Mozambique - Third Economic Recovery Credit

Report No. PIC1880 Project Name Mozambique-Third Economic Recovery (@) Credit (TERC) Region Africa Sector Economic Management Project ID MZPA35922 Borrower Government of Mozambique Implementing Agency Ministry of Planning and Finance Date of this PID February 3, 1997 Projected Appraisal Date July 1996 Board Date February 4, 1997 Background In 1987, the Government of Mozambique embarked upon a wide-ranging reform program aimed at establishing the basis for sustained economic growth and poverty reduction. After fifteen years, the war ended in 1992 and Mozambique's first multi-party elections were held in October 1994, returning power to Frelimo. Significant reform has already taken place. Price controls and quantitative restrictions on external trade have been essentially removed, and since 1992 the exchange rate is being determined by a unified market for foreign exchange. Over 600 out of about 1,000 state-owned enterprises have been privatized. However, the macroeconomic framework remains unstable and structural reform, especially in the financial and fiscal sectors, is far from complete. Objectives The Third Economic Recovery Credit (TERC) seeks to support the Government's reform agenda as outlined in the Policy Framework paper for 1996-98. The agenda targets broad-based, poverty-reducing growth through (i) the restoration of a stable macroeconomic framework; (ii) the development of the private sector; (iii) the promotion of high growth potential sectors, such as agriculture and transport; and (iv) the development of human resources to ensure long term growth and welfare. Within this broad strategic agenda, the TERC will focus on structural and policy reforms aimed at strengthening aggregate demand management, chiefly through further financial and fiscal reforms, and at generating a rapid and sustainable supply response, by removing key impediments to growth. Description This will be the fifth adjustment credit for Mozambique since 1988. The proposed credit will consist of two broad component s (i) demand management measures; and (ii) supply response measures. The first area will be concerned with financial sector reform (the privatization of the two state banks) and fiscal management (budget management, indirect subsidies to enterprises). The second will concentrate on removing key  impediments to growth through further rationalization of sales taxes and tariffs, cashew liberalization, and restructuring of CFM - the parastatal running the national ports and railways. Environmental Aspects The recommended environmental assessment category is C. The proposed operation does not have a direct environmental impact. Implementation The credit will be disbursed through Bank of Mozambique, in two equal tranches, upon compliance with the conditions, yet to be defined. Simplified disbursement procedures under adjustment credits will apply. The Ministry of Planning and Finance will be responsible for coordinating the implementation of the reform program agreed under the credit. In addition to monitoring a number of economic indicators, the proposed operation will support a system to monitor the poverty and gender impact of cashew liberalization. As such, this adjustment operation will be one of the three gender impact pilots supported within the SPA initiative. Financing The amount of the proposed IDA credit is US$100 million. As a balance of payments support operation, the proposed credit will finance 1009 of the foreign exchange costs of eligible imports. Benefits and Risks The credit will assist in meeting Mozambique's financing requirements during 1997 and the first half of 1998. In addition, it will support the implementation of key structural reforms needed to restore macroeconomic stabilization and to ensure sustained growth. The cashew liberalization component will have a direct poverty impact as it will enhance the earnings of over one million farmers. Potential risks are linked with Mozambique's weak institutional and managerial capacity, which may slow down execution of several components of the program, and some opposition from special interest groups. The Government has achieved a great deal in mitigating these risks by informing the public in general about the benefits of reform and by actively seeking consultation with the private sector and other stakeholders. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. - 2 -  Processed by the Public Information Center week ending February 7, 1997. - 3 -