[stop-imf] Mozambique Scandal: IMF replies to Hanlon

[Robert Weissman]

  To see the article to which the IMF is responding, see:


http://lists.essential.org/pipermail/stop-imf/2006q1/001182.html

A Response to Joseph Hanlon's Recent Article, /Donor Concern Over IMF
Cap on Aid Increases/


A Letter
By Perry Perone
IMF Resident Representative Mozambique
Maputo
February 7, 2006

This letter was sent to Joseph Hanlon in response to a recent article,
/Donor Concern over IMF cap on aid increases/ that Mr. Hanlon, a writer
on African issues, distributed through his newsletter on Mozambique.

Dear Mr. Hanlon,

I read with interest your analysis of the IMF-supported program for
Mozambique, but you present a misleading picture of IMF program support
for Mozambique. The IMF is actively working with the Mozambique
authorities to make good use of all available aid. I therefore disagree
with your conclusion that the IMF is blocking more aid from getting to
the country.

You rightly mention that the government sets a primary domestic deficit
target, which is included in the IMF-supported program. This target does
not act as a cap on budget support. In fact, the target takes into
account the amount of foreign aid that is expected to be available. For
example, the deficit in 2006 is somewhat higher than envisaged at the
time of the last review of the IMF-supported program in June 2005
reflecting explicit donor commitment to higher budget support.

The deficit target is a fiscal means of ensuring continued macroeconomic
stability, prudent debt management and an appropriate level of spending
to meet the objectives set out in Mozambique's poverty reduction
strategy paper (or `PARPA' in Portuguese). It is consistent with the
authorities' budget, not pegged at some arbitrary level. If budget
planning accurately reflects donor commitments, then a correctly set
deficit target should not constrain corresponding spending and will
reflect the priorities of the government. Only an unanticipated increase
in donor assistance, coming, for instance, in the middle of the budget
year, could push the primary domestic deficit over the target.

These unplanned surges in aid need to go through the budget; otherwise,
the Mozambique authorities would lose all control over their own
spending priorities. While indeed "donors are anxious to pump more
money" into Mozambique, as you write, the Mozambican finance ministry
must work with reasonable projections of both domestic and foreign
revenues, and not with donor trends of the moment. Donors must also
coordinate their pledges with the country's budget cycle, so that any
new income and associated spending is supervised by parliament. It is
also important to remember that they must not only promise but also
commit, possibly over a multi-year cycle.

Nonetheless, when aid surprises happen, the authorities, and the IMF,
need to adjust. The IMF is in constant touch with the Mozambican
government and with the donors, including the World Bank, and it reviews
the programs every six months. During such reviews the target is
revisited and adjusted based on any new information that is available.
So where there is a plan for spending the new aid, the deficit target
can be relaxed.

Regarding your specific question on health, let me stress that the IMF
is aware of the challenges facing the Minister of Health, and wants to
be supportive of his efforts to expand the health program through
greater donor funding. IMF reviews are done frequently enough to allow
for adjustments of the primary domestic deficit targets should some
donors disburse more funds than they previously indicated. Certainly,
the IMF would not want the introduction of project funds into the budget
to cause a reduction in health spending, and it would adjust the primary
domestic deficit target accordingly.

At the same time, it is important to ensure that the Government of
Mozambique has the capacity to finance a higher level of staffing with
the necessary qualifications and training in the future. This is a
critical point that should not be overlooked. Donors should be willing
to guarantee future funding for this expanded staffing. If they are not,
then this may call for some flexibility in hiring arrangements in order
to provide the government sufficient confidence in broadening the program.

This brings me to one of the most relevant issues in the current debate
on expanding aid, and that is the importance of aid coordination and
harmonization, as well as the need for donors to make their aid payments
more predictable.

Despite the excellent donor coordination in Mozambique, the government
faces many constraints when preparing such multi-year plans. It is
difficult for the government to be certain about the level of donor
payments in the medium term, and it might not be prudent to make medium
term expenditure commitments=97especially when it comes to hiring more
personnel=97when there is uncertainty about whether the money will still
be available over the next budget cycle.

There has been considerable discussion on how to resolve such timing
problems. This has been part of the regular dialogue between the
Mozambican government, bilateral donors and the IMF. We have had
constructive dialogue on ways to improve the design of the IMF fiscal
target, taking into account developments in aid in recent years. Donor
aid, in particular, has increasingly moved away from lending to support
capital investment projects, and toward direct budget support. Such aid
has increasingly supported the hiring of personnel in health and
education, and purchases of medicine. This has been in an effort to help
achieve the Millennium Development Goals.

Finally, your article also mentions a recent IMF study on the
macroeconomics of scaled-up aid. It however mischaracterizes the study
as arguing that "periods of higher inflation actually achieve real
growth, and this should be tolerated to keep the exchange rate from
depreciating." In fact the study makes the more nuanced point that,
under some circumstances, a permanent rise in the level of aid may
require an appreciation of the equilibrium real exchange rate. An
appreciated real exchange rate often involves some combination of
nominal appreciation and inflation.

Countries can use monetary and fiscal policy to choose the combination
appropriate to their circumstances. However, as the study points out,
the choice should be conditioned by recent economic history. A country
which is recovering from a period of high inflation should probably seek
to keep inflationary expectations in check, and seek to adjust to
scaled-up aid through the nominal exchange rate. Moreover, the study
also emphasizes that if the aid is spent productively, the economy's
supply response may, over time, greatly cushion the impact on the real
exchange rate.

I hope that you will share my remarks with the readers of your
newsletter. I will also be happy to meet with you to discuss these
issues at your earliest convenience. However, I would like to inform you
that my tenure as the Fund Resident Representative in Mozambique will
end February 28, 2006. I hope that we can meet before my departure; but
if this is not feasible, you can always contact my successor Mr. Felix
Fisher.

Sincerely,

Perry Perone
Resident Representative
Mozambique