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Crisis Simulation in Mozambique

Project Development Objective (PDO)

The purpose of this project is to assist the authorities in enhancing crisis preparedness and crisis management capabilities to strengthen financial sector stability in Mozambique.

Background

In Mozambique, banks dominate the financial sector. There are a number of economy-wide risks to the financial system and some emerging sector-specific risks. With regard to financial sector–specific risks, the increase in credit provisions, particularly to households, has raised concern about over-indebtedness, especially given the overall low levels of financial education and still-emerging standards on financial consumer protection. Indeed, a number of banks that are focused on micro, small, and medium enterprise finance and agricultural credit have faced difficulties in the past few years with loan collections and profitability. Credit concentration also remains an issue; the bulk of new credit is going to households, real estate, or a few corporate entities and not to broad-based economic activities. Indeed, although credit has more than doubled over the past five years, the increase has not gone to productive sectors such as industry, tourism, or agriculture, or even commerce. Instead, credit has gone to other sectors (mainly consumer credit) and to construction.
As part of the reforms being undertaken to safeguard financial sector stability, the Bank of Mozambique (Banco de Moçambique) has been working on enhancing its crisis preparedness. Initiatives in that regard include the establishment of memorandums of understanding with home supervisors of banks operating in Mozambique and important steps toward the establishment of an operating deposit insurance scheme and the issuance of a contingency plan circular, among others. At this stage, an important step would be the ability to test the newly established framework. The proposed technical assistance project aims to provide Mozambican authorities with a means to test and enhance their tools and mechanisms for efficiently managing financial distress and potential systemic crisis through the performance of an initial crisis simulation exercise.

Activities

The expected activities of the project are as follows:
1.  Conducting a simulation exercise of scenario building and a simulation including high-level
     authorities and staff members with a focus on experiencing stressful events and actions and
     reactions
2.  Drafting a report for the authorities summarizing the results of the simulation
3.  Developing an action plan and conducting a workshop to discuss the report and findings of the
     Crisis Simulation Exercise

Expected Outcomes

The expected outcomes of the project are as follows:
Principal outcomes
    1.  Testing the way the authorities would respond to the emergence of serious problems in one or
         more financial institutions
    2.  Testing intra- and interagency coordination by the authorities in such a situation 
    3.  Evaluating the adequacy of existing laws, regulations, and procedures for dealing with such
         situations 
    4.  Identifying the scope for improvement in all the above 
    5.  Providing the opportunity to examine the use of existing laws, regulations, policies, procedures,
        and institutional arrangements for dealing with emerging distress, including systemic distress
Short-term outcomes
    1.  Enhancing skills of the staff of the Bank of Mozambique and related agencies in preparing for
         and handling a systemic financial crisis by improving the authorities’ ability to undertake
         crisis detection, avoidance, mitigation, and management 
    2.  Enhancing coordination among and collective preparedness of the authorities to respond to a
         financial crisis
Long-term outcome 
    1.  Establishing a stable financial system, enabling prompt action to deal with risks to systemic
         stability and problem banks, and effective management of a financial crisis in the event that it
         occurs, while reducing its cost to the economy