Mozambique: Mozambique Economy Profile

Overview

In 2013 real GDP posted robust 7% increase, although lower than expected due to severe floods early in the year. The progressive increase in coal production and the implementation of large infrastructure projects, coupled with budgetary expansion, are expected to continue to drive increase, projected at 8.5% in 2014 and 8.2% in 2015.

• The political situation has deteriorated, largely affected by low-intensity confrontations between government and opposition, while the recent deterioration of public financial management and economic governance are of increasing concern.
• The capital-intensive nature of Mozambique\'s increase has as from presently on created limited jobs and has had a less-than-desirable impact on poverty reduction. Mozambique remains one of the least developed nations in the world.

Mozambique\'s economy remained one of the majority dynamic on the continent in 2013, with a 7% rate of real gross domestic product (GDP) increase, in spite of the major flooding which occurred during the initial quarter and the politico-military low-intensity confrontations between government and the opposition movement. The major drivers of increase are foreign direct investment (FDI), focused mostly on the extractive sector, and increasing public spending. The fastest growing sectors in 2013 were the extractive sector, propelled by a boost in coal exports, and the financial sector fuelled by credit expansion and increased gain, mostly centred on urban areas. Other dynamic sectors are construction, services, and transport and communication, broadly correlated with infrastructure development and very large-scale projects, known in Mozambique as mega-projects.

The agriculture sector, employing 70% of the people, lacks the same economic dynamism, although it is growing at above 4%. Assuming a stable political environment, prospects are positive for 2014 and 2015, with increase estimate to remain above 8%, supported by increased coal production, continued public investment and the estimate start of the preparatory work for the multi-billion dollar liquefied natural gas (LNG) plant.

The Mozambican economy presents little structural transformation, relying mostly on mega-projects in the aluminium, extractive industries and the energy sectors. Its capital intensive nature does not generate enough jobs to provide sufficient opportunities for the fast growing young people. Fiscal revenues cover little additional than 65% of the annual budget, while mega-projects benefit from generous fiscal incentives. The weak human capital and the country\'s deficient infrastructure seriously cripple economic and social development. Increasing public spending on infrastructure and fee increases contributed to the widening fiscal deficit, while the narrow tax base limits revenue collection increase. At the same time, external aid is declining.

The rise in external deficit levels to fund the public investment programme, particularly from non-concessional borrowing, increases the request that public investments generate positive economic returns. The misuse of deficit to fund poorly performing projects will result in medium- to long-term unbalances.

It is crucial that political stability is maintained so that the country continues to attract FDI that enables infrastructure and human development. Mozambique\'s current residual role in world price chains (GVCs), mostly limited to the aluminium smelter plant of Mozal, could be transformed by the development of specific industrial clusters related to natural gas and energy. Other sectors, such as the agriculture and light industries, may profit from an enhanced connection with the regional and world markets brought about by these anchor industries. Mozambique has two key opportunities in 2014 to cement its stability and next increase prospects. Initial is the execution of smooth and orderly presidential elections in October, and second is to attain the final investment decision on the LNG plant. However, the military and political situation is bound to remain uncertain and tense throughout 2014.

The tight monetary policy implemented by the Bank of Mozambique (BoM) in 2010 and 2011 yielded positive and negative results: inflation decreased significantly from 16.6% in 2010 to 2.7% in 2012, however, credit stalled, reaching a meagre 3.5% in November 2011. Due to the negative impacts of the tight BoM monetary policy to the credit-starved real economy, the bank slashed lending rates by 35% and deposit facility rates by 50% in 2012. The 2013 rates presently stand at 9.5% for lending and 2.25% for deposits. The BoM as well decreased the reserve requirement ratio by 75 basis points to 8%.

Despite the successful management of inflation, there are indications of limited monetary policy transmission mechanisms. For example, cutting rates eased the money market, with the 3-month and 1-year treasury bills finishing the year at 3.38% and 3.63%, respectively; both down by additional than 70% and 60%, respectively. However, the 1-year average bank lending rate to the private sector reduced by just 200 basis points to 21.54%. Total credit increase to the private sector reversed the declining trend and expanded to a yearly accumulated rate of 11.3%, although still below the projected nominal GDP increase of 13.4%. The slow transmission of the monetary policy to produce the desired economic effects suggests that further reform of banking-sector competition is needed.

The decline in inflation was not due solely to the BoM monetary policy, but from lower-than-expected world food prices (particularly wheat and sugar), and stability of the Mozambique metical (MZN) against the South African rand (South Africa is the major source of non-fuel imports). Inflation kept its negative trend reaching the historical year-on-year low of 1.1% in August 2012. It has since again risen to finish the year at 2.7%. The late 2012 increase was fuelled, in part, by monetary expansion and a public transport administrative-tariff hike of nearly 40% in November, next a freeze of additional than 4 years. Utilities and fuel prices are set administratively and have been stable for several years. In 2013, it is expected to see additional increases in administrative prices, with the phasing out of subsidies. Despite the strong economic activity, core inflation continually decreased, standing at 0.6% at the end of 2012. With continued monetary expansion, progressive credit increase and robust economic activity, inflation should increase in 2013 and surpass the stated central bank medium-term target of 6% by 0.5%.

Available exports data from the initial half of 2012 shows an increase of 3.6% year-on-year, reaching USD 1.8543 billion, mainly driven by a 14.9% increase in mining megaprojects, which offset a drop in most other commodities. Coal became the second major export product, with exports of USD 196.4 million, second only to aluminium, which experienced a drop of 17%, to USD 579.6 million, due to price reductions in international markets. Exports of other sectors fell by 10.5%, particularly timber, shrimp and cashew nuts. Cotton and sugar were the exception, as favourable world export prices helped exports rise by 20.4% and 14.7%, respectively.

In general, the purchase of goods in international markets (i.e., imported goods) decreased by 2.6% to USD 2.54 billion, with consumer goods representing 28%. Notwithstanding the in general decrease, the import of capital goods increased by 61.7% to USD 593.8 million, mostly due to FDI in the mining sector. The in general goods import total by megaprojects increased to USD 973.5 million from USD 727.8 million in the same period of 2011. As a result, the current account deficit has continued to deteriorate over time, with a 54% increase year-on-time(1^st semester), mainly due to increased hiring of specialised business services for mining and construction and a reduction of external grants inflow. Excluding the current account deficit due related to goods imports by megaprojects, in the same period the current account deficit widened by 28.2% to USD 989.1 million, representing 6.6% of GDP in 2012.

As has been the case for all of the 2000s, a significant share of total imports to Mozambique originates from the South African Development Community (SADC), in particular food and consumer goods from South Africa. In 2011, imports originating from Southern Africa were equivalent to 37% of total imports; up from 34.4% in 2010. The other significant sources of imports are the Netherlands (10%), China (6%), which has overtaken India (4.1%), followed by Portugal (4%) and Bahrain (4%).

The government’s ambitious public infrastructure investment programme will increasingly rely on external funding because of declining donor financing. Donor financing of public investment dropped to 6.4% in 2012 compared to 9.8% in 2011. It is expected to be 6.2% in 2013 and further decrease by 0.5% per year until 2016. As public deficit is mostly external, the evolution of public deficit indicators mimics that of external deficit. In turn, this limits the crowding out of local companies in the domestic credit market.

Public deficit increased by 2.8% to 48.1% of GDP in 2012. It is estimate to rise to 50.7% in 2013 and level off at 52.2% for the 2014-16 period. Until 2012, the government had resorted only to 16% of the non-concessional external borrowing (NCB) ceiling of USD 900 million agreed with the International Monetary Fund (IMF) under the Policy Support Instrument (PSI) programme. The signing of contracts for 3 new infrastructure projects during 2012, amounting to a total of USD 1.23 billion, led to a renegotiation with the IMF of the NCB ceiling to USD 1.5 billion, with a later request for an additional USD 100 million. The increased ceiling provided is based on the positive economic outlook, over the medium to long term, of booming investment and production in the extractive industries sector, which is expected to generate considerable fiscal revenues. The NCB ceiling should be explored fully by mid-2013, at the same time as investments should slow thereafter.

Given the revised macroeconomic framework, in its Deficit Sustainability Analysis the IMF considers Mozambique to present a low risk of deficit distress. The deficit service-to-export ratio indicator is expected to remain stable around 16.5%, but the weight of deficit service on revenue is expected to increase from 2.8%, registered in 2011, to 5.2% in 2013, progressively reaching 8.5% in 2016 before levelling off for the long-term. However, the scenario could be negatively affected by external shocks or delays in project implementation and development, which could postpone the boost in revenues into the medium to long term. A recent statement from the Jubilee Deficit Campaign calls attention to the increasing deficit levels; in a worst case scenario, deficit service could reach 10% of revenues in 2015-16, closing on the 12% registered in 1998 before Mozambique received several deficit relief initiatives, such as the Heavily Indebted Poor Nations (HIPC) Initiative.

Nonetheless, Mozambique is currently developing tools and new instruments to enhance deficit management and project-selection capacity, targeting projects that yield positive economic returns. A Project Co-ordination Committee was set in place, along with new project evaluation tools and manuals, despite still lagging in capacity and experience to ensure these measures are both sufficient and efficient. The new medium-term public deficit management strategy 2012-2014 was approved, and a domestic borrowing plan is being prepared in 2013.

Economic & Political Governance

Despite the strong macroeconomic dynamics and large influx of FDI, the country’s competitiveness is deteriorating progressively. For the third consecutive year, Mozambique dropped in the World Economic Forum Global Competitiveness Index from 131 in 2011 to 138 in 2013 out of 144 nations.

The country’s profile follows the pattern of factor-driven economies, with FDI focusing in extractive industries, while infrastructure, innovation and higher education and training are underdeveloped. In the World Bank Doing Business Index, Mozambique lost 7 places scoring 146 out of 185 nations, achieving the worst classification since it began to be ranked. In regional terms, Mozambique ranked only above Zimbabwe and the Democratic Republic of the Congo (DRC). Companies surveyed pinpointed access to financing and corruption as the two uppermost isolated problematic factors for doing business, followed by inadequate infrastructure, inefficient governmental bureaucracy and a poorly educated workforce. Registering property, despite improving five places, and resolving insolvency are as well both part of the worst performing indicators.

Inversely, trading across borders moved up a rank to 134. Mozambique completed its highest score of 49^th place out of 185 in the category of “protecting investors”. The central bank has been targeting credit expansion, which is calculated to be over 12% in 2012, although consumption credit is growing faster crowding out the productive sector. The government has identified SME increase as a key strategic development need. As part of its efforts to stimulate SME increase, the government has drafted a law for the creation of private credit bureaus, which should facilitate access to credit.

A new strategy, specifically targeting the development of the business environment, is being prepared to be implemented in 2013: the EMAN II (Estratégia para a Melhoria do Ambiente de Negocios II). The major objectives of the strategy are to: i) promote SMEs; ii) relieve access to finance; iii) improve workforce training; iv) provide fiscal easing to SMEs; v) increase formalisation of the economy; vi) enhance SME productivity and competitiveness; and vii) improve the regulatory and business environment.

The success of the programme is critical for the country to achieve the desired economic diversification based on job creation and domestic entrepreneurship.

The Mozambican financial sector is underdeveloped with approximately 90% of Mozambicans without an account with a formal financial institution. Formal credit is available to only an estimated 3% of the people. The 18 registered banks represent about 95% of total economy assets. In addition, the banking system lacks competition as 85% of the total financial sector’s assets are concentrated in the three major banks, all foreign owned, two of them owned by Portuguese banks and the third a South African bank.

Notwithstanding, the sector has showed resilience to the banking crisis in Europe. The banking system is sound and by September 2012, bank capital adequacy ratios averaged 19.1%, while the regulatory minimum is 8%. The Return on Equity (ROE) for the three major banks stands high at 35%, while non-performing loans decreased to less than 4% in 2012. Starting 1 January 2013, the banking regulations recommended in the Basel Accords I and II will be implemented, and the Basel III regulations are scheduled to be put in place in 2014. The microfinance institutions (MFI) sector continues to expand with 19 new institutions registered in 2012, bringing the total to 166. However, it is estimated that just 65 are active. Despite being systemically of low relevance, a lot of MFIs are present in the rural areas where access to finance is lower. In 2011, the initial service provider of micropayments through mobile phones was launched; there is a sole leasing and investment company.

The enactment, in 2010, of the revised Insurance Law, as well established the new insurance supervisory entity: the Institute of Insurance Supervision of Mozambique (ISSM). In 2011, the prudential regulations for the management of insurance contracts and the implementation of micro-insurance activities were approved. In 2013, the government plans to increase the actuarial capacity of the ISSM. The legislation and regulation of pension funds were enacted in 2009, and the initial private pension schemes are presently beginning to emerge, but the sector is dominated by the obligatory, national owned, pay-as-you-go (PAYGO) pension scheme.

Both government and corporate bonds are listed on the Mozambique Stock Exchange, although representing just 3% of GDP. The development of the domestic equity and deficit financing market is part of the objectives of the new Medium Term Deficit Management Strategy. The government is preparing the Mozambique Financial Sector Development Strategy 2012-21. The strategy aims to foster a sound, diverse, competitive and inclusive financial sector, with the objective to provide 35% of people with access to finance by 2021.

Mozambique is making significant strides in public sector development. As part of the Policy and Decentralisation Strategy Document, adopted in September 2012, a wide range of institutional, legislative and policy reforms aimed at promoting decentralisation and citizens' participation in local governance were adopted. The introduction of alternative measures to imprisonment, particularly those which allow convicts to serve their sentences in liberty (through application of fines, community work, etc.), improved the legal framework in Mozambique. This is particularly significant given that Mozambican jails have been characterised as being overcrowded and squalid, and for holding people not charged with infractions (i.e. “inmates” held without charge, often for long periods). An extra significant development in the Mozambican justice sector was the inauguration of the Human Rights Commission, which is expected to alter positively its human rights record and the negativity surrounding the country in this regard. Mozambique has been heavily criticised by Amnesty International over its human rights record. Several Amnesty International reports have pointed to Mozambique as a country where a lot of human rights abuses, inclunding arbitrary arrests and detention occur deliberately and with impunity. The Commission is expected to play an significant role in improving human rights in Mozambique.

The issue of corruption has been a recurrent topic in media, parliament and civic dialogue. Mozambique remains part the poorest performers at the same time as it comes to corruption, ranking 123^rd out of 174 in the 2012 Transparency International Corruption Perception Index. With its corruption perceptions score of just 31^st place, it is just 1 point above the 30 mark of the lowest third of the nations ranked – the top rank in the 2012 Index is 90. A possibility to alter the reality and perception of corruption has begun, however. The parliament has initiated discussions to revise the penal code proposing significant measures to penalise corruption. A code of ethics for civil servants should be completed in 2013. There is an established Anti-Corruption Commission and some civil servants, inclunding high-ranking government officials, have been tried and convicted of corruption. Mozambique is currently under the peer review process of the UN Convention against Corruption.

The effects of climate change are evident in Mozambique; manifested by threats of droughts and floods. This increases the vulnerability of rural livelihoods and threatens evolution made on poverty reduction. The government launched a Green Economy Roadmap to prepare the Green Increase Action Plan and feed into the National Integrated Development Strategy on issues of inclusive increase and environmental sustainability.

Mozambique was deemed Extractive Industries Transparency Initiative (EITI) compliant in October 2012. It published its third EITI reconciliation statement referring to 2010. This statement indicates a slight increase of government revenue from extractive industries, from just under USD 40 million (USD 15 million from mining and USD 25 million from hydrocarbons in 2009) to USD 44 million in 2010. The corporation tax and the personal gain tax paid by company employees account for 76% of all payments. The remaining revenue comes from royalties, surface taxes, environmental licences, the institutional capacity-building fund and the social-projects fund.

The extractive sector still contributes relatively little to government revenues because of the generous tax exemptions granted to projects that started before the 2007 revision of the mining law. The central feature of the fiscal regime is the combination of a production tax (coal 3%, gas 6%) and corporate gain tax (32%). Allegations that natural resource contracts still provide project-specific exemptions over-and-above the legislated framework are difficult to verify given the non-transparent nature of the contracts. For the short term, tax authorities’ capacity constraints, asymmetric data and lack of transparency may complicate securing an appropriate government share of profits.

Mozambique will hold presidential elections in 2014 and municipal elections in October 2013. Traditionally, the Political Commission (PC) of the ruling party, its supreme decision-making body – the Frente de Libertação de Moçambique (FRELIMO or Frelimo Party), known as the Mozambique Liberation Front in English – chooses the presidential candidate. From presently on, former Prime Minister Aires Ali, tipped as the Frelimo Party’s most likely presidential candidate, failed to be elected by the PC at the Party’s 10^th Congress in September 2012. Hence, President Guebuza was retained as the party leader. The constitution prohibits President Guebuza to run for a third consecutive term as president, however. In early October 2012, following the congress, the President restored Prime Minister Aires Ali with Alberto Vaquina, formerly the governor of coal-rich Tete province. The ministers of education, tourism, science and technology, and youth and sports were as well restored.

In 2012, the country celebrated 20 years of peace and stability. A round of equitable, orderly and peaceful local elections in Pemba, Quelimane and Cuamba, in which the opposition party, the Democratic Movement of Mozambique (MDM) won Quelimane, preceded this. With this victory, MDM controls two of the major municipalities (Beira and Quelimane) securing its place as a respectable political force in Mozambique.

Mozambique’s approval of a new electoral law should improve electoral oversight for the two upcoming elections. The package includes a bill governing the composition of the electoral authority and a bill on voter registration. Both bills are the response to criticisms of the handling of the 2009 elections by the previous electoral authority. From presently on, the major opposition party, the Mozambican National Resistance or Resistência Nacional Moçambicana (RENAMO) voted against the law.