• The Mozambican economy maintained its robust performance in 2012 with a real GDP growth of 7.4%. The progressive increase in coal production, the implementation of large infrastructure projects, coupled with credit expansion are expected to continue to drive growth to 8.5% in 2013 and 8% in 2014.

  • In the face of declining external aid flows, government efforts to address the poor infrastructure and expand social safety nets will require strengthening the institutional framework to increase revenue collection, properly manage debt levels and improve investment planning.

  • Despite more than a decade of sustained high economic growth, Mozambique’s economy did not undergo any significant structural change, limiting its capacity to sustainably reduce poverty and foster human development, still one of the lowest in the world.

Overview

Mozambique continued its robust economic performance in 2012. The real gross domestic product (GDP) growth rate increased by 0.1% from 2011 to 2012. It was driven by larger than expected coal production, which contributed 0.8% to the GDP growth rate. The continuation of sizable foreign direct investment (FDI) inflows, increased coal production, credit expansion to the private sector and strong infrastructure investment are expected to drive growth to 8.5% and 8.0% in 2013 and 2014, respectively. An ambitious infrastructure programme, coupled with the expansion of social safety nets will pressure public finances. The continued negative trend in foreign aid flows will further stress the fiscal balance. The fiscal deficit is expected to worsen from 8.2% in 2012, to 9.2% and 9.5% in 2013 and 2014, respectively. The government plans to rely on private financing and public-private partnerships to finance infrastructure development; however, an enhanced institutional framework is needed to assure accountability and scrutiny for the plans to add economic value.

Inflation reached historical lows of 2.7% in 2012, thus, providing room for the central bank to maintain its expansionary monetary stance – begun at the end of 2011 – that targets credit expansion. The financing of local private enterprises is essential to assuring jobs, economic diversification and ownership of the development process.

Despite its strong and sustained past economic growth, the Mozambican economy has undergone minimal structural transformation. Its productive base remains dependent largely on natural resources, which are concentrated in a few megaprojects, specifically coal, gas and aluminium. These megaprojects resulted in large FDI inflows, which have driven economic growth but not had a significant impact on government revenues, employment creation and economic diversification. Weak human capital, the high cost of credit, deficient infrastructure and burdensome regulations have slowed the diversification of the economic structure.

According to the World Bank, the emerging extractive industry could provide the means for Mozambique to reach the status of a middle-income country by 2025. Large future public and private investments in extractive industries are expected to transform the deficient infrastructure. The likely improvement in the business environment may trigger a diversification of economic activities, which is imperative to sustainable economic growth, as increased activity in resource-rich regions, such as Tete province, is likely to exert significant pressure on local communities.

The recent offshore gas discoveries, estimated at 150 trillion cubic feet (tcf), are one of the largest known gas reserves. According to sector experts, their commercial exploitation is unlikely before 2019 due to the large investments required in production and transport infrastructure. However, the projected increase in world capacity of gas production combined with technological developments could threaten the economic viability of the gas reserves in the medium term.

Figure 1: Real GDP growth 2013 (South)

Table 1: Macroeconomic indicators

 2011201220132014
Real GDP growth7.37.48.58
Real GDP per capita growth55.16.35.8
CPI inflation10.42.76.55.7
Budget balance % GDP-4.3-8.2-9.2-9.5
Current account % GDP-10-18.8-15.5-15.8

Recent Developments & Prospects

Table 2: GDP by Sector (percentage of GDP)

 20072011
Agriculture, forestry & fishing--
Agriculture, hunting, forestry, fishing27.731.5
Construction3.13.1
Electricity, gas and water5.84.5
Electricity, water and sanitation--
Extractions--
Finance, insurance and social solidarity--
Finance, real estate and business services11.28.6
General government services--
Gross domestic product at basic prices / factor cost100100
Manufacturing15.413
Mining1.61.5
Other services4.64.7
Public Administration & Personal Services--
Public Administration, Education, Health & Social Work, Community, Social & Personal Services3.94.1
Public administration, education, health & social work, community, social & personal services--
Social services--
Transport, storage and communication1010
Transportation, communication & information--
Wholesale and retail trade, hotels and restaurants16.818.9
Wholesale, retail trade and real estate ownership--

Mozambique is one of the rising economies on the African continent. Despite having one of the lowest human development indexes in the world (ranked 184th out of 187 countries in the United Nations Development Programme Human Development Index), it has achieved an average annual GDP growth rate of 7.2% during the last decade. It has also entered the group of emerging resource-rich countries, making international headlines for sizeable investments in coal, and in 2012, by confirming its discoveries of large natural gas reserves. The country’s geographic location as a gateway to the Indian Ocean, and to some of the largest energy-intensive world economies, continues to attract major international investors, even though development occurs at a slower pace.

Large-scale projects, mostly financed by foreign capital, dominate the economy. These projects – referred to as megaprojects in Mozambique – are concentrated in the extractive industries (mainly aluminium) and the energy sectors. Other drivers of growth include construction, financial services and transport and communication, which are mostly correlated with mega-project development. Agriculture, which accounts for nearly 80% of employment, presents relatively modest growth rates: 3.4% in 2012, and an estimated 3.7% in 2013.

The Mozal aluminium smelter, the first megaproject with foreign direct investment (FDI) of USD 2 billion, accounts for about 40% of the country’s exports. However, with the smelter currently at maximum productive capacity, aluminium may be surpassed quickly by coal as the top export commodity. The two coal mining megaprojects from Vale and Rio Tinto spearhead coal extraction with a combined investment of over USD 10 billion. The first full year of coal production in 2012, yielded 5 million tons and USD 196.4 million in exports. Production in 2013 is projected to expand by 24%, with the increased productivity from the 2 megaprojects, but also from other concessions. Besides Vale and Rio Tinto, other major coal companies are present in Tete province, including: Beacon Hill Resources and Ncondezi Coal Company from the United Kingdom; JSPL and Tata Steel Ltd from India; Eta Star from Dubai; Nippon Steel from Japan; and the recent entrant, Anglo-American. In total, the government has granted 1 600 mining licenses, half of these for coal. In 2012, the government launched an auction of 148 mining licenses in the new promising Niassa coal basin; although only open to local companies. Production of other minerals is also expanding, namely tantalite, limonite, zircon and tourmalines. The 28 000 tons of iron ore exported to China in 2012, by Indian company Damodar Ferro, mark Mozambique’s entrance into the world iron market. However, the deficient infrastructure network is curtailing productions. For example, Tete province is linked to the Beira seaport but only via a single rail line – the Sena line. Although the line transport capacity is being upgraded from 3 million tonnes per year (t/y) to 6.5 million t/y, the estimated production capacity of the combined coal projects in the Tete region at their maturity stage is 100 million t/y.

The government has an ambitious plan for a complete overhaul and expansion of the country’s infrastructure. A USD 2 billion tender was launched for the construction of a new seaport at Macuse, jointly with 525 kilometres of new rail line linking it to Tete. The Nacala seaport, under expansion, will also be linked to Tete by two new rail lines. One line will run entirely within Mozambique, and another will run through Malawi to reach Nacala. In total, the various rail and port projects in the pipeline are expected to raise the coal export capacity to more than 120 million t/y, at an estimated total cost of USD 12 billion. The road sector will see further expansion in 2013. National road coverage will be expanded by 900 kilometres, including the 2 new projects in Maputo, the Ring Road and the Catembe Bridge with a connection to the South African border. Total cost will be USD 982 million, provided by a loan from the Chinese government.

Investments in the power sector are expected to increase access to electricity from 20.7% of the population in 2012 to 24.1% in 2013. A 107 megawatt (MW) temporary gas-fired power station is under construction by Aggreko (UK), the first independent power producer. This plant will operate from 2012 to 2014, at a total cost of USD 250 million, including fuel, and will supply both Mozambique and South Africa. The construction of 2 other gas-fired power stations in Gaza and Maputo, using gas from the Pande fields, was approved for a total cost of USD 345 million. The main coal producers are also considering building thermal power stations, which will be fuelled by the abundant thermal coal resources. However, these projects will only be viable if the construction of the STE (formerly CESUL) transmission project is completed. It has been delayed due to difficulties with the contract, specifically a USD 5 billion financial closure. In parallel, the number of consumers connected to off-grid renewable energy should expand in 2013 by about 17% to reach 3.5 million.

Two combined biofuel and agricultural (sugar and bio-fertilizers) projects are scheduled for 2013. The projects, in Massingir and in Caia, represent a total combined investment of USD 953 million. Growth in agriculture will be further enhanced by a maize and rice project of USD 250 million and a livestock project of USD 50 million, both by Chinese companies.

The Mozambican government acquired, in 2012, a 49.5% stake of Banco Nacional de Investimento (BNI), owned by the Portuguese state bank, providing it full control of the bank. The government has declared its willingness to transform it into a development bank that will invest in agriculture and infrastructure. The bank will also provide special financing to small- and medium-sized enterprises (SMEs). In 2012, the Special Economic Zone of the Nacala Corridor region attracted USD 1.2 billion worth of private sector projects.

Mozambique’s offshore fields may hold as much as 250 tcf of gas, estimated to be enough to meet world consumption for more than two years. ENI and Anadarko, concessionaires of the major blocks with a combined 150 tcf of proved reserves, signed an agreement for the co-ordinated development of the common reservoirs. They will also jointly plan and construct an onshore, liquefied natural gas (LNG) facility near Palma, in Cabo Delgado province. The two companies were awarded a front-end engineering and design contract for the initial project phase, which will consist of four trains. Each train will cost between USD 4-5 billion and will be capable of producing 5 million metric tons per year of LNG, culminating in 20 million metric tons per year for a total budget of USD 20 billion. The first LNG should be shipped in 2018.

Macroeconomic Policy

Fiscal Policy

The main fiscal challenge facing Mozambique is the balancing of the expansion of the social safety net with the infrastructure investment programmes, within a context of decreasing external aid resources and limited progression of domestic revenue collection. External aid resources will decrease from 40% in 2012 to 32.8% in 2013. The Netherlands and Belgium have declared they will no longer provide budget support from 2013 onward. This decrease in foreign aid has been partially offset by domestic revenue collection, which grew from 15.6% in 2009 to 19.4% of GDP in 2012. This was achieved mostly through efficiency gains on tax collection. However, in 2013 revenues should decrease slightly to 19.23% because the collection of the value-added tax (VAT) is projected to decrease by 3.2% to 8.3% of GDP, as the limited fiscal base curtails continued fiscal progress. The government plans to modernise further the tax administration system with the implementation of a single taxpayer database and the introduction of an electronic tax system (e-tax).

The fiscal deficit in 2012 increased to 8.2% of GDP from 4.3% in 2011, due in large part to higher capital expenditure. It is estimated that the deficit will further rise to 9.2% of GDP in 2013 and reach 9.5% in 2014, before levelling off. The anticipated boost from extractive industries revenue will only occur in the medium-term horizon, as the megaprojects from coal are still at the initial production phase. Total tax revenue from extractive industries remains at 5% of GDP. Nonetheless, the 2013 budget foresees the earmarking of 2.75% of revenues from production taxes on mining and gas activities to be allocated to the local communities.

The government approved, in 2012, an Integrated Investment Programme to close the infrastructure gaps. Public capital expenditure is expected to continue to increase in 2013 and 2014. Expenditure in priority areas in support of the Poverty Reduction Action Plan (PARP 2011-2014) strategy will increase from 66.9% to 71.5% of overall expenditure, with allocations to social protection up to 0.3% of GDP, and possible additional World Bank funding for public works programmes.

Table 3: Public Finances (percentage of GDP)

 200920102011201220132014
Total revenue and grants27.129.530.12827.526.8
Tax revenue15.617.919.619.419.218.8
Oil revenue------
Grants9.597.865.85.4
Total expenditure and net lending (a)32.633.434.436.236.736.3
Current expenditure1818.919.519.819.117.6
Excluding interest17.518.118.518.617.917
Wages and salaries8.99.29.89.89.28.7
Interest0.50.811.21.20.6
Primary balance-5-3.1-3.3-7.1-8-8.9
Overall balance-5.5-3.9-4.3-8.2-9.2-9.5

Monetary Policy

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

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

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

Economic Cooperation, Regional Integration & Trade

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

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

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

Table 4: Current Account (percentage of GDP)

 2004200920102011201220132014
Trade balance-9.3-13.3-12.9-8.5-13.2-8.4-8
Exports of goods (f.o.b.)26.422.325.424.821.424.724.3
Imports of goods (f.o.b.)35.735.638.333.334.633.132.3
Services-4.7-4.8-5.5-6.3-10-9.6-8.8
Factor income-6-2.6-0.9-1.5-0.8-0.6-1.7
Current transfers5.77.97.26.35.232.6
Current account balance-14.3-12.7-12.1-10-18.8-15.5-15.8

Debt Policy

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

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

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

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

Figure 2: Stock of total external debt and debt service 2013

Economic & Political Governance

Private Sector

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

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

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

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

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

Financial Sector

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

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

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

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

Public Sector Management, Institutions & Reform

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

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

Natural Resource Management & Environment

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

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

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

Political Context

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

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

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

Social Context & Human Development

Building Human Resources

Mozambique is contending with changes to employment prospects. The discoveries of natural resources have pressured the education system that, for decades, has concentrated on producing graduates with general diplomas. The emergence of the fast growing resource-extraction sector and the concurrent spin-off industries with specific demands for a specific and highly qualified workforce, imply the need for an accelerated training programme for the future domestic labour force. Enhancing and amending the education system to meet the employment and economic needs must be done rapidly, for not doing so could lead to loss of knowledge transfer and ownership in this essential sector for the country’s overall development.

The new national education strategy was approved in June 2012 focusing on improving the quality of education. For the next five years, priority will be given to improving primary education; improving employment readiness; promoting early-childhood development for school readiness; diversifying the education supply, including the encouragement of private providers, community schools and scholarships for vulnerable groups; as well as the promotion of alternative training and vocational education, in particular in the new areas of economic activity.

Achieving universal primary education, Millennium Development Goal (MDG) objective 2, is a high priority for Mozambique. The objective of 100% primary education access is likely to be achieved by 2015. The primary school net enrolment rate in 2012 has surpassed 77%, while it was 64.5% in 2009. This results from continued investments in new schools and recruiting of additional teachers. The main challenge in education is the retention of secondary school students, in particular girls. To address this issue, new measures are being implemented, such as the roll out of a school feeding programme introduced in four districts in 2012. Since the programme is in its infancy, the impact cannot yet be measured.

The most recent health survey in the country (MICS 2008) reports that from 2003 to 2008 the under-five mortality decreased to 138 from 153 deaths per thousand live births while the infant mortality rate (under 1-year) fell to 93 from 101 deaths per thousand live births during the same period. Mozambique has the potential to achieve the MDG targets of 67 deaths per thousand live births in the under-five mortality category and 108 deaths per thousand live births in the infant mortality rate by 2015. While MDG health-related target data that is more recent is not available, the government, in partnership with the development partners, has continued with vaccinations, mosquito spraying and other health-related campaigns to achieve the MDG targets. This contributed to a reduction in the number of deaths attributed to malaria with 16.3% fewer deaths registered in 2012. Despite the 11.5% HIV national prevalence rate, some improvements have occurred. Mozambique pledged to increase treatment coverage, the elimination of new infection and vertical HIV transmissions. Antiretroviral coverage has increased from 37% in 2009 to 45.7% in 2012.

Poverty Reduction, Social Protection & Labour

When calculating the poverty rate using the Mozambican poverty line of 18 meticals (MZN) per day (about USD 0.6), the rate is 54.7%. However, poverty calculations are much higher using the international poverty lines of 1 or 2 USD per day. The corresponding Mozambican USD 1/day poverty rate is about 60% and the USD 2/day is about 82%. Hence, the level of vulnerability or the risk of falling back into poverty, even for those considered non-poor in Mozambique, is high. Over 70% of Mozambicans live in rural areas and rely on subsistence agriculture for their survival; therefore, vulnerability to poverty is high. Mozambique is also susceptible to environmental risks such as floods and droughts making the population even more vulnerable to falling into poverty.

Several poverty assessments on the impact of the past poverty-reduction strategies indicated that poverty remained unchanged from 2005 to 2009. One of the main reasons recognised in the assessments was the failure of previous strategies to prioritise agriculture and employment. The new Poverty Reduction Strategy Paper (PARP 2011-2014) recognises the key role of agriculture, employment and social protection, establishing these three themes as the main objectives. The country’s economic model, based on FDI into capital-intensive industries, has left unemployment untouched since it was last measured in 2004 at 18.7%.

Responding to all the many vulnerabilities and risks, the government and its partners are starting to implement the Strategy for Basic Social Protection, which will increase the number of people covered under social protection mechanisms, and improve the quality of delivery. The Mozambican government set in place enhanced inclusive social protection policies, as well as increased both the coverage and quality of protection. The coverage of rural areas as well as female-headed households has received special focus, since about 70% of its population lives in rural areas.

In addition, in 2012, in an unprecedented move, the parliament requested a revision of the state budget in order to address social protection needs. The 2013 approved budget, in alignment with the IMF recommendations, entails increases in pensions for the most vulnerable ranging from 32% to 92%. A family of five that previously received MZN 380 per month basic pension will receive MZN 500 per month (about USD 17) in 2013. The number of beneficiaries is expected to increase from 26 500 to 29 000.

Gender Equality

Mozambique is moving toward providing space for female participation in the society in which they make up 52% of the population. Following its tradition of inclusion in the political decision-making process, Mozambique is in a relatively advanced position when it comes to gender equality with 39% female participation in the legislative body. The primary education balance is close to a one-to-one ratio of boy:girl enrolment.

There are frequent television advertisements, as well as seminars and civic campaigns promoting women’s rights in Mozambican cities. The Ministry of Women and Social Action held over 278 seminars aimed at raising awareness of gender-related issues in 2012 alone. The enforcement of domestic violence laws; family law; the SADC Protocol; the Protocol to the African Charter on Human and Peoples’ Rights on the Rights of Women in Africa (better known as the Maputo Protocol) have all contributed to enhancing the gender equality agenda in the country. However, challenges remain. There are still imbalances. For example, female illiteracy is higher at 63.9% while for men it is 33.2%; poverty is higher among female-headed households (57.8% against 53.9 of males); and the HIV/AIDS infection rates are higher among women (13.1% of women 15-49 years of age against 9.2% of males within the same age range).

Thematic analysis: Structural transformation and natural resources

Despite an impressive annual average GDP growth of 7.2% in the 2000s, there has been no structural transformation in Mozambique. A strong post-civil war economic recovery and significant improvements of social indicators characterised the decade of the 1990s. From 2000 onwards, improvements in poverty reduction significantly slowed down, social indicators stagnated and employment creation was insufficient to absorb the 300 000 yearly entrants to the labour market.

The diversification of the country’s economic structure is limited by weak human capital, a high cost of credit, deficient infrastructure and burdensome regulations. Although the service sector provided over 50% of GDP in 2011, agriculture still provides a livelihood to over 80% of the workforce. It is also one of the largest contributors to GDP with 24.9%. Yet, agriculture largely remains subsistence based and productivity is low.

The economy in Mozambique is mainly an extractive economy, relying on raw-material exports, with minimal economic linkages to other economic sectors. This is the result of the highly capital-intensive nature of growth. Large FDI flows to a few megaprojects drove GDP growth. Mozambique’s exports of goods increased tenfold from USD 360 million in 2000 to USD 2.78 billion in 2011. Yet, this is entirely due to the start of aluminium production by Mozal in 2000 and natural gas production by Sasol in 2004. As a result, the share of GDP from the manufacturing sector declined from 17% in 2004 to 11.9% in 2011. Gas and aluminium made up 75% of total manufacturing and 70% of total exports in 2008. The remaining manufactured products included sugar, beer, tobacco and cement. According to the 2009 African Peer Review Mechanism, productive capacity, excluding aluminium, remains as low as it was in 1971.

As the extractive sector only started in early 2000, the natural-resource reserves remain essentially unexploited. The tantalum, limestone, gold, uranium and iron ore endowments provide opportunities for further exploration and diversification. Heavy mineral sands are estimated at 100 million tons with the potential to provide 20% of global demand for titanium. In addition to the extractive sector, Mozambique possesses agricultural land with potential for biofuels, hydro-energy resources and forestry as well as fishery, aquaculture and tourism.

The biggest future impact is likely to emanate from the emerging gas sector through increased fiscal revenues and energy provision. Estimated offshore natural gas reserves were 150 tcf in early January 2013. Sector experts estimate there is an additional 100 tcf of gas to be discovered. These total amounts of gas equal the reserves of Western Australia, one of the leading natural gas providers in the world. Mozambique is likely to benefit from royalties and “profit gas” in kind, in addition to substantial revenues in the form of taxes and revenue from the sale of gas to megaprojects. Conservative estimates from the government of future gas revenues are set to reach 12% of GDP or the equivalent of 40% of the state budget, after which they are projected to decline from 2050 onwards. New exploration licenses for the remaining offshore blocks are expected to be granted through a competitive bidding process by 2014-15.

The government is preparing further reforms to the fiscal and institutional framework managing the natural resources. A 32% capital gains tax on local assets sales by foreign companies was implemented in 2012, while the mining and hydrocarbons fiscal regimes are being revised. These fiscal reforms aim to raise fiscal revenue from future, large natural resource projects and ensure fiscal sustainability.

Major future investments in the extractive industries are expected to transform the country’s deficient infrastructure and potentially catalyse the development of new economic activities. Private investment in extractive industries totalled USD 7 billion since 2005; it was USD 2.7 billion in 2011 alone, while USD 15 billion is planned for investment in the coal sector in the coming years. Estimates for the development of the gas sector range between USD 200-400 billion over the next 40 years.

These FDI inflows contrast with the only 3 800 direct jobs created by the coal megaprojects. Even if the number of direct and indirect jobs are projected to reach several tens of thousands by the time of full coal exploitation in 2016, this would remain insignificant in light of the estimated yearly 300 000 entrants to the labour market.

The government’s new “local content” bill aims to strengthen economic linkages with the local economy in order to promote employment creation and technology spillovers. The high cost of credit, weak human capital and unreliable energy, compounded by the high-skilled labour and quality input requirements from multinationals, severely hamper local SMEs from servicing the coal extraction industry. The SME development programme, jointly designed by the multinationals and the government, is likely to gradually increase the business share of Mozambican SMEs so that they become providers of services to the mines. In 2011, the government started a programme to train around 4 000 specialised national staff to take up work in the expanding extractive industries.

The natural gas project by the South African company Sasol provides examples of good practice in terms of maximising the positive impact on local communities. The project achieved 29% of local content with 200 contracts awarded to private Mozambican companies since its inception in 2004. The pipeline also contributed to socio-economic development through local employment creation, road infrastructure and local business development, such as accommodation and agriculture. About 70% of the 700 full-time employees at the gas facility in Temane are Mozambicans. The country’s national long-term development strategy for 2015-35 reflects the government’s initiatives to harness these new economic opportunities. They favour industrialisation and local transformation of natural resources to generate wealth and reduce poverty. Public investment focuses on improving infrastructure. This is likely to create an enabling environment for the private sector to provide the required large investments to develop the extractive industries, tourism, agriculture and manufacturing.

The success of the Mozambican development strategy depends on the improvement of the state’s capacity to design, co-ordinate and implement the required public policies, including engaging with both the private sector and civil society. This challenge is compounded by weakened checks and balances due to the collusion of the business elite with party cadres and conflicts of interests arousing from the dominance of a single political party (FRELIMO) controlling the state apparatus. In addition, the weak civil society and widespread corruption erodes the enforcement of specific measures targeted at developing specific sectors, such as agriculture. As a result, Mozambique’s past industrial policy has mainly been reactive to the interests of the large investors and the donor priorities, rather than proactive.

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