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Cablegate: Imf and Mozambique Agree On 2005 Program

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 MAPUTO 001653

SIPDIS
DEPT FOR AF/S, AF/EPS, EB/IFD, AND EB/CBA
DEPT PLS PASS AID FOR /AFR/SA AND EGAD
TREASURY FOR OASIA - E BARBER, USED/IMF, AND USED/IBRD
USDOC FOR 3131/ITA/ANESA/KBRENNAN/JMATHESON
USDOC FOR 4510/ITA/MAC/OA/JDIEMOND
PASS USAID FOR AA/AFR AND AFR/SA
SENSITIVE
E.O. 12958: N/A
TAGS: ECON EAID MZ IMF
SUBJECT: IMF AND MOZAMBIQUE AGREE ON 2005 PROGRAM
UNDER PRGF


(U) Sensitive but unclassified - not for Internet
Posting - protect accordingly.

1. (SBU) Summary: An IMF Mission visited Mozambique
from 8-24 September 2004 to review progress under the
PRGF and to advise the GRM regarding the 2005 budget.
Agreement was reached ad referendum on a Letter of
Intent (LOI) for 2005. However, the GRM then changed
the 2005 budget methodology, including so-called own
revenues (e.g. hospital fees) in the budget,
necessitating a rework of the 2005 program.
Subsequent to this change, the GRM concluded the
concessioning of the Moatize coal fields,
necessitating a further revision. The GRM and the IMF
now appear ready to finalize the LOI, and the GRM is
ready to submit the budget to Parliament. The IMF
came away generally quite satisfied with macro
developments and structural conditions but noted some
slippage in completing structural benchmark actions.
GDP growth will be 7.8 percent in 2004, and 7 to 7.5
percent in 2005. Inflation is being brought down to
11 percent in 2004, and in 2005 will be further
reduced to 8.5 percent. Exports are up and forex
reserves cover nearly six months of imports. Interest
rates have declined. The private sector enabling
environment, the legal and judicial sector, and
HIV/AIDS are the areas of most concern for the Fund.
The IMF commended GRM management of the economy in the
run-up to the 1-2 December national elections. The
Fund encouraged donors to give more in order that the
Millennium Development Goals might be achieved. A
study of land as collateral for bank loans, the
creation of a Central Revenue Authority, VAT refund
delays, SISTAFE launch problems, and better
harmonization between the IMF and the Budget Support
donors rounded out the discussion. End summary.

2. (SBU) Background: This message concerns the IMF's
first review of progress under the Poverty Reduction
and Growth Facility (PRGF) for Mozambique which was
approved on 9 July 2004. A Fund Mission visited Maputo
from 8-24 September 2004, and returned to Washington
thinking that it had essentially completed the review
ad referendum. However the draft 2005 budget which
was the basis of the 2005 macroeconomic program was
subsequently revised quite substantially to include
considerable amounts of revenue and expenditure which
had been "off budget," often referred to as "own
receipts." While this broadening of the coverage of
the budget was welcomed, it meant that the
macroeconomic program had to be reworked. Then the
GRM concessioned the Moatize coal field to the
Brazilian conglomerate CVRD for USD 123 million which
led to a further reworking of the program. In early
December, the GRM was pushing to get Fund agreement so
that the 2005 budget and the annual economic and
social plan could be finalized and sent to parliament.
The IMF would then finalize the PRGF consultation
paper with a 2004 date on it, but the Board review
target date of 19 January 2005 is likely to slip to
February. While some of the 2005 and out year numbers
will be changed, we understand that 2004 performance
continues on track, and the overall concept of the
2005 program is essentially the same as described in
the debriefing reported below. The PRGF is a small
program (USD 16.6 million over three years) designed
to support the authorities' reform program along with
minimal balance-of-payments support. The Fund
Mission, headed by Mr. Juan Carlos Di Tata, was timed
to provide counsel to the GRM as their 2005 budget was
being shaped. The IMF visit coincided with the Mid
Year Review (MYR) of progress in economic and social
development activities of the GRM. The MYR is
conducted jointly by the 15 Program Assistance
Partners (a.k.a. the G-15) and the GRM. The Fund team
met with the donors several times during the mission
in an effort to coordinate with the MYR.

3. (SBU) Macro performance 2004 is on track with the
program. Real Gross Domestic Product is on a path to
7.8 percent growth in 2004. Prices, as measured by
the Maputo index, have risen 12 percent from a year
ago, and the 11 percent target for 2004 is still
expected to be obtained. There is a shortfall in
customs revenue which has been compensated for by
expenditure cuts. Monetary growth has exceeded its
target due to an accumulation of reserves, and a
broadening of application of bank reserve requirements
in June has served to slow somewhat the growth of M2
money supply. Exports are up strongly as Mozal's
stage II aluminum refinery is now on stream, and
natural gas exports to South Africa via the SASOL
pipeline have begun. Interest rates on loans continue
to decline; from a 37 percent annual rate at the end
of 2002, bank loan rates are now down to 24 percent.
Deposit rates are now in the 11 percent range, so
there is now a zero real rate being paid on deposits
rather than the negative real rate in the recent past,
as inflation has dropped. The mega projects (Mozal
and the Sasol gas pipeline) have had a major impact on
the balance of payments; Mozal II has boosted exports
some 60 percent and imports of raw materials
(especially alumina) have also risen dramatically.

4. (SBU) Structural conditions and benchmarks for 2004
are reported to be generally positive with some
shortfalls. The conditions regarding submission of
the draft general tax law to parliament, the
strengthening of the Bank of Mozambique's balance
sheet by shifting IRS external debt to the Treasury,
and close monitoring of the performance of the
country's largest bank, Banco Internacional de
Mozambique (BIM) have been met. Indeed, BIM was
described as both profitable and prudential. However,
benchmarks performance was described as mixed.
Specifically, submission to the parliament of the law
to create the Central Revenue Authority (CRA) was two
weeks late, budget reporting using the computerized
government accounting system "SISTAFE" is delayed, and
the strategy for resolving difficulties with two small
banks is only half complete. However, regulations to
implement the new financial law have been drafted, the
micro-finance regulations are being prepared, and the
feasibility study to divest GRM holdings in BIM should
be ready by year's end.

5. (SBU) For 2005, the Fund projects generally
favorable performance. Real GDP will grow in the 7 to
7.5 percent range while price inflation will slow to
8.5 percent. Aid flows will continue rising, reaching
USD 820 million, up from USD 740 million in 2004.
Fiscal policy will hold steady, with the domestic
primary deficit unchanged at 3.3 percent of GDP. The
government's wage bill, a point of contention in the
review a year ago, will appear to go up as a
percentage of GDP because of a change in
classification of expenditures. Moreover, government
proposes to add 10,000 new employees in priority
sectors, 5000 of which in education alone, so the Fund
expects that nominal wages and salaries for the public
service will increase less than inflation.

6. (SBU) Structural developments expected in 2005
include approval of the CRA law by the parliament, and
the issuance of implementing regulations. Delays in
the implementation of SISTAFE mean the first budget
execution report generated by the new system will be
for the first quarter of 2005. The Fund will provide
technical assistance in monetary and exchange rate
management and in bank supervision management.
Reviews of the largest four banks leading to their
transition to international accounting standards (IAS)
will be completed by end 2004, paving the way to IAS
adoption in early 2005. A draft law clarifying and
improving the foreign exchange regime will be
submitted to parliament in the second half of 2005.
The GRM will strengthen the balance sheet of the
central bank over the three year period 2005-2007 by
issuing securities to the central bank.

7. (SBU) Private sector problems were given
considerable emphasis in Mr. Di Tata's presentation.
He deplored the high cost of doing business in
Mozambique and welcomed the issuance of new business
license regulations during the IMF's visit. He called
attention to delays with customs clearances, both
import and export. He is counting on the
establishment of a "dry port" at Ressano Garcia, on
the border with the Republic of South Africa and the
principal entrepot for overland commercial traffic.
He noted that the private sector believed that the
decree of December (2003) liberalizing the use of ex-
pat labor in Mozambique was working well, but he
called for further labor sector reforms, particularly
in severance compensation and work regulations, in a
new draft law to be presented to parliament by the end
of 2005. Di Tata is also expecting continued progress
in privatizing the state airline LAM, the telephone
company TDM and its cell phone spin-off MCel, as well
as water supply companies and the ports and railways
conglomerate CFM.

8. (SBU) Public sector reform is of vital importance
and implementation is seen as a long term program of
the World Bank. The Fund is concerned with the
linkage of wages to productivity in the public sector.
The Fund is also following closely the development of
a new decree regulating public sector procurement
under the SISTAFE law.

9. (SBU) Land tenure regulations came up near the end
of Mr. Di Tata's presentation. In the GRM's letter of
intent to the Fund for the new PRGF, Government
announced plans to issue a decree to regularize
property rights in urban areas before end-July 2004.
The draft decree was taken up in the Council of
Ministers, and it was decided that further studies
were needed and that the final decision would be put
off until after the December 2004 election. Mr. Di
Tata also called attention to the letter of intent's
commitment to undertake a Poverty and Social Impact
Analysis (PSIA) to study land tenure issues with a
view to facilitating the use of land as collateral to
access bank credit. Earlier Mr. Di Tata had asked
bilateral donors to finance the PSIA, and several,
including Ireland, the Netherlands, Germany, and USAID
have expressed willingness to do so.

10. (SBU) Short takes: Limited progress was reported
for reform of the judicial sector. Statistics for the
real sector of the economy will be improved. The
National Statistics Institute will undertake a labor
force survey in September 2005. The GRM will prepare
a new PRSP (PARPA in Portuguese) for February 2006.

11. (SBU) The following points were offered during
the Q and A:
-- the drop in customs revenue is not very large;
-- the flow of budget funds to the provinces will
catch up in the second half of the year;
-- SISTAFE has been delayed but by the end of 2005,
60 percent of the budget will be covered by the new
system;
-- the Fund had no time to examine the discrepancies
between the Budget Execution Report and the mid-year
report to the parliament on implementation of the 2004
Economic and Social Plan;
-- as a follow up to the Safeguards Mission of the
IMF, a Statistics Mission is working with the central
bank to reconcile monetary statistics;
-- donor timing of budget support disbursements is
better in 2004 than in 2003, and the amount is holding
steady at 13.5 percent of GDP;
-- to achieve the Millennium Development Goals, the
Fund is encouraging donors to provide more assistance
into sound activities commensurate with GRM's
absorptive capacity, and the Fund is not concerned
with reducing aid dependency in the short- and medium-
term as long as macroeconomic stability is not
affected in a negative way;
-- GRM management of the economy in the run-up to
elections has been very good in terms of stability,
maintenance of the program, structural reforms, and
macro management-- Di Tata said "good job";
-- there has been some appreciation of the real
effective exchange rate as a result of forex reserve
accumulation and the corresponding issuance of
government paper (T-bills) and the Fund is encouraging
greater use of forex reserves instead -- the
accumulated appreciation in 2004 now is at about 6.5
percent. [According to the Standard Bank of South
Africa's branch in Maputo, the appreciation has been
10.7 percent against the USD, 2.0 percent against the
ZAR, and 7.2 percent against the EURO for the 12
months ending September, 2004].
-- The appreciation of the metical does not bode well
for Mozambique's traditional exporters.
-- VAT refund delays are a problem and arise to some
extent from the undertakings to waive VAT for flood
reconstruction projects but the Fund is not getting
too involved. Di Tata remarked that some refund
claims were not justified. In give and take on this
point it was opined that the system of refunds is too
complicated and that the VAT authorities can always
find a fault with any refund application. Concern was
expressed that the GRM "budget" for refunds was too
low compared with legitimate refund obligations. The
IBRD's Peter Moll, attached to the IMF Mission,
believes that the GRM can meet the 60 day refund
target and perhaps lower it. The tripartite VAT
Refund Task Force, agreed to in the GRM/G-15 Joint
Review in March-April 2004, is still to be convoked.
-- the Fund does not consider Mozambique's external
or internal debt position to be a problem at present;
-- the Fund agrees that there is some validity to the
need to simplify and perhaps reduce income tax rates,
and a Fund Fiscal Affairs Department Mission was
examining this question while the PRGF Mission was in
Maputo. However, there is no consideration being
given to reducing the VAT rate of 17 percent;
-- trade issues are being led by the World Bank, the
top tariff rate will come down to 20 percent (from 25
percent) in 2006, and there will be no major changes
in trade policy in 2005;
-- the Swiss Ambassador and chair of the G-15 budget
support donors (USAID is an observer) looked for
increased harmonization of the IMF with the G-15,
commented that the G-15 concerns were not with macro
performance but with [1] the private sector, [2] the
judicial sector, and [3] the banking system and bank
supervision. Mr. Di Tata agreed with [1] and [2], did
not fully agree with [3], and added [4] HIV/AIDS;
-- the head of French Cooperation challenged the IMF
to 'harmonize' more closely with the work of the G-15
budget support donors. Di Tata threw up his hands and
asked what the Fund should do differently. The G-15
wants earlier and better budget projections and better
leadership from the Ministry of Plan and Finance
(MPF). The Mid Year Review and the IMF Mission were
plagued by last minute and inadequate presentations by
the GRM. The IBRD member of the Mission said the MPF
doesn't have the sector expertise necessary for the
job.

12. (SBU) Comment: The IMF team was clearly pleased
with performance to date but noted some reluctance on
the part of the authorities to commit for the new
administration that is expected to take office in
January 2005. The Fund noted that it was the GRM's
purpose in seeking the new PRGF to commit the new
administration to follow on with the reform process.
We are pleased with the IMF's concern about the needs
of the private sector and will work closely with the
Resident Representative to pursue the achievement of
the liberalization agenda that we share. End comment.
DUDLEY

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