IMF praise “prudent” monetary policy

The International Monetary Fund (IMF) has praised the “prudent fiscal and monetary policies” followed by the Mozambican government, which it regards as a major factor in the sharp fall in the Mozambican inflation rate.

An IMF mission visited Mozambique from 5-19 October, conducting the third country review under the Policy Support Instrument (PSI) approved in June 2010. The PSI is an instrument whereby the IMF provides analysis and endorsement of a country’s policies, but does not grant loans. The current Mozambican PSI covers the period 2010-2013.

According to the head of the mission, Johannes Mueller, cited in an IMF press release, Mozambique “remains resilient”, despite “weakening global economic prospects”. Economic growth, he added, is projected to reach 7.2 per cent this year, and should “further accelerate over the medium term, helped by strong public investment and activity of mega-projects in the natural resource sector”.

The annual inflation rate fell from 16.5 per cent at the end of 2010 to less than eight per cent by the end of September this year. Muller said that falling inflation benefitted the poorer strata of society, and he attributed it to “favourable developments of international prices, a good harvest, a stronger metical and, importantly, the authorities’ prudent fiscal and monetary policy stance”.

Nonetheless, “core inflation (excluding food and fuel products) remains relatively high and needs to be brought down further”.

He added that “acceleration of both mega-project and traditional exports helped offset the increase in the import bill for fuel products and mega-project investments, keeping external accounts in line with initial projections. This, together with robust capital inflows, contributed to a stronger-than-projected international reserves position”.

The IMF, the statement continued, “welcomes the authorities’ commitment to continue to pursue prudent fiscal and monetary policies aimed at further moderating inflation expectations. This will also position Mozambique well should there be any spillovers from the weakening external outlook that may require adjustments in policies”.

The mission “broadly supports the fiscal policy stance underlying the 2012 budget law (which will go before the country’s parliament, the Assembly of the Republic, in December) and emphasizes the need to ensure that the budget appropriately reflects the priorities under the Poverty Reduction Strategy”.

Mueller added that the IMF mission also “welcomes the authorities’ intentions to further strengthen public finance management, tax administration, debt management and investment project selection, natural resource management, and the framework to fight corruption and money laundering”.

Speaking to reporters in Maputo on Friday, the IMF representative in Maputo, Victor Lledo, predicted a fall in the annual inflation rate to six per cent in the medium term, if current policies are continued.

The main risks that the international financial crisis posed to Mozambique, he said, were a decline in the world price for some of its main exports (such as aluminium ingots) and difficulties for the Mozambican private sector in gaining access to financial resources. But there was no indication that such threats were imminent – indeed, the IMF regards the current state of the Mozambican financial sector as “healthy and stable”.

Lledo congratulated the Bank of Mozambique for its “timely monetary policy” and for its determination “to continue to take measures that hold back inflation”.

As for the generous tax breaks offered to mega-projects, Lledo pointed out that not all large scale foreign investment enjoys the same fiscal regime. The most generous terms were offered to the initial projects, such as the MOZAL aluminium smelter, set up at a time when there was only a trickle of foreign investment into Mozambique.

The recent giant mining projects are governed by the 2007 legislation on taxes for the mining and petroleum sectors, which does not envisage enormous tax exemptions. Lledo announced that the IMF has agreed to provide the government on implementing the 2007 fiscal regime.

As for the possibility of renegotiating the early mega-project contracts, so that companies such as MOZAL pay more tax, Lledo said the IMF believes that the government “should deal with such matters very carefully because of their impact on investment”. Any renegotiation “should reach agreements that benefit both sides”.

Up until recently, external finance for the Mozambican economy has taken the form of grants and soft loans. But under the current PSI, the Mozambican government may also obtain non-concessional loans up to a ceiling of 900 million dollars. Lledo said that to date Mozambique has signed non-concessional loan contracts amounting to 146 million dollars – this consists of 80 million dollars from Brazil to fund construction of the international airport in the northern city of Nacala, and 66 million dollars from China for the second phase of the rehabilitation of Maputo airport (essentially the construction of a new domestic terminal).

These loans “are not exactly commercial”, said Lledo, but they come on tougher terms that, for example, the soft loans from the World Bank.

Post published in: Africa News

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