1 REPUBLIC OF MOZAMBIQUE MINISTRY OF FINANCE Namaacha, March 22, 2010 THE GOVERNMENT'S VIEW ON DEBT SUSTAINABILITY 1

2 I. Introduction II. The current public debt situation III. The public debt sustainability level IV. Factors that contribute to debt sustainability V. Risks that could render the public debt unsustainable VI. Precautions to minimize risks VII. Challenges VIII. Issues for debate Outline

3 The importance of this issue stems from the fact that public debt is one of the main sources of financing for the State Budget. Society's interest in the issue stems from the potential impact of the public debt on future budgets and future generations. For these two reasons it is necessary to analyze whether the debt is sustainable in the short, medium, and long terms. Accordingly, our approach will have the following analytical focus: 3 I. Introduction

4  What is our country’s current debt situation?  How sustainable is the debt?  What factors supported the level of sustainability?  What risks could render our debt unsustainable in the future?  How can we minimize those risks? 4 I. Introduction

5  Mozambique’s public debt originates from foreign borrowing (external loans) representing 94 percent, and domestic debt, which accounted for 6 percent in late 2009, as shown in the table.  In general, the external public debt has dropped considerably from US$4.6 billion in 2005 to US$3.9 billion in 2009, as a result of negotiations undertaken by the Government of Mozambique in the context of the HIPC and MDRI initiatives.

6 II. The current public debt situation Trends in the stock of domestic and external debt (in nominal terms), (% of GDP)

7 II. The current public debt situation In millions of USD and MZM USDMZMUSDMZMUSD MZM External debt 4, , , , , , Domestic Debt , , , Total Public Debt 4, , , , , ,

8 II. The current public debt situation In millions of USD and MZM % of Total USD MZM USD MZM 2009 External debt 3, , , , % Domestic debt , , Total Public Debt 3, , , , % 8

9  2005 to US$ million reduction in total debt (about 30 percent), resulting from debt cancellation by the IMF, World Bank, and African Development Bank, through the Multilateral Debt Relief Initiative (MDRI);  2007 to Slight increase in the public debt stock by US$527.4 million, as new concessional loans (e.g. IFAD, IDA) were contracted for poverty-reducing investment projects;

10  In 2009, the present value of the debt stock amounted to just 16 percent of GDP, compared to the upper limit for sustainability of 40 percent; so the slight increase in the debt stock is not putting debt sustainability at risk. GDP is also growing, which means that the financing contracted has been used for productive projects;  Mozambique's largest creditor is the World Bank, through its International Development Agency (IDA), not only because it offers loans under highly concessional conditions, but also a larger volume of resources per year. This amounts to an average of about US$200 million, making it possible to expand the portfolio of programs and projects with this lender.

11  External public debt service has averaged US$50 million, which is an eminently sustainable amount in relation to domestic revenue levels, and is much lower than the average of US$100 million prevailing before the HIPC initiative. It currently represents just 2 percent of domestic revenue and 1 percent of exports.

12 As the table shows, Mozambique's external debt remains sustainable, displaying sustainability ratios for 2009 that are well below the upper limits for sustainability; According to the ratios, there is fiscal leeway for the government of Mozambique to contract concessional credits and (on a cautious basis) nonconcessional debt, to finance projects in the public-private partnership (PPP) model. RatiosUpper limits for sustainability 2009 Stock/GDP40%16% Stock/Exports150%59% Stock/Revenue250%99% Debt service/exports20%1% Debt service/Revenue30%2% III. The debt sustainability level 12

13 The factors that allowed for the current level of debt sustainability are:  International debt relief initiatives, from which Mozambique has benefited owing to its good macroeconomic performance and political sustainability;  Domestically there are a number of factors that have contributed to the current state of debt sustainability, such as:

14 On the fiscal policy front :  The government has achieved a gradual increase in revenue collection, with state revenues rising from 13.8 percent in 2005 to 18.1 percent in 2009;  The predictability of financing (revenue and grants) for the state budget, has made it possible to improve budget deficit forecasting;  Prioritization of grant financing for the primary deficit;

15  Financing of the deficit after grants through concessional loans;  Absolute restriction on nonconcessional loans;  Allocation of debt resources to priority structural projects targeting poverty reduction and economic growth.

16 IV. Factors that contribute to debt sustainability (cont.) In terms of public financial management :  The Budget Law specifies a minimum grant element of 35 percent to guarantee concessionality in contracting loans;  Article 16(1) of the SISTAFE Law, No.9/2002 of February 12, 2002, specifies that “The signing of contracts that entail the incurrence of financial liabilities by the state or involve fiscal issues require prior authorisation from the Minister of Finance, even if the expenses in question have been included in the State budget;" and  Presidential Decree 22/2005 of April 27, 2005, creating the Ministry of Finance, and defining its core functions in the public debt management area.

17 IV. Factors that contribute to debt sustainability (cont.)  Loans are contracted on the basis of authorization from the Assembly of the Republic (AR), and detailed in the annually approved budget law, which establishes the pertinent limits.  Once authorized by the AR, public debt management is the exclusive responsibility of the Ministry of Finance (MF), which, through the National Treasury Department (DNT) negotiates with the relevant sectors and the Bank of Mozambique (BM), in coordination with the Ministry of Planning and Development (MPD), and signs and registers public loan agreements, pursuant to its responsibilities and in accordance with the conditions established in the Budget Law.

18 IV. Factors that contribute to debt sustainability (cont.)  The Council of Ministers ratifies loan agreements contracted on behalf of the Republic of Mozambique (Article 204 of the CRM), and the Office of the Attorney General of the Republic issues a legal opinion on the loan agreements signed, to ensure that the conditions established by the Assembly of the Republic and legal requirements have been met, without which the loan cannot come into effect.  It should be noted that loans to be contracted directly by public entities require approval from the Ministry of Finance after being approved by the respective line ministry.

19 IV. Factors that contribute to debt sustainability (cont.)  All procedures for issuance, registration, control, and payment of Treasury Bonds (TBonds) are the responsibility of the MF.  Nonetheless, sales of Tbonds to financial institutions and the public are organized by the Mozambique Stock Exchange (BVM).  The BM issuesTreasury Bills (Tbills) for monetary policy purposes.  Although the government has not yet issued bonds on the international market, it is getting ready to access those markets, by undergoing training on their functioning and upgrading its debt sustainability team.

20 IV. Factors that contribute to debt sustainability (cont.)  Implementation of Decree 54/2005 of December 13, 2005, on Procurement Regulations, which require transparency in contracting with a view to improving expenditure efficiency;  Implementation of the Single Treasury Account (STA) as an exclusive tool for managing public funds, which has reduced the use of borrowing to finance the cash deficit;  Execution of the State Budget in the e-SISTAFE environment, reducing levels of debt with suppliers;

21 IV. Factors that contribute to debt sustainability (cont.)  The Budget Law is approved by the Assembly of the Republic; the State Budget is a public document, and the budget outturn is published in quarterly reports;  The fiscal scenario is a basic tool for allocating resources, prepared with participation from all sectors and approved by the Council of Ministers;  Expenditure execution is limited to to expenditures included in the State budget;

22  Annual preparation of the General State Account (CGE), auditing thereof by the Administrative Tribunal, approval by the Assembly of the Republic, and publication;  Publication of the Annual Public Debt Report, contributing to good governance, accountability, and transparency in public debt management, and ensuring that the published information is of high quality, and is reliable and useful;  Project monitoring and supervision, aimed at guaranteeing implementation within established deadlines, avoiding capital costs, and ensuring efficiency.

23  Dispersion of the decision-making center for investment priorities;  Limited capacity to design and select key projects;  Limited capacity to analyze the level of return on projects in an effort to identify financing mechanisms more effectively;  Delays in project implementation, without the performance and efficiency required to meet deadlines and achieve expected returns in timely fashion, thereby raising the risks of incurring capital costs and being required to service the debt before the project begins.

24 To minimize risks of debt unsustainability, the government has adopted the following measures:  Initial preparations for the debt sustainability analysis table, to calculate the fiscal space available for contracting debt in each year;  Preparation of the Public Debt Strategy with a view to establishing a table of medium and long-term debt management measures, together with the pertinent legal framework;  Creation of the Public Debt Area in the Ministry of Finance, which emphasizes the best international practices, and is thus divided into back office (debt recording and service), middle office (analyses and studies), and front office (borrowing);

25  Also, creation of a unit for monitoring and inspection of large projects and public-private partnerships (PPPs);  Draft Law on PPPs, which will establish regulations on concessions, among other related issues;  In the final review phase, the document on the Strategic Overview of Public Finance ;  Preparation of the Law on State-Owned Enterprises (SOEs), to more effectively regulate the powers of SOEs to contract debt;  Periodic evaluation of project implementation levels, in an effort to overcome constraints on a timely basis.

26  As concessional financing sources are limited, financing entailing a lower degree of concessionality also needs to be used;  Difficulties in obtaining debt relief for countries that not members of the Paris Club, which, coincidentally, are those that also need financing;  Need for institutional training to improve the technical design and analysis of projects, prior to policy decisions;  Poor understanding of the functioning of capital markets and the inherent risks.

27  Can Mozambique build infrastructures relying only on concessional financing?  What solutions are available to overcome the challenges and risks involved in contracting nonconcessional debt, from the standpoint of: Personnel training; Project formulation and selection; Negotiation of loan terms and conditions.

28 VIII. Issues for debate  Who should have strategic responsibility for the debt contracted in capital markets: the government or private entities?  Should the concept of sustainability be based only on traditional ratios and purely commercial rates of return; or should it also take account of other factors such as the level of development capable of being promoted by the project, including with respect to government revenue?

29 REPUBLIC OF MOZAMBIQUE MINISTRY OF FINANCE 29 Thank you very much.