Executive summary
Mozambique's performance under the authorities' program during the first three quarters of 2003 remained broadly on track. Manufacturing output, construction, and services performed strongly during the first half of 2003, and the program's target of real GDP growth of 7 percent for the year as a whole appears achievable. After peaking in May, the 12-month rate of inflation declined to 14 percent in September as the impact on food prices of the regional drought subsided. However, the end-year inflation target of 10.8 percent is likely to be exceeded. All the indicative program targets for end-June 2003 and most indicative targets for end-September were observed. The program's three structural benchmarks and some structural measures envisaged for the second half of 2003 have been implemented. Other measures have been delayed, however, owing in part to factors beyond the authorities' control.
The government's domestic primary deficit turned out significantly smaller than programmed during the first half of 2003. Total revenue was in line with expectations, but locally financed capital expenditure was lower than envisaged reflecting delays in project execution associated with aid shortfalls. Monetary growth- has been subject to substantial volatility owing in part to operations performed by some private companies involving large purchases of government bonds with bank deposits, with repurchase agreement. The still high level of lending rates (bank spreads remain wide at 18 percent) has contributed to a slower than envisaged growth of credit to the private sector.
The policy discussions focused on the macroeconomic policies for 2004-06 and the government's plans to address pending structural reforms in order to broaden and sustain growth. Understandings were reached, in principle, on the main elements of a macroeconomic framework for 2004. Real GDP growth is projected to increase to over 8 percent in 2004 owing to the coming on stream of the expansion of the aluminum smelter (MOZAL II) and the gas pipeline (SASOL). End-year inflation is targeted to decline to 9 percent, and net international reserves are programmed to increase to above 5 months of imports.
Discussions on structural issues focused on the authorities' plans to remove remaining obstacles to private sector development, including weaknesses in the financial system. The authorities are working on measures to (i) reduce red tape and simplify the regulatory framework; (ii) address labor rigidities that hinder competitiveness; (iii) improve basic infrastructure, including by increasing private sector participation in key sectors; and (iv) reform the judicial system. In addition, the World Bank is supporting a reform program to increase efficiency in the public sector. The mission also discussed with the authorities a number of recommendations made by the FSAP team to tackle remaining vulnerabilities in the financial system and improve monetary management.
Based on the reasons provided in the expost assessment, the staff is of the view that a recommendation to the Executive Board of continued Fund support through a new low access PRGF arrangement would be warranted. Following completion of the Article IV consultation and taking into account the views of the Board, a second mission would visit Maputo early next year to continue the discussions on a possible successor program.
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