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
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