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AFRICAN DEVELOPMENT FUND
MOZAMBIQUE
ECONOMIC GOVERNANCE AND INCLUSIVE GROWTH
PROGRAM (EGIGP) – PHASE II
APPRAISAL REPORT
OSGE/SARC
November 2015
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TABLE OF CONTENTS
CURRENCY EQUIVALENTS i
ACRONYMS AND ABBREVIATIONS ii
PROGRAM INFORMATION iii
EXECUTIVE SUMMARY FOR 2015 PROGRAM iv
RESULTS-BASED LOGICAL FRAMEWORK v
I. THE PROPOSAL .......................................................................................................... 1
II. UPDATE ON COUNTRY ELIGIBILITY .................................................................. 2
III. YEAR 2015 PROGRAM .............................................................................................. 4
3.1 Program Goal and Purpose ................................................................................................................. 4 3.2 Program Components ...................................................................................................... 4
3.3 Program Outputs and Expected Results .......................................................................... 5 3.4 Progress on Prior Actions Outlined in the Previous Operation ....................................... 6
3.5 Policy Dialogue ............................................................................................................... 7 3.6 Loan or Grant Conditions ................................................................................................ 7
3.7 Application of Good Practice Principles on Conditionality ............................................ 9
3.8 Financing Needs ............................................................................................................ 10
IV. OPERATION IMPLEMENTATION ....................................................................... 10
4.1 Beneficiaries of the Program ......................................................................................... 10
4.2 Implementation Arrangements ...................................................................................... 11 4.3 Financial Management and Disbursement and Reporting Arrangements ..................... 11
4.4 Procurement .................................................................................................................. 11
V. LEGAL DOCUMENTATION AND AUTHORITY ................................................ 12
5.1 Legal Documentation .................................................................................................... 12 5.2 Conditions Associated with Bank’s Intervention .......................................................... 12
5.3 Compliance with Bank Group Policies ......................................................................... 12
VI. RISK MANAGEMENT .............................................................................................. 12
VII. RECOMMENDATION .............................................................................................. 13
Tables
Table 1: Key Macroeconomic Indicators
Table 2: Progress on Targets from Result Based Logical Framework (RLF)
Table 3: Prior Actions for 2015 Program
Table 4: Proposed Indicative Triggers for 2016
Table 5: Financing Requirements and Sources, 2014-2016 and Bank Group Financing
Annexes
Annex I: Letter of Development Policy
Annex II: IMF Country Relations Note
i
CURRENCY EQUIVALENTS (As of June 2015)
Currency Unit = Mozambican Metical (MZN)
1 UA = MZN 47.086
1 USD = MZN 31.153
1 UA = USD 1.4064
FISCAL YEAR
1st January to 31st December
ii
ACRONYMS AND ABBREVIATIONS
AfDB African Development Bank
BAU Balcão de Atendimento Único
BoM Bank of Mozambique
CPIA Country Policy and Institutional Assessment
CSO Civil society organization
CSP Country Strategy Paper
DP Development partner
DSA Debt Sustainability Analysis
DfID UK Department for International Development
EGIGP Economic Governance and Inclusive Growth Program
EITI Extractive Industries Transparency Initiative
EMAN II Private Sector Development Strategy II
EMATUM
e-SISTAFE
FDI
Empresa Moçambicana de Atum
Sistema de Administração financeira do Estado
Foreign Direct Investment
FRA Fiduciary Risk Assessment
FRELIMO
FSDS
Frente de Libertação de Moçambique
Financial Sector Development Strategy
GBS General Budget Support
GDP Gross Domestic Product
GoM Government of Mozambique
HDI Human Development Index
IGEPE
IGF
Instituto de Gestão das Participações do Estado
General Inspectorate of Finance
IIAG Ibrahim Index of African Governance
IIP Integrated Investment Program
IMF International Monetary Fund
IPSAS International Public Sector Accounting Standards
MDGs Millennium Development Goals
MIC Ministry of Industry and Commerce
MoEF Ministry of Economy and Finance
MoU Memorandum of Understanding
MSME Micro-, small and medium enterprise
MTFF Medium-Term Fiscal Framework
M&E Monitoring and evaluation
PAF Performance Assessment Framework
PARP Poverty Reduction Action Plan
PBO Program Based Operation
PEFA Public Expenditure and Financial Accountability
PFM Public Financial Management
PSD Private sector development
RBLF Results-based logical framework
RENAMO Resistência Nacional Moçambicana
SME
SAR
Small and Micro Enterprises
Streamlined Appraisal Report
SOE State-owned enterprise
TA Tribunal Administrativo (Administrative Court)
TSA Treasury Single Account
TYS
UGEA
Ten-Year Strategy
Executive Management Procurement Units
iii
PROGRAM INFORMATION
INSTRUMENT: General Budget Support (GBS)
PBO PHASE: Phase II of the Three-Year Programmatic Operation
GRANT INFORMATION
Client information
GRANT RECIPIENT: Republic of Mozambique
EXECUTING AGENCY: Ministry of Economy and Finance
Financing Plan for 2015 for fiscal years 2015-2016 (commitments)
Source Amount (2015) Amount (2016)*
ADF Grants UA 15 million (USD 21m) UA 10 million (USD 14m)
World Bank USD 70 million USD 116 million
EU USD 15.9 million USD 67.1 million
DfID USD 33.4 million USD 39.18 million
Sweden USD 47.3 million USD 34.7 million
Denmark USD 10.7 million USD 10.9 million
Other G-19 partners USD 48.9 million USD 22.72 million
TOTAL USD 247.2 million USD 304.6 million
** 2016 commitments are provisional
Program Timeframe - Main stepping stones (expected)
Original Program Approval September 19, 2014
2015 Program (EGIGP II) approval December 2015
Disbursement (Phase II) December 2015
Completion June 2016
iv
EXECUTIVE SUMMARY FOR THE SECOND OF A MUTLI-YEAR PROGRAM (EGIGP II)
2015 Program
Overview
Program Name: Economic Governance and Inclusive Growth Program - Phase II (EGIGP II). This
operation is the second in a programmatic series of three consecutive general budget support (GBS)
operations covering 2014-2016.
Program Goal and Objective: In line with the original approved program by the Board in 2014, the
goal of EGIGP II is to support government effort in promoting inclusive and sustainable growth by (i)
consolidating transparent and accountable PFM and natural resource management frameworks; and (ii)
improving the enabling environment for private sector development.
Expected Outputs in 2015: (i) Draft law on state-participated enterprises or the corporate sector of
the State adopted; (ii) Revised Integrated Investment Plan with details of project financing published;
(iii) Financial reports of the 6 largest SOEs published: (iv) The profile of procurement units’ (UGEAs)
staff defined and approved; (v) Draft fiscal regime for mining and petroleum activities submitted to
parliament; (vi) Revised SME strategy approved by the Council of Ministers; (vii) Regulations
implementing the Compensation law adopted; (viii) Statutes of the Competition Authority adopted; and (ix)
Regulations governing e-banking including mobile banking adopted.
Program Cost: The 2015 estimated cost is USD 247.2 million out of which the Bank will provide UA
15 million (equivalent to USD 21 million at the current exchange rate).
2015 Country
Context overview
Economic performance in 2014 was robust with an estimated GDP growth rate of 7.4%, driven by
rebound in agriculture (a recovery from 2013 floods), manufacturing and a vibrant financial sector.
Inflation was low, estimated at 1.1% in end-December 2014 down from 3% in the same period in 2013.
External current account deficit declined to 36% of GDP in 2014 down from 42% in 2013. Despite the
robust macroeconomic performance, poverty rates have stagnated around 54%, while income
inequality remains high (estimated at 45% in 2013). The signing of the cessation of hostilities
agreement between the Government and RENAMO (in September 2014) facilitated a peaceful general
elections in October 2014, and inauguration of a new president in January 2015, in which ruling
FRELIMO retained parliamentary majority. Although RENAMO disputed the results of the election,
relative political stability continued.
Lessons learnt
Main lessons learned include the: (a) need to focus on high-priority measurable indicators closely
aligned with the PAF; (b) importance of consolidating progress in PFM and stepping up efforts for
private sector development; and (c) the need to have a streamlined harmonization framework and PAF
focusing principally on the strategic objectives of General Budget Support (GBS). A recent evaluation
of GBS in Mozambique suggests that budget support has been successful in achieving its objectives,
although it recognized weaknesses in the use of the instrument, in particular in the quality of the policy
dialogue. The G-19 and the Government are currently working on a design a new PAF and MOU that,
starting in 2016, would better link policy actions with results sought and streamline the policy dialogue.
Conditions for
continuous
support
Continuous budget support in 2016 is premised on two conditions namely, positive assessment of the
Policy Support Instrument (PSI) by the IMF and the recommendation of Program Aid Partners’ (PAPs)
for continued GBS. In June 2015, the IMF fourth review concluded that the implementation of the
economic reform program underpinning the three year PSI remains satisfactory. IMF staff commended
the authorities for making progress on structural reform implementation and for being the first country
in Sub-Saharan Africa to request and publish a Fiscal Transparency Evaluation (FTE). Staff also
observed that the authorities have started to improve disclosure and management of fiscal risks,
including from EMATUM, and to take steps to improve public investment management and
modernize tax administration. The 2015 Annual Review of the GBS Performance Assessment
Framework (PAF) completed on May 15, 2015, concluded that the overall implementation
performance coupled with the recent approval of the Government Five-Year Program (QGP) and the
Government's commitment to deepening dialogue on concrete reforms, provides a basis for the
continuation of GBS in 2016. Mozambique meets the Bank’s eligibility criteria for PBOs.
Policy dialogue
Key policy dialogue issues, which came out strongly from the joint budget support review include the
need for: (a) close monitoring of the implementation of the Fiscal Transparency Action Plan; (b)
improving governance with emphasis on effective implementation of anti-corruption package; and (c)
careful identification of drivers of inclusive growth and designing concreate programs (e.g. in small-
scale agriculture), with particular attention to women and youth. Deepening PFM reforms, integrated
policy management of natural resources, and improving enabling environment for doing business with
particular emphasis on the triggers for the 2016 Program will also be focus of policy dialogue.
v
RESULTS-BASED LOGICAL FRAMEWORK Country and project name: Mozambique Economic Governance and Inclusive Growth Program Phase II (EGIGP II) Purpose of the program: Promoting inclusive and sustainable growth in Mozambique by (a) consolidating transparent and accountable PFM and natural resource management frameworks, and (b) improving the enabling environment for private sector development and investment
RESULTS CHAIN PERFORMANCE INDICATORS
MOV RISKS/MITIGATION
MEASURES Indicator (including CSI*) Baseline Target
IMP
AC
T Sustainable and
inclusive economic growth through good governance and private sector development
Real GDP growth 7.1% (2013) 8.1% (2014-2018 average) MoEF
Macroeconomic risks. Mitigation: GoM has a solid track record of prudent macroeconomic policies; IMF PSI (2013-2015) will run in parallel. Weak implementation capacity. Mitigation: Policy actions are derived from GoM priorities and the 2013-2015 PAF agreed upon between GoM and donors. Donors are providing TA and capacity building. Fiduciary and debt management risk (particularly in light of recent EMATUM case), Mitigation: A recent IMF study on Fiscal Transparency Assessment has concluded that overall, the government’s fiscal framework is transparent. GoM has made considerable progress in its governance and PFM reform agenda as identified by the Bank FRA. Program will further support the consolidation of these reforms. Vulnerability to natural disasters (particularly floods and droughts): Mitigation: GoM has designed a disaster management master
HDI and Gender Inequality indices 0.327 & 0.582 (2012) 0.350 & 0.650 by 2018
Sustainable Economic Opportunity Sub-Index – Ibrahim Index of African Governance
50.6 (2013) 54 by 2018 IIAG
OU
TC
OM
ES
Outcome 1: Improved efficiency and transparency in the management of public resources, including pro-poor spending
Bank CPIA Cluster D (Governance) score 3.4 (2012) 3.7 by 2017 CPIA
Priority sector (pro-poor) spending deviation +/- 6% from approved State Budget for the expenditure of the priority sectors (Agriculture, Education, Governance, Health, and Public Works)
Met for aggregate (96%) but not
sectors: deviation of Public Works (80%); Education (112.3%)
(2013)
Maximum of 6% deviation by 2017
MoEF
Natural Resource Governance Index (score) 37/100 in 2013 45/100 by 2017 NRGI
Outcome 2: Expanded opportunities for business creation, growth, and employment
Time to start a business (days) 13 (2013) 8 by 2017 WB DBR
Percentage of SMEs contracted in public tenders of small scale
85% (2013) 90% (2017) PAF/MoEF
Jobs created by enterprises established through the simplified licensing regime (annual increase vs. previous year)
50.458 jobs created (2013)
Annual increases of 70% (2016) – at least 30% women
PAF AR/ MIC
OU
PU
TS
A. Consolidating Transparent and Accountable PFM and Natural Resource Management Frameworks
Output 1.1: Improved transparency, and accountability in public finance management
1.1.1 Adoption of draft legislation on SOEs N/A Corporate Sector of the State adopted by June 2016
PAF AR/ MoEF
1.1.2: Number of state enterprises with published financial statements
4 financial statements published
in 2013
2013 financial report of 6 largest SOEs published by 2015 and 8 SOEs by 2016
PAF AR/ MoEF
1.1.3 Publication of revised IIP and MTFF IPP manual adopted in 2013, AND MTFF approved in 2014
A revised IPP with financial information for projects with identified financing published (2015)
MTFF methodology revised to incorporate the main criteria to select and assess public investment projects (2015)
PAF AR/ MoEF
1.1.4 Revised public procurement regulation adopted
Procurement regulation / Decree
15/2010
A revised procurement regulation adopted in 2016
PAF AR / UFSA
1.1.5 Progress in the operationalization of a procurement career
N/A Profiles of staff working for procurement units defined and approved by 2016
1.1.6 Publication of “Citizens Budget” First publication in
2014 Publication of Citizens Budget for 2015 FY
PAF AR/ /MoEF E
Output 1.2: Increased transparency and accountability in the
1.2.1 Preparation and publication of 5th and 6th EITI reconciliation report according to new standard
EITI 4th report published in March
2014
5th EITI Report published in 2015, and 6th EITI report published in 2016
PAF AR /MIREM/MF
vi
management of natural resources / extractive sector
1.2.2 Adoption of draft revised legislation on mining and hydrocarbons
Draft legislation and consultations in 2013
Revised legislation on mining and new fiscal regime on mining and petroleum approved by Cabinet (2015)
MIREM/ MoEF
policy and has put in place a flood early warning system.
B. Improving Enabling Environment for Private Sector Development and Investment
Business licensing and procedures simplified
Adoption of Single Form for business start-up 9 forms needed
(2013) Single form adopted and implemented in 2015
Min of Industry and Commerce (MIC)
Adoption of Industrial Licensing Regime Draft prepared Industrial licensing decree approved by end-2015
Expansion of e-BAU platform Implemented in 1 sites 2014
Rolled out to 11 sites (2016)
Improved MSME policy framework
Adoption of revised MSME Strategy 2007-2012 policy Adoption of revised strategy by end-2016
MIC
Competition law implemented
Adoption of regulations and creation of competition authority
Competition law (2013)
Regulations adopted and authority established by end-2015
MIC
Improved framework to promote financial inclusion
Adoption of regulations governing e-banking, including mobile banking
Draft regulation in preparation (2014)
Draft regulations adopted by 2015
BoM/MoEF/ MIC
Adoption of a legislation on the establishment of a movable collateral registry
Draft legislation (2015)
Draft legislation adopted in 2016
BoM/MoEF
Adoption of National Financial Inclusion Strategy Draft strategy (2015) National Financial Inclusion Strategy adopted by 2016
MIC/MoEF
Funding in US$ million (2015) - AfDB: 21; other G-19 partners: 226.2 (committed amounts).
1
REPORT AND RECOMMENDATION BY MANAGEMENT TO THE BOARD OF
DIRECTORS ON A PROPOSED GRANT TO MOZAMBIQUE FOR THE ECONOMIC
GOVERNANCE AND INCLUSIVE GROWTH PROGRAM PHASE II (EGIGP II)
I. INTRODUCTION: THE PROPOSAL
1.1 Management submits this report and recommendation for a proposed ADF grant of
UA 15 million to finance the second phase of the Mozambique Economic Governance and
Inclusive Growth Program (EGIGP II). The EGIGP was designed as a programmatic series of
three consecutive general budget support (GBS) operations covering fiscal years 2014, 2015, and
2016. All the operations in the series are single tranche. Consistent with the Bank’s Policy on
Program-Based Operations (PBOs), the disbursement of the proceeds of the first phase1 in the
programmatic series (UA19.335 million) was approved and disbursed against the achievement of a
set of prior actions for 2014. In addition, the EGIGP anticipated indicative triggers for the second
and third phases (EGIGP II and III) in 2015 and 2016, thereby providing predictable financing for
the Government of Mozambique (GoM) and creating a medium-term platform for policy dialogue.
EGIGP II is the second in a series of three annual single-tranche operations to be delivered in 2015.
1.2 The proposed EGIGP II is aligned with the Government’s development plan and multi-
donor budget support program. The EGIGP II is harmonized with the G19 joint-donor mechanism
for provision of GBS, and reforms supported under EGIGP II are in line with the Poverty Reduction
Action Plan (PARP, Programa de Ação para a Redução da Pobreza 2011-2014), the Medium-Term
Fiscal Framework (MTFF) 2015-2017 and the objectives laid out in the Five-Year Program. In
February 2015, Government approved a new Five-Year Program (2015-2019), outlining the main
priorities and strategic actions for the medium term, with emphasis on employment creation, and
greater competitiveness through higher productivity.
1.3 In line with the original approved program by the Board in 2014, the development
objective of EGIGP II is to promote inclusive and sustainable growth in Mozambique. Strong
economic growth (average 7%) over the past two decades has not translated into significant poverty
reduction2. This is due to a growth pattern, driven by large capital intensive projects in mining and
hydrocarbon sectors, with limited links to the rest of the economy. Consistent with the Bank’s
operational objectives and new institutional priorities3, the reforms supported by this operation
will contribute to inclusive growth and support Mozambique in achieving the Bank’s objective
of improving the quality of life and well-being of all Mozambican. Reforms to simplify business
regulations and start up procedures to obtain a license will lead to higher investment, increase
productivity of the private sector and increase job creation for youth and women. These reforms are
focused more to benefit smaller and medium enterprises that have fewer resources at their disposal
to deal with an excessively onerous business environment. The development of the extractive
industry brings significant opportunity to the country but much will depend on whether Government
is able to capture a fair share of the rents and how these are used. Reforms supported under the
operation will improve regulatory environment, transparency and management of public finance and
the extractive industries. These changes will contribute to a more judicious use of resources and
sharing benefits.
1 ADF/BD/WP/2014/93 2 Strong economic growth led to a decline in the national poverty headcount by 14 percentage points between 1997 and
2003 to 56 percent, implying a growth elasticity of poverty reduction of 0.3. Poverty fell between 2003 and 2009 to 52
percent, implying a growth elasticity of poverty reduction of only 0.14. 3 The new High-5 recently announced by the President of the Bank Group that will drive the Bank’s work as it
implements its current ten year strategy are: (a) Light up and Power Africa; (b) Feed Africa; (c) Integrate Africa; (d)
Industrialize Africa, and (e) Improve quality of life for the people of Africa
2
II. UPDATE OF COUNTRY ELIGIBILITY
2.1 Country’s continued commitment to poverty reduction: The GoM’s continued
commitment to poverty reduction and inclusive growth is encapsulated in the new Five Year Program
(Plano Quinquenal do Governo, PQG 2015-2019), whose major emphasis is on employment creation,
poverty reduction and greater competitiveness through higher productivity. The five guiding pillars
of the national development strategy are (i) consolidation of national unity, peace and sovereignty,
(ii) development of human and social capital, (iii) promotion of employment, productivity and
competitiveness, (iv) development of economic and social infrastructure, and (v) sustainable and
transparent management of natural resources. It has also three supporting pillars: (a) consolidate the
democratic rule of law, good governance and decentralization, (b) promote a balanced and stable
macroeconomic environment, and (c) reinforce international cooperation. The PQG represents
significant continuity in the focus of the government program, and has elevated the transparent and
sustainable management of its natural resources to one of the top priorities. The 2015 program is
fully consistent with these strategic pillars.
2.2 Continued political stability: In 2012, Mozambique celebrated 20 years of peace during
which elections were held regularly and peacefully. Political stability was jeopardized in 2013 when
tension between the Government and RENAMO, the former rebel group turned political opposition,
degenerated into fighting in the interior of the country. The resumption of dialogue and signing of
the cessation of hostilities agreement in September 2014 facilitated general elections conducted in
October 2014, and inauguration of a new president and a new government in January 2015, in which
ruling FRELIMO retained parliamentary majority. Although RENAMO disputed the results of the
election, relative political stability continued. The new government has expressed commitment to
political decentralization and the existing framework for political dialogue, which with support from
development partners, has contributed to ensuring stability.
2.3 Macroeconomic and fiscal analysis: The year 2014 was characterized by high economic
growth (7.4%) and relative macroeconomic stability. GDP growth was driven by rebound in
agriculture (a recovery from 2013 floods), manufacturing and a vibrant financial sector. Inflation was
low at 1.1% in 2014 down from 3% in 2013, largely due to unchanged administered prices of the
basket, increased agriculture production, and stable exchange rate of the Metical during most part of
the year. End-year inflation is expected to accelerate to 5.5% in 2015 but contained within the
government’s medium term objective of 5-6% in 2016. Large fiscal expansion in 2014 saw the overall
fiscal deficit (after grants) soar to about 10% of GDP, but projected to decline to 7.0% of GDP in
2015, remaining around 4-5% of GDP in the medium term in view of GoM fiscal consolidation effort.
This will help stabilize public debt over the medium-term. External current account deficit was 34.7%
of GDP in 2014 down from 40% in 2013. While international reserves lost over 25% from mid-2014
to mid-2015, standing at 3rd Quarter 2015 below 3 months of imports cover (non-megaprojects
related), the Bank of Mozambique is already taking steps to rebuild buffers. Table 1 presents
macroeconomic indicators.
Table 1: Key Macroeconomic Indicators 2012-2017
(In per cent of GDP, unless otherwise indicated) 2012
Act.
2013
Act.
2014
Est.
2015
Proj.
2016
Proj.
2017
Proj.
Annual GDP growth 7.2 7.4 7.4 6.3 6.5 7.9
Inflation rate (CPI, average) 2.1 4.2 2.3 4.0 5.6 5.6
Fiscal balance (after grants) -4.1 -2.8 -10.4 -6.5 -5.5 -5.8
Total revenue and grants 28.7 26.9 27.8 25.5 25.7 25.9
Total expenditure and net lending 31.4 34.9 43.3 36.9 34.6 34.6
Of which: capital expenditure 11.9 13.1 15.5 14.3 12.9 12.3
External current account balance (incl. official grants) -42.3 -40.0 -34.7 -38.2 -42.1 -39.9
International reserves (in months of imports). 2.7 3.3 3.1 2.7 2.8 2.6
Total public debt 41.1 46.9 55.4 61.2 61.7 60.8
Public external debt 35.5 38.1 46.7 50.9 52.6 53.3
Public domestic debt (including T-bills) 5.6 8.8 8.7 10.3 9.1 7.5
3
2.4 Government is committed to a prudent fiscal stance. The 2015 budget approved by
parliament reflects an effort to tighten fiscal policy and commitment to implement fiscal
consolidation. Authorities plan to continue reducing public spending to below 34.6% of GDP by
2017 and the overall deficit (after grants) from over 10.4% in 2014 to 5.8% in 2017 and later to 5%
in 2019. One-off factor explain about half of the fiscal loosening, with electoral spending accounting
for 0.9% of GDP, and the inclusion in the budget of the non-commercial spending of EMATUM
representing 2.8% of GDP. Economic activity in 2015 has remain solid, though new challenges have
emerged with the drop in commodity prices and require decisive policy action. Mozambique’s
medium-term macroeconomic outlook is positive. Annual growth is expected 6.3% in 2015 and is
projected to accelerate slightly to 6.5% in 2016 and in 2017 to around 8% as agriculture recovers
from the 2015 floods and growth continues strongly in the extractive sector, construction,
transportation and communications. In the short run, resource-related FDI, and infrastructure
investments, both public and private, are expected to be major contributors to growth. Weaker
commodity prices, particularly if prolonged, could have an adverse impact on Mozambique’s
economic prospects. The external position has deteriorated considerably, with continued pressure
over the balance of payments since mid-2014. The widening of the trade balance deficit reduced
foreign currency liquidity. The Metical is on freefall against the US dollar accumulating a 45.4% loss
year-on-year. The devaluation negatively affects debt sustainability, as 80% of public debt is
denominated in US dollars. The Central Bank has already start to increase reference rates to tighten
monetary policy in order to contain inflationary pressures and assist the Metical exchange rate. Inflation is projected to stay between 5-6% through 2017. The IMF concluded its 4th PSI review in
July 2015 and acknowledged Mozambique’s strong economic growth record, but the increasing
challenging environment requires stepping up the progress in implementing structural reforms,
including fiscal risks management, public investment management and tax administration. In
addition, Government agreed for an 18-month Stand-by Credit Facility of SDR 204.48 million to
support the Balance of Payments. The overall macroeconomic framework provides adequate basis
for this operation.
2.5 Fiduciary risk assessment: Several satisfactory fiduciary risk assessments (FRAs) have been
undertaken in Mozambique, including three PEFA assessments in 2006, 2008 and 2010. In particular,
the 2010 PEFA assessment identified substantial progress in areas such as budget credibility (with
the roll-out of the e-SISTAFE system, improvement in budget transparency and a reduction in the
deviation of budget execution from budgeted amounts) and, to a lesser, extent, comprehensiveness
and transparency of the budget. In particular, the country’s performance in budget transparency is
strong, with all eight major budget documents being regularly published and a major improvement
in terms of the Open Budget Index, from a score of 28 out of 100 in 2010 to 47 in 2012. Reforms
have continued unabated since 2010 in all areas, and a new PEFA assessment has been launched in
May 2015 and expected to be completed before end-December 2015. The Bank’s Fiduciary Risk
Assessment (FRA) undertaken in 2015 as part of the CSP issue paper concluded that the fiduciary
risk is substantial, although declining (see annex III).
2.6 Harmonization: Coordination amongst development partners (DPs) in Mozambique is
highly harmonized under the G-19 budget support donor group4and is governed by the new
Memorandum of Understanding (MoU) signed in September 2015. The core GBS partners and
the Ministry of Economy and Finance (MoEF) have been working on the reform of the harmonization
framework for GBS. Consequently, a streamlined MoU focusing only on GBS has been adopted in
2015 to underpin a more focused PAF and a more effective policy dialogue. A common Performance
Assessment Framework (PAF) which is aligned with the Government’s PQG 2015-2019, will inform
individual DPs’ GBS programs. In addition, DPs and GoM jointly monitor “areas of special
4 Out of the G-19 Group, otherwise known as Program Aid Partners, only 14 currently provide budget support. The G-19
includes: Austria, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Norway, Portugal, Sweden, Switzerland,
UK, EU, AfDB and World Bank, two associate members (USA and UN) and IMF (ex-officio member).
4
attention” linked to specific reforms. Policy dialogue takes place at the political (Head of Mission)
and technical (Head of Corporations and working groups) levels. The Bank is involved at both levels
and plays an active role in the Head of Corporation as well as in the Economist Working Group,
Private Sector Group, and Budget Analysis Group. The PAF cycle is based on a planning exercise in
September/October (when PAF indicators are defined for the following year) and a review exercise
in April/May (when performance in the previous year is assessed). The review of the 2014 program
was concluded on 15 May 2015 and a joint aide-memoire detailing progress in program
implementation has informed the design of EGIGP II. Budget support partners are currently working
with the Government to design a new PAF that will better link policy actions with results sought and
to form the basis for providing budget support from 2016 onwards.
III. YEAR 2015 PROGRAM
3.1 Program Goal and Purpose
3.1.1 As earlier indicated, the goal of EGIGP is to support the government effort in promoting
inclusive and sustainable growth through good governance by (i) consolidating transparent and
accountable PFM and natural resource management frameworks; and (ii) improving the enabling
environment for private sector development. Consistent with this goal, the operational objective of
the 2015 program is strengthening policy, legal and regulatory frameworks for transparency and
accountability in pubic financial management (public investment management, fiscal risk
management, and natural resource management) and business enabling environment.
3.2 Program Components
3.2.1 The EGIGP II components remain the same as specified in the original Program
Appraisal Report (PAR) namely (1) Consolidating transparent and accountable PFM and natural
resource management frameworks; and (2) Improving the enabling environment for private sector
development. These two components are complementary and mutually reinforcing.
Component 1: Consolidating Transparent and Accountable PFM and Natural Resource
Management Frameworks
3.2.2 Mozambique has made important progress in PFM and natural resource management,
but further efforts are needed to strengthen efficiency and governance. Furthermore, EMATUM
sovereign guarantee calls for a strengthening of investment planning and monitoring of fiscal risks.
In this regard, the Government is undertaking major reforms in the areas of: (i) budget credibility and
predictability; (ii) management of fiscal risks; (iii) expenditure controls; (iv) value for money in
spending; and (v) the extractive sector transparency.
3.2.3 EGIGP I supported (as prior action) the adoption of a Fiscal Transparency Action Plan
(FTAP) in March 2014, in coordination with the IMF, to strengthen governance of fiscal resource
flows and monitoring fiscal risks. Government has registered progress in rolling out the integrated
financial management system (e-SISTAFE) across government ministries and expanding its
functionality over time. The program has supported (as prior action) the operationalisation of the
procurement functionality in e-SISTAFE, as the first step to allow the creation of a database on
procurement processes at all levels. Government has also taken measures to improve transparency in
the management of the extractive sector. EGIGP I supported (as prior action) the adoption of a revised
legislations for the mining and petroleum sectors in mid-2014. This legislation increases transparency
in contract disclosure, but further reform and implementing regulations will be required to concretise
many aspects of the legislations.
3.2.4 EGIGP II would support government efforts and plans to strengthening the fiduciary
systems and governance in extractives. This include measures to enhance linkages and streamline
the investment planning instruments, further fiscal transparency in SOEs, broadening and deepening
of Mozambique’s EITI engagement, and operationalization of the revised legal framework on mining
and petroleum.
5
Component 2: Improving the Enabling Environment for Private Sector Development
3.2.5 The Government is implementing reforms to improve the business enabling
environment for private sector development. The Bank continued to support Government to
implement two strategies shaping the private sector development agenda, namely: (a) EMAN II
(2013-2017), focusing on simplifying business regulations and strengthening competitiveness
through concrete legal and regulatory reforms; and (b) the FSDS 2013-2022, aimed at fostering
stability, access and long-term development with an emphasis on MSMEs to promote inclusive
growth and job creation, particularly for women and youth.
3.2.6 EGIGP I supported (as prior action) the adoption of a decree for introducing a single form for
business start-up procedures, adoption of a revised industrial licensing decree, and the creation of
private credit bureaus and register of borrowers. These reform measures are encapsulated in the
above strategies and aimed at promoting a friendlier investment climate and expanded access to
finance, as well as address information gaps allowing financial institutions to better assess clients’
creditworthiness.
3.2.7 EGIGP II will support government to deepen reforms supported under EGIGP I
including: (a) measures to expand the integrated one-stop-shop network (e-BAUs, which are already
being piloted to support streamlined business procedures); (b) implementation of the 2013
Competition Law, through the adoption of the regulations and establishment of a new competition
authority aimed at facilitating market entry and ensuring a level playing field; and (c) adoption of
regulations for e-banking and mobile banking services in order to promote inclusion in rural areas.
3.3 Program Outputs and Expected Results
3.3.1 Implementation progress of the program of reforms supported under the previous operation
(EGIGP I) has contributed to improve the business climate and to enhance transparency in the PFM
system and the management of extractive industries. The Government has implemented regulatory
reform to improve the business environment including revision and simplification of licensing
requirement and streamlining procedures for starting a business. There has been considerable
progress in rolling out e-SISTAFE across multiple public agencies, as well as expanding its
functionality over time. E-SISTAFE now covers budget preparation as well as budget execution and
the reporting of expenditures. Public finance review show the trajectory of improvement, as the PFM
reform program produced substantial improvements in fiscal policy and budget execution.
Nevertheless, there is need to strengthen the public investment management systems and greater
transparency and oversight in the management of stated owned enterprises. Progress made on the
outputs targets established in the original PAR approved by the Board in 2014, as envisaged in the
results logical framework (RLF) is summarized in Table 2 below.
Table 2: Progress on Targets from the RLF
Output Achievements
A. Consolidating Transparent and Accountable PFM and Natural Resource Management Frameworks
Improved fiscal transparency A Fiscal Transparency Action Plan is being considered. Six of the largest state
enterprises have published financial statements
Strengthened procurement
systems
Progress is made in the operationalization of the procurement functionality in e-
SISTAFE, allowing for the creation of a database on procurement processes at all
levels
Increased oversight by service
users and CSOs in budget
process and public service
delivery
The 2014 and 2015 citizens budget have been published
6
Improved efficiency,
transparency and inclusion in
the management of mineral
resources
Mozambique has achieved compliance with the new and revised standards of
the EITI
The 5th EITI reconciliation report (based on 2012 data) published according
to the new standard
The law on hydrocarbon and mining was approved in August 2014. The
preparation of its regulation is ongoing and expected to be approved soon.
B. Improving Enabling Environment for Private Sector Development and Investment
Business licensing and
registration simplified
A Decree introducing a Single Form for business start-up procedures approved and published
A revised Industrial Licensing Decree approved by Council of Ministers The Law on the creation of private credit bureaus and register of borrowers
approved by Council of Ministers.
Government introduced the e-BAU, an integrated IT platform to further
streamline business start-up procedures
The time for licensing commercial activities reduced and can be done in one
day or next day. This is being implemented in provinces and city of Maputo.
Industrial licensing of big projects is done on average within 15 days and the
simplified licensing reduced to 1 day.
Improved MSME policy
framework
A revised MSME Policy has been adopted in 2013. The draft strategy is
expected to be approved in early 2016.
Number of jobs created through starting a business under the simplified
licensing regime has increased by 34% compared to 2013.
Percent of SMEs contracted in public tenders of small scale has increased
from 40% in 2013 to 100% in 2014 (53,980 SMEs)
3.4 Progress on Prior Actions Outlined in the Previous Operation
3.4.1 The progress on prior actions and results has been reviewed systematically during the joint
budget support donors review of the performance assessment framework, Bank Group supervision
missions and participation by the Field Office in working groups with Government of Mozambique
and development partners. There has been considerable progress on all the previous program triggers
(now prior actions) for 2015 program outlined in the original PAR approved by the Board in 2014.
Under component 1 of EGIGP II, progress on the prior actions are summarized in the following
four reform areas:
Public Investment Management: the program has supported (a) the adoption of a revised
Integrated Investment Plan (IIP) that provides detailed financial information for investment
projects for guaranteed financing; and (b) the revision of the methodology for 2015-2017
MTFF with the aim of incorporating the main criteria to select and assess public investment
projects. Further, a budget manual/guidelines for a mandatory technical assessment of
investment projects, by investment evaluation committee, is being developed.
Fiscal Risk Management focused on state-owned enterprises and public corporations:
The program supports government plans to effectively monitor and supervise the performance
and fiscal risks of state owned enterprises (SOEs) as well as state participated enterprises5 and
to ensure transparency in their operations. In this regard, six largest SOEs of the total 14 SOEs,
have published their annual financial reports and accounts for 2013, and the number is
expected to grow to 8 in 2016. For the state-participated enterprises (approximately 117)
supervised by State Equity Holdings Management Institute (IGEPE), a draft Law on the
Corporate Sector of the State has been developed and expected to be to adopted in early 2016.
Procurement: The first phase of the program supported the operationalization of the
procurement functionality in e-SISTAFE, allowing for the creation of a database on
procurement processes at all levels. To complement this policy action, preparation of staff
5 Commercial enterprises in which the GoM has equity participation.
7
profile of the Procurement Units’ (UGEAs) is being developed with the aim of strengthening
the capacity and skills mix of professional staff. However, the approval of the procurement
staff profile has delayed until the revision of the procurement law is completed in early 2016.
Natural Resource Management: The program supported the adoption of the legislation for
mining and hydrocarbon fiscal regime as well as the implementing regulation for the mining
law. Mozambique has also shown serious commitment to the new EITI standards. The
preparation of the 6th EITI report covering 2013 and 2014 based on the new standards has
started, and is expected to be published by March 2016.
Under component 2 of the EGIGP II, progress on the prior actions are summarized as follows:
Business regulatory reforms: The Government has expanded e-BAU platform to 8 sites
allowing further streamlining through automation of business start-up procedures. The time it
takes for licensing commercial activities has significantly reduced. For example, the time it takes
for obtaining construction licence declined sharply from 377 days in 2012 to 18 days currently.
Financial Sector Development: A new regulation on electronic money (e-banking and mobile
banking) has been approved by the Board of Bank of Mozambique. The new regulation imposes
a requirement for the E-money issuers to deposit the funds received against issuing of E-money
in a custody account (termed “trust account”) as a mean of protecting the money owed to E-
money holders, should they need to redeem it. Furthermore, a draft Law on the moveable
collateral is being developed. Given the cross-cutting nature of the draft Law, a workshop was
conducted in July 2015 in order to consult with the main stakeholders. The draft law is expected
to be finalized and submitted to Council of Ministers by end-December 2015.
SME Strategy and Competition Law and Competition Authority: To further deepen inclusive
development, a national SME strategy is being developed and is expected to be submitted to
Council of Ministers for approval in early 2016. The new SME Strategy focuses on enhancing
the capacity of the MSMEs, increasing their access to financial services, and improving access to
markets. To promote competitiveness, both the regulations for implementing the Competition
Law, and the Statutes (“estatutos”) of the Competition Authority were approved in 2015.
3.5 Policy Dialogue
3.5.1 Key policy dialogue issues, which came out strongly from the joint PAPs-GoM review of the
implementation of the 2014 program include the need for close monitoring of the Fiscal Transparency
Action Plan, including identifying legal and structural reforms on the basis of IMF evaluation; good
governance with emphasis on effective implementation of anti-corruption package and strengthening
the link between the Integrated Investment Plan (IIP) with debt sustainability. Policy dialogue will
also focus on the need for careful identification of drivers of inclusive growth and designing concreate
programs especially in small-scale agriculture, informal sector, services and tourism to operationalize
it, with particular attention to women and youth. Policy dialogue with the GoM will also be
intensified on the streamlined MoU and PAF focusing principally on GBS for effective monitoring
and evaluation of budget support operations. Deepening PFM reforms and improving business
enabling environment with particular emphasis on the triggers for the 2016 Program will also be
focus of policy dialogue.
3.6 Loan and Grant Conditions
3.6.1 Prior Action for 2015 Program: Table 3 summarizes the changes between the triggers
identified for EGIGP II in EGIGP I and the proposed prior actions for this operation. All EGIGP II
prior actions have been met by the authorities and the required documentary evidences will be
submitted to the Bank before the operation is presented to the Board. Further, there is logical follow
up of reform actions linked to the previous and the next phase of the programmatic operation.
8
Table 3: Prior Actions for 2015 Program
Proposed Prior Actions Status Evidence
Co
mp
on
ent
1:
Co
nso
lid
ati
ng
Tra
nsp
are
nt
an
d A
cco
un
tab
le P
FM
an
d
Na
tura
l R
eso
urc
e M
an
ag
emen
t F
ram
ewo
rks
Prior Action 1: Publication of
revised Integrated Investment
Plan (IIP) that includes financial
information for projects with
identified financing
Prior Action 2: Revision of the
MTFF methodology to
incorporate the main criteria to
select and assess public
investment projects
Prior Action 3: Publication of the
financial reports of the 6 largest
SOEs in the Official Gazette and
newspaper with largest
circulation
Prior Action 4: Submission to
Parliament of draft legislation on
the new fiscal regime for mining
and petroleum activities
Prior Action 5: Adoption of the
implementing regulations for the
mining law by the Council of
Ministers
Fulfilled. IIP that provides detailed financial
information for investment projects with
guaranteed financing approved in 2014.
Fulfilled. Revision of the methodology for
MTFF 2015-17 approved in November 2014.
Fulfilled. The 2013 annual reports and financial
accounts for the 6 largest SOEs published
Fulfilled. The new fiscal regime for mining and
petroleum activities was adopted by the Council
of Ministers
Fulfilled. The mining regulation was adopted by
the Council of Ministers in October 2015.
Copy of the revised IIP and
print screen of the website
Letter from the Ministry of
Finance confirming the
revision of the MTFF
methodology and copy of the
revised MTFF for 2015-17
Copy of the official Gazette
and news papers
Minutes of the Council of
Ministers recording the
adoption of the new fiscal
regime for mining and
petroleum
Minutes of the Council of
Ministers recording the
adoption of the mining
regulation
Co
mp
on
ent
2:
Imp
rov
ing
En
ab
lin
g
En
vir
on
men
t fo
r P
riv
ate
Sec
tor
Dev
elo
pm
ent
Prior Action 6: Expansion of the
e-BAU network to 8 sites across
the country
Prior Action 7: Adoption of (a)
regulations implementing the
Competition Law, and (b) statutes
(“estatutos”) of the Competition
Authority
Prior Action 8: Adoption of
regulations governing e-banking,
including mobile banking
services
Fulfilled. e-BAU platform expanded to 8 sites
by July 2015
Fulfilled. The regulation for implementing the
competition law, and the statutes of the
competition authority approved in 2015.
Fulfilled. A new regulation approved in July
2015.
Letter from the Ministry of
Industry and Commerce
confirming the expansion of e-
BAU to 8 sites.
Copy of the competition
regulations. Copy of the
statutes of the Competition
Authority.
Notice on electronic money,
Aviso No 6/GBM/2015.
Maputo, 13 July 2015
3.6.2 Proposed Indicative Triggers for the Next Operation in 2016: The list of indicative
triggers for the subsequent year is comprehensive, comprising important reform actions, while
providing the Bank and GoM flexibility to select prior actions for Phase III based on changing
circumstances during program implementation. Implementation of the triggers remains critical to
achieving the strategic objective of the program and key elements of the National Development Plan.
Indicative triggers for these phases include revisions to the MTFF to strengthen the links with
investment planning, greater financial transparency and financial risk management of SOEs,
enhanced budget transparency and citizens’ participation in budget process, broadening and
deepening of Mozambique’s EITI engagement, the adoption of a revised procurement law and
transparency in public procurement, draft Law on State-participated enterprises, the adoption of a
legislation on the establishment of a movable collateral registry, the adoption of National Financial
Inclusion Strategy, and an implementation strategy for SME development.
9
Table 4: Proposed Indicative Triggers for 2016
Proposed Indicative Triggers Proposed Modifications to Triggers/
Rationale
Evidence
Co
mp
on
ent
1:
Con
soli
da
tin
g T
ran
spa
ren
t a
nd
Acc
ou
nta
ble
PF
M a
nd
Na
tura
l R
eso
urc
e M
an
ag
emen
t F
ram
ewo
rks
Indicative Trigger 1: Revision of the
MTFF methodology
Indicative Trigger 2: Publication of the
financial reports of the 8 largest SOEs in
the Official Gazette and newspaper with
largest circulation
Indicative Trigger 3: Submission to
Parliament of draft legislation to adopt
IPSAS
Indicative Trigger 4: Publication of
Citizens’ Budget for 2016 in two versions
(first draft and final draft) and with
improved content
Indicative Trigger 5: Publication of
procurement information under the UFSA
Procurement Portal, including information
on number of contracts awarded under
each procurement modality at central,
provincial, and district level.
Indicative Trigger 6: Adoption of
regulations on the new fiscal regime for
mining and petroleum activities.
Modification. This has been met and
considered as prior action for 2015.
However this is replaced by another
trigger - adoption by Cabinet of draft
Law on State-participated enterprises.
No modification
Modification – GoM and IMF agreed
to improve the sequence of reform, as
the result the policy actions has been
priorities and this trigger is modified
to adoption of IPSAS implementation
roadmap
No modification
Modification. This has been replaced
by two important reform measures: (a)
the adoption of a revised public
procurement act, and (b) approval of
the staff profile of Procurement Units’
(UGEAs)
Modification. This has been met and
consider as prior action for 2015.
However, this is replaced by
Publication of EITI 6th report.
Minutes of the Council of
Ministers recording the adoption
of the draft Law on State-
participated enterprises
Copy of the official Gazette
and/or news papers
Copy of the IPSAS
implementation roadmap
Copy of publication
Minutes of the Council of
Ministers recording the adoption
of the revised procurement act;
and a letter from the Ministry of
Economy and Finance
confirming the approval of the
profile of UGEAs staff.
Copy of the publications
Co
mp
on
ent
2:
Imp
rov
ing
En
ab
lin
g
En
vir
on
men
t fo
r P
riva
te S
ecto
r
Dev
elo
pm
ent
Indicative Trigger 7: Expansion of the e-
BAU network to 11 units across the
country
Indicative Trigger 8: Submission to
Parliament of draft legislation on the
establishment of a movable collateral
registry
Indicative Trigger 9: Adoption of National
Financial Inclusion Strategy
Modification. This has been met and
considered as prior action for 2015.
However this is replaced by another
trigger - Approval by the Council of
Ministers of the revised SME Strategy.
No Modification. The draft law is
being prepared and expected to be
submitted to Cabinet in January 2016.
No modification. Expected to be
submitted to Cabinet in January 2016
Minutes of the Council of
Ministers recording the approval
of the SME Strategy.
Minutes of Council of Ministers
recording the adoption of the
draft legislation and submission
to Parliament for approval
Minutes of Council of Ministers
recording the approval of the
financial inclusion strategy.
3.7 Application of Good Practice Principles on Conditionality. Good practice principles on
conditionality have been applied. The EGIGP II seeks to implement only actions and objectives
embedded in the PAF and GoM strategic policy documents, thus ensuring country ownership as well
as transparent monitoring and evaluation. Policy actions and conditionality have been based on GoM
priorities and country context, focusing prior actions and triggers on critical measures relevant and
achievable within the program’s timeframe (see Technical Annex VII). In addition, the programmatic
approach adopted ensures predictability, mirrors the PAF cycle, creates a medium-term platform to
support policy dialogue, and adapts to potential changes in country conditions (e.g. a new PARP or
similar instrument after 2015). The disbursement modality (a yearly disbursement under each
operation) has been retained to align with the PAF cycle and reduce transaction costs.
10
3.8 Financing Needs. Table 5 presents the Government’s financing needs for 2015-2016, and
Bank Group financing. For 2015, total revenues and grants are projected at MZN 151 billion, while
total expenditure and net lending are projected at MZN 218.2 billion. Revenues are estimated to
expand by 0.7% of GDP, reflecting ongoing efforts to improve tax administration which have
generated annual average increases of 1.25% of GDP over 2010-2014, excluding windfall taxes.
Total expenditure in the 2015 budget is 6.4% of GDP lower than in 2014 (or 2.6% of GDP lower
excluding one-off factors). As noted in Section 2.3, the current fiscal stance is considered sustainable,
external debt risk rating remains moderate, and fiscal consolidation has started in 2015, bringing
projected fiscal deficit to 6.5% of GDP in 2016 and below 6% starting in 2017. The disbursement
pattern of the proposed EGIGP II is closely aligned with these financial needs and the projected
reduction of GoM’s fiscal gap from a relatively high level in 2014 as a result of the factors explained
in Section 2.4, above, to more modest levels in 2015 and 2016. With the current medium-term fiscal
policy, the Government envisages a stock of domestic and foreign debt of 5.9 and 53.1% of GDP
respectively, by 2018. The financial resources provided by the EGIGP would therefore contribute
directly to a mitigation of public debt burden, which is all the more important given GoM’s ambitious
strategy for the public investment program.
Table 5a: Financing Requirements and Sources, 2014-2016 (In billions of Meticais)
Categories 2014 2015 2016
Prel. Projected A Total revenue and grants 162.8 170.0 170.0 Of which: grants (excl. budget support) 18.8 19.1 19.1 B Total expenditure and net lending 219.5 220.7 220.7 Of which: interest payments 7.0 7.8 7.8 Of which: capital expenditure 83.8 76.3 76.3 C Overall balance (A + B) -56.7 -50.7 -50.7 .. External financing (net) 48.8 41.6 41.6 .. Plus: EGIGP 0.9 0.5 0.5 Other budget support 8.4 6.2 6.2 Domestic financing (net; including T-bills) -1.4 2.4 2.4 Residual financing gap 0 0 0 Memo item: Stock of public sector domestic debt 38.5 41.6 41.6
Source: Government of Mozambique and AfDB staff calculations.
Table 5b: Bank Group Financing (UA million)
Total cost of entire PBO program (EGIGP) UA 49.335 million
Amount committed in previous phase UA 19.335 million
Amount of 2015 program UA 15.000 million
Estimated amount for remaining phase UA 15.000 million
Other partners contribution to 2015 program UA 175 million See details of the overall projected financing requirements and sources in technical annex
IV. OPERATION IMPLEMENTATION
4.1 Beneficiaries of the Program
4.1.1 The direct beneficiaries of the program include (a) GoM institutions benefiting from an
improved PFM framework (including, as direct beneficiaries, entities implementing the reforms, such
as the Tribunal Administrativo and IGF); and (b) private sector entities, in particular MSMEs
(estimated at 4.5 million), as direct beneficiaries from the supported reforms in the form of increased
access to finance and lower market entry barriers. Indirect beneficiaries include (a) the entire public
administration through greater public sector efficiency; and (b) the entire Mozambican population
(and specially women, youth, and rural communities) through the promotion of inclusive growth,
improved natural resource management and a friendlier business environment. Potential beneficiaries
will participate in program implementation through GoM’s participatory processes, including
11
consultations with CSOs for the preparation of the yearly Economic and Social Plans and dialogue
with private sector groups in the implementation of PSD sectoral strategies.
4.2 Implementation, Monitoring and Evaluation
4.2.1 Implementation institutional framework: The Ministry of Economy and Finance (MoEF)
will be responsible for the overall implementation of the reform program supported by the EGIGP,
in line of the harmonization framework laid down in the 2009 MoU between GoM and the G-19 DPs.
Through capacity building projects supported by the Bank and other DPs, the MoEF is being
strengthened to enhance its capacity to monitor reform implementation under the PGQ and PAF.
4.2.2 Monitoring and evaluation will take place in accordance with the MoU through (a) the joint
PAF, which is evaluated for year n outputs and outcomes in the context of the Annual Review in
April/May of year n+1, as well as (b) the regular monitoring of the PARP, both of which include
participation by civil society and other stakeholders. The program will be supervised semi-annually
in alignment with the PAF cycle, with the MZFO leading on policy dialogue through the existing G-
19 working groups and other fora. A PCR will be prepared at program completion after 2016. IMF
assessments and any other relevant analytical work will also be used to monitor progress.
4.3 Financial Management and Disbursement & Reporting Arrangements
4.3.1 The overall conclusion of the PFM diagnostic reviews conducted over the last four years is
that the country’s PFM systems are improving steadily over time as systems are stabilized and
capacity and skills are developed. The 2010 PEFA report indicates that between 2008 and 2010,
eleven of the twenty-eight PEFA indicators had improved or were moving in the right direction,
fifteen indicators were unchanged; and just two indicators deteriorated. Other recent PFM diagnostic
reviews conducted indicate that the country is in the phase of consolidating the reforms underway
and exhibiting a positive trajectory of change in the overall country PFM systems. In general, the
country’s PFM system is determined to be adequate to support the Program. The Bank’s FRA
concluded that the fiduciary risk is substantial, but reducing over time (Technical Annex III).
4.3.2 Treasury Management, funds flow and disbursement method: The second phase of the
proposed operation involves a single-tranche disbursement of UA 15 million in 2015 following Board
approval. The proceeds of the grant will be deposited into an account designated by the MoEF at the
BoM that is part of the Country’s foreign exchange reserve upon fulfilment of the disbursement
conditions. The equivalent local currency will be transferred to the Treasury Single Account (TSA)
that is used to finance budgeted expenditures, and appropriately accounted for in the financial
management systems of the Government. The MoEF will provide a confirmation letter to the Bank
indicating that the amount deposited in the foreign currency account has been credited to the TSA.
4.3.3 External audit: In line with the Bank Policy on PBOs, the external audit arrangement will
follow the country’s systems. The Tribunal Administrativo, will annually audit the General State
Account including the Bank’s contribution. The annual audit report on the State Account will be
available to development partners. The 2013 General State Accounts (CGE) was published in July
2014 but the Opinion of the Administrative Court on the 2013 CGE was not published until April
2015. The 2014 CGE and Opinion of the Administrative Court is expected to be published in time
for debate in Parliament in 2015. In addition, an audit of the flow of funds of GBS will be conducted
in accordance with the GoM-G-19 MoU. The audit report and the management letter will be
submitted to the G-19, no later than six months after year end.
4.4 Procurement: The principles of the procurement regulatory framework are generally
consistent with international best practices. However, there is still need to supplement this regulatory
framework, operationalize the institutional system and build the capacity of parties in the
procurement chain. In this context, GoM has embarked on a reform process aimed at establishing a
procurement professional career path in the public administration, setting up an information system
for procurement activities and improving transparency through an efficient procurement portal. The
12
Bank’s FRA has rated procurement risk as Moderate and identified mitigating measures for the
identified risks (including EGIGP II prior actions and indicative triggers).
V. LEGAL DOCUMENTATION AND AUTHORITY
5.1 Legal Documentation
5.1.1 A protocol of agreement signed between the Republic of Mozambique and the ADF.
5.2 Conditions Associated with Bank Group Intervention
5.2.1 Prior Actions and entry into force: Before the Grant proposal is presented to the ADF Board,
GoM shall have provided evidence, satisfactory in form and substance, to the Fund that the prior
actions for EGIGP II outlined in Table 3 have been fulfilled. The Protocol of Agreement shall enter
into force upon signature by the parties.
5.2.2 Conditions precedent to the disbursement of the Grant for the EGIGP II: Disbursement
of the grant amount of UA 15 million shall be conditional upon the entry into force of the Protocol
of Agreement, and the transmission to the Bank of the details of a foreign currency account with the
Bank of Mozambique for the purpose of receiving the proceeds of the Grant.
5.3 Compliance with Bank Group Policies. This program complies with all applicable Bank
Group policies, strategies and guidelines. These include: (i) Policy on Program-Based Operations
(Revised, March 2012) and the Operational Guidelines on PBO (Revised, April 2014); (ii) Annotated
Streamlined Appraisal Report Format (2014); and (iii) revised Staff Guidance on Quality-at-Entry
Criteria and Standards for Public Sector Operations.
VI. RISK MANAGEMENT
Risk Mitigation measure
Macroeconomic stance could be
threatened by rising external debt
and unpredictable external shock
such as commodity price.
GoM has built a solid track record of prudent macroeconomic management. The 2015
budget puts the country back on sustainable path by reducing public spending and
narrowing the deficit. The IMF PSI (2013-2016) will run in parallel to the EGIGP,
thus providing a coordinated monitoring and dialogue platform for macroeconomic
management to manage shocks. This operation will contribute to minimizing risks.
Weak implementation capacity
may slow the pace and scope of
reforms.
Policy actions are derived from GoM priorities (e.g. Social and Economic Plan; 2014-
2016 MTFF) in the PAF agreed between GoM and DPs. AfDB and other DPs are
providing TA and capacity building, notably in oversight (Sweden for Tribunal
Administrativo; DfID for procurement); private and financial sector development
(World Bank on business enabling environment, DfID on financial sector, GIZ on
SMEs); and natural resource management (e.g. AfDB, World Bank, IMF, others). G-
19 commitment to budget support is still strong. Government remains engaged with
development partners to gain support for its economic reforms program.
Fiduciary risks: The EMATUM
case (issuance of a US$850m
government-backed bond), raised
transparency and debt
sustainability concerns.
A recent IMF Fiscal Transparency Assessment has concluded that overall, the
Government’s fiscal framework is transparent. An update of the DSA prepared by the
IMF shows that the debt sustainability outlook is not significantly affected by the
EMATUM transaction as long as other non-concessional debt in the pipeline for 2014
is delayed. Moreover, GoM has made good progress in its governance and PFM
reform agenda (e.g. approval of anti-corruption package; creation of a financial crimes
unit, and strengthening of audit systems). The EGIGP will further support the
consolidation of these reforms. A FRA has been carried out during appraisal
(Technical Annex III) to assess the residual fiduciary risks associated with the
program, which have been rated Substantial but reducing, and thus acceptable for
program implementation.
13
VII. RECOMMENDATION
Management recommends that the ADF Board of Directors consider and approve the proposed Grant
in an amount not exceeding UA 15.0 million to the Republic of Mozambique for phase II of the
EGIGP for the purposes, and subject to the conditions, stipulated in this report.
I
ANNEX I: Letter of Development Policy
REPÚBLICA DE MOÇAMBIQUE
MINISTÉRIO DA ECONOMIA E FINANÇAS
GABINETE DO MINISTRO
Letter nº 365/GM/MEF/2015
Maputo, November 18, 2015
Subject: Letter of Development Policy for the Economic Governance and Inclusive Growth
Program Phase II (EGIGP II)
1. I am writing on behalf of the Government of the Republic of Mozambique to request the budget
support operation – Economic Governance and Inclusive Growth Program phase II (EGIGP II) in
the amount of UA 15 million to support the implementation of the country’s Action Plan for Poverty
Reduction (PARP 2011-2015).
2. After successful democratic elections conducted in October 2014, His Excellency Filipe Jacinto
Nyusi was sworn in as a new President, and a new Government was inaugurated in January 2015.
A Five Year Government Plan 2015 - 2019 (Plano Quinquenal do Governo 2015-19) was approved
by the Parliament in April 2015.
3. We would like to commend the African Development Bank’s commitment to support our efforts to
reduce poverty over the years and the active participation in the budget support partners to
Mozambique, and signatory of the new Memorandum of Understanding between the Government
of Mozambique and the budget support development partners signed in 2015.
4. The Five Year Government Plan 2015 - 2019 (PQG 2015-19) HAS employment promotion,
productivity and competitiveness an overarching theme to achieve a more inclusive growth. The
PQG 2015-19 has five priorities: (i) consolidate national unity, peace and sovereignty, (ii) human
and social capital development, (iii) promote employment, and improve productivity and
competitiveness, (iv) economic and social infrastructure development and (v) ensure sustainable
and transparent management of natural and environmental resources. It has also three supporting
pillars which are: (a) consolidate the democratic rule of law, good governance and decentralization,
(b) promote a balanced and sustainable macroeconomic environment, and (c) reinforce international
cooperation. We are working with budget support development partners to develop a results
framework for budget support that is aligned with the PQG 2015-19 so that budget support is in
line with the country’s priorities. Departing from past experience, and in agreement with
development partners, we will not be preparing a poverty reduction strategy paper. This is in line
with the objectives of this operation, which is to support government efforts to improve the business
environment for private sector development, and strengthen transparency and accountability in the
management of public finance and natural resource management.
Macroeconomic context and outlook
5. Mozambique’s economy remains robust, with growth estimated at 7.2 percent in 2014, supported
by growth in the financial sector, agriculture and trade. Extractive industries continue to be a very
dynamic sector, but growth has slowed down as a result of low commodity prices and infrastructure
constraints. We expect developments in the mining and petroleum sectors to transform
II
Mozambique’s economy in the medium term, resulting in strong growth in coal production and
exports, the implementation of large infrastructure investments, including in LNG plants and
greater dynamism in the construction and transport sectors.
6. In line with developments around the world, growth in 2015 has decelerated in the first half of 2015
reaching 6.3 percent compared to 6.9 percent in the first half of 2014. The most dynamic sectors in
the second quarter of 2015 were extractive industries, construction, fisheries and electricity, gas and
water. We expect growth in 2015 to decelerate to 6.3 percent and to accelerate to around 8 percent
in the medium term, as investments in the extractive industries and related sectors (construction,
trade, transport) pick up and growth in some of the traditional sectors such as agriculture recovers.
7. Year on year inflation at the end of 2014 was 1.1 percent, well below BdM’s target of 5-6 percent.
Inflation remains low but has accelerated, reaching 2.41 (year-on-year) by September 2015. Low
inflation was supported by low commodity prices and relative stability against the South African
Rand, while the Metical has depreciated significantly against the US$ over the past year. After
several years of monetary easing, the central bank increased policy rates by 25 bps to 7.75 in
October 2015. We expect inflation between 5 and 6 percent over the next few years and we will
continue to monitor inflation and proactively coordinate fiscal and monetary policies. Monetary
policy will remain oriented toward achieving the objectives of keeping inflation low and stable,
safeguarding the financial system and encouraging lending. We will continue reforms to improve
operations in the financial system and broaden access to financial services.
8. In 2015 we have started a process of fiscal consolidation. Spending as a share of GDP will decline
by almost 7 percentage points of GDP to around 35 percent of GDP, narrowing the (after grants)
deficit from 10.1 percent of GDP to a projected 6 percent of GDP. We will continue to implement
a prudent fiscal policy in the medium term, with further declines in expenditure levels that, together
with increased revenue, will contribute to a narrowing of the fiscal deficit. These efforts will ensure
that the country maintains fiscal and macroeconomic stability.
9. Over the past few years we have seen a widening of the current account deficit, caused by significant
FDI inflows for the extractive industries, which by nature are capital- and import intensive. The
current account deficit widened to US$5.8 billion in 2014 or 34 percent of GDP. We expect the
deficit to narrow in 2015 on account of a reduction in investment in the coal and gas sectors.
Investments will pick up again in the second half of 2016 and onwards, with the current account
deficit widening again as the construction phase of the LNG development in the north of the country
starts. We expect the current account deficit to quickly narrow toward the end of the decade when
gas exports will start. Low commodity prices and lower than expected FDI inflows have put
pressure on the metical in the last year, which has depreciated against the US$ from around 30
Mts/US$ in mid-2014 to 42 Mts/US$ by end of August 2015. This level of depreciation against the
US$ is not dissimilar with that observed in many other countries in Africa. International reserves
have declined from US$3.2 billion in August 2014 to US$2.3 billion by end September 2015.
10. The depreciation of the metical has increased our debt stock as a share of GDP, since a large share
of it is denominated in US$. Public debt grew to 56 percent in 2014, and we expect it will reach 74
percent of GDP in 2015 as a result of valuation effects. A draft DSA being prepared with the support
of the World Bank and the IMF shows that the present value of the debt to GDP ratio has reached
40 percent but the risk of debt distress continues to be considered moderate. We will continue to
conduct a prudent fiscal policy to moderate borrowing and reduce debt from current levels and we
will continue to work with your institution to improve debt management. As part of our efforts to
improve fiscal management, we continue to work together with the World Bank and other
development partners to enhance the way we manage fiscal risks, and a number of those reforms
are supported by this operation.
III
Implementation of the Poverty Reduction Strategy
11. We are committed to sustain our pursuit of more inclusive growth during and beyond the
current Action Plan for Poverty Reduction. During the past year, the following results were
achieved as part of our poverty reduction strategy and the support provided by budget support
development partners:
(a) Enhancing production and productivity in agriculture. Agriculture employs 78 percent of
the economically active population and contributes 26 percent to GDP. Thus productivity increases
and the expansion of areas under cultivation are key to improvements in the livelihood of the
population. To this end, we have adopted an agricultural sector development strategy (PEDSA) for
2011-20 and an agricultural investment plan (PNISA) 2013-17 that will help to gradually shift
production from subsistence to commercial farming. During 2014, 19% of farmers were supported
by extension services, the area under rehabilitated irrigation network increased to 8,727 ha and the
share of roads in good condition increased to 73%. (b) Creating employment. The ability of the
private sector to create productive employment will be crucial in our efforts to ensure that growth
is inclusive. We have a strategy for the Improvement of the Business Environment 2013-17 (EMAN
II) and are working with a series of development partners, including the World Bank Group, to
implement the interventions included in this strategy. As a result of these efforts we have continued
to strengthen vocational training and improved opportunities for SMEs in public tenders, while an
increasing number of jobs are being created under the simplified licensing regime. (c) Enhancing
social and human development. Efforts to boost primary school enrolment continued. The net
school enrollment rate at age 6 in first grade increased to 82 percent and Mozambique has an
increasingly gender-equitable system, particularly in secondary schools. Assisted deliveries
increased to 71 percent in the health sector, 433,000 households are now benefiting from social
assistance programs and the number of water sources in rural areas increased to almost 25,000.
Recent and planned reforms in this operation
12. This operation will support a number of reforms in three areas that are crucial for the achievement
of the development objectives outlined in the PARP and in the new PQG: (i) to improve public
finance and natural resource management, and (ii) improve the enabling environment for private
sector development. The specific reforms implemented over the last year include:
Transparency and accountability in public finance and natural resource management
13. As part of our efforts to enhance the effectiveness of public expenditure, we are strengthening
systems to manage public investments and continue with efforts to enhance the management of debt
and fiscal risks. As the country starts to benefit from increasing revenues from extractive industries,
which may grow exponentially toward the end of the decade, it is particularly important to
strengthen government systems to ensure that a larger resource envelope translates into improved
provision of public goods and services, laying the foundation for robust economy-wide growth.
14. As we continue with our efforts to close the large infrastructure gap t, we are strengthening our
systems to manage public investments to ensure the implemented projects have the expected
returns. As part of those efforts the Government has undertaken a number of initiatives, including:
(i) adoption of the Integrated Investment Program (Programa Integrado de Investimento—PII), (ii)
establishment of the Public Project Coordination and Selection Committee (Comité de Coordenação
e Selecção de Projectos Públicos, CCSPP), an organ of the Ministry of Economy and Finance that
advises government on the prioritization and selection of public investment projects, (iii) adopted
a Manual for the Appraisal and Evaluation of Public Projects to guide project preparation and
establish a standard set of criteria for assessing project proposals. Earlier this year we strengthened
the regulatory environment by issuing a circular that mandates that all investment projects above
US$50 million have to be submitted to the Ministry of Economy and Finance accompanied by a
viability study.
15. We are also seeking to strengthen our ability to manage debt and fiscal risks, as a large share of the
new infrastructure investments are being financed through debt or financing mechanisms that may
IV
increase fiscal risks. Improved management of debt and fiscal risks will allow us to continue
implementing our ambitious infrastructure investment plan without compromising fiscal
sustainability. As part of our efforts to improve debt management, we formulated our first annual
domestic borrowing plan in 2013 which we have successfully implemented. We have revised the
Medium Term Debt Management strategy this year which will inform financing choices going
forward. Recognizing the need to pay increased attention to fiscal risks management, this year we
have created a fiscal risks unit in the Ministry of Economy and Finance.
16. Further, the Government is implementing reform measures to improve transparency,
competitiveness and value for money in public procurement. Measures has been taken to strengthen
procurement capacity across government departments, as well as to operationalize the procurement
functionality in e-SISTAFE, allowing for the creation of a database on procurement processes at all
levels. To complement this policy action, preparation of staff profile of the Procurement Units’
(UGEAs) is well underway with the aim to finalize it in early 2016. Further the Government has
embarked on reviewing the public procurement regulations with the aim to further improve
efficiency, transparency and value for money in procurement practices. To this end, a revised public
procurement regulation will be presented to Cabinet in early 2016.
17. The Government is accelerating efforts to strengthen both our systems and regulatory environment
to be able to manage the country’s extractive industries, which are likely to become an engine of
growth and, if well managed, bring significant benefits to the population. The national assembly
passed recently four crucial pieces of legislation for the management of extractive industries. The
mining law and the fiscal regime for mining will govern the management of the sector and also
determine the sharing of rents between investors and the public. The petroleum law and the fiscal
regime for petroleum will do the same for the petroleum sector. In October of 2015 the Government
approved the implementing regulations for the mining law and in November of 2015 the
implementing regulations for the petroleum law. Both provide additional clarity and certainty to
investors.
18. We are also aiming to maximize transparency in the way the country manages extractive industries.
We published the 5th EITI report complying with the new EITI standard. The majority of contracts
with investors in the extractive industries were also made public online and we continue to share a
portion of the production taxes paid by extractive industries with affected communities to ensure
that the benefits of these industries are also felt by those closest to the large investments taking
place. In 2015 we allocated 2.75 percent of production taxes to producing districts. We have revised
the system by which we estimate the transfers to communities to avoid within-year volatility and
allow communities to focus on implementing projects with the budgeted funds.
Improving business enabling environment to foster private sector development
19. As part of our efforts to improve the business and investment climate, we have been working with
the African Development Bank Group to simplify licensing requirements in a number of areas and
streamlining procedures for starting a new business. In 2013 we revised the commercial and tourism
licensing regulations which reduced the number of days that businesses need to obtain these licenses
as well as the administrative costs associated with the process. In 2014 we revised the industrial
licensing regulations which reduced the amount of time required to issue industrial licenses. In 2014
we also adopted a single form for opening a new business and starting activities, which cut by half
the number of steps required for regulatory compliance. In the last year we established online one-
stop-shops (e-BAU) to further streamline business startup procedures. Private firms are now able
to submit all required information at the Government’s e-BAU. This has cut the number of steps
required for regulatory compliance from 9 to 5, a 44 percent reduction.
Social Protection
20. A large proportion of Mozambique’s population is highly vulnerable to shocks. These include
structural food insecurity during the annual agricultural cycle, unpredictable changes in food prices,
V
and a range of natural disasters. As a way of supporting the poor and vulnerable, the Government
is seeking to improve and expand its social assistance programs. As we continue to allocate
additional resources to these key programs (the Basic Social Subsidy Program – PSSB, and the
Productive Social Action Program – PASP), we will need to establish more effective mechanisms
for selecting, recording and organizing beneficiaries in order to allocate and manage funds
effectively.
21. The government’s strategy is based on the principle that different vulnerabilities require different
interventions, but that these should be based on a common targeting system that identifies and
registers beneficiaries in a single database, the single registry of beneficiaries. INAS has developed
a single registry covering all beneficiaries of basic social assistance programs, starting with those
enrolled in the PSSB, PASD and PASP. The Government, by October 2015, has already registered
50 percent of all PASP beneficiaries in the single registry and will continue with efforts to register
the rest of the social program beneficiaries. We remain fully committed to a payments system that
ensures that cash benefits are timely, predictable and transparent.
Reform measures undertaken in 2015
22. The EGIGP II would support the following prior actions already completed by the Government of
Mozambique to achieve results in the reform aims discussed above:
a) Publication of revised Integrated Investment Plan that includes financial information for
projects with identified financing;
b) Revision of the MTFF methodology to incorporate the main criteria to select and assess public
investment projects
c) Publication of the financial reports of the 6 largest SOEs in the Official Gazette and newspaper
with largest circulation
d) Mozambique has achieved compliance with the new and revised standards of the Extractive
Industries Transparency Initiative (as approved on May 2013)
VII
ANNEX II
IMF COUNTRY INFORMATION NOTE IMF Executive Board Completes Fourth Policy Support Instrument for Mozambique
Press Release No. 15/315
July 2, 2015
The Executive Board of the International Monetary Fund (IMF) today completed the fourth
review of Mozambique’s economic performance under the program supported by the Policy
Support Instrument (PSI).1 In completing the review, the Board also approved the modification
of three assessment criteria and one indicative target for June 2015 in line with the updated
economic outlook for Mozambique.
The PSI for Mozambique was approved by the Executive Board on June 24, 2013 (see Press
Release No. 13/231)
Following the Executive Board’s discussion, Mr. Min Zhu, Deputy Managing Director and
Acting Chair, issued the following statement:
“Mozambique’s continued strong growth performance and low inflation are commendable.
Investments in large coal and natural gas projects underpin a positive medium-term outlook,
but low commodity prices have increased near-term risks.
“Recent program performance under the Fund’s Policy Support Instrument has been mixed.
While structural reforms have been proceeding, there were macroeconomic policy slippages
and reserve losses in late 2014. With a strong fiscal adjustment envisaged in the current budget
and a recent tightening of liquidity conditions, needed steps to maintain macroeconomic
stability are now in place. The decline in international reserves has largely been reversed, and
greater exchange rate flexibility will help the economy to better respond to external shocks in
the period ahead.
“The strong fiscal adjustment in the budget appropriately calls for revenue mobilization and
expenditure restraint, while safeguarding social programs. Recent fiscal reforms have
strengthened the policy framework but more needs to be done to improve public financial
management, including by stronger controls over state-owned enterprises and enhanced
management of fiscal risk.
“Ongoing progress on a broad range of structural reforms, including the passage of the new
mining and hydrocarbon legislation, is encouraging. Nonetheless, further measures are needed
to make poverty more responsive to growth and strengthen the business climate.”