Mozambique - Economic Recovery

 Economic Recovery Report No: ; Type: Report/Evaluation Memorandum ; Country: Mozambique; Region: Africa; Sector: Macro/Non-Trade; Major Sector: Economic Policy; Project ID: P001775 The Implementation Completion Report (ICR) for the Mozambique Economic Recovery Credit (Credit 2384-MOZ), was prepared by the Southern Africa Regional Office. The credit was approved in FY92 for an amount of US$180 million equivalent, and closed on June 30, 1996, one year after the original closing date. A remaining balance of less than US$30,000 equivalent was cancelled. Switzerland, Norway, Denmark, and the United Kingdom provided cofinancing. The Borrower approved the ICR, but did not provide comments. In addition to supporting a program of continued macroeconomic stabilization, the ERC supported specific measures to (i) improve foreign exchange allocation and export incentives; (ii) strengthen the role of the Central Bank and develop a commercially-oriented financial sector; (iii) privatize state enterprises in commercial sectors; (iv) redeploy public expenditures toward the social sectors; and (v) establish a targeted safety net for the urban poor. The credit supplied general import financing in two equal tranches. The credit built upon reforms already undertaken under three IDA rehabilitation credits. Specifically, it supported the Borrower’s Economic and Social Rehabilitation Program (ESRP), formulated in 1991 and supported by the IMF and a wide array of multilateral and bilateral donors. Substantial progress was made toward achieving all five major objectives of the credit. The administratively-managed system of foreign exchange allocation was replaced with market-based allocation, including a substantial real devaluation. The Central Bank of Mozambique and the Commercial Bank of Mozambique were established as separate entities and a diversified set of private financial institutions created. Thirty-two major public enterprises were privatized, comprising two-thirds of the production capacity of the public sector. Redeployment of budgetary expenditures resulted in significant increases in the volume of health and primary educational resources. And a safety net assisting 80,000 urban poor was established, while the number of families nationwide in need of food assistance declined from over one million in 1994 to 90,000 in 1996. However, progress towards stabilization was more modest. While economic growth accelerated during the implementation period to 6 percent annually, progress toward restoring fiscal equilibrium has been elusive, hampered by declining revenues, difficulties in coordinating external aid, a large and unsustainable burden of external debt, and limited institutional capacity. These difficulties led to a roughly one-year delay in disbursement of the second and final tranche. Nevertheless, overall progress toward reform since 1987 has been impressive, and suggests a strong degree of Borrower commitment to sustain the reforms supported by the ERC. The ICR rates project outcome as satisfactory, sustainability as likely, institutional development as high, and Bank performance as satisfactory. OED is in agreement with all these ratings. The principal lessons are that: (i) borrower ownership of the adjustment program was essential to its success to date; (ii) unsynchronized progress in implementing privatization and financial sector reforms contributes substantially to macroeconomic instability; and (iii) Mozambique’s slow progress toward reducing fiscal imbalances limited the scope for reorienting budgetary expenditures towards health and education, and hence the effectiveness and scope of the safety net for the poor. The ICR is of satisfactory quality. It covers all key topics, provides adequate supporting evidence, and is internally consistent in its analytical conclusions. Particularly noteworthy is its exemplary aide memoire. However, it does not include a plan of future operation, and would have benefited from a more explicit discussion of the Borrower and cofinancier comments received. The longer-term impact of the ERC will be assessed as part of a forthcoming CAR on Mozambique.