Mozambique - Economic Management Reform Operation

 ICRR 10863 Report Number : ICRR10863 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 08/10/2000 PROJ ID : P001767 Appraisal Actual Project Name : Economic Management Project Costs 150 150 Reform Operation US$M ) (US$M) Country : Mozambique Loan /Credit (US$M) Loan/ US$M ) 150 150 Sector (s): Macro/Non-Trade Cofinancing US$M ) (US$M) L/C Number : Board Approval 99 FY ) (FY) Partners involved : Closing Date 12/31/1999 12/31/1999 Prepared by : Reviewed by : Group Manager : Group : 2. Project Objectives and Components a. Objectives The overall objective was to support the continued implementation of a favorable macroeconomic framework, and to implement reforms aimed at improving the sustainability and efficiency of public sector operations. The operation was a grant extended in the context of IDA’s HIPC initiative. b. Components (1) Tax and Trade Policy: goals were to (a) reduce tax-induced distortions; (b) improve the efficiency of taxation; (c) support institutional changes that would improve the quality of tax administration; (2) Customs Reform and Import Administration: strengthen customs administration and simplify the import process; (3) Budgetary Management: (a) improve the transparency and coverage of the budget, and ensure adequate recurrent funding to finance health and education programs, maintain infrastructure, and decompress civil servants’ salaries; (4) Sustainability of Expenditures: support government’s efforts to (a) improve effectiveness of the budget as a tool to assure that fiscal aggregates are sustainable in the medium term; and (b) improve prioritization of public expenditures to attain stated policy objectives. c. Comments on Project Cost, Financing and Dates Project cost was US$150 million, of which half was disbursed in the first tranche, on March 23, 1999, with the rest disbursed in the second tranche on June 15, 1999. The project closed as planned on December 31, 1999. 3. Achievement of Relevant Objectives: Tax and Trade Policy: Turnover and consumption taxes were replaced with VAT and excise taxes, respectively, and the top excise tax rate was reduced from 35% to 30%. The country now has one of the most liberal import tariff regimes in the region. However, in late 1999 the government backtracked and increased protection on the cashew and sugar sectors. Customs: Implementation of reforms continued, with the time needed to process import documentation falling from 3-4 weeks to 48 hours. The effective rate of duty collection rose from around 7% in 1997 to 9% in 1998, and 11% in 1999. Budgetary Management: A study was done of off-budget revenues, and modest progress was made by including some categories into the budget. Sustainability of Expenditures: Medium Term Expenditure Frameworks were prepared for the 1999 and 2000 budgets, and quarterly budget execution reports were prepared comparing planned vs. actual expenditures at the central and provincial levels. 4. Significant Outcomes/Impacts: To avoid short-term revenue loss, coordination between domestic tax reform, trade liberalization, and customs overhaul was achieved. Budget revenues increased slightly from 10.7% of GDP in  1998 to 10.8% in 1999. Macroeconomic performance during the project remained strong, with GDP growth at 12% in 1998 and 9% in 1999, and inflation at 0.6% and 2.0% in those two years. A foundation was laid for utilizing the budget as part of the process of formulating overall economic policy, as well as for exercising stronger control over the budget. 5. Significant Shortcomings (including non-compliance with safeguard policies): As noted, the government backtracked on several policy reforms, including protection for the cashew and sugar sectors. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Exemplary NOTE: NOTE ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness. 7. Lessons of Broad Applicability: Borrower commitment to reforms is the most important key to a successful adjustment operation . In a broad reform program, it is critical to sequence actions so that fiscal impacts are manageable . In a country with limited capacity, a more narrowly -targeted operation is more likely to be successful . 8. Assessment Recommended? Yes No Why? Project lessons are likely to be particularly relevant to future Bank operations . 9. Comments on Quality of ICR: OED rates the ICR as exemplary, even though it should be pointed out that it is prepared in accordance with the pre-1999 guidelines. The ICR clearly reviews each area of project activity, and provides candid assessment of achievement backed by ample evidence and data . Lessons learned are commendable .