[stop-imf] Mozambique: More from Hanlon on IMF

[robert weissman]

Excerpted from: MOZAMBIQUE 94
       IMF SPECIAL:
                 SUPPORT FOR =91TRICKLE DOWN=92
                 IMPORTANT CONCESSIONS
                 BIG PROJECTS

News reports & clippings no. 94
      from Joseph Hanlon
      (j.hanlon@open.ac.uk)
     10 February 2006
=3D=3D=3D=3D=3D=3D=3D=3D
New website under construction with back newsletters and background
documents
http://www.open.ac.uk/technology/mozambique
=3D=3D=3D=3D=3D=3D=3D=3D

IMF BACKS THE
=91TRICKLE-DOWN THEORY=92
FOR MOZAMBIQUE

=93Trickle-down theory=94 - that if money is given to the rich, some will
"trickle down" to the poor - had been thought long discredited, but it is
promoted in the IMF=92s latest report on Mozambique, released Wednesday 8
February. In 1992 John Kenneth Galbraith described trickle-down theory as
=93the less than elegant metaphor that if one feeds the horse enough oats,
some will pass through to the road for the sparrows.=94

In a section on how Mozambique must now carry through a "second wave of
reforms", the IMF praises Mozambique's decision "to launch an agricultural
and rural strategy to enhance the trickling down of growth to the poorest
segments of the population."

The report is =93Country Report No. 06/46: Republic of Mozambique: Third
Review Under the Three-Year Arrangement Under the Poverty Reduction and
Growth Facility=94 (PRGF) and is on
http://www.imf.org/external/pubs/cat/longres.cfm?sk=3D18874.0

IMF MAKES MAJOR
CONCESSIONS
ON WAGES & AID

Buried in the statistical tables of the new report are two important
concessions by the IMF. Throughout Africa, the IMF has been insisting that
the civil service wage bill be kept between 6.5% and 7.5% of GDP (national
income). In other words, the poorest countries are allowed to hire the
fewest teachers and health workers, and these countries are, in effect,
being stopped from reaching the Millennium Development Goals. Mozambique
was near the bottom end of the range, with a salary cap of 6.9%. But
HIV/AIDS means Mozambique needs more staff, both to replace those ill and
dying, and also health workers for expanded programmes to provide
anti-retrovirals.

This cap was clearly broken when the new government of Armando Guebuza
hired an extra 10,000 teachers and 2000 health workers. The report itself
skates over this by saying that despite the extra hiring the wage bill for
2005 will be "nearly constant". But a check of the tables shows that the
IMF agreed to change its programme, allowing wages to be 7.2% instead of
6.9% last year, and rising to 7.4% this year and 7.5% next year. This may
still not be enough, but will clearly provide more space for higher wages
and allow the training and hiring of more teachers and health workers.

The other issue relates to the amount of budget support Mozambique is
allowed to use. The IMF limits what it called "domestic primary deficit",
which is, in effect, current expenditure not covered by taxes - and thus
covered by donor budget support. This will be about $200 million for 2005,
but the IMF programme had assumed a cut to $114 million in 2006. The
revised programme, agreed in the new document, increases this to $185
million. This change is entirely done by statistical slight of hand - the
old programme assumed an average rate of exchange of 25,757 to the US$,
which seems plausible, but the new programme assumes an entirely
unrealistic exchange rate of 20,120 to the US$. This has the effect of
inflating GDP in $ terms, and since domestic primary deficit is calculated
as a %age of GDP, it has the effect of allowing Mozambique to use more
donor dollars of budget support. The %age has also been raised, from 1.6%
to 2.1%.

But the programme continues to project that budget support will fall to
$140 million per year in future.

The IMF will allow Mozambique to accept additional aid, but it continues
to apply a 50% tax. This is because any increase in disbursements of
foreign programme assistance (budget support and similar programmes) must
be matched by an increase the central bank's international reserves
equivalent to 50% of the extra aid. In effect, half of all extra aid
cannot be spent and must be kept in the bank as reserves.

IMF CRITICAL
OF MEGAPROJECTS

The IMF has become increasingly critical of the megaprojects - aluminium
smelting, gas, titanium and coal - which it feels are not benefiting
Mozambique. In a special box in the report, it points out that "their
capital-intensive nature, profit repatriation and limited linkages to the
local economy mean that the megaprojects' main impact on poverty
alleviation will need to be felt through contributions to the state
budget." Yet "contributions to the state budget have been marginal",
currently around $20 million per year. Gain has been reduced by fiscal
incentives to investors. And the IMF warns that since megaprojects
"generally involve natural resource extraction", careful attention needs
to be paid to contracts in order to "sustain benefits for future
generations." Finally, it says that in future "the governmtne should seek
to maximize domestic revenues from projects that are deemed highly
profitable and location-dependent" such as exploitation of natural
resources.