Document of The World Bank

Report No: ICR00002413

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-41320)

ON A

CREDIT

IN THE AMOUNT OF US$10.5 MILLION EQUIVALENT

TO THE

REPUBLIC OF MOZAMBIQUE

FOR A

FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT

December 28, 2012

Finance and Private Sector Development Country Department AFCS2 Africa Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective June 30, 2012)

Currency Unit = Meticais US$ 1.00 = 27.95 Meticais

US$ 1.00 = 1.52 SDR

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AfDB African Development Bank ADP AML

Área da Dívida Pública (Public Debt Department of MoF) Anti-money laundering

BCP Basel Core Principles BoM Banco de Moçambique (Bank of Mozambique) BVM Bolsa de Valores (Mozambican Stock Exchange) BTs CSD

Treasury securities (also referred to as Treasury bills) Central Securities Depository

DFID UK Development Fund for International Development DGI Direcção Geral dos Impostos (General Directorate of Taxation) DNT Direcção Nacional de Tesouro (National Directorate of Treasury) EMPSO Economic Management and Private Sector Operation FSAP Financial Sector Assessment Program FSCBP Financial Sector Capacity Building Project FSTAP Financial Sector Technical Assistance Project GTZ/GIZ German Technical Assistance Cooperation ICR IDA IFB

Implementation Completion and Results Report International Development Association Instituto de Formação Bancária (Bankers’ Training Institute)

IFRS International Financial Reporting Standards IMF International Monetary Fund INE Instituto Nacional de Estatística (National Statistics Institute) ISR Implementation Status and Results Report IT Information technology KfW Kreditanstalt fur Wiederaufbau (German Fund for Reconstruction) MoF Ministério das Finanças (Ministry of Finance)

OTs PAD

Treasury bonds Project Appraisal Document

PDO Project Development Objective PIU Project Implementation Unit PRSC Poverty Reduction Support Credit PROCYS World Bank Africa Procurement Cycle Tracking System QALP Quality Assessment of Lending Portfolio RTGS Real Time Gross Settlement SIDA SISTAFE

Swedish International Development Agency Government’s public financial management system

ToR Terms of Reference

Vice President: Makhtar Diop Country Director: Laurence Clarke

Sector Manager: Irina Astrakhan Project Team Leader: Mazen Bouri

ICR Team Leader: Susan Hume

REPUBLIC OF MOZAMBIQUE

Financial Sector Technical Assistance Project (FSTAP) (P086169)

CONTENTS

A. Basic Information............................................................................................................ i B. Key Dates ........................................................................................................................ i C. Ratings Summary ............................................................................................................ i D. Sector and Theme Codes ............................................................................................... ii E. Bank Staff ....................................................................................................................... ii F. Results Framework Analysis .......................................................................................... ii G. Ratings of Project Performance in ISRs ........................................................................ v H. Restructuring ................................................................................................................. vi I. Disbursement Profile ..................................................................................................... vi

1. Project Context, Development Objectives, and Design .................................................. 1 2. Key Factors Affecting Implementation and Outcomes .................................................. 6 3. Assessment of Outcomes .............................................................................................. 16 4. Assessment of Risk to Development Outcome ............................................................. 26 5. Assessment of Bank and Borrower Performance ......................................................... 27 6. Lessons Learned ........................................................................................................... 30 7. Comments on Issues Raised by Borrower .................................................................... 30

Annex 1 Project Costs and Financing ............................................................................... 32 Annex 2 Outputs by Component ...................................................................................... 33 Annex 3 Economic and Financial Analysis ...................................................................... 46 Annex 4 Bank Lending and Implementation Support/Supervision Processes ................. 47 Annex 5 Borrower’s ICR .................................................................................................. 49 Annex 6 List of Supporting Documents ........................................................................... 53 MAP

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A. Basic Information

Country: Mozambique Project Name:

MZ-Financial Sector TA Project Financial Sector Technical Assistance

Project ID: P086169 L/C/TF Number(s): IDA-41320 ICR Date: 12/01/2012 ICR Type: Core ICR

Lending Instrument: SIL Borrower: GOVERNMENT OF MOZAMBIQUE

Original Total Commitment:

XDR 7.30M Disbursed Amount: XDR 6.28M

Revised Amount: XDR 7.30M Environmental Category: C Implementing Agencies: Ministry of Finance, Bank of Mozambique Co-Financiers and Other External Partners: Complementary projects/parallel financiers: African Development Bank, German Fund for Reconstruction (KfW), and German Technical Cooperation (GTZ). Other partners: United Kingdom Department for International Development (DFID), Swedish International Development Agency (SIDA), and International Monetary Fund (IMF). B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 08/07/2003 Effectiveness: 03/14/2006 03/14/2006 Appraisal: 09/28/2005 Restructuring(s): 06/22/2011 Approval: 12/01/2005 Mid-term Review: 04/30/2008 03/30/2008 Closing: 06/30/2011 06/30/2012 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Negligible Bank Performance: Satisfactory Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory

Overall Bank Performance: Satisfactory Overall Borrower

Performance: Satisfactory

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C.3. Quality at Entry and Implementation Performance Indicators

Implementation Performance Indicators QAG Assessments

(if any) Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Moderately Satisfactory

Quality Assessment of Lending Portfolio (QALP-1) 9/18/2008

Likelihood of Achieving DO: 2 (likely)

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Banking 36 72 Central government administration 48 22 Non-compulsory pensions and insurance 12 0 Tertiary education 4 6

Theme Code (as % of total Bank financing) Administrative and civil service reform 14 14 Debt management and fiscal sustainability 29 29 International financial standards and systems 29 29 Other financial and private sector development 14 14 Regulation and competition policy 14 14 E. Bank Staff

Positions At ICR At Approval Vice President: Makhtar Diop Gobind Nankani Country Director: Laurence Clarke Michael Baxter Sector Manager: Irina Astrakhan Antony Thompson Project Team Leader: Mazen Bouri Sherri Archondo ICR Team Leader: Susan Hume

ICR Primary Author: Susan Hume F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) Within the overall framework of the multi-donor program, the project development objective (PDO) of IDA’s contribution to the program was to improve the soundness of the Mozambican Banking Sector and to improve public debt management.

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The PDO was to be supported by: (i) strengthening the banking sector, including improving the institutional capacity of the Bank of Mozambique; (ii) improving financial accountability and transparency; (iii) strengthening public debt management; and (iv) improving money and government bond market efficiency and depth. Revised Project Development Objectives (as approved by original approving authority) One of the two key PDO indicators noted in the PAD was changed in 2007: “Debt burden indicators do not signal a reasonable risk of debt servicing difficulties”, was dropped and replaced with a new indicator: “Percentage of outstanding treasury securities traded on the secondary market”. No formal revision of the indicators was undertaken. (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at Completion or Target

Years

Percentage of banks in compliance with improved prudential regulations

Not available until regulations

issued 100% 95%

Date Nov 3, 2005 April 30, 2012

Comments Target met

1 of 18 banks was not compliant (this bank represents less than 0.5 percent of total assets in banking sector)

Percentage of outstanding treasury securities (BTs) traded on the secondary market

0 No secondary

trading at project conception

Market was under-developed and no

specific target identified

1.5% Some development since

2009 start (including reaching 17% in August 2011) but recent trading

minimal Date Nov 3, 2005 June 30, 2012

Comments Target not met

This reflects poor selection as PDO indicator; underlying objective to improve public debt management was actually met.

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(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at Completion or Target

Years

Number of BCP BoM is compliant with

BoM compliant with 13 of 23 relevant BCP

BoM compliant with 16 of 23 relevant BCP

BoM compliant with 21 of 25 relevant BCP

Date March 14, 2006 June 30, 2012

Comments Target met (exceeded)

Two BCPs were added during implementation for a total of 25, of which compliance was achieved for 21

Reduction of time needed to transfer funds between banks

24 hours Real time for banks

Real time for banks representing 80% of the

system Date March 14, 2006 June 30, 2012

Comments Target largely met

Percentage of banks whose financial reporting is in accordance with IFRS

0% 100% 94%

Date March 14, 2006 June 30, 2012

Comments Target largely met

1 of 18 banks was not compliant (this bank represents less than 0.5 percent of total assets in banking sector)

Percentage of large enterprises whose financial reporting is in accordance with IFRS

0% 75% 97%

Date March 14, 2006 June 30, 2012

Comments Target met (exceeded)

Over-achievement may be explained by the fact that most large corporations either are: (i) already required by their parent corporation to use IFRS; or (ii) wholly or partly owned by the Government of Mozambique.

Percentage of medium enterprises whose financial reporting is in accordance with IFRS

0% 20% 100%

Date March 14, 2006 June 30, 2012

Comments Target met (exceeded)

Full IFRS compliance by medium-sized corporations can be attributed to FSTAP’s instigation

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Annual publication of public debt reports including comprehensive debt inventory

NA Annual publication Annual reports published

for 2007-2011

Date March 14, 2006 June 30, 2012

Comments Target met

Regular debt forecasts published NA Quarterly

publication Quarterly Debt Bulletin Forecast published

Date March 14, 2006 April 2012

Comments Target Met

Treasury securities (BTs) auctions held on a monthly basis

Sporadic At least monthly Biweekly

Date March 14, 2006 June 30, 2012 Comments Target met Treasury bond (OTs) auctions held regularly Irregular Quarterly Ad hoc issuance at the end

of the year Date March 14, 2006 June 30, 2012

Comments Target not met

But FSTAP policy dialogue laid strong basis for forthcoming internal borrowing plan to introduce regular OT auctions

G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 06/28/2006 Satisfactory Satisfactory 0.80 2 10/05/2006 Satisfactory Satisfactory 1.01 3 12/29/2006 Satisfactory Satisfactory 1.34 4 06/25/2007 Satisfactory Satisfactory 1.50 5 12/14/2007 Satisfactory Satisfactory 1.87 6 06/12/2008 Satisfactory Satisfactory 2.94 7 12/23/2008 Satisfactory Satisfactory 3.64 8 04/13/2009 Satisfactory Satisfactory 4.19 9 11/24/2009 Satisfactory Satisfactory 5.24

10 06/22/2010 Satisfactory Satisfactory 6.57 11 03/27/2011 Moderately Satisfactory Moderately Satisfactory 7.72 12 01/03/2012 Moderately Satisfactory Satisfactory 8.41 13 07/07/2012 Satisfactory Satisfactory 9.21

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H. Restructuring Restructuring Date

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in US$m

Reason for Restructuring

& Key Changes Made

DO IP June 22, 2011

Not applicable

Moderately Satisfactory

Moderately Satisfactory

7.78

A level 2 restructuring of the project allowed for a twelve month extension of the closing date and a reallocation of financing proceeds.

I. Disbursement Profile (as of November 20, 2012)

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1. Project Context, Development Objectives, and Design

1.1 Context at Appraisal Country and Macroeconomic Context 1. At the time that the FSTAP project was prepared during 2003-2005, Mozambique was experiencing strong overall macroeconomic performance. During the preceding decade the Government had taken key steps to create a stable economy, consistent and comprehensive fiscal and monetary policies, enhanced financial sector management and supervision, a gradual reduction of government bureaucracy, strengthening of institutional capacities, and improved governance. The Government’s Five Year Plan (2001-2005) emphasized economic growth, public investment in human capital and productive infrastructure, and institutional reform to improve the environment for private investment. Sector Background 2. The Government of Mozambique recognized that the scope and efficiency of the financial sector played an important role in facilitating economic and private sector growth and reforms in the financial sector needed to be pursued. The 2003 Financial Sector Assessment Program (FSAP) highlighted a series of issues to be addressed in the project. The banking system, comprised of 12 commercial banks, became fragile following the privatization of two large, state-owned commercial banks in 1996-1997 and liquidity crises in 2000. This necessitated Government contributions to the recapitalization of the two banks in 2001 and 2002, amounting to about 6 percent of GDP. Further strengthening of banking supervision, as well as implementation of International Financial Reporting Standards (IFRS) by the commercial banks and divestiture of the Government of its remaining holdings in the banking (11 percent) and insurance sectors, were considered a priority. 3. In addition, the domestic capital market was underdeveloped and domestic debt in Meticais was small. In particular, money and bond markets (the mechanism that could be used for monetary management) were considered too narrow to be effective. Similarly, the debt management framework was weak with respect to the Government’s authority to borrow, institutional responsibilities, and overall governance structure. A comprehensive public debt management framework and related capacity building were needed to manage external and domestic debt. As noted in the PAD, a key objective was to develop the market for Government securities, thereby providing a market-driven benchmark yield-curve for the issuance of private securities.1

1 The PAD also discussed weaknesses related to access to financial services by Mozambican households, notably in rural areas, and by private enterprises, especially micro, small and medium-sized enterprises. But this agenda was part of a broader financial sector reform program that was to be supported by other donor agencies.

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4. In terms of addressing the sector’s weaknesses, the Government’s Five Year Plan sought to, inter alia: modernize the expansion of the financial system; reinforce regulation and supervision and reduce vulnerability that might affect the financial system; encourage and promote entry of new financial institutions, therefore increasing competition and diversifying products of the financial market; continue with actions that contribute to the growth of national savings; increase the degree of monetization of the national economy; and, adopt international accounting standards. Rationale for Bank Assistance 5. FSTAP aimed to fully support the Government’s financial sector reform program. Moreover, the project was consistent with the World Bank’s Country Assistance Strategy (approved October 2003) which focused on: improving the investment climate; expanding service delivery; and building public sector capacity and accountability structures. 6. The Bank had been involved in the Mozambican financial sector since 1993, when the country, recovering from its long civil war, put priority on developing and strengthening institutions related to policy and institutional reforms in the financial sector. The Financial Sector Capacity Building Project (FSCBP, FY94, US$9 million), supported the Government’s initial efforts to transform the financial system from a mono-banking system to a market-based financial system. The FSTAP also built on the efforts of the IDA-financed Economic Management and Private Sector Adjustment Operation (EMPSO, FY03, US$120 million) which supported the Government’s program to consolidate macroeconomic stability and to lay the foundation for sustained private sector-led growth. 7. In response to a request from the Government and in line with the newly-signed Paris Declaration, the World Bank led the effort to coordinate and harmonize donor efforts to prepare a financial sector reform program. This was in line with the Bank’s role as co-leader of the Financial Sector Working Group in Mozambique. Hence, the IDA-financed FSTAP project was part of a broad-based and comprehensive reform program. [This Implementation Completion and Results Report (ICR) only assesses the IDA-financed FSTAP project.] While all participating donor agencies coordinated their efforts, their respective financing supported clearly-defined reform activities. For example, the African Development Bank (AfDB) (US$10.2 million) focused on insurance, the social security system, lending environment, and anti-money laundering. The German Technical Assistance Cooperation (GTZ, later renamed GIZ) (US$2.4 million) and the German Fund for Reconstruction (KfW) (US$1.2 million) concentrated on micro and rural finance. The IDA, AfDB, GTZ, and KfW projects all carried the “FSTAP” designation to emphasize their coordinated nature. In addition, DFID supported the implementation of international accounting standards in the banking system during the 2004-2008 period. This informed the design and implementation of the IDA-financed FSTAP project.

1.2 Original Project Development Objectives (PDO) and Key Indicators 8. As stated in the PAD, “Within the overall framework of the multi-donor program, the project development objective (PDO) of IDA’s contribution to the program is to improve the soundness of the Mozambican banking sector and to improve public debt management”.

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9. The PDO was to be supported by: (i) strengthening the banking sector, including improving the institutional capacity of the Bank of Mozambique; (ii) improving financial accountability and transparency; (iii) strengthening public debt management; and (iv) improving money and Government bond market efficiency and depth. 10. The key PDO indicators at the outcome level were:[Note that there was some ambiguity with the second and third indicators; see discussion on Revised PDO and Key Indicators in Section 1.3]

• The percentage of banks compliant with improved prudential regulations • Debt burden indicators do not signal a reasonable risk of debt servicing difficulties • Percentage of outstanding treasury securities traded on the secondary market

11. The above PDO indicators were complemented by the following nine intermediate results indicators related to specific components (see Data Sheet for specific targets): Strengthening of banking sector

• Number of Basel Core Principles (BCP) that BoM is compliant with • Reduction of time needed to transfer funds between banks

Improving financial accountability and transparency

• Percentage of banks whose financial reporting is in accordance with IFRS • Percentage of large enterprises with financial reporting in accordance with IFRS • Percentage of medium enterprises with financial reporting in accordance with a

simplified IFRS Strengthening public debt management

• Annual publication of public debt reports, including a comprehensive debt inventory • Publication of regular debt forecasts

Improving money and debt markets2

• Treasury security auctions held on a monthly basis • Treasury bond auctions held regularly

1.3 Revised PDO and Key Indicators, and Reasons/Justification 12. In the PAD three key PDO indicators were discussed. The prudential regulations indicator was noted in both the main text of the PAD and Annex 3 (Results Framework and Monitoring). This indicator had a clear target and was consistently tracked throughout supervision. While PAD Annex 3 included this first indicator as one of two key PDO indicators,

2 The PAD (main text and Annex 3) only noted “Regular Treasury securities auctions held on a monthly basis”. The additional intermediate indicator “Treasury bond auctions held regularly” was added in the first ISR and was monitored throughout project implementation.

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it referred to the second and third indicators interchangeably and targets were not defined for either. Hence, it was not clear whether one or both of the two indicators were to be considered a key PDO indicator. In any case, the Credit Agreement did not mention any of the key PDO indicators but did note the nine intermediate outcome indicators. 13. When project implementation started, the debt burden indicator was used as the second key PDO indicator, with the end target: “The Central Bank and the Ministry of Finance have 100% capacity to determine vulnerability, and debt burden indicators do not signal a reasonable risk of debt servicing difficulties”. At the time of the fifth supervision mission, however, this key PDO indicator was removed. The team indicated that it found that it was not possible to effectively measure debt servicing sustainability. The other key performance indicator – “percentage of outstanding treasury securities traded on the secondary market” – was used instead since it was considered more meaningful for the activities that the project would be able to achieve. But no end-target was noted for this indicator, presumably because the market was under-developed. This key PDO indicator along with the prudential regulations indicator, were the two included in the ICR Data Sheet.

1.4 Main Beneficiaries 14. The primary target groups for this project, as identified in the PAD, were the following institutions: Bank of Mozambique (BoM); Ministry of Finance (MoF); Instituto de Formação Bancária (Bankers’ Training Institute) (IFB). The stock exchange (Bolsa de Valores, BVM) was later added as a beneficiary of component 4. 15. Within the overall multi-donor program, the IDA-financed FSTAP was implemented in close coordination with other donor-funded projects that covered activities related to micro and rural finance, insurance, pensions, improving the lending environment, and anti-money laundering, with numerous Government beneficiaries.

1.5 Original Components (as approved) 16. The project funded four technical3 and one administrative component. 17. Component 1: Strengthening the Banking Sector, including improving the Institutional Capacity of BoM (US$4.8 million) This component was to support activities to strengthen the banking sector by: (i) building institutional capacity of the BoM, to include supporting the process of implementing international practices in off-site and on-site supervision and improvements of financial market infrastructure and information technology (IT); (ii) financing an advisor for the Government to assist with its strategy to divest from the banking sector; and (iii) strengthening the training capacity at the IFB.

3 While the IDA-financed FSTAP did not directly support the development of any law, it did finance analytical work for the development of regulations for banking supervision, financial accountability and transparency, and debt management.

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18. Component 2: Improving Financial Accountability and Transparency (US$1.5 million) This component was to support: (i) the transition of the banking sector to IFRS (phase 1); and (ii) the transition of the Mozambican corporate sector to IFRS (phase 2). Additional support (not financed by FSTAP) was provided to the accounting profession through raising awareness to existing public and private teaching institutions so that they modify the accounting curriculum to reflect the new requirement on compliance with IFRS. 19. Component 3: Strengthening Public Debt Management (US$1.05 million) This component supported efforts to introduce a comprehensive public debt management framework, which includes policies and strategies to provide, inter alia, better coordination of the issuance of debt between the BoM and the MoF. This project followed on SIDA’s support to the Government of the development and implementation of a comprehensive public debt management framework to ensure transparency and accountability in public debt management. In particular, IDA supported: (i) restructuring of the Public Debt Department of the MoF and strengthening procedures and controls; (ii) consolidating and reconciling the debt database for all public debt; (iii) capacity building for staff of the Public Debt Department; (iv) strengthening information analysis and reporting, including debt forecasting, risk and cost analysis and monitoring, debt sustainability analysis, analysis of loan agreements, and preparation of an annual report on debt management; and (v) improving the Government’s cash management policies and procedures in order to reduce the cost of borrowing and simplify monetary operations. This component included the provision of technical assistance to review procedures for management of cash balances in commercial banks and exposure limits, improve liquidity forecasting capabilities, and extend cash-flow forecasts toward a rolling 12-month horizon. In addition, assistance was to be provided in formulating procedures using treasury bonds and bills. 20. Component 4: Improving Money and Government Bond Market Efficiency and Depth (US$1.65 million) This component was to support the development of more liquid money and debt markets, and strengthen the capacity of the BoM to implement monetary policy by: (i) improving the efficiency of the primary Government debt market through regular auctions; (ii) increasing the depth of the secondary market by providing a range of instruments; (iii) developing the repurchase (repo) and reverse repurchase (resale) markets; (iv) improving the financial market infrastructure with the introduction of a Central Securities Depository; and (v) enhancing registration procedures and tracking of private external-corporate debt. 21. Component 5: Project Implementation (US$1 million) The Project Implementation Unit (PIU) was the focal point and coordinating unit between the Bank, other development partners, and the beneficiary institutions. This component provided financial support to a professional PIU established to assist in project implementation by financing PIU salaries, office facilities, operating expenses, and transportation. As needed, short-term national or international specialists, including a high-level financial sector advisor to assist the PIU, were to be recruited. The auditing function, to be carried out annually by independent, external auditors, was also financed under this component.

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1.6 Revised Components 22. The components as envisioned in the design remained generally intact throughout project implementation. Some planned activities, were dropped, however, such as regulation of e-banking due to insufficient time, consultancy for IT governance due to disagreement on training methodology, and the model for stress testing since this was picked up by the IMF. Support for the development of a Central Securities Depository was shifted from component 1 (under the auspices of BoM) to component 4 (under the auspices of BVM). Similarly, additional activities were added when there was a strong need or good rationale to exploit synergies and there was available financing. The primary example of this was collaboration with the IMF on a debt management strategy. When the project was restructured (primarily to extend the closing date), there was a reallocation among expenditure categories: an increase for the consultant category and a decrease for the goods category. There was also a reallocation among components, mostly through a shift from component 1 to component 2. This reflected the fact that the technical assistance and capacity building requirements were greater than originally anticipated. In other instances, equipment financing was no longer necessary when the adequate set-up was deemed to be satisfactory. 1.7 Other Significant Changes 23. The project closing date was extended from June 30, 2011 to June 30, 2012 (through a Level 2 restructuring). This extension was designed to allow time to complete some of the larger consulting contracts that were affected by delays in procurement processes and the enactment of legislative measures. In particular, more time was required for the tax authority to put in place tweaks to the existing IT systems to process returns based on IFRS, pursuant to the passage of new legislation which had been delayed. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design, and Quality at Entry

Note: A Quality Assessment of Lending Portfolio (QALP-1) review on this project was prepared, dated Sept. 16, 2008. The Likelihood of Achieving DOs was rated as 2 (likely). The final QALP report reflected the comments by the project team.

24. The IDA-financed FSTAP project was prepared in the context of a broader financial sector reform program, which also included a wide range of reforms that were supported by other donors. The Bank was considered a critical development partner in the financial sector, especially since it took a comprehensive approach to the sector. The Bank’s working relationship with other development partners enabled maximum leverage and fostered coordination of disparate interests and activities in the financial sector, as well as in other vital sectors (e.g., legal reform). At the time of project preparation and during most of project implementation, the Bank co-chaired the Financial Sector Working Group and accordingly was also responsible for the semi-annual review of the Government’s Performance Assessment Framework in the sector. Hence, as intended, the FSTAP provided the opportunity for the Bank to use it as a vehicle to continue close and highly effective coordination of donor activities in the

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financial sector. In this respect, the design was in full accordance to the Paris Declaration on Harmonization. 25. The broader program approach was outlined in the PAD and was also reflected in project implementation and supervision. However, this created some confusion and ambiguity. As noted by the QALP review, the “program” approach was misrepresented as a comprehensive and holistic program. Moreover, some ambiguity was created by the PAD language which aligned the PDO to the multi-donor program (“Within the overall framework of the multi-donor program…”). This was exacerbated by including in the PAD the risk of “delivery of the complementary support committed by the other development partners” as critical. The PAD also created some confusion when it listed “non-compulsory pensions and insurance” as a sector focus (see Data Sheet) when this was not a focus of the IDA-financed FSTAP, but rather a focus of the AfDB’s complementary project. Similarly, confusion was fostered by ISR sector management comments (ISR#3) that noted the need to strengthen linkages and “enhance the FSTAP’s role as a quasi sector-wide approach”. Although multi-donor coordination was a key aspect to project design and implementation, it would have been helpful if the PAD emphasized that project activities were complementary and independent, rather than mutually dependent within a broader program. This was clarified in supervision documentation following the QALP review that raised the issue, although the aide memoires continued to assess non-IDA financed activities under the broader program (consistent with the coordinated approach including joint missions). 26. The PAD, however, was very clear and persuasive on the strategic relevance of this technical assistance project. Following a major liquidity crisis in the early 2000s, strengthening bank supervision, implementation of IFRS by commercial banks, and divestiture of the Government of its remaining holdings in the banking sector became priorities. In response, the Government had prepared a comprehensive program of financial sector reforms, in collaboration with the Bank and other development partners. The reform program, as well as the IDA-financed FSTAP, was underpinned by the analysis of the Financial Sector Assessment Program (FSAP) prepared jointly by the Bank in 2003. FSTAP’s four components appropriately reflected the Government and development partner consensus on priority reforms. 27. Strong Government ownership of the reform effort conveyed to the FSTAP project. As lead implementing agency, the MoF was actively involved in the design of the project. The early involvement of key personnel was critical, according to the PIU. Because the other beneficiary agencies were not as involved in the design, ownership within those agencies took time to develop. This was especially true for BoM. 28. In addition to a strong analytical foundation provided by the 2003 FSAP, the project benefitted from lessons of previous projects (e.g., EMPSO; FSCBP). Most importantly--and reflecting the essence of the project--it was recognized that changes in laws and regulations would unlikely have the desired effect without parallel technical assistance and capacity building. The expectation was that this would lay the foundation for longer-term impact. To a great extent, this was realized (see discussion of Assessment of Risk to Development Outcome in Section 4). In this regard, a technical assistance project proved to be the right choice in lending instrument.

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29. The project also sought to take into account the institutional constraints by prioritizing and sequencing activities according to the capacity of the institutions to implement the various components. The self-contained nature of each component proved to be very important since each experienced interruptions but which did not affect overall project implementation. The design also took into account that reforms had multiple steps and took significant time. Accordingly, project implementation was planned for five years instead of the conventional four. In fact, six years were needed for implementation. 30. Project design was selective in its focus regarding BoM and MoF activities, reflecting a coordinated donor approach and also owing to good practice. As noted, rural finance, insurance, and pension were supported in parallel operations from AfDB, KfW, and GTZ. And, it was decided that a component for judiciary reform would be included in a stand-alone project. Although flagged as a risk, the delivery of complementary support by other partners was never an issue. Notwithstanding the intention to narrow the focus, the FSTAP project still had over 20 sub-components and involved several beneficiary organizations. Fortunately, project complexity proved to be effectively mitigated during implementation. 31. The capacity constraints of the implementing institutions were flagged as a moderate risk, which did actually emerge due to procurement-related difficulties, especially in BoM. The risks related to the implementation of IFRS in the corporate sector were certainly noted in the PAD and during project implementation. Since this activity actually ended up over-achieving its target, however, perhaps the fact that most of the large corporations were already mandated to use IFRS by their international parent companies was not sufficiently appreciated in the design. 32. In contrast, it is noteworthy that potential problems related to the implementation of component 4, Improving Money and Debt Markets and Financial Infrastructure, were not identified as a critical risk. In retrospect, this component was probably not only overly ambitious but it was also severely hindered by the fragmented nature of the Government’s monetary and fiscal policies. Clearly, the project design did not adequately assess this risk. 33. One identified risk that actually emerged during project implementation was the weakness of the accounting profession. Project funds were not initially allocated to this, counting on other initiatives to take up the slack. But the problem became acute during the roll-out of IFRS to the corporate sector. Fortunately, there was enough flexibility in the project to re-direct funds to address this apparent weakness in project design. 2.2 Implementation 34. The project was implemented over a period of six years, from effectiveness in March 2006 (within four months following Board approval) until closing on June 30, 2012 (following a one-year extension). The project was supervised by four different Task Team Leaders over the implementation period, three of which were based in Mozambique and the other based in a neighboring country which facilitated interaction with the borrower. There were two PIU Project Coordinators (the first coordinator was present for four of the six years and the second coordinator had been involved in the Project Preparation Facility at the beginning).

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35. The implementation arrangements involved several beneficiaries. This would have posed a risk of complexity if all the beneficiaries had to coordinate with one another but the project design ensured that the activities ran in parallel but under one PIU, within the MoF. Implementation was further simplified by the fact that most of the receiving beneficiaries were either under BoM or MoF. 36. Nevertheless, during project start-up there were some coordination issues between the PIU (attached to MoF) and BoM which impeded a strong launch. This concerned delays within BoM which reflected initial lack of ownership and clarity of roles and responsibilities, competing internal priorities, and insufficient procurement knowledge. By the second year of implementation, however, the relevance of the various project activities to its core functions became clearer to BoM. As a result, progress related to BoM components improved. Better coordination between the PIU and BoM was also thanks to a high level dialogue between the Minister of Finance and the Governor of BoM, who discussed the issues and ensured their timely resolution. During the ICR mission, the first PIU Coordinator emphasized the importance of reporting directly to the Minister: reporting to a high level authority allowed for bottlenecks to be addressed quickly and prompt and clear decisions. 37. The mid-term review was carried out March 2008, one month prior to the scheduled time at approval, at which time all project performance indicators were rated satisfactory (or above) and disbursement was on target. The mid-term review identified the key challenges at that time, including unutilized funds for certain components, substantial delays in completing previously-agreed tasks, and delays in the enactment of legislation and regulations. During the review a technical workshop was held with all beneficiary institutions. This proved to be helpful in rectifying several problems, including the delay in the BoM training plan. 38. In late-2010 a new PIU Coordinator took over after the position that had been vacant for several months. This delayed transition resulted in the first moderately satisfactory rating for implementation progress (IP). Because this caused corresponding delays in the completion of several activities (especially related to components 2 and 3), there was a concomitant downgrade of progress towards the development objective (DO) to moderately satisfactory. Implementation progress regained momentum within a year and was subsequently restored to satisfactory. However, the residual affect meant that progress towards the development objective did not fully regain its satisfactory rating until the final sixth month period.4 39. As noted, the IDA-financed FSTAP was implemented in conjunction with the other concurrent projects supported by AfDB, KfW and GTZ, but coordinated by one PIU (AfDB co-financed the PIU with the Bank). Although this resulted in longer missions and lengthy aid memoires, joint coordination between donors and the Government did create a significant

4 The DO rating prior to close is noted in the ICR Datasheet as “MS”, which reflected the ISR rating for the DO in the ISR #12. The final ISR (#13), however, actually rated the DO as “S”. This inconsistency is due to fact that the final ISR was not archived until after the June 30, 2012 project closing date and the Datasheet uses the DO rating that is archived in the system when the project closes.

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advantage. In particular, since supervision missions were conducted fully with the other participating donors this reduced the burden on the Government. Coordination with the IMF proved to be of particularly high value. 40. Because project implementation involved several entities, progress was uneven with each component experiencing its own challenges and successes which are elaborated below.

Component 1: Strengthening the Banking Sector 41. The first of three subcomponents, Building the Institutional Capacity of the BoM, was primarily implemented by six departments within BoM coordinated by a focal point. As noted, it took about a year before the BoM became fully engaged in project implementation. Sluggish implementation was initially reflected in delays in the finalization of a training plan. Much of this was due to the need to have the plan approved by the BoM Board and the perception that it was not subject to change. Once the Bank team clarified that the plan was only indicative and should be flexible, delays in its annual preparation were no longer an issue. 42. The consultant selection process proved to be challenging for many BoM departments. According to the PIU which coordinated all procurement processes, this seemed to be attributed to inadequate attention to technical BoM evaluation of the proposals, required BoM board approval for most contracts, and lack of understanding of processes. For training-related activities the issue was frequently insufficient documentation to substantiate expenditures. (A procurement workshop was held in 2007 for project beneficiaries but lack of familiarity with procurement fundamentals persisted.) This resulted in many training activities ending up being financed by BoM, and not the FSTAP project. 43. The second much smaller subcomponent was support to Mozambique Bankers’ Training Institute which was implemented successfully. The third subcomponent was to develop a model for stress testing. However, given its ongoing support in this area, this activity was picked up by the IMF. Component 2: Improving Financial Accountability and Transparency 44. This component, executed by the tax authority DGI (within MoF) experienced a two year delay, due to initial tensions between DGI and the consultants and then to an inordinate amount of time taken for internal DGI review and approval of proposals. This, in turn, delayed the consideration and approval of relevant legislation (not directly supported by the IDA-financed FSTAP). A successful and sustainable implementation of IFRS to the corporate sector required adequate training for implementers, users, and other stakeholders. But this was difficult due to start-up delays and the tight schedule created by the late passage of the relevant legislation. 45. This pressure was compounded by the very weak state of the accounting and audit profession. Although this was acknowledged in project design, there was no associated funding. Because the problem risked derailing the project development objective a broad approach was required. In response, FSTAP financed a survey and curricula review for the accounting profession, as well as activities to train and raise awareness on IFRS. And, through another

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IDA-financed project, Competitiveness and Private Sector Development Project (FY09, US$25 million), the Bank supported a twinning arrangement. Hence, despite serious implementation challenges to this component there was enough flexibility to re-direct funds (and draw support from another project) to address a serious issue that had not originally received resources. Component 3: Strengthening Public Debt Management 46. The six activities under this component were implemented by MoF. Although there were initial challenges since MoF had no experience in implementing this type of project, the internal reorganization of the MoF’s Public Debt Department generally went smoothly. Similarly, capacity building for the Department’s staff was well planned and executed. 47. The subcomponent to support the consolidation of external debt, domestic debt, and on-lending into a common database was generally implemented except for the incorporation of domestic debt. The less than full achievement of this subcomponent is mostly attributed to IT-related problems. Despite significant attention to these problems, there was also some perceived slowness by MoF to move on this. Another subcomponent, the publication of annual reports and quarterly bulletins, took much more time than envisaged but was eventually completed. MoF stated that this was because there was a learning curve to ensure accurate data. In addition, staff were overwhelmed with other data-related tasks. 48. The debt management strategy subcomponent was introduced after the start of the FSTAP. The resulting key outputs – the formulization of the Debt Management Committee, a draft debt management strategy, and the forthcoming preparation of an internal annual borrowing plan – were intensively supported by a series of coordinated Bank/IMF missions. This led to a higher level technical advice than would have been otherwise possible within just IDA-supported FSTAP activities. 49. The borrower’s interest in the improvement of cash management practices, the sixth subcomponent, vacillated. Early on this subcomponent was dropped since the intention was to finance through the Government’s SISTAFE program. Despite an eventual interest in pursuing, it was too late to implement. The lack of consistent commitment to this activity may be due to the fact that the MoF unit responsible for this area had not been very involved in project design and/or implementation. Component 4: Improving Money and Debt Markets and Financial Infrastructure 50. This component included five subcomponents involving BoM, MoF, and the stock exchange (BVM). Implementation generally went well for financial market infrastructure and registration procedures for private external debt in BoM. However, implementation was more problematic for the other three subcomponents: primary debt market, secondary market, and inter-bank market. In addition, support for the Central Securities Depository in BVM (originally envisaged under component 1) was significantly reduced since there were different views between the Bank and BVM on the approach and scale of FSTAP support.

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51. The quality of implementation for this subcomponent was fundamentally affected by the fragmentation of monetary and fiscal policy execution. This was manifested in lack of coordination between BoM and MoF/BVM in the issuance of government securities and bonds. The weak communication between the Government institutions improved somewhat during the FSTAP period. One of the contributing factors to this progress was the technical assistance from the IMF to improve monetary policy implementation, as well as the Bank/IMF joint missions. 2.3 Monitoring and Evaluation (M&E) Design, Implementation, and Utilization 52. As stated in the PAD, “Within the overall framework of the multi-donor program, the project development objective (PDO) of IDA’s contribution to the program is to improve the soundness of the Mozambican Banking Sector and to improve public debt management”. Not uncommon for projects designed at that time, the PDO lacked specificity and would have benefitted from a more direct causal link with the supported activities. As noted by the QALP review, the PDO was phrased in such a general manner (e.g., “improve”) as to practically guarantee the likelihood of its achievement. 53. The vagueness of the PDO was compounded by the ambiguity of the key PDO indicators. As discussed in Section 1.3 on Revised PDO and Key Indicators, the original project design did not clarify the second key PDO indicator. The indicator that was eventually used as the second key PDO indicator (treasury securities traded on the secondary market) could be measured but had serious attribution problems.5 For instance, how much credit/blame can the FSTAP project take if “increased secondary market trading” or a similar outcome like “reduced borrowing costs” are impacted by factors outside the control of the project. Indeed, the failure of the second PDO indicator is largely due to weak fiscal and monetary policy coordination which the project design did not assess. In hindsight, it would have been better to select an indicator that had a more direct causal link to improved debt management; to this end, Section 3.2 on Achievement of PDO discusses some proxy indicators to judge achievement.

54. In contrast, the nine intermediate result indicators were appropriate in number and were specific, measurable, achievable, and relevant. They also had specific end-project targets for all four components and were generally monitored consistently throughout implementation. Achievements related to the indicators are likely to be continually monitored post project completion since monitoring capacity has been improved and the indicators reflect core activities/objectives of the implementing agencies (e.g., percentage of banks and corporations compliant with IFRS, number of compliant BCPs).

5 There was also an issue with the data that was reported for this indicator. In the final ISR (June 2012) old data was inadvertently used from April 2011. If the updated (April 2012) or end-project (July 2012) data had been noted instead, this would have reflected a more disappointing outcome (1.5 percent instead of 4.4 percent of outstanding treasury securities traded on the secondary market).

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55. One observation of the QALP review was that at least one indicator of actual economic or financial outcome should have been included. The QALP review also recommended that some information on banking and financial developments (e.g., bank productivity, efficiency of financial intermediation, etc.) be included in future supervision documents. Although it was noted that the project could not have been expected to have a major and rapid influence on such indicators, some discussion of these development would help place the project-related institutional improvements in a broader context. The task team factored these recommendations into account. However, because the topics required more time than a standard supervision mission and the associated aide memoire, they were actively pursued through other initiatives such as the 2009 FinScope report and the 2012 Financial Sector Development Strategy. 56. Given the nature of the project – technical assistance and multiple implementing agencies – a formal monitoring system (beyond the project indicators) was not really required. At the same time, the nature of the project did require a mechanism for coordination among the various beneficiaries. To this end, the PIU conducted monthly meetings with all beneficiaries and donors of the broader program (referred to as the technical working group). The technical working group discussed not only the implementation of the IDA-financed FSTAP project but also the activities of the other projects. This approach was universally regarded as productive and efficient, demonstrating the benefits of donor collaboration. It also provided an important mechanism to utilize and evaluate emerging issues, and respond accordingly. As emphasized in the Borrower’s own completion report (see Annex 5), this forum was critical for sustaining strong project performance. 2.4 Safeguard and Fiduciary Compliance Financial Management 57. The project performed well with regards to financial management, with no significant internal controls issues identified. It remained adequately staffed throughout the life of the project with experienced and qualified financial management personnel and always in a timely and satisfactorily manner submitted all the required quarterly un-audited reports, as well as audited reports. All audit reports under the operation had unqualified (clean) opinions. Overall, the project had a satisfactory financial management performance. This strong performance is noteworthy given the PIU’s additional responsibilities to oversee financial arrangements for the other donor-financed projects. Procurement 58. Procurement was overseen in the PIU by experienced staff with relevant capacity, and the PIU remained adequately staffed throughout the life of the project. The PIU took the lead on procurement in terms of ensuring all processes and timetables were followed. However, the beneficiaries (e.g., BoM, MoF) were closely involved and responsible for all technical aspects of procurement-related processes. 59. Throughout project implementation, the Bank team did express concerns related to BoM’s lack of ownership and time commitment to technical aspects of the procurement process

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(TORs, specifications, evaluations). This led to delays and/or poor technical quality of the documents prepared and submitted to the Bank. As explained in the Borrower’s own completion report (see Annex 5), this necessitated more extensive involvement of the PIU in procurement processes. The PIU also explained that procurement delays were caused by requirements for BoM board approval for most contracts, lack of understanding of the processes, and insufficient documentation provided to substantiate the expenditures. BoM beneficiaries did express concern that the processes took too long and there were delays in receiving responses to procurement-related questions. Upon review of the Bank PROCYS system, the Bank turn-around times for no-objection and other queries appeared timely. 60. Although there may have been issues regarding their procurement performance, BoM did have significant appreciation of value-for-money. In two instances, the relevant BoM department was not satisfied with the quality or recommended approach of the consultant’s work and thus sought cancellation of the contract (following a Bank no-objection). There were instances for which contracts were cancelled for other reasons (e.g., administrative problems related to a change in government policy on the payment of taxes). As part of the ICR review, the reasons for all cancellations were examined and found to be justified. 61. Another procurement issue that was probed was the language requirement that may have limited the competition, including cases of withdrawal of proposals or declining to submit. This was due primarily to the initial requirement that the consultants’ outputs had to be in Portuguese. To address this, the requirement was changed so that the final outputs could be in English and then translated into Portuguese. This modification allowed a doubling in the number of proposals by the short-listed firms, in most cases. 62. These issues underscore the need to tailor the procurement requirements to the market and to client circumstances. And, given the large number of activities and beneficiaries involved in procurement in this project, the ability to effectively coordinate all internal and external participants in the procurement process is critical. Safeguards 63. The project was classified as a Category C and no safeguard policies were triggered. 2.5 Post-completion Operation/Next Phase 64. Following the completion of the IDA-financed FSTAP, the project benefitted from the one year extension of the PIU through continued financing from AfDB (whose activities are still under implementation). The organizational structure, including the monthly technical working group meetings, will hopefully help ensure that some loose ends of the IDA-financed project are implemented and momentum is gained on other relevant reforms, including: Strengthening of the banking sector

• The regulation of e-banking is an ongoing task and there is potential need for further technical assistance to BoM. GIZ (formally known as GTZ) is providing follow-up technical assistance in this area.

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• The BoM continues to have a need for specialized technical assistance in the implementation phase of Basel II in 2014 when Basel II and Basel I will be running parallel. This could be funded via alternative funding mechanisms such as the FIRST trust fund initiative.

• A task force responsible for communication with the commercial banks is to be created to continue carrying out the work in the area of IFRS.

Improving financial accountability and transparency

• The development of the accountancy profession, including increasing knowledge of IFRS among medium-sized companies, continues to be of paramount importance. Currently there are different training initiatives operating in isolation of each other. The Installing Committee, which is implementing the new Order for Professional Accountants and Auditors of Mozambique, will need to coordinate closely with the tax authority (MoF’s DGI) and BoM. This will be supported by the IDA-financed FY09 Competitiveness and Private Sector Development Project which is financing a twinning arrangement.

Strengthening public debt management

• Support from the Commonwealth Secretariat to MoF is expected to help improve the accuracy of the debt database, including incorporation of domestic debt (not achieved under FSTAP).

Improving money and debt markets and financial infrastructure

• An important outcome of the medium-term debt strategy will be the preparation of the internal annual borrowing plan including the domestic debt (BTs and OTs) issuances based on the selected strategy. This is expected to improve the function of the primary market with positive spillovers on secondary market activity, as well as pushing down long-term interest rates.

65. Although no phase-II FSTAP per se is envisaged, the Bank and other development partners are in the process of formulating their follow-up support for the development of the financial sector. Under discussion is the creation of a multi-donor trust fund that would focus on financial deepening and access. In addition, the Bank is considering a stand-alone Development Policy Operation for the financial sector; this would be distinct from the broader PRSC for budget support in order to ensure a sustained and strong focus. Any support from the Bank and other development partners will be closely guided by Mozambique’s new Financial Sector Development Strategy. 66. The nature of the FSTAP technical assistance project, as well as any policy operation being contemplated, may not lend themselves to the achievement of specific sector-wide indicators. Even so, it is important that these interventions be evaluated in the broader context of financial sector trends, such as those discussed in Section 3.2 on Achievement of PDO.

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3. Assessment of Outcomes 3.1 Relevance of Objectives, Design, and Implementation Rating: Substantial Relevance of Objectives: High 67. Following a major liquidity crisis in the early 2000s, strengthening bank supervision, implementation of IFRS by commercial banks, and divestiture of the Government of its remaining holdings in the banking sector became priorities. The FSTAP project reflected consensus on how to address several of these priorities. Hence, the PDO to improve the soundness of the Mozambican banking sector and to improve public debt management was highly relevant at the time the project was approved. In addition to being in line with the Bank’s country assistance strategy when the project was prepared, FSTAP objectives continue to be relevant with the Bank’s current FY12-15 partnership strategy, specifically the objective to improve economic governance and policy making.

68. The continued relevance of the FSTAP approach is validated by the recent Financial Sector Development Strategy, 2012–2021 which has been finalized and is awaiting adoption by Government by end-2012. As illustrated by the Strategy’s cover design shown on the left, the goals are to: (i) maintain financial sector stability through effective monetary policy, regulation, and supervision of banks, and by developing the non-bank financial sector, including the insurance sector, pensions, and effective safety net and crisis management arrangements; (ii) undertake reforms to promote universal financial access by strengthening the financial sector’s infrastructure, developing the microfinance and micro-payments sectors, increase financial sector outreach to rural areas, and developing the housing finance market; and (iii) increase the supply of private capital for development by enabling public-private partnerships and developing the capital markets.

69. The support provided through FSTAP is especially critical to achieving this third objective -- attracting private capital for development -- for two important reasons. First, the ability to effectively manage debt is becoming an imperative given that the Government is seeking private finance to rehabilitate and upgrade the country’s infrastructure. With the

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leveling off of aid flows for budget support and project financing,6 the Government will need to ensure that its finances are in order to allow it to borrow. Sufficient attention will need to be given to the composition of the debt portfolio in terms of costs and risks. With the previous reliance on soft money, this was easier; now the financial environment is more demanding. Second, greater access to private capital will require better financial infrastructure including capital and secondary markets. Greater financial accountability and transparency will also be critical to this effort. FSTAP activities supported both of these goals. Relevance of Design: Substantial 70. The project design was underpinned by the 2003 FSAP analysis and the four components reflected the priority reform areas and were generally well designed to achieve the PDO. Specifically, component 1 (strengthen the banking sector) and component 2 (support the transition to IFRS) supported the objective to improve the soundness of the banking sector. Component 3 (strengthen public debt management) and component 4 (improve money and debt markets and financial infrastructure) were focused on the second part of the PDO, to improve public debt management. The fact that the PDO indicator for this was not measurable does impact, somewhat negatively, on the relevance of design. In addition, there are two other minor caveats regarding design relevance. The first concerns the fact that while the capacity of the accounting/auditing profession was acknowledged to be important, the project did not initially support it. The second caveat is the extent to which component 4 actually enabled the development of a more liquid money and debt market since the design did not sufficiently take into account the impact of uncoordinated monetary and fiscal policies. 71. The continued relevance of FSTAP’s design is borne out by several previous and more recent Bank reports on the financial sector in Africa. In particular, the reports Making Finance Work for Africa (2007) and Financing Africa (2011) set standards for how to develop the financial sector. The financial sector strategy for Africa stresses stability, long-term finance, and access. FSTAP’s design was entirely consistent with these goals. Stability was reflected in component 1 (strengthen the banking sector), component 2 (support the transition to IFRS), and component 3 (strengthen public debt management). Increasing long-term finance was an implicit goal in component 4 (improve money and debt markets and financial infrastructure). While the project design intentionally did not focus on access, since this was being supported by other development partners, component 4 did include activities to promote payment systems to reach underserved areas. 72. The relevance of design was also substantial given that its emphasis on donor coordination proved to be very effective. Although the activities financed by the other donors may not have been closely entwined with IDA-funded components, there were benefits to the client. The most noteworthy was the fact that there was one PIU that coordinated all activities

6 According to the IMF, net aid flows have already declined significantly from the global crisis-related peak of 14.5 percent of GDP in 2009 to 12 percent of GDP in 2011, and are projected to level off to below 10 percent of GDP from 2012 onward.

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under the broader program. This also involved single missions, joint aide memoires, and a unified results framework. As a result of these factors, the transaction cost for the client was substantially reduced. Indeed, this is a good example of the benefits from the Paris Declaration.

Relevance of Implementation: Substantial 73. The implementation of FSTAP benefitted from the 2009 FinScope study for Mozambique, a nationally representative study of consumers’ perceptions on financial services and issues. The findings provided insights to consumers’ behavior regarding their financial lives and identified gaps in the development of the financial sector. For this reason, it further informed FSTAP’s implementation challenges and opportunities. 74. The Bank’s implementation support was responsive to changing needs. For instance, the Bank team fully exploited the synergies created from the IMF support to the Government, by coordinating FSTAP/IMF missions and advice to the client. The unplanned formulization of the Debt Management Committee and the draft debt management strategy were the result of this adaptable collaboration. The other major example of responsiveness during implementation to ensure continued relevance was the recognition that project support was needed to strengthen the accounting and audit profession, which had not received resources in the project design. The Bank and implementing agencies proactively addressed this through a FSTAP financed survey/curricula review and training/dissemination activities. Additional support for this area was arranged through a separate IDA-financed project. 75. Similarly, the client and project teams demonstrated flexibility by dropping activities that were no longer relevant. For example, not supporting the Government’s divestiture from the banking sector that had been largely completed early on in project implementation. In addition, the subcomponent to develop a model for stress testing was removed since this activity was being supported by the IMF. 3.2 Achievement of Project Development Objectives Rating: Substantial 76. A solid case can be made that the project substantially achieved its development objective to improve the soundness of the Mozambican banking sector and to improve public debt management. Improved Soundness of Banking Sector PDO indicator: 17 out of 18 banks were in compliance with improved prudential regulations

Intermediate results indicators: The BoM exceeded the target by compliance with 21 of 25 Basel Core Principles All but one bank was compliant with IFRS 97% of large enterprises reporting in IFRS, exceeding the 75% target 100% of medium enterprises reporting in IFRS, exceeding the 20% target

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The Real Time Gross Settlement (RTGS) allowed for real time transfer of funds 77. It is clear that the first part of the PDO – improved soundness of banking sector – was attained and is reflected in the achievement of the respective PDO indicator and intermediate outcome indicators. The relevant sub-components focused on building the institutional capacity of BoM, spanning several functions. One critical function, supported by FSTAP-financed training, was BoM’s implementation of Basel Core Principles, a key process to ensure soundness. Training of BoM staff was also cited as critical for the transition to IFRS submissions of commercial banks. Learning and exchange visits with other countries’ regulators were considered of high value in supporting BoM’s development of an anti-money laundering manual and regulations concerning payment instruments, channels, and custody accounts. 78. By financing equipment, software, and specialized training, FSTAP also helped upgrade BoM’s capacity to monitor and analyze financial and monetary statistics, including economic forecasting. This has greatly informed the monthly discussions of the monetary policy committee which now has greater confidence in the forecasting. The training also provided BoM staff with a sufficient basis to effectively evaluate the work of project consultants; in a few cases contracts were cancelled because of poor performance. Even for those consultancies that were not completed, the activity itself raised awareness on the topic.

79. The increased capacity of BoM was validated through ICR mission interviews with the IMF and commercial banks. According to the IMF, BoM’s supervisory framework and capacity have been significantly enhanced since the 2003 FSAP was conducted. The IMF and commercial banks also indicated that over the past few years BoM staff have demonstrated: greater capacity to review their IFRS bank submissions, increased knowledge of technical topics, and ability to engage in a higher level of dialogue. Moreover, with improved analytical and monitoring abilities, BoM is better equipped to respond to global financial crises. The commercial banks also noted the positive impact for them in being able to review IFRS of corporations, given the new requirement.

80. Despite serious doubts during implementation about IFRS introduction in the corporate sector, the final outcome actually exceeded the targets. For the large corporations, however, this may reflect the fact that most of them were mandated to use IFRS because of their international parent requirements or were wholly or partly owned by the Government. But the impressive 100% IFRS compliance of medium-sized firms can be fully attributed to FSTAP’s instigation. Notwithstanding this impressive result, there was a significant delay in the IFRS roll-out and the absence in the design of support to the accounting/audit profession. Although the project showed enough flexibility to later include this support, an even greater impact would probably have been realized if sufficient activities to develop the accounting/audit profession had been included in the original design. 81. Finally, the Real Time Gross Settlement system (RTGS, subcomponent of component 4) was introduced and by project-end was operating with four banks that constitute about 80 percent of the banking sector in terms of clients as well as asset size. The project also supported improvements to financial market infrastructure by financing goods and equipment for the new national switch project.

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Improved Public Debt Management PDO Indicator:

≠ Trading in treasury securities on the secondary market did experience some momentum but by project end it was minimal, hence this indicator was not met

Intermediate results indicators: Annual publication of public debt reports were issued for all years during the 2007-2011

period Quarterly publication of debt forecasts was published twice, beginning in April 2012 Regular issuance of treasury securities (BTs) carried out ≠ Auction of treasury bonds (OTs) auctions were not held regularly

82. For the second part of the PDO – improved public debt management – the respective PDO indicator was not met. However, this was a reflection of a poor selection of indicator rather than a failure to achieve this project objective. 83. In terms of the PDO indicator, improvements in the secondary market for treasury securities did show some development since it started in 2009, including reaching 17% of outstanding treasury securities in August 2011. However, the level of trading dropped significantly during 2012. This decline is attributed to the reduced roll-over of BTs reflecting BoM’s decision to leave excess liquidity in the market. In addition, the trading activity can be considered weak due to a shallow primary market, taxation differentials, and separate financial architecture for BTs and OTs. Hence, the PDO indicator to increase secondary market trading was a poor choice since it was significantly impacted by factors outside the control of the project.

84. The regular issuance of BTs (an intermediate indicator), however, did occur. And, although funds were not fully allocated to the Central Securities Depository, progress was also made to harmonize the segmented securities clearing and settlement regarding the custody of BTs and OTs in different IT platforms.

85. The fragmented nature of monetary and fiscal policy impeded increasing the efficiency in the primary Government debt market (related to the intermediate indicator of auction of OTs). Just like the BoM issues BTs for monetary policy purposes, MoF issues OTs for budget/fiscal financing. OTs are issued on an ad hoc basis, usually in the second half of the year when the Government has spent the other financing sources. Despite emphasis by FSTAP and IMF missions for a more stable issuance of OTs, this did not happen. The development of money and debt markets is complex in any country and requires intensive consultation among the monetary and fiscal authorities. Given the importance of a coordinated approach to achieve this project objective, project design should have considered this risk more carefully. In any case, it was overly ambitious. It is noteworthy, nonetheless, that FSTAP (with IMF support) did initiate a policy dialogue on this topic and there is a good chance that the forthcoming internal borrowing plan will improve policy coordination including the introduction of regular auctions for OTs. 86. Although the PDO indicator was poorly chosen for the specific objective of improved public debt management, the final project achievements were entirely consistent with a good

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quality public debt management in terms of governance, capacity and management of internal operations, and debt management strategy and risk management. 7 These proxy indicators demonstrate the achievement of the PDO and are discussed below.

87. Governance: The expectation is that a government’s debt management office fulfills its mandate in a sustainable manner with strengthened governance. The MoF demonstrated this, with support of FSTAP, by the reorganization of the debt management department and the development of related statutes and procedures. As a result, MoF was able to prepare better reports, debt forecasting, and debt sustainability analysis (which previously had to be done by the IMF). During an ICR mission interview, the IMF affirmed that there had been significant strengthening of the debt management department. 88. Capacity and management of internal operations: The expectation is that a government’s debt management office has the trained staff to efficiently manage public debt and other risks and contain operational risk. Through FSTAP, MoF increased its capacity by training staff on highly relevant topics and thus raised awareness of factors that affect debt management. Likewise, FSTAP support increased MoF capacity to publish annual reports and quarterly bulletins, so that MoF is now able to provide timely and regular debt information to stakeholders. However, a better effort to disseminate this information is needed since the commercial banks interviewed were not aware of these publications. Several targeted staff demonstrated such increased competencies that they were later selected for high-level positions within the Government, including president of the stock exchange. Sustainability is unlikely to be affected by staff departures since there were dozens of staff trained and a critical mass remain, and new systems have become entrenched into operations.

89. Debt management strategy and risk management: The expectation is that a government is able to achieve the desired level of risk at an acceptable cost by preparing a public debt management strategy annually, based on a sound analysis of cost and risk, and makes this public. Although not originally envisaged in the design, the project supported the establishment of a Debt Management Committee which is mandated to develop an internal annual borrowing plan that will lead to better coordination of fiscal and monetary policies and overall debt management. This is further supported by the installation of a new debt management system to consolidate debt data into a common database that increases efficiency and reduces operational risk. But the common database does not yet incorporate domestic debt nor does the external debt part of the system generate correct cash flows. This deficiency, however, is expected to be resolved with forthcoming (non-FSTAP) technical IT support. Moreover, the weakness in the IT system is compensated by improved internal organization. The Government’s cash management policy was dropped from this component since the MoF had decided to finance related activities through other resources under the broader SISTAFE program. 90. In sum, strengthened public debt management – as reflected by governance, capacity and management of internal operations, and debt management strategy and risk management -- has been demonstrated. This is critical since Mozambique will increasingly turn to external

7 This reflects outcome indicators now used for World Bank-financed government debt and risk management programs.

22

borrowing to close the infrastructure gap and the selection and preparation of projects will require greater rigor and analysis. A key element of this will be the ability to conduct a debt management strategy analysis based on cost and risk trade-offs of future borrowing choices (e.g., assessing loans in different currencies and at different interest and maturity terms and loans on commercial and non-concessional terms). Through coordinated FSTAP and IMF technical assistance, officials of BoM, MoF, and Ministry of Planning have been intensively trained to conduct a debt management strategy analysis based on cost and risk trade-offs of future borrowing choices. Mozambican debt structure was summarized in a number of instruments representing different cost and risk implications for the portfolio. Furthermore, a good test of the Government’s debt management capabilities was the preparation and publishing of the Quarterly Debt Bulletin with a set of core tables including cost and risk indicators. This supports senior management decision making and monitoring of the debt management strategy. As part of the strategy, the expected annual internal borrowing plan for domestic debt will improve internal planning and help communication with the market, thereby reducing potential issuance cost in the long term. This will define the gross domestic financing and OT issuance needs and support an actual OT issuance plan. 91. The expectation is that the Government’s increased capacity to manage public debt – a key FSTAP objective -- will reduce potential debt vulnerabilities. A joint World Bank/IMF debt sustainability analysis8 confirms that “Mozambique continues to face a low risk of debt distress”. This is attributed to a continued pursuit of prudent macroeconomic policies and “structural reforms to boost their debt management capacity”, thus reinforcing the case that the project has achieved one of its key objectives. Figures 1 and 2 illustrate that key debt indicators remain below their respective thresholds.

Figure 1: Present Value of Debt-to-GDP Ratio Figure 2: Debt Service-to-Revenue Ratio

Source: International Monetary Fund and World Bank; Debt Sustainability Analysis Update; May 24, 2011

8 International Monetary Fund and World Bank; Debt Sustainability Analysis Update; May 24, 2011.

23

Broader Sectoral Impact 92. To better understand the potential impact of FSTAP, it is worthwhile reviewing some key sectoral trends. While it may be difficult to conclude a direct causal relationship between a sounder banking sector and better management of public debt, it is encouraging that several financial sector indicators have improved during the FSTAP period. For instance, thanks to macroeconomic stability and as a result of reforms undertaken since 2003 — many supported by FSTAP — the banking sector’s soundness (and particularly its asset quality) has improved significantly. Between end-2003 and end-2011, non-performing loans for the system as a whole declined dramatically from about 13.8 to 2.6 percent.9 Capital adequacy ratios have been stable or have recently increased (see Figure 3), well above the 8 percent minimum ratio.10 The improved condition of the banks has reduced the need for capital cushions against further asset quality deterioration. Hence, the sector remains highly liquid, with liquid assets to total assets at 28 percent (as of end 2011).11 93. Over the 2001-2011 period interest rates declined. (See Figure 4) Similarly, interest rate spreads also declined over the same period. (See Figure 5) High interest rates act as a major constraint on credit provision. And, high spreads (from overhead costs, nontransparent commissions and fees) reduce incentives to intermediate deposits into loans while also contributing to higher borrowing costs. There is further evidence that reforms have taken root as reflected by increased competition in the sector: the number of commercial banks increased by 50% over the 2003-2011 period (12 in 2003, 14 in 2008, 18 end-2011).12 Over the past four years, there was also the successful rollout of mobile banking.

9 IMF, Fourth Review Under the Policy Support Instrument; May 11, 2012, Table 6. 10 World Bank and IMF, FSAP 2009 update. 11 Ibid. 12 Data on commercial banks taken from FSAP (2003 and 2009 Update); Financial Sector Development Strategy 2012–2021.

Figure 4: Selected Bank Interest Rates (Percent at Period End)

0.005.00

10.0015.0020.0025.0030.0035.0040.00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

8/20

11

30 Days 1 year Prime Rate

Source: Bank of Mozambique

Figure 5: Like Maturity Lending Minus Deposit Interest Rate Spreads

(Percent at Period End)

0.002.004.006.008.00

10.0012.0014.0016.0018.0020.00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

8/20

11

30 Days 1 year

Source: Bank of Mozambique

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3.3 Efficiency Rating: Substantial 94. The project was a technical assistance project and the Project Appraisal Document did not include an economic analysis. Therefore, alternative considerations are used to substantiate the different aspects of project efficiency. 95. First, as seen from Annex 1 the final costs at project closure were US$9.66 million, which compare favorably with estimated costs at appraisal of US$10.50 million while achieving what it set out to do. As anticipated by the project design, there is a strong basis to conclude that project benefits exceed project costs and that there has been a substantial return on investment. The credit proceeds tapped important expertise from over 25 consultancies, trained approximately 350 public servants and numerous people outside government, and purchased equipment worth US$1.83 million. As a result, the banking sector was strengthened substantially reducing the risks of very costly financial crises caused by weak banks. The introduction of the IFRS in large and medium-sized enterprises has better positioned the private sector to attract domestic and local investment, which will support economic development. The increased capacity to manage public debt means that the Government can achieve the desired level of risk at an acceptable cost. And, an enhanced financial infrastructure such as the introduction of the Real Time Gross Settlement system and the national switch project have led to lower financial intermediation costs.

96. Second, the project effectively leveraged Bank and development partner resources. The best illustration of this was the close collaboration with the IMF. Examples include the IMF picking up the stress testing model (component 1) freeing FSTAP resources, and coordinated FSTAP/IMF technical missions to advise on the debt management strategy. Also, the AfDB continued financing the MoF resident advisor when the FSTAP project ended, reinforcing sustainability. Correspondingly, the Bank’s expert on anti-money laundering provided support to AfDB on their own component for this. In addition, the project team tapped resources from trust funds and partner initiatives (e.g., FIRST trust fund, Debt Relief International, Institute of Eastern and Southern Africa). 97. Third, flexibility during implementation maximized resources. The project and client teams’ willingness to respond to emerging needs or changing circumstances meant that some activities were dropped because they were perceived not to be needed (Central Securities Depository), financed by others (e.g., stress testing), or would not be completed in time (e.g., cash management). Alternatively, other activities were added because of emerging needs, such as support to build the accounting and audit profession and support to the national statistics institute. At the same time, value-for-money was maintained when BoM staff sought to cancel consultant contracts when they were unhappy with performance. 98. The final disbursement figure is 92 percent of estimated project costs: US$9.66 million of US$10.50, resulting in a difference of about US$0.84 million. [Because of the appreciation of the SDR the final total available loan amount was US$11.24 million.] The lower amount utilized was due to less expenditures than envisaged for component 4. There were substantially lower IT-related expenditures in this component because BoM used its internal resources to develop the RTGS. Also, IT-related costs were not incurred for the Central Securities Depository since equipment financing was not consistent with the evolving implementation approach. And, the

25

training budget was not fully drawn upon because some BoM training expenses could not be reimbursed since they were not appropriately documented.

99. The final costs related to project management were over double appraisal estimates (US$2.38 million compared to US$1 million). According to the PIU, this is explained by several factors. There was a significant rise in operating expenses and salaries since the estimates were prepared in 2003. This increase was observed in several other PIUs financed by IDA during the period.13 Although the PIU was to be co-financed with AfDB, only two out of eight PIU staff were financed by AfDB while IDA financed six, including those with the highest salaries. The PIU also noted a tendency to draw upon IDA financing for the PIU-related costs instead of AfDB financing, given the perception that IDA funds were administratively easier to access. In addition, the one year project extension added to total project management costs.

100. Total Bank administrative costs for project supervision (not including ICR preparation) over the six-and-a-half year implementation period were $831,000, or an annual average of $128,000 which was above the Africa regional annual average of $110,000. The higher cost may be explained by the intensive level of Bank effort to coordinate supervision missions involving multiple donors and stakeholders, reflecting the administrative complexity of the project. [It is noteworthy that supervision costs were actually kept lower due to the field-based presence of the task team leaders.] This observation is consistent with other instances in Mozambique: while donor coordination may yield lower transaction costs overall, it tends to be more resource demanding for the lead donor (the World Bank in the case of FSTAP). 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory 101. The overall rating of the outcome of this project is moderately satisfactory. This rating takes into account the substantial relevance of the project at the time of design as well as at completion, and the substantial achievement of project development objectives, and the substantial efficiency in use of resources. 102. The project receives a moderately satisfactory rating instead of a satisfactory rating because of the weak outcome to improve money and Government bond market efficiency and depth. This constitutes “moderate” shortcomings in the FSTAP’s achievement and hence justifies the moderately satisfactory rating, according to IEG evaluation criteria for ICRs.

13 For comparison, project management costs were reviewed for Enterprise Development Project (FY00-06), Mineral Resources Management Capacity Building (FY01-07), Communications Sector Reform (FY02-09), and Decentralized Planning and Financing Project (FY04-09).

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3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 103. FSTAP sought to build institutional capacity to support a sound banking sector and effectively manage public debt. This has promoted financial stability and has created the basis for the new Financial Sector Development Strategy, which seeks to promote access. While no particular interest group was targeted by FSTAP, arguably it has laid the foundation for greater financial inclusion. (b) Institutional Change/Strengthening 104. FSTAP focused on institutional strengthening, raising awareness, and building capacity specifically in BoM and MoF, discussed throughout this report. (c) Other Unintended Outcomes and Impacts 105. In addition to the establishment of the Debt Management Committee and subsequent debt management strategy, there were some other unintended outcomes. The first was the partnership created by BoM’s research department with the national statistics institute (INE). At BoM’s request, FSTAP provided ad hoc financing to INE to increase its capacity to develop a relevant business survey. This data has not only been instrumental in BoM’s ability to conduct economic forecasts, but it has created a new product line for INE. Second, FSTAP’s support to develop e-learning program for the Bankers’ Training Institute strengthened its capacity to receive the Financial and Capital Markets Operators Certification. 106. There were important benefits and efficiencies derived from donor coordination and there is some evidence of synergies created between the IDA-financed project and the other partner activities under the broader program. Specifically, with the relevant IMF activities (although the IMF was not formally part of the technical working group to monitor the broader program). GIZ is also supporting the draft regulations on e-banking which complements the FSTAP-financed training and peer exchanges. More synergies did not occur given the fact that the respective activities were mutually distinct and thus complementary but not necessarily synergistic. 4. Assessment of Risk to Development Outcome Rating: Negligible 107. The risk that development outcomes will not be maintained is negligible. Robust systems are in place to monitor and ensure stability of the banking system, better institutional set-up and procedures continue to strengthen public debt management, and the corporate sector is now fully on board with IFRS. For these reasons, and because the FSTAP-financed activities were targeted to build capacity of the core functions of MoF and BoM, it is highly likely that the impact will be sustained in the long term. For those beneficiaries that were more peripheral to the project (the stock exchange (BVM), Bankers’ Training Institute (IFB), and the new accounting and auditing professional body), FSTAP’s impact is also likely to be sustained, albeit more modest.

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5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory 108. It is commendable that the project design reflected a substantial level of strategic relevance at the time of preparation, and that this relevance endures at the end of the project and likely beyond. In addition, the design included a broad range of activities bringing together many beneficiaries and development partners. This approach proved to be appropriate to achieving the PDO. Nonetheless, quality at entry can only be rated as moderately satisfactory given the following moderate shortcomings:

• The broader multi-donor program approach created some confusion and ambiguity, including the PAD noting that the project was dependent on delivery of the complementary support. (Noted in the QALP review)

• There was a poor choice for the second key PDO indicator since there was no appropriate way to measure debt servicing sustainability. Even with a swap to another PDO indicator (trading on the secondary market) this was not an appropriate indicator due to attribution issues. The poor selection of indicators was also compounded by confusion in the PAD write-up.

• The project did not target resources for strengthening the accounting/audit profession, although its importance was appreciated.

• The design was overly ambitious regarding the development of the Government debt market. (Noted in the QALP Review) No measures were put in place to address the related fiscal and monetary policy constraints.

• The risk assessment was not sufficiently robust. (Noted in the QALP Review) For instance, it probably over-rated the risk associated with IFRS implementation since it did not recognize the fact that most of the large corporations were already mandated to use IFRS by their parent companies, or were wholly or partly owned by the Government. In contrast, the fragmented nature of monetary and fiscal policy which impeded development of the Government debt market was not flagged as a risk.

(b) Quality of Supervision Rating: Satisfactory 109. The Bank team is to be commended for its thorough and effective implementation support of an organizationally complex project, meriting a satisfactory for the following reasons:

• The field-based presence of each of the four Task Team Leaders provided the client real-time support and allowed for greater proactivity for resolving potential problems. Similarly, the local presence and quality of support of the fiduciary staff was highly

28

appreciated by the PIU. The Bank’s disbursement team (based in Johannesburg) was singled out by the PIU for exceptional service.

• The task team led complex joint missions, requiring significant time and effort to prepare. No doubt this also reflected the high performance of the administrative support (ACS) team.

• The Bank effectively leveraged its leadership role in the sector and thereby supported the overall financial sector dialogue with various Government agencies. (Noted in the QALP review)

• Technical experts on the team played an integral role in ensuring that international good practice were adopted, especially critical for technical assistance projects. On a related point, the team actively pursued close collaboration with the IMF which led to important synergies. (Noted in the QALP review)

• All missions included a technical discussion/workshop, which ensured that the beneficiaries maintained context and didn’t get bogged down in administrative aspects.

• All missions, including the mid-term review were on schedule and aide memoires were thorough and generally candid. ISRs were generally filed regularly. (In a few instances the semi-annual supervision missions were reflected in one ISR, instead of two.)

110. The minor blemish to this strong performance was some inconsistencies in monitoring and reporting. The problem associated with monitoring the PDO indicator has been discussed. The inadvertent use of outdated data for one of the key PDO indicators in the final ISR (#13) was also unfortunate. In addition, the initial ISRs were confusing in parts since the distinction between the IDA-financed FSTAP project and broader multi-donor FSTAP program was not sufficiently made clear. (Noted in the QALP review). (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory 111. Based on a moderately satisfactory rating for quality at entry and a satisfactory rating for supervision, the overall rating for Bank performance is satisfactory. In determining the overall Bank performance rating, additional weight is given to the strong supervision performance given the complexity of implementation. 5.2 Borrower Performance (a) Government Performance Rating: Satisfactory 112. Government performance is rated satisfactory due to strong ownership of the project and commitment to its objectives that was demonstrated by the two main Government beneficiaries. (Noted in the QALP review) Although there were some coordination tensions between BoM and MoF early in the project, they were resolved thanks to the good working relationship at the ministerial level. Strong commitment at the ministerial level also ensured that project activities

29

were leveraged with broader Government financial sector reforms. Unfortunately, however, this did not fully lead to consistent and strong coordination between monetary and fiscal policies, which limited the pace of development of a government debt market 113. There were a few other minor weaknesses in the Government’s performance. It took BoM, which had the most project activities, at least one year to become fully engaged. There were several procurement-related delays, often attributed to BoM’s lack of involvement in technical evaluations. These delays may also be due to the project set-up which split the procurement functions between the beneficiary agency and the PIU. This also led to frequent delays in the preparation of the annual procurement plan (also implicating MoF). While the number of project activities executed by MoF was less, it also experienced delays; the publication of the annual debt reports and quarterly bulletins took an inordinate time. And, there is an apparent lack of proactivity to better disseminate these materials to target groups. 114. The involvement of the two other beneficiaries – Bankers’ Training Institute and the stock exchange (BVM) -- were limited, although their performance was satisfactory. (b) Implementing Agency (PIU) Rating: Satisfactory 115. It took significant capacity to coordinate such a relatively complex project -- in terms of number of activities, beneficiaries, and partner projects. In this respect, the specialized training the PIU coordinator and all PIU staff received on project management and M&E at the start, proved to be a good investment. Nevertheless, some delays were experienced during the transition period to a new PIU coordinator. This gap led to a temporary project downgrade (to moderately satisfactory over the 2011-2012 period). 116. Overall, a satisfactory performance of the PIU is borne out by:

• Leading regular and inclusive monthly meetings of the technical working group which provided a forum to coordinate and resolve problems.

• Strong PIU Coordinator who was well connected within the Government bureaucracy. In addition, an important advantage for the project was the PIU Coordinator’s direct (weekly) reporting relationship to the MoF Minister. At the same time, the PIU’s physical location outside of MoF ensured the team didn’t get side-tracked with non-FSTAP issues.

• Experienced and competent fiduciary staff, maintained throughout the project. Their task was probably more challenging than other IDA-financed projects, given the vast number of stakeholders and related processes involved, including the organization of joint missions.

• The fact that the actual and projected disbursement curves were almost congruent. This strong disbursement pattern is especially noteworthy during the early stage of the project.

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(c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory 117. Based on satisfactory ratings for the government performance and for the implementing agency performance, the overall rating for Borrower performance is satisfactory. 6. Lessons Learned 118. Key lessons for the Bank are:

• Flexibility during implementation is critical to successful outcomes. When a project is designed, it’s not possible to envision all potential scenarios. Being able to drop and add activities and redirect resources in response to changing circumstances is essential. Notwithstanding the flexibility exercised regarding activities, the Bank missed an opportunity during the mid-term review to formally change the PDO related to outstanding treasury securities traded on the secondary market.

• Bank coordination with other development partners can work well when, as demonstrated in this project: their respective activities are done in parallel and not dependent upon each other; the Government wants it and finds value for a broader base of funding; the PIU has strong capacity and is sufficiently empowered; it is supportive of the Bank’s sector strategy; and the Bank team is ready to devote considerable time and energy to lead the effort including with a field-based Task Team Leader. This lesson will resonate as the Bank considers the nature of its future support to the sector.

119. Key lessons that were emphasized by the PIU and implementing agencies are:

• Establishing a government-wide policy and coherent pay scale for personnel funded by donor agencies, would promote efficiency and equity. The FSTAP PIU, like many other donor-funded units, experienced the “poaching” of a technical staff by another donor-funded initiative that was willing to pay a substantial premium (e.g., double the salary) for essentially the same work.

• Beneficiary agencies would benefit by making their preferences clearer on how funds are to be allocated when the project is designed. Based on the FSTAP experience BoM expressed a preference for peer-to-peer learning (e.g., exchanges with developing countries that have implemented similar reforms). Although consultancies are valued, they can achieve greater impact if they first train staff on the overall context, then undertake some type of peer learning. This would then be followed by the second half of the consultancy that would offer high-level expertise to help agencies fine-tune and apply what they have learned.

7. Comments on Issues Raised by Borrower 120. The Borrower prepared its own completion report on the project, which is attached as Annex 5. In addition, the Borrower provided the following comments on the draft ICR, referring to paragraphs in the text. The Bank’s response is noted in italics.

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• Para 34: Only the last two Task Team Leaders were field-based. The first Task Team Leader was based in the Bank Mozambique country office for the majority of the time she worked on the project. The second Task Team Leader was based in a Bank country office in a neighboring country, which facilitated interaction with the Borrower. This has been clarified in the text.

• Para 42: There is no relation between that lack of procurement knowledge and the financing process for training. In fact, for several reasons, the project financed the training of BoM through reimbursements opposite to other beneficiaries where the project paid the training expenses upfront. Since the project could only reimburse against valid supporting documents, sometimes this was not provided and the project could not reimburse. The point is noted for training and the text has been revised. The lack of procurement knowledge, however, did impact the processing of consultant selection, which is the main subject of this paragraph.

• Para 49: The main reason for not implementing this activity was related to the intention of financing via SISTAFE program and when returned to FSTAP there was not enough time. This has been elaborated in the revised text to make this point clearer.

• Annex 1, Project Costs: The project management cost included the total Project Preparation Facility (PPF) used amount. Annex 1 Table (a) focuses on the final breakdown of expenditures by component, how the credit proceeds were spent. The table is not meant to specify when the funds were disbursed, such as through the PPF advance.

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Annex 1 Project Costs and Financing

Mozambique FSTAP (P086169)

(a) Project Cost by Component

Components

Appraisal Estimate

(USD million)

Estimate DCA Amendment May 26, 2011 (USD million)

Actual/Latest Estimate

(USD million)

Percentage

of Appraisal

Percentage of

Amendment Estimate

Strengthening of banking sector

4.80

4.1

3.54

74%

86%

Improving financial accountability and transparency

1.50

2.4

2.12

141%

88%

Strengthening public debt management

1.05

1.07

1.28

122%

120%

Improving money and debt markets

1.65

1.69

.33

20%

20%

Project Management

1.00

1.23

2.38

238%

194%

Unallocated

.50

0

0

Total Project Costs

10.50

10.50

9.66

92%

92%

Note: The appraisal estimates are taken from Table 2, Annex 4 of the PAD (PAD Annex 5, Project Costs, included aggregated donor financing)

(b) Financing

Source of Funds

Type of

Cofinancing

Appraisal Estimate

(USD million)

Actual/Latest Estimate*

(USD million)

Percentage of

Appraisal* Borrower In-kind 1.40 1.40 100% International Development Association (IDA)

Credit

10.50

9.66

92% African Development Bank Parallel 10.20 0.00 UK: British Department for International Development (DFID)

Parallel

2.00

0.00

GERMANY: German Technical Assistance Corporation (GTZ)

Parallel

2.40

0.00

GERMANY: German Fund for Reconstruction (KFW)

Parallel

1.20

0.00

SWEDEN: Swedish International Development Cooperation Agency (SIDA)

Parallel

1.00

0.00

Notes: the AfDB financing included US$1 million to the PIU to support project management. * Data on the parallel financing is either still disbursing or not accessible; hence, actual estimates are unavailable

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Annex 2 Outputs by Component

Mozambique FSTAP (P086169) 1. The project development objective of FSTAP was to improve the soundness of the Mozambican banking sector and improve public debt management. To this end, the project financed four main components which are discussed in this Annex.1 Component 1: Strengthening the Banking Sector 2. The objective of this component, as outlined in the Project Appraisal Document, was to strengthen the banking sector by: (i) building the institutional capacity of the Bank of Mozambique (BoM), including supporting the process of implementing international practices in off-site and on-site supervision and improvements of the financial market infrastructure and information technology; (ii) helping the Government divest from the banking sector; and (iii) developing the training capacity of the Mozambique Bankers’ Training Institute (IFB). It is noted, however, that early in project implementation sub-component (ii) was dropped since the government’s divestiture from the banking sector had been largely completed by that time. (There had been no related result indicator related to this sub-component.) On the other hand, early in project implementation a sub-component on implementation of stress testing was added. However, this sub-component also did not receive FSTAP funding since the decision was made to draw on IMF support instead. (i) Building the Institutional Capacity of the BoM a. Implementation of Basel Core Principles (BCP) 3. Improvement of the Contingency Planning and Problem Bank Resolution Framework: An important activity that supported FSTAP’s objective to implement Basel Core Principles was technical assistance provided in 2010 that aimed to: (i) review and make recommendations to strengthen BoM’s contingency plans for dealing with problem banks and potential systemic distress and crisis; (ii) provide advice on alternative means of problem bank/institution resolution and their implementation; and (iii) provide advice on the format and contents of a crisis preparedness handbook. The technical assistance concluded with providing the BoM with a road map for the implementation of a crisis management plan and problem bank procedure in order to strengthen contingency arrangements in the BoM and the MoF for handling a bank failure or any other potentially systemic shock to the financial system in Mozambique. The Contingency Planning Report and the Problem Bank Resolution Guidelines were approved by the BoM’s Board and published in April 2011. Stress testing was undertaken during the 2009 FSAP, at

1 The IDA-financed FSTAP was implemented in close coordination with a broader multi-donor supported financial sector reform program which covered additional activities related to public debt management, micro and rural finance, insurance, pensions, improving the lending environment, and anti-money laundering. These additional activities were supported and/or financed by the IMF, African Development Bank, Swedish International Development Agency, and the Commonwealth Secretariat among others. This Annex mentions several of these activities since they strongly supported the FSTAP project development objective.

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which time 17 of 18 banks were complying with improved regulations. This result continued to be consistent with the technical assessment of the implementation of the BCPs. In addition to the above improvements, other activities (discussed below) related to improved prudential regulations included: regulations issued on the anti-money legislation; risk-based supervision framework; banking sector corporate governance; preparation of banking systems for Basel II; and introduction of IFRS. [RESULT INDICATOR (LARGELY) MET: Percentage of banks in compliance with improved prudential regulations: 100% by project end] 4. Anti-Money Laundering (AML): A FSTAP-financed consultant was hired to prepare this manual but BoM’s Banking Supervision Department management cancelled the contract since it believed that the work did not sufficiently respond to the ToRs. Alternatively, FSTAP provided funding for staff exchange with the Malawi central bank. An AML Manual was prepared and at project close was awaiting BoM board approval. Implementation of the manual is dependent upon the revision and subsequent approval of the AML law which was submitted to parliament in December 2011 for consideration. 5. Risk Based Supervision: FSTAP financed a policy paper on risk based supervision which was approved by the BoM’s board of directors in 2011. Guidelines for financial institutions on risk management were also developed. At project end, the Risk Based Supervision Framework was anticipated to be finalized in 2012 and pilot inspections were to be conducted using the new framework. 6. Banking Sector Corporate Governance: The training took place in 2009 and guidelines were disseminated. At project close, the guidelines were being reviewed by BoM’s legal department and will then be submitted to the BoM Board for approval. 7. Based on the final supervision mission (which relied on a more thorough review done during the October 2011 supervision mission), these initiatives led to improved compliance (compliant or largely compliant) in 21 of the 25 Basel Core Principles, as presented in Table 1. [RESULT INDICATOR MET (EXCEEDED): BoM compliant with 16 of 23 relevant BCPs by project end] b. Financial Institutions, Risks, and Instruments 8. After cancellation of a consultancy contract for the regulation of e-banking due to the non-responsiveness of the consultant, it was decided to split the activities intended to be done under this consultancy into two different consultancies, given complexity of the task to be performed. One consultancy focused on training, which included participation of BoM’s task force on e-banking members at relevant international conferences, workshops and trainings as well as exchanges with other central banks. In April 2012, training on Falsification and Counterfeiting of Payment Means and Fraud on Electronic Payment Mechanisms was given in Maputo by the Portuguese Bankers’ Training Institute. Selected Task Force Team Members also participated at the Payments in Banking Summit in Spain that month. Further to this, two staff members of the BoM visited the Central Bank of Spain for a traineeship and another two the Central Bank of Brazil in April and May 2012, respectively. [Shortly after project close, BoM financed additional traineeships at the central banks of the Philippines and Malaysia.]

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9. It was also planned to have a second consultancy, which would focus more specifically on the elaboration of the regulation on e-banking. However, a suitable consultant to do the work was not identified in sufficient time prior to project close. The e-banking task force, however, advanced the work on the regulation and developed a plan that identifies the needs for regulation and adequate regulatory instruments. As regards the regulation under BoM’s responsibility, three areas have been identified in which the e-banking task force will work to elaborate the respective regulations, namely payment instruments, channels and custody accounts. In this regard, the learning and exchange visits with other countries’ regulators were very useful. These are being followed up by technical assistance by GIZ on the applicable regulations for e-banking.

Table 1: Compliance with Basel Core Principles

Core Principle

Grading 2009

(FSAP) 2011

(BoM*) 1 Objectives, independence, powers, transparency and cooperation C C 2 Permissible activities C C 3 Licensing criteria C C 4 Transfer of significant ownership C C 5 Major acquisitions C C 6 Capital adequacy LC C 7 Risk Management Process NC NC 8 Credit Risk LC C 9 Problem assets, provisions, and reserves LC C 10 Large exposure limits C C 11 Exposure to related parties C C 12 Country and transfer risks NC NC 13 Markets risks MNC N/A 14 Liquidity risk MNC LC 15 Operational risk MNC LC 16 Interest rate risk in the banking book MNC C 17 Internal control audit LC LC 18 Abuse of financial services MNC C 19 Supervisory approach LC NC 20 Supervisory techniques C C 21 Supervisory reporting C C 22 Accounting and disclosure C C 23 Corrective and remedial powers of supervisors MNC LC 24 Consolidated supervision C C 25 Home-host relationships C C C: Compliant; LC: Largely Complaint; MNC: Materially Noncompliant; NC: Noncompliant; N/A: Not Applicable ∗ Subsequent to the 2009 FSAP review of compliance, a Bank supervision mission in October 2011 reviewed additional work

and validated the self-assessed progress.

36

c. Implementation Support for the Introduction of Basel II 10. The consultancy for supporting the BoM Banking Supervision Department in the introduction of Basel II was concluded. A roadmap for the implementation of Basel II, an Implementation Strategy, and a Training Plan were finalized by December 2010. Training took place in 2011. Three task forces were formed with one being responsible for the implementation of each pillar. d. Transition of the BoM and Banking Accounting to International Financial Reporting

Standards (IFRS) 11. IFRS was successfully introduced in the banking sector in 2007. FSTAP provided assistance to the BoM Banking Supervision Department, as well as training to other relevant BoM departments. The training focused on: (i) improvement of the skills of the task force and the on-site and off-site examiners in its role of assisting the banks and reviewing the reports submitted in accordance with IFRS; (ii) training the Banking Supervision Department in the updated and newly adopted IFRS; and (iii) expand training in IFRS to all BoM departments where IFRS may be of relevance. 12. A revised IFRS implementation manual to BoM was submitted. The training for the Banking Supervision Department and other relevant BoM staff – about 100 trainees, of which 50 were from the Banking Supervision Department – was undertaken over the period from November 2011 to January 2012. 13. In terms of the number of banks whose financial reporting is in accordance with IFRS, at project end there was only 1 of 18 banks that was not compliant. This bank experienced a range of difficulties and BoM’s Banking Supervision Department exhausted tools provided in the banking law (Law 15/99). The case of this bank was referred to the board of directors of the BoM. In terms of assets, this bank is not systemically important, representing less than 0.5 percent of total assets in the banking sector. [RESULT INDICATOR (LARGELY) MET: Percentage of banks whose financial reporting is in accordance with IFRS; 100% by project end] e. Improvements in the BoM’s Information Technology 14. A consultancy for IT governance began in May 2009 to conduct an assessment, provide training, identify priority actions, support implementation, and create an action plan. The IT department assessed that the BoM meets Level III Maturity Compliance and is aiming for Level IV compliance, which was supported by the FSTAP. The majority of this assistance envisioned in this sub-component was delivered. But due to disagreements on the training methodology the consultancy was not fully concluded. In addition to this consultancy, FSTAP funded IT server equipment. 15. Initially the project envisaged that component 1 would finance the Central Securities Depository (CSD) through BoM. However, early on the Government decided that the CSD should be the responsibility of the stock exchange (BVM) and, therefore, under component 4.

37

f. Strengthen Research and Reporting

16. The objective of this sub-component was to support the BoM’s Economic Research Department to upgrade its capacity to monitor and analyze financial and monetary statistics, including economic forecasting and corporate financial information. The project financed training, equipment and software. Specifically, the acquisition of the software Matlab and the respective licenses, as well as laptops. Specialized training in Matlab took place in May and June 2011. In addition, at the request of the BoM’s Economic Research Department FSTAP financed the national statistics institute (INE) to develop confidence indicators. Finally, FSTAP financed a consultancy for the development of a new monetary policy and inflation forecasting model for the BoM took place in June 2012. But because of the imminent project closing date, the consultancy was only able to deliver one of the two planned training sessions. g. Implementation of Human Resources (HR) Integrated System 17. The project supported the BoM in the development of an overall strategy for human resource development, namely the Integrated Human Resources Management System. A consultancy provided the human resources department with skills in the area of Human Technology Performance, including training that took place in January 2012. (ii) Support to Mozambique Bankers’ Training Institute (IFBM) 18. The Mozambican Bankers’ Training Institute (IFB), received support from FSTAP to develop a web-based distance learning program. System administrators and tutors to support the e-banking platform and training were also trained. By the end of 2010 the e-learning platform was operational. By project end, eight professional banking courses were offered and an additional four courses were under preparation. The e-learning platform is an important tool to make the courses of the IFBM available to students outside of Maputo. A training during the 2012 training cycle was attended by about 60 students of which about one-third participated from outside the Maputo area. FSTAP-supported courses helped the IFB gain its certification as a training institute. (iii) Implementation of Stress Testing 19. As part of the FSAP (Financial Sector Assessment Program) recommendations, the Banking Supervision Department needed to develop and implement a model for stress testing that is applicable to the Mozambican market. The BoM requested support from FSTAP to develop the Mozambican Stress Testing Model through training and implementation support. However, it was then decided to pursue this activity with the support of the IMF. The IMF-funded training started in May 2012. Component 2: Improving Financial Accountability and Transparency 20. The objective of this component was to support the transition to International Financial Reporting Standards (IFRS) for: (i) the banking sector (phase 1); (ii) the corporate sector (phase 2); and (iii) to provide support to the development of the accounting profession in Mozambique.

38

(i) Implementation of IFRS in Banks (Phase 1) 21. As discussed above regarding component 1, the introduction of IFRS in the banking sector was completed and implementation has been ongoing since 2007: 17 out of 18 banks are applying IFRS. After this successful introduction of IFRS in the banking sector there was a need to provide assistance to the BoM’s Banking Supervision Department and provide training to the BoM staff of other departments that are responsible for the BoM’s financial reports. FSTAP provided this additional support to the BoM as outlined under component 1. [RESULT INDICATOR (LARGELY) MET: Percentage of banks whose financial reporting is in accordance with IFRS; 100% by project closing] (ii) Transition of the Corporate Sector to IFRS (Phase 2) 22. The corporate sector transitioned to IFRS in two parts: part 1 was for large enterprises with an implementation date of January 2010, and part 2 for medium enterprises and small enterprises both with an implementation date of January 2011. The one year extension of project closing was considered instrumental in completing training for enterprises, particularly since IFRS only became mandatory for the 2011 tax and financial statements of medium enterprises. 23. First corporate submissions of large enterprises were due May 31 (tax returns) and June 30 (financial reports) 2011, for the 2010 tax year. In this initial year, about half of large enterprises were IFRS compliant. For the next year – 2011 statements submitted by June 2012 -- 73 of 75 (97%) submissions from large enterprises were IFRS compliant. [RESULT INDICATOR MET (EXCEEDED): Percentage of large enterprises whose financial reporting is in accordance with IFRS: 75% by project closing] Also impressively, the submissions of all 50 medium enterprises were also IFRS compliant in 2012, the first year that this was required for these firms. [RESULT INDICATOR MET (EXCEEDED): Percentage of medium enterprises whose financial reporting is in accordance with IFRS: 20% by project closing] (iii) Development of the Accounting Profession 24. To develop the accounting and audit profession in the country, consistent with the rollout of a new law (of November 2011) that established the Order of Professional Accountants and Auditors of Mozambique, an “Installation Committee” was formed. The Installation Committee: (i) completed seminars across the country to interpret the new law and disseminate information on the program to create professional bodies at national and provincial levels; and (ii) received registration from about 2,500 accountants and auditors who will soon undergo elections for the various boards of commissioners. The Installation Committee was also on tract to install boards of commissions by end-2012, both at national and provincial levels. 25. Establishment of the Order of Professional Accountants and Auditors received funding support under the IDA-financed Competitiveness and Private Sector Development Project (FY09) through a twinning arrangement with an internationally recognized accounting body from Ireland. 26. Also, through a FSTAP-financed consultancy, a survey was conducted of the training needs and a review was undertaken of school curricula for the accounting profession. The key

39

conclusion from the survey was that there is a large deficit of knowledge in IFRS in the country, and that in most educational institutions school curricula do not have content on the new accounting standards for the business sector. It is anticipated that this agenda will be rolled by the professional commissions when they become operational. In addition, this consultancy included dissemination and training on IFRS at professional learning institutions. Component 3: Strengthen Public Debt Management 27. The objective of this component was to support the efforts to introduce a comprehensive public debt management framework to improve transparency and accountability and reduce the Government’s vulnerability to financial shocks through strengthened debt management capacity and institutions. This covered: (i) improved internal organization of the MoF’s Public Debt Department (DNT-ADP); (ii) increased capacity of DNT-ADP staff; (iii) more reliable public debt management information systems to reduce operational risk; (iv) strengthened debt management analysis and reporting; (v) articulation of a debt management strategy to better coordinate primary issuances between BoM and MoF; and (vi) improved cash management practices. (i) Restructuring of the Public Debt Department 28. The purpose of this subcomponent was to bring the Public Debt Department (ADP) located within the National Directorate of Treasury (DNT) in line with international best practices. At the onset of the FSTAP, the DNT-ADP was understaffed and structured according to lenders with the officials responsible for all aspects of their portfolio and there was no clear separation of responsibilities for the core front, middle and back office functions. There was significant improvement in this area. 29. An internal regulation addressing the reorganization of the DNT including the ADP was enacted in February 2012 through a ministerial decree. This legislation formalized the new structure of the DNT-ADP which operated effectively in the form of front office, middle office and back office with a recent additional unit dealing with the management of grants and on-lending. Operations manuals for front, middle and back offices were prepared in 2009, by the FSTAP resident adviser. The resident adviser also provided additional leverage and assisted the unit on a series of debt management activities, many within the scope of FSTAP. The DNT-ADP rehired the resident adviser through AfDB funds for the period June 2012 - June 2013. (ii) Capacity Building for Staff of the Public Debt Department

30. This subcomponent aimed to build capacity at the DNT-ADP in order to gain a critical mass of sufficiently trained staff with skills needed for each office. This would support the smooth functioning of public debt management, reduce operational risk, and increase the effectiveness of DNT-ADP. 31. During the first years of the FSTAP, a strategic and operational training plan was developed and implemented. Courses on international law, basic macroeconomics, international

40

and domestic financial markets, banking and financial system, basic statistics, foreign language,2 and loan negotiations were provided. A number of staff benefited from the payment of their fees for graduate studies. In addition, technical training on basic financial notions in addition to the computation and evaluation of the costs and risk exposure of public debt portfolio was provided during the two Bank/IMF medium-term debt management strategy missions to a large audience comprising the whole DNT-ADP staff as well as other related departments within the MoF and BoM. Further notable capacity building activities included the participation in World Bank training events and workshops funded by the AfDB. These trainings/courses were important to strengthen staff capacity, build awareness of exogenous and endogenous factors that affect debt management, and for the exchange of views during the lessons. (iii) Consolidating and Reconciling the Debt Database for all Public Debt 32. This subcomponent supported the consolidation of external debt, domestic debt, and on-lending into a common database in order to have a single source of information, for reduced operational risk and increased efficiency. 33. At the DNT-ADP, the debt management information system was installed (CS-DRMS 2000+). This system which only included multilateral debt at the beginning of the project, incorporated bilateral and commercial debt transferred from BoM in 2008 with the support of Commonwealth Secretariat consultants. The incorporation of domestic debt into this database did not take place, however. Nor does the external debt part of the system generate correct cash flows. The consolidation initiative was hindered for some time by the expired Oracle license and antiquated servers and equipment. An IT specialist hired in 2009 with FSTAP funds worked on bringing the current IT equipment in line with the technical requirements to update the CS-DRMS. The problem was finally solved with the transfer in 2012 of the CS-DRMS server to the Center for Development of Finance Information Systems. Nonetheless, achievement of this subcomponent is considered limited. (iv) Strengthening Information Analysis and Reporting 34. The purpose of this subcomponent was to develop good reporting practices including debt forecasting, risk and cost analysis and monitoring, debt sustainability analysis, analysis of loan agreements, and preparation of an annual report on public debt management. 35. DNT-ADP published annual reports during the lifetime of the FSTAP, for 2007, 2008, 2009, 2010, 2011. [RESULT INDICATOR MET: Annual publication of public debt reports including comprehensive debt inventory] However, the process of the preparation of the annual reports was significantly delayed due to efforts to reconcile and validate the external debt data with the lenders. Preparation of the most recent annual report was considerably faster since the data reconciliation and validation in CS-DRMS had been addressed. The content of the annual reports is comprehensive as they include consolidated stock and flow information on the total public debt (external and domestic together) as well as some statements related to the debt

2 In particular, English and French language training was provided to MoF staff who were involved in the processing of multilateral debt whose documentation and/or negotiation was in those languages.

41

management strategy. In this respect, they are an important breakthrough since they treat public debt in a consolidated way and introduce the concept of debt management objectives and strategy. This progress was initially supported by a consultant financed by the FSTAP who presented in November 2007 an overview of international practices in public debt management reporting, highlighting the usual design and content of monthly, quarterly, and annual reports. The consultant also assessed data availability and gaps to build (monthly, quarterly and annual) debt reports in line with international best practices. 36. In addition to the annual debt reports, with the goal of providing timely and regular debt information (debt stock and flow information, basic cost and risk indicators) to the stakeholders, FSTAP envisaged the publication of a quarterly bulletin providing regular debt forecasts. Although some drafts were prepared by the FSTAP-financed resident adviser, there was significant delay in their publication attributed to IT system problems and the focus on completing the annual reports. Eventually the first bulletin was published in April 2012. [RESULT INDICATOR MET: Regular debt forecasts published: quarterly publication by closing date] In addition to improved transparency and accountability, this will help monitor the public debt and sharpen the skills of the DNT-ADP staff in the use of the debt database. (v) Debt Management Strategy 37. This subcomponent was introduced after the start of the FSTAP and became an important pillar of the FSTAP in view of its importance to guide borrowing decisions and reduce the Government’s risk exposure. With support of Debt Relief International (financed by the SIDA) a FSTAP-financed consultant produced a draft debt management strategy in 2009. The strategy work gained momentum starting June 2010 with the support of a series of joint Bank/IMF and Macroeconomic and Financial Management Institute of Eastern and Southern Africa missions that provided technical assistance to a team composed of DNT-ADP, BoM and Ministry of Planning and Development in the preparation of a cost and risk based medium-term debt management strategy. FSTAP continued to support the debt management strategy work throughout 2011-2012 from Washington DC. At project close, a debt management strategy for the period 2011-2015 was finalized and eventually approved by the Council of Ministers (in September 2012). 38. An important outcome of the medium-term debt management strategy is the preparation of the internal annual borrowing plan including the domestic debt (BTs and OTs) issuances based on the selected strategy. (The first plan is on track to be issued in January 2013, in line with an IMF agreement.) This document seeks to signal to the market the fiscal policy linked issuances and promote increased transparency and accountability. Longer term benefits would be the improvement of the primary market functioning and better price discovery with positive spillovers on the secondary market activity. 39. An additional accomplishment, although not originally envisioned in the project design, was the establishment of a Debt Management Committee in 2011. This was recommended by the IMF and the Bank during the technical assistance missions noted above. The Debt Management Committee which is composed of high level officials of the MoF, BoM and Ministry of Planning and Development aims to improve and manage the coordination among the entities related to debt management. The Committee meets at least on a quarterly basis and leads

42

the policy level discussions on the debt management strategy, revision of new financing options, and monitoring of debt operations. (vi) Improving the Government’s Cash Management Policies 40. The objective of this subcomponent was to reduce the cost of borrowing and simplify monetary operations. At the initial stages of the FSTAP, the Government had prepared terms of reference for specific assistance for the improvement of cash management policies in several areas including: capacity building for the preparation of accurate treasury payments plans; consolidation in the MoF of information received from several sectors; development of regular reports on government financial activities; and capacity building to improve the use of information available through SISTAFE (the Government’s financial management system). 41. In late 2010, the MoF had decided to finance these activities through other resources under the broader SISTAFE program. However, upon later review there was renewed interest from the MoF for FSTAP to support this work. The terms of reference for the consultancy were revised and the consultancy was tendered. But because of a limited number of bids received by consultants and the limited time before project end, FSTAP financing was not used for these activities. Component 4: Improving Money and Debt Markets and Financial Infrastructure 42. The objective of this component was to sustain the development of the money and bond markets in Mozambique. The activities supported: (i) increased efficiency in the primary Government debt market; (ii) increased depth of the secondary market, including introduction of a Central Security Depository (CSD) in BVM; (iii) reduced segmentation in the inter-bank market; (iv) improved financial market infrastructure; and (v) enhancement of the registration procedures in the BoM for private external debt. 43. As in other countries, the complexity of the topic required an intensive communication and consultation with all parties involved, such as the BoM, the MoF, the BVM but also market participants such as banks and institutional investors. The weak communication between the Government institutions improved somewhat during the FSTAP period. One of the contributing factors to this progress was the technical assistance from the IMF to improve monetary policy implementation, the Bank/IMF joint missions and the support provided by FSTAP. (i) Improvements in the Primary Government Debt Market 44. This subcomponent covered the standardization of instruments and the establishment of regular auctions, with a goal of moving towards a balanced issuance program and consistent issuance in 12-month BTs (treasury securities issued by BoM). With support from FSTAP the BoM, which was conducting weekly multi-price auctions for all BT maturities simultaneously prior to 2008, adopted a regular issuance calendar with only the 3 month BTs issued every week while alternating the 6 and 12 month issuances every other week. [RESULT INDICATOR MET: Treasury securities (BTs) auctions held on a monthly basis] This provided to the financial markets a transparent and consistent source of lending.

43

45. The primary government debt market in Mozambique, however, is fragmented among the BoM which issues BTs for monetary policy purposes and the stock exchange which is the MoF’s agent for the issuance of OTs (treasury bonds) aimed for budget financing. OTs are issued on an ad hoc basis, usually in the second half of the year when the Government has spent the other financing sources. It is well known by market participants that OTs are issued for fiscal policy purposes. Bank and IMF missions reiterated on several occasions that a more stable issuance of OTs in an array of maturities is needed in order to support the development of the domestic government securities market. [RESULT INDICATOR NOT MET: Treasury bond (OTs) auctions held regularly]

(ii) Improvements in the Secondary Market for Government Debt 46. Secondary market activity is limited to transactions in the money market concentrated on overnight interbank loans and repos with BTs as collateral. The trading showed some development since it started in 2009 at 1.1%, increasing to 6.5% in 2010, and even to 17% at one monthly point in 2011. However, the number came consistently down with minimal trading in 2012 (1.5% as of July 2012/project end). [RESULT INDICATOR NOT MET: Percentage of outstanding treasury securities (BTs) traded on the secondary market: no specific target noted] This decline is attributed to the reduced roll-over of BTs reflecting BoM’s decision to leave excess liquidity in the market. This reflects the fact that BTs are used solely for monetary policy purposes and that the main mandate of BoM is to reduce inflation; development of domestic market and secondary market activity is of secondary importance. In addition, the trading activity can be considered weak due to a shallow primary market, taxation differential between BTs and OTs, separate financial architecture for BTs and OTs, and the BT issuance calendar. 47. Support to BVM for the development of a Central Securities Depository (CSD) to foster the secondary market had been introduced in 2008, at a time when there were uncommitted resources that allowed for new activities. BVM requested consultancy services for the implementation of the CSD. (This was originally included in component 1, but BoM decided it was BVM’s responsibility) This included IT hosting as well as for the revision of the CSD legal framework and training of CSD staff. In total, this would have amounted to US$1.5 million which would have exceeded the component 4 resource envelope. Instead, the Bank team proposed that a consultancy focus on preparation of a CSD strategy including a review of the existing regulatory environment and the identification of system requirements. But BVM decided not avail itself of FSTAP funds for this purpose. FSTAP did support, however, the purchase of some office furniture and equipment related to CSD operations. 48. Although funds were not allocated to the CSD, progress was nonetheless made to harmonize the segmented securities clearing and settlement regarding the custody of BTs and OTs in different IT platforms. A team comprised of officials from BoM, MoF, and BVM meet regularly to discuss the procedures and structure for linking the platforms. A note delineating the responsibilities and containing the list of activities was submitted to the BoM board for approval. 49. Finally, the MoF intends to have a more regular issuance calendar for OTs. This will be guided by the debt management strategy and the internal annual borrowing plan (to be issued in January 2013). If the problems such as the infrastructure upgrades currently hindering the trading of these securities are solved by the time the Government is ready to issue OTs in a

44

structured way, this might help increase the secondary market activity, thus bring higher liquidity to the market. (iii) Improvement of the Monetary Framework and Development of the Repurchase (Repo)

and Resale (Reverse Repo) Market 50. The BoM repo activities were launched in July 2007 and reached a reasonable level of consolidation, with daily transactions at varying maturities (1 to 62 days). By June 2012, the main action in the repo and reverse repo market remained concentrated on the money market mainly between the banks and BoM, where BTs are used as collateral in some of the activities. However, the interbank activity remains very limited and mostly on a non-collateralized basis due to the required tax on BTs. Although some IT improvements for the registry and processing of repo transactions between banks were conducted in 2008 for enhanced activity (the volume of repo transactions between commercial banks is still concentrated among few banks). According to the BoM, some commercial banks were consulted about the need for a Master Repo Agreement and concluded that the banks are comfortable with the existing regulation developed during the establishment of the repo market. (iv) Improvement of the Financial Market Infrastructure 51. The objective of this subcomponent was to improve the financial market infrastructure through the introduction of a delivery versus payment system in conjunction with the Real Time Gross Settlement (RTGS) system to improve custody and settlement arrangements. Because BoM determined it had in-house IT capacity to develop the RTGS system, FSTAP funds were not tapped for this activity. 52. The RTGS was introduced and as of project end, the system was operating with four banks that constitute about 80 percent of the Mozambican banking sector in terms of clients as well as asset size, according to the BoM. [RESULT INDICATOR (LARGELY) MET: Reduction of time needed to transfer funds between banks: real time by project end] Although FSTAP funding was allocated for a dissemination campaign, there wasn’t sufficient time prior to project close to initiate it. Currently, RTGS is optional but the BoM plans to make adherence to the system compulsory. 53. FSTAP supported the national switch for the payment system to allow the integration of ATMs and POS in the country. A milestone for this national switch project has been the creation of the Sociedade Interbancária de Moçambique (SIMO) in 2011. FSTAP financed furniture, safes, and IT equipment for SIMO. By project end, four banks were in the national switch called SIMOREDE, including two of the largest banks measured my asset size. With the planned connection of SIMOREDE with the INTERBANCOS-Switch (Ponto24), another nine banks will join the national switch. (v) Establishment of Effective Procedures for the Registration of Private Debt in BoM 54. This subcomponent supported the review of the laws and regulations with respect to external private debt to define the role of the BoM and to adjust the IT infrastructure of BoM in line with the 2009 foreign exchange law. Significant developments were achieved. In 2008, a FSTAP-financed consultant supported the establishment of effective procedures for the

45

registration of private debt in BoM. This included a framework for recording non-guaranteed private debt through instructions and questionnaires and proposed specifications for an IT system to be developed by BoM IT department. 55. The development of the proposed IT system was delayed because of a change of priorities and staff allocation in BoM due to the additional work load necessary to adjust current practices in line with the foreign exchange law enacted in 2009. [Whether it was to be developed in-house or outsourced, IT development is time-consuming involving several stages and many internal and external stakeholders.] However, over the final two years of FSTAP implementation, the IT project was accelerated and the software was being tested and training planned by project end.

46

Annex 3 Economic and Financial Analysis

Mozambique FSTAP (P086169)

The project was a technical assistance project and the Project Appraisal Document did not include an economic analysis. Therefore, alternative considerations are used to substantiate the different aspects of project efficiency. This is discussed in Section 3.3 (Efficiency) of the ICR.

47

Annex 4 Bank Lending and Implementation Support/Supervision Processes

Mozambique FSTAP (P086169) (a) Task Team Members

Names Title Unit Responsibility/ Specialty

Lending Alberto Ninio Chief Counsel LEGEN Andrea Vasquez-Sanchez Sr. Program Assistant AFTFS Ann Christine Rennie Lead Financial Sector Specialist SASFP Anthony Thompson Sector Manager AFTFS Antonio Borges Sr Program Assistant HDNHE Bridie Champion Consultant CTRDM Brighton Musungwa Sr. Financial Management Specialist AFTFM Eduardo Brito Sr. Legal Counsel LEGAF Fatiha Amar Program Assistant MNSSD Irene Chacon Operations Analyst AFTFS Joao Tinga Financial Management Analyst AFTFM Marius Koen Lead Financial Management Specialist ECSO3 Michael J. Fuchs Adviser AFTFE Mohamed Khatouri Sr. Monitoring and Evaluation Specialist AFTKL Monica Sawyer Consultant Counsel LEGAF Ravi Ruparel Sr. Financial Sector Specialist AFTFS Sherri Ellen Archondo Senior Operations Officer AFTFE Task Team Leader #1 Slaheddine Ben-Halima Sr. Procurement Specialist AFTPC Suzanne Morris Sr. Finance Officer LOAG2 Thomas Muller Young Professional AFTFS Thordur Jonasson Sr. Debt Specialist OPD Tulio Correira Financial Management Specialist AFTFM

Supervision / ICR Adelina Mucavele Program Assistant AFCS2 Amos Martinho Malate Procurement Analyst AFTPC Anderson Caputo Silva Lead Securities Market Specialist FCMSM Andrea Vasquez-Sanchez Sr Program Assistant AFTFW Anna Luisa Paffhausen Financial Sector Development Analyst AFTFE Antonio L. Chamuco Senior Procurement Specialist AFTPC Bina Kakusa Resource Management Officer CFRPA Component 2 Cigdem Aslan Sr Financial Officer FABDM Components 3, 4 Elvis Langa Financial Management Analyst AFTME George Ferreira Da Silva Finance Assistant CTRLA Irene F. Chacon Operations Analyst AFTFW Jeannette Kah Le Guil Sr. Program Assistant AFTFE Joao Tinga Financial Management Analyst AFTFM Jonathan Nyamukapa Financial Management Specialist AFTFM Luc Cardinal Sr Financial Management Specialist ECCAT M. Zubaidur Rahman Program Manager OPCFM Maria Isabel Nhassengo Procurement Assistant AFCS2

48

Marilyne Pereira Goncalves Financial Sector Specialist FFSFI Mazen Bouri Sr PSD Specialist AFTFE Task Team Leader #4 Ravi Ruparel Sr Financial Sector Specialist AFTFE Task Team Leader #2 Samuel Munzele Maimbo Lead Financial Sector Specialist AFTFE Task Team Leader #3 Serap Gonulal Sr Financial Sector Specialist FCMNB Serap Oguz Gonulal Financial Sector Specialist FDPSN Slaheddine Ben-Halima Sr. Procurement Specialist AFTPC Stuart Yikona Sr Financial Sector Specialist FFSFI Susan Hume Sr Operations Officer AFTFE ICR Author Tania Saranga Consultant AFTFE Teresa De Jesus S. McCue Finance Analyst CTRLA Yeshareg Dagne Program Assistant AFTFE Zulfa Mulla Program Assistant AFCS2

(b) Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD thousands (including travel and consultant costs)

Lending FY04 10.93 60.33 FY05 24.45 101.01 FY06 19.16 85.96

Total: 256.30 Supervision/ICR

FY06 6.55 41.60 FY07 22.92 131.32 FY08 25.64 163.65

FY09 46.06 155.91

FY10 58.65 146.24 FY11 42.75 104.16 FY12 16.62 88.23 FY13 (ICR-related only) 7.42 46.83

Total: 877.94

49

Annex 5 Borrower’s ICR

Mozambique FSTAP (P086169)

50

51

52

53

Annex 6

List of Supporting Documents Mozambique FSTAP (P086169)

Project File Project Concept Note; July 7, 2003

Project Appraisal Document; November 3, 2005

Development Credit Agreement; December 16, 2005

Aide Memoires and Implementation Status Reports; June 2006 – June 2012

Restructuring Paper; May 26, 2011

Other

International Monetary Fund; Country Report No. 12/148; June 2012

International Monetary Fund and World Bank; Debt Sustainability Analysis Update; May 24, 2011

International Monetary Fund and World Bank; Medium-Term Debt Management Strategy and Project Selection; March 2012 Mozambique Council of Ministers; Financial Sector Development Strategy 2012–2021 (draft)

World Bank and International Monetary Fund; Financial Sector Assessment Program (FSAP); 2003 and 2009 (Update)

World Bank; Country Assistance Strategy; October 2003

World Bank; Making Finance Work for Africa; 2007

World Bank; FinScope Mozambique Survey Report; 2009

World Bank; Financing Africa Through the Crisis and Beyond; 2011 Thorsten Beck,

Montes NamuleMontes Namule(2,419 m)(2,419 m)

Mo

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mb

iq

ue

Pl a

i n

M o z a m b i q u e

P l a t e a u

MAPUTOMAPUTO

G A Z AG A Z A

S O F A L AS O F A L A

T E T ET E T E

Z A M BZ A M B É Z I AZ I A

N A M P U L AN A M P U L A

C A B OC A B OD E L G A D OD E L G A D O

N I A S S AN I A S S A

Limpopo

INHAMBANEINHAMBANE

MANICAMANICA

GuijaGuija

MassingirMassingir

ChicualacualaChicualacuala

MapaiMapai

MoambaMoamba

EspungaberaEspungabera

ChiguboChigubo

MachaílaMachaíla

PandaPanda

GorogosaGorogosa

SenaSena

ChangaraChangara

CatandicaCatandica

InhamingaInhaminga

MontepuezMontepuez

MuedaMueda

MarrupaMarrupa

CaturCatur

MetangulaMetangula

Alto MolócueAlto Molócue

RibáuRibáuè

GuruGurué

CuambaCuamba

NamacurraNamacurra

MocubaMocuba

MoatizeMoatize

SongoSongoZumboZumbo

FíngoFíngoè

FurancungoFurancungo

MualadziMualadzi

MilangeMilange

LichingaLichinga

ChimoioChimoio

TeteTete

NampulaNampula

ChibitoChibito

MatelaMatela

Monte BingaMonte Binga(2,438 m) (2,438 m)

To To LusakaLusaka

To To PetaukePetauke

To To LilongweLilongwe

To To MangocheMangoche

To To MtwaraMtwara

To To ZombaZomba

To To BlantyreBlantyre

To To ChipataChipata

To To MutokoMutoko

To To HarareHarare

To To MasvingoMasvingo

To To MasvingoMasvingo

To To RutengaRutenga

To To MessinaMessina

To To NelspruitNelspruit

To To MbabaneMbabane

S O U T HS O U T HA F R I C AA F R I C A

SWAZILANDSWAZILAND

Z I M B A B W EZ I M B A B W E

Z A M B I AZ A M B I A

T A N Z A N I AT A N Z A N I A

MALAWIMALAWI

LakeLakeMalawiMalawi

Zitundo

Manhica

Guija

Massingir

Chicualacuala

Mapai

Moamba

Nova Mambone

Espungabera

Inhassôro

Vilanculos

Chigubo

Machaíla

Inharrime

Panda

Chibito

Gorogosa

Sena

Changara

Catandica

Inhaminga

Pebane

Angoche

Nacala

Montepuez

MuedaMocimboada Praia

Marrupa

Catur

Metangula

Alto Molócue

Ribáuè

Gurué

Cuamba

Namacurra

Mocuba

Moatize

SongoZumbo

Fíngoè

Furancungo

Mualadzi

Milange

Moçambique

Xai-Xai

Matela

Beira

Chimoio

Quelimane

Tete

Nampula

Inhambane

Pemba

Lichinga

MAPUTO

S O U T HA F R I C A

SWAZILAND

Z I M B A B W E

Z A M B I A

T A N Z A N I A

MALAWI

MAPUTO

G A Z A

S O F A L A

T E T E

Z A M B É Z I A

N A M P U L A

C A B OD E L G A D O

N I A S S A

INHAMBANE

MANICAINDIAN OCEAN

Lago deCahora Bassa

LakeMalawi

Lugenda

Messalo

Lúrio

Ligonha

Licungo

Zambeze

Buzi

Save

Changane

Zambeze

Limpopo

To Lusaka

To Petauke

To Lilongwe

To Mangoche

To Mtwara

To Zomba

To Blantyre

To Chipata

To Mutoko

To Harare

To Masvingo

To Masvingo

To Rutenga

To Messina

To Nelspruit

To Mbabane

Mo

za

mb

iq

ue

Pl a

i n

M o z a m b i q u e

P l a t e a u

Monte Binga(2,436 m)

Montes Namule(2,419 m)

30° E 35° E

30° E 35° E 40° E

25° S

20° S

15° S

10° S

25S

20° S

15° S

10° S

MOZAMBIQUE

0 50 100 150

0 50 100 150 Miles

200 Kilometers

IBRD 33451R1

JANUARY 2007

MOZAMBIQUESELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.