Project Mozambique-Flood Emergency... Recovery Project (FERP)
Project ID MZPE70432
Implementing Agency Ministry of Planning and Finance, Central Bank of Mozambique
Environment Category C
Date Initial PID Prepared March 10, 2000
Date Final PID Prepared March 27, 2000
Projected Board Date April 13, 2000
Circumstances of the Disaster
Heavy rains, which started in early February 2000, have flooded parts of Mozambique's southern provinces of Maputo, Gaza, Inhambane, Sofala, and Manica, resulting in the largest natural disaster that the country has experienced in recent memory. The Limpopo, Incomati, Umbeluzi and Save rivers, which gather their head-waters in South Africa, Botswana and Zimbabwe, reached their highest-ever recorded levels in early March, and many riparian communities were submerged under water for weeks. As of March 23, 640 people have died and some 650,000 are in need of substantial assistance. Altogether, about 1.9 million people have been affected by the floods and one million will require at least some emergency assistance, in the form of life-supporting services, until they can resume sustainable livelihoods.
Physical and social infrastructure in the affected areas remains in disarray. Large sections of the only paved road that connects Maputo, the capital, to the north of the country have been demolished. Small bridges on the elevated road over the Limpopo flood plain, and sections of the railroad connecting the Mozambican port of Maputo to Zimbabwe, have been damaged or washed away. The Government estimates that about 20,000 cattle have drowned and 140,000 hectares of crops have been destroyed, constituting a large shock to the productive economy. Health centers, water supply, and sanitation in affected towns and villages have suffered extensive damage, placing as many as one million people at greater risk for water- borne diseases such as cholera, malaria, and diarrhoeal disease (a leading killer of children).
Preliminary Damage Assessment
Bank staff, working closely with the Government, Mozambique's development partners, and the IMF, have prepared a preliminary estimate of the impact of the flood disaster on the Mozambican economy, entitled "A Preliminary Assessment of Damage from the Flood and Cyclone Emergency of February-March 2000", dated March 27, 2000. Direct costs of the disaster are estimated to total US$273 million, or about six percent of projected GDP for 2000. Preliminary estimates indicate that economic growth in 2000 will be 1.6 percent lower as a result of the disaster, falling to about 5.4 percent for the year, and inflation will rise from about 6.6 percent to 9.5 percent. In 2001, GDP growth is expected to accelerate to 7.9 percent, boosted by reconstruction activities. Additional fiscal expenditures associated with reconstruction activities is expected to be about US$300 million spread over the period 2000-2001.
The disaster will have serious short-term economic consequences for Mozambique, but the Government can manage them provided that it continues to implement its economic reform program and obtains sufficient external support to finance the emergency recovery and rehabilitation effort. The largest direct costs to the budget will be repairs to the road, rail, and power systems, estimated to total about US$70 million if replaced to the same standard, though costing up to US$136 million if replaced to an improved standard with lower flood-loss exposure. The current account deficit (before grants) is expected to widen by about US$325 million in 2000, or 8.5 percent of GDP, and by US$58 million in 2001, or about 2.7 percent of GDP, as a consequence of the floods. The estimated total effect on the balance of payments shows a financing gap of US$206 million in 2000 and US$49 million in 2001. This external gap will be reduced by accelerated debt relief from IDA and the IMF under the enhanced HIPC framework as well as the deferral of debt service granted by the Paris Club. The remaining external gap is expected to be financed by additional donor grants, reprogramming of existing IDA credits, additional financing under the IMF PRGF program, and this proposed IDA Flood Emergency Recovery Project. The International Donor Conference to be held in Rome, Italy, in May will serve to confirm pledges made to date and secure any additional assistance required to fully meet Mozambique's external financing needs.
Impact on the Poor
The United Nations estimates that about 491,000 people have been either displaced or trapped in isolated areas as a result of the floods, which, more than six weeks after the onset of the emergency, have not yet receded fully. About 70 percent of these people were very poor even before the disaster, living on less than US$0.40 per day. As a result of the floods, many have lost all of their capital assets-including their homes, their crops, and their livestock-and require basic life-supporting services to survive this difficult time. Opportunities for on- and off-farm work in their home areas have also been foreclosed, at least until the rains end and the flood waters recede. Small traders and entrepreneurs in the affected areas have been hit especially hard, as many have suffered heavy losses of inventory with minimal or no insurance coverage. As a result, there is likely to be an increase in poverty in the affected region (offset to some degree by growth associated with the reconstruction effort) until activity in agriculture, trade and industry are restored to former levels.
Response of the Government and the International Community
The Government's macroeconomic policy response to the emergency has been appropriate and effective. It has been working closely with its international partners to organize and mobilize external financing for the recovery and reconstruction effort. Although the initial response was somewhat disorganized, progress is rapidly being made in defining institutional arrangements and organizational structures to support the recovery effort. A large number of agencies and donors are currently active in Mozambique, providing humanitarian aid, and many of the same donors have pledged additional support for reconstruction. According to Government sources, as of March 22, 2000, about US$118 million of external emergency assistance had been provisionally committed. In addition, the IMF is expected to augment Mozambique's access to PRGF resources and consider the PRGF review on an accelerated schedule to help limit the impact of the disaster on the economy. Despite the disaster, the Government has also reaffirmed its intention to continue pursuing its medium-term development agenda, including its economic reform program.
Bank Response and Strategy
During the flood, the Bank received a request from the Government of Mozambique for emergency assistance. The Bank's response is being closely coordinated with the IMF and with other donors in the Core Group of donors providing assistance to Mozambique in response to the emergency. IDA is responding to the disaster in the following ways:
- Preparing a preliminary assessment of the damage resulting from the flood and cyclone emergency. From March 12 to 24, Bank staff have worked with national authorities, the IMF, and other donors in the field to prepare this assessment, which will be a key contribution to an International Donor Conference scheduled for April 26-27, 2000.
- Preparing this Flood Emergency Recovery Project to contribute towards financing the balance of payments needs resulting from the disaster.
- Restructuring and reallocating existing projects in the portfolio through appropriate amendments to the relevant Credit Agreements in order to provide high- priority and fast-disbursing short- and medium-term assistance for rehabilitating physical and social infrastructure. (Over US$24 million has already been identified for reallocation in existing roads and water projects.) IDA will also review and modify, as necessary, projects and non-lending services currently scheduled or under preparation to ensure that future IDA support addresses the Government's development agenda adjusted to reflect priorities resulting from the damage.
- Proposing to the Board, in the context of the Enhanced HIPC Framework, an acceleration of debt relief to Mozambique through various modalities to cover 100 percent of IDA debt service due over the next twelve months, so that IDA debt service obligations do not become an obstacle to Mozambique's ability to respond to emergency rehabilitation needs.
- Enhancing, over the longer term, the institutional capacity for disaster preparedness and management.
The proposed Flood Emergency Recovery Project would seek to assist Mozambique to maintain macroeconomic stability by helping to sustain a higher level of imports necessary for rehabilitation and reconstruction. The additional foreign exchange resources are needed to enable the country to import food, equipment, machinery, and other materials while maintaining the soundness of balance of payments and the budget. This Bank support is being closely coordinated with other multilateral and bilateral agencies.
The Flood Emergency Recovery Project will provide immediate, quick-disbursing balance of payments support to finance the purchase of equipment and commodities on a positive list of imports needed for the rehabilitation effort. The list of eligible imports will be determined in consultation with the Government and is likely to include food, fuel, construction materials, agricultural inputs, essential health and education supplies, and parts, machinery and equipment for commercial and industrial use. Both the composition of the positive list and the procurement rules to be applied will allow flexibility in order to accelerate disbursements and minimize distortions in the foreign exchange market.
The Government is expected to use the Meticais counterpart of the loan funds to finance the higher public expenditures required for the reconstruction effort while maintaining macroeconomic stability. These counterpart funds are expected to contribute to a supplementary budget earmarked for the Government's emergency recovery and reconstruction program, which is likely to include infrastructure rehabilitation as well as emergency aid to flood-affected communities, including the provision of seeds, tools and other essential agricultural inputs; temporary shelters and services for displaced persons; and emergency food aid until the next harvest.
The project will be implemented by the Ministry of Planning and Finance (MPF) in close collaboration with the Bank of Mozambique. The credit may be disbursed through a US Dollar Special Account to be established at the Bank of Mozambique. The Special Account would be replenished as and when needed to ensure timely disbursement of funds to cover eligible imports. The corresponding funds in national currency will be disbursed through an account managed by the Government. The credit will finance 100 percent of the delivered cost of general imports, excluding import duties and taxes, subject to a positive list agreed with the Government. Procurement will follow World Bank guidelines. Up to 20 percent of the loan will be used for retroactive financing of expenditures. Adequate quarterly reporting requirements and audit trails will be provided by the MPF and the Bank of Mozambique.
In keeping with OP/BP 8.50, this emergency operation will not include conditionality linked to macroeconomic policies, though Bank staff will continue to monitor economic developments in close collaboration with the IMF to help ensure adequate macroeconomic management during this difficult period.
The project will be implemented over a one-year period and is expected to be completed by June 30, 2001.
In accordance with the Bank's Operational Directive on Environmental Assessment (OD 4.01, Annex E), the proposed operation has been placed in Category C and does not require an environmental assessment.
Major Benefits and Risks
The project has several benefits. The import financing provided by the credit will provide timely balance of payments support to the Government in view of the additional import demands generated by the effects of the floods and the cyclone. It will also be critical to maintaining macroeconomic stability while rehabilitating and restoring productive capacity in Mozambique and ensuring procurement and delivery of adequate supplies of essential equipment, materials, and commodities for the construction, social, and agricultural sectors. The counterpart funds generated by the sale of foreign exchange will provide the Government with an important source of non- inflationary finance for its emergency recovery program at a time when there will be need for additional government expenditures due to lower than projected economic growth. It will complement the support for short- and medium-term rehabilitation that will be provided through the restructuring and reprogramming of ongoing operations in the portfolio, and assistance provided by other multilateral and bilateral agencies.
There are two major risks. First, there is some macroeconomic uncertainty associated with the economic impact of the floods and the Government's ability to maintain stability in the face of increasing fiscal and external pressures. The project itself will directly address this risk. To this end, it is extremely important that disbursements under the operation not be delayed. Second, emergency recovery programs can provide an environment conducive to misappropriation of resources. The project will address this risk through due diligence in procurement, independent audits, and a periodic review of project accounts by IDA staff.
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-5454
Fax: (202) 522-1500
WB Country Office Manager, Maputo,
Telephone: 533-201, (258-1) 492-841/51/61/71
Telephone: (202) 473-1262
Fax: (202) 522-3158
Note: This is information on an involving project. Certain components may not be necessarily included in the final project.
Processed by the InfoShop week ending April 14, 2000.