MOZAMBIQUE: JUNE ECONOMIC DIGEST

UNCLAS SECTION 01 OF 03 MAPUTO 000847

SIPDIS

SIPDIS

AF/S FOR HTREGER AND JMALONEY
JOHANNESBURG FSC FOR RDONOVAN
JOHANNESBURG TDA FOR DSHUSTER
USDOC FOR RTELCHIN
MCC FOR SGAULL
USAID FOR AA/AFR AND AFR/SA

E.O. 12958: N/A
TAGS: ECON EAID EINV ETRD MZ
SUBJECT: MOZAMBIQUE: JUNE ECONOMIC DIGEST


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1. This is a brief summary of significant economic
developments in Mozambique during June 2006. We provide it
as a supplement to our other reporting. The items discussed
are:

-- IMF Completes Fourth Review Under PGRF Arrangement

-- GRM Launches Second Five-Year Poverty Reduction Plan

-- World Bank to Loan USD 20 Million to Mozambican Farmers

-- Mozambican Beer Launched in London

-- Fuel Prices Rise Again

-- Germany to Provide USD 25 Million in Budget Support

-- Road Sector to Receive USD 230 million in 2007

-- New Currency Issued without Problems


IMF Completes Fourth Review Under PGRF Arrangement
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2. On June 20 the Executive Board of the International
Monetary Fund (IMF) completed the fourth review of
Mozambique's economic performance under its existing Poverty
Reduction and Growth Facility (PGRF) plan. Completion of
this review allowed for the release of an additional USD 2.4
million to the Mozambican government (GRM). (Note: This
loan is part of approximately USD 16.7 million the IMF is
providing Mozambique under the PGRF. End note.)


3. Mr. Takatoshi Kato, Deputy Management Director and
Acting Chair of the Executive Board, characterized
Mozambique's performance in 2005 as "strong, despite
exogenous shocks". Fiscal results were commendable and all
performance criteria through end-March 2006 were met,
according to Kato. While the macroeconomic outlook remains
favorable, vigilance will be required in light of volatile
oil prices and unpredictable weather.


4. According to the IMF, the main challenges over the
medium term are sustaining broad-based economic growth and
making further inroads in alleviating poverty through
implementation of 2006-2009 poverty reduction strategy.
Mozambique launched its second poverty reduction strategy
this month (see para 5 below).

GRM Launches Second Five-Year Poverty Reduction Plan
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5. On June 23 the Mozambican government formally launched
its second five-year "Plan of Action for the Reduction of
Absolute Poverty" (PARPA II) in a ceremony chaired by the
Minister of Planning and Development, Aiuba Cuereneia. The
plan document had been approved in May by the Cabinet of
Ministers, after a long drafting process that included
consultation with civil society and the donor community.


6. PARPA II aims to reduce, by 2009, the percentage of the
population living below the poverty line from 54 percent,
the figure derived from the 2003 National Household Survey,
to 45 percent. The new plan maintains many of the same
priorities of PARPA I, including more training in the
education and health sectors, strengthening good governance,
developing basic infrastructure, and improving macro-
economic and financial management.


7. Where PARPA II differs from its previous iteration is
that it focuses on development at district level, something
Guebuza has emphasized, as well as on creating a favorable
environment for growth of the productive sector,
particularly with respect to small and medium companies.
PARPA II also attaches significant importance to investment
in infrastructure. (Note: In this regard Prime Minister
Luisa Diogo has characterized 2006-2007 as the "year of
civil construction" in Mozambique. Projects planned include
improvements to the national highway system and construction
of the Zambeze and Rovuma bridges. End Note.)


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8. Cuereneia stressed that the success of PARPA II will
depend on close coordination between the government, civil
society, and Mozambique's foreign donors and funding
agencies. He also emphasized the importance of timely and
rational allocation of government resources. The Minister
stated that Mozambique's 128 districts will form the basis
for all planning and development activities outlined in the
PARPA II.


9. Some observers have criticized the plan for being too lax
in its goals and objectives. During a June 27 talk in
Maputo, UN-affiliated economist Jeffrey Sachs stated that
PARPA II, although it contained the right elements, was not
ambitious enough. (Comment: Sachs repeated this view
numerous times during his visit, going as far as to cite
specific paragraphs of the PARPA to illustrate how
"ambition" was lacking in the document. End Comment.)

World Bank to Loan USD 20 Million to Mozambican Farmers
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10. The World Bank announced in June that it would make USD
20 million available to smallholder farmers in the Zambezi
valley via a credit facility to be disbursed through the
International Development Association.


11. According to the World Bank, which deems this a market-
led smallholder development project, long term
environmentally sustainable agricultural development by
smallholder farmers is essential for continued macroeconomic
growth. To support such growth, the Bank intends to provide
direct support to smallholder groups and other supply chain
participants, as well as strengthening local level capacity
within the context of the GRM's decentralization policy.


12. This project has four components. The first component,
Community Group Organization and Local Institutional
Strengthening, focuses on empowering and building the social
capital of farmer groups, women's groups and other supply
chain participants. The second component, Agricultural
Production and Marketing Development, is intended to provide
technical support for market driven, broad-based sustainable
agricultural development via technical assistance to
stakeholders involved in production, marketing and
processing of agricultural products. The third component,
Community Agricultural and Environment Investment, will
provide financial resources and technical assistance to
support agricultural related public and private investments.
The last component focuses on continued capacity at the
governmental level; the Management, Coordination and
Monitoring and Evaluation component will work with the
Directorate of Rural Development within the Ministry of
Planning and Development to ensure effective management of
the project.


13. The World Bank provides this money as a soft loan,
payable over 40 years, which includes a ten-year grace
period. This pilot project is part of the World Bank's
overall strategy to support development in the Zambezi
valley, where the World Bank is already supporting bridge,
road and rail projects. If successful, the World Bank may
extend the project to other areas of Mozambique.

Mozambican Beer Launched in London
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14. On June 23 the Mozambican High Commissioner in London,
Antonio Gumende, hosted an event launching a Mozambican
beer, Laurentina, in Great Britain. The launch was part of
the High Commission's larger effort to promote tourism in
Mozambique. Both types of Laurentina, Clara (clear) and
Preta (dark),will be available for purchase at select
wholesalers. Laurentina is produced in Maputo at the
MacMahon (2M) brewery, owned by Cervejas de Mocambique, the
local subsidiary of South African Breweries (SAB).
Fuel Prices Rise Again
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15. The Mozambican Ministry of Energy increased fuel prices
again in June. The price of fuel oil rose by 54.9 percent;
petrol increased by 10.9 percent; diesel fuel by 16.2
percent. The rise in jet fuel was slightly lower at eight

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percent. Cooking gas also increased by 11.9 percent. The
Ministry of Energy blamed the increases on rising import
prices for all petroleum products and the depreciation of
the metical against the US dollar since the last price rise.
(Note. The metical depreciated by 9.63 percent in that time
period. End note) Mozambique must import 100 percent of its
fuel needs and is therefore very vulnerable to fluctuations
in price and currency value.

Germany to Provide USD 25 million in Budget Support
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16. Over the next two years, the German government, via its
cooperation institute KFW, will grant approximately USD 25.4
million to the Mozambican budget. This will be the first
budget support Germany has provided. This direct budget
support is intended to help Mozambique implement its Plan
for the Relief of Absolute Poverty (PARPA II),but is not
specifically earmarked for any project or program.
Mozambique will receive half of the money in 2006 and half
in 2007. The Governor of the Bank of Mozambique, who signed
the agreement along with KFW's representative in Maputo,
stated that this direct budget support is a sign of trust on
the part of Mozambique's partners, the fruit of Mozambique's
economic stability, control of inflation and of the exchange
rate.

Road Sector to Receive over USD 200 million in 2007
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17. Mozambique's road sector is set to receive USD 150
million in donor funding in 2007. The GRM will contribute
an additional USD 80 million. The multi-donor and multi-
year (2007-2011) program eventually will put an estimated
USD 1.14 billion towards construction, improvement and
maintenance of Mozambique's road infrastructure.




Transition to New Meticais Relatively Problem Free
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18. At 12:01 a.m., July 1, Mozambique began circulating its
new currency, the Nova Familia de Metical. While some minor
inconveniences arose, such as ATMs being inaccessible while
waiting to be calibrated, there was no major disruption.
Some Mozambicans have complained that they have not yet seen
the new notes and some ATMs are still issuing the old notes,
but these issues are expected to resolve themselves easily
over the next months. Both the new and the old currencies
will circulate until December 31.

DUDLEY