The World Bank’s Mozambique Economic Update (MEU) series is
designed to present timely and concise assessments of current
economic trends in Mozambique in light of the country’s
broader development challenges. Each edition includes a
section on recent economic developments and a discussion of
Mozambique’s economic outlook, followed by a focus section
analyzing issues of particular importance. The focus section in this
edition explores the growth – poverty nexus in Mozambique, and
the impact this has had on inequality. The MEU series seeks both
to inform discussions within the World Bank and to contribute
to a robust debate among government officials, the country’s
international development partners, and civil society regarding
Mozambique’s economic performance and key macroeconomic
policy challenges.

The cutoff date for the current edition of the MEU was August
31, 2018.
Contents
Abbreviations and Acronyms ......................................................................................................................................... iii
Acknowledgements	 ...................................................................................................................................................... iv
Executive Summary	 ...................................................................................................................................................... 1
Part One: Recent Economic Developments ........................................................................................................ 3
	 Economic Growth .................................................................................................................................................. 3
	 Exchange Rate and Inflation ................................................................................................................................ 5
	 The External Sector ................................................................................................................................................. 8
	 Fiscal Policy ............................................................................................................................................................... 12
	 Monetary policy ...................................................................................................................................................... 18
Part Two: Shifting To More Inclusive Growth ........................................................................................................ 21
	 Structural change, Productivity, and Poverty Reduction ............................................................................... 21
	 Less Poverty, but More Inequality ....................................................................................................................... 25
	 Dealing with the Challenge of Falling Productivity and Rising Inequality through
	 Broad-Based Growth ............................................................................................................................................... 27
References ..................................................................................................................................................................... 35


FIGURES
Figure 1:	 GDP growth is expected to drop slightly in 2018 …......................................................................... 4
Figure 2:	 … as the growth rate in coal production declines …........................................................................ 5
Figure 3:	 … and as household purchasing power remains eroded by prices ............................................ 5
Figure 4:	 A more stable metical has helped reduce inflation, especially for tradable goods …................ 6
Figure 5:	 … which, along with lower inflation in South Africa, has cooled food prices .............................. 6
Figure 6:	 Food price spikes have increased poverty across all provinces; the increase is
	                  largely concentrated in rural areas ...................................................................................................... 7
Figure 7: 	 The REER is back at 2011 levels ........................................................................................................... 8
Figure 8:	 The current account deficit is set to widen due to a growing deficit in the non megaproject
	                  economy ................................................................................................................................................... 11
Figure 9:	 …as consumer imports begin to recover .......................................................................................... 11
Figure 10:	 FDI inflows continue to decline ........................................................................................................... 11
Figure 11:	 A weaker price outlook is a source of external risk ........................................................................ 11
Figure 12:	 Expenditure dropped faster than revenue in 2017 .......................................................................... 14
Figure 13:	 …allowing for narrowing of the primary balance ............................................................................ 15
Figure 14:	 Domestic debt levels continue to rise ............................................................................................... 15
Figure 15:	 … adding to the debt service burden ................................................................................................. 15
Figure 16:	 Fuel and bread subsidies have had a modest impact on poverty headcount ........................ 17
Figure 17:	 The decrease in inflation has created space for lower reference lending rates since the
	                  start of 2018 ............................................................................................................................................. 19




i
Figure 18:	 Commercial bank rates are also decreasing, but tend to respond more slowly during
	               monetary easing cycles .........................................................................................................................              19
Figure 19:	 Credit growth remains negative, despite easing rates ...................................................................                                          20
Figure 20:	 Commercial bank asset quality has deteriorated with higher NPLs ................................................... 20
Figure 21:	 Mozambique has enjoyed robust growth that led to a sustained rise in GPD per capita ............ 22
Figure 22:	 Productivity gains have been the main drivers of growth .................................................................... 22
Figure 23:	 Employment has gradually shifted from agriculture to services ......................................................... 22
Figure 24:	 … where productivity is over six times larger than in agriculture ........................................................ 22
Figure 25:	 An FDI boom supported growth and demand, including for services .............................................. 23
Figure 26: 	Fiscal and monetary expansion also supported faster private consumption growth .................... 23
Figure 27:	 Poverty has been falling since the early 2000s ....................................................................................... 24
Figure 28:	 … and the pace accelerated after 2008 ..................................................................................................... 24
Figure 29:	 The pattern of growth in the period 2008/09-2014/15 benefited mostly the non-poor, chiefly
	               those in urban areas ........................................................................................................................................ 26
Figure 30:	 The distribution of household consumption is highly unequal in Mozambique relative to other
	               countries in the region ................................................................................................................................... 26
Figure 31:	 There are large differences in the prevalence of poverty across provinces ..................................... 26
Figure 32:	 A reduction in the level of economic complexity accompanied the increase in exports ........... 28
Figure 33:	 In 1996, Mozambique exported a low volume/ variety of primary products .................................. 30
Figure 34:	 By 2016, exports became more diverse, but remained dominated by primary products ............ 30
Figure 35:	 Mozambique has a low level of economic complexity compared to major and neighboring
	               African economies ............................................................................................................................................ 31
Figure 36	 The number of products exported by Mozambique declined in the 2000s and is below well-
	               performing economies in the region ......................................................................................................... 31
Figure 37:	 Average yields are lower in Mozambique than in the region …........................................................... 32
Figure 38:	 … largely due to low adoption of modern inputs. .................................................................................... 32
Figure 39:	 Isolation is a major barrier for farmers in accessing inputs and markets …........................................ 33
Figure 40:	 … and is compounded by exposure to weather shocks ....................................................................... 33
Figure 41:	 Literacy rates are slowly improving but a large gap persists between rural and urban areas ...... 34
Figure 42:	 Location, household consumption and parental education drive most of the inequality of
	               opportunity across the population .............................................................................................................. 34


TABLES
Table 1:	       Growth Outlook ................................................................................................................................................ 4
Table 2:	       The Balance of Payments ............................................................................................................................... 10
Table 3:	       External Outlook ............................................................................................................................................... 10
Table 4:	       Government Finances (commitment basis) ............................................................................................. 16
Table 5:	       Decomposition of Total Labor Productivity Change, 1996-2014 ...................................................... 23


BOXES
Box 1:	         What happened to poverty after inflation soared in 2016? ................................................................... 7
Box 2:	         The distributional impact of recent fuel and bread subsidy reforms ................................................. 16




                                                                                                                                                                                      ii
Abbreviations
and Acronyms
          BoP      Balance of Payments
          BdM      Bank of Mozambique (Banco de Moçambique)
          BVM      Mozambique Stock Exchange (Bolsa de Valores de Moçambique)
          CAD      Current-Account Deficit
          CGE      State’s General Account (Conta Geral do Estado)
          CGT      Capital Gains Tax
           CPI     Consumer Price Index
          FAO      Food and Agriculture Organization of the United Nations
           FDI     Foreign Direct Investment
          FPC      Standing Lending Facility (Facilidade Permanente de Cedência)
          FPD      Standing Deposit Facility (Facilidade Permanente de Depósito)
          GDP      Gross Domestic Product
          GEP      Global Economic Prospects
         GFSM      Government Finance Statistics Manual
        GIEWS      FAO Global Information and Early Warning System
           GIC     Growth Incidence Curve
           GIZ     German International Cooperation Agency (Deutsche Gesellschaft für Internationale
                   Zusammenarbeit)
            IAS    Integrated Agricultural Survey (Inquérito Agrário Integrado)
           IMF     International Monetary Fund
           INE     National Statistics Institute (Instituto Nacional de Estatística)
           IOF     Household Survey (Inquérito sobre Orçamento Familiar)
             IPI   Industrial Production Index
           LIC     Low Income Countries
          LNG      Liquefied Natural Gas
         MBTU      Million British Thermal Units
          MEF      Ministry of Economy and Finance (Ministério da Economia e Finanças)
         MIMO      Interbank Reference Interest Rate
           MIT     Massachusetts Institute of Technology
          MPC      Monetary Policy Committee
          MPO      Macro-Poverty Outlook
         MSME      Micro, Small and Medium Enterprises
             Mt    Metric tons
          MZN      New Mozambican Metical
          NPL      Non-Performing Loan
           PER     Public Expenditure Review
         REER      Real Effective Exchange Rate
           SSA     Sub-Saharan Africa
          SOE      State Owned Enterprise
      STATS SA     Statistics South Africa
             US    United States
          USD      United States Dollar
          WDI      World Development Indicators
          WEO      World Economic Outlook
           WB      World Bank
         WMO       World Meteorological Organization



iii
Acknowledgements



  This edition of the Mozambique Economic Update was prepared
  by a team led by Shireen Mahdi (Senior Economist, GMTA4). The
  team included Anna Carlotta Allen Massingue (Research Analyst,
  GMTA4), Fernanda Ailina Pedro Massarongo Chivulele (Research
  Analyst, GMTA4), Javier Baez (Senior Economist, GPV01), Ian Walker
  (Lead Economist, GPSJB), Adelina Mucavele (Program Assistant,
  AFCS2), Ruben Barreto (Consultant, GFCAS) and Julian Casal
  (Senior Financial Sector Economist, GFCAS). Peer reviewers were
  Harold Zavarce (Senior Economist, IMF), Moritz Meyer (Economist,
  GPV07) and Sam Jones (University of Copenhagen). The report
  was prepared under the overall guidance and supervision of Mark
  R. Lundell (Country Director, AFCS2), Mathew Verghis (Practice
  Manager, GMTA4) and Carolin Geginat (Program Leader, AFCS2).




                                                                       iv
executive summary




Executive
Summary
                                                                    go up without having seen their incomes rise at
More stable, but with                                               the same pace. It also signals the private sector’s
reduced capacity for                                                reduced capacity to contribute to growth, and
growth.                                                             the diminished capability of the economy to
                                                                    generate a sufficient volume of jobs.
Mozambique is beginning to emerge from a
period of elevated macroeconomic volatility two                     In addition, macroeconomic risks remain
years after hidden debt revelations triggered a                     considerable. A weaker price setting for
significant economic downturn.1 The stability                       Mozambique’s main exports coal, aluminum
of the metical since mid 2017 helped to reduce                      and tobacco is a source of risk to the external
inflation from 26 percent at its peak in November                   outlook. Similarly, whilst the current external
2016 to just over 5 percent by August 2018,                         position is adequate, pressures could intensify
whilst a rapid increase in coal exports over the                    in the medium-term if demand for consumer
course of 2017, equivalent to 7 percent of GDP,                     imports recovers, whilst exports and investment
supported an improvement in the trade balance                       in the non-megaproject economy remain
and the recovery of central bank reserves to                        sluggish. A recovery in import demand, if not
7 months of import cover2 by August 2018.                           accompanied by an improved performance in
Moreover, by the start of 2018, Mozambique                          exports from key sectors such as agriculture and
had secured the final investment decision for                       energy, and an increase in investment, is likely to
developing the Coral South project, one of two                      widen the economy’s external financing needs
major gas projects in the Rovuma basin pipeline.                    and raise pressure on central bank reserves.
                                                                    These dynamics, which were beginning to
Yet, Mozambique is emerging from the recent                         appear in the first half of 2018, would be further
episode of macroeconomic volatility with a                          exacerbated if public-sector consumption grows
reduced capacity for growth. GDP growth                             and if monetary policy easing boosts consumer
dropped to an average of 3.8 for 2016 and                           credit and demand for imports.
2017, down from 8 percent on average over the
preceding decade,3 and is expected to attain the                    Budgetary financing
slightly lower rate of 3.3 percent in 2018 as the
economy continues to confront the downturn
                                                                    needs and external sector
that followed the debt crisis in 2016. Private                      risks cloud the economic
demand, especially for services, which was the                      outlook.
largest driver of growth in the years prior to the
economic downturn, has slowed significantly.                        Fiscal consolidation efforts are progressing.
This phenomenon reflects the extent of the                          Spending levels have dropped, largely through
reduction in consumer purchasing power,                             a sharp reduction in the investment budget.
especially for households that have seen costs                      Additional savings were realized through the



1   A decline in investor and donor confidence followed the hidden debt revelations in 2016 as public debt increased to an
    unsustainable level and risk perceptions deteriorated, contributing to a reduction in external inflows from investors and donors.
2   Excluding megaprojects.
3   Average GDP growth from 2005 to 2015.




1
                                                             mozambique economic update october 2018


elimination of subsidies to fuel and bread.             six times more productive. This boosted output
Together, these efforts yielded an estimated            per worker on average, established productivity
3 percent reduction in the primary balance              as the engine of growth in recent years, and
between 2015 and 2017 (excluding capital gains          increased the pace of poverty reduction. The
revenues). However, the gradual decline in the          rate of poverty reduction accelerated between
primary deficit has coincided with an increase          2008 and 2014, bringing poverty down from
in domestic debt, exacerbating debt levels and          59 to 48 percent of the population. Yet, these
reflecting the public sector’s persistent financing     gains were accompanied by a widening gap
needs, including those linked to underperforming        between the better-off and the poor. Although
state-owned enterprises. Rising domestic debt           the poor gained from growth, the wealthier
levels are of concern considering the high cost         segments of society gained at a higher pace,
of domestic credit, and the potential for public-       especially in urban areas. This recent pattern of
sector financing to crowd out the private sector’s      “pro-richness” in growth reflects the extent to
access to credit.                                       which Mozambique’s growth acceleration and
                                                        the improvements in access to services achieved
Looking ahead, fiscal risks continue to be              have been concentrated in urban centers,
substantial. The wage bill, which is typically a        hindering Mozambique’s progress in achieving
rigid expense, is beginning to slow at a gradual        shared prosperity and making it now among the
pace but continues to be a significant source of        most unequal countries in sub-Saharan Africa,
fiscal pressure. In addition, the ongoing electoral     with a Gini coefficient registering at 0.56 in
cycle and the emerging decentralization                 2014/2015.
arrangements could have significant budgetary
implications that condition the pace of fiscal          The section concludes by highlighting that
adjustment in the medium-term. With these               dealing with poverty and the challenge of
spending pressures in view, creating fiscal space       rising inequality requires redefining the drivers
without exacerbating the debt burden requires           of inclusive growth in Mozambique’s resource
a renewed focus on revenue mobilization,                dependent economy. Rapid growth episodes,
efficiency in spending, and lowering fiscal risks       as experienced by Mozambique for most of the
from state owned enterprises.                           2000s, are a welcome occurrence. But it is the
                                                        breadth of this growth across the sectors of the
Raising the quality of                                  economy and the extent to which it endurably
                                                        raises productive capacity, whilst maintaining
growth.                                                 a sustainable macroeconomic setting, that
                                                        determines the quality of this growth. Shifting
The special focus section in this edition of the
                                                        the growth model to broaden the drivers of
Mozambique Economic Update discusses the
                                                        growth and to raise productivity in sectors with
structure and drivers of Mozambique’s growth
                                                        the highest employment potential is a primary
over the past two decades, and the extent to which
                                                        challenge facing Mozambique’s policy makers
past patterns of growth helped to shape current
                                                        today. Extractives will not be enough. An intensive
poverty and inequality outcomes. The analysis
                                                        and ambitious focus on achieving diversification,
notes several positive developments. Firstly,
                                                        raising rural productivity, and providing more
Mozambique’s economy has been experiencing
                                                        equal access to services in national development
a gradual structural transition as workers began
                                                        efforts is essential for inclusive growth.
moving from agriculture, the sector with lowest
level of productivity, to services – a sector that is




                                                                                                         2
part one: recent economic developments




Part One:
Recent Economic
Developments
Economic Growth                                                  reduction in investor confidence and consumer
                                                                 demand over the past two years, are now slowly
Slower growth in coal could offset an                            recovering as the economic context stabilizes.
upturn in manufacturing and services, and                        Improved rainfall is also aiding the recovery of
mitigate growth expectations for 2018.                           Mozambique’s water reservoirs and may boost
                                                                 hydro-electric power generation.
Early indicators for 2018 suggest that
Mozambique continues on a reduced growth                         However, the extractives sector, which was
trajectory. After having dropped to 3.8 and                      the main contributor to growth in 2017, is
3.7 percent real GDP growth in 2016 and 2017                     expected to grow at a slower pace in 2018. A
respectively, growth indicators signal that the                  slower increase in coal production, following the
economy continues to confront the economic                       significant ramp-up realized in 2017, is expected
downturn that commenced subsequent to the                        to limit the contribution of the extractives
hidden debt crisis in 2016. GDP growth in the                    sector to growth in 2018, offsetting some of the
first semester of 2018 at 3.3 percent is lower                   potential improvements in other sectors (Figure
than the 4 percent growth registered in the first                2).4 Nevertheless, extractive industries remain
half of 2017. A slight upturn across a number of                 a significant contributor to GDP growth and
sectors was offset by a reduced contribution of the              continue to drive the level of concentration in
extractive sector to growth, whilst private sector               the economy given that this sector has grown to
performance remained sluggish. These trends,                     represent 50 percent of exports by end 2017.5
which are discussed below, are indicative of the
likely trends throughout the course of the year,                 Growth prospects also depend on the recovery
and motivate the expectation of a slight reduction               of private consumption, especially for services.
in GDP growth to 3.3 percent in 2018 (Figure 1).                 Private demand for services6 was the largest driver
                                                                 of growth in the years prior to the current economic
Recent trends point to more positive signs for                   downturn, having contributed almost two thirds of
growth in 2018 in some sectors. Primary amongst                  GDP growth on average between 2012 and 2015.
them is the potential for modest recoveries                      By 2017, private demand for services had contracted
in manufacturing, construction, and services,                    heavily and accounted for just over a fifth of GDP
which posted increased contributions to growth                   growth. This reflects weaker consumer demand
in the first half of 2018. These sectors, which                  for a range of services, especially for households
were amongst the most deeply affected by the                     which have seen costs go up without having seen



4   Growth in coal production volumes is expected to taper as the coal industry reaches target production capacity.
5   This figure increases to 74 percent of exports when aluminum is included.
6   Private demand for services includes commerce, hotels and restaurants, transport, public and financial sector services.




3
                                                                         mozambique economic update october 2018


their incomes rise at the same pace (Figure 3). The               growth at the 3 to 4 percent range until
recovery of this sector is critical for Mozambique’s              the end of the decade.
future growth prospects, and is also critical for the
employment prospects of many Mozambicans who                      Mozambique’s GDP growth is projected to
escaped poverty by entering informal employment                   increase gradually towards 4 percent by 2020,
in this sector.                                                   and may advance at a faster rate with progress in
                                                                  the development of its large liquified natural gas
A strong policy focus on reducing macroeconomic                   projects. Growth is expected to firm-up gradually
uncertainty and on enhancing investment,                          in a stable price scenario, which would support
especially in rural areas, would set the grounds                  conditions for monetary policy easing and provide
for recovery and for more inclusive growth. The                   stimulus for investment. An extended slump in
progress made in re-establishing peace in central                 consumer demand, delays in LNG investments,
Mozambique is a boon for growth. It paves the                     and continued growth in the domestic debt burden
way for a gradual and more broad-based recovery                   are sources of risk to the growth outlook in the
if accompanied by reduced macroeconomic                           near term. Exposure to weather related shocks
uncertainty and structural reforms that crowd                     are an additional and significant source of risk for
public and private investment back-in, especially                 Mozambique, which is one the economies with
in rural areas. Part two of this report addresses this            the highest exposures to climatic events in the
agenda by discussing the distribution of growth in                Africa region and may be an emerging cause for
recent years and the drivers of more inclusive and                concern for the 2018/19 harvest season.7 However,
resilient future growth.                                          in the medium term, progress in advancing the
                                                                  gas projects in the Rovuma basin, would boost
Weak performance in the non-                                      investment and confidence and represents a
megaproject economy could keep GDP                                significant upside to the growth outlook.




Table 1: Growth Outlook

                                                         2017e            2018p             2019p             2020p

    Real GDP, % ∆                                           3.7             3.3               3.5                4.1

Source: World Bank staff estimates. p = Projection




Figure 1: GDP growth is expected to drop slightly in 2018…
Annual contribution to growth (%), 2012 - 18

     8%
     7%
     6%
     5%
     4%
     3%
     2%
     1%
     0%
    -1%           2012              2013             2014         2015            2016              2017         2018f
                     Agriculture                 Extractives          Manufacturing           Private services
                     Public services             Tax                  GDP
Source: INE; World Bank staff estimates.


7    According to the World Meteorological Organization, weather monitoring stations are predicting below normal rainfall for
     the southern Africa Region at the end of 2018 - El Niño / La Niña Update, September 2018.




                                                                                                                          4
part one: recent economic developments




Figure 2: … as the growth rate in coal production               Figure 3: … and as household purchasing power
declines…                                                       remains eroded by prices.
Coal output volumes (% change), 2013 – 18                        Remuneration index (12 month % change), 2016-18

250%                                                             30%

200%                                                             25%

150%                                                             20%

100%                                                             15%

    50%                                                          10%

                                                                   5%
    0%
                                                                   0%
-50%
            2013 2014 2015 2016 2017 2018f


                                                                        Jan'16
                                                                      Mar '16
                                                                      May '16
                                                                        Jul '16
                                                                      Sep '16
                                                                      Nov '16
                                                                       Jan '17
                                                                      Mar '17
                                                                      May '17
                                                                        Jul '17
                                                                      Sep '17
                                                                      Nov '17
                                                                       Jan '18
                                                                      Mar '18
                                                                      May '18
                                                                  -5%

              Thermal coal                 Coking coal
Source: INE; World Bank staff estimates.                         Source: INE.




Exchange Rate
and Inflation
Easing food prices and a stable metical                         metical to US dollar exchange rate and inflation in
have enabled a more stable price                                South Africa are key determinants of inflationary
outlook.                                                        trends in Mozambique.¹⁰ The recovery of the
                                                                metical between October 2016 and June 2017
Mozambique is recovering from one of the                        with support from tighter monetary policy, and
most rapid currency depreciation and high                       lower inflation in South Africa contributed to
inflation episodes in its history as the economy                restoring a more stable price outlook. Year-on-
returns to a more stable currency and price                     year inflation stood at 5 percent in August 2018,¹¹
outlook. The period of price instability in 2016-               bringing the 12-month average to 5 percent.
178 was the most evident indicator of the                       Splitting inflation trends between tradable and
emerging turbulence in the economy at the                       non-tradable goods shows the extent to which
time, and had significant consequences on the                   the appreciation of the metical between October
welfare of the least privileged segments of the                 2016 and June 2017, and its stability henceforth,
population (Box 1). It also had a lasting impact on             has contributed to reducing the cost of imported
the private sector, especially amongst firms and                goods (Figure 4).
state-owned enterprises (SOEs) with heightened
exposure to foreign exchange risk.9                             Food prices ceased being the underlying
                                                                driver of inflation since January 2018. This is
The continued stability of the metical since                    partly due to improved domestic food supply,¹²
mid-2017 helped keep inflation in check. The                    and potentially, the positive contribution that


8  The volume of foreign currency inflows contracted after significant volumes of additional debt were revealed in April 2016,
   denting donor and investor confidence and reducing external inflows. Currency expectations also deteriorated in 2016,
   spurring the depreciation of the metical and a rise in inflation between 2016 and 2017.
9 Mozambique Economic Update, “A Two Speed Economy”, 2017.
10 Mozambique Economic Update, “Facing Hard Choices”, 2016.
11 Inflation peaked at 26 percent in November 2016 and continued to subside through 2017.
12 Above-average maize output in 2017 enabled the country to build up its stocks in the 2017/2018 marketing year, bolstering
   domestic stock availability (FAO GIEWS, 2018).




5
                                                                            mozambique economic update october 2018


 increased security in central Mozambique                          given the volumes of trade between the two
 is having on the activities of farmers in those                   economies, where declining food inflation
 areas. South Africa’s food prices also tend to                    since January 2018 has helped reduced price
 be a determinant of Mozambique’s food prices                      pressures domestically (Figure 5).




 Figure 4: A more stable metical has helped reduce inflation, especially for tradable goods …
 Tradeable vs non-tradable inflation (12 month % change) and MZN/USD; 2016 – 18



 60%                                                                                                                 80

 50%                                                                                                                 70

 40%                                                                                                                 60

 30%                                                                                                                 50

 20%                                                                                                                 40

 10%                                                                                                                 30

   0%                                                                                                                20
         Jan '16
        Feb '16
        Mar '16
        Apr '16
        May '16
        Jun '16
          Jul '16
        Aug '16
        Sep '16
        Oct '16
        Nov '16
        Dec '16
         Jan '17
        Feb '17
        Mar '17
        Apr '17
        May '17
        Jun '17
          Jul '17
        Aug '17
        Sep '17
        Oct '17
        Nov '17
        Dec '17
         Jan '18
        Feb '18
        Mar '18
        Apr '18
        May '18
        Jun '18
-10%                                                                                                                 10

-20%                                                                                                                 0
                Tradeable non-food                         Tradeable food           Non-tradeable food
                Non-tradeable non-food                     MZN/USD,RHS

 Source: World Bank estimates based on INE data.




 Figure 5: … which, along with lower inflation in South Africa, has cooled food prices.
 Food and non-food contributions to inflation (%), 2016 – 18


 30%                                                                                                                 7.5%

 25%                                                                                                                 7.0%

 20%                                                                                                                 6.5%

 15%                                                                                                                 6.0%

 10%                                                                                                                 5.5%

   5%                                                                                                                5.0%

   0%                                                                                                                4.5%
          Jan '16
         Feb '16
         Mar '16
         Apr '16
         May '16
         Jun '16
           Jul '16
         Aug '16
         Sep '16
         Oct '16
         Nov '16
         Dec '16
          Jan '17
         Feb '17
         Mar '17
         Apr '17
         May '17
         Jun '17
           Jul '17
         Aug '17
         Sep '17
         Oct '17
         Nov '17
         Dec '17
          Jan '18
         Feb '18
         Mar '18
         Apr '18
         May '18
         Jun '18
           Jul '18
         Aug '18




  -5%                                                                                                                4.0%


                        Other non-food               Food                            Electricity, gas, other fuels
                        Transport                    Mozambique Inflation            RSA inflation, RHS

Source: World Bank estimates based on INE data; STATS SA




                                                                                                                         6
part one: recent economic developments



                                             Box 1: What happened to poverty after inflation soared in 2016?


    Mozambique experienced steep food price                                                                                                                                         that a 10 percent increase in maize prices
    inflation during 2016-17, going up as high as                                                                                                                                   reduced household consumption per capita
    40 percent in November 2016. Prices for maize,                                                                                                                                  by 1.2 percent in rural areas and 0.2 percent in
    rice and cassava, which form a substantial part                                                                                                                                 urban areas. The welfare effects from changes
    of the Mozambican diet (on average 30 percent                                                                                                                                   in prices of rice and cassava were lower but
    of the household budget allocation), increased                                                                                                                                  qualitatively equal. The negative effects of price
    significantly during the period. The combined                                                                                                                                   increases were larger for the three first quintiles
    effects of a sharp currency depreciation, given                                                                                                                                 of the income distribution.
    that Mozambique is a net importer of maize
    and rice, and effects of the el-Niño drought                                                                                                                                    These findings underscore the costs of
    were central to this trend.                                                                                                                                                     macroeconomic instability on the poor,
                                                                                                                                                                                    especially given the extent to which food
    Sharp increases in the price of staple goods                                                                                                                                    price spikes are disproportionately felt by
    led to a reduction in household consumption,                                                                                                                                    the poorest households, even when they
    particularly in rural areas. A recent World                                                                                                                                     are producers of food. The findings of this
    Bank analysis of the welfare implications of                                                                                                                                    analysis make the case for greater attention
    the spike in food inflation in 2016-17 found                                                                                                                                    to the welfare impacts of food price inflation.
    that it may have translated into a poverty                                                                                                                                      Prudent macroeconomic management is
    increase of 4-6 percentage points, with some                                                                                                                                    vital. Other key policy actions include raising
    of the poorest provinces (Manica, Niassa                                                                                                                                        agriculture’s productivity and its resilience
    and Tete) bearing much of the brunt due                                                                                                                                         through more efficient and connected input
    to their high level of dependence on maize                                                                                                                                      and output markets, and investing in rural
    consumption. An analysis of the net welfare                                                                                                                                     safety nets to mitigate the impact of shocks
    impact of higher prices (i.e. the net impact on                                                                                                                                 on rural households, including through
    households after taking both food purchases                                                                                                                                     mechanisms such as food price and food
    and food production into account) shows                                                                                                                                         security monitoring systems.



    Figure 6: Food price spikes have increased poverty across all provinces; the increase is
    largely concentrated in rural areas.
    Effect of food price increases on poverty across provinces

                                                                            (Rural)                                                                                                                                                                           (Urban)
          81.5




     90                                                                                                                                                                             90
                                            71.3




                                                                                                     71.6
                                                           68.7




     80                                                                                                                                                                             80
                                                                           64.3




                                                                                                                                                                       63.4



                                                                                                                                                                                           60.5
                                                                                       60.6




                                                                                                                                                                                                                           59.0




     70                                                                                                                                                                             70
                                                                                                                                                                                         51.4
                        54.1




                                                                                                                                    53.1




                                                                                                                                                                                                                                          49.5




     60                                                                                                                                                                             60
                                                                                                                   38.6




                                                                                                                                                                                                                                                                                                         34.9




     50                                                                                                                                                                             50
                                                                                                                                                                                                                                                          32.4


                                                                                                                                                                                                                                                                                                        31.5




                                                                                                                                                                                                                                                                                                                                                32.6
                                                                                                                                                                                                                                                                      25.9




     40                                                                                                                                                                             40
                                                                                                                                                25.3




                                                                                                                                                                                                                                                                                                                5.9 6.0
                                                                                                                                                                                                                                                                                                                3.7 4.0
                                                                                                                                                                                                                                                                                    Inhambane 14.6 14.9




     30                                                                                                                                                                             30
     20                                                                                                                                                                             20
          Niassa 71.1
                        Cabo Delgado 49.4
                                            Nampula 67.1
                                                           Zambezia 63.9
                                                                           Tete 43.3
                                                                                       Manica 43.1
                                                                                                     Sofala 60.8
                                                                                                                   Inhambane 36.6
                                                                                                                                    Gaza 47.6
                                                                                                                                                Maputo Province 22.0
                                                                                                                                                                       Total 55.0



                                                                                                                                                                                         Niassa 57.8
                                                                                                                                                                                                       Cabo Delgado 50.3
                                                                                                                                                                                                                           Nampula 57.6
                                                                                                                                                                                                                                          Zambezia 48.2
                                                                                                                                                                                                                                                          Tete 31.3
                                                                                                                                                                                                                                                                      Manica 20.9
                                                                                                                                                                                                                                                                                        Sofala 29.1


                                                                                                                                                                                                                                                                                         Gaza 33.3



                                                                                                                                                                                                                                                                                                                                                Total 31.3




     10                                                                                                                                                                             10
      0                                                                                                                                                                              0
                                                                                                                                                                                                                                                                                                                Maputo Province
                                                                                                                                                                                                                                                                                                                                  Maputo City




                                                              Initial                                After                                                                                                                                        Initial                               After
    Source: World Bank based on IOF-2014/15 and IAS-2015

 Source: World Bank, “Who wins and who loses with staple food price spikes? Welfare implications in Mozambique”, 2018.




7
                                                                     mozambique economic update october 2018



The External Sector
The current account deficit is expected                       support the overall external position. After
to widen slightly in 2018 as demand for                       having dropped from 40 percent of GDP
consumer imports begins to recover with                       in 2015 to 20 percent in 2017, the current
currency stability.                                           account deficit (CAD) is expected to increase
                                                              slightly to 24 percent of GDP in 2018, mainly
Earnings from the 2017-18 ramp-up in coal                     due to an increase in the non-megaproject
production continue to buoy exports and                       trade deficit.




Figure 7: The REER is back at 2011 levels.
Real effective exchange rate index (2010 = 100) and Exports (USD millions), 2011 - 18


 175                                                                                                                400

                                                                                                                    350
 150
                                                                                                                    300

 125                                                                                                                250

                                                                                                                    200
 100
                                                                                                                    150

  75                                                                                                                100
       Apr '17

       Oct '17
       Jan '18
       Apr '18
        Jul '18
       Apr '14

       Oct '14
        Jan'15
       Apr '15




       Apr '16

       Oct '16
       Jan '17

        Jul '17
       Apr '13

       Oct '13
       Jan '14

        Jul '14




        Jul '15
       Oct '15
       Jan '16

        Jul '16
       Apr '11

       Oct '11
        Jan'12
       Apr '12
        Jul '12
       Oct '12
       Jan '13

        Jul '13
       Jan '11

        Jul '11




          Real effective exchange rate (2010=100)                 Exports excl. coal (3 month moving avg), RHS

Source: World Bank estimates based on BdM and INE data.


A growing consumer import bill and slowing                    as fuel and food is another factor underlying
agricultural exports underlie pressures in                    the growing import bill. Another risk factor is
the non-megaproject trade balance. Non-                       slowing exports of agricultural goods, which
megaproject goods imports (which account                      was highlighted by a 14 percent drop in the
for roughly 80 percent of total goods                         export of tobacco, Mozambique’s largest non
imports¹³) increased by 13 percent in 2017                    megaproject export, in the first half of 2018.¹⁴
and are estimated to grow by a further 24                     These trends highlight the downside risks from
percent in 2018. Demand for imports has                       lackluster export performance in non-extractive
been recovering with the renewed stability of                 sectors. They also highlight the modest
the metical, especially for consumer products.                response of Mozambique’s exporters to the
This is mirrored in the increase in confidence                stimulus provided by a more competitive real
indicators such as the demand perspective,                    exchange rate since 2016 (Figure 7) as access
which returned to pre-crisis levels by start of               to credit and structural constraints continue to
this year. Rising prices for key imports such                 pose obstacles for growth.



13 Figure refers to the average between 2011 and 2017.
14 Tobacco exports were particularly low in Q1 2018 following low production in 2017 due to adverse weather conditions and
   crop substitution in favor of maize by small farmers.




                                                                                                                       8
part one: recent economic developments


External reserve levels remain adequate                    and public debt servicing, which contributed to
despite a continued decline in foreign                     a USD 110 million drop in reserves in the first
direct investment.                                         half of 2018.

FDI continues to be the main source of                     Global economic activity is robust,
external financing, but is covering a smaller              but potential imbalances in the non-
share of the current account deficit, spurring             megaproject economy and a softer
the private sector to resort increasingly to               commodity price outlook increase
shorter-term financing instruments. FDI inflows            external risks.
were equivalent to 84 percent of the current
account deficit on average between 2010 and                A weaker price outlook for some of
2017. The continued drop in FDI inflows since              Mozambique’s largest commodities is a
2015 (Figure 10) and the expected widening of              source of risk to the external outlook.
the current account deficit suggest that its role          Commodity prices strengthened in the first
in covering the external financing needs of the            quarter of 2018, supported by accelerating
economy may decline further in 2018 (down to               global growth and tighter supply conditions for
an estimated 54 percent of the current account             a number of commodities. However, the most
deficit).¹⁵ Long-term debt financing has also              recent commodity price outlook¹⁶ suggests
declined as over indebtedness constrains the               a softer price setting for coal, aluminum and
private and public sector’s external borrowing             tobacco in 2019 and 2020, which together
capacity. In this context, the private sector has          accounted for 64 percent of exports in 2017.
been increasingly relying on short-term financing          The increase in commodity prices over the
channels such as trade credits to finance                  past two years, coal in particular, has played
external transactions. This trend, which largely           a central role in supporting the economy,
affects non-megaproject firms, has negative                making the weaker price setting a significant
implications. Short-term financing instruments             source of macroeconomic risk.
offer higher exposure to financing risk than
long-term finance and are less conducive to                Moreover, pressures on the external
investment and expansion since they tend to                position could intensify in the medium-
cover current operational needs, highlighting the          term if demand for consumer imports
importance of recovering investor confidence to            recovers, whilst exports and investment
boost FDI and the economic outlook.                        in the non-megaproject economy remain
                                                           sluggish. A recovery in import demand, if not
Having continued to recover through 2017,                  accompanied by improved performance in
gross international reserves stood at USD 3.2              exports from key sectors such as agriculture
billion in August 2018, covering roughly 7                 and energy and an increase in investment,
months of imports (excluding megaprojects).                is likely to widen the economy’s external
The balance of payments surplus in 2017 helped             financing needs and raise pressure on central
to bring Mozambique’s reserve coverage to                  bank reserves. These dynamics, which were
more comfortable levels, more in line with other           beginning to appear in the first half of 2018,
resource-dependent economies in the region                 would be further exacerbated if public-sector
(Figure 11). This improvement put reserves in a            consumption grows and if monetary policy
position to absorb emerging pressures in early             easing leads to a rapid increase in consumer
2018, such as the fuel sector’s financing needs            credit and demand for imports.




15 A combination of reduced confidence in the economy post 2016 and the tapering investment cycle in the LNG sector
   caused the reduction in FDI.
16 World Bank Commodity Markets Outlook, 2018.




9
                                                                         mozambique economic update october 2018




Table 2: The Balance of Payments

             (USD millions,                              2016         2017           2018                ∆               ∆
        unless otherwise stated)                        Actual      Estimate        Forecast          16/17           17/18
  Current Account (% of GDP)                             -35.0         -20.4           -23.6             …               …

  Current Account                                       -3,846        -2,584          -3,456            -33%            34%
  	 Trade Balance                                       -4,106        -2,828          -3,574            -31%           26%
    		 Goods, net                                       -1,405         -498           -1,125            -65%           126%
    			 Exports                                          3,328         4,725           5,334            42%             13%
  				 megaproject                                       2,413         3,719           4,179             54%            12%
     			 non-megaproject                                  915          1,007           1,155             10%            15%
  			 Imports                                            4,733         5,223           6,458             10%            24%
  				 megaproject                                        771           733             883              -5%            21%
        		 non-megaproject                               3,962         4,490           5,575             13%            24%
    		 Services, net                                    -2,701        -2,331          -2,449            -14%             5%
  Income and transfers, net                               260           244             118              -6%           -52%

  Capital & Financial Account                            3,374        3,856            3,817            14%             -1%
  of which
  	 FDI, net                                             3,093        2,292            1,859           -26%            -19%
  				megaproject                                        1,322         911              812            -31%            -11%
       		 non-megaproject                                1,771        1,381            1,047           -22%            -24%
  	 Other, net (1)                                         74         1,360            1,744          1742%            28%

  Overall Balance                                        -472         1,272             361              …               …


Source: BdM, World Bank staff estimates
(1) Other flows include net portfolio investment; net currency and deposits; loans; insurance, pensions and standardized guarantee
schemes (net); net trade credits and advances; net other accounts payable/receivable.




Table 3: External Outlook

                                                         2017e             2018p               2019p               2020p

  Nominal Commodity Price
  	 Aluminum USD/mt                                       1,968             2,175               2,100               2,109
  	 Coal, Australia USD/mt                                 88.4               85                  75                 65
  	 Coking coal, Australia USD/t                           194               132                 115                 115
  	 Natural gas, Europe USD/mmbtu                           5.6              6.5                 6.6                 6.7
  	 Tobacco USD/mt                                        4,679             4,900               4,865               4,831

  Current Account Deficit, % of GDP                        -20.4            -23.6               -53.9               -57.6

Source: World Bank staff estimates, Bloomberg; p = Projection




                                                                                                                              10
part one: recent economic developments




Figure 8: The current account deficit is set                                        Figure 9: …as consumer imports begin to recover.
to widen due to a growing deficit in the non
megaproject economy…
Current Account Balance (USD millions), 2009 – 18                                   Change in non-megaproject import levels (%), and trade
                                                                                    balance (% of GDP), 2012 – 18

 2,000                                                                               100%                                                          -30%
                                                                                      80%
        -                                                                                                                                          -32%
                                                                                      60%
(2,000)                                                                               40%                                                          -34%
                                                                                      20%
                                                                                                                                                   -36%
(4,000)                                                                                0%
                                                                                     -20%                                                          -38%
(6,000)                                                                              -40%
                                                                                                                                                   -40%
                                                                                     -60%
(8,000)                                                                                                                                            -42%
             2009
                    2010
                           2011
                                  2012
                                         2013
                                                2014
                                                       2015
                                                              2016
                                                                     2017
                                                                            2018f




                                                                                                2012

                                                                                                       2013

                                                                                                              2014

                                                                                                                     2015

                                                                                                                            2016

                                                                                                                                    2017

                                                                                                                                           2018f
                                                                                     -80%

      Current Account Balance (MP)                                                                Goods Imports
      Current Account Balance (non-MP)                                                            Services Imports                 Trade Deficit (RHS)
      Current Account Balance
Source: BdM; World Bank staff estimates.                                             Source: BdM; World Bank staff estimates.




Figure 10: FDI inflows continue to decline.
Net foreign direct investment flows (USD millions) and months of import cover; 2010 – 18

 7,000                                                                                                                                                8
 6,000                                                                                                                                                7
 5,000                                                                                                                                                6
 4,000                                                                                                                                                5
                                                                                                                                                      4
 3,000                                                                                                                                                3
 2,000                                                                                                                                                2
 1,000                                                                                                                                                1
     -                                                                                                                                                0
                2010              2011            2012               2013           2014        2015          2016          2017           2018f

   Megaproject FDI                       Non-megaproject FDI                        Imports cover (RHS)               Imports cover excl. MP (RHS)

Source: BdM; World Bank staff estimates.




Figure 11: A weaker price outlook is a source of external risk.

Selected commodity price trends (2005=100); 2015 – 20
200
180
160
140
120
100
 80
 60
            2015                     2016                            2017                      2018p                 2019p                    2020p

     Aluminum USD/mt                     Coal, Australia USD/mt                       Coking coal, Australia USD/t                 Tobacco USD/mt
     Natural gas, Europe USD/mmbtu                            Crude Oil USD/bbl

Source: World Bank




11
                                                                          mozambique economic update october 2018



Fiscal Policy
Fiscal adjustment efforts are hampered by                          difficulties in financing the reduced spending
persistent public-sector financing needs                           envelope. Although fiscal policy makers have
and increased domestic borrowing.                                  made progress in constricting budgetary growth,
                                                                   the sources of affordable financing available to
Fiscal consolidation efforts are gradually                         fund the deficit have been limited. The gradual
progressing. Mozambique’s budget has                               decline in the primary deficit has coincided with
contended with reduced fiscal space since                          an increase in domestic debt from 25 percent of
the onset of the debt crisis in 2016, as external                  GDP in 2016 to 27 percent by 201723 as access
funding levels dropped, and debt service costs                     to external credit continues to be reduced. This
mounted. External grants and project loans                         trend has continued into 2018, with domestic
declined by 3 percent of GDP 2015 and 2017,¹⁷                      debt levels picking up by an additional MZN 10
whilst debt service costs added 2.4 percent of                     billion (approx.1 percent of GDP) in the first half
GDP (on a commitment basis)18 to the budget.                       of the year. This increase, which is occurring
The budget has made progress in adapting                           during a period of high domestic interest rates,
to these circumstances through measures to                         has raised the average cost of domestic debt
reduce spending and shore-up revenues. Total                       service to 17 percent (from 5 percent in 2015).24
expenditure dropped to 33 percent of GDP, down                     These pressures, along with the costs of external
from 36 percent in 2015, on a commitment                           debt service, have limited the reduction of the
basis.19 Investment expenditures bore the brunt                    overall fiscal deficit from 7.7 percent of GDP in
of the fiscal adjustment, having dropped from                      2015 to 7.2 percent in 2017.25 Arrears to private
13 to 7 of GDP over this period.20 Additional                      sector suppliers have also continued to be a
savings were realized through the elimination of                   challenge. Government estimates place the
subsidies to fuel and bread (see Box 2).21 These                   stock of domestic arrears to suppliers at 3.8
efforts contributed to an estimated 3 percent                      percent of GDP at end 2016,26 equivalent to the
reduction in the primary fiscal deficit22 (excluding               budget allocated to health spending for 2018
capital gains revenues in 2017 equivalent to 2.7                   and almost 12 percent of credit extended to
percent of GDP), from 6.4 percent of GDP in                        the private sector by June 2018 (Figure 14 and
2015 to 3.4 percent of GDP in 2017 (Figure 12                      Figure 15).
and Figure 13). Moreover, budget execution
trends in the first half of 2018 point to potential                This trend reflects the public sector’s persistent
additional reductions in the fiscal deficits.                      financing needs, and in particular, those linked
                                                                   to underperforming state-owned enterprises.
Despite this progress, payment arrears and                         Fiscal risks from state-owned enterprises have
growing domestic debt indicate continuing                          been materializing and adding to the public




17 The 2017 Conta Geral do Estado shows that on budget donor grants and projects narrowed to 3.9 percent of GDP in 2017,
   from 7.1 percent of GDP in 2015.
18 0.9 percent on a cash basis.
19 Mozambique’s fiscal accounts are presented on a cash basis, and therefore do not report expenditure arrears, which limits
   fiscal transparency and the ability to clearly assess the state of public finances. Estimating fiscal trends on a commitment
   basis means including expenditures committed but not paid during the year.
20 At 7 percent of GDP, Mozambique’s public investment levels remain above the average for peer countries in the region
   (the average for Malawi, Angola, Botswana, Ghana, Kenya, Nigeria, South Africa, Zimbabwe, Zambia between 2015-2017
   was 5 percent of GDP).
21 Assuming no reform had taken place in 2017, spending on price subsidies would be an estimated 0.7 percent of GDP, of
   which 0.6 percent of GDP (MZN 4.8 billion) would be accounted by fuel subsidies.
22 The primary deficit is equivalent to the overall fiscal deficit less interest payments.
23 Including SOE debt.
24 The average cost of domestic debt is the effective interest rate paid for the debt stock. In this case, it is given by the ratio
   between the total interest payments on domestic debt and the total domestic debt stock reported by the central government.
25 On a commitment basis.
26 Ministry of Economy and Finance – O Estágio e Perspectivas da Economia Nacional (2018).




                                                                                                                               12
part one: recent economic developments


sector’s financing needs, which have been                       source of fiscal pressure. The domestic
increasingly met through domestic borrowing.                    investment budget (which typically accounts for
In particular, assistance to support financial and              a large share of the election budget) increased by
operational costs of underperforming SOEs                       an average 17 and 20 percent in the last round of
raised domestic financing needs in 2017, as did                 municipal and general elections, respectively.29
the payments to meet outstanding obligations to                 Similarly, goods and services spending increased
fuel suppliers. In total, MZN 11 billion (1.4 percent           by an average of 20 and 27 percent over the
of GDP) are reported to have been allocated to                  same period. Further pressures spring from
support public entities, including MZN 7.4 billion in           the emerging decentralization arrangements
securitization of SOE debt through bond issuance                accompanying the peace agreements between
and MZN 3.6 billion in assumed debt.27 In the                   Frelimo and Renamo, which could raise
absence of an effective restructuring program,                  personnel and administrative overhead costs.
SOEs will continue to be a source of fiscal risk
given the persisting operational and financial                  A package of recent regulatory reforms,
difficulties facing a number of enterprises.                    if implemented well, will strengthen
                                                                fiscal management. The Government of
The shift away from external financing and                      Mozambique has advanced on a number of
the stronger metical have helped to reduce                      key reforms to strengthen fiscal management,
the public debt stock from 128 percent at its                   including new regulations to strengthen the
peak in 2016 to 112 percent by end 2017,28 but                  management of public debt and guarantees, a
domestic debt stock and service needs have                      revised legal framework for strengthening the
risen. External debt dropped to 85 percent of                   governance of SOEs, and a new framework
GDP by end 2017, down from 104 percent of                       to improve the selection of public investment
GDP in 2016. In contrast, domestic debt is                      projects. The authorities also introduced
estimated to have increased over this period by                 measures to limit wage bill growth through
2 percent of GDP to 27 percent (including SOEs),                measures30 to constrain admissions, subsidies
and has continued to grow in 2018. Although                     and promotions. These reforms help to rebuild
it represents a relatively small share of the total             confidence in fiscal institutions, particularly
public debt stock, domestic debt issued since                   subsequent to the events surrounding the
2016 comes at a relatively high cost. It also has               hidden debts, which revealed significant gaps
shorter maturity profiles than most multilateral                in the regulatory frameworks for guarantees,
and bilateral external loans, thereby amplifying                SOEs and public investment. The quality and
potential rollover risks.                                       extent of implementation of these reforms will
                                                                determine their impact, and the extent to which
With spending pressures in view, creating                       they will contribute to placing Mozambique’s
fiscal space without exacerbating the                           fiscal framework on a more solid footing.
debt burden requires a renewed focus
on revenue mobilization, efficiency in                          The remaining reform agenda is substantial.
spending, and lowering fiscal risks.                            With significant fiscal risks in view, reforms to
                                                                widen fiscal space and increase the efficiency
The ongoing electoral cycle and the emerging                    of public expenditure continue to be urgent.
decentralization arrangements could have                        These include administrative reforms to reduce
significant budgetary implications that                         Mozambique’s wage bill and align it with levels
condition the pace of fiscal adjustment in the                  in peer countries (where wage-bill spending
medium-term. With municipal elections in 2018                   averaged at 6.6 percent of GDP in 2016).31
and general elections in 2019, budgetary costs                  Tackling the underperforming SOE sector is also
related to the electoral cycle are an emerging                  urgent, and will involve restructuring the portfolio


27 The State’s General Accounts for 2017 report transactions to bailout public entities, including Maputo Sul, the Roads Fund
   and fuel suppliers.
28 Based on the February 2018 Debt Sustainability Analysis prepared by the staffs of the IMF and World Bank.
29 In 2013 and 2014, respectively.
30 New measures were introduced through the Diploma Ministerial no 49/2018 of 23/05/2018.
31 Figure refers to the median for a group of 42 low-income and developing countries, as presented in IMF (2018).




13
                                                                                mozambique economic update october 2018


   of distressed companies and refocusing on a                             institutions for the sustainable management of
   smaller number of strategic and well-performing                         natural resource revenues through fiscal rules
   firms. Sectoral reforms to increase the quality                         and a well-managed wealth fund is necessary
   and equity of spending, especially in improving                         if fiscal discipline is to be an anchor for sound
   service delivery and rural infrastructure, are                          macroeconomic management.
   also critical for achieving national development
   objectives in a tight fiscal context.32                                 The fiscal outlook is challenging.

   Strengthening revenue management is                                     Budgetary pressures maybe be elevated in the
   increasingly pressing. Although under strain                            runup to the 2019 elections. Additional costs
   from a weaker economy, the revenue effort                               linked to the roll-out of the electoral cycle
   has shown a level of robustness that has helped                         and the implementation of decentralization
   keep Mozambique amongst the countries with                              reforms are likely to add to spending pressures.
   a higher revenue to GDP ratio in the region.                            When taken together with the high cost of
   However, there is scope to improve and simplify                         debt service and the persistent fiscal risks
   the tax regime to enhance the revenue effort.                           from SOEs, a fragile fiscal outlook becomes
   In particular, consolidating multiple schemes                           evident. This implies a potential increase in the
   for small and medium taxpayers and revising                             government’s financing needs and highlights
   the overly generous system of fiscal incentives                         the importance of seeking increased efficiency
   would improve the economic and technical                                in revenue collection, including through a
   efficiency of tax administration and shore up                           consolidation of tax expenditure. Reforms to
   the fiscal outlook in the medium-term.33 The                            strengthen the domestic debt market are also
   Government might also want to review its double                         critical. Similarly, a resolution of Mozambique
   taxation treaties with a view to reducing forgone                       debt default status would provide for a clearer
   taxes from foreign investments.34 Further along                         fiscal outlook, and also promote increased
   the road, as the country moves towards gas                              investor confidence.
   production at start of the next decade, building



    Figure 12: Expenditure dropped faster than revenue in 2017…
    Changes in revenue and expenditure (excluding capital gains revenues), (% of GDP) 2012 – 18

                                                 10%
                                                 8%         2014                           ↑∆Exp>∆R


                                                 6%
Expenditure (% of GDP)




                                                 4%
                                                                   2018
                                                 2%
                                                              2012
                                                 0%
                         -4%               -2%               2%     2013       4%          6%              8%            10%
                                                 -2%2016
                                                 -4% 2017
                               ↓∆Exp>∆R
                                                 -6%
                                          2015
                                                 -8%
                                                            Revenue (% of GDP)

    Source: MEF; World Bank staff estimates.


    32 World Bank, (2016), ‘Mozambique - Public Expenditure Review: Education,’ and World Bank, (2016), ‘Mozambique – Health
       Public Expenditure Review: 2009-2013’.
    33 World Bank, “Mozambique Public Expenditure Review: Addressing the Challenges of Today, Seizing the Opportunities of
       Tomorrow”, 2014.
    34 Evidence for 41 African countries between 1985-2015 suggests that double taxation treaties in Africa have resulted in
       significant tax revenue losses in countries trying to attract investment through these treaties, while they have not led to
       significant additional investment flows. Instead investment is often just re-routed (Beer and Loeprick, 2018 forthcoming).




                                                                                                                               14
part one: recent economic developments




Figure 13: …allowing for narrowing of the primary balance.
Commitment basis primary and overall balance – excluding capital gains tax, (% of GDP) 2015 – 17

                     2015 Actual                                2016 Actual                              2017 Estimate
 0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%                               Primary Balance (excl. CGT)              Overall Balance (excl. CGT)

Source: MEF; World Bank staff estimates.




Figure 14: Domestic debt levels continue to rise…                      Figure 15: … adding to the debt service burden.
Domestic public debt (MZN billions), 2014 - 18                         Total Debt service (% of GDP), 2015 - 2018

140                                                            16%     25%
120                                                            14%
                                                               12%     20%
100
 80                                                            10%     15%
 60                                                            8%
                                                               6%      10%
 40                                                            4%
 20                                                                     5%
                                                               2%
  -                                                            0%       0%
         2014       2015       2016      2017      2018*                                2015          2016          2017        2018*
                                                   (As at
                                                                                                                              (Estimate)
                                                  mid-Sep)
   Treasury Bonds            Central Bank          Treasury Bills        Cash Basis Domestic               Cash Basis External
   Others                    % GDP (RHS)                                 Arrears
Source: World Bank staff estimates based on data from BdM, MEF, BVM.   Source: World Bank staff estimates based on data from BdM, MEF, BVM.




15
                                                                              mozambique economic update october 2018




Table 4: Government Finances (commitment basis)

                       (Percent of GDP)                                   2015             2016             2017            2018
                                                                        Estimate         Estimate         Estimate        Budget (6)
  Total Revenue                                                            25.0             24.1              26.5             25.4
  	 Tax Revenues                                                           21.0             20.8              21.9             21.7
  		of which: Capital Gains                                                                                    2.6
  	 Non-Tax Revenue (Incl. capital revenue)                                 4.0              3.3               4.6              3.7
  	Grants                                                                   3.0              2.2               2.1              2.0

  	 Total Expenditure & Net Lending                                        35.7              33.5             33.3             32.8
  	 Current Expenditure                                                    21.6              21.0             20.0             22.0
  			 of which: Compensation to employees                                  10.8              11.3             10.6             10.5
  				           Interest on public debt                                    1.3              2.9               3.7              4.8
  				           ………of which arrears (1)                                                     0.6               1.5              1.0
  	 Capital Expenditure                                                    12.9              8.8               6.8              9.3
  		Domestically financed                                                   7.2               3.4              2.9              3.8
  		Externally financed                                                     5.7              5.3               3.9              5.4
  	 Unallocated expenditure(2)                                             0.0               0.4               3.3             0.0
  	 Supplier arrears(3)                                                    0.5                1.3               --             0.0
  Net Lending                                                               0.7              2.0               3.2              1.5
  	
  Primary Balance                                                           -6.4             -4.3             -0.9             -0.6
  Overall Balance                                                           -7.7             -7.2             -4.6             -5.4
  Primary Balance (excluding capital gains tax)                             -6.4             -4.3             -3.4             -0.6
  Overall Balance (excluding capital gains tax)                             -7.7             -7.2             -7.2             -5.4
  	
  Financing
  	 Net external Financing (4)                                              4.2              4.3               5.4              4.5
  		of which: exceptional financing (debt arrears)                          0.0              2.0               4.1              3.3
  	 Net Domestic Financing                                                  3.0              1.6              -0.8              1.0
  		of which: exceptional financing (suppliers & CGT)                       0.5              1.3               2.6              0.0

  D.Total Debt (Public and Publicly guaranteed)                             88               128              112               122
  External                                                                  76               104              85                95
  Domestic                                                                  12                25              27                26

  GDP (nominal, MZN millions) (5)                                        591,679          689,213          804,464           876,944

Source: MEF; Mozambique DSA, World Bank staff estimates
(1) & (3) All arrears are estimates.
(2) Unallocated expenditure line in 2017 is the residual between other operations and capital gains presented in the Conta Geral do Estado.
This figure may change if the authorities reconcile fiscal accounts to allocate this amount.
(4) Commitment values include debt service foreseen for Ematum, Proindicus, MAM and six official creditors.
(5) GDP figure for 2018 is based on the World Bank estimates.
(6) 2018 figures are based on the budget law, with exception of debt service, which is presented on a commitment basis.




              Box 2: The distributional impact of recent fuel and bread subsidy reforms.


     How did the increase in fuel and bread                            commonly used amongst lower income
     prices since 2017 affect the Mozambican                           groups the overall level of consumption is
     population? Using data from the most                              low. Hence, the increase in prices resulted
     recent survey of household expenditure,                           in small direct reduction in consumption
     the Inquérito sobre Orçamento Familiar                            of fuels and minimal impact on poverty
     (IOF), recent World Bank analysis finds                           and inequality. Moreover, the fuel reform
     that the impact of higher fuel prices on                          was progressive given that the impact on
     the poor has been modest, mainly due to                           consumption increased with the levels of
     the underlying consumption patterns. The                          wealth. The indirect effects on food and
     poor consume less gasoline and diesel                             transport prices are also modest. Similarly,
     than other groups, and whilst paraffin is                         bread subsidy reforms are estimated to have




                                                                                                                                      16
part one: recent economic developments




     had a marginal impact on aggregate poverty                     to the narrowness of their consumption
     levels, given the limited consumption of                       capabilities. The increase in prices also
     bread amongst the poorer rural households                      suggests that they are less likely to afford
     (Figure 16).                                                   these products in the future without
                                                                    compensating growth in their income
     The impact of the reforms on welfare is                        levels. The results also suggest that amongst
     even lower under a substitution scenario,                      Mozambique’s underprivileged households,
     which assumes that households adjust their                     the group most deeply affected by higher
     consumption patterns as prices increase.                       transport and bread prices is the urban
     Results show a reduced impact of the                           poor especially in the southern region and
     subsidy reforms when substitution effects                      Maputo city. This group has a relatively high
     are taken into account, as households                          level of reliance on bread in their diet, and
     deploy coping mechanisms to protect their                      on public transport for mobility and access
     purchasing power. Substitution effects tend                    to jobs.
     to be limited for diesel and gasoline given
     the lack of substitutes for these products,                    Social protection programs have a role in
     and more pronounced for bread and paraffin                     mitigating the impact of these reforms,
     which can be replaced by other starches or                     especially on the urban poor. Allocating
     cooking/lighting fuels.                                        cash transfers to mitigate the impact on the
                                                                    population affected by subsidies reforms,
     These results highlight the limited nature of                  and bring poverty back to pre-reform levels,
     the consumption basket of the poorest in                       is estimated to cost 0.06 percent of GDP.
     the Mozambican population, and suggest                         This would represent a very low cost to
     that urban households were the most                            the budget when compared to the annual
     affected by higher transport and bread                         average of 0.6 percent of GDP spent on
     prices amongst the poor. Although finding                      subsides between 2010 and 2016.
     a limited negative impact on the poor as
     a result of fuel and bread price increases
     is a welcome result, it also draws attention



     Figure 16: Fuel and bread subsidies have had a modest impact on poverty headcount.
     Effect of food price increases on poverty across provinces

                               Fuel                                                          Bread

                                    ∆ poverty headcount                                         ∆ poverty headcount
     0.488                          ratio = 0.3%                    0.488                       ratio = 0.1%
     0.487                                                          0.487
     0.486                                                          0.486
     0.485                                                          0.485
     0.484                                                          0.484
     0.483                                                          0.483
     0.482                                                          0.482
                             Headcount ratio                                              Headcount ratio

        Pre-reform         No substitution                                      Pre-reform       No substitution
        Substitution scenario                                                   Substitution scenario

     Source: World Bank based on IOF-2014/15 and IAS-2015


Source: World Bank, “Distributional Impact of Fuel and Bread Subsidy Reforms”, 2018.




17
                                                                   mozambique economic update october 2018



Monetary Policy
Monetary policy easing continues, but                        risk reports are published on a quarterly basis
with moderation in view of external and                      – allowing for greater transparency and better
fiscal risks.                                                oversight of the sector. In addition, reform of the
                                                             foreign exchange law has marked an important
Lower inflation facilitated the continuation                 shift towards liberalizing forex transactions for
of the monetary policy easing cycle, but                     trading firms whilst curbing non-trade related
macroeconomic risks continue to moderate                     forex flows. These reforms will help to limit the
the pace of adjustment. The reference lending                dollarization of the economy and support growth
rate (FPC35) dropped by 250 basis points (to 18              in trade and external investment, especially
percent) since the start of 2018 as inflationary             if complemented with a more sustainable
pressures eased. Similarly, the interbank                    macroeconomic outlook and structural reforms
reference lending rate (MIMO36) dropped by                   in favor of private sector growth.
450 basis points so far this year, registering at
15 percent by the end of August 2018. There is               The financial sector continues to navigate
potential for continuation of the easing cycle,              a weaker economy setting.
but the pace will depend on the central bank’s
assessment of macroeconomic risks, including                 Macroeconomic conditions have been
risks related to the sustainability of the external          challenging to the banking system. Lower
position and the rate of fiscal adjustment.                  confidence, high debt levels, and high cost
                                                             of credit have reduced the capacity of many
Commercial bank rates are beginning to                       borrowers to repay their debt, in a scenario
respond to the drop in reference rates.                      of significant reduction in credit availability.
Commercial bank credit rates dropped at the                  Domestic credit has continued to contract,
slightly slower rate of 400 basis points on                  although at a slower rate in the last few months
average since the start of 2018, placing the                 (a decline of about almost 9 percent in nominal
average retail rate at 23.8 percent at the end of            terms in the twelve months to July 2018,
July 2018. Commercial bank rates have tended                 compared to about 14 percent throughout
to be “sticky downwards”, meaning that they                  2017). In 2017, credit to the private sector
tend to rise in step with rising policy rates, and           was about 26 percent of GDP, down from
tend to be more sluggish in dropping when                    about 35 percent in 2015 and 2016. Recent
the cycle shifts to reducing policy rates. Figure            credit dynamics continue to reflect a sharp
18 shows this trend: a growing gap between                   reduction in the commerce, transport and
the FPC and the average commercial bank                      communication, and manufacturing sectors.
rates (for loans with one-year maturity) as the              Banks have instead allocated more assets
reference lending rate began dropping over the               to cash and reserves at the central bank (11
past year. This trend is linked to the banking               percent of GDP in April 2018, up from 7 percent
sector’s risk perceptions and has contributed                of GDP in December 2014).
to the continued decline in volume of credit
contracted by the private sector.37                          Banks continue to be exposed to credit
                                                             risks. Despite improvements in aggregate
Recent monetary policy reforms have also                     bank solvency ratios, the rapid rise in non-
helped to increase transparency in financial                 performing loans (NPLs) and exposure of banks
market conditions and modernize foreign                      to underperforming state-owned enterprises are
exchange management. As part of the ongoing                  key vulnerabilities. In a scenario of lower interests
reform package, the central bank strengthened                and lower profitability, in the medium-term some
reporting of financial risk indicators. Since                small banks may require additional capital. The
September 2017, commercial bank systemic                     level of NPLs increased from 6 to 12.8 in the 12



35 Facilidade Permanente de Cedência.
36 Interbank Money Market Rate.
37 The volume of credit to the economy dropped by 9 percent in the 12 months leading up to July 2018.




                                                                                                              18
part one: recent economic developments


months to February 2018 and has continued                                                        increase reflects increased risks in the current
at this level (NPLs stood at 12.6 by June 2018).                                                 macroeconomic environment, as well as
Credit performance has remained poor, with                                                       structural issues such as high operating costs,
second quarter prudential indicators on NPLs                                                     lack of credit information, limited availability of
ranging between 3 and 19 percent for the largest                                                 collateral, and limited competition. The average
banks.38 In this context, robust financial safety                                                cost-to-income ratio for banks stood at 57.2
nets, including deposit insurance and resolution                                                 percent in June 2018.
frameworks, are essential to increase confidence
in the system, protect depositors, and promote                                                   Access to finance for micro, small and medium
sound competition.                                                                               enterprises (MSMEs) and agriculture producers
                                                                                                 remains significantly constrained. Although
Sector profits have not reflected the                                                            2015 data shows that MSMEs contribute to 28
deterioration in asset quality. Return on assets                                                 percent of GDP and account for 42 percent of
and on equity, at 3.3 percent and 33.7 percent,                                                  formal employment,39 most (75 percent) are
respectively in June 2018, mark a growing trend.                                                 financially excluded. Lending to the agriculture
The increase in commercial bank returns have                                                     sector is particularly limited. In 2017, while
been supported mostly by high interest rates,                                                    agriculture was responsible for 21 percent of
including income from government securities,                                                     GDP, credit to agriculture represented only 4
and continued to maintain their level of fees and                                                percent of lending to the economy (down from
commissions. The average spread on lending–                                                      an average of 12 percent in 2000–2010). Policies
deposit registered at 10.6 percent in 2017 (from                                                 that look to overturn this trend will be key in
an average of 6.2 percent in 2010–2015), higher                                                  contributing to diversification in the economy
than regional and income group medians. This                                                     and broader growth.




Figure 17: The decrease in inflation has created                                                 Figure 18: Commercial bank rates are also
space for lower reference lending rates since                                                    decreasing, but tend to respond more slowly
the start of 2018.                                                                               during monetary easing cycles.

Central and Commercial Bank interest rates and CPI,                                              Commercial Bank deviation from Central Bank reference rate;
2010 – 18 (%)                                                                                    2008 –18

35%                                                                                              14%                                                                                                                  25%
30%                                                                                              12%
                                                                                                                                                                                                                      20%
25%                                                                                              10%

20%                                                                                               8%                                                                                                                  15%

15%                                                                                               6%
                                                                                                                                                                                                                      10%
10%                                                                                               4%
                                                                                                                                                                                                                      5%
 5%                                                                                               2%

 0%                                                                                               0%                                                                                                                  0%
       Jan '10

                 Jan '11

                           Jan '12

                                     Jan '13

                                               Jan '14

                                                         Jan '15

                                                                   Jan '16

                                                                             Jan '17

                                                                                       Jan '18




                                                                                                        Jan '08
                                                                                                                  Jan '09
                                                                                                                            Jan '10
                                                                                                                                      Jan '11
                                                                                                                                                Jan '12
                                                                                                                                                          Jan '13
                                                                                                                                                                    Jan '14
                                                                                                                                                                              Jan '15
                                                                                                                                                                                        Jan '16
                                                                                                                                                                                                  Jan '17
                                                                                                                                                                                                            Jan '18




   Inflation rate (12 month% change)                                     MIMO                      Retail rate deviation from reference rate (LHS)
     Standing Lending Facility                                                                       Standing Lending Facility (RHS)                                                              MIMO (RHS)
     Commercial Banks interest rate (1 year loan)
Source: BdM; World Bank staff estimates.                                                         Source: BdM; World Bank staff estimates.



38 Banco de Moçambique (2018) – Anexo à Circular nº 2/EFI/2017
39 GIZ (2016): https://www.giz.de/de/.../giz2016-pt-PME-in-mocambique-situacao-e-desafios.pdf.




19
                                                     mozambique economic update october 2018




Figure 19: Credit growth remains negative,     Figure 20: Commercial bank asset quality has
despite easing rates.                          deteriorated with higher NPLs.
Credit growth (12 month % change); 2015 – 18   Non-performing loans (% of total loans); 2014 – 18


 40%                                           18%
 30%                                           14%
 20%                                           12%
 10%                                           10%
                                                8%
  0%
                                                6%
-10%                                            4%
-20%                                            2%
-30%                                            0%
         Jan '15
        Mar '15
        May '15
          Jul '15
        Sep '15
        Nov '15
         Jan '16
        Mar '16
        May '16
          Jul '16
        Sep '16
        Nov '16
         Jan '17
        Mar '17
        May '17
          Jul '17
        Sep '17
        Nov '17
         Jan '18
        Mar '18
        May '18
          Jul '18




                                                      Jan '14
                                                     Mar '14
                                                     May '14
                                                       Jul '14
                                                     Sep '14
                                                     Nov '14
                                                      Jan '15
                                                     Mar '15
                                                     May '15
                                                       Jul '15
                                                     Sep '15
                                                     Nov '15
                                                      Jan '16
                                                     Mar '16
                                                     May '16
                                                       Jul '16
                                                     Sep '16
                                                     Nov '16
                                                      Jan '17
                                                     Mar '17
                                                     May '17
                                                       Jul '17
                                                     Sep '17
                                                     Nov '17
                                                      Jan '18
            Constant              Current
Source: BdM; World Bank staff estimates.       Source: BdM




                                                                                                    20
part two: a missed opportunity - strong but not broadly shared growth




Part Two:
Shifting to More
Inclusive Growth
There is little doubt of the role that broadly                Structural change,
shared economic growth plays in reducing
poverty and distributing wealth. Drawing on
                                                              Productivity, and Poverty
the recent World Bank Poverty Assessment                      Reduction.
and Jobs Diagnostic reports for Mozambique,
this section of the Mozambique Economic                       Productivity has been the main engine of
Update discusses the structure and drivers                    Mozambique’s strong and sustained economic
of Mozambique’s growth, and the extent                        growth over the last two decades. It is well known
to which past patterns of growth helped                       that Mozambique’s GDP growth picked up
to shape current poverty and inequality                       remarkably following the end of the civil war in
outcomes. The analysis shows that increased                   199240 boosting incomes and living standards, and
productivity and a gradual structural transition              making it one of the fastest-growing countries in
in jobs, from agriculture to services, boosted                Sub-Saharan Africa (Figure 21). This growth was
productivity and accelerated the pace of                      mostly driven by the rising labor productivity
poverty reduction in recent years. Yet, these                 (Figure 22).41 Broadly speaking, two forces can
gains were accompanied by a widening                          raise labor productivity. First, workers can become
gap between the better-off and the poor as                    more productive if there is an increase in the
growth was concentrated in urban areas,                       stock of capital, an improvement in technology,
and as advances in access to both services                    or knowledge that leads to higher output per
and infrastructure accrued mostly to urban                    worker in their sector of employment (within-sector
populations. Dealing with the challenges                      productivity growth). Second, productivity can
of poverty and rising inequality requires                     increase with the reallocation of workers from lower
redefining the drivers of inclusive growth                    to higher productivity sectors (between-sector
in Mozambique’s resource dependent                            productivity growth). As shown in Table 5 below,
economy. Extractives will not be enough. An                   overall the two sources have contributed almost
intensive and ambitious focus on achieving                    equally to labor productivity growth in the period
diversification, raising rural productivity, and              1996-2014. Yet, after 2008, it is the redeployment
providing more equal access to services is                    of labor across sectors that explains most of the
essential.                                                    growth in labor productivity. In contrast, changes
                                                              in employment levels and labor force participation
                                                              have had a negligible contribution.




40 GDP grew at an annual average rate of 7.2 percent between 2000 and 2016.
41 Table 5 shows the results of a “growth accounting exercise” used to decompose GDP per capita growth into four
   components: productivity, the employment rate, the labor participation rate and the ratio of the working age population
   to the total population.




21
                                                                             mozambique economic update october 2018




Figure 21: Mozambique has enjoyed robust growth                    Figure 22: Productivity gains have been the
that led to a sustained rise in GPD per capita.                    main drivers of growth.

Real GDP (% change); GDP per capita (USD), 2000 - 16               Annual Contribution to Growth (%), 1996 - 2014

1,200                                                      14%       6             5.36
1,000                                                      12%       5
  800                                                      10%       4
                                                           8%        3
  600
                                                           6%        2
  400
                                                           4%        1
  200                                                                                          -0.07       -0.34           -0.09
                                                           2%        0
     0                                                     0%       -1                             1996-2014
         2000
         2001
         2002
         2003
         2004
         2005
         2006
         2007
         2008
         2009
         2010
         2011
         2012
         2013
         2014
         2015
         2016

             GDP per Capita, PPP 2011 (LHS)                                   Productivity                   Employment Rate
             Real GDP Growth (RHS)
                                                                              Participation Rate             Demographic Change
Source: INE; World Bank using WDI.                                 Source: World Bank - Mozambique Jobs Diagnostics (2018).



A gradual transition of jobs away from                             share fell to 71 percent by 2014 and most of
agriculture and into the more productive                           that shift was absorbed by the service sector, an
services sector has been key to Mozambique’s                       area of the economy where productivity is over
productivity growth. In recent years, the                          six times larger than in agriculture despite high
drivers of growth gradually shifted away from                      levels of informality. By 2014, the jobs share
agriculture, the sector with the lowest levels                     of services increased to 24 percent from 9
of productivity, and moved towards the more                        percent in 1996. In contrast, the contribution of
productive services and industry42 sectors                         the industry sector to employment was rather
(Figure 23 and Figure 24). Back in 1996, shortly                   limited in the last two decades, mainly due to
after the end of the war, 87 percent of workers                    a concentration of investments in large-scale
were primarily engaged in agriculture. That                        capital-intensive projects.



Figure 23: Employment has gradually shifted                        Figure 24: … where productivity is over six
from agriculture to services…                                      times larger than in agriculture.
Employment by economic sectors, 1997 - 2015                        Average labor productivity (constant US$2010), 1996 - 2014
                                                                                                                   5,643




100%                                                               6,000
                                                                                                                5,046




             9.0%
                                                                                                              4,701




                         16.1%         15.0%        24.0%
             4.4%
 80%                     3.4%          4.7%                        5,000
                                                                                                   3,685




                                                     4.9%
                                                                                                 3,424
                                                                                                 3,319




                                                                   4,000
 60%
                                                                                             2,413




                                                                   3,000
 40%         86.6%       80.5%         80.4%        71.0%
                                                                                                                                1,477
                                                                                                           1,343




                                                                   2,000
                                                                                                                              1,108
                                                                                                                             815




 20%
                                                                                                                            579
                                                                                530




                                                                   1,000
                                                                               420
                                                                              318
                                                                              255




  0%                                                                     -
             1997         2003          2009         2015                     Agriculture Services           Industry          Total
         Agriculture        Industry            Services                          1996           2003              2008            2014

Source: World Bank - Mozambique Jobs Diagnostics (2018).           Source: World Bank - Mozambique Jobs Diagnostics (2018).



42 In this section of the report, the industry sector includes the extractive industries.




                                                                                                                                       22
part two: a missed opportunity - strong but not broadly shared growth




Figure 25: An FDI boom supported growth and                                     Figure 26: Fiscal and monetary expansion also
demand, including for services.                                                 supported faster private consumption growth.

Net FDI (USD millions), 2008 - 16                                               Government expenditure (% of GDP) and private sector credit
                                                                                (% change), 2011 - 16

 7,000                                                                          50%                                                      35%
 6,000
                                                                                40%                                                      25%
 5,000
 4,000                                                                          30%
                                                                                                                                         15%
 3,000                                                                          20%
 2,000                                                                                                                                   5%
                                                                                10%
 1,000
     -                                                                           0%                                                      -5%
                                                                                          2011 2012 2013 2014 2015 2016
         2008
                2009
                       2010
                              2011
                                     2012
                                            2013
                                                   2014
                                                          2015
                                                                 2016
                                                                        2017          Government expenditure
          Megaproject FDI                     Non-megaproject FDI                     Government expenditure - SSA average
                                                                                      Private sector credit growth (RHS)
Source: BdM.                                                                    Source: MEF; WEO.



An investment boom in the minerals and                                          macroeconomic setting also supported the
extractives sectors, and expansionary                                           conditions for faster consumption growth and
macroeconomic policies set the stage for                                        increased demand for services. Public expenditure,
growth in the services sector. Between the late                                 measured as a proportion of the GDP, increased
1990s and the middle of the 2000s, output growth                                steadily between 2008 and 2014, rising from 24
was lifted by investments in capital intensive                                  percent to 39 percent. In addition to expansive
industrial activities (or “megaprojects” in extractive,                         fiscal policy, Mozambique experienced several
export-oriented industries).43 Investments in this                              years of expansionary monetary policy over the
sector helped to boost domestic demand and                                      past decade, leading to substantial rates of credit
spur the other emerging economic activity, the                                  growth. Annual credit growth to the private sector
services sector. Mozambique’s expansionary                                      averaged 23 percent between 2009 and 2015.




Table 5: Decomposition of Total Labor Productivity Change, 1996-2014

                                                            1996-2014              1996-2003            2003-2008           2008-2014

  Annual Growth of GDP per capita                                 4.85                    5.41                 5.30             3.83

                                                            %           share       %        share       %        share      %         share
  Total Labor Productivity Growth                          5.36         100%       5.01      100%       6.30      100%      4.89       100%

  Within-Sector Contribution                               2.60          49%       1.76           35%   5.73          91%    1.03      21%
     Agriculture                                           1.30          24%       1.12           22%   1.77          28%     1.1      22%
     Industry                                              1.20          22%      3.07            61%   -0.3          -5%     0.6       12%
     Services                                              0.10           2%      -2.42          -48%   4.26          68%   -0.68      -14%

  Between-Sector Contribution                              2.76          51%      3.24           65%    0.57          9%    3.86       79%
     Agriculture                                           0.59          11%       0.53           11%   0.02          0%    1.01       21%
     Industry                                              0.08           1%      -0.53          -11%   1.05          17%   0.14        3%
     Services                                              2.10          39%       3.25          65%    -0.5          -8%   2.71       55%


Source: World Bank – Mozambique Jobs Diagnostic, (2018).



43 World Bank, Mozambique Systematic Country Diagnostic, 2016.




23
                                                                            mozambique economic update october 2018


High and stable growth has led to poverty                            measures the percentage change in poverty
reduction, especially after the late 2000s.                          with respect to a 1 percentage change in GDP
                                                                     growth, increased. Between 2008 and 2014,
The growing economy and structural change                            each 1 percentage change in growth resulted in
boosted incomes and living standards, and                            a 0.68 percent reduction in poverty, a significant
placed poverty on a declining trend.44 The                           increase compared to a 0.08 growth elasticity
accelerated growth of the services sector since                      of poverty between 2002 and 2008 (Figure 28).
2008 offered a wider path to jobs outside
agriculture and helped speed up the pace of                          Economic progress also improved the non-
poverty reduction in recent years. The GDP                           monetary dimensions of well-being. The
share of services increased remarkably over this                     average household in Mozambique has better
period, by almost 6 percentage points, providing                     standards of living today than at the turn of
for a faster increase in the participation of the                    the century. School enrollment and attendance
workforce in this sector and explaining nearly                       show continued improvement since the early
one in four jobs available in the economy.                           2000s. Individuals aged 20 to 65 now have on
Moreover, the fact that more people now hold                         average 5.1 years of schooling, compared to
jobs in non-farm self-employment, even in rural                      2.4 in 2002/03. Mozambicans are also living
areas, suggests that rural households have also                      longer. Life expectancy increased by nearly
benefited from growth in services. Therefore,                        9 years since 2001, from 49 to 57. Other key
poverty fell markedly faster between 2008 and                        health indicators, such as infant and maternal
2014. Between 2003 and 2008, the poverty                             mortality and morbidity, are also moving in the
rate45 had barely shifted, falling from 60 to 59                     right direction. These changes were coupled
percent of the population. By 2014, the poverty                      with improvements in the quality of housing
rate dropped to 48 percent, a notably quicker                        and increased ownership of traditional and
pace of poverty reduction (Figure 27).46 In other                    modern assets, amongst other indicators of
words, the growth elasticity of poverty, which                       household well-being.



Figure 27: Poverty has been falling since the                        Figure 28: … and the pace accelerated after
early 2000s…                                                         2008.
Poverty rate (%); 2002/03, 2008/09, 2014/15                          (GDP per capita growth elasticity of poverty, Mozambique);
                                                                     2002/03, 2008/09, 2014/15

70                                                                   0.80                                                  0.68
                                                                     0.70
             60.3                58.7                                0.60
                                                                     0.50
55                                                                   0.40           0.30
                                                     48.4            0.30
                                                                     0.20
                                                                                                       0.08
                                                                     0.10
40                                                                   0.00
           2002/2003         2008/2009            2014/2015                      2002/03 -          2002/03 -          2008/09 -
                                                                                  2014/15            2008/09            2014/15

Source: World Bank using IOF-2002/03, IOF-2008/09 and IOF-2014/15.   Source: World Bank using IOF-2002/03, IOF-2008/09 and IOF-2014/15.




44 The poverty and inequality estimates presented in the section are based on the World Bank assessment results.
45 Based on a USD 1.9 a day PPP poverty line.
46 Despite this, rapid population growth during the same period resulted in a higher number of poor people, in absolute
   terms, – from 11 million in 2002/03 to 12.3 million in 2014/15.




                                                                                                                                   24
part two: a missed opportunity - strong but not broadly shared growth



Less Poverty, but More
Inequality.
Economic progress is becoming less                  poverty rates. In contrast, Maputo Province and
inclusive as gains in consumption growth            Maputo City recorded the largest decline even
have been increasingly concentrated                 though they already had the lowest poverty
among the better-off in urban areas.                levels in 2002/03 (Figure 31).

Stronger growth resulted in faster poverty          Mozambique could have achieved twice as
reduction, but disproportionally benefited the      much poverty reduction after 2000, if growth
upper parts of the income distribution in urban     had been more equally shared. The skewed
areas. The Growth Incidence Curves presented        distribution of growth means that many low-
in Figure 29 show the extent to which the various   income Mozambicans are missing out on the
segments in society, from poorest to wealthiest,    benefits of progress. Household consumption
have benefited from growth. They show that          growth was the main force behind the fall in
although the poor gained from growth, the           poverty. Had growth between 2008 and 2014
wealthier segments of society primarily in          been more inclusive, poverty could have
urban areas, gained at a higher rate. The annual    declined to 37.2 percent rather than the actual
consumption growth for the top wealth quintile      48.4 percent. Instead, the increase in inequality
was three times faster than the rate exhibited by   in the distribution of consumption has offset part
the bottom 40, with the divergence between          of these potential gains and increased poverty
rich and poor being widest in urban areas. This     by 11.2 percentage points.
reflects the extent to which Mozambique’s
growth acceleration has been concentrated in        Moreover, the repercussions of the economic
urban centers, converging economic activity         downturn since 2016 suggest that some of the
and job creation in these areas, including higher   recent gains have been reversed. Even with
skill jobs in the service sector.                   progress in poverty reduction, a significant share
                                                    of the population living above the poverty line is
Mozambique is now among the most unequal            economically insecure and therefore vulnerable
countries in sub-Saharan Africa. This recent        of slipping back into poverty if exposed to shocks,
“pro-richness” in growth pattern hindered           in the absence of high quality growth and strong
Mozambique’s progress in achieving shared           social protection and safety net mechanisms.
prosperity and reducing inequality. The             Such a shock occurred in the 2015/16 period;
Gini coefficient, which measures inequality,        first with a drop in commodity prices and an el-
increased from 0.47 to 0.56 between 2008            Nino season, and subsequently with the hidden
and 2014. Mozambique’s Gini coefficient has         debts crisis and climatic disasters. The significant
consistently remained above 0.4 even in rural       economic downturn that followed resulted in
areas, a high level of inequality per regional      a sharp slowdown in the services sector that
standard (Figure 30).                               had generated many jobs for the poor. Services’
                                                    contribution to growth fell to 1 percent by 2017,
Faster poverty reduction in some of the             down from an average of around 4 percent
areas of the country where poverty was              between 2010 and 2015, narrowing an important
lowest a decade and half ago has limited the        path out of poverty. In addition, the coinciding
convergence in welfare levels between regions.      spike in price levels has reduced the purchasing
The evolution of poverty displays noticeable        power of a wide section of the population. In
regional differences. Despite the generalized       particular, the 2016/17 spike in food prices is
decline in poverty, welfare levels remain low       estimated to have increased poverty across
in the Northern and the Center Regions of the       all provinces of Mozambique (see Box 1). It is,
country relative to the South. Poverty continues    therefore, likely that that some of the gains made
to be high in Zambezia, Nampula and Niassa,         towards poverty reduction and shared prosperity
historically the provinces with the highest         have been reversed.




25
                                                                                                                                                     mozambique economic update october 2018




   Figure 29: The pattern of growth in the period 2008/09-2014/15 benefited mostly the non-poor,
   chiefly those in urban areas.

 Consumption Growth Incidence Curves with 95% confidence intervals nation-wide, urban and rural; 2002/03-2008/09

                        10
                                                                                                                                                     12
Annual growth rate, %




                                                                                                                             Annual growth rate, %
                         8                                                                                                                           10
                         6                                                                                                                            8
                                       4.34                                                                                                           6
                         4
                                                                                                                                                      4
                         2                                                                                                                            2
                         0                                                                                                                            0
                              0        10 20 30 40 50 60 70 80 90                                                                                         0 10 20 30 40 50 60 70 80 90
                                                                                                                                                     -2
                        GIC                   Mean Growth Rate                                       95% CI                                                       Urban GIC                              Rural GIC

   Source: World Bank using IOF-2002/03, IOF-2008/09 and IOF-2014/15.
   Note: dotted lines in each graph show 95% confidence intervals.




   Figure 30: The distribution of household consumption is highly unequal in Mozambique relative
   to other countries in the region.

 Gini coefficient for selected countries and years
                                                                     0.63           0.61
             0.7                                       0.56                                     0.56 0.56                      0.54 0.52                          0.52 0.51
             0.6                                                                                                                                                                             0.49 0.46
                             0.47       0.47
             0.5                                                                                                                                                                                                   0.43    0.40
             0.4
             0.3
                                         (2008/09)

                                                        (2014/15)
                                                                    South Africa
                                                                         (2011)
                                                                                   Botswana
                                                                                      (2009)
                                                                                                Central African

                                                                                                                  Zambia
                                                                                                                   (2010)
                                                                                                                            Lesotho
                                                                                                                             (2010)
                                                                                                                                                     Rwanda
                                                                                                                                                      (2005)

                                                                                                                                                                   (2009)

                                                                                                                                                                                    (2010)
                                                                                                                                                                                              Kenya
                                                                                                                                                                                             (2005)
                                                                                                                                                                                                         Malawi
                                                                                                                                                                                                         (2010)
                                                                                                                                                                                                                  Madagascar
                                                                                                                                                                                                                      (2012)
                                       Mozambique

                                                      Mozambique




                                                                                               Republic (2008)




                                                                                                                                                                             Guinea-Bissau




                                                                                                                                                                                                                    Tanzania
                                                                                                                                                                                                                      (2007)
                                                                                                                                                                 Swaziland
                           (2002/03)
                         Mozambique




      Source: World Bank using WDI.




   Figure 31: There are large differences in the prevalence of poverty across provinces.

 Poverty rates across provinces; 2014/15

       90
                         66.7              64.9                61.8
       60                                                                           50.0               49.6
                                                                                                                        43.6                              41.9         37.2                  34.5
       30
                                                                                                                                                                                                            11.8
                                                                                                                                                                                                                          3.8
               0
                                                                                      Cabo
                                                                                   Delgado




                                                                                                                            Gaza


                                                                                                                                                          Tete


                                                                                                                                                                        Manica


                                                                                                                                                                                             Inhambane


                                                                                                                                                                                                            Maputo
                                                                                                                                                                                                           Province

                                                                                                                                                                                                                      Maputo
                                                                                                                                                                                                                         City
                         Niassa



                                            Nampula


                                                               Zambezia




                                                                                                        Sofala




   Source: World Bank using IOF-2014/15.




                                                                                                                                                                                                                           26
part two: a missed opportunity - strong but not broadly shared growth



Dealing with the Challenge
of Falling Productivity and
Rising Inequality through
Broad-Based Growth.
Is Mozambique’s recent growth model suited                     role of this sector if the capacity of SMEs to add
for a future of sustained and inclusive growth?                value and to export is not raised. This sector,
Mozambique’s growth model, especially from                     which includes the majority of Mozambique’s
2008 onwards, relied increasingly on investment                megaprojects, has played an important role as a
inflows linked to the extractive sector. Booming               driver of investment and growth over the past 20
investments in this sector, coupled with a cycle               years. It nearly doubled its share in GDP from 10
of expansionary macroeconomic policies,                        percent to 19 percent between 1996 and 2014
raised growth and boosted domestic demand                      and maintained the highest level of output per
for goods and services. This model contributed                 worker. Much of this growth accompanied the
to important advances in poverty reduction                     emergence of capital-intensive megaprojects at
as the volume of jobs in the service sector                    a time when the manufacturing base was small,
increased to meet the consumptions needs of                    which skewed the sector towards these large
the domestic economy, and drew labor from                      industries whilst small and medium enterprises
the low productivity agricultural sector, but it               played a smaller role.48 This structure of the
was accompanied by a reduction in productivity                 sector contributed to the low job share of
growth since 2008, and increased inequality.                   industry, which has remained stagnant at 4-5
                                                               percent of total employment since 1996. Besides
The service sector was key to boosting growth                  its low contribution to employment, two other
and poverty reduction, but its declining level of              factors standout as causes for concern in the
productivity may limit its future contribution to              evolution of Mozambique’s industrial sector.
growth. Productivity growth in services declined               Firstly, industry’s contribution to productivity
between 2008 and 2014 as the sector began to                   growth has been lower than both agriculture
absorb more labor over this period, pulling the                and services’ contributions between 1996 and
economy’s overall rate of productivity growth                  2014, which given its stable job share, indicates
downwards, which suggests that the skills and                  limited progress in increasing innovation and
marginal productivity of new workers entering                  value added within the sector. Secondly, only a
the services sector is below the average level                 small fraction of small and medium enterprises
of productivity in the sector. In the absence of               sells to export markets (only 4 percent of
significant increases in the use of technology and             MSMEs49), which limits the sector’s contribution
development of skills, a continued shift of labor              to export diversification, and also limits increase
from agriculture to services will reduce within-               in value added through knowledge transfers that
sector productivity growth in services further,                accompany growth in export industries.
turning this sector into a drag on the economy’s
rate of productivity growth.47 Moreover, whilst                Shifting the growth model to broaden
an expansionary macroeconomic policy setting                   the drivers of output growth and to raise
can help to boost demand, such policies can                    productivity in sectors with the highest
prove counterproductive to sustained long-term                 employment potential is a primary challenge
growth, especially if they lead to an unsustainable            facing Mozambique’s policy makers today.
increase in the levels of public and private debt.             Rapid growth episodes, as experienced by
                                                               Mozambique for most of the 2000s, are a
Similarly, limited job creation and slow                       welcome occurrence. But it is the breadth of
productivity growth in industry could limit the                this growth across the sectors of the economy,



47 World Bank, Mozambique Jobs Diagnostic, 2018.
48 World Bank, Mozambique Systematic Country Diagnostic, 2016.
49 A 2017 survey of micro, small and medium enterprises, carried out by the University of Copenhagen in collaborations with
   others, found that 19 out of 520 of Mozambican micro, small and medium sized firms (3.7 percent) sell to export markets.




27
                                                                       mozambique economic update october 2018


it’s diversity, and the extent to which it endurably             products, with increasing linkages to global value
raises productive capacity whilst maintaining a                  chains through trade. Recent economic literature
sustainable macroeconomic setting that signals                   has also highlighted the link between low product
the quality of this growth. In the absence of                    complexity and inequality, especially for lower
effective structural reforms, Mozambique would                   income countries. Economies specializing mainly
be at risk of building an undiversified economy                  in a narrow number of commodities such as
and a society with a widening gap between                        gold, coal, or oil tend to have lower incomes and
rich and poor. To conclude this section of the                   have been shown to suffer from a more unequal
report, we discuss three areas of vast importance                distribution of wealth. These economies have a
to this agenda in the Mozambican context:                        lesser potential to expand into more diverse and
reducing concentration in primary exports,                       sophisticated products. This is because the products
raising productivity in agriculture, and ensuring                produced in a country influence the volume and
better and more equitable outcomes in both skill                 types of jobs available, the skills mix in the economy,
development and service delivery.                                and the opportunities for technological catch-up,
                                                                 and thus influence the potential to diversify to higher
Reducing concentration in primary exports                        value-added products. As a result, the economy
                                                                 remains concentrated in industries that generate
Reducing concentration in primary exports, by                    significant resource inflows but that offer few jobs,
diversifying the economy into higher productivity                which contributes to inequality.⁵⁰ A relevant trend
activities across sectors, is not only good for                  in the context of Mozambique.
economic growth but also for the income
distribution. The positive link between economic                 A country’s potential for economic
diversification and growth is widely discussed in                diversification can be illustrated by the degree
the economic literature. Diversification helps to                to which its export basket develops more into
reduce economic concentration in a narrow set                    higher value-added exports. Mozambique is an
of products and markets, and thus helps to manage                interesting case of increasing export volumes in
volatility, providing a more stable path for long-term           the presence of decreasing complexity of export
growth. Diversification also raises productivity                 products. While Mozambique’s export volume
when it takes the form of a transition from                      doubled over the past ten years (from US$ 2.4
primary products to developing a growing range                   billion in 2007 to US$ 4.7 billion in 2017), its
of processed or value-added (i.e. more complex)                  export basket remained concentrated in primary



Figure 32: A reduction in the level of economic complexity accompanied the increase in exports.
Mozambique Economic Complexity Index, 1996 - 2016⁵¹

         1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
    0
 -0.2
 -0.4
 -0.6
 -0.8
   -1
 -1.2
 -1.4
 -1.6
 -1.8

Source: The Observatory of Economic Complexity, MIT.




50 Hidalgo et al., 2007; Hidalgo and Hausmann, 2009; Hausmann et al., 2014; Hartmann et al., 2017.
51 The Economic Complexity Index measures the sophistication of an economy’s export basket by considering the diversity
   and the level of specialization in exports. Countries with a more diverse range of export products, and higher concentration
   in more sophisticated products have a higher complexity index. The Economic Complexity Index was developed by Cesar
   Hidalgo and Ricardo Hausmann. The data is available on the website of the Observatory of Economic Complexity: https://
   atlas.media.mit.edu/en/.




                                                                                                                          28
part two: a missed opportunity - strong but not broadly shared growth


products. In 1996, Mozambique’s export basket         How can Mozambique broaden its economy
was dominated by primary marine and agricultural      by diversifying and progressively increasing
exports, by 2016 coal, gas, and minerals emerged      the sophistication of its productive base?
as major additional products. The composition         There is no single answer or unique approach
of the export basket changed but new and old          to this important question. It will take a
major exports all shared the feature of being         long-term multifaceted policy package that
primary products (Figure 33 and Figure 34).           successfully builds the competitiveness of
As a result, Mozambique’s position on MIT’s           Mozambican firms, increases their capacity
Economic Complexity Index decreased (Figure           to export, and that invests in building skills,
32). Mozambique’s performance as measured             against the background of an appropriate
by this index, which estimates the sophistication     macroeconomic framework, to advance
of an economy’s export basket, has been               towards this goal. A focus on building broad-
dropping since the late 1990s (Figure 32), placing    based firm, labor, and institutional capacities
Mozambique’s level of economic complexity             will also help place Mozambique in a position
at a lower level than several of its peers in the     to create opportunities, increase productivity
Africa region (Figure 35). In addition to this, the   and sophistication across a wide a range of
number of products exported by Mozambique             sectors. This includes manufacturing, which
declined between 2003 and 2012, before picking        created a pathway to development for Asian
up slightly, a trend that contrasts with most well-   and Latin American countries in the 20th
performing African economies over this period,        century, but also agriculture and services,
and which suggests a less competitive context         which hold potential to become more
for Mozambican exporters not specialized in the       productive and to create pathways to jobs for
main primary products (Figure 36).                    many Mozambicans.




29
                                                       mozambique economic update october 2018




Figure 33: In 1996, Mozambique exported a low volume/ variety of primary products.

Composition of good exports (%of total), 1996




Source: The Observatory of Economic Complexity, MIT.




Figure 34: By 2016, exports became more diverse, but remained dominated by primary products.

Composition of good exports (% of total), 2016




Source: The Observatory of Economic Complexity, MIT.




                                                                                          30
part two: a missed opportunity - strong but not broadly shared growth




Figure 35: Mozambique has a low level of economic complexity compared to major and
neighboring African economies.

Economic complexity index for selected African economies, 2016
          Mozambique




                                                                                                                            South Africa
                                 Madagascar




                                                                             Zimbabwe
                                                                  Tanzania




                                                                                                       Senegal


                                                                                                                  Uganda
                                               Zambia
                       Nigeria




                                                         Angola




                                                                                          Kenya
 0.00
-0.20                                                                                                                      -0.03
-0.40
-0.60                                                                                                            -0.44
                                                                                                      -0.53
-0.80                                                                                     -0.66
-1.00                                                                                                               More complex
                                                                             -0.90
-1.20                                                             -1.01
                                                        -1.11
-1.40                                          -1.23
                                 -1.32
-1.60
                       -1.54
-1.80     -1.61

                       Less complex

Source: The Observatory of Economic Complexity, MIT.




Figure 36: The number of products exported by Mozambique declined in the 2000s and is below
well-performing economies in the region.

Number of products exported, 2000 - 15⁵²

4,000

3,500

3,000

2,500

2,000

1,500

1,000

  500

     0
        2000 2001 2002 2003 2004 2005 2006 2007 2008 2009                               2010 2011 2012 2013 2014               2015

                       Kenya                  Madagascar              Senegal                     Tanzania
                       Uganda                 Mozambique              Ethiopia                    Rwanda

Source: World Bank World Integrated Trade Solutions database.




⁵² Total number of products exported by a country at the Harmonized System 1998 (HS 2) six-digit level in any given year.




31
                                                                mozambique economic update october 2018


Redoubling efforts to raise agricultural                  on regional standards (as seen in Figure 37)
productivity.                                             but is also far below Mozambique’s agricultural
                                                          potential. Linked to this are the low adoption rates
Gains in agriculture’s productivity, rural markets        of productivity-enhancing technologies amongst
dynamism and resilience to shocks are essential           Mozambican farmers as lack of financing leads
for reversing the trend in inequality. The strong         to low levels of adoption of improved seed
negative correlation between poverty and                  and low usage of fertilizer, two factors that
agricultural productivity makes this agenda               contribute to low yields. Mozambican farmers
a priority in any effort to reduce inequality. A          are also highly exposed to price and climate-
more productive agriculture sector can also be            related shocks and lack of access to credit and
a platform for increasing the volume of exports           risk mitigation instruments. Relative isolation
and diversifying into linked industries with more         and high transport costs are other major barriers
value-added such as processed foods and textiles.         for farming households in accessing input and
                                                          output markets and raising productivity. Increased
However, agricultural growth and productivity             emphasis on public investment in rural areas to
in Mozambique are low by global and regional              strengthen irrigation, access to rural roads and
standards. In 2015, the average maize yield for           to electricity would provide more enabling
farmers who planted maize was 836 kilograms               conditions for raising agriculture productivity and
(kg) per hectare and half of them had yields              more dynamism in rural markets.
under 480 kg per hectare. This is not only low




Figure 37: Average yields are lower in                    Figure 38: … largely due to low adoption of
Mozambique than in the region…                            modern inputs.
Maize yields in kilograms per hectare, 2000 - 14          Share of farmers using inputs, 2014/15

6,000                                                      100%
5,000                                                       80%
4,000
                                                            60%
3,000
                                                            40%
2,000
1,000                                                       20%        6.6%          5.7%        4.3%         2.0%          1.0%
      0                                                       0%
          2000
          2001
          2002
          2003
          2004
          2005
          2006
          2007
          2008
          2009
          2010
          2011
          2012
          2013
          2014




                                                                                    Fertilizer
                                                                      Pesticides


                                                                                   Inorganic



                                                                                                 Herbicides


                                                                                                              Irrigation

                                                                                                                           Improved
                                                                                                                              Seeds




              Southern Africa            Eastern Africa
              Mozambique

Source: World Bank using IOF-2014/15.                     Source: World Bank using IOF-2014/15.




                                                                                                                               32
  part two: a missed opportunity - strong but not broadly shared growth




    Figure 39: Isolation is a major barrier for farmers                     Figure 40: … and is compounded by exposure
    in accessing inputs and markets…                                        to weather shocks.

  Average travel time to nearest market by foot (minutes),                  Productivity of farmers affected by shocks relative to non-
  2014/15                                                                   affected farmers, 2014/15

                                                                                             Drought                   Flood
                          80%                                                 0%
                          70%
Provincial poverty rate




                                                                             -4%
                          60%
                          50%                                                -8%
                          40%                                                                  -7.7%
                          30%                                               -12%
                          20%
                                                                            -16%
                          10%
                           0%                                               -20%
                                5     15 25     35   45 55 65      75 85                                              -18.1%

                                    Average travel time to nearest market
                                              (minutes on foot)

   Source: World Bank using IOF-2014/15.                                    Source: World Bank using IOF-2014/15.




   Raising educational outcomes and ensuring                                While 35 percent of the adult poor can read and
   more equal access to infrastructure and                                  write, similar to the levels recorded in 2002, the
   services.                                                                proportion among the non-poor increased from
                                                                            53 to 60 percent. In addition to these variations,
   Slow progress in upgrading the education                                 the spatial distribution of literacy is correlated
   system and the skills of the workforce are a                             with poverty, with the poorest provinces
   barrier to building human capital and impede                             experiencing higher rates of illiteracy (Figure 41).
   the transition towards an economy fueled by
   productivity growth. The Mozambican society                              In addition to this, large inequalities of
   is slowly becoming more educated, but the                                opportunity remain across the population,
   levels of school attainment and the quality of                           limiting the degree to which the poor participate
   education remain low and with a large gap                                in the growth process and share in its proceeds.
   between rural and urban areas, particularly in                           Improvement in several dimensions of wellbeing
   comparison with other neighboring countries.                             such as access to basic services, ownership of
   Overall, literacy rates for adults 21 years and                          physical and human capital and connectivity
   older rose from 42 percent in 2002 to 50                                 to markets occurred from low levels, which
   percent in 2014. However, the rate of progress                           means that the remaining gaps are significant.
   is slow and there are significant disparities with                       Indicators such as access to electricity, food
   respect to other countries in the region as well                         security and stunting, among others, show little
   as across different socioeconomic groups                                 or no improvement during the period with the
   within Mozambique. Relative to the average                               strongest economic growth on record, especially
   adult literacy rate across sub-Saharan African                           in rural areas. Moreover, progress has not been
   countries of 62 percent, Mozambique fares                                even across income groups nor across areas.
   considerably worse. As of 2014, literacy rates                           The Human Opportunity Index, a measure that
   for adults in rural areas (37 percent) are nearly                        summarizes the level of basic opportunities in a
   half of the rates seen for their urban counterparts                      society and how equitable they are distributed,
   (70 percent). Changes in literacy in the last 15                         reveals that the chances of Mozambican
   years benefited disproportionally the better off.                        children later in life are largely influenced by their




  33
                                                                                           mozambique economic update october 2018


     location and family background. For instance, 98                                 trap will require a renewed emphasis of public
     percent of the probability that a child has access                               policy toward equality of opportunity for current
     to safe water is explained by location, household                                children by increasing access to basic goods
     consumption and education of household                                           and services to children from underprivileged
     head53 (Figure 42). Breaking this inequality                                     groups, particularly those from rural households.



    Figure 41: Literacy rates are slowly improving but a large gap persists between rural and urban areas.
  Literacy rates for adults age 21 and older, 2014/15

                           100%
Provincial literacy rate




                            90%
                            80%
                            70%
                            60%
                            50%
                            40%
                            30%
                              0%                    10%          20%       30%          40%              50%       60%       70%
                                                                          Provincial poverty rate
   Source: World Bank using IOF-2014/15.




    Figure 42: Location, household consumption and parental education drive most of the inequality
    of opportunity across the population.

   Contribution of different circumstances to inequality of opportunity (%), 2014/15

                    100%
                                      76.3


                                                  70.5




                           80%
                                                62.7
                                   59.3




                           60%
                                             36.2




                                                               31.9

                                                               31.0




                           40%
                                                              28.1




                                                                             27.4
                                                           17.9


                                                          13.0




                           20%
                                                                         7.2



                                                                                    6.3
                                                                                    5.5
                                                                        2.0




                           0%
                                          Urban            Household    Head's school     Child gender     Number of     Both parents
                                                          consumption    attainment                         siblings

                                      Water               Electricity      Education          Sanitation       Housing
     Source: World Bank using IOF-2014/15.




      53 The 98 percent is broken down to location (59 percent), household consumption (32 percent) and education of household
         head (7 percent).




                                                                                                                                   34
references




References
Beer, S., and Loeprick, J. (2018, forthcoming). ‘The Cost and Benefits of Tax Treaties with Investment
Hubs: Findings from Sub-Saharan Africa’, IMF Working Paper

FAO (2018), ‘Global Information and Early Warning System on Food and Agriculture Country Brief
– Mozambique’, Maputo, Mozambique.

GIZ (2016): ‘Pequenas e Médias Empresas em Moçambique: Situação e Desafios’, Maputo,
Mozambique.

Hausmann, R., Hidalgo, C. A., Bustos, S., Coscia, M., Simoes, A., and Yildirim, M. A. (2014). ‘The atlas
of economic complexity: Mapping paths to prosperity’. MIT Press

Hartmann, D., Guevara, M. R., Jara-Figueroa, C., Aristaran, M., and Hidalgo, C. A. (2017), ‘Linking
Economic Complexity, Institutions, and Income Inequality’, World Development Vol. 93, pp. 75–93.

Hidalgo, C. A., and Hausmann, R., (2009), ‘The Building Blocks of Economic Complexity’, Proceedings
of the National Academy of Sciences, 106(26), 10570–10575.

Hidalgo, C. A., Klinger, B., Barabási, A.-L. and Hausmann, R., (2007), ‘The Product Space Conditions
the Development of Nations’, Science, 317(5837), 482–487

IMF, (2018), ‘World Economic Outlook: Cyclical Upswing, Structural Change,’ IMF: Washington DC.

IMF, (2018), ‘2018 Article IV Consultation Staff Report for Angola,’ IMF: Washington DC.

IMF, (2018), ‘2018 Article IV Consultation and Request for Three-Year Arrangement Under the
Extended Credit Facility for Malawi,’ IMF: Washington DC.

IMF, (2018), ‘2018 Article IV Consultation Staff Report for Kenya,’ IMF: Washington DC.

IMF, (2018), ‘2018 Article IV Consultation Staff Report for Nigeria,’ IMF: Washington DC.

IMF, (2018), ‘2018 Article IV Consultation Staff Report for South Africa,’ IMF: Washington DC.

IMF, (2018), ‘2017 Article IV Consultation Staff Report and Debt Sustainability Analysis for Mozambique,’
IMF: Washington DC.

IMF, (2017), ‘2017 Article IV Consultation Staff Report for Botswana,’ IMF: Washington DC.

IMF, (2017), ‘2017 Article IV Consultation Staff Report for Kingdom of Swaziland,’ IMF: Washington DC.

IMF, (2017), ‘2017 Article IV Consultation Staff Report for Ghana,’ IMF: Washington DC.

IMF, (2017), ‘2017 Article IV Consultation Staff Report for Zambia,’ IMF: Washington DC.

IMF, (2017), ‘2017 Article IV Consultation Staff Report for Zimbabwe,’ IMF: Washington DC.




35
                                                        mozambique economic update october 2018




IMF, (2017), ‘Regional Economic Outlook Sub-Saharan Africa: Restarting the Growth Engine,’ IMF:
Washington DC.

IMF, (2014), ‘Government Finance Statistics Manual,’ IMF: Washington DC.

Lachler, U., and Walker, I., (2018), ‘Mozambique Jobs Diagnostic’, World Bank: Washington DC.

Republic of Mozambique, Central Bank of Mozambique (2018), ‘Indicadores Prudenciais e
Económico-Financeiros, Anexo à Circular nº2/EFI/2017,’ Maputo, Mozambique.

Republic of Mozambique, Ministry of Economy and Finance, (2018), ‘O Estágio e Perspectivas da
Economia Nacional,’ Maputo, Mozambique.

Republic of Mozambique, Central Bank of Mozambique, various quarters ‘BOP and Monetary Survey
data,’ Maputo, Mozambique.

Republic of Mozambique, Central Bank of Mozambique, various months ‘Monthly Situation bulletin,’
Maputo, Mozambique.

Republic of Mozambique, Central Bank of Mozambique, various sessions ‘Monetary Policy
Committee briefings,’ Maputo, Mozambique.

Republic of Mozambique, National Institute of Statistics, various years ‘National Accounts,’ Maputo,
Mozambique.

Republic of Mozambique, National Institute of Statistics, various months ‘Consumer Price Index
bulletin,’ Maputo, Mozambique.

Republic of Mozambique, National Institute of Statistics, various months ‘Economic Activities Index
bulletin,’ Maputo, Mozambique.

Republic of Mozambique, National Institute of Statistics, various months ‘Economic Confidence
Indicators bulletin,’ Maputo, Mozambique.

Republic of Mozambique, National Institute of Statistics, various quarters ‘Short-Term Industry
Indicators,’ Maputo, Mozambique.

Republic of Mozambique, Ministry of Economy and Finance, (various years), ‘Audited State Accounts,’
Maputo, Mozambique.

Republic of Mozambique, Ministry of Economy and Finance, (various years), ‘State Budget,’ Maputo,
Mozambique.

Republic of Mozambique, Ministry of Economy and Finance, (various years), ‘Budget Execution
Report,’ Maputo, Mozambique.




                                                                                                36
references


Republic of Mozambique, Ministry of Economy and Finance, (various years) ‘Annual Public Debt
Report,’ Maputo, Mozambique.

Vale Moçambique (2018), ‘Quarterly Performance Report’, Maputo, Mozambique

World Bank, (2018), ‘Annual Meetings Macro-Poverty Outlook, (various countries)’, World Bank:
Washington DC.

World Bank, (2018), ‘Strong but not broadly shared growth. Mozambique Poverty Assessment’,
World Bank: Washington DC.

World Bank, (2018), ‘Who wins and who loses with staple food price spikes? Welfare implications
in Mozambique’, World Bank: Washington DC.

World Bank, (2018), ‘Distributional Impact of Fuel and Bread Subsidy Reforms’, World Bank:
Washington DC.

World Bank, (2018), ‘Commodity Markets Outlook – April 2018’, World Bank: Washington DC.

World Bank, (2017), ‘Global Economic Monitor – April 2017’, World Bank: Washington DC.

World Bank, (2017), ‘Mozambique Economic Update: A Two Speed Economy’, World Bank:
Washington DC.

World Bank, (2016), ‘Mozambique Economic Update: Facing Hard Choices’, World Bank:
Washington DC.

World Bank, (2016), ‘Mozambique – Systematic Country Diagnostic,’ World Bank: Washington DC.

World Bank, (2016), ‘Mozambique - Public Expenditure Review: Education,’ World Bank:
Washington DC.

World Bank, (2016), ‘Mozambique – Health Public Expenditure Review: 2009-2013,’ World Bank:
Washington DC.

World Bank (2014), “Mozambique Public Expenditure Review: Addressing the Challenges of Today,
Seizing the Opportunities of Tomorrow”, World Bank: Washington DC.

World Bank, (various years), ‘World Development Indicators,’ World Bank: Washington DC.

World Meteorological Organization, (2018), ‘El Niño / La Niña Update – September 2018’.




37