources 13. Environment: We would have appreciated a more pro-active approach with regard to environmental issues and concerns. This should include the carrying out of EAs, prior to decisions on an active participation by any parts of the Bank Group (IDA, IFC and MIGA). 14. Gender: We would have expected a more prominent gender focus in this CAS, especially in view of the focus in the CAR on this issue. However, the timing of the CAR and the CAS has not allowed findings in the CAR on this issue and other issues to be taken fully into account in the CAS. We, therefore, hope that CAR and CAS processes will be better scheduled in the future. 15. Strengthening Partnership: We welcome the Bank's decision to delegate the portfolio management responsibility to the country office in Maputo. The current centralized organization has hampered program implementation and the Bank’s dialogue with the Mozambican government, the civil society, the local donor community and other cooperation partners in Mozambique. There seems to be a need to improve this dialogue in Mozambique, and we wish to encourage the Bank to further delegate authority to the field, as this will facilitate partnership and cooperation. The electronic version of the document is provided for convenience. (The official record is the version printed by the Corporate Secretariat). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned.  4 16. Preparations of the CAS - involving local partners: During the preparation of the CAS, it appears that the local donor community has found insufficient openness from the side of the Bank. On this background, we would appreciate to learn to which extent the Bank generally carries out consultations with local donor communities and other local development partners in the preparation of CASs, and specifically, whether the next CAS for Mozambique will be carried out in a participatory process. The electronic version of the document is provided for convenience. (The official record is the version printed by the Corporate Secretariat). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned.