Institutional Capacity Building Needs for the Next Three Years

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Ralph Wiggins
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1 REPUBLIC OF MOZAMBIQUE MINISTRY OF FINANCE Directorate of Studies and Economic Analysis Strengthening Macro-Fiscal Management Within the Context of Natural Resources Exploitation Institutional Capacity Building Needs for the Next Three Years Por: Isabel Sumar

2 Structure of the Presentation I. Introduction II. Natural Resources III. Macro-Fiscal Management International vision Mozambican Context IV. Macroeconomic Implications Dutch Disease White Elephant Others V. Capacity Building Needs

3 I. Introduction Mozambique is a country with enormous natural resources potential: land, water, forests and minerals. Mineral Resources: heavy sands, coal, base metals, pegmatite, marble, bauxite, graphite, diamonds, gold, precious stones, phosphates, limestone, hydrocarbons. Coal and natural gas figure prominently: Abundance (gas trillion cubic feet; Coal 20 billion metric tons); Market demand; and Impact on State Revenue 3

4 I. Introduction (cont.) The natural resources boom brings challenges for Macro-Fiscal Management. The work focuses the approach on two commodities: Coal and Natural Gas. But their implications on Macro- Fiscal Management are for the economy as a whole. Macro-Fiscal Management: understood as the adoption of the best decision regarding revenue collection policies and public expenditure, taking into consideration the income from natural resources

5 I. Introduction (cont.) Objective To assess the pertinence of the need for institutional capacity building to strengthen Macro-Fiscal Management in view of the impact of natural resources exploitation

6 II. Natural Resources (Hydrocarbons) Sedimentary Basins Rovuma Basin 150 TCF (trillion cubic feet, Areas 1&4) Mozambique Basin Pande; Temane; 3,6 TCF Buzi; Inhassoro; Njika Well Contract Area Protected areas 200 km 6

7 II. Natural Resources (Minerals) Niassa Province Maniamba-Lunho Tete Province Mucanha-Vuzi Sanagôe-M Fidezi Moatize- Minjova Manica Province Mepotepote 7

8 II. Natural Resources (cont.) Projection of Gas Revenue Trillion BTU Projection of LNG Production (trillion BTU/year) Produção dos trens de GNL (fase IV) Produção dos trens de GNL (fase III) Produção dos trens de GNL (fase II) % R E C T O T Contribution of Gas to Total Revenue Produção dos trens de GNL (fase I)

9 III. Macro-Fiscal Management: International Vision Depletion of Natural Resources (SPSRN) Consumption Macro-Fiscal Management Volatility of NR Revenues Investment Volatility (Pricing Rule) Savings

III: Macro-Fiscal Management: Mozambican Context Macro-Fiscal Management in Mozambique Should Consider: Precise Knowledge of the Quantities and Quality of NR Reserves Selection, Implementation,

10 III: Macro-Fiscal Management: Mozambican Context Macro-Fiscal Management in Mozambique Should Consider: Precise Knowledge of the Quantities and Quality of NR Reserves Selection, Implementation, Monitoring, Assessment and Careful Control of Enterprises (Linkage to SMEs) Policy of Rational Application of Resources (National Development Strategy Public Finance Vision) Need for Capacity Building Efficient and Decentralized NR Management Deficit Reduction Strategy (Greater Efficiency in Government Expenditure Debt Policy)

III: Macro-Fiscal Management: Mozambican Context (Cont.

Inclusion and Social Protection Financing for Mozambicans Inclusive and

improve the Absorption of Resources Need for Capacity Building Integrated

11 III: Macro-Fiscal Management: Mozambican Context (Cont.) Macro-Fiscal Management in Mozambique Should Consider: Promotion Economic Inclusion and Social Protection Financing for Mozambicans Inclusive and Comprehensive Economic Growth Strategy Poverty Reduction Solid knowledge to improve the Absorption of Resources Need for Capacity Building Integrated View of the Transport System ( Export) Develop Knowledge to Use Technologies related to NR Industries

IV. Macroeconomic Implications Failure to carefully consider the pre-requisites for Prudent Macro-Fiscal

Increase in the Export of NR Inflow of Foreign Currency Appreciation of the MZN Marginalisation of Other

Industries) Accelerates inflation Appreciates the Real Exchange rate Long-Term Effects Reduces the

12 IV. Macroeconomic Implications Failure to carefully consider the pre-requisites for Prudent Macro-Fiscal Management, as described above, may result in the following macroeconomic implications a) Dutch Disease Increase in the Export of NR Inflow of Foreign Currency Appreciation of the MZN Marginalisation of Other Sectors of the Economy Short-Term Effects Reduces competitiveness of other sectors (Labour- Intensive Industries) Accelerates inflation Appreciates the Real Exchange rate Long-Term Effects Reduces the Diversification of the Economy Reduces the demand and supply of qualified labour Unequal distribution income 12

13 IV. Macroeconomic Implications (Cont.) b) White Elephant Investment in non-priority spending; Investment in low return projects 13

14 IV. Macroeconomic Implications (Cont.) c) Other implications Fluctuation in Revenue Difficulties Planning Budget revisions Price Volatility of NR Discourages Private Investment Affects the effectiveness of government expenditure : Tendency for extra expenditure - abundance Drastic expenditure cuts - Rupture Increased Debt 14

15 V. Capacity Building Needs: Current Situation Despite the challenges resulting from the exploitation of natural resources, Mozambique has made notable progress in terms of Macro-Fiscal Management: SISTAFE; CFMP; E-Taxation; Medium-Term Public Debt Management Strategy; PPP Act; and Public Finance Vision

16 V. Capacity Building Needs Exact information on the Variety, Quantity and Quality of NRs Training in Prospecting and Research. Institutes requiring capacity building: Ministry of Mineral Resources; Ministry of Energy; Ministry of Planning and Development; and Ministry of Agriculture

17 V. Capacity Building Needs...(Cont.) Institutional Arrangements: Rationality in Concessions; Oversight of NR exploitation; and Contract Negotiation Techniques. Institutions requiring capacity building: Ministry of Finance; Ministry of Energy; Ministry of Mineral Resources; Ministry of Planning and Development

18 V. Capacity Building Needs (Cont.) Estimates of Natural Resources Revenues: Identification and determination of long- and short-term cyclical components; Detailed projections based on the quantity of confirmed reserves; Aggregation of NR Revenue Projections from individual Enterprises or projects; and Capacity for Sensitivity Analysis and alternative scenarios under different prices, cost, production volume and export scenarios. Institutions requiring capacity building: Ministry of Mineral Resources; Ministry of Finance; Ministry of Industry and Trade; and Bank of Mozambique

19 V. Capacity Building Needs (Cont.) Selection, Implementation, Monitoring, Assessment and Control of Investments : Synchronising the Investment Plan with the budget, medium term expenditure plans and budgetary limits; Experts in various infrastructure areas; and Mechanism to assess project objectives, prioritisation and implementation. Institutions: Ministry of Public Works; Ministry of Finance ; Ministry of Planning and Development; Ministry of Transport and Communications; Ministry of Mineral Resources; and Ministry of Energy

20 V. Capacity Building Needs (Cont.) Medium-Term Budget Planning : Medium-term planning based on fiscal rules; and Forecast of aggregate expenditure and its translation in maximum expenditure limits and investment projects. Institutions: Ministry of Finance; and Ministry of Planning and Development

21 VI: Capacity Building Needs (Cont.) Efficient and effective resources management, taking into consideration the long-term vision Sovereign Fund as a revenue management strategy: Savings, Investment or Stabilisation? Institutions: Ministry of Finance ; Bank of Mozambique; and Ministry of Planning and Development

22 Thank You Very Much!

January/2014. Growth. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized

January/2014. Growth. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized HIGHLIGHTS: MOZAMBIQUE ECONOMIC UPDATE January/1 's economy registered strong growth