MOZAMBIQUE ECONOMIC UPDATE Setting The Stage For Recovery February 2021 mozambique economic update february 2021 The World Bank’s Mozambique Economic Update (MEU) series is designed to present timely and concise assessments of current economic trends in Mozambique considering the country’s broader development challenges. Each edition includes a section on recent economic developments and a discussion of economic outlook, followed by a thematic section that analyzes issues of importance. The focus section in this edition explores the implications of COVID-19 for the economy, businesses and households. It provides recommendations for moving forward—in the short-term relief phase, as well as over the medium and longer term in order to ‘build back better’. 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. Cover picture taken from: https://www.ft.com/content/08af2802- 9372-11e9-aea1-2b1d33ac3271 iii contents Contents Abbreviations and Acronyms ......................................................................................................................................... vi Acknowledgements ...................................................................................................................................................... vii Executive Summary ...................................................................................................................................................... viii Part One: Recent Economic Developments and Outlook .................................................................................... 1 Economic Growth .................................................................................................................................................. 1 Exchange Rate and Inflation ................................................................................................................................ 7 The External Sector ................................................................................................................................................. 7 Fiscal Policy ............................................................................................................................................................... 11 Monetary policy ...................................................................................................................................................... 18 Part Two: COVID-19 Has Hurt Businesses and Households. How to Respond? ........................................ 22 What does the Private Sector Look Like in Mozambique? ......................................................................... 22 The impact of COVID-19 on firms’ sales and employment was severe ................................................... 22 How Has the Government Responded to These Impacts?.......................................................................... 25 Financial sector and market measures .............................................................................................................. 26 Fiscal measures......................................................................................................................................................... 27 Measures to reduce utility costs ..................................................................................................................... 27 Workforce measures .......................................................................................................................................... 27 How to Help Businesses Move Forward? .................................................................................................... 27 Sector-specific measures .................................................................................................................................. 30 COVID-19 has mainly affected vulnerable urban households ..................................................................... 30 COVID-19 could wipe out much of the recent gains in poverty reduction ............................................. 33 Human capital is undermined by school closures ......................................................................................... 35 How to support households? ............................................................................................................................... 36 References ..................................................................................................................................................................... 38 FIGURES Figure 1: Mozambique is faring well compared to regional peers .............................................................. 2 Figure 2: Growth is expected to decline in 2020, but gradually recover over the medium term....... 3 Figure 3: COVID-19 depressed coal production in 2020…............................................................................ 3 Figure 4: … whilst falling domestic demand led to a sharp drop in services and manufacturing ....... 4 Figure 5: …with overall economic sentiment deteriorating .......................................................................... 4 Figure 6: Moderate non-food price increases helped contain overall inflation ......................................... 7 Figure 7: The CAD is set to widen in 2020 …..................................................................................................... 8 Figure 8: …due to higher import levels ............................................................................................................... 8 Figure 9: … and a drop in commodity exports ................................................................................................. 8 Figure 10: … despite favorable real exchangerate movements ...................................................................... 8 iv mozambique economic update february 2021 Figure 11: High FDI levels continue to support the external position .......................................................... 9 Figure 12: The COVID-19 shock delayed fiscal consolidation efforts …........................................................ 12 Figure 13: ... as the COVID-19 response resulted in a significant financing gap.................................................... 12 Figure 14: … while GDP contraction and currency depreciation led to rising external debt levels ............... 13 Figure 15: … and domestic debt pressures remaining significant............................................................................ 13 Figure 16: ENH debt post-COVID ................................................................................................................................... 17 Figure 17: ENH debt; post-COVID; no Rovuma LNG ............................................................................................... 17 Figure 18: Policy measures have supported credit growth....................................................................................... 20 Figure 19: …but credit levels remain lower than pre-hidden debt levels ............................................................... 20 Figure 20: The impact on sales has been particularly severe for small businesses ............................................ 23 Figure 21: The fall in demand was firms’ biggest constraint .................................................................................... 24 Figure 22: Hospitality and entertainment workers were the worst affected......................................................... 25 Figure 23: … firms resorted to cuts in labor costs ....................................................................................................... 25 Figure 24: Significant employment losses occurred during the pandemic …........................................................ 32 Figure 25: … leading to declines in household income .............................................................................................. 32 Figure 26: Job losses were concentrated in services, where the poor are largely employed ........................ 32 Figure 27: The poorest provinces were particularly affected .................................................................................... 32 Figure 28: Income losses were greatest for households in the poorest provinces ........................................... 33 Figure 29: Poverty will increase in even the most optimistic scenarios ............................................................... 34 Figure 30: Most urban jobs are in sectors likely to be hardest hit ............................................................................ 34 Figure 31: A large share of at-risk jobs is held by vulnerable people ..................................................................... 34 Figure 32: A fall in consumption could see urban poverty increase significantly .............................................. 34 Figure 33: Maternal and child mortality have fallen significantly ............................................................................. 36 TABLES Table 1: Growth outlook 2020-2023 ........................................................................................................................ 4 Table 2: The Balance of Payments .............................................................................................................................. 10 Table 3: External outlook ............................................................................................................................................... 10 Table 4: Government Finances (commitment basis) .............................................................................................. 15 Table 5: Selected prudential indicators for domestic systemically important banks, September 30, 2020............................................................................................................................ 19 BOXES Box 1: COVID-19 trends in Mozambique and the Government’s response ................................................... 2 Box 2: Mozambique needs to put in place the enabling conditions for starting vaccination .................. 5 Box 3: Impact of COVID-19 on the LNG portfolio of Empresa Nacional de Hidrocarbonetos (ENH) ....... 16 Box 4: Government measures taken to support the financial sector and resilient economic recovery ...... 18 Box 5: Government Support Measures for Households and Businesses ........................................................ 26 Box 6: How will COVID-19 affect Mozambique’s ability to reach the Sustainable Development Goals (SDGs)? ....................................................................................................................................................... 35 v abbreviations and acronyms Abbreviations and Acronyms INE National Statistics Institute (Instituto Nacional de Estatística) SOE State-owned enterprise BdM Bank of Mozambique (Banco de Moçambique) BNI National Bank of Investments BoP Balance of payments BVM Bolsa de Valores de Moçambique CAD Current-account deficit CGT Capital gains tax COVID-19 Corona virus disease 2019 CPI Consumer Price Index CTA Confederation of private sector associations DSSI Debt Service Suspension Initiative ENH National Hydrocarbons Company (Empresa Nacional de Hidrocarbonetos) FAO Food and Agriculture Organization of the United Nations FDD State Development Fund (Fundo de Desenvolvimento Estatal) FDI FForeign direct investment FPC Standing Lending Facility (Facilidade Permanente de Cedência) FPD Standing Deposit Facility (Facilidade Permanente de Depósito) GDP Gross domestic product FX Foreign exchange GEP Global economic prospects GIEWS FAO Global Information and Early Warning System HFS High Frequency Survey IAE Economic Activity Index (Índice de Actividade Económica) ICE Economic Climate Index (Índice de Confiança Económica) IMF International Monetary Fund INE National Statistics Institute (Instituto Nacional de Estatística) INSS National Institute of Social Security IOF Household Survey (Inquérito sobre Orçamento Familiar) IRPC Corporate income tax LICs Low-income countries LNG Liquefied natural gas MEF Ministry of Economy and Finance (Ministério da Economia e Finanças) MIMO Interbank Reference Interest Rate Mt Metric ton MZN New Mozambican metical NPL Non-performing loan PMI Purchasing Managers Index PPP Purchasing power parity SDG Sustainable Development Goals SSA Sub-Saharan Africa UNICEF United Nations Children’s Fund US United States USD United States dollar WB World Bank WDI World Development Indicators WEO World Economic Outlook ZAR South African rand vi mozambique economic update february 2021 Acknowledgements This edition of the Mozambique Economic Update was prepared by a team led by Fiseha Haile (Senior Economist, EAEM2). The team included Albert Pijuan (Senior Economist, EAEM2), Fernanda Ailina Pedro Massarongo Chivulele (Research Analyst, EAEM2), Anna Carlotta Allen Massingue (Research Analyst, EAEM2), Julian Casal (Senior Financial Sector Economist, EAEF2), Ruben Barreto (Consultant, EAEF2), Francisco Moraes Leitao Campos (Senior Economist, EAEF2), Elena Gaffurini (Consultant, EAEF2), Carlos da Maia (Senior Economist, EAEPV), Miguel Angel San Joaquin Polo (Senior Health Economist, HAEH1) Adelina Mucavele (Program Assistant, AECS2), and Nani A. Makonnen (Senior Program Assistant, EAEM2). Fiona Hinchcliffe provided editorial support. Peer reviewers were William G. Battaile (Lead Economist, EAEDR) and Jose Ernesto Lopez Cordova (Lead Economist, ETIFE). The report was prepared under the overall guidance and supervision of Idah Pswarayi-Riddihough (Country Director, AECS2), Mathew A. Verghis (Practice Manager, EA1M2), and Paulo Guilherme Correa (Program Leader and Lead Economist, EACS2). vii executive summary Executive Summary of US$1.90 per day). The pandemic is further Recent Economic delaying Mozambique's already slow progress Developments. towards the Sustainable Development Goals (SDGs), undoing the substantial gains made COVID-19 continues to spread globally, with a on health and education, among others. While second wave now resurfacing. Mozambique there is great uncertainty about the path of has been spared the worst of the pandemic the pandemic, the economy is expected to so far but confirmed cases have been growing gradually recover from 2021 as aggregate rapidly since the lifting of the State of Emergency demand rebounds and LNG investments and in early September. The country has taken extractive production gain momentum. Despite unprecedented measures to contain the spread the expected recovery, the development and of the virus, although at the expense of bringing widespread deployment of COVID-19 vaccines the economy to near standstill. It has now will be at the core of a resilient recovery. The started to gradually reopen its economy amid economy cannot recover fully until mobility high socio-economic fallouts. is restored, hence the critical importance of ensuring broad, rapid and affordable access to This Economic Update explores the implications vaccines once they come onstream. of COVID-19 for the economy, businesses and households. It makes recommendations for Fiscal challenges are significant, and the crisis moving forward—in the short-term relief phase, will further delay fiscal consolidation efforts. The as well as over the medium and longer term in fiscal deficit will increase substantially in 2020, order to ‘build back better’. owing to lower fiscal revenues and COVID-19- related expenditures. This is in a context of debt The global pandemic has taken a heavy toll overhang, a growing wage bill and rising military on the economy. In 2020, Mozambique is spending. Mozambique is in debt distress with expected to experience its first economic debt-to-GDP projected to surge this year due to contraction in nearly three decades. COVID-19 the balance sheet effect of currency depreciation hit the economy as it was attempting to recover and falling GDP. Once the COVID-19 crisis has from the slowdown triggered by the hidden receded, fiscal consolidation will be central to debt crisis and the tropical cyclones in 2019. generate the fiscal space needed for recovery Real gross domestic product (GDP) is projected measures. Further progress in improving debt to decline by 0.8 percent in 2020, compared management and transparency, combined with to a pre-Covid estimate of 4.3 percent, as debt service relief, will be crucial to enhance external demand falls, domestic lockdown debt sustainability. measures disrupt supply chains and depress domestic demand, and liquified natural gas Finally, the slowdown in foreign direct (LNG) investments are delayed. investment and capital inflows has tightened external constraints. The current account deficit COVID-19 has jeopardized years of hard- will increase sharply this year due to poor export won development gains, with about 850,000 performance and increased imports of LNG- people projected to slip into poverty in 2020 related services. The economic downturn in (as measured by the international poverty line key trading partners, and the commodity price viii mozambique economic update february 2021 slump, represent key sources of external risk. In addition, if left unchecked, the large influx The impact on sales volume has been particularly of foreign currency to finance LNG projects in severe for small businesses the coming years could erode Mozambique’s Formal firms: Percentage change in sales volume in the external competitiveness. first half of 2020 (year-on-year) 100 90.5 89.5 91.1 COVID-19 Has Hurt 80 60 Businesses and Households 40 20 As elsewhere, firms, workers and households in 0 Mozambique are bearing the economic brunt of -20 -40 -22.3 -21.8 the pandemic. COVID-19 has caused a sudden income loss for enterprises and households, -60 -48.7 worsening living conditions, especially for the Small Medium Large Business Business Business urban poor largely engaged in the informal sector. According to the National Institute of Statistics, Y-o-Y business volume Share of firms affected as of June 2020, about 120,000 jobs were lost Source: INE (2020b). and 63,000 employment contracts suspended, Note: Y-o-Y: year on year, comparing the first half of 2020 with the same time period in 2019. with women being the most affected. Around Source: Based on INE (2020b) 2.9 percent of the firms affected were forced to cease their activity. The northern region, currently facing an escalation of insurgency, Households have suffered substantial income experienced a temporary or permanent closure losses of 38 percent of businesses. The capacity of Share of households reporting changes in income since firms to respond to such massive shocks is very COVID outbreak limited in Mozambique. Firm survival time in 80% the absence of revenues is short, estimated at between 6 to 10 weeks in Mozambique. While 60% the impact is significant across the board, small 40% firms are worst affected. 20% Although almost no sector has been spared, 0% Increased Stayed the same Reduced Increased Stayed the same Reduced service activities are the hardest hit. The tourism and hospitality industry has suffered a steep decline in revenues, with about 7.5 percent of firms estimated to have terminated operations as of June 2020. The transport sector has also recorded heavy losses. Further, the extractive Male Female sector (notably the coal industry) has seen a sharp Farming, livestock or fishing Wage employment drop in production. Source: WB staff based on HFS Households are feeling the impacts of COVID-19 through loss of earnings and employment. This How to Respond? particularly affects urban low-income households engaged in formal and informal services. Job Mozambique has adopted policies that were losses have undermined food security, with more broadly similar to those of other countries in the than 50 percent of urban households reportedly region, but design and implementation issues running out of food, though rural households have undermined their effectiveness. As the are less affected. This is likely to hold back urban pandemic unfolded, the government increased poverty reduction. Furthermore, school closures priority social expenditures and expanded to combat COVID-19 could set back progress in coverage to households most affected by the building human capital. shock. The Bank of Mozambique took several ix executive summary stimulus measures, including cutting the capacity, and maximize the cost-effectiveness monetary policy rate, providing a line of credit of the policies. The government should also in foreign currency, and measures to ensure consider extending the moratorium on tax financial sector stability. Although the authorities payments to a wider share of small companies, provided support to firms through discounted with the support of development partners. In credit lines, the funds were too limited to meet the recovery phase, policies need to support demand and relieve firms of financial distress. economic transformation and job creation, Steps were also taken by commercial banks especially for the youth. to restructure existing loans by extending maturities and offering grace periods on loan Social protection programs should be scaled up, principals. Moreover, fiscal measures were taken including food assistance, to support informal (self- to support small firms, but their impact was employed) entrepreneurs. Targeted interventions limited due to overly restrictive eligibility criteria. are also needed to support women and alleviate Overall, the measures were either insufficient existing gender inequalities, including expanding or else hindered by procedural bottlenecks. access to finance and inputs, and harnessing the Direct support (transfers) were not among the power of mobile technology. Once schools re- measures taken and government support was open, there is a need for measures to encourage not conditioned on the preservation of jobs. children to return to school; these may include one-time cash transfers contingent on re- The road to a resilient and inclusive recovery will enrollment and attendance. be long. In the short-term, measures to support viable firms need to be strengthened. Once a In the longer term, Mozambique needs to diversify vaccine becomes available, efforts should be away from the current megaproject-driven growth directed at deploying it effectively to make sure toward a more interconnected and competitive that implementation does not put substantial economy. Growth needs to be made more pressure on the already overstretched health inclusive through improved resource allocation system. As the pandemic subsides, the agenda of to services, small-scale manufacturing, and structural reforms will have to be reignited. The agribusiness. The development impact of resource focus should be on firms that were most affected revenues could be maximized through public by the crisis and were economically viable before investment programs that are better targeted the crisis. In the short term, it will be key to toward underserved areas and savings for future provide targeted support, such as employment generations. On the fiscal side, efforts to enhance subsidies, to firms to encourage worker retention revenue mobilization, combined with measures to and minimize layoffs. Support to previously increase spending efficiency and rationalize civil viable firms should be made conditional on job service renumeration, will help meet development protection to minimize the loss of productive needs while maintaining fiscal sustainability. x mozambique economic update february 2021 Part One: Recent Economic Developments and Outlook Economic Growth steps to respond to the outbreak (Boxes 1, 3 and 5), the economic contraction has had a In 2020 the Mozambican economy will significant impact on households and firms. A experience its first contraction in almost recent survey by the National Statistics Institute, three decades as COVID-19 reduces covering about 90,000 firms, estimated as of domestic demand and delays liquified June 2020 that firms’ revenue losses represented natural gas (LNG) investments. 7 percent of GDP, about 120,000 jobs had been lost, and about 62,000 employment contracts Mozambique’s economy is expected to contract had been suspended.1 Income per capita is for the first time in 28 years. The global pandemic estimated to fall from US$519 in 2019 to US$461 hit the country as it was attempting to recover in 2020, pushing the poverty rate up from 62.5 from the economic slowdown triggered by the to 64.0 percent. This means about 850,000 hidden debt crisis and the tropical cyclones in more people would slip into poverty in 2020, 2019. Growth declined sharply from an average as measured by the international poverty line of 8 percent in 2001–2015 to 3 percent in (US$1.9 PPP per day) (See Part 2). 2016–2019. In 2020, weak global demand, low commodity prices and strict measures to contain Agriculture and public services are expected the virus have seen trade decline and domestic to be the only sectors that could contribute to consumption shrink, with output contracting growth in 2020. Favorable weather conditions by 3.3 and 1.1 percent in the second and third have helped agricultural production to recover quarters (year-on-year), respectively. In addition, from the impact of the tropical cyclones, with oil price shocks and unfavorable financial market output increasing by 3 percent in the third conditions have delayed the Mozambique quarter of 2020, compared to the same period Rovuma liquefied natural gas (LNG) project. As in 2019.2 While public services output contracted a result, real GDP is expected to decline by 0.8 during the same period, this is anticipated to percent this year (Figure 2), compared to a pre- be offset by the expansion of health capacity COVID estimate of 4.3 percent. and social protection programs related to the COVID-19 response.3 The government’s Although the government has taken important COVID-19 response, combined with additional 1 INE (2020b). 2 The growth rate in the third quarter of 2020 was significantly higher than the -1.9 percent decline registered in the same period of 2019 and the 2 percent growth in 2018. 3 The authorities plan to expand social services in 2020 to include financial support to households and firms affected by the pandemic crisis by increasing the number of cash transfer beneficiaries to more than 1 million from about 600,000 in 2019. 1 part one: recent economic developments and outlook military spending to combat insurgents in the of the country’s largest coal mine, temporarily north and center of the country, should drive suspended production in June 2020. As a result, increased activity in the public sector. the extractives industry is expected to contract by 12 percent in 2020, having already seen a The extractives sector is struggling in the negative growth of 1 percent in 2019. face of low commodity prices, muted global demand and depressed production. The sector The decline in domestic demand that followed was already struggling even before COVID-19 the introduction of lockdown measures because of reduced production capacity at the constrained private sector services and main coal plant due to operational difficulties. manufacturing output. Private sector services This has been worsened by the disruptions in output, which had been recovering in the global supply chains and lower commodity previous two years (Figure 4), dropped by 3 prices, leading to a sharp decline in Mozambique’s percent in the third quarter of 2020, after falling extractive production. Coal production fell by 40 by 5 percent in the second quarter (Figure 5). percent in the third quarter of 2020 (year-on- Output in the hospitality and restaurant industry year) (Figure 3). As inventories accumulated due declined by 31 percent due to travel restrictions to subdued sales, Vale do Rio Doce, the operator and social distancing measures. Box 1: COVID-19 trends in Mozambique and the Government’s response Mozambique registered its first case of deaths attributed to the virus. COVID-19 on March 22, 2020. As of end December, the number of positive cases However, the number of positive cases has reached more than 18.5 thousands. been growing at an increasing rate. In the However, given weak testing capacity, the first half of January 2021, the total number of official numbers may understate the true positive cases reached almost 30 thousand. number of infections. The country is doing Of this, more than 40 percent was registered relatively well in controlling the virus (Figure in the last 45 days. According to the National 1). Up to end 2020, about 90 percent of Institute of Health (Instituto Nacional de the total positive cases had recovered, and Saúde – INS), Mozambique currently has the mortality rate was relatively low with 166 one of the fastest reproduction rates in Africa. Figure 1: Mozambique is faring well compared to regional peers Total Number of Positive Cases Total Number of Deaths 140 30 120 100 20 Thousands Hundreds 80 60 40 10 20 0 0 2020/03/22 2020/04/06 2020/04/21 2020/05/06 2020/05/21 2020/06/05 2020/06/20 2020/07/05 2020/07/20 2020/08/04 2020/08/19 2020/09/03 2020/09/18 2020/10/03 2020/10/18 2020/11/02 2020/11/17 2020/12/02 2020/12/17 2021/01/01 2021/01/16 2020/03/22 2020/04/06 2020/04/21 2020/05/06 2020/05/21 2020/06/05 2020/06/20 2020/07/05 2020/07/20 2020/08/04 2020/08/19 2020/09/03 2020/09/18 2020/10/03 2020/10/18 2020/11/02 2020/11/17 2020/12/02 2020/12/17 2021/01/01 2021/01/16 Angola Ethiopia Kenya Mozambique Tanzania Uganda Zambia Zimbabwe Source: COVID-19 Data Repository by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University. 2 mozambique economic update february 2021 Mozambique declared a State of Emergency suspension of travel and visa issuance until (SE) on April 1, which was extended up to August September 2020. 2020. Since September, it has been in a State of • Ramping up the health sector response Public Health Calamity (SPHC). Key features of capacity. the SE and SPHC include the following: The country continues under the SPHC, but • Measures to prevent and mitigate the as of end-October the president announced propagation of COVID-19, such as mask resumption of the issuance of tourist visas and wearing, limiting public gatherings, and no need for quarantine for those who arrive the number of passengers allowed on in the country with a negative test. However, public transport. amid the growing number of COVID-19 cases, • Information campaigns stressing the need as 2021 began, government tightened social for handwashing and mask wearing in distancing measures including limitation of public and hygiene protocols. public gatherings, introduction of a curfew and • Closure of borders for non-goods transit; closure of services considered non-essential. The slowdown in activity is reflected in economic expectations on demand, prices and employment indicators, which reached historical lows in deteriorated.5 According to the Economic Activity the second quarter of 2020. The Purchasing Index (IAE), the tourism and transport sectors Manager’s Index (PMI), an indicator of private experienced the sharpest decline in economic companies’ perception of market conditions, activity in June. Manufacturing activity also fell, averaged 45.8 points in the first ten months of exhibiting a large drop in prices, production and the year, having fallen to a trough of 37 points in turnover in the first half of 2020.6 Despite the April, from an average of 51 points in 2019.4 The relative recovery observed in the last months of Economic Climate Index (ICE), which assesses the year, the economic activity indexes for these business sentiment, fell to a 16-year low in June as sectors are still well below the 2019 levels. Figure 2: Growth is expected to decline in 2020, Figure 3: COVID-19 depressed coal production but gradually recover over the medium term in 2020… GDP growth (% change), 2015–2022 Coal production (metric tons) and prices (% change) 20.0% 14,000 120 12,000 100 6.9% 10,000 80 10.0% 8,000 4.0% 4.2% 4.4% 60 3.5% 6,000 2.3% 2.8% 4,000 40 2,000 20 0% -0.8% - 0 2015 2016 2017 2018 2019 2020e 2021f 2022f 2015 2016 2017 2018 2019 2020e Tax Public Services Coal Production Prices, RHS Private Services Extractives Manufacturing Agriculture GDP (Baseline) GDP (Downside Scenario) Source: MASA. Source: Vale Mozambique. 4 The Purchasing Managers’ Index™ (PMI) published by Standard Bank is a weighted average of the following five indices: new orders (30 percent), output (25 percent), employment (20 percent), suppliers’ delivery times (15 percent) and stocks of purchases (10 percent). Mozambique’s PMI covers about 400 private companies in the agriculture, mining, manufacturing, construction, wholesale and retail sectors. PMI values below 50 percent indicate a contraction in economic activity. 5 The ICE is published by the National Statistics Institute (INE). Its assessment of business expectations is based on demand, prices, employment expectations, and actual employment. The index covers companies in the non-financial sector, specifically manufacturing, construction, transport, commerce, and other non-financial services. 6 The IAE is also published by INE. It provides a monthly index that reports companies’ performance in terms of turnover, employment and remunerations. It covers manufacturing, extractives, energy, commerce, transport, hotels, restaurants and other services. 3 part one: recent economic developments and outlook Figure 4: …whilst falling domestic demand led Figure 5: …with overall economic sentiment to a sharp drop in services and manufacturing deteriorating Manufacturing and services quarterly growth (y-o-y) Quarterly growth (% change) and Purchasing Managers Index (<50 deterioration), 2019-2020 15.0% 120.0 53.0 6.0% 51.0 10.0% 100.0 49.0 4.0% 80.0 47.0 2.0% 5.0% 45.0 60.0 0.0% 43.0 0.0% 40.0 41.0 -2.0% -5.0% 39.0 20.0 -4.0% 37.0 -10.0% 0.0 35.0 -6.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2019 2020 2019 2020 Manufacturing (LHS) Private Services (LHS) Private Services and Construction quarterly growth (RHS) GDP (LHS) Demand expectations (RHS) Purchasing Managers Index (LHS) Source: INE data, various years; World Bank staff estimates Source: IHS Markit (2019, 2020); INE data, various years Growth is projected to recover in the outbreak. Under this scenario, growth is expected medium term assuming a rebound in global at 2.8 percent in 2021 and 4.4 percent in 2022 demand, additional stimulus from LNG under the assumption that global demand will pick projects, and the roll-out of a COVID-19 up positively impacting exports, and the roll-out vaccine in 2021. of a COVID-19 vaccine in 2021 will allow people to circulate and economic activity to resume The economy is expected to gradually pick up in sectors affected by the social distancing. An over the coming years as the global demand additional stimulus is expected under this scenario for commodities and domestic demand for as the development of LNG projects progresses, services recover, and LNG investments gain which besides supporting investment growth, momentum. Growth prospects are evaluated would support private sector activity, especially under two scenarios depending on the impact in sectors with linkages to the industry such as of COVID- 19. While both scenarios consider that transport, real estate and manufacturing. The the recovery begins in 2021, the baseline scenario recovery path will accelerate further in 2023 as looks at the impacts of a severe but contained LNG production begins (Table 1). Table 1: Growth outlook 2020-2023 Real GDP, Δ% 2020e 2021p 2022p 2023p Baseline scenario -0.8 2.8 4.4 6.3 Downside scenario -1.4 1.4 3.8 6.2 Source: World Bank staff estimates. e = estimate; p = projection The outlook is subject to significant downside require rolling out a COVID-19 vaccine effectively risks. As the number of COVID-19 cases (Box 2) and strengthening support to households continues to grow domestically and a second and viable firms affected by the crisis (see Part wave of COVID-19 is experienced by important Two in this Economic Update). This should be trade partners, more stringent social distancing complemented by strengthening awareness measures could constrain domestic and external campaigns to support the lifting of containment demand further. Entering a recovery path will measures. An inability to implement an effective 4 mozambique economic update february 2021 counter-insurgency campaign in Cabo and military instability would continue to delay Delgado could cause additional challenges for LNG investments. On the production front, developing LNG facilities led by multinational agriculture and manufacturing sectors would energy corporations while posing further fiscal have a weaker performance in 2021 compared and monetary policy pressures. to the baseline, and the services sectors would continue to contract due to subdued aggregated The downside risks could push growth to demand. This scenario could lead to a further as low as -1.4 percent in 2020. Under the deterioration of the macro-fiscal aggregates downside scenario, growth would reach 1.4 and the standards of living.7 With population percent in 2021, lower than the 2.8 percent in growth at 2.8 percent, GDP per capita could the baseline scenario. This scenario assumes fall to U$460 in 2020 from U$520 in 2019. that delays in the roll-out of the vaccine in Besides, as per the projections from the World advanced, emerging markets and developing Meteorological Organization Mozambique has economies will slow the recovery in global been affected by tropical cyclones in 2021, demand and commodity prices, negatively depending on the impact, these could disrupt impacting the country’s exports. In addition, oil projections of growth recovery in 2021, which price shocks, unfavorable market conditions, are partly driven by the agriculture sector. Box 2: Mozambique needs to put in place the enabling conditions for starting vaccination There has been enormous progress in vaccine will require special cold-chain developing a COVID-19 vaccine over the requirements. The most efficacious last few months. Several candidate vaccines vaccines require storage at temperatures have delivered promising efficacies, above below 80⁰C, for which there is no capacity 90 percent. Global initiatives such as in Mozambique. A rapid assessment COVAX – a multilateral venture to ensure is currently analyzing these logistical the vaccine's acquisition and deployment to constraints and how financiers can low- and middle-income countries – have support the vaccine roll-out. Identifying been established. COVAX seeks to ensure vulnerable groups is also non-trivial in a up to 20 percent vaccine coverage free of setting where diagnosing comorbidities charge, focusing on frontline workers and is challenging. The subsequent outreach vulnerable populations. The World Bank to these patients is also a constraint that will contribute with additional financing to may require approaches different from the expand this coverage and strengthen the standard hospital or health facility delivery systems required to supply and deploy the approach. There have already been reports vaccine. Mozambique will benefit from of disrupted essential services, leading to these initiatives. morbidity and, presumably, mortality that may exceed that caused by the COVID-19 However, multiple challenges remain. The virus alone. The health system needs to country will face multiple institutional and be strengthened in planning, budgeting, logistical challenges when implementing and human resources to effectively out such a large-scale vaccination campaign. a vaccine. According to the World Bank’s preliminary estimates, vaccine costs (including Essential areas of activity to support the transport and deployment) in Mozambique purchase and administration of vaccines could reach about US$260 million. include: (i) Planning and management, It is yet unclear whether the selected including the identification of target 7 Ceteris paribus, in 2020, total public debt levels would increase by 1 percentage point to 122 percent of GDP under the downside scenario and the overall deficit increases by almost 10 basis points, to 8.4 percent of GDP. 5 part one: recent economic developments and outlook populations and the development of Policy, regulations and institutions micro-plans to promote equitable access to vaccines; (ii) supply and distribution: Clients must be Equitable service purchase of vaccines and vaccination able to effectively delivery materials, logistics management and cold implement chain requirements; (ii) implementation: comprehensive community awareness creation and COVID-19 vaccine deployment Logistics & surveillance of vaccine safety; (iv) support supply chain strategy/plan systems and infrastructure, including - a complex strengthening existing data and monitoring proposition systems and improving the basic especially for new vaccinces Human infrastructure of primary health units. Resources Deploying the vaccine is necessary Creating public support for but it should take into account the the device already overstretched health system. Additional activities that need reinforcing management of positive cases through are: (i) developing and strengthening the allocation of personnel to isolation decentralized laboratory surveillance centers and the purchase of equipment capacities, including lab equipment, including X-rays, ventilators and heart-rate testing reagents, essential commodities, monitors; and (iii) provision of personal and support for training personnel; protective equipment to health facility and (ii) ensuring adequate preparedness lab personnel throughout the country. Medium-term challenges include management to prevent adverse effects from counteracting the pandemic's long-term the expected large foreign currency inflows impact on potential growth, and promoting for LNG investments and ensure continued economic diversification, using gains from the commitment to macroeconomic stability. LNG sector to support inclusive growth and job creation, notably for the youth. Beyond the Embarking on a path of productivity-driven short-term effects, COVID-19’s impact on human growth that creates more, better, and inclusive capital, investment, trade, and public service jobs—including for lower-income, lower-skilled delivery may leave lasting scars on potential people—is essential. The Jobs and Economic output. Economic policies should focus on Transformation (JET) agenda provides a policy boosting growth fundamentals while bringing framework for charting the course for a steady diversification and shock resilience center-stage. recovery in Mozambique in the post-COVID-19 The government can achieve these objectives period.8 It rests on two pillars: creating and through, among others, policies that enhance connecting to markets, and building capabilities local linkages with the LNG industry and use and connecting workers to jobs. Efficient the LNG gains to promote inclusive growth. implementation of these policies would enable These policies include investing in human and African economies to recover faster and thrive in physical capital and supporting the development the post-COVID-19 world. of other sectors, especially services, small-scale manufacturing, and agribusiness. Mozambique It is essential to protect the economy against needs to diversify away from its dual focus scarring and a costly loss of potential GDP. on capital-intensive megaprojects and low- Resources should be directed to previously viable productivity subsistence farming into a more firms. As discussed in Part 2, Mozambican firms interconnected and competitive economy. have limited cash flow to stay afloat for long It is also essential to strengthen economic periods. If the crisis is extended, viable firms could 8 World Bank (2020e). 6 mozambique economic update february 2021 go bankrupt. This could lead to a loss in production capacity which may take a long time to recover. Figure 6: Moderate non-food price increases Thus, interventions to support the private sector helped contain overall inflation should take into consideration the relevance of Contributions to inflation (%, left-hand axis), ZAR/MZN, and selected sectors and firms for potential growth. USD/MZN exchange rate (right-hand axis), 2016-2020 Sustained economic recovery would also 50% 85 require addressing the military insurgency in 75 40% 65 Cabo Delgado. Since 2017, the country has been 55 30% struggling to control an insurgency orchestrated 45 by militants linked to the Islamic State. The 20% 35 25 conflict has already costed the country more 10% 15 than 2 thousand lives and led to about 500 0% 5 -5 thousand displaced, in the past three years. 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 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 -10% -15 This has contributed to exacerbate the levels of social vulnerability in Cabo Delgado, already Transport Electricity, gas and fuel one of Mozambique poorest provinces according Food items Other non-food items to the 2014/5 household survey. The progress Inflation - Mozambique Inflation - Food MZN/USD (RHS) MZN/ZAR (RHS) of the LNG projects, crucial to the recovery of economic growth, have been affected as attacks Source: World Bank staff based on INE data have occurred in areas closer to the projects operations site. Additionally, the already tight absorption. However, the deflationary effect of public budget has seen significant pressures from falling demand more than offset the upward increased military spending. pressures from the depreciation. A more stable exchange rate between South Africa’s rand, a key Exchange Rate trading partner, and the metical helped stabilize inflation. In the medium term, as the economy and Inflation recovers from the crisis and LNG projects progress, inflation is expected to rise and the Inflation has remained broadly contained metical to appreciate in line with the expected given the sharp drop in domestic demand, large investment inflows. Nonetheless, inflation despite continued currency depreciation. would remain within single digits, reflecting prudent monetary policy and a gradual recovery Inflation stood at 3.5 percent in December 2020 in demand. (year-on-year), reflecting weak demand and lower fuel prices. Food inflation, which accounts for just under a third of the consumer price index The External Sector (CPI) basket, rose by 8.2 percent (year-on-year) in November (Figure 6). High food inflation is due Mozambique’s current account deficit (CAD) to a combination of factors, including challenges is expected to widen significantly in 2020 in sourcing inputs from South Africa in the early owing to poor export performance and a stages of the pandemic, disruptions in domestic sharp increase in imports of LNG-related agri-food supply chains during the State of services. Emergency, and a depreciation of the metical against the US dollar. However, lower fuel prices The CAD, excluding receipts from capital gains, is and easing trade restrictions helped dampen expected to increase from 25.5 percent of GDP in inflationary pressures. Average inflation closed at 2019 to 54 percent in 2020 (Figure 7). It increased 3.1 per cent in December above the 2.8 per cent by 28 percent in the first nine months of 2020 registered in 2019. (year-on-year), reflecting the combined effects of a fall in export volumes and commodity prices Mozambique’s USD nominal exchange rate, an (Figure 7). Foreign direct investment (FDI), mostly important determinant of inflation, depreciated for LNG megaprojects, financed about 43 percent by 18 percent between January and November of the CAD in the first nine months of the year. This, 2020. The depreciation was driven by the decline together with private external borrowing, helped in exports, investment flows and domestic to keep gross international reserves equivalent to 7 part one: recent economic developments and outlook seven months of imports (excluding megaprojects up from 26 percent in 2019, mostly reflecting a imports) in November. Megaproject services contraction in agricultural and manufacturing imports are forecast to more than double in 2020 exports (Table 2). An external financing gap of (Figure 8). The megaproject deficit is expected to 6 percent of GDP is anticipated in 2020, which rise to 24.4 percent of GDP in 2020, up from a should be financed by donor budget support, debt 1 percent surplus in 2019. The non-megaproject service suspension (DSSI), and savings from past deficit is forecast at 39.5 percent of GDP in 2020, capital gains receipts and reserves. Figure 7: The CAD is set to widen in 2020… Figure 8: …due to higher import levels Current account balance (USD millions, left-hand axis), Goods and services imports (USD million), 2011-20 and % of GDP (right-hand axis), 2011-20 2,000 0% 15,000 - -20% 10,000 (2,000) (4,000) -40% 5,000 (6,000) (8,000) -60% 0 2012 2013 2014 2015 2016 2017 2018 2019 2020p 2012 2013 2014 2015 2016 2017 2018 2019 2020p Non-Megaprojects, LHS Megaprojects, LHS Megaprojects Non-megaprojects Overall CAB % GDP Overall CAB % GDP (exc. CGT) Imports Source: BdM data, various years; World Bank staff estimates. Source: BdM data, various years; World Bank staff estimates. Figure 9: … and a drop in commodity exports Figure 10: … despite favorable real exchange rate movements Exports (USD million) and price index (2005 = 100), of key Real effective exchange rate index (2010 = 100) and exports goods, 2016-19 (USD millions), 2011–19 3,500 250.0 190 300 3,000 170 200.0 2,500 150 250 2,000 150.0 130 200 1,500 100.0 110 1,000 90 150 50.0 500 70 - 0.0 50 100 2012 2013 2014 2015 2016 2017 2018 2019 2020p Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Apr-16 Jan-17 Oct-17 Jul-18 Apr-19 Jan-20 Coal Exports, LHS Aluminium Exports, LHS Real Effective Exchange Rate, LHS Coal (Australia USD/ Aluminium (USD*10/ Exports excl. coal and aluminium, RHS mt), RHS mt), RHS Source: BdM data, various years; World Bank staff estimates, World Source: World Bank staff estimates based on BdM and INE data. Bank Commodities Price Forecast. Despite favorable real exchange rate (RER) to COVID-19. Mozambique’s RER currently sits movements, commodity exports in 2020 well below historical levels (Figure 10), which is have been hit hard by lower global demand supportive of export competitiveness. However, and the decline in commodity prices owing goods exports contracted by 26 percent in the 8 mozambique economic update february 2021 first nine months of the year compared to the flows contracted by 21 percent in the first nine same period of last year, reflecting lower demand months of the year compared to the same period and prices for key export commodities and the in 2019, owing to COVID-induced uncertainties disruption in coal production. Together, coal in the transport and communication sectors and aluminum account for about 50 percent (Figure 11). The growing CAD was financed of exports and experienced significant declines by loans, mostly LNG-project financing, and in their prices in 2020 (Figure 9). Coal prices short-term financing such as trade credits. FDI at the end of October 2020 were 21 percent inflows will remain the main source of external lower than in the same period of 2019, while financing. Private external debt, which finances aluminum prices fell by 11 percent over the same LNG investments, is also playing an important period. Coal exports decreased by 53 percent role in closing the financing gap. Large CADs in the first nine months of 2020 compared to will continue through the mid-2020s as LNG the same period last year and are forecast to investments proceed to the construction contract by 64 percent in 2020. Similarly, exports phase. The deficit will remain well above the of aluminum bars dropped by 8 percent in the SSA and LIC averages (Figure 11). At an average of 64 percent of GDP over 2020–2023, the projected CAD would remain large, but it is Figure 11: High FDI levels continue to support expected to be mostly funded through FDI the external position and project financing. Net foreign direct investment (% of GDP), 2012-19 Gross international reserves are expected to 40% reach approximately USD 3.2 billion by the end of 2020, covering about 6.1 months of 30% imports (excluding megaprojects). This places Mozambique’s reserves at an adequate level 20% which helps cushion potential shocks. 10% The global economic recession and falling 0% commodity prices present a less favorable external outlook. 2012 2013 2014 2015 2016 2017 2018 2019 2020p Mozambique SSA LIC The medium-term external outlook remains Note: SSA: Sub-Saharan Africa; LIC: Low-income countries positive but subject to high uncertainty. Falling Source: BdM, various years; World Development Indicators. global demand and commodity prices represent key sources of external risk for Mozambique (Table same period and are forecast to shrink by 17 3). Global growth in 2020 was revised downward percent in 2020. Non-megaproject exports, from 2.5 percent to –4.4 percent.9 The slowdown in which had seen double-digit annual growth the global economy is delaying investments in the between 2016 and 2019, have been severely gas sector. Investment flows into auxiliary services affected by the crisis. Nine-month data show a (e.g. construction, legal and financial services) for decline in key exports such as tobacco, cotton, the gas industry will likely be delayed given large sugar, prawns and wood. uncertainties, travel restrictions and weak investor confidence. Continued low commodity prices Investment flows, mainly directed to remain a cause for concern. The growing megaprojects, have come under pressure Islamist insurgency in the north of the country given the global financial conditions, but could also slow the pace of development of LNG the CAD is expected to be fully financed projects. There are also some upside risks. In the in 2020. medium term, export revenues are expected to rise as coal and aluminum production volumes The CAD will be primarily funded by FDI and, rebound, complemented by a rise in global increasingly, LNG project financing. Net FDI demand and prices. 9 World Bank (2020a). 9 part one: recent economic developments and outlook Table 2: The balance of payments (USD millions, unless otherwise stated) 2017 2018 2019 2020 ∆ ∆ ∆ Actual Actual Actual Estimate 17/18 18/19 19/20 Current Account (% of GDP) -19.6 -30.3 -19.7 -54.1 … … … Megaproject 8.0 -4.6 0.9 -24.5 … … … Non-megaproject -27.6 -25.8 -20.6 -29.6 … … … Current Account (% of GDP), excl. capital gains -22.2 -30.3 -25.5 -54.1 … … … Current Account -2,586 -4,502 -3,012 -7,529 74% -33% 150% Trade Balance -2,830 -4,545 -3,961 -8,089 61% -13% 104% Goods, net -498 -973 -2,081 -3,585 95% 114% 72% Exports 4,725 5,196 4,718 3,181 10% -9% -33% Megaproject 3,657 3,913 3,278 2,211 7% -16% -33% Non-megaproject 1,068 1,282 1,439 969 20% 12% -33% Imports 5,223 6,169 6,799 6,766 18% 10% 0% Megaproject 733 1,277 1,405 1,385 74% 10% -1% Non-megaproject 4,490 4,892 5,394 5,381 9% 10% 0% Services, net -2,332 -3,571 -1,880 -4,504 53% -47% 140% Income and transfers, net 244 42 949 560 -83% 2139% -41% Capital & Financial Account 3,838 4,255 3,823 6,743 11% -10% 76% of which FDI, net 2,293 2,692 2,212 2,264 17% -18% 2% Megaproject 912 2,013 954 1,687 121% -53% 77% Non-megaproject 1,381 679 1,258 576 -51% 85% -54% Other, net (1) 1,342 1,399 1,010 4,347 4% -28% 330% Overall Balance 1,253 -247 810 -786 … … … Source: World Bank staff estimates, BdM data; Δ=percentage change (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 2018 2019 2020p 2021p 2022p Nominal Commodity Price Aluminum USD/mt 2,108 1,794 1,660 1,680 1,713 Coal, Australia USD/mt 107 77 57 57 58 Hard coking coal, Australia USD/t 194 184 138 140 141 Liquefied Natural Gas, Japan USD/mmbtu 10 10 8 8 8 Tobacco USD/mt 4,866 4,579 4,500 4,529 4,558 Current Account Deficit, % of GDP -30 -19 -60 -72 87 Financial and Capital Account, % of GDP 26 22 51 69 85 Net Foreign Direct Investment, % of GDP 18 14 17 24 30 Note: mmbtu = Metric Million British Thermal Unit; mt = metric ton; p = projection Source: World Bank staff estimates; World Bank Commodities Price Forecast; KPMG (2020) 10 mozambique economic update february 2021 Large forex inflows in the medium to long term at 4 percent. The growth estimate seems optimistic are expected to help strengthen Mozambique’s compared to contractions of 0.5 percent and 0.8 external buffers. Mozambique is set to receive a percent forecasted by the International Monetary large influx of foreign currency to finance LNG Fund (IMF) and the World Bank, respectively. This projects in the coming years. However, if not difference mainly arises because the government well managed, this could significantly strengthen foresees a smaller contraction in the extractives the metical, eroding Mozambique’s external sector and minor private services growth. This competitiveness and placing further pressure outlook may be unrealistic considering the on the CAD. economy's 1 percent contraction in the first nine months of the year. Achieving 0.8 percent annual Fiscal Policy growth would imply 6 percent growth in the fourth quarter of the year. Besides being unlikely, COVID-19 has added significant budgetary considering the current economic setting, this pressures to an already constrained fiscal would be higher than the growth observed in context characterized by low revenue the fourth quarter of 2018 and 2019, when the collection, a high public debt burden and economy was in a better position. In addition, a growing wage bill. while inflation is in line with recent developments, the deflator assumption seems inconsistent with The Government of Mozambique had to revise the 4 percent inflation foreseen.12 Despite the the 2020 budget due to growing COVID-19 government projecting positive growth in 2020, fiscal pressures. Budgetary pressures are not nominal GDP appears to contract. These GDP yet fully reflected in fiscal data. The overall fiscal figures imply that total public debt may reach 130 deficit six months into 2020 was lower than the percent of GDP in 2020. same period in 2019.10 This reflects weak budget execution, particularly development expenditure The primary deficit is expected to widen to 4.9 financed by grants, and the fact that most percent of GDP in 2020, up from a pre-COVID-19 COVID-19-related spending to date has been off- estimate of 1.1 percent of GDP. The overall fiscal budget and financed by development partners. deficit is expected to reach 8.3 percent of GDP in However, as growth was revised downwards and 2020, from 5.3 percent in 2019 and a pre-COVID spending needs kept rising, a modified budget estimate of 4.5 percent, reflecting lower revenue for 2020 was adopted in November. The fiscal collection and an increase in COVID-related deficit was revised to 8.3 percent of GDP, from spending in the second half of the year (Table 4). 4 percent in the original budget.11 Besides a Revenue collection is anticipated to fall as demand 1 percent downward revision in total public declines and COVID-19 tax relief measures for revenues, the 2020 supplementary budget adds 3 firms take effect.13 On the expenditure side, percentage points of GDP to original expenditures. implementation of COVID-response measures, Of these, about 2 percent are COVID-19 related estimated at 2.2 percent of GDP, will push total measures, and the remainder is additional military spending to almost 33 percent of GDP, from 30 spending. percent in 2019. COVID-19 is expected to create a fiscal financing gap of 3.6 percent of GDP in Assumptions in the 2020 revised budget appear 2020 (Figure 13). This occurs in a context of limited optimistic and are subject to significant risks. fiscal space due to low revenue collection, over- GDP growth is forecast at 0.8 percent and inflation indebtedness, as well as a growing wage bill and military spending.14 Participation in the DSSI, 10 The half-year fiscal deficit stood at MZN 9 billion, which is 9 percent lower than the deficit registered in the same period of 2019. 11 The modified 2020 budget proposal increases total expenditure to 33 percent from 30 percent of GDP in the initial budget. 12 The value of the deflator may be a result of changes in the GDP structure. But this may have to be confirmed when the third quarter GDP data is released. It is also important to note that the number differs from the 10 percent GDP deflator used in the 2021-2023 Medium Term Fiscal Framework. 13 The Decree Law 23/2020 of April 27 exempted companies affected by COVID-19 with an annual turnover below US$ 40,000 (MZN 2.5m) from corporate income tax advanced payments normally made during the year; see Part Two in this publication. 14 Military spending during the first half of the year doubled to 1 percent of GDP compared to the same period of 2019, as terrorist insurgencies continued to escalate in the north and center of the country. Also, the 2020 suplementary budget added 1 percent of GDP in military spending to originally planned. 11 part one: recent economic developments and outlook budget support from donors, and drawdown In recent years, the government has made of savings from past capital gains receipts are significant progress in fiscal and debt expected to help close the financing gap.15 management, and arrears clearance. Primary and secondary legislation was passed on debt and COVID-19 will further delay fiscal consolidation guarantees management, state-owned-enterprises efforts (Figure 12). Mozambique has made (SOEs) and public investment management. More significant progress on fiscal consolidation in recently, credit risk assessment methodologies to recent years, which helped reduce the primary better support financial operations by SOEs and deficit from 6 percent of GDP in 2015 to 2 percent a manual to guide macro-fiscal projections were in 2019. With total revenue (excluding capital approved. In addition, the government continues gains) remaining unchanged at 23 percent of to prepare financial risk statements in line with GDP between 2015 and 2019, fiscal adjustment the budget cycle.16 Moreover, the verified stock focused on the expenditure side. Spending fell of domestic suppliers’ arrears was reduced from from 33 to 30 percent of GDP between 2015 and 1.6 percent of GDP in 2017 to 0.1 percent by 2019, despite additional fiscal pressures brought 2019. However, COVID-19 has created significant by the elections and the tropical cyclones in additional fiscal pressures, which make the 2019. Spending cuts were mostly borne by the continued implementation of structural reforms investment budget. more pressing. Figure 12: The COVID-19 shock delayed fiscal Figure 13: … as the COVID-19 response resulted consolidation efforts… in a significant financing gap Fiscal balances (% of GDP), 2015 - 19 Financing gap (% GDP), 2015-2020 2015 2016 2017 2018 2019 2020 0.0% 8% 6% 4% 2% -5.0% 0% -2% -4% -10.0% -6% 2015 2016 2017 2018 2019 2020 Primary balance (excl. capital gains) Primary balance (excl. capital gains)_pre-COVID Overall balance (excl. capital gains) Overall balance (excl. capital gains) _pre-COVID Source: MEF, IMF, and World Bank staff calculations Source: MEF, IMF, and World Bank staff calculations 15 According to the government update on COVID-19 donors’ disbursements, as of September 2020 donor support to Mozambique for COVID-19 totaled US$ 452 million (about 3 percent of GDP). Of this amount, US$ 309 million were from the International Monetary Fund, US$ 40 million from the African Development Bank, US$ 41 from the World Bank and the rest from other donors. Details of the disbursements can be found on the Ministry of Finance website: https://www.mef.gov. mz/index.php/covid-19/1037--243. 16 SOEs’ debt and guarantees were at the heart of the 2016 debt crisis, so improving credit operations with SOEs is key to addressing debt vulnerabilities. 12 mozambique economic update february 2021 Figure 14: … while GDP contraction and currency Figure 15: … and domestic debt pressures depreciation led to rising external debt levels remaining significant Public sector debt (% GDP), 2015-2020 Treasury bonds amortization profile 150% 25,000 9.0 8.0 20,000 7.0 100% 6.0 15,000 5.0 4.0 10,000 50% 3.0 5,000 2.0 1.0 0% - - 2015 2016 2017 2018 2019 2020 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 External arrears Amount due ENH % of GDP, RHS Public sector domestic debt (incl. guarantees) % of Revenue, RHS Public sector external debt Total debt Total debt Downside growth scenario Note: ENH: National Hydrocarbons Company Source: World Bank staff calculations based on data from Bolsa de Source: 2020 DSA Valores de Mocambique (BVM) The authorities continue to prioritize spending worst affected by the crisis (Box 5 in Part Two on social and key economic sectors. Despite of this report). In its attempts to combat the significant budgetary pressures arising from a pandemic, the government increased the annual growing wage bill and debt service, the authorities health budget from 3 to 4 percent of GDP. Social have managed to maintain spending levels on assistance to families is expected to double to priority sectors at 14-15 percent of GDP.17 In 1.1 percent of GDP (compared with 0.6 percent alignment with the government’s five-year of GDP in 2019), as coverage was expanded to development plan, spending on education, health households most affected by COVID-19.19 In and infrastructure absorbed about 80 percent addition, a package of measures equivalent to 1 of the priority spending budget. According to percent of GDP was introduced to support firms recent findings from a fiscal incidence analysis (see Part Two). exercise, this expenditure prioritization is equity- enhancing.18 However, there is still room to Mozambique remains in debt distress enhance spending effectiveness. Despite having and COVID-19 has exacerbated debt a similar level of social spending (in percent of vulnerabilities. GDP), Mozambique lags behind peers with similar income levels in terms of lowering inequality and Debt levels are projected to grow in 2020 due increasing access to social services. to currency depreciation and GDP contraction. After falling steadily to 108 percent of GDP in 2019 As the pandemic unfolded, the government (from 127 percent of GDP in 2016), total public focused on protecting social expenditures debt is projected to reach 120 percent in 2020 to maintain service delivery. The authorities (Figure 14). This is mainly driven by an anticipated strengthened health sector capacity and rise in external debt from 89 percent in 2019 to provided support to businesses and households 103 percent of GDP in 2020, largely reflecting 17 Mozambique’s medium-term development plan considers education, health, infrastructure, agriculture, transport and communication, and social action as priority sectors. 18 See Baez et al. (forthcoming). 19 Refers to social assistance to families excluding pensions. 13 part one: recent economic developments and outlook the depreciation of the metical/USD nominal debt reflects the short-term financing needs of exchange rate since January 2020, the contraction underperforming SOEs and debt servicing on in projected GDP and borrowing related to treasury bonds maturing in 2020. The domestic the participation of the Empresa Nacional de debt profile presents considerable levels of Hidrocarbonetos (ENH) in LNG projects.20 maturity concentration. Almost 75 percent of the treasury bonds’ stock is due between 2020 External and total public debt are projected and 2022, which increases the likelihood of debt at around 94 and 111 percent of GDP in 2020, rollovers (Figure 15). With domestic interest rates respectively, when excluding ENH (Figure 14). at an average of 20 percent since the start of the The variation in these ratios when excluding ENH year, domestic debt service in 2020 is estimated reflects the contribution of Mozambique’s LNG at 8 percent of GDP, compared to 5 percent financing to the debt stock. Debt service levels in 2019. remain substantially high. Initial projections indicated that external and public debt service- Following progress in resolving the MOZAM to-revenue ratios could reach 13 and 48 percent, bond default, the authorities are now challenging respectively, by the end of 2020. The country’s another undisclosed loan, the Proindicus. participation in the DSSI between October and The authorities concluded negotiations with December would provide an estimated relief bondholders on the US$ 727 million MOZAM 2023 amounting to 0.6 percent of GDP (about 2 in 2019, resulting in a swap to a US$ 900 million percent of public revenue). Further, the country bond. Under the agreement, the maturity was will benefit from the 6-month DSSI extension extended from 2023 to 2031, while the annual in 2021.21 coupon rate was reduced from 10.5 to 5 percent until 2023 and 9 percent from 2023 onwards. Domestic debt has also continued to grow. They also took steps to legally challenge the US$ Central government domestic debt increased to 622 million Proindicus-linked debt, seeking the 19 percent of GDP in the third quarter of 2020, cancelation of the related debt and compensation from 16 percent in 2019. This trend will likely for damages and losses.22 This debt is part of the continue till year-end as the 2020 supplementary US$ 2 billion package contracted over 2013–2014 budget projects almost 1.5 percent points of to finance security companies backed up by state GDP in additional net domestic financing, above guarantees deemed unconstitutional. The next the 1.2 percent of GDP planned in the original trial session for the Proindicus-linked debt by budget. Apart from the budgetary pressures the London court, scheduled for Feb. 2021, will posed by COVID-19, the increase in domestic evaluate Mozambique’s claim.23 20 Mozambique’s national hydrocarbons company, which represents the government in the LNG investments. 21 Total external bilateral debt service for 2021 is estimated at 3 percent of GDP. 22 Besides the MOZAM and the Proindicus debts, the US$ 535 million Mozambique Asset Management (MAM) debt is also pending, which is another part of the package of the loans considered to be unconstitutional. 23 Details can be seen here: https://clubofmozambique.com/news/mozambique-at-credit-suisses-request-london-court-agrees- to-hear-former-president-noticias-report-174474/ 14 mozambique economic update february 2021 Table 4: Government finances (commitment basis) (In percent of GDP) 2015 2016 2017 2018 2019 2020 Actual Actual Actual Actual Actual Estimates Revenue + grants (excl CGT) 26.0 23.9 24.6 25.8 24.4 24.8 Total revenue 23.2 22.0 25.1 23.8 28.9 22.8 Tax revenues 19.5 18.4 20.0 20.5 25.0 19.7 of which: capital gains 2.5 5.7 Non-tax revenue (incl. 3.7 3.6 5.1 3.2 3.9 3.2 capital revenue) Grants 2.8 1.9 1.9 2.0 1.2 2.1 Total expenditure & net lending 33.1 30.6 30.3 31.2 29.8 33.1 Current expenditure 20.0 19.2 19.4 21.3 20.6 24.2 of which: Compensation to employees 10.0 10.4 10.6 10.8 11.8 13.3 COVID expenditure 0.7 Interest on public debt 1.2 2.5 3.0 4.4 3.3 3.4 of which: arrears 0.5 1.5 0.0 0.3 0.2 Capital expenditure 12.0 8.1 6.7 8.1 7.6 7.7 Domestically financed 5.3 3.2 3.2 3.7 4.7 4.0 Externally financed 6.7 4.9 3.5 4.4 2.9 3.7 Supplier arrears 0.5 1.2 0.3 0.3 0.0 0.0 Unallocated expenditure/revenue 0.0 0.4 0.9 -1.4 0.1 Net lending 0.7 1.8 3.0 1.6 1.5 1.2 Fiscal balance - commitment basis Primary balance -5.9 -4.3 -0.3 -2.4 3.6 -4.9 Overall balance -7.1 -6.7 -3.3 -6.8 0.3 -8.3 Primary balance -5.9 -4.3 -2.8 -2.4 -2.1 -4.9 (excluding capital gains tax) Overall balance (excluding capital gains tax) -7.1 -6.7 -5.7 -6.8 -5.3 -8.3 Financing Overall financing 7.1 6.7 5.7 6.8 5.3 4.7 External financing 4.0 3.9 6.8 3.3 2.2 0.9 Domestic financing 3.2 2.9 -1.1 3.6 3.2 3.8 needs (residual) Financing gap 0.0 0.0 -2.5 0.0 -5.7 3.6 Government capital gains tax 0.1 World Bank Development 0.7 Policy Operation EU budget support 0.4 IMF Rapid Credit Facility/Extended 1.2 Credit Facility African Development Bank 0.3 Debt suspension 0.8 Source: MEF and IMF data, World Bank staff calculations 15 part one: recent economic developments and outlook Though Mozambique remains in debt drop below the thresholds by 2029 as LNG distress, debt is assessed to be sustainable production contributes to higher growth, in a forward-looking perspective. Under exports and fiscal revenues. Debt sustainability the baseline scenario of the latest debt ratios improve faster when ENH’s debt is sustainability analysis (DSA),24 external excluded. This is because total external debt debt indicators breach the policy relevant in the medium-term is largely driven by ENH thresholds in the near and medium term. In borrowing to finance its equity participation in particular, the present value of external public LNG megaprojects, and issuance of sovereign debt (as a share of GDP) is projected to remain guarantees to ENH to cover its share in the above the prudent threshold over the medium borrowing package for one of the projects term. However, the ratios are projected to (Box 3). Box 3: Impact of COVID-19 on the LNG portfolio of Empresa Nacional de Hidrocarbonetos (ENH)1 Recent simulations suggest that the Due to the COVID-19 pandemic, ENH's economic breakout from the COVID-19 may portfolio has become more vulnerable. increase ENH debt costs by 21 percent and The analysis suggests that worsening expand the debt servicing period by a decade. financial conditions posed by the crisis Scenario analysis by the World Bank explores will make it impossible for ENH to pay the impact on the two projects underway, its carry (money it borrows from venture Coral South FNLG (Area 4) and Mozambique partners) from the Coral South FLNG LNG (Area 1), of further delays of six months without a cross-subsidy from the Rovuma and a year, respectively. This scenario also LNG (the FID on the latter is still pending). assumes that the Rovuma LNG project's final In a scenario where the Rovuma LNG investment decision (FID), expected to take project does not move ahead (Figure 17), place between 2020 and 2021, may now only ENH would end up with unpaid debt from occur in 2025, and that production may only the Coral South FLNG when the project start in 2030. These delays, combined with reaches the end of its economic life (in lower commodity prices at the early stages 2047). The analysis suggests that ENH of production, are expected to reduce ENH’s can no longer run Coral South FNLG as available cash flow. As a result, debt-servicing a ringfenced project. The pandemic's capacity is anticipated to decrease, especially emerging impact stresses the need to in the initial repayment years, which will lead evaluate other possible strategies to to interest accumulation and increased debt manage ENH's LNG portfolio, such as exposure (Figures 16 and 17). cross-subsidies and debt refinancing. 1 ENH is the state owned company that representes the state in the gas exploitation in the north of the country. 24 IMF (2020), ibid. 16 mozambique economic update february 2021 Figure 16: ENH debt post-COVID Figure 17: ENH debt; post-COVID; no Rovuma LNG USD millions; RT'20 USD millions; RT'20 4,000 4,000 3,000 3,000 USD 771 million 2,000 2,000 in unpaid debt 1,000 1,000 0 0 2020 2025 2030 2035 2040 2045 2050 2055 2020 2025 2030 2035 2040 2045 2050 2055 Area 4, Coral S FLNG, Rovuma LNG Area 4, Coral S FLNG, Rovuma LNG Area 1, Mozambique LNG Pre-COVID Area 1, Mozambique LNG Source: WBG estimates Source: WBG estimates While uncertainty remains high, fiscal combined with debt service relief, would consolidation efforts could resume from 2021. help reduce debt vulnerabilities and enhance debt sustainability. These fiscal consolidation Fiscal consolidation could resume in 2021, with measures will be all the more critical under the a target of achieving a zero primary deficit by downside scenario. 2024. Once the COVID-19 crisis has receded, fiscal consolidation will be central to generate Achieving this fiscal consolidation will the necessary fiscal space to implement the require continued strengthening of medium- recovery measures. The recently approved term fiscal planning and a framework for 2021 budget establishes a fiscal deficit of 2.6 managing the future inflow of resources. percent, down from the 8.4 percent projected If Mozambique is to maximize the resource in 2020, signaling the government’s continued boom, the authorities will have to manage commitment to fiscal consolidation. In the short- macro-fiscal risks adequately. There is a need term, this improvement in the fiscal balance is for a medium-term fiscal framework that is expected to be driven by a strengthened tax anchored in appropriate fiscal targets and for administration, including through increased establishing a well-designed stabilization fund to tax collection on income, goods and services. manage resource revenue in the future. 25 This In the medium term, the authorities plan to should be complemented by a medium-term achieve a primary surplus by widening the tax debt strategy underpinned by sustainable debt base, collecting some revenues from the early objectives. Finally, the implementation of the stages of LNG production, controlling wage new regulatory framework for managing public bill growth through structural reforms, and investment should also contribute to fiscal improving spending efficiency. Further progress stability, as investment projects are increasingly in improving debt and fiscal risk management, selected based on social and economic impact. 25 After years of debate on the need of a framework to manage revenues from the exploitation of natural resources, the government published the first draft of a Sovereign Wealth Fund October for public consultation. 17 part one: recent economic developments and outlook to 10.25 and 13.25 percent, respectively, in the Monetary Policy first half of the year. The Central Bank also reduced reserve requirement ratios for domestic Mozambique’s financial system entered and foreign currency by 150 basis points, to 11.5 this period of economic uncertainty with and 34.5 percent of total deposits. However, pre-existing vulnerabilities and risks, but the monetary easing paused in June, with policy Central Bank’s policy responses were resolute. rates and reserve requirements unchanged since then amid concerns over inflationary pressures, While maintaining a degree of caution, the mainly from the depreciation of the metical and authorities took several measures to provide fiscal constraints. The monetary authorities have monetary stimulus and avoid a deterioration also put forward complementary measures to in financial system conditions. The Central support the financial system (Box 4), including: Bank reduced policy rates and took additional (i) a Central Bank credit line of US$ 500 measures to ensure financial system liquidity. million for financial institutions participating Since the beginning of the year and until in the interbank foreign exchange market; (ii) September, the Central Bank’s balance sheet removal of limits to access the standing lending had increased almost 50 percent (from MZN 387 facility; and (iii) easing of conditions for credit billion to MZN503 billion). As part of the package restructuring.26 Credit to the private sector has of measures to mitigate the impact of COVID-19, slightly rebounded over the last six months, the monetary policy rate and the standing but the substantial increase in bank credit to lending facility rate were cut by 250 basis points government and SOEs has overshadowed this. Box 4: Government measures taken to support the financial sector and resilient economic recovery Measures to support the financial sector economic recovery: include: • To improve debt transparency and fiscal • Cut in the policy interest rate from 12.75 risk management, the GoM published (i) to 10.25 percent. an annual debt report with coverage of • Reduction of the reserve requirement for SOE and LNG debt from 2019 onwards; local currency from 13 to 11.5 percent (ii) the financial statements of the national and for foreign currency loans from 36 hydrocarbons company (ENH); and (iii) to 34.5 percent. a credit risk assessment framework for • US$500 million forex credit line to SOEs. commercial banks. • To enhance debt sustainability, the • Removal of specific provisioning Council of Ministers approved a requirements for forex lending to decree that establishes a regulatory importers. framework for public investment • Facilitating the restructuring of credits for management, which requires planned Covid-19 affected firms if needed, before projects to be pre-appraised for social- payments become due. economic impact before financing and consideration of disaster resilience for Structural reform measures to support resilient infrastructure projects. 26 Financial institutions were authorized to not constitute provisions for restructured loans because of the pandemic, provided that the loans were not overdue. Specific provisions on foreign currency loans were also waived. 18 mozambique economic update february 2021 Mozambique’s financial system already had approach and high reserve requirements for vulnerabilities and risks before the pandemic. foreign exchange (FX) deposits. Non-performing These include a large share of bank assets and loans (NPLs) are high at 10 percent and vary liabilities denominated in foreign currency, weak among financial institutions. Significantly, the two creditworthiness of the sovereign coupled with largest domestic systemically important banks high bank exposure, and weak prudential and (D-SIBs) have reported higher NPLs in 2020 crisis management frameworks. Mozambique's (Table 5). Although their capital levels remain deteriorating economic outlook will impact the comfortably above minimum requirements, financial sector, with potential spillovers to the this is likely to constrain credit provision to the real economy. Second-round effects could be economy.27 Loan loss provisions are high as most exacerbated by these pre-existing vulnerabilities. NPLs have been delinquent for more than 360 Banks’ aggregate capital levels are adequate, days. A fall in the value of the metical will have although provisioning levels are difficult to assess, an automatic accounting impact on the capital given BOM's waivers. Funding is stable, mostly position of many banks, as a quarter of assets and deposits which have continued to grow since liabilities (system-wide) are denominated in foreign the pandemic hit. Liquidity levels are higher than currency. Exposure to financially distressed SOEs peer countries, reflecting banks’ conservative is a key risk factor in Mozambique. Table 5: Selected prudential indicators for domestic systemically important banks, September 30, 2020 Select ratios (percent) BCI BIM SB ABSA(1) System Total capital adequacy to risk-weighted assets 22.8 43.0 27.5 19.1 26.0 Total capital to total assets 11.4 19.7 13.6 17.1 11.8 Non-performing loans 13.0 24.0 2.8 2.8 11.8 Provisions 41.7 98.8 72.1 82.5 82.5 Return on assets 1.7 3.8 4.2 1.4 2.4 Return on equity 14.9 18.9 28.3 12.6 20.2 Liquid assets 36.8 48.6 69.4 49.6 39.7 Source: Bank of Mozambique data; Note: (1) As of 30 June 2020. Having introduced higher prudential Central Bank measures have helped to requirements, BOM has helped to maintain maintain domestic credit growth and capital buffers at comfortable levels. From increase electronic transactions, but access 2017 to 2020, the Central Bank has increased the to financial services remains a challenge. minimum capital levels from 10 to 14 percent of risk-weighted assets, which are important buffers In 2020, real credit growth has accelerated, but during periods of economic and financial stress. high interest rate spreads and structural issues Capital ratios follow a Basel I regime and do not remain. Mainly driven by domestic currency include operational and market risk charges. The credits, real credit growth averaged 4 percent in Central Bank credit line of US$ 500 million for the first seven months of the year (Figure 18). But the interbank foreign exchange market was an credit to the private sector remains lower than important precautionary measure. Commercial the period leading to the 2016/17 economic and banks had limited demand for the precautionary financial crisis (Figure 19). Risk aversion by banks, credit line, which signals that they had sufficient combined with reduced demand for credit, FX liquidity to meet their FX liabilities. have further lowered the loan-to-deposit ratio, 27 Bank of Mozambique has designated BCI, Millennium BIM, Standard Bank, and ABSA as D-SIBs. 19 part one: recent economic developments and outlook which was already low before the pandemic. remains high in Mozambique. This high-interest Central bank measures have contributed to rate spread reflects heightened risk aversion, high liquidity levels in domestic currency, which structural issues including lack of credit may explain credit growth. However, lending information, limited availability of collateral, rates remain elevated in real terms despite and limited competition in providing credit some reductions in response to the policy cuts. services to the private sector. The introduction The benchmarking lending rate is 15.9 percent, of a single bank identification number will which is still high in real terms, and the average partly help address information asymmetry rate for lending operations with a year maturity issues in the sector and the planned launch of is 19 percent. This shows that the net interest a movable collateral registry in 2021.28 A key rate spread (the difference between interest instrument lacking in Mozambique is a partial financial institutions receive on loans relative to credit guarantee scheme to help increase the what they pay on deposits and other liabilities) risk appetite of financial institutions. Figure 18: Policy measures have supported Figure 19: …but credit levels remain lower than credit growth pre-hidden debt levels Real credit growth (%) Private credit % of GDP 40% 40% 30% 35% 20% 30% 25% 10% 20% 0% 15% -10% 10% -20% 5% -30% 0% Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Credit Foreign Currency Mozambique SSA Average LIC Average Credit in Domestic Currency Nominal Credit Growth Real Credit Growth Source: Bank of Mozambique data, World Bank staff calculations Source: International Financial Statistics The Central Bank has enacted a series of The financial sector lacks capacity and measures to ease cash flow constraints and key instruments to act as a channel for promote digital transactions. It has mandated countercyclical measures. For example, the a reduction in fees and commissions for digital know-your-customer requirements for opening payments through commercial banks and accounts and financial transactions result in mobile money platforms. These measures, high levels of exclusion as a large share of the combined with social distancing requirements, population lacks identification documents. have contributed to a significant increase in the Mozambique also lacks a partial credit guarantee volume and number of electronic transactions, (PCG) facility, used by other countries to provide particularly on mobile platforms. However, guarantees for loans most affected by credit although digital transaction increased in 2020, deterioration in times of crisis. The overall they were not as strong as in previous years, financial safety-net and crisis management likely reflecting subdued economic activity. frameworks have important gaps. Deposit 28 The Central Bank announced in August the introduction of the single bank identification number, which will be required for customers to perform any operations with any financial and credit institutions. Details can be seen here: https://clubofmozambique. com/wp-content/uploads/2020/08/pt_432_n%C3%BAmero-%C3%BAnico-de-identifica%C3%A7%C3%A3o-banc%C3%A1ria.pdf 20 mozambique economic update february 2021 insurance is limited with reserves equivalent financial sector legislation that would introduce to less than 1 percent of insured deposits, and a resolution authority and tools in line with the coverage is low at MZN 20,000 (US$ 275). Financial Stability Board’s Key Attributes of Parliament is considering an amendment to Effective Resolution Regimes. 21 part two: covid-19 has hurt businesses and households. how to respond? Part Two:COVID-19 Has Hurt Businesses and Households. How to Respond? Firms, workers and households in of formal firms has been increasing, albeit at a slow Mozambique are feeling the economic pace, reaching about 90,000 according to recent brunt of COVID-19. estimates.29 Three-quarters of these formal firms are micro firms, employing fewer than 5 people, COVID-19 has caused a sudden income loss while only 2 percent employ 100 or more workers. for many enterprises and households in Geographically, a large proportion of the firms Mozambique, worsening living conditions, are located in Maputo, with the density of firms especially for the urban poor largely engaged decreasing as one moves away from the capital. in the informal sector. The capacity of firms in Mozambique to respond to such shocks is very Market concentration remains high. In 2018, limited. Therefore, the impact on performance large firms employing 100 or more workers and employment has been acute for both formal accounted for 52 percent of total sales volume and informal enterprises. Households have also and 54 percent of total employment. In turn, been severely affected by the crisis through loss micro formal firms made up only 5 percent of of earnings, business activity, and employment. total sales and 17 percent of total employment. This part of the Mozambique Economic Update Trade and retail, hospitality, manufacturing discusses the impact of the COVID-19 crisis on the and other services represent the largest private sector and on households. It outlines the proportions of formal firms and formal sector measures taken by the government to overcome jobs. The manufacturing sector is still small and the impacts, and provides recommendations for underdeveloped, consisting mostly of micro recovery. It starts with a review of the impacts on businesses that produce basic goods to sell to the private sector and closes with the analysis of individuals in their locality or region. The extractive how households are affected. sector is growing thanks to foreign investment. Half of the firms in the sector are exporters, but What Does the Private they account for less than 2 percent of total jobs. Sector Look Like in Mozambique? The impact of COVID-19 on firms’ sales and The private sector mostly consists of informal employment is severe small-scale enterprises. The informal sector accounts for about 90 percent of enterprises in COVID-19 has affected firms through both Mozambique and 31 percent of GDP. The number external and domestic transmission channels. 29 CEMPRE, the official census of the private sector published in 2017, reports 51,237 private firms. The latest reports published by INE in 2020 list 90,505 private firms registered, based on data sourced from the VAT Registry from the Tax Authority, the monthly statistical surveys, the folder of statistical units (FUE) and the Registry of legal entities. 22 mozambique economic update february 2021 External channels include: (i) disruption in global volumes of their larger contractors, which are value chains and trade; (ii) falling international more likely to reduce contracts with small commodity prices, such as coal and aluminum;30 providers than with bigger ones. Medium-sized and (iii) lower foreign direct investment.31 firms suffered a 45 percent contraction in sales Domestically, the crisis is spilling over into volume during the second quarter (y-o-y), whilst the economy through two main channels: (i) large firms recorded a 10.8 percent reduction. economic disruptions caused by containment According to the confederation of private sector measures; and (ii) direct health impacts of associations (CTA, 2020), given the greater COVID-19. Domestic containment measures weight, the decline experienced by large firms have disrupted the flow of people, goods, and represents a higher share of the economy. capital, amplifying the impact of external shocks on formal and informal firms. Firms have been affected by a combination of challenges, including liquidity constraints, Disruptions caused by the measures to contain maintaining international trade levels, lack the spread of the virus have reduced local of raw materials, and a forced reduction of demand for goods and services, affecting 90 workforce on site (Figure 21). Almost half of percent of all formal firms and informal sectors. firms faced liquidity challenges given lower Firms have been mainly affected by low demand, sales and inflexible cost structures. Difficulties in losing 41 percent in business volumes during the importing and exporting affected 44 percent of first half of 2020 compared to the same period in firms across the country due to reduced global 2019. In the second quarter (Q2), 75.5 percent of trade, initial confusion over border procedures firms reported 53.5 percent compound losses in and speculative increases in transport costs. business volume. The fall in demand particularly Workforce reduction affected 28 percent of affected the commerce and retail sectors, which firms, limiting their production capacity. represent more than 70 percent of the small firms in the country. Firms suffered from lack The capacity of firms in Mozambique to of liquidity and constrained working capital. respond to this shock is limited, primarily Small, cash-dependent firms experienced due to their constrained financial capacity. financial distress and fell into arrears. Only a few trading companies were able to capitalize on the business opportunities arising from the Figure 20: The impact on sales has been pandemic, such as the provision of medical and particularly severe for small businesses sanitary equipment, and digital services. Percentage change in sales volume of formal firms in the first half of 2020 (year-on-year) Small businesses were worst affected 100 90.5 89.5 91.1 (Figure 20). Most of the firms affected by the 80 crisis were small (86.5 percent), 12.8 percent 60 medium-size firms and only 0.5 percent large. 40 Small businesses recorded a reduction of 20 48.7 percent of business volume (y-o-y) in the 0 second quarter (INE, 2020b). Small businesses -20 -40 -22.3 -21.8 have more fragile operating structures and have been more exposed to the reduction of demand, -60 -48.7 since they trade primarily in the retail sector Y-o-Y business volume with individual consumers. From a business-to- Share of firms affected business perspective, small firms may also have Note: Y-o-Y: year on year, comparing 2020 with the same period in 2019. been more affected by the reduction of business Source: INE (2020b). 30 The disruptions to trade and value chains, and the decline in global commodity price, have been significant. Growth deceleration in Mozambique’s key export destination markets, namely the European Union (accounting for 30.5 percent of the country’s exports), South Africa (18.8 percent), and India (17 percent), led to a drop in demand for its export products. 31 For instance, the highly anticipated Final Investment Decision (FID) of Area 4’s gas investment (led by Exxon Mobil) was delayed for at least one year. The other major gas investment in Cabo Delgado, led by Total in Area 1, was forced to suspend operations for seven weeks after finding COVID-19 cases on its construction sites. 23 part two: covid-19 has hurt businesses and households. how to respond? Most small firms do not fulfill the necessary in business volumes and export demand, and collateral requirements to secure bank loans. no government subsidies for labor costs).33 Even for most medium and large firms, the Retail companies have less survival time (about cost of external financing is prohibitive. About 5 weeks) than those in manufacturing (more 75 percent of firms are financially excluded. than 13 weeks) and much less than those in The International Finance Corporation (2017) the extractive industry (more than 20 weeks). estimated the financing gap of micro, small and Within manufacturing, exporting firms have medium enterprise (MSME) in Mozambique at lower survival probability given the cycle of 10 percent of GDP in 2017.32 The median firm in payments they are subject to. These figures for Mozambique has 6 to 10 weeks of survival time Mozambique are not too far off those for other without revenues (that is, assuming a collapse emerging economies. Figure 21: The fall in demand was firms’ biggest constraint % of firms affected by identified constraints The most affected industries Low level of demand for goods and services Hospitality Commerce Financial Services 75.5% Lack of working capital Hospitality Industry 47.8% Difficulty to import and export Hospitality Commerce Transport 43.9% Lack of raw materials Construction Industry 39.8% Reduced workforce Hospitality Industry Health 28.1% Source: INE (2020b). Companies of all sizes responded to the their activity (Figure 22). The closure of viable drastic reduction in revenues by cutting business and the loss of productive jobs will their labor costs. Common actions by firms likely reduce productive capacity, with a possible included reducing working hours, suspending, negative impact on Mozambique’s long-term and terminating labor contracts (Figure 23). growth potential. About 77,539 wage contracts (2.3 percent of the workforce) were terminated. As a result, at Among the workers affected, women made up end-June 2020, 3.6 percent of the workforce a larger share (7 percent of the women in the had lost their jobs and another 62,000 had seen labor force) than men (5.5 percent of the men their contracts suspended, according to the in the labor force). The women affected were provisions of Art.123 of the Labor Law. By the primarily working in entertainment and recreation, end of the second quarter, 20 percent of firms hospitality and services. Men were mostly affected were paying lower salaries. About 2.9 percent by suspension or interruption of contracts in the of all the firms affected were forced to cease extractive, construction, and hospitality sectors. 32 A difficult macroeconomic environment, limited domestic resource mobilization, lack of credit information, limited availability of collateral, limited access to credit risk-sharing facilities, and limited diversification of financial products all help explain this gap. 33 Bosio, et al. (2020). 24 mozambique economic update february 2021 Additionally, 56 percent of firms adopted worker sources of income. As a result, salary reductions rotation, but only 19 percent followed the bi- and job losses had a greater-than-expected impact weekly rotation schedule recommended by the on wage employed workers and their families. Ministry of Health, raising questions about the effectiveness of the measure. The aggregate Companies continue struggling despite decrease in hours worked in Q2 corresponds to the gradual opening of the economy. The 17.6 percent of hours worked per person. construction, hospitality and retail sector remain the most affected sectors and are the Salary cuts and layoffs reduced households’ most pessimistic: 61 percent of companies still income and led to lower demand for goods. faced limitations on activity at the end of the Financial institutions consulted indicate that a third quarter. The employment indicator in the large share of wage employed workers leverage third quarter was at its lowest level of the year. their salaries to access credit to finance formal All sectors, except manufacturing, expect to or informal activities to help improve their living see a price increase towards the end of the standards. These activities are often entrusted year, reflecting the common trend of the period to family members, who in turn gain their own (INE, 2020c). Figure 22: Hospitality and entertainment Figure 23: … firms resorted to cuts in labor costs workers were the worst affected Percentage change in sales volume of formal firms in the first Percentage change in sales volume of formal firms in the first half of 2020 (year-on-year) half of 2020 (year-on-year) Entertainment Reduction of working hours Health and social services Telecommute Education Other services Rotation Admin and services Consulting Contract termination Communication Hospitality Collective leave Transport and warehousing Commerce and Retail Suspension of contracts Construction Suspension of activity Utilities, energy, water Industry Shut down Extractives Agriculture Others -5% 5% 15% 25% 35% 45% 0% 10% 20% 30% 40% 50% 60% Companies forced to close activity Workers Companies Companies that terminated contracts Companies that suspended contracts Source: INE (2020b). Source: INE (2020b). with available budget reaching 0.6 percent of How Has the GDP as of September 2020. However, only a Government Responded small proportion of this has been disbursed so to These Impacts? far. The effectiveness of the measures has been limited—either being of insufficient scope or The government and the Central Bank have else hindered by procedural bottlenecks. Also, provided support to the private sector through direct support (transfers) were not among the a combination of measures: (i) financial sector measures adopted, and government support and credit market measures; (ii) fiscal measures; was not conditioned on keeping jobs. The loss (iii) measures related to utility costs; and (iv) of productive jobs and critical skills could have workforce measures. These are summarized in long-term implications for firms and the broader Box 5. The resources planned for private sector economy, thereby limiting the cost-effectiveness support amounted to about 1.5 percent of GDP, of the policies. 25 part two: covid-19 has hurt businesses and households. how to respond? Financial sector and credit by the reduction of the Central Bank’s reserve market measures. ratio (see also Part One in this publication). This measure helped free up liquidity in the order of The Central Bank and the government helped to US$ 90mn for commercial banks. Additionally, alleviate the liquidity constraints of firms under the Central Bank relaxed conditions for credit financial distress. The government and the Social restructuring of commercial banks’ clients for Security Institute financed a US$ 22.9mn credit up to US$ 500mn for six months, based on the line to provide direct liquidity support to firms. assessment of borrowers’ capacity to pay under The credit lines are managed by Banco Nacional the new terms. de Investimento (BNI) at a discounted interest rate of between 8 and 12 percent. However, the Unattractive costs and uncertainty surrounding funds were too limited to relieve firms of financial repayment conditions halted the adoption of distress and up to September, six months after the Central Bank’s US$ 500mn credit line for the introduction of social distancing measures, import traders by commercial banks. The aim no disbursement had been made. About 1,031 was to finance clients’ commercial transactions companies applied to the BNI credit line, with linked to the imports of essential consumer requests amounting to a total of US$ 152mn goods, raw materials and equipment. Companies – 587 percent more than the funds allocated. found this measure unattractive as it added 5.6 Submissions of new proposals were halted in percent in costs to the six-month Libor premium, September due to excess demand.34 and because the conditions for repayment were uncertain. The measure was not attractive to Commercial banks were incentivized to meet banks either, due to low loan-to-deposit ratios their private sector clients’ need for liquidity in foreign currency. Box 5: Government Support Measures for Households and Businesses As of mid-October 2020, the Mozambican • Forgiveness of social contribution Government has implemented a range of fines and reduction of interest rates for measures to address the short-term impact payments due. of the COVID-19 pandemic and to support • US$ 14.5m credit line to support small reforms that will aid the recovery: and medium-sized enterprises (SMEs) affected by the crisis for treasury and Measures to support businesses: equipment acquisition. • Postponement of income and • US$ 8.7m credit line repayable at 4 corporate tax advance payments for percent interest rate. small firms (turnover less than MZN 2.5 million) until 2021. Measures to protect families: • Authorization of VAT tax credits • Expansion of beneficiaries of social compensation with other taxes owed protection programs from 592,179 to until 31 December 2020. 1,695,004 households. • 10 percent reduction of electricity tariffs • Simplification of ID requirements for businesses. for mobile money transfers to social • Suspension of mobile money protection beneficiaries. commission fees and increase in • Establishment of a fuel price stabilization mobile money transaction limits for fund and allocating savings to the three months. Covid-19 response. 34 At the time of writing, 39 per cent of the proposals had been assessed. Of those, only 25 per cent were considered eligible, for a total allocation of US$ 14mn. However, disbursement is expected to take place only after in-depth due diligence on the collateral proposed by the applicants. 26 mozambique economic update february 2021 • Suspension of VAT on soap, oil and opportunistic pricing. sugar until end 2020. • 50 percent reduction in electricity tariffs • Suspension of water charges for for low-income households during the customers with consumption of up to state of emergency. 5 m3 and exemption from fines. • Prohibition of eviction of tenants. • Monitoring of market prices to curb • Cross subsidies to kitchen gas bottles. Digital payments were incentivized by removing Measures to reduce utility costs transaction fees and increasing daily limits to promote cashless transactions. Transaction A set of measures targeting household fees on mobile money were removed, whilst the enterprises has been introduced to reduce daily limit was increased. E-money transaction utility costs. These include the suspension limits doubled to US$ 757.50, whilst commission of water charges for small consumers and fees for transactions to mobile wallets fell by exemption from the collection of fines and 50 percent. Though this step was welcomed, reduced fuel prices. Electricity bills were its effect was limited by the economy’s lack of reduced by 10 percent for companies, whilst preparedness for going cashless. 3,000 individual low-income customers who consume up to 125kW per month were allowed Fiscal measures to postpone the fixed tax on electricity and saw their bill reduced by 50 percent. Fiscal measures were introduced to support small firms. The corporate income tax “per Workforce measures account” was waived during 2020 for companies that subscribed to the organized regime (IRPC) Temporary measures were introduced to and with an annual turnover of less than MZN regulate workforce relations. Only 50 percent 2.5mn (US$ 36,000). The special advance of employees were allowed in the workplace, payment “Special per account” was also except for essential industries, with a turnover postponed to early 2021 for these companies. In of service teams every 15 days. Simultaneously, addition, up until December 31, 2020, taxpayers remote working and the use of ICT were with VAT credits were allowed to offset these allowed. An independent survey reported that credits against other taxes they owed, as long as only 22 percent of firms still required all staff the cases had already been decided in court.35 to work in the office. The National Institute of Social Security (INSS) forgave fines and reduced The impacts of these fiscal measures were interest on late payments resulting from non- limited by overly restrictive eligibility criteria. compliance with social security contributions. The targeting did not include the majority Remuneration for absences by employees who of small firms that are registered under the are infected by COVID-19, or by employees who simplified tax regime. As a result, according to have to take care of infected family members, INE, 14.7 percent of firms did not pay any of their are covered by the INSS. fiscal obligations at the end of Q2. However, as of June 2020, 8.9 percent of medium-sized How to Help Businesses Move Forward? businesses and 11.6 percent of large businesses – by far the most important fiscal contributors In the short-term, measures to support viable in absolute terms – reported having fallen into firms need to be strengthened. Productive arrear (INE, 2020b). assets and jobs should be protected, while 35 All legal procedures were initially suspended for 60 days. With the gradual re-opening of the economy, courts have reinstated service. Nevertheless, all time limits related to all court cases and procedures had been suspended, including procedural time limits for insolvency. 27 part two: covid-19 has hurt businesses and households. how to respond? in the medium term, the agenda of structural measures and lockdowns, and continued low reforms will have to be reignited. Support needs levels of demand, business will need additional to focus on firms that were most affected by liquidity support through relief measures. the crisis and were economically viable before the crisis. It will be important to promote the Focus policies on formal firms that are reallocation of resources to more efficient more affected by demand shocks and were medium-size companies and avoid measures economically viable before the crisis, to protect that risk propping up unviable firms or declining productive assets and avoid unemployment industries.36 In the recovery phase, support should of productive workers. Data for more than 30 focus on productivity, economic transformation countries show that the main drop in sales due and job creation. This would include gradually to the COVID-shock occurs around the peak of eliminating relief measures and implementing the health crisis and is persistently large after 16 policies that support firm capability, including weeks. Support to firms’ treasury should be made the adoption of digitalization and improved conditional on job protection to defend critical production practices. This can facilitate linkages skills and productive capacity in the longer term. with mega-projects and exploring opportunities in the international markets. Tailor limitations on economic activity by region and sector for increased effectiveness. The measures implemented so far did not The results presented by the INE assessment of fully target the sectors most affected by the the COVID-19 crisis on the private sector suggest pandemic, such as hospitality and tourism, that firms suffered from heterogeneous causes transport, micro firms or household enterprises. and were impacted differently according to their Incentives, cash injections and tax relief were sector and location . For example, over 36,000 not tailored to the characteristics of firms in firms were affected in the Province of Maputo, these industries. Looking ahead, it is crucial to representing 44 percent of all firms affected tailor measures and their implementation to during the crisis, followed by Nampula with 8 the different regional contexts in Mozambique. percent. This is a consequence of the degree of Support to the private sector needed to be social distancing, the density of the population, more rapid, transparent and time bound to and the mobility of workers. address immediate liquidity challenges, prevent widespread layoffs and limit firm bankruptcies Reinforce and extend discounted credit lines effectively.37 It is also essential to continue to to meet demand, with the support of partnering improve transparency by publishing information countries or multilateral agencies. Making on allocation and execution of COVID support the credit lines accessible from commercial to firms. banks instead of only BNI may increase fund allocation efficiency, motivated by a competitive The sections below outline the support environment. In this case, a unique selection panel measures for businesses under two scenarios: and database should be created to avoid double scenario 1: COVID-19 outbreak with a significant funding the same firms. The criteria to identify second shock; and scenario 2: COVID-19 beneficiaries could be a mix of their results for stabilizes, the economy enters recovery phase. the past three years and turnover, number of staff formally employed and a minimum number of Scenario 1: COVID-19 outbreak with years in operation. The success of the measure significant second shock will depend on the capacity of the managing institutions to select beneficiaries transparently, In the case of an acceleration of COVID-19 cases provide quick feedback on applications, and in trade partner countries, prolonged restrictive rapidly disburse the funds. 36 In particular, conditions need to be improved to reduce the number of “zombie firms” - those that earn just enough money to continue operating and service debt but are unable to pay off their debt, and in turn, unable to invest or grow, thus diverting resources away from healthy, viable firms Adalet McGowan et al. (2017). In Mozambique, “zombie firms” are likely to represent a significant share of registered MSMEs. Even in normal circumstances, many MSMEs struggle to grow due to a mix of factors, including low human capital, difficult access to credit, low capitalization, and poor financial and management practices. 37 World Bank (2020b). 28 mozambique economic update february 2021 Extend fiscal relief and payment postponement and the prospects of economic recovery. to a wider share of firms. This could be achieved by including those under the simplified tax regime Combine access to capital with efforts to (ISPC), and considering increasing the threshold improve the conditions under which the private for taxpayers under the organized regime (IRPC) sector operate, particularly SMEs. Facilitating to MZN 14.7mn (according to the definition access to capital is important, if paired with other of small businesses)38 or US$ 1mn turnover interventions on the supply chain. As seen after (considered as small taxpayers). Additionally, the the Tsunami that hit Sri Lanka in 2004,40 and after requirement for court cases to be resolved for the Great East Japan Earthquake in 2011,41 lack VAT postponement should be reviewed. Given of access to capital inhibits the recovery process. government's limited fiscal space, resources to On the other hand, firms that received randomly implement these measures could be mobilized allocated grants managed to recover profit levels through different mechanisms: (i) savings from almost two years before other damaged firms. the DSSI; (ii) additional donor support; and (iii) a Capital is important for the recovery of the retail tax reform to expand the fiscal base. sector, whilst the manufacturing and services sector require support to restore their broken Support informal self-employed (subsistence) supply chains. Additionally, SMEs can benefit entrepreneurs and household enterprises from guidance to support business resilience. through social protection programs. The Examples of forward-looking support programs government’s plan to offer micro firms cash are the mentoring programs and financial grants of US$ 200 repayable in six months to workshops conducted in Queensland, Australia, offset loss of income is appropriate. However, to assist SMEs navigating periods of crisis. the amount seems inadequate and difficult to implement at this scale.39 Policies that are Continue to improve the frameworks for designed to target formal enterprises, even secured transactions and insolvency. A new small ones, might be less effective for informal secured transactions law was enacted in 2019 enterprises, which have lower levels of skills, and a movable collateral registry was expected human capital and access to finance. Mass to be launched in 2021. The framework for underemployment is a structural and enduring resolving insolvency in Mozambique is better feature of the Mozambican economy, and has than its peers, but creditors still face major been exacerbated by COVID-19. Even returning challenges in debt recovery. The Insolvency to business as usual means ongoing economic Administrator Regulations were approved in distress. Without resolute actions to address 2019 but need to be complemented with these structural constraints, the informal sector capacity building and increased use of out- will remain a large part of the economy. of-court settlement. The new framework can help MSMEs to have higher access to capital. COVID-19 stabilizes, the economy enters Offering new financial products such as leasing recovery phase and factoring will become more feasible. Focus support to the formal private sector Invest in skills, infrastructure development and during the recovery phase on productivity and conditions to support the development of a local economic transformation and job creation. If transformative industry. This will increase the the number of cases is kept under control and the resilience of the economy in the face of external, normalization of economic activities continues, global supply chain shocks, and help develop including in the country’s main trade partners, integrated local value chains. Mozambique the government could gradually start to phase ranked 84 (out of 160) economies in the 2016 out relief policies in favor of structural measures Logistics Performance Index, performing poorly that improve the country’s fiscal performance for its trade and transport infrastructure quality 38 Decree No. 44/2011 of 21 September. 39 Extended review of conclusions from international experiences can be found in Gaffurini and Campos (2020). 40 Mel, McKenzie, Woodruff (2014). 41 Kashiwagi, 2019. 29 part two: covid-19 has hurt businesses and households. how to respond? and for the competence and quality of its logistics and food sector. Increasing access to agricultural services. Mozambique also has poor levels of inputs (seeds and fertilizer), equipment and electricity infrastructure, and problems with transport services to sustain short-cycle crops transmission and distribution losses. such as horticulture and potatoes can guarantee food supplies – especially to urban centers – Improve the private sector capacity to tap into and support peri-urban farmers. Facilitating opportunities by improving capabilities and agreements between farmers and distributers promoting investment for worker training, in urban areas would streamline the food supply management training, business development chain. The first step would be for the Ministry services, technology adoption. Mozambique’s of Agriculture and Rural Development and the firms score low on capability measures. Weak organizations working on farmer development to management practices mean a lack of lean collaborate to update the mapping of producers production mechanisms, limited development and production. of talent, lack of planning and targeting, and limited use of documentation to capture Implement tailored measures to relaunch lessons. Larger firms are more likely to employ the hard-hit hospitality industry. Firstly, build more skilled workers and managers and provide investment promotion capacity to assess, additional training.42 develop and package investment opportunities. As international tourists are expected to only Improve data digitalization and make integrated return slowly, promoting opportunities to fill databases available to public institutions to gaps in mid-level accommodation can attract improve the targeting of public policies and investment to respond to internal demand. support measures to the private sector. Scarce Domestic tourism can be boosted by offering public resources can therefore be invested reduced airfares during off-peak seasons or as more efficiently during the recovery phase part of lower-cost packages. International visitors and beyond. The authorities could provide an can be attracted by creating an online one- environment conducive to experimentation to stop-shop for information to attract and inform innovative services and remove obstacles to the potential tourists and respond to negative media use of more efficient technologies by financial coverage. Additionally, promoting links between institutions. Digital technologies have proven the hospitality industry and local producers can to be game changers in times of crisis, but increase their integration into the tourism value firms in Mozambique lag behind other African chain and reduce reliance on imports. countries on the adoption of new business practices, such as digital platforms. To close the COVID-19 has mainly gap, (i) regulated institutions should be allowed to experiment with new products and services affected vulnerable urban under oversight, with regulation following a households need and proportionate risk-based approach; (ii) the regulatory sandbox for fintech (financial The impacts of COVID-19 on households has technology services) firms to pivot innovative mainly been felt through loss of earnings and solutions and business models in a controlled employment, especially for the poor working environment should be streamlined; and (iii) all in the informal sector. Mozambique still has a market participants should have access to a level relatively small number of deaths and people playing field. falling ill from COVID-19 (Box 1). The pandemic is mainly affecting households through two Sector-specific measures interlinked channels: incomes and jobs, and poverty vulnerability. Improve framework conditions for the farming 42 Lemos & Scur (2014). 30 mozambique economic update february 2021 Job and income losses are concentrated Due to the structure of the labor market, the in sectors and areas where the poor are impact of COVID-19 on employment and predominant. The services sectors (retail, incomes has been mainly felt in the cities. transport, restaurants, tourism, personal service, Over 70 percent of the workforce is engaged in etc.), which employs most of the urban poor, agriculture, either self-employed or in informal accounted for 60 percent of the overall reduction employment. Most of the remaining workers in jobs recorded (Figure 28). The drop was (24 percent) participate in the services sectors, observed across all provinces, but was particularly with a small fraction (4.9 percent) employed notable in Manica, Cabo Delgado, Niassa, and in manufacturing. Social distancing measures Zambezia, the latter three being among the and the shutdown of firms have largely reduced poorest provinces (Figure 27) and also provinces economic output, employment and incomes in where a significant share of households reported the main cities. significant losses in income (Figure 28). The negative impact on income and jobs For rural households, the effect of COVID-19 has been significant on labor income is less important. Most rural households consist of smallholder farmers who The urban population has been hit hard. earn their livelihoods mainly from traditional According to results of a high frequency survey agriculture (85 percent), which is relatively less (HFS) conducted by the National Statistics exposed to the negative effects of lockdown Institute (INE),43 67 percent of the urban measures. Non-farm rural employment is at a population were not working in June 2020, higher risk, but its share is low, only 9 percent of whereas over one-third were working before all primary jobs. Most income from agriculture is COVID-19 in March (Figure 24). This indicates in the form of auto-consumption and to a lesser the large employment and income losses that extent from sales of production. Only 18 percent are likely to be associated with the pandemic of farmers grow at least one cash crop and less (Figure 28). Over 70 percent of workers indicated than half of them sell any part of their production that they were unable to work normally – of in markets. In addition, population density is these, only 9 percent received their wages in much lower in rural areas, which helped reduce full. About 41 percent of the urban households the spread of the virus. Of the total number of interviewed reported a reduction in their wage (registered) jobs lost due to COVID-19, only income. In addition, most of the urban poor earn 5 percent was accounted for by agriculture. their income through self-employment in the However, the impact of the crisis on the informal informal economy, mostly in small-scale retail sector in urban areas may have exacerbated the such as small shops, food stands, etc. Informal vulnerability of rural households that rely on self-employment is also the main livelihood for informality as a source a non-agricultural jobs. the urban non-poor who are vulnerable to falling into poverty. 43 The survey was conducted between 19 and 30 June 2020 and focused on 1,185 urban households, corresponding to 5,938 individuals. 31 part two: covid-19 has hurt businesses and households. how to respond? Figure 24: Significant employment losses Figure 25: … leading to declines in household occurred during the pandemic… income Individuals in work in the 7 days prior to the survey (%) Share of households reporting changes in income since COVID outbreak (%) 80% 33% 60% 40% 20% 0% Increased Stayed the same Reduced Increased Stayed the same Reduced 67% Men Women Yes No Farming, livestock or fishing Wage employment Source: World Bank staff based on HFS. Source: World Bank staff based on HFS. Figure 26: Job losses were concentrated in Figure 27: The poorest provinces were services, where the poor are largely employed particularly affected Number of jobs registered (thousands) Poverty levels and variation in recorded jobs (%) 180 80% 150 40% 120 Thousands 0% 90 -40% 60 30 -80% - -120% Gaza Sofala Tete Manica Zambezia Niassa Inhambane Maputo Maputo Nampula Cabo Delgado Total Jobs Agriculture Services Others construction Industry (including Number of Registered Jobs Quarterly Variation 2020 Q2/2019 Q2 Poverty Incidence 2014/15 2019 Q2 2020 Q2 Poverty Incidence National Source: World Bank staff based on Ministry of Labor Quarterly Bulletin. Source: World Bank staff based on Ministry of Labor Quarterly Bulletin. While remittances have fallen, the overall impact share of migrants to South Africa, the most on households is expected to be limited. Total affected country in the region. With the shutdown inflow of remittances stood at US$ 36.8 million of the economy in South Africa to contain the in the first half of 2020, 26 percent lower than spread of COVID-19, many Mozambiquan during the same period in 2019. But, unlike other migrants returned home meaning they were no countries in the region, Mozambique is not longer earning money to support their families. highly dependent on remittances from abroad. However, the recent easing of restriction Remittance inflows accounted for 1.1 percent measures in South Africa and the opening of the of GDP in 2018 and 0.9 percent in 2019.44 borders has allowed migrants to return to their Remittances are most important in the southern workplace and will counteract the initial expected part of the country, which typically has a greater decline in remittances. 44 World Bank (2020e). 32 mozambique economic update february 2021 Income lost directly due to deaths and illness urban households interviewed expressed concerns was limited. The number of deaths and positive about not having enough food and 37 percent COVID-19 cases is still low in Mozambique (Box had gone a day without eating. Food prices rose 1). Results from the HFS show that most urban by nearly 8 percent year-on-year in August, up households were aware of COVID-19 and from 3.4 percent in the same period of 2019. The complied with the preventive measures. Out-of- consumption budgets of both poor and non- pocket health care expenditures did not affect poor but vulnerable households are vulnerable households much either. Members of poor to increases in food prices. On average, rural and and vulnerable households who fell ill were urban households spend 60 and 40 percent of their treated through the National Health System, income on food, respectively, and these shares which is more affordable than private sector are even higher for low-income households. In clinics. Results from the HFS indicate that normal times, 1 in 4 households are considered urban households have faced no problems in chronically food insecure. Mozambique is a net accessing general medical treatment. importer of basic staples such as maize and rice, which heightens the risks of food scarcity and price COVID-19 has led to food insecurity. Results from rises due to supply disruptions. For instance, 94 the HFS show that, as of June, 76 percent of the percent of maize imports come from South Africa. Figure 28: Income losses were greatest for households in the poorest provinces Households reporting losses in income (%) Zambezia Tete Sofala Niassa Nampula Maputo Provincia Maputo Cidade Manica Inhambane Gaza Cabo Delgado 0% 20% 40% 60% 80% 100% Wage employment Farming, livestock or fishing Source: World Bank staff based on HFS. COVID-19 could wipe out day, 48.4 percent of the population are classified as poor—56 percent of rural households and 32 much of the recent gains percent of urban households. Nearly 8 out of 10 in poverty reduction poor people live in rural areas. When assessed against the international poverty line (US$1.9 The pandemic hit Mozambique when it was PPP), the poverty headcount ratio rises to 62.9 already facing high levels of socioeconomic percent nationally. The second largest group are vulnerability. According to the methodology the “non-poor but vulnerable to fall into poverty”, applied by the World Bank in its latest Poverty representing 25 percent of the population. Assessment of Mozambique,45 and using data Even a slight drop in consumption would push from the 2014/15 household budget survey46 and many of these households into poverty as well. a national poverty line of 25.9 MZN per person per The vulnerability of poor households is further 45 World Bank (2018). 46 Inquérito sobre o Orçamento Familiar 2014/2015 33 part two: covid-19 has hurt businesses and households. how to respond? compounded by low asset holdings and limited the crisis (see Box 1) – would raise the poverty access to basic services, especially in rural areas. rate by more than 5 percentage points, from 48.4 to 53.4 percent. This is equivalent to 1.4 Simulations suggest that at least 1.4 million million more Mozambicans slipping below more Mozambicans could fall below the the poverty line. This shock would wipe out national poverty line. A first scenario that half of the gains in poverty reduction achieved assumes a decline in consumption for the between 2008 and 2015, the period with the entire population was used to estimate the size fastest growth in consumption expenditures. A of the effects.47 The results, shown in Figure 29, more negative scenario could see the poverty underscore the high levels of vulnerability. A rate rise to 62.7 percent, well above the levels short to medium-term reduction of 10 percent recorded in 2002/03. This scenario is based in consumption per capita by all households on a reduction of 25 percent in consumption – a reasonable assumption given the scale of (Figure 29). Figure 29: Poverty will increase in even the Figure 30: Most urban jobs are in sectors likely most optimistic scenarios to be hardest hit Modelled impact of consumption decreases on poverty share Share of urban workers by economic sector 100 40% 90 78.5 71.8 80 30% 26.3% 62.7 61.8 70 59.7 58.8 56.0 Percentage 53.5 23.5% 50.8 60 48.4 42.9 50 20% 35.7 33.7 32.0 40 30 20 10% 6.4% 4.5% 3.1% 10 0 0% Total Urban Rural Other services Manufacturing Administrative services Extractive industries Energy Agriculture Trade and finance Transport & communications Construction Baseline -5% -10% -25% -50% Source: World Bank staff calculations. Source: World Bank based on IOF-2014/15. Figure 31: A large share of at-risk jobs is held Figure 32: A fall in consumption could see urban by vulnerable people poverty increase significantly Share of urban workers by consumption vulnerability Modelled poverty impact on households with members employed in at-risk sectors 35% 32.4% 60% 50.0% 30% 50% 24.9% 25% 38.7% 19.9% 40% 32.9% 34.1% 20% 32.0% 14.1% 30% 15% 10% 8.7% 20% 5% 10% 0% 0% Q1 Q2 Q3 Q4 Q5 Baseline -5% -10% -25% -50% Consumption quintiles Reduction in household consumption Source: World Bank. Source: World Bank based on IOF-2014/15. 47 The national household budget survey does not collect comprehensive income data. 34 mozambique economic update february 2021 Job losses or reduced working hours can term. Schools were closed during the State have significant effects on urban poverty and of Emergency. While this was an important inequality. About 64 percent of the jobs in the measure to prevent the spread of the virus, urban economy are in sectors most at risk from it interrupted teaching for about 6.5 million being negatively affected by COVID-19 (colored children in primary and 1.2 million children in in pink in Figure 30). Further disaggregation shows secondary education. While other countries that 42.7 percent of these at-risk jobs are held by moved to teaching students online, there is low- and medium-skilled workers (i.e. those in the virtually no capability for Mozambique to do first three quintiles, roughly representing the poor this, as only 7 percent of the population has and vulnerable) (Figure 31). Job losses or reduced access to internet.48 School closures meant working hours in these sectors can have significant lost learning time for students.49 With dropout effects on urban poverty and downward economic rates already high, school closures may have mobility. To examine this, simulations were further reduced the low retention rates. Before modelled for different reductions in consumption the pandemic, one in four students who started to see the impact on households with at least one in first grade had dropped out of school by worker in the “at-most-risk” sectors. These found third grade (World Bank, 2018). In addition, 47 that a transitory drop in consumption of 10 percent percent completed only the first level of primary would increase the urban poverty headcount by education, while only 20 percent completed full over 2 percentage points (from 32 to 34.1 percent), primary education. adding nearly 250,000-300,000 extra poor to the 3,400,000 urban individuals already in poverty. A Nearly half of rural children are considered scenario that assumes a decline of 25 percent chronically malnourished. Disruptions to in household consumption would double the existing systems51 to deliver food rations to poverty effects (Figure 32). children have worsened the nutrition status of children, undermining their short and long-term Human capital is physical and cognitive development. undermined by Taken together, these impacts are likely to slow school closures Mozambique’s progress toward achieving the Sustainable Development Goals (SDGs), as The disruptions to service delivery are expected discussed in Box 6. to affect human capital in the medium to longer 48 According to the 2017 census results. 49 This is likely to affect rural households more, as assessment of COVID impact based on the High Frequency Survey (HFS) found that as of June 2020, more than 80 percent of the urban households interviewed had managed to find alternative educational activities following school closures. 50 These figures are based on analysis of the 2017 Population and Housing Census. The analysis was restricted to children aged 11 years for the first level of primary education and 13 years for full primary education. 51 Mostly school-based but covering a very small fraction of children. 35 part two: covid-19 has hurt businesses and households. how to respond? Box 6: How will COVID-19 affect Mozambique’s ability to reach the Sustainable Development Goals (SDGs)? COVID -19 is exacerbating Mozambique's is a positive function of household income, already slow progress towards achieving which sees privileged pupils in private the SDGs. The share of population living schools in urban areas. Pupils from poor in extreme poverty was declining slowly urban and rural families are expected to fall between 2009 and 2015, from 69 percent to substantially behind in educational access 63 percent. COVID-19, which comes on top and quality, which in turn will affect their of the hidden debt shock in 2016 and tropical labor market prospects. cyclones in 2019, has reversed the downward trend in poverty incidence. Malnourishment, COVID-19 has also brought challenges for already on the rise before COVID-19, is monitoring SDG progress. Disruption in expected to further increase alongside field data collection operations due to social stunting among children younger than five. distancing measures, and funding cuts in On gender equality, women experiencing statistical offices in low-income countries violence by an intimate partner, which fell have limited the availability of data necessary by only 5 percentage points to 20 percent to monitor progress toward the SDGs. Thus, between 2000 and 2017, has seen risks the COVID-19 pandemic is not only creating a aggravated by the containment measures. massive setback in the realization of the 2030 The limited movement allowed under the Agenda for Sustainable Development, but it State of Emergency, besides exposing girls is also exacerbating global data inequalities. and women to longer periods with their Mozambique’s household survey, the main partners, reduced households’ sources of source for monitoring progress in poverty income (constituting a source of conflict in reduction, was interrupted in April 2020 to the household). contain the spread of the virus. Fortunately, with the application of strict biosafety The pandemic will disrupt the substantial measures, fieldwork activities resumed and gains observed on health and education the survey is expected to be completed in indicators. The maternal mortality ratio December 2020. practically halved between 2000 and 2015, from 915 to 489 per 100,000 live births. Between 2000 and 2017, child mortality Figure 33: Maternal and child mortality reduced to almost a third from 170 to 72 per have fallen significantly 1,000 live births (Figure 33), and the incidence 1,200 of HIV dropped from 18 to 9 per 1,000 uninfected adults. These health gains are 900 expected to shrink as resources are diverted to other health areas and households avoid 600 making use of health facilities. Education, which had been a success story in terms 300 of access since the 2000s, will be set back. 0 Besides the interruption in the learning process Maternal Child Incidence due to the efforts to contain the spread of the mortality mortality of HIV virus, COVID-19 has exacerbated inequality 2000 2017 both in educational access and quality. In a Note : Maternal and child mortality data are per 100,000 live context of already limited education quality, births and 1000 live births respectively. Incidence of HIV is per the ability of pupils to attend remote classes 1,000 uninfected adults. 36 mozambique economic update february 2021 How to support from the pandemic. Employment subsidies can households? help firms bridge a period of inactivity while retaining employees who might otherwise be The government has taken some measures to laid off, face a potentially long unemployment help vulnerable families weather the COVID episode and fall into poverty. However, achieving storm (summarized in Box 5). The following this would require mobilizing fiscal space, already policy responses could also be introduced in pressured by the high debt service and wage the short and medium term to mitigate the bill. This highlights the importance of a wage devastating health and economic effects of the bill reform, and the coordination between fiscal virus, especially for the poor: and monetary policies on debt management. Such subsidies can also support the recovery of Use cash transfer programs to sustain aggregate demand. In terms of implementation, household income. The National Social Action partnerships with existing micro-credit and micro- Institute aided the 570,000 existing beneficiaries savings organizations should be leveraged to of the productive safety net program with an reach informal firms where the majority of the additional one-off payment of US$50, equal to poor work. three months of regular subsidies. An additional 290,000 vulnerable households in urban and Scale up safety nets, especially food assistance, peri-urban areas were included in the Direct for the poor. Given the projected losses of Social Assistance Plan. They receive a bimonthly employment, drops in consumption, and cash transfer of US$ 50 for six months, paid as increases in the poverty rate, ensuring the food an incentive to stay at home. Of these, 40,000 security of poor and newly poor households are informal workers, who are registered at the is of paramount importance. In particular, the INSS. The World Bank provided US$ 21.7m to nutritional needs of children must be prioritized fund these programs (MEF, 2020). to prevent long-term negative impacts from stunting and compromised human capital Protect lives by continuing to strengthen development. It is important to ensure the the health system capacity. While COVID-19 implementation of the plan to expand the response capacity has significantly improved (see number of family beneficiaries of cash transfer Box 1), in general the health care system is very programs from 600,000 to 1.7 million, as well as weak and under-resourced, especially in rural increasing the generosity of the transfer. areas. Access to testing should expand further and contacts traced to prevent further spread. Mitigate the negative effects on human Additional donor support to fundprograms for capital. To ensure that children’s human capital people with co-morbidities, such as malaria, development is not further jeopardized, or their TB or HIV, could also help mitigate vulnerability future labor market prospects compromised, and avoid neglecting existing strains on the once COVID-19 is under control and schools healthcare system. 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